by Samuel Indyk
LONDON (Reuters) – The basic resources sector in Europe is once again attracting investors on the stock market who see opportunities there after the economic recovery measures decided in China.
The mining index on the pan-European Stoxx 600 has fallen 15% this year, making it the worst performing sector in the region, behind real estate which lost only 4.5% over the same period, while distribution, the best sector performance, jumped 27%.
Metals and mining are typically sought after in Europe to gain exposure to China, the world’s largest consumer of raw materials, but the sector has foundered along with growth forecasts for the world’s second-largest economy.
The Chinese economy is struggling to take off again after a brief acceleration linked to the end of health restrictions against COVID-19 last winter. The country faces huge debt linked to decades of infrastructure investment and a slowdown in real estate, a key market for its economy.
China’s gross domestic product (GDP) is expected to grow just 5% this year, the slowest outside of the COVID years since 1990, according to a Reuters survey of economists released this week.
Beijing has, however, taken targeted measures in recent weeks to support key sectors of its economy, which has allowed the mining index to emerge from a 31-month low. Over the past month, this index has gained almost 10%, compared to a gain of just 2.5% for the Stoxx 600.
“China is building a recovery wall, but they are doing it brick by brick,” said Nathan Sweeney, chief investment officer at Marlborough Investment Management.
“At some point, people will realize that they built the wall, but it didn’t happen all at once,” he said.
DISCOUNT OF MORE THAN 20%
Over the past three months, China has relaxed rules on home buying and borrowing in the sector. New tax relief measures have also been taken in favor of small businesses and private investment in certain infrastructure sectors.
According to Nathan Sweeney, this series of measures could serve as a catalyst for a recovery in the metals and mining sector.
The basic resources index is trading at a discount of more than 20% compared to the Stoxx 600. According to LSEG Datastream, the 12-month price/earnings ratio for mining stocks is 9.8, compared to 12.3 for the rest of the market.
Some sector heavyweights like Glencore and Boliden have fallen more than 20% since the start of the year, while Anglo American has plunged 30%, compared to a 7.5% gain for the Stoxx 600.
Copper and iron ore resisted the downtrend more. Three-month copper on the London Metal Exchange has been stable since the start of the year, at $8,380 per tonne, while three-month iron ore futures in Singapore are up almost $9. %.
Given China’s weight in the raw materials sector – Morningstar estimating that the country accounts for more than 50% of refined copper demand and around 70% of maritime iron ore trade – some of this resilience should eventually to instill itself in mining stocks, analysts predict.
“Clearly the heavyweight in terms of demand for primary metals is China,” said Peter Mallin-Jones, a mining analyst at British investment bank Peel Hunt.
“I am quite positive because I see quite significant signs of demand in base metals in relatively tight markets,” he said.
ENERGETIC TRANSITION
According to Peter Mallin-Jones, the world’s energy transition, against a backdrop of decarbonization of economies, could lead to a considerable increase in demand from growing countries such as India, Indonesia, Malaysia and Nigeria .
Copper is the backbone of the electrical and electronics sectors and is essential for the modernization of electricity networks, the construction of photovoltaic and wind farms, as well as the production of electric vehicles.
The United States and China are expected to increase their solar production capacity to a record level this year, by an additional 32 gigawatts (GW) for the first and from 95 to 120 GW for the second.
“This is a huge number that significantly supports copper demand and, to some extent, aluminum demand,” said Daniel Major, an analyst at UBS specializing in metals and mining.
Daniel Major, however, does not think that the recovery measures in China will lead to an explosion in demand for raw materials like that observed after 2008, at the end of the global financial crisis.
The UBS analyst therefore has a “sell” recommendation on diversified mining companies Rio Tinto and BHP Group, preferring groups with more direct exposure to copper.
Antofagasta, the largest copper mining group in Europe by market capitalization, Poland’s KGHM and Germany’s Aurubis are all down less than 12% this year and have relatively outperformed diversified mining groups like Glencore, Rio Tinto and Anglo American, which fell from 14% to 35%.
“The reality is that the sector is now attractive and there is a lot of bad news on the way,” said Nathan Sweeney of Marlborough Investment Management.
(Report Samuel Indyk, French version Claude Chendjou, edited by Blandine Hénault)
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