Led by Anglo American PLC, U.K.-listed mining shares are emerging as notable winners during February’s trade, catching a break after being beaten down in recent months.
The U.K.’s FTSE 100 UKX, -0.38% was narrowing its loss for the month to around 0.1%, with much of the heavy lifting coming from shares of companies that produce a range of metals including iron ore, copper, and gold.
The FTSE’s strongest performances in February came from Anglo American AAL, +4.53% and Glencore GLEN, +3.04% as their shares jumped 73% and 49%, respectively. Copper producer Fresnillo was on course for a gain of 39% and iron ore heavyweight Rio Tinto PLC RIO, +1.48% RIO, +2.55% RIO, +0.70% bulked up 10%.
Investors appeared to embrace moves by Anglo American to strengthen its business. The company, which this month posted a wider $5.6 billion net loss for 2015, ramped up plans to sell assets and cut costs and said it’ll concentrate on copper, diamonds and platinum.
Meanwhile, Randgold Resources Ltd. RRS, +1.72% was up about 31% for the month, aided in part by a 10% jump in gold prices GCH6, +1.16% as investors sought relative safety in the precious metal.
Mining shares have been knocked back in recent months on worries about metals oversupply, slower demand from China, the world’s second-largest economy, and pressure on metals prices by U.S. dollar-strengthening. Anglo shares, for instance, have lost more than 60% of their value of the past 12 months.
Richard Knights, research analyst at Liberum, said “really strong Chinese credit growth data” was what he considered the main driver in the February rise in mining stocks. Chinese lenders extended 2.51 trillion yuan ($385.5 billion) worth of new yuan loans in January, surging from 597.8 billion yuan recorded in December.
“Now, the extent to which that was lending into the economy versus refinancing is sort of unknown. But it’s definitely something that people looking at fixed-asset investment look at and [January’s figure] was a pretty big print,” he said.
A climb in spot iron-ore prices and plans by China’s key planning agency, the National Development and Reform Commission, to offer 400 billion yuan for local infrastructure projects during the first quarter also benefited mining shares, said Knights.
Housing hurdles: But looking ahead, investors over the next 12 months should watch for the possibility that Chinese demand turns negative for imported copper and iron ore. He said the housing sector is responsible for 70% of iron-ore consumption in China and in copper, 50% to 60%, in terms of direct and indirect demand.
Demand is strong for home building in China’s 10-largest cities, but in areas of the country, “you’ve got significant negative rates of growth,” said Knights, speaking in terms of China’s 5-tiered ranking of more than 600 cities.
“What matters for commodities is what’s happening in the property market in Tier 3-5 cities in China. And we’re seeing no recovery there because you’ve had this massive misallocation of capital, vacancy rates are through the roof and there’s huge amount of bad debts that haven’t yet been recognized,” he said.
MarketWatch
