Emerging market demand growth anticipated in metals and mining

The long term view of Brewin Dolphin, the UK’s largest independent private client investment manager, on the mining sector remains positive due to emerging market demand growth driven by infrastructure investment and urbanisation mainly in China.  However, metals exchange inventories have remained lower than in previous recessions due to rapid reduction cuts etc.  Supply is also likely to become constrained as the mining industry has substantially cut capital expenditure.

At the beginning of September Brewin Dolphin recommended a tactical trimming of the mining sector. The sector had performed very well since the stocks reached their lows between November 2008 and February 2009. The stocks had been driven by the market coming to believe that a recovery was underway – our upgrades in previous quarters were geared to play this momentum.

The question is now shifting to how sustainable the recovery will be, which will take a little longer to become clear. On the macro side mining investors will hope to see solid GDP numbers over the next two quarters. In the metals markets the true demand picture has been obscured by restocking by the industry and strategic stocking by China. The true picture in underlying demand is unlikely to become clear until the early part of 2010.

The stocks have moved a long way very quickly and are already pricing in a positive commodities outlook for 2010. Chinese GDP forecasts have risen very fast and there is a risk of some downgrades to these as China tries to rein in credit.

Longer term Brewin Dolphin remains positive on the mining sector due to emerging market demand growth driven by infrastructure investment and urbanisation, mainly in China. The world is exiting this recession in a good position in many commodities. In many metals exchange inventories have remained lower than past recessions due to rapid production cuts and China’s stocking. Supply is more likely to be constrained sooner as the mining industry has substantially cut capex, as is typical in recessions.