The Current View
A lengthy downtrend in sector prices had given way to a relatively stable trajectory after mid 2013 similar to that experienced in the latter part of the 1990s and first few years of the 2000s.
The late 1990s and early 2000s was a period of macroeconomic upheaval during which time sector pricing nonetheless proved relatively stable.
Relative stability suggests a chance for companies genuinely adding value through development success to see their share prices move higher. This was the experience in the late 1990s and early 2000s.
Still vulnerable cyclical conditions were aggravated in the second half of 2015 by a push from investors worldwide to reduce risk. Sector prices were pushed to a new cyclical low. These conditions were reversed through 2016 and 2017 although sector prices have done little more than revert to the 2013 levels which had once been regarded as cyclically weak.
With a median decline in prices of ASX-listed resources companies through the cycle of 89%(and 30% of companies suffering a decline of more then 95%), the majority of stocks remain prone to strong 'bottom of the cycle' leverage in response to even slight improvements in conditions.
Has Anything Changed?
The strength of the US dollar exchange rate since mid 2014 had added an unusual weight to US dollar prices. Reversal of some of the currency gains has been adding to commodity price strength through 2017.
Signs of cyclical stabilisation in sector equity prices has meant some very strong ‘bottom of the cycle’ gains.
Funding for project development has passed its most difficult phase with the appearance of a stronger risk appetite.
Resource Sector Weekly Returns
Market Breadth Statistics
52 Week Price Ranges
Equity Markets
US markets - again led by the technology sector - pushed higher as global markets came under pressure as a result of weakening developing economy currencies and anxieties over trade policies.
Investors in US markets continued to price assets for highly favourable market conditions in which currently perceived problems will be resolved without market disruption.
The USA and Mexico reached an agreement on a new trade pact but, at the deadline on Friday, Canada and the US remained apart. The Trump administration began the necessary legislative process for ratification by informing the US Congress of changes NAFTA, hoping that Canada will rejoin the tripartite agreement within a few days.
Resource Sector Equities
Resource sector equity prices finished the week on a weakening note with the main metal price indicators shifting lower during the week.
Concerns about developing country growth prospects intensified as Argentina joined the list of countries confronting policy difficulties.
In the Australian market context, non-resource stocks continued to outperform the mining and oil and gas segments of the market.
Interest Rates
Financial market conditions had stabilised but higher risk government bonds lost ground. Despite relatively strong growth in the USA, bond yields have changed little as demand for US assets remains buoyant benefiting bond prices and the US dollar. US dollar denominated corporate debt price indicators remained firm.
Exchange Rates
The US dollar continues to be affected by short-term political and economic influences resulting in a generally upward bias. Other currencies - whether of developed or developing economies - are moving in the other direction.
Developing country risk, which had been thought of as idiosyncratic until recently, has been reappraised with more analysts becoming worried about the increasing risk of a contagion effect.
Turkey, Brazil and China, among a large number of the more significant developing nations, have been battling currency headwinds. Argentina has sought assistance from the International Monetary Fund to help manage short term liquidity problems as it tries to meet its debt repayment obligations. The Indonesian currency is one of the latest to come under pressure because of the country’s rising oil bill.
Few direct linkages across developing countries are evident but the coincidence of disparate events with similar economic consequences may be a catalyst for more widespread panic. At least, that is the rising fear.
The weakening Australian dollar has been caught up in the crossfire over trade and the reappraisal of global growth leaving it also vulnerable to a more generalised non-US dollar sell- off.
A lower Australian dollar should assist the earnings of mining companies reporting in Australian dollars and their resulting valuations although, on the other side of the ledger, foreign investors have been reluctant to commit to the Australian market as long as perceptions of downside currency risk persist.
Commodity Prices
The general upswing in commodity prices since mid 2017 had been given added impetus by stronger crude oil prices.
Diminished momentum has left prices within the bounds of a cyclical trough, albeit at the upper end.
The flip side of the benefits for commodity producers and exporters of higher commodity prices is the cost pressure now being experienced by users of agricultural and raw material commodities. Reporting companies have been suggesting this as a source of margin compression.
Business surveys closely watched by central banks are showing signs of upward pressure on selling prices as a result of higher raw material prices.
Gold & Precious Metals
Precious metal prices are acting as if US interest rates are on the rise to a greater extent than expected extent by gold market investors. Alternatively, the most recent price action could reflect an unsustainable, and historically unusual, earlier movement in which gold prices moved higher as bond yields were falling.
