FTSE 100 stock Anglo American (LSE: AAL) is around 40% off its January 2023 high. And the key reason, it seems to me, is China. Like all major commodities firms, it has been hit by uncertainty about growth prospects in the country.
Since the mid-1990s, China almost single-handedly sustained the commodities ‘supercycle’, characterised by rising commodities prices. This came from the vast disparity between its need for these commodities and its lack of indigenous resources.
However, economic figures this year have looked a lot less bullish to many analysts.
For me though, what many overlook in these numbers is that whatever is required politically will happen. And this means that whatever President Xi Jinping decides to do, he does.
What does Xi want?
Xi wants economic growth this year of 5% or more. And he wants this to be achieved in a careful way that does not risk surging inflation later.
He has seen that flooding the economies in the West with cheap money has caused an inflationary spiral. He does not want the same, or the ballooning interest rates required to combat that.
This caution is why the economic figures this year have been so mixed and why they have caused knee-jerk trading reactions.
What does this mean for the shares?
Anglo American is one of the leading companies across virtually all key commodities areas. It is the world’s largest producer of platinum, with around 40% of world output. It is also a major producer of diamonds, copper, nickel, iron ore, and coal.
China has been a big buyer of all these commodities since the mid-1990s. In the first couple of phases of its growth, these were used in a dramatic manufacturing-led boom. Iron ore is used to make steel — key to China’s later infrastructure buildout.
Several of these have also been used in China’s energy transition business. Platinum is a core component in catalytic converters. Analysts’ predictions are for prices to rise to $1,200 per troy ounce by 2025, from around $910 currently.
Copper also plays an essential role in computers, smartphones, electronics, and other appliances. Analysts’ predictions are for prices to rise to $15,000 per tonne by 2025, from around $8,200 now.
Excellent shareholder rewards
Predicting future commodities prices is notoriously difficult, of course. Less difficult for me is expecting that Anglo American will maintain good rewards for its shareholders.
In its preliminary 2022 results released on 23 February, it paid a $0.9bn final dividend. This was equal to $0.74 per share and — crucially — was consistent with its 40% payout policy.
In 2021, it paid out 7.5%, in 2020 it paid 3.2%, and in 2019 it paid 4%.
The key risk I see here is that China’s economic recovery falters. This would mean demand for commodities staying lower for longer and prices staying lower too.
I expect the company to recoup all its share price losses in the next 12 months, subject to market conditions. If I did not have holdings in companies in the sector then I would buy the shares now, without hesitation.
