By Barbara Kollmeyer
While European markets logged gains on Wednesday, the downward tug from two heavily weighted mining shares proved too much for the FTSE 100, which could only straddle the flat line.
The FTSE 100 index /zigman2/quotes/210598409/delayed UK:UKX -0.08% traded slightly in the red at 6,725.52, while the Stoxx 600 /zigman2/quotes/210599654/delayed XX:SXXP +0.10% managed a gain of 0.5%, and U.S. stocks moved higher. Also weighing some on the index, the pound /zigman2/quotes/210561263/realtime/sampled GBPUSD +0.9727% rose 0.2% against the dollar /zigman2/quotes/210598269/delayed DXY +0.06% , a move that can hurt multinationals that derive revenue overseas.
Dragging down the index, shares of miners Rio Tinto /zigman2/quotes/202627887/composite RIO +0.69% /zigman2/quotes/208934945/delayed UK:RIO +1.88% and BHP Group /zigman2/quotes/203323256/delayed UK:BHP +1.63% /zigman2/quotes/208108397/composite BHP +1.83% fell over 1% each. That comes after two days of losses for copper /zigman2/quotes/210056589/delayed HGK21 -1.13% , though the commodity was moving higher on Wednesday. Softer iron ore prices also weighed on the big miners, said Michael Hewson, chief market analyst at CMC Markets, in a note to clients.
Mining stocks have had an impressive run over the last 12 months , thanks to surging prices of related commodities. That has been in part due to talk of a commodities supercycle, which refers to a cycle that lasts decades and moves commodities as a whole.
Some fresh doubt on the supercycle came from analysts at Liberum, who on Wednesday updated estimates of coverage, upgrading iron ore prices but remaining below consensus. “We are broadly negative on the commodity outlook, with a couple of exceptions, but do not expect a sharp collapse,” said Ben Davis and Max Kaye, in a note to clients.
The analysts said they prefer “names with equity catalysts,” lifting BHP to hold from sell, but keeping a sell rating on Rio Tinto. Buy-rated Glencore /zigman2/quotes/201400686/delayed UK:GLEN +2.63% , Ferrexpro /zigman2/quotes/208342608/delayed UK:FXPO +3.38% , Shanta Gold /zigman2/quotes/200528022/delayed UK:SHG +2.08% and Sylvania Platinum /zigman2/quotes/208206512/delayed UK:SLP +2.51% are their most preferred names in the sector. Shanta Gold shares rose 2%, Sylvania shares fell 2%, while Glencore and Ferrexpro saw modest losses.
As for Rio Tinto, they noted a “stellar year of performance,” lifted by unusually high iron ore prices but risks remain to the downside, given a lack of diversification from a commodity perspective, as a chunk of its earnings come from iron ore, and customer perspective, owing to the risks surrounding deteriorating Australian and Chinese relations.
Antofagasta /zigman2/quotes/200173667/delayed UK:ANTO +0.51% was cut to sell, as analysts see negative momentum building for the miner on falling copper prices. Those shares dropped 2%.
Separately, strategists at HSBC told clients in a note that while global commodities have seen a strong upswing, they don’t expect a supercycle like in the early 2000s.
“Much like before, China is leading the upswing, there has been an extended period of low mining investment, and monetary policy is accommodative,” said a team led by Paul Bloxham.
“Unlike earlier, China is at a different stage of its development, with its growth set to be more about services, imposed OPEC [Organization of the Petroleum Exporting Countries] constraints have driven much of the oil prices upswing, and the nimble U.S. shale oil sector is a much larger part of global oil supply,” said the team.