Mining stocks have risen in a struggling British market – and have two more winds behind them

The sector benefits from an increase in the value of the metals it discovers. HG00 copper from the first month,
+ 0.04%
futures have increased by 62% in the last 12 months, silver SI00,
+ 0.15%
won 51% and platinum PL00,
+ 0.93%
added 32%.

And there are two big trends that should further stimulate the sector.

The first is the decline of the DXY dollar,
-0.12%.
A weak dollar environment increases the purchasing power of key commodity-consuming markets, especially China, says Ephrem Ravi, an analyst at Citigroup. A smaller dollar also helps ease global monetary conditions, as much of the world’s corporate debt is denominated in the green dollar.

As the chart shows, there is usually a strong correlation between mining stocks and the changing dollar.

Another impetus comes from the growth of copper over gold. The copper-gold ratio has risen in the last year, implying optimism about global growth, says Ravi from Citi. Copper is needed for production and construction, while gold is often used as a safe haven in financial constraints.

Jeffrey Gundlach, CEO of DoubleLine Capital and the so-called King of Bonds, said the copper-gold ratio closely tracks US government bond yields, which tend to grow as the economy improves.

According to Ned Davis Research, citing data from 1995, the European metals and mining industry outperformed the market with an average annual gain of 9.7% when the economic outlook improves, but underperformed by 7.4% annually when the outlook economic deteriorates.

Mark Phillips, a European stock analyst at Ned Davis Research, says it makes sense for miners to go through booms and busts. “A boom will start when an increase in demand for goods increases prices, while short-term supply remains relatively fixed. As high prices persist, this encourages companies to invest in new projects that were previously uneconomical, ”says Phillips.

“However, long delivery periods usually mean that many companies are investing in new projects at the same time, resulting in cost pressures and a lack of supply, which can come at a time when demand is starting to decline. This results in a drop in prices, and metals and mining companies are raising the cost curve, it is no longer working, “he added.

Supercyclical discussion

Also behind the gains are spoken of some commodity supercycles. This basically means a cycle that lasts for decades and moves the goods as a whole. “The commitment of many nations to be carbon neutral and to consume less energy by 2050-2060 requires significant investment in infrastructure, which will require the consumption of goods. Structural models of commodity prices have shown that at every major stage of economic development: agricultural, industrial and service, commodity use can change, increasing the likelihood of a supercycle in the early stages of development, ”says Daniel Jerrett, investment director at Stategy Capital, which launched a global macro fund last month.

The market discussion is about inflation, fueled by lax monetary policy and aggressive fiscal spending. Analysts at Variant Perception, a research firm, said rising inflation risks, the need to cover them and “generously cheap” prices would lead to a commodity supercycle. Among the big banks, JPMorgan also supported the vision of the commodity supercycle.

At this point, he is betting alone against the miners. There are no short positions against large miners that are large enough to be reported, according to daily updates from the Financial Conduct Authority.

But there are some with different points of view. Ben Davis, an analyst at Liberum Capital, has a sales rating at Rio Tinto and a holding at BHP. He admits that the weakness of the dollar can help the rally continue, “but it feels like a big part of the price.” And Davis doesn’t think the goods are in a supercycle.

But Davis anticipates a slowdown in Chinese credit, which will soon have an impact. Loan growth gradually decreased from 13.2% year-on-year in June to 12.7% in January.

“The decline in Chinese credit will begin to be felt in demand for goods, and while replenishment in the rest of the world is a very strong force, it is unlikely to last beyond the middle of the year. The earliest and largest beneficiary of this cycle was iron ore and, for this reason, BHP and Rio Tinto have the least short-term disadvantage in our opinion, ”he says.