MINING heavyweight Rio Tinto helped limit a slide in Britain’s blue-chip FTSE 100 index yesterday with a production update that assuaged some concern about Chinese demand.
Rio said it would boost iron-ore output by at least 10 per cent and banked on selling more to China – providing a fillip after data on Monday showed growth in the world’s second-biggest economy and top metals consumer continued to slow.
The UK’s blue-chip share index traded higher for much of the day but closed down 29.7 points, or 0.5 per cent, at 6,556.35 points – weighed down by a 2.8 per cent fall in Standard Chartered after India, the bank’s fourth-biggest market, raised short-term borrowing costs.
Rio shares rose 2.7 per cent, adding 3.7 points to the FTSE and momentum to the broader mining sector, which helped drive peer BHP Billiton, due to report second-quarter earnings on Wednesday, up 1.4 per cent.
The basic resources sector is the third-biggest in the FTSE index but worries about Chinese demand has made it this year’s worst-performing.
HSBC mining analysts also took a more positive view of China – citing growth in steel demand there of nine per cent in the year to end-May – and said they liked Rio and BHP given their cheap prices relative to earnings and an attractive dividend yield.
The scale of the market’s aversion to the sector was visible in StarMine data to the Monday close that showed the market price of Rio implied a fall in earnings per share of 2.1 per cent every year for the next 10, on a compounded basis. That compared with an implied gain for the FTSE 100 over the same period of 1.9 per cent, following an improved performance in recent days, StarMine data showed.
The FTSE has recovered almost two-thirds of its May and June selloff as concern over the impact of a potential scaling back in US monetary stimulus gave way to increased confidence that it would only happen gradually, as and when growth improved.
The release of slightly weaker-than-expected UK inflation data, ahead of minutes from the last Bank of England meeting today, could give the bank more scope to boost support for the economy – a trade some were betting on.
“A lot of clients are looking at the UK and buying upside FTSE calls as a way to play the currency debasement story.” said Emmanuel Dray of BNP Paribas.