UK Miners Face Challenges as Key Commodities Decline

The UK's mining industry faced difficulties in September, with key commodity prices declining as investors remained cautious about the pace of China's economic recovery. However, some early signs of stability or growth in commodity demand have also started to emerge recently.

Commodity Prices Drop to Multi-Year Lows

Major commodity markets saw sharp declines recently following weak manufacturing and construction data from China, with Chinese manufacturing PMI retreating back into contraction territory last month and construction activity remaining stagnant. This represents the latest movement in a long-term trend that has seen key commodity prices such as iron ore, copper and nickel fall to their lowest levels in years. Oil prices are also down despite the disruption of around a quarter of Gulf of Mexico production due to Hurricane Francine earlier this week.

As a result, UK mining companies have underperformed in the FTSE 100 index as the outlook for China remains subdued. Steel mills in China reportedly produce at a loss due to weak demand from the property development sector, leading to a build-up of excess inventory. Copper stockpiles have also risen to unusually high levels as copper is employed mainly in construction. While demand for commodities typically reaches annual lows in summer and may start to recover between September and November, aluminum prices are already showing signs of increase and fueling hopes that Chinese demand could bounce back later in the year.​

Raising the Asian Giant

For UK mining companies to see sustainable price increases, profits must improve on prolonged commodity price increases beyond temporary fluctuations in stockpile volumes and government incentives. This would likely rely on a renewed upward trend in the Chinese economy if not for the global economy. With central banks moving towards easier monetary policies, economic performance could improve. However, several major economies, such as the US and Europe, are exhibiting signs of recession, which could complicate a short-term rebound until those fears are resolved.

The most recent data shows a mixed picture for China, with surging exports aiding the economy but diminishing imports suggesting internal conditions remain weak. However, if this trend continues, China can start working through stockpiles, and the imports of commodities may increase in a delayed manner. The country has a target of 5% growth this year but has not matched that in the first half, increasing pressure to provide further economic stimulus. It also means the Asian giant must grow faster in the coming months to offset slower initial yearly growth, which could also provide the long-awaited boost to UK miners. That is unless a global recession materialises in the interim.​

Rio Tinto Ends Triangle Pattern?

Rio Tinto's share price has found double-bottom support at 4500 GBX, suggesting it may complete a triangle or continue lower towards the 4000 handle. Breaking below this level of support could result in further declines towards the next major hurdle of 3000 GBX. Alternatively, if the technical pattern is resolved, the medium-term outlook would involve exceeding 5850 GBX before reaching a high of 6800 and potentially setting new highs.​

Source: SpreadEx / Rio Tinto

Key Takeaways

The UK mining industry faced difficulties in September as key commodity prices declined due to investor caution over China's economic recovery pace after commodity prices fell to multi-year lows on weak manufacturing and construction data. For prices to rise sustainably, profits must improve through prolonged increases beyond temporary stockpile fluctuations or incentives, with renewed Chinese economic growth supporting this. Still, recession risks in major economies like the US and Europe could complicate a short-term rebound despite China's exports surging as weak imports suggest internal weakness. However, increasing demand in a delayed manner could work through stockpiles and boost commodity imports if the country's economic stimulus proves effective.​