Diversified mining giant Anglo American (LSE: AAL) has enjoyed a welcome bounce in Monday morning business, the stock last trading 6.1% higher from Friday’s close. And industry peer Vedanta Resources (LSE: VED) has also benefitted from resurgent market appetite, the company having gained 3.2% so far today.
Such chunky rises represent a marked departure from the languid performances of last week. Anglo American tumbled to fresh lows last week, the share price tanking 5% between Monday and Friday. And Vedanta Resources slipped 8% during the period.
The mining sector has enjoyed a bump higher on Monday as metal values have advanced, with bellwether metal copper leaping by more than $100 per tonne to change hands around $4,670.
But this represents nothing more than a temporary pre-Christmas bump in my opinion, and I fully expect the sector to retreat again sooner rather than later.
Metal forecasts remain murky
Indeed, quite why investors feel confident enough to plough into Anglo American and Vedanta Resources is quite beyond me, given the chronic market imbalances affecting all major commodity classes.
Indeed, just last week Goldman Sachs again slashed its price forecasts for iron ore for the next few years. The steelmaking component – a material from which Anglo American sources more than a quarter of underlying earnings – skidded to its cheapest since 2008 around $38.30 per tonne just last week.
Consequently Goldman Sachs now expects iron ore prices to average $38 per tonne in 2016, down from its prior prediction of $44. And the commodity is anticipated to slump to an average of $35 in both 2017 and 2018, a significant reduction from the broker’s previous $40 estimate.
It’s no surprise that analysts are becoming more and more bearish concerning commodity values next year and beyond, the double whammy of rising global output and falling demand due to the slowing Chinese economy exacerbating already-abundant supply levels.
Adding to these industry-specific factors, the prospect of an ever-strengthening dollar – prompted by expectations of further Federal Reserve hikes in the months ahead – should add a further layer of pressure to the embattled commodities space, I believe.
So what does the City think?
It therefore comes as little surprise for both Anglo American and Vedanta Resources to rack up further earnings pressure in the near-term and beyond.
The former is expected to experience a 55% bottom line dip in 2015, the fourth successive fall if realised. And Vedanta Resources is expected to rack up losses of 8.4 US cents per share in the period.
And I don’t expect things to improve any time soon. Sure, both companies have undertaken a variety of capital-saving measures to ride out the storm, from initiating additional cost reduction initiatives through to knocking the dividend on the head.
But until suffocating supplies in core markets begin to erode, I reckon the bottom line at Anglo American and Vedanta Resources – and indeed the wider mining and energy segments – is poised to keep on struggling.
