PESSIMISM towards the mining sector continues to grow ahead of today's release of new Chinese economic data, with Australia's top mining stocks suffering another selloff as investment banks continue to trim forecasts for both commodity prices and share prices.
Gloomy expectations that China will today release its weakest quarterly economic growth figures in three years were exacerbated when Credit Suisse downgraded its target share price for both BHP Billiton and Rio Tinto.
The bank's target price for BHP was revised from $45 to $35, while Rio Tinto's was revised from $90 to $70, based on the expectation that weakening commodity prices will shrink earnings by 32 per cent and 20 per cent, respectively.
The news accelerated a bad day on the markets for resources stocks, pulling the two major miners down by more than 2 per cent, and delivering hits of 6 per cent and 4 per cent to Fortescue Metals Group and Atlas Iron, respectively.
Shares in BHP and Rio have closed lower every day for more than a week, and the $30.40 that BHP was fetching last night is the stock's lowest ebb since March 2009.
As with Merrill Lynch and other big banks in recent days, Credit Suisse's thinking was driven by downward revisions for most commodity price forecasts, including those of most importance to the Australian economy: iron ore, thermal coal and coking coal.
"While commodity prices will remain well above the average of recent decades, it is likely that many have peaked for this cycle," said the Credit Suisse analyst note, led by Paul McTaggart.
But importantly for the local economy, the bank suggested that iron ore was one commodity that would enjoy higher prices.
Despite downgrading its own iron ore price forecasts 9 per cent, 8 per cent and 5 per cent over the three years from this year, Credit Suisse still expects benchmark iron ore prices to reach $US150 a tonne by mid-2013, well above yesterday's price of $US136 a tonne.
Dispelling suggestions of a sustained crash in iron ore prices, the bank is predicting a benchmark iron ore price of $US128 a tonne in 2014.
The Goldman Sachs analyst Richard Coppleson mounted a defence of the sector last night, declaring the negative sentiment surrounding Chinese demand for commodities was "overdone".
While China's June iron ore imports were lower than in May, he stressed the first half of this year saw China import more iron ore than in either the first or second half of last year.
"While a recovery in the short term is unlikely, downside risk is also limited and we expect a normalisation of demand going into 2013," he wrote.
The market volatility came on a landmark day for Rio, which announced that its chief financial officer, Guy Elliott, will step down next year after 32 years at the company.
Despite declaring that Mr Elliott would retire, it is understood he will continue to serve on other boards including at Royal Dutch Shell.
Frequently Asked Questions about this Article…
Why did Credit Suisse downgrade target prices for BHP Billiton and Rio Tinto?
Credit Suisse cut its target prices because it expects weakening commodity prices to reduce earnings — it revised BHP’s target from $45 to $35 and Rio Tinto’s from $90 to $70, forecasting earnings falls of about 32% for BHP and 20% for Rio.
How did the downgrades affect BHP, Rio Tinto and other Australian mining stocks?
The downgrades accelerated a selloff in resources stocks: BHP and Rio Tinto fell by more than 2% on the day, Fortescue Metals Group dropped about 6% and Atlas Iron about 4%. BHP had closed lower every day for more than a week, trading as low as $30.40 — its weakest level since March 2009.
What commodity price forecasts did Credit Suisse change and why does that matter for investors?
Credit Suisse trimmed forecasts for key commodities important to Australia — notably iron ore, thermal coal and coking coal — citing the likelihood that many prices have peaked for this cycle. Those downward revisions can reduce miners’ earnings and influence share prices, so they matter to investors in resource companies and the broader market.
What are Credit Suisse’s iron ore price expectations and how do they compare to current prices?
Despite downgrading its iron ore forecasts by about 9%, 8% and 5% over the next three years, Credit Suisse still expects benchmark iron ore to reach US$150 a tonne by mid‑2013 and projects US$128 a tonne in 2014. At the time of the article the spot price was about US$136 a tonne.
Is there a widespread expectation of an iron ore price crash?
No — Credit Suisse dismissed the idea of a sustained crash. While it believes many commodity prices may have peaked for this cycle, it still expects iron ore prices to remain well above the long‑term average and forecasts a return to higher levels in the coming years.
What did Goldman Sachs say about Chinese demand for commodities and the mining sector outlook?
Goldman Sachs analyst Richard Coppleson said negative sentiment around Chinese demand was 'overdone.' He noted China imported more iron ore in the first half of the year than in either half of the previous year and suggested that while a short‑term recovery may be unlikely, downside risk is limited and demand should normalise going into 2013.
What investor relevance is there to Rio Tinto’s CFO Guy Elliott announcing his step down?
Rio announced that CFO Guy Elliott will step down next year after 32 years with the company; he is expected to continue serving on other boards such as Royal Dutch Shell. For investors this is a notable leadership change to watch, though the article does not provide further detail on succession or immediate financial impact.
How should everyday investors interpret the market volatility tied to upcoming Chinese economic data?
The article highlights growing pessimism ahead of China’s economic release, which magnified selloffs as banks trimmed commodity and earnings forecasts. Everyday investors should recognise that short‑term volatility can be driven by macro data expectations and analyst downgrades, and consider whether price moves reflect long‑term fundamentals or temporary market sentiment.
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