UK Miners Down, Any Chance for a Rebound

Mining companies in the UK have been on a downward roller coaster this year, quarter and month, as China's economy faltered, but is there a chance of a rebound?

The Giant in the Room

The UK's blue-chip index, the FTSE-100, was down on Tuesday after a bit of a rally on Monday, as the main components of the index have much exposure to the global economy, including China. This is particularly true for miners, such as Anglo-American and Rio Tinto, which export primarily to the Asian giant. Iron ore, in great demand for construction, has been particularly depressed through the summer, given the turmoil in the Chinese housing industry.

There have been some signs of improvement recently — China's flurry of stimulus measures meant to target the housing industry. Following the announcements, the price of iron ore shot up, though it remained below the highs at the start of the year. The initial optimism about China's rebound that had helped push commodity prices higher and UK miners along with it has seemingly run its course, pending further support from the Chinese government. Such announcements have managed a pop in optimism that fades over time, particularly after the release of more concerning data.

The Shifting Economic Paradigm

At the start of September, Moody's was just the latest in a series of analysts who have cut their growth outlooks for China for this and next year. On the other hand, it raised the outlook for the US, which implies a shift in the perception of the world's economic driver for this year. That also implies a shift in demand for commodities. While China is a major buyer of ores, particularly iron and copper, the US typically imports refined metals, with aluminium being the largest commodity it imports, followed by iron and copper.

The shift in demand could shake up which companies are best positioned for growth. Rio Tinto, up 2% this month, is the world's largest non-Chinese, non-Russian aluminium producer. It also owns a stake in the world's largest copper mine, Escondido. Global copper demand is expected to increase due to the energy transition, with the world's largest economy having the largest vehicle fleet likely to need the biggest amount of copper. And the US is leading in investment in energy transition. Up 3% in September, Antofagasta, which focuses on the production of refined copper, is likely poised to benefit from that situation, even if it suffers demand slowing from China. The company has been on a comprehensive cost-cutting program that could better position it in a slowing global economy where pricing is more sensitive. On the other hand, if the global turndown becomes severe, Fresnillo's 85% of revenue coming from gold and silver sales might be a better option. The recent slide in commodities has imparted the stock price of FRES; however, miners might have to wait to see if the housing situation in China is generally resolved. There has been some good news on that front, with the latest major developer at risk, Country Garden, making (late) coupon payments and reprograming some of its debt. It might signal that the Chinese housing market has turned a corner if it avoids defaulting.

Antofagasta Ends Rising Pennant

Of the UK miners, Antofagasta appears to have just completed a rising pennant down at 1365, with the descending trendline break opening the door to the top of 1840 following the successful takeover of 1680. When utilising the measured-move method, the longer-term projection sees the price above the 2k handle.

If price action shifts and the stock slides under the final trough of 1340, we might be in a flag pattern. This would imply further descends towards the next major support at 1240. Otherwise, a full-blown reversal could be at play, potentially clearing the path to double digits.

Source: SpreadEx / Antofagasta

Key Takeaways

UK mining companies are facing a downturn due to China's struggling economy. Iron ore has been affected by turmoil in the Chinese housing industry. However, there are signs of improvement following China's stimulus measures. But Moody's has adjusted growth outlooks, favouring the US, with Rio Tinto and Antofagasta well-positioned for increased global copper demand. At the same time, Fresnillo may fare better in a severe global downturn. Recent developments in the Chinese housing market indicate a potential turnaround.