Mining stocks have finally recovered in step with commodity prices but can the rally continue?

 
Tracey Boles
The only female driver of a one-hundred...
mining in action (Source: Getty)

AS THE political earthquakes of the past few months exact a heavy toll on currencies including sterling, commodities have been a beneficiary.

Iron ore prices, for example, have doubled from their January 2016 lows while other base metal prices like zinc have also climbed, up nearly 70 per cent in the year to date.

The rebound in commodity prices has helped drive this year’s recovery in the mining sector, with BHP Billiton's shares rising 84 per cent in the year to date and Rio Tinto's 64 per cent.

It is welcome relief for mining investors who have suffered sliding prices, sliding demand and sliding growth since 2011's peak in commodity prices.

The recovery didn’t come a moment too soon for the likes of mining giant Glencore which at one point saw its share price hit record lows of 70p just weeks after the company approved a share placing at 125p a share to cut its debt load.

As Michael Hewson at CMC Markets points out, there was rising concern over the sustainability of the company’s balance sheet and its profitability at a time when commodity prices were in freefall and its debt was an eye-watering $30bn.

At the end of last year, concerns about the sustainability of dividends as well as cash flow were familiar themes across the sector. One year on, and miners appear on firmer ground. The overcapacity in the sector over the past few years is starting to work its way through

What does the year ahead hold? Further gains are likely to be contingent on further rises in commodity prices as well as on stronger demand. In Hewson's view, progress is likely to hinge on expectations of large scale fiscal stimulus being delivered, or at least showing signs of being delivered, in the lead up to the first quarter of 2017.

Encouragingly, a new poll of 9,000 investors by brokerage firm Interactive Investor found that commodities are again the chosen favourite of those surveyed for 2017 despite some fears the bull market for this sector has run its course.

For now, major mining stocks look copper bottomed. However, investors should bear in mind that in a low growth world, the recent bounce in commodity prices may well be set for a pause.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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