With few exceptions, we continue to see commodity and miner share prices as overvalued. After a very strong start to the year, the markets for mined commodities have generally softened. Market attention has turned from the tailwind of last year‘s fiscal stimulus in China and enthusiasm around U.S.
Iron Ore Outlook
President Donald Trump to the headwind posed by structural change and the reduced importance of fixed-asset investment for China‘s future economic growth. The second quarter of 2017 saw a meaningful correction in mined commodity prices, particularly for iron ore. The benchmark 62% iron ore spot price of $54 per metric ton is down nearly 40% from the buoyant first quarter of $85 per metric ton. With further low-cost additions looming, demand from China likely to be anaemic, and port stockpiles at high and still-rising levels, the market continues to look oversupplied longer term.
Coking coal has fared better, with the disruption to Australian supply from Cyclone Debbie sending the spot price above $300 per metric ton. However, spot markets have quickly cooled as supply has recovered, and we now expect long-term drivers to reassert on the market.
Steel Outlook
For similar reasons, we‘re pessimistic on steel. Trump‘s protectionist leanings, highlighted by an announced investigation into whether high volumes of imported steel represent a threat to U.S. national security, have proved to be a boon to steelmaker stock prices in 2017. We contend that weak fundamentals will eventually win out, however, as substantial global overcapacity and decelerating fixed-asset investment in China will weigh on steel prices.
As Chinese stimulus measures have tapered, so have steel and steelmaking raw material prices. In the near term, U.S. steelmaker profits should remain attractive, but we see tougher times ahead. Based on our outlook, every U.S. steelmaker we cover is trading above fair value.
Gold Outlook
Investor demand continues to prop up gold prices at $1,200 to $1,300 per ounce, with ETF gold holdings largely recovered to levels last seen before the December 2016 US rate hike. But as the Federal Reserve continues to pursue rate increases, prices look primed to fall.
With the 10-year U.S. Treasury now yielding 2.2% and market inflation expectations at 1.8%, real interest rates are in positive territory, raising the opportunity cost of gold ownership. Additional rate hikes by the Fed would further discourage investor flows into gold and has the potential to unleash accumulated ETF holdings back into the market, pressuring prices.
Longer term, we‘re more optimistic, as we expect rising Chinese and Indian jewellery demand to fill the gap of shrinking investor demand for the yellow metal. We see limited opportunities in gold miners and caution that even undervalued companies are likely to face near-term headwinds.
