Just when you thought things couldnt get any worse in the commodity sector, they suddenly got better. One minute big names Anglo American and Glencorewere slugging it out for the title of the FTSE 100s worst performer in 2015, the next they were posting double-digit monthly returns.
Contrarian investors who bought at the bottom of the market deserve to be congratulated for their courage, craziness and sheer good fortune. But will it last?
Large caps, massive gains
Incredibly, Anglo American is up 77% in the last month. That kind of turnaround simply shouldnt be possible in a company with a market cap that runs to 7 billion. Glencore, with its 18.8bn market cap, is up 45% over the same period. These are multi-billion pound companies behaving like penny stocks.
BHP Billiton and ,have beenrelatively muted by comparison, rising 10% and 13% respectively. But even that is pretty incredible, given that BHP Billiton has just admitted toa half-year loss of $5.67bn and slashed its dividend, while Rio Tinto fessed up toa 27% drop inconsolidated sales revenues to$34.8bn and dumped its progressive dividend policy at the same time.
Bulls Rush In
As a long-term commodity stock bear, who sold out of BHP Billiton and spent the subsequent two years shoutingto anybody who would listen, warning that the China growth story couldnt last forever, I am now in a difficult position. I missed the recent rebound and I still dont believe in it, but I am also aware that this may just be sour grapes.
Investor sentiment has turnedon a sixpence, as beliefflooded back into the market. Last monthwas certainly a great time to go bargain hunting.The big miners were duea slice of luck, as they have been working hard to strengthentheir overloaded balance sheets by boosting production, slashing costs, cutting capex, dumpingnon-core assets, slashingdividends and overhauling their strategic plans.
Bear In A China Shop
The truth is that the rebound isnt down to anything the miners have done. Once again, it is all about China.Investors have beencheered bysigns of a rise inChinese infrastructure and construction demand, even if it islargely credit-fuelled.Iron ore prices recently recovered to $50 a tonne, up 30% from theirDecember lows. Copper is also up to $2.16 per pound, up 10% fromaround $1.96 in mid-January. Where copper and iron ore lead, mining giants are sure to follow.
YetI do not see Chinese demand recovering to former levels. Even if its economy avoids a hard landing, the countryis shifting towards consumption andaway from infrastructure and exports. Chinese PMI readings continue to slip, with manufacturing hitting a seven-year low, withthe privately compiled Caixin measureshowingatwelfth consecutive contractionary reading.
Commodity prices and stocks fell so low, so fast, that some kind of rebound was likelyas valuations became irresistible. It is cruelto call thisa dead cat bounce, but amid continuing signs that the global economy is slowing, it seems daftto hail it as the start of a serious recovery either.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Rio Tinto. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.