An ill wind is blowing across UK mining stocks, which are trading at around a five-year low. Stocks, however, are offering tempting dividend yields and some momentum-driven traders are predicting the cycle is about to turn. Volatile mining stocks have long been popular with individual investors with a more aggressive approach to risk. But is now the time to buy in, or does the sector remain too unpredictable for even the very brave?
The first thing private investors should be aware of is what is happening in China. The fall in mining shares can be blamed on slowing growth in the world’s second-largest economy, which has historically been the major global consumer of most commodities, from copper to cotton.
The China slowdown is not miners’ only problem. For several years until around 2012, the industry invested heavily in new mines, then greatly increased their production of commodities such as the steelmaking material iron ore.
So metals prices have been falling.
To fund their investments, many mining companies loaded up with debt. Lower commodity prices have made it harder to service such borrowings. FTSE 100 miner Glencore, for example, is selling mines to repay loans and shore up its balance sheet.
Amid all this pain, some analysts are exhorting brave investors to buy into the mining sector now, claiming the market has reached a nadir and is set to bounce back.
One thing that is exciting mining bulls is the US Federal Reserve, which has backtracked on hints it is going to raise interest rates, which in turn creates a better outlook for investment into the emerging markets that miners depend on for commodities demand. Futures markets imply just a 10 per cent chance of a rate increase this month, according to Bloomberg, down from almost 50 per cent in mid-July.
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