London resource stocks going nowhere fast – by Lawrence Williams ( – July 7, 2015)

Investec in London paints a mostly gloomy picture for resource stocks for the next 2 years.

Analysts at the London arm of the international specialist banking and asset management group Investec, continue to paint a gloomy outlook for resource stocks in the short to medium term. However they do suggest that the year-end may provide something of a clearer outlook and the possible indication that the sector may have bottomed out by then.

Even so they don’t see a meaningful recovery in commodity prices until 2017 and while this is not to say that some resource stocks may not outperform the market, the likelihood is that most will remain depressed, and there could well be casualties among the weaker ones.

Investec points to what it describes as tepid signals from China, weaker than expected U.S. growth and the problems surrounding a possible (perhaps probable) Greek exit from the EU as being the major factors accounting for commodity price weakness.

Looking at China in particular, although there is some stimulus being applied to the Chinese economy, a change in focus away from infrastructure building towards consumer driven growth, as the government aims for a self-sustaining economy, has been implemented. The bank feels that iron ore is particularly vulnerable in this respect although admits that it has performed better in the year to date than suggested would be the case in an earlier analysis.

But the analysts feel this is only temporary and the underlying situation is that steel demand has peaked – at least for the time being – but at the same time expansion projects coming on line from the world’s biggest iron ore producers means there is a substantial increase in seaborne supply.

This makes prices vulnerable to further falls. This, they feel, has been exacerbated by falling producer currencies and lower unit costs for the miners, that is onloy serving to prolong the down-cycle by helping them maintain margins. This applies to other commodity stocks too, of course, with most miners being paid in dollars while incurring costs in their local currencies.

While iron ore is perhaps the most obviously vulnerable of the industrial metals given the sustained supply increases (with more forecast in the pipeline), the summer months have tended to be a relatively weak period for commodity demand and prices.

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