Mining stocks face pressure from China's reforms - Financial Times

What next for the miners after a choppy 2017?

Analysis from Liberum puts the sector’s strong start to the year down to the late stages of a cyclical upturn in China, its biggest destination market. Monetary tightening there took a toll in the second quarter, before clearer insight into reforms in the summer lifted the mining sector back toward its highs from late June.

“The rest of the year will be a battle of competing forces,” says Richard Knights at the broker.

“The domestic supply-side reforms in China begin in earnest, which will have a myriad of implications on the industrial commodity space, at the same time as our lead indicators are pointing to a roll over in the lacklustre demand we’ve seen in China this year thus far.”

Liberum thinks investors are already pricing sharply lower bulk materials prices into the sector. Nonetheless, it predicts “absolute underperformance” from metals stocks into the year-end.

But there is nuance in the outlook on a stock-by-stock basis.

“Rio Tinto continues to screen cheaply on spot and management are saying and doing all the right things . . . however we struggle to buy Rio at this juncture, with the still significant risks to iron ore prices under our base case.”

Glencore is Liberum’s top pick among the big miners, due to its “commodity mix and defensive marketing business”, with the stock “trading incredibly cheaply on spot commodity prices”.

michael.hunter@ft.com