In an analysis published Monday, Citigroup mining analysts John H. Hill, Graham Wark and Paul Cheng noted that mining and metals “have been battered amid the broader crude oil and China-slowdown induced carnage in materials and cyclical.”
Nevertheless, the analysts advised that investors should differentiate between mining and metals sub-groups, such as copper, steel and coal, and focus on micro-indicators, particularly in areas of structural change or M&A, to guide stock picking.
“This favors tight supply chains in bulks (iron ore, coal) and select industrial metals (copper, aluminum, steel),” they explained. “In general, metals micro-indicators (inventories, scrap prices, merchant premia, and smelter charges) have proven to be clear and effective guideposts during macro-driven ‘end-cycle, burst-bubble’ jitters which tend to recur.
The analysts asserted that copper micro-indicators are mixed. “Inventories remain down in China but are creeping up in Korea, local premiums have cratered in China to just $15/T and are slipping in Europe, while spot TC/RCs are barely bouncing above zero as acid byproducts boost profitability,” they said.
Meanwhile, the analysts noted that the pace of copper imports to China was at two-year lows in June and barely up in July.
Nevertheless, Citigroup forecasts that a higher copper import volume will “prove a catalyst for LME [copper] prices in 2H/08.”
Citigroup predicts that Chinese restocking, mine shortfalls and project stretch-outs will drive copper prices higher next year. “We see it as best-positioned among base metals, with replacement costs more deterministic than the operating cost curve.”
While gold is suffering during this time of a rallying U.S. dollar, nevertheless, Citigroup advised, “We would be aggressive buyers at current levels.”
While Citigroup finds that gold “has been punished amid a broad-based correction in commodities,” the analysts assert that the floor in the U.S. dollar “is likely a short-term blip for gold, as it underscores the frailty of fiat currency globally.”
“We see gold as attractive, heading into a period of seasonally strong physical out-take, which tends to tighten the market and allow any negative macro catalysts to be rapidly transmitted to prices. …Gold will likely shine over time. Long-term drivers remain intact; falling mine production especially in S. Africa, competitive currency devaluations, wealth creation on India/China, and petrodollar flows.”
Despite the battering in mining and metals stocks, Citigroup declared it remains focused on “names with superior in-ground assets, margins, and growth/yields, as top pick Freeport in copper, Nucor in steel, Peabody in coal, and Barrick in gold.” Citigroup’s favorite mining/metals stocks also Alcoa in aluminum, Nucor in steel, and Newmont in gold, as well as Arch in coal.