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There has been a steady drip-feed of bad news. First the gold price, then coal, then this week the iron ore price hit five-year lows. All have fallen steeply, taking the shares of the resource sector leaders down with them, some to multi-year lows.
At Bell Potter, head of research Peter Quinton wrestled with changing his “hold" call to recommending its brokers put their clients into the top miners’ shares. Normally the sustained slide in the iron ore price would whet his appetite – but not this time, not just yet.
His concern is that, if the iron ore price were reflected in earnings, there would be an immediate 20 per cent cut in the profit forecasts of BHP and Rio, and more for others such as
‘‘I’m not convinced the market is reflecting the price. Nor will we see the [iron ore] price push back up any time soon,’’ he says.
‘‘On a 12 to 18-month view, I’m happy to hold BHP and Rio. But near term, I’d sit on the sidelines.’’
The risk for buyers is heightened by uncertainty over China, the largest buyer of our iron ore. Concerns over that country’s slowdown may mean buyers need to exercise caution. “Patience and caution is a good policy at the moment,’’ BBY senior client adviser Henry Jennings says.
“Tuesday’s bounce was given back on Wednesday, for example. It’s continued slippage in this market. I’m not in a rush.’’
There’s poor economic data coming out of Europe, mixed data from the US and the numbers continue to fall short of expectations in China, he says.
‘‘If you have cash, just be patient and wait for the stocks you like to come back to your buying range."
The slide in the iron ore price to five-year lows this week signals little let-up in the gloom – for the near term, at least. The Bureau of Resources and Energy Economics says prices will improve, but maybe not back to former levels.
“Iron ore prices have fallen 37 per cent since the start of 2014," the bureau noted in its latest quarterly report. “While prices are expected to rebound . . . the peak of each rebound and trough is likely to be lower as more supply enters the market."
The decline in the Australian dollar has prompted reflexive selling of leading banks and resources by foreign investors rather than reflecting their view of fundamentals, Quinton says. “That usually gives you a ‘buy’ opportunity. Traditionally, you have been a winner with this strategy, but it is not something you should be doing today."
It is also hard to recommend investors take advantage of the export bans on nickel and alumina by Indonesia and the Philippines, since this involves putting money into smaller names, which many are reluctant to do, he says. But investors with spare cash looking for a home may wish to take a closer look at oil and gas.
‘‘I quite like
“If I was to put fresh money into the market it would be Oil Search, rather than BHP or Rio, but that is very difficult to push to investors with concerns over the price outlook and the prospect of start-up export projects in the US. ’’
BBY’s Jennings points to Oil Search’s ‘‘massively increasing production profile with PNG coming on stream, spitting out a lot of cash. ‘‘That’s my preferred pick. Stocks in the sector have come back a long way, stocks like
The Australian Financial Review