As China rebalances away from infrastructure and construction-led growth, long-lagging Anglo American (AAL) will find itself better positioned than most diversified peers. The company has greater exposure to consumption-oriented commodities like platinum and diamonds, about 40% of revenue, which should enjoy better demand growth than investment-oriented commodities like iron ore and copper that prospered most in the past decade.
Anglo's huge platinum business should benefit as rising household incomes bolster Chinese demand for automobiles and jewellery, categories that collectively account for 84% of platinum and palladium use in China. However, persistent problems related to labour, geology, and electricity in South Africa, which have weighed on profits in recent years, threaten to limit the upside.
Copper has endured an awful 2015 so far, extending a bout of weakness that kicked off in late November. At $2.53 per pound in the spot market, copper has fallen $0.50 in just a couple of months. The red metal's recent troubles are particularly striking relative to its resilience for most of 2014, which stood in sharp contrast to ill-fated iron ore. For iron ore, 2014 was downright ugly: prices dropped 47%. By contrast, iron ore has held steady so far this year, hugging the $70 per ton mark for the past couple of weeks.
We'd point to copper's lagged leverage to Chinese real estate as one of the main causes for its delayed drop, a phenomenon we addressed in our fourth-quarter 2014 report "Copper's Resilience Won't Last." As China's real estate starts declined throughout 2014, down 9% through November, Chinese copper demand, 40% of the global total, held up surprisingly well, but only because copper is used much later in the construction process than iron ore. We believe weak real estate activity is now beginning to affect Chinese demand for copper wires and pipes in a big way.
Largely due to a persistently bearish view on Chinese real estate, we've been more bearish than most on copper for quite some time. We remain more bearish, but the gap has shrunk as consensus enthusiasm has waned. We're maintaining our 2015 copper price outlook of $2.67 per pound, also our long-term outlook, a longstanding view largely informed by our reading of the cost curve. That said, commodity prices seem to have a way of defying conventional wisdom regarding cost curve support, so the risk to our view is substantial.
So is the risk to our view that copper mining stocks are looking attractive, which is why we assign a high or very high fair value uncertainty rating to every copper miner we cover. Despite large share price declines for copper blue chips like Freeport-McMoRan, we don't yet see enough margin of safety to merit diving into a bloodbath.
