Mining Stocks Drop As London Trade Carries Over

Why do we always hear about BHP Billiton [ASX:BHP] or Rio Tinto [ASX:RIO] trading on the London stock exchange? Does it really matter if mining stocks go up or down on a different exchange to ours?

It may seem unimportant to pay attention to other exchanges. But since London is nine hours behind us, we are able to study BHP’s and Rio’s price movements not just six hours of the day, but 12 hours — that’s six hours in Aussie trading, and 6 in the UK.

News surrounding BHP comes out irrespective of the time. News about a mining disaster, or a sharp drop in iron ore prices, could come out at 12:00am AEST (3:00pm London time). While the ASX is ‘asleep’, shares for BHP, Rio and others are able to fluctuate on the London exchange. Therefore, by the time our market opens we already have an idea of the general concerns investors have surrounding said news.

But you’re probably better off ignoring daily fluctuations of stock prices if your investment timeline is long term. However, for those of you who wish to only take positions in the market for a week or month, then tracking what stock prices do overnight could pay off.

The prediction this morning was that miners like BHP, Rio and other miners would initially trade down. Why? Last night, in London, BHP traded down 6.1%, Rio dipped 5.7% and others, like Anglo America plc [LON:AAL], dropped more than 14%.

So what happened this morning on the ASX? Exactly what was predicted. BHP and Rio traded down more than 4% on open.

Last night’s mining dip in London trade was the result of many factors — the first being iron ore. Iron ore traded down 5.7%, to US$54.99 a tonne. The mineral is now down more than 22% from its peak of more than US$70 a tonne.

Metal Bulletin Iron Ore Index

Source: Business Insider Australia

The catalyst for the decline in iron ore was actually the Dalian Commodities Exchange (DCE) — an exchange that presides in the Chinese city of Dalian.

The reason iron ore saw the sharp drop ripple across the globe was down to the level of speculation surrounding commodities in general.

Rising stock piles and increasing prices just don’t add up. Many banks believed, and rightly so, that iron ore’s surge was unfounded. Chinese speculation on the commodities markets is what drove the price up. However, when Chinese ports expand their holdings by 100 million tonnes, speculators are inevitably silenced.

Is iron ore out for the count?

The DCE exchange said on Monday that it would curb the rise of speculation by raising transaction fees. Basically, it will cost more to trade, and therefore discourage, traders from heavy speculation. This is the logic that the DCE is using. But they are not the originators of this policy.

Earlier this year, there was a lot of speculative trading on the Shanghai Futures Exchange. In response to this speculation, they did exactly what I’ve explained above. They increased the cost for each transaction made in late April. Whether it’s been effective or not is unclear. Not enough time has elapsed to make any such hypothesis.

But the DCE has raised margin requirements and tightened rules on what they call ‘abnormal trading’. But, as it stands, iron ore might not have an unexplainable surge for months to come. This means that recent trading in iron ore that was thought to be cause by fundamental changes has been undermined.

It also raises a question over recent forecasts of iron ore itself. The Australian government suggested that the Free on Board (FOB) iron ore would trade around US$50 a tonne in the upcoming fiscal year. However, the FOB iron ore price is now around US$5 below their current forecasts.

As calculated by the treasury, a US$10 per tonne reduction in average iron ore prices would have a large impact. It would, in fact, result in a $6.1 billion dollar reduction in nominal GDP in the 2016–17 fiscal year.

So if you’re still wondering why we always hear about London trade, it’s because small differences in time impact the big picture after all.

Härje Ronngard,

Junior Analyst, Money Morning

PS: Mining stocks have been volatile of late. They’re also trading much lower compared to just three years ago. This may not be a bad thing, though. There are always opportunities in the market that presents themselves when things take a turn for the worse.

But you need to be honest with yourself. If you are taking on risk, understand the outcome if things don’t turn out the best.

Let’s not kid ourselves, not every miner is going to close up shop and go out of businesses tomorrow. The opportunities are there for investors — they only need to find them.

According to Money Morning’s resource specialist, Jason Stevenson, there are 10 great miners in the market right now. As Jason says, this could be the perfect time to buy mining stocks, as they’ve never been lower.

In Jason’s report, ‘The Top 10 Australian Mining Stocks for 2016’, you’ll find all the answers you’re looking for. To get your free copy of Jason’s report, click here.

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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