Palladium prices bucked the trend in the past week restoring the relative pricing direction of the more industrially oriented metal to where it had been over the past 20 months.
Gold related equity prices have lost some of their downward momentum although the Australian sector remains well within its trading range from over the past two years and still well ahead of returns from US counterparts.
Nonferrous Metals
With the exception of aluminium, the major London traded nonferrous metals finished the week edging lower and converging on similar performance outcomes over the past 18 months.
The copper price, often regarded as a sensitive growth barometer, continues to signal a deteriorating global growth picture. US bond yields appear not to share this appraisal. Nor, however, have they risen despite strong US growth outcomes and the prospect of ongoing rises in US interest rates which suggest some pessimism, too, about global growth on that front.
Bulk Commodities
Relatively weak first quarter Chinese GDP growth had suggested a ramp up in activity through the remainder of 2018 if China was going to meet its growth target which, in a centrally controlled economy in which leaders are trying to maintain credibility, is a reasonable assumption.
The difficultly of achieving its targets has now been acknowledged by Chinese officials who have conceded that second half growth may not be as strong as had been expected.
Nonetheless, the Chinese government reported June quarter GDP growth in line with its stated target.
Coal markets are more supply constrained than iron ore, leaving at the latter with less leverage to existing demand conditions. Meanwhile, as the effects of the trade policy conflict between the USA and China are felt more acutely, industrial metal demand is likely to be damaged more significantly than demand for thermal coal.
Coal prices have remained firm with demand from China growing at its fastest pace since 2011. Indian port authorities also reported strong growth in coal movements in the second quarter of 2018. Prices have been supported, too, by constraints on supply imposed by financial institutions unwilling to support mine development.
Oil and Gas
The upward trend in crude oil prices has given way to a leveling out in price with a further modest gain in the past week.
OPEC production decisions have helped to support prices as has reimposition of economic sanctions by the US government on Iran. The failure of effective government in Venezuela has been another contributing influence.
The Iranians have been lobbying European countries to prevent more widespread application of sanctions but the likelihood of relief appears slim as long as funds must circulate through US banks.
US production, in any event, continues to rise and is now matching output from Russia and Saudi Arabia. Texas alone is positioned to be the third largest producer after Russia and Saudi Arabia.
Despite the change in tone within crude oil markets, related equity prices have been muted in their responses, implicitly signaling scepticsm about the sustainability of price rises when they have occurred.
Battery Metals
Eighteen months of rising lithium-related stock prices have given way to a prolonged period of market reassessment as a lengthy pipeline of potential new projects has raised the prospect of ongoing supplies better matching expected needs.
Potential lithium producers have been able to respond far more quickly to market signals than has been the case in other segments of the mining industry where development prospects have been slowed by reticence among financiers to back development.
Movements in lithium related equity prices had been aligned more closely with overall sector equity prices in recent weeks although they have not suffered the wider sector sell-off evident in the past two weeks.
Battery metals remain a focal point for investors with recent attention moving to cobalt and vanadium.
Doubts about a peaceful transfer of political power in the Democratic Republic of the Congo (and instances of Ebola) have added a dimension to cobalt prices lacking in other metals caught up in the excitement over the longer term impact of transport electrification.
In the longer term, cobalt is the most vulnerable of the battery related metals to substitution with high prices likely to stimulate research in that direction.
A spokesperson for Panasonic, manufacturer of batteries for Tesla motor vehicles, has been quoted as saying that the company intends to halve the cobalt content of its batteries because of uncertainties over supply.
Uranium
The uranium sector is in the midst of forming a prolonged cyclical trough as market balances slowly improve. Power utilities are still not prepared to re-enter the market for contracted amounts of metal to meet longer term needs. A slight upward bias in prices has been evident in the past month.
Slightly higher equity prices from time to time, in the hope of improved conditions, have not been sustained but could be repeated as speculation about improved future demand ebbs and flows. The effect of an announcement by Canadian producer Cameco to extend the duration of its previously implemented production cut gave the market a very slight but quickly lost lift.
The Steak or Sizzle? blog LINK contains additional commentary on the best performed stocks in the sector and the extent to which their investment outcomes are underpinned by a strong enough value proposition to sustain the gains.
