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Mining Stocks Up on Better Chinese Economic Growth

UK mining stocks rose today after better than expected Chinese economic data and record steel production

Karen Kwok 17 July, 2017 | 6:12PM

Shares in UK mining stocks were up on Monday, boosted by positive economic data from China.

China’s economy expanded 6.9% in the second quarter of the year compared to the same three months in 2016. This was the same growth rate as the first quarter, running January to March end, the National Bureau of Statistics of China said today. This was higher than analysts’ expectations of 6.8% GDP growth. Industrial output rose 7.6% in June compared to 2016, higher than the estimated 6.5% increase. 

The Chinese government has set an economic growth target of 6.5% "or higher if possible," for 2017, the lowest economic growth target in 25 years.

“The better than consensus print for Chinese GDP suggests that the economy is maintaining momentum with both industrial output and fixed asset investment somewhat stronger than estimates. Despite concerns over China’s so-called shadow banking system, the global economic recovery seems to have supported the Chinese economic growth,” said Shilen Shah, bond strategist at Investec Wealth & Investment.

Separate data from the National Bureau of Statistics of China on Monday showed that China’s steel output hit a record level in June. China is the world’s largest copper and coal consumer. Other commodities also rely on Chinese. Anglo American's platinum business benefit from China’s rising household income that bolster Chinese demand for automobiles and jewellery, categories that collectively account for roughly 80% to 90% of platinum and palladium use.

Mining Stocks Up on Positive Chinese Data

As China is a keydriver of global commodities demand, the positive economic news boosted a number of UK mining stock prices today. Antofagasta (ANTO) gained 1.6% while Anglo American (AAL) was up 2.3% at the end of the trading day on Monday. Shares of other miners Glencore (GLEN) and BHP Billiton (BLT) also gained 2% and 1% respectively, while Rio Tinto (RIO) were slightly up 1%.

The above mining stocks, except BHP Billiton, were rated as overvalued stocks, meaning analysts believe these stocks are trading at their fair value estimate. Glencore and Anglo American were rated as one-star stock, which is trading at a higher fair value estimate than two-star rated Rio Tinto and Antofagasta.

BHP Billiton is rated a three-star stock, meaning analysts believe the stock is trading at its fair value estimate.

Antofagasta a Pure Copper Miner

Antofagasta is a "pure-play" Chilean copper miner, said Seth Goldstein, equity analyst with Morningstar. This set the scene that why share prices of Antofagasta went up the most when the data showed record steel outputs from China.

“We expect Chinese copper demand to dip during the next several years as real estate activity fades to a level more commensurate with underlying urbanization trends and power spending shifts away from copper-heavy distribution to copper-light transmission. On the supply side, mine production growth, cost deflation, and rising scrap availability all threaten prices. Our analysis points to long-term $2 copper in real terms,” said Goldstein. Cooper price is now at $2.68 per libra.

While analysts’ view on the long-term Chinese copper outlook remained rough, Antofagasta’s healthy balance sheet gives it some flexibility to stomach lower copper prices for a number of years, Goldstein added.

Anglo Benefits from Chinese Middle Class

Anglo American will find itself better positioned than most diversified peers as China rebalances away from infrastructure and construction-led growth, said Morningstar equity analyst Mathew Hodge.

“The company has greater exposure to consumption-oriented commodities like platinum and diamonds, which is about half of revenue, which should enjoy better demand growth than investment-oriented commodities like iron ore and copper that prospered most in the past decade,” said Hodge.

As incomes from Chinese rise that boost demands for luxury goods automobiles and jewellery, commodities used in these two sectors will benefit Anglo American’s platinum and palladium businesses.

Anglo also has major exposure to investment-oriented commodities, including iron ore, copper, and metallurgical coal, which Hodge expects waning demand growth for these commodities as China rebalances. 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
Anglo American PLC1,294.00 GBX0.19
Antofagasta PLC943.50 GBX0.37
BHP Billiton PLC1,352.00 GBX0.63
Glencore PLC348.75 GBX0.77
Rio Tinto PLC3,507.00 GBX-0.31
About Author Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk