DJ Market Dynamics Still Favor Base Metals Stocks, Some Say
2004-07-22 07:33 (New York)
(This article was originally published Wednesday)
By Charles Roth
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Spooked by fears of Beijing's moves to cool China's
red-hot economy and an incipient cycle of U.S. interest rate rises, investors
appear unsure about the prospects for stocks, especially base metals plays.
Some see the Chinese government's credit tightening measures and the U.S.
rate outlook, and conclude that global economic growth has peaked. Commodities
stocks, especially those from the traditionally volatile emerging markets, are
poised for a slump, their thinking goes.
In April, when such concerns came to the fore, a number of commodities stocks
began to tumble, particularly those from Brazil. But since then, investors seem
to have had a change of heart, and bid them back up. Shares of Brazilian steel
company Gerdau (GGB), for example, slid from $11.83 April 1 to $7.96 on May 10,
but have since won back and even gained ground, ending at $13.20 on Wednesday.
Investors may now find cause for optimism in a number of reports this week by
base metals analysts.
In a Wednesday report, Merrill Lynch said worries about the impact of slowing
Chinese demand on commodity prices "has led some investors to be over-bearish,
in our view, missing the supply-side tightness of many commodity markets." Yet
to avoid a "boom-bust" cycle, "slowing Chinese demand should be welcomed,"
Merrill argued, adding that it doesn't expect a hard-landing for China's
economy.
China's gross domestic product slowed to a still strong 9.6% expansion in the
second quarter from the year before, easing a bit from 9.8% growth in the first
quarter and 9.9% in the last quarter of 2003. China's fixed-asset investment
also slowed to a 22.3% increase in April through June from the year before,
versus a 43% jump in the first quarter, Merrill noted.
More sustainable and still strong Chinese economic growth, together with a
robust U.S. economy and recovery elsewhere in the world, supports currently
lofty commodity prices. "Global consumption of metals will most likely set
another record this year, even with the 'slowing' of economic activity in
China," Merrill predicted.
Supply-side dynamics are also favorable, UBS Investment Research pointed out
in a Tuesday research note. In recent weeks and months, copper, aluminum and
zinc inventories have fallen. Steel inventories have declined "over the last
six to 12 months and now lie at seven-year lows in Europe and Japan and 13-year
lows in Korea and the U.S., and other metal stocks such as tin are also
extremely low."
UBS noted that worker strikes at Grupo Mexico's (GMEXICO.MX) La Caridad
copper complex - not to mention the threat of strikes at its Cananea copper
mine or its zinc refinery in San Luis Potosi state - and at Alcoa Inc.'s (AA)
Becancour smelter in Quebec also "are likely to restrict supply."
"The near-term outlook for materials prices is good with strong demand
boosted by low inventories," it added.
According to a report from Morgan Stanley Wednesday, expectations for strong
cash flow mean not just "rapid reduction of net debt for the
large-capitalization global mining houses" but also bigger dividends and share
repurchases for shareholders.
"In aggregate, through share buybacks and dividends, the mining sector could
return up to $27 billion to shareholders over the next three years," it
reckoned.
That's partly because acquisition activity should cool. ""We think the
industry will resist further consolidation with asset prices at cycle highs,"
Morgan said. Furthermore, "most global mining companies value assets in U.S.
dollar terms, so (they) will likely wait for U.S. dollar appreciation and
consequent lower asset prices before considering mergers and acquisitions," it
added.
Among steel stocks that Morgan would overweight is Brazil's Companhia Vale do
Rio Doce SA (RIO), or CVRD, the world's biggest iron ore exporter. Merrill, for
its part, has a buy on CVRD, as well as on Russia's Norilsk Nickel (GMKN.RS).
Like Gerdau's, CVRD's shares have been on a rollercoaster lately, falling
from $56.80 on April 5 to $42.25 on May 10, and closing Wednesday at $51.70.
-By Charles Roth, Dow Jones Newswires; 201 938 2226;
charles.roth@dowjones.com |
