While mining stocks have been outperforming more mainstream equities for much of the year, May saw a...
While mining stocks have been outperforming more mainstream equities for much of the year, May saw a decline in their performance, which is likely to continue, according to Credit Suisse First Boston (CSFB).
Gary Lampard, vice president global mining equity research at CSFB, says that while the group previously believed there was some likelihood of sustained outperformance from mining stocks against equity markets worldwide, over the past month they have declined.
'Now, more than one year into this period of outperformance, it is not surprising some investors have been questioning its sustainability,' Lampard says. 'Still, lower rates and lower taxes supporting demand in the US are such that we will eventually see an end to inventory liquidation and a rebound in production.
'The major risk is timing. Economic recovery may take a month or two longer than we expect, in which case we may well see further buying opportunities for metals and mining equity. A bumpy ride is not unusual as we approach turning points and this time promises to be no different. However, in the long term we continue to see a supportive global economic outlook for further metals and mining outperformance.'
The attractiveness of mining stocks, energy and general commodities at the moment, is due in part, to the extreme negativity on technology. It is also down to a market realisation of how underinvested it has been in the sector in recent years.
Chris Tracy, global strategist at JP Morgan Fleming Asset Management, says the group is relatively optimistic on the sector as the stock prices are low compared to other areas of the market.
Tracy says: 'There has been little investment in commodities in years and not enough investment in new capacity. Since 1981 to the end of 2000, the GDP in the US has risen by some 92%, whereas refining production has actually gone down 5.8% over that time period. This is, in part, a function of energy prices falling after the 1970s oil crisis and increasing environmental problems.'
On a stock-specific basis, attractive companies in this area tend to be in the US, although there are competitive companies in the Far East and Asia, according to Tracy.
In a low inflation environment, the performance of commodities is often hampered, he says. 'Commodities is an area no one really thinks of because inflation has not been an issue,' he adds.
The highly publicised energy crisis in California has been a boon for the aluminium industry. Energy shortages mean lower aluminium production levels are pushing prices up.
The price of aluminium companies has fallen somewhat in recent weeks, Lampard says, but the medium-term outlook remains stable.
'The aluminium price remains supported by the continued potential for a squeeze. Power shortages are continuing to force capacity closures in the US Pacific north-west, British Columbia and Brazil,' he says.
US producer Alcoa is planning to shut down one of its plants for 15 months starting this month, while further smelting cutbacks are also likely in Brazil, according to Lampard.
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