Today I’m explaining why I think the commodities space remains an unattractive destination for stock selectors.
In perilous waters
Investor appetite for the oil sector has been revived in recent weeks as supply problems in Nigeria and Canada have soothed the pressure on bloated inventories. However, I reckon these outages are likely to prove nothing more than a temporary panacea, and that fossil fuel specialists like BP (LSE: BP) are not yet out of the woods.
Indeed, a resurgent oil price has led to North American producers getting back to work, a situation that bodes ill for the market’s long-term supply/demand dynamics. Latest Baker Hughes data showed the number of US rigs in operation up for the third successive week last time out, to 337 units.
And sparking production activity across the pond is likely to increase the reluctance of OPEC and Russia to trim their own output, such is their determination to maintain market share.
Sure, the City may expect BP to flip back into the black in 2016 with earnings of 19.1 US cents per share. But a consequent P/E rating of 28.6 times still makes the firm an unattractive stock pick, in my opinion, particularly given the obstacles likely to block further oil price strength.
Supply woes
Like BP, I believe the massive material imbalances washing over commodity markets make Anglo American (LSE: AAL) a dicey pick.
This is particularly the case in the iron ore market, where big players like BHP Billiton and Vale are hiking their mining capacity to counter falling metal values on their top lines.
At the same time, prolonged cooling in China’s construction sector could see demand for the steelmaking ingredient collapse in the coming years. Indeed, industry group worldsteel expects demand from the Asian giant to keep shrinking through to the close of 2017 at least.
The number crunchers expect earnings to dip 36% at Anglo American in 2016. And I reckon weakness should extend in the years ahead as the market swims in unwanted supply, making a forward P/E rating of 20.8 times unattractive value.
Surging stocks
Copper giant Antofagasta (LSE: ANTO) is also at the mercy of a moderating Chinese economy as the country accounts for almost half of total global demand.
News that total Chinese exports tumbled 4.1% year-on-year in dollar-denominated terms in May casts a pall over ‘red metal’ demand in the near term and beyond, as does recent London Metal Exchange data showing material held at its Asian warehouses roaring higher.
With copper producers the world over also hiking investments heavily to increase production, I reckon Antofagasta is also in danger of suffering protracted top-line troubles.
So even though Antofagasta is expected to see earnings surge to 10.7 US cents per share in 2016, I believe a subsequent P/E rating of 56 times fails to reflect the risks facing the business in the near term and beyond, and by some distance.
