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Time to pause, or “no time to be underweight the miners,” that’s the difference in advice being offered by two big name investment banks as life returns to the commodity sector.
Morgan Stanley reckons a “purple patch” in prices for minerals and metals is coming to an end, for now.
Credit Suisse reckons it’s no time to be underweight the miners, and has upgraded its advice on the mining stocks it follows and regards it as significant that it has “no underperforms.”
For the average investor these are confusing times with conflicting advice reflecting the speed at which commodity prices have surged higher after five years of decline.
The critical question of whether the recovery can continue or whether it’s time to pause is easiest to understand in the case of metallurgical coal (also known as coking coal) which has doubled in price this year to be selling for more than $200 a ton.
No-one was forecasting a price that high earlier this year for a type of coal used to make steel, nor was thermal coal, which is used to generate electricity, expected to rise by 40% to $70/t.
It’s a similar, but less extreme picture in two other mineral commodities classified as “bulks” because they are mined and sold in large volumes. Iron ore and manganese, also used to make steel, have risen strongly thanks largely to an unexpected surge in demand for steel in China.
Macquarie Bank said supply side reforms in China had enhanced the outlook for bulk commodities. “We have materially upgraded our forecasts for coking coal, thermal coal and manganese,” the bank said in a research report published earlier this week.
The upgrades by Macquarie are not small. The coking coal forecast for next year is up 42% to $129/t, well short of the current short-term price of more than $200/t but well up on this year’s average price of $87/t. Thermal coal is forecast to rise by 21% to $61/t and manganese is up 25% to $3.35/t.
Pleasing as those forecasts are for mining companies, especially BHP Billiton which is the world’s leading producer of coking coal, there is a nagging concern that the banks are simply playing catch up rather than pointing to the way ahead.
In effect, some analysts have been slow to recognize the recovery in commodities which started earlier this year and might now be slow in recognizing that the first flush of the recovery has occurred and a pause is more likely than a continuation of the rise.
Morgan Stanley is certainly of the view that it’s time to take a break after an overdue revival in commodities, an investment sector which has reportedly been the recipient of $54 billion in fresh capital funds since the start of the year.
Recovery From Five-Year Bear Market
“Declining costs, lower capital expenditure, easing credit market conditions, rising commodity prices and attractive valuations drove the (mining) recovery from a five-year secular bear market,” Morgan Stanley said.
“Several of these factors are set to stall or partially reverse and the upside to our price targets has come down from 28% in January to 1% today.”
Despite its warning that the best of this year’s commodity recovery is priced into the mining stocks Morgan Stanley remains optimistic about the outlook.
“Medium term, secular drivers of urban population growth, better capital allocation, and depletion (of the ore in mines) support the sector,” the bank said.