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Shares in mining companies hurt by Chinese lockdowns and operational issues
The strong run enjoyed by mining stocks has come to a juddering halt after Chinese lockdowns raised the prospect of reduced demand and some of the sector’s largest players revealed operational issues and downbeat outlooks.
China is the world’s leading consumer of many commodities and the country’s continuing policy of pursuing a zero-Covid approach is seen as a major threat to its economic growth and therefore its appetite for the metals produced by global mining firms.
While Chinese first quarter GDP was slightly ahead of expectations, showing 4.8% year-on-year growth, a target of 5.5% annual growth in 2022 now looks a real stretch with the International Monetary Fund slashing its own forecast to just 4.4%.
Jefferies analyst Christopher LaFemina says: ‘We would attribute the recent sharp sell-off in mining equities mostly to growing concerns about demand due to Covid lockdowns in China, Fed tightening and recession risk in Europe.
‘CYCLE ON HOLD, NOT DEAD’
He adds: ‘We expect the sector to remain under pressure for the short term, but we believe this will be followed by a continuation of the powerful upturn in commodity prices that began anew two years ago. The cycle is on hold, but it is not dead, in our view.’
Among the UK-listed miners, for its first quarter Antofagasta (ANTO) reported a 24% year-on-year decline in copper production thanks to drought-like conditions affecting its Chilean operations and lower grades of metal contained in material dug out of the ground. Similar issues led to a 13% decline in copper output at Anglo American (AAL) in its first quarter with the company also facing labour shortages and higher costs.
The environmental regulator in Chile has also recommended blocking the extension of Anglo American’s Los Bronces copper project amid concerns about the impact on a local glacier and water availability.
While the world may need copper to build the infrastructure required for a transition to renewable energy and electric vehicles, miners face a challenge to ramp up output while also limiting the harm they do to the local environment.
Issues with staffing were also seen in Rio Tinto’s (RIO) first quarter results with a 15% quarter-on-quarter decline in iron ore shipments from its flagship Pilbara operations in Western Australia. Chief executive Jakob Stausholm acknowledged ‘a need to lift our operational performance’.
BHP (BHP) in the three months to March 2022 saw volumes fall quarter-on-quarter in iron ore, nickel and thermal coal.