We turn our attention to the resources sector. If the market in general has been a rollercoaster for the past week, the resources sector looks as though it has been subjected to tag-team wrestling bout.
In the corner against it there is a slowing US economy being partnered by an easing of demand from China - and they’re looking pretty mean at the moment. In its own corner it has the falling Aussie dollar trying to urge it on - “You don’t need to sell as much because I’ve fallen against the Greenback, just make sure you stay on your feet.”
Rio Tinto CEO Tom Albanese has said that the company won’t be materially affected by a softening of demand from China. He said, “In this environment, until we see fourth quarter steel production pick-up, which we haven’t - we’re just two weeks into the month but we are beginning to see the stocks working down - they will be looking hard at their overall iron ore imports.”
To us it makes sense that China is going to put the brakes on. It was bound to happen at some point. The important point is not so much that they have done so but rather how long it will take before they lift their foot off the brake.
Once the steel producers have used up a significant amount of their stockpiles then they will need to ramp up the shipments again. The unknown part of it is to what extent. Chances are that it will be more subdued than what we have seen during the last five years or more, but it will still be a big driver of the commodities markets.
Yesterday we asked Al Robinson, intrepid editor of Diggers & Drillers for his thoughts on what is happening with resources companies at the moment. “The four cheap, cash-greedy resource stocks we took a look at in Diggers and Drillers last week have all risen. They’re up 21%, 22%, 40% - and the fourth just threw off a massive dividend. It looks like we’re seeing the beginning of a flight to scarce, quality assets.”
“If the markets are truly coming around - and if the government bailouts inject confidence back into asset markets - then these safe, undervalued mining and energy stocks have some big, big gains ahead of them before they’re back at their rightful prices.
“That said, the biggest resource sale of all time probably won’t be over in a single week. But the fastest part of the bounce is unfolding on my computer screen right now.”
He was right about that. As we write the market is down by over 5% this morning following a 7% fall on Wall Street and London overnight as investors slowly work out that the billions (or is it trillions) of dollars of bank bail outs will do little to stop the slowdown of the US economy.
We’ll revisit the bank bail-out plans again tomorrow. Quite a few things have happened since we last looked.
