=DJ THE SKEPTIC: Hot Metal Pressed
(This item was originally published Friday)
By Arindam Nag
A DOW JONES NEWSWIRES COLUMN
LONDON (Dow Jones)--The fluctuations of some major mining stocks over the last few days raise the question of whether there's too much hot money sloshing around in the sector - and more importantly whether it's sensible for cautious investors to start heading elsewhere.
Shares in mining companies, especially those with sizable copper portfolios, have historically been considered cyclical, relatively predictable stocks. But the red hot streak of the last couple of years, and the current gyrations, mean mining stocks are no longer for the comfort-seeking investor.
Expected high demand for copper and other base metals from the emerging economies of China and India have pushed up commodity prices and subsequently boosted shares of Antofagasta, Anglo American, Xstrata, BHP Billiton and Rio Tinto.
But here lies the source of volatility. Few can predict with certainty how much metal will China consume over the next few years. Estimates have varied, leading to varying degree of fluctuations in metal prices.
Such is the clout of the Chinese in the global metals markets that any blow hot, blow cold behavior from any Chinese official - or even rumors thereof - is enough to cause a ripple.
Take this week for instance. Rumors of a price cap on iron ore by Chinese steel mill owners was enough to send shares of BHP Billiton and Rio Tinto sharply lower this week. BHP is now trading around 920 pence levels, down from 1,100 pence last month. Rio is down from 2,880 pence to around 2,600 pence over the same period.
In the past year the FTSE-100's top five miners returned well over 60%, nearly 3.5 times what the index returned.
But that looks toppish, given the fundamentals.
The high demand for metals is clearly being offset by high operating costs. Oil prices have raised transportation costs, especially with demand concentrated in Asia, far from most major mining areas. More importantly, shortage of labor has also started to pinch. In its annual results, Billiton talked about the 8.2% increase in its 2005 cost base over the previous year.
Copper isn't the only metal crimped by rising costs. It is estimated that Falconbridge, a major nickel producer, saw its operating costs rise 17% last year. Even Newmont, the gold miner, said it faced a 25% increase in costs at mines in Nevada in the fourth quarter of 2005, mainly because of increased labor and underground contract services.
Clearly, an industry which has promised and delivered superb margins is now showing signs of heading back to more typical returns. When it happens is the big question, hence the speculative buying and selling.
But on a medium-term view, the reckoning's in sight. And that means it's time for those who remain bullish on metal stocks to take off their rosy-colored glasses.
(Arindam Nag has covered business and finance for 15 years in Asia, Europe and the United States. He can be reached at +44 207-842-9289 or by e-mail: arindam.nag@dowjones.com)
(END) Dow Jones Newswires
March 13, 2006 01:44 ET (06:44 GMT)
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