Iron ore giants BHP (ASX: BHP) and Rio Tinto (ASX: RIO) look fairly valued after an 18% fall since June in concert with iron ore prices. This is the first time in the 2.70 to 2.90 range for Rio since November 2021. This week, copper prices reached a 19-month record low with the local copper miner Oz Minerals (ASX: OZL) undervalued for the first time since 2020. Diversified miners Mineral Resources (ASX: MIN) and South32 (ASX: S32) are also in the red.
Commodity prices are falling sharply from recent highs as investors fear that rapidly rising interest rates in heavyweight regions from the US to the Eurozone risk tipping the global economy into recession, Morningstar equity analyst Jon Mills said. This week, renewed lockdowns in China weighed more on demand, he says.
“[China] were allegedly reopening but now they’re cracking down again, so that’s one big reason,” he says. The other big reason is that it’s as if all the central banks in the Western world are raising interest rates extremely fast, because they believe they’re out of control of inflation they continue to push upwards. And so they started, you know, they went from not worrying about inflation to that projection that they’re really worried about inflation,” he says.
Commodities closely tied to economic activity like oil and copper are dropping fast as traders wager on slower growth. Brent crude oil, the international benchmark, fell briefly below US$100 on Wednesday, a 9% drop since June. Copper recorded its worst quarter since January last year in June. Iron ore has fallen 43% since an April peak, grappling with fears of softening demand in China, the world’s biggest importer.
The Bloomberg Commodity Index which tracks the performance of 23 commodities is down 18% over the last month.
Traders are responding to new data indicating leading sectors of the global economy seem to be cooling even as China brought back lockdowns in major cities.
US retail sales fell 0.3% in May from the previous month. A US manufacturing activity fell for June, but showed expansionary conditions. At the same time the euro hit a two-decade low against the US dollar on Thursday with the continent’s energy crisis threatening to tip the economy off a cliff.
“A deluge of softer data from the US vindicates growth bears,” Morningstar head of equity research, Peter Warnes, said in a client note.
The latest client survey from investment bank Deutsche Bank showed that 90% of respondents expect a US recession by the end of 2023, a big jump from the 35% in Deutsche’s December survey.
And a province in China, Anhui, announced lockdowns after nearly 300 cases of covid-19. Xi’an city on Wednesday, ordering businesses, schools and restaurants to shut for one week after the 13 million population city reported covid-19 cases.
Oil and copper and other commodities soared to multi year highs after Russia’s invasion. Fears of underinvestment and a supply deficit helped keep prices high. Energy and resources led as wider markets suffered brutal selloffs.
Fundamentally, oil looks strong
These underlying supply and demand imbalances helped fuel the oil price, 18-month rally but remain intact and any price correction is likely to be temporary, Lazard Portfolio manager Aaron Binsted says.
“I feel that even if we have some demand hit, yes, oil prices might drop a little bit and yes, oil equities might drop somewhat, but the depth of this likely is going to end up being shallower than everyone really thinks,” he says.
“As soon as you have an economic recovery, we’re going to return back to those constraints of a limited energy supply.” To say that, yeah, there’s gonna be an impact, but I think it’s going to be a lot shallower and a lot shorter than people think,” Binsted added.
