Forex Analysis from Michael Hewson, Market Analyst, CMC Markets
7 January 2011
Mining Sector Trading Update
The commodity price crash of 2008 saw metals prices and mining companies plummet in value across the board as investors sought to deleverage across the globe in the face of the credit crunch.
Since then stocks and in particular commodity prices have rallied on the back of government efforts to stimulate their economies back to a sustainable growth path.
As one of the most cyclical sectors, the mining sector has borne the brunt of this rotation of capital and in some cases mining shares have recovered all of the losses incurred in the financial meltdown in 2008.
Optimism about growth forecasts in emerging markets in 2011, especially in China and India is fuelling demand for copper which has surpassed the levels we saw in 2008 at $4 to hit record highs above $4.40.
Despite concerns about rising inflation tempering risk appetite in 2011 the expectation is that these economies will continue to grow at slightly slower rates once measures have been taken to temper the inflationary effects of rising commodity prices.
Rising inflation in these BRIC economies has fuelled speculation of monetary tightening in the early part of 2011, and this could curtail risk appetite going forward in the event of a slowdown in the growth rates in these economies, however while GDP growth continues to pull ahead of western economies, mining companies should continue to hold up well if commodity prices continue their upward trajectory, however with the price beginning to deviate away from the 200 day MA there is potential in the short term for a pause in upward price momentum and a slide back in commodity prices.
As a result the UK mining sector has continued to make gains and could well re-test the highs we saw in 2008 at 30,745.
The sector could pull back towards the 200 day MA and trend line support around 22,000 without negating the current positive momentum that has been in place since the lows in late 2008.
Some stocks within the mining sector have outperformed the sector since the 2008 lows while some have underperformed.
For example Australian miner BHP Billiton, the world’s largest mining company has managed to regain all of its losses from the 2008 decline, despite notable failures in its acquisitions program over the past 12 months, to post brand new highs despite concerns about an Australian resource tax impacting profits margins.
Having succeeded in holding above its 2008 highs after initially failing earlier this year, momentum remains positive.
A fall below the 2,200p level could prompt a fall lower but only a move below the uptrend line at 1,925p, from the 2008 lows at 731.50p would undermine upward momentum and prompt a larger sell-off.
Chilean copper miner Antofagasta has been the pick of the bunch though outperforming all the others blasting past its 2008 highs at 886p to trade nearly 90% above these levels, on the back of the surging copper price.
There is a danger that the move higher could be overextending itself as the price moves further away from its 200 day MA, however while copper continues to rise the share price could well find downside pressure limited. There is support around the 1,360p level from the lows this year around 760p, while the 200 day MA should also act as support on any pullbacks.
In direct contrast copper and zinc miner Xstrata has underperformed the sector by quite some way despite the expansive rise in metals prices as it looks to test the 61.8% retracement of its down move from the 2008 highs to the 2008 lows.
Its share price fall however was a lot steeper than BHP’s as it dropped from highs of 2,510p, to lows of 288.75p so the move back to the 61.8% retracement level at 1,665p could well be only a matter of time.
Certainly as long as the uptrend line that has been in place since the March 2009 lows at 1,032p and the 200 day MA support remains intact, a test of these levels seems likely.
Looking at a cross-section of the UK mining sector there does appear to be a broad cross-section of strength underpinning the upward momentum for now.
However any slide back in copper prices could quickly undermine this and see mining sector shares slide back quite sharply.
There is certainly plenty of scope for share prices to slide back given that a good number of them are quite some distance from their 200 day MA’s and share prices do have a habit of reverting back to their 200 day means over time.
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Article provided / approved by CMC Markets UK plc / CMC Spreadbet plc which are authorised and regulated in the UK by the Financial Services Authority, registration numbers; 173730 and 170627 respectively.
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Article provided / approved by CMC Markets UK plc / CMC Spreadbet plc which are authorised and regulated in the UK by the Financial Services Authority, registration numbers; 173730 and 170627 respectively.
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'Mining Sector to See a Correction?' edited by DB, updated 07-Jan-11
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