MARKETS SPECTATOR: Cheap mining trap

Citigroup has warned against chasing mining bargains, citing volatile commodity prices and a spate of earnings downgrades worldwide.

Want to bottom fish mining stocks? Be careful, warns Citigroup analyst Jon Bergtheil, “it is easy to forget how volatile metals prices can be”.

BHP’s stock has fallen 19 per cent since its 52-week high on February 19 of $39. Rio Tinto’s shares are down 28 per cent since their 52-week high on February 14 of $72.07. Fortescue’s stock has plunged 44 per cent since their 52-week high of $5.39, also on February 14. The spot price of iron ore imported through the northeast Chinese city of Tianjin has also fallen 28 per cent since its 52-week high of $US158.90 a tonne on February 20.   

“Growth is weak and commodity prices subdued,” says Bergtheil’s Citi colleague David Lubin.

Of more of a concern for miners and the broad Australian market is that global earnings revisions, on the cusp of an overall upgrade a month ago, are now trending down. Analysts are putting in more downgrades, says Citi analyst Robert Buckland. This is consistent with a fall in global stock prices.

The global earnings revisions index was at 0.18 last week, according to Citi. This means the upgrade to downgrade ratio was two-to-three, the worst in the year to date.

At 1454 AEST the S&P/ASX200 Index was up 60.84, or 1.3 per cent, to 4716.80. The index is up just 1.5 per cent this year compared with as much as 12 per cent between January 1 and May 14 when it rose to a 52-week high of 5220.987.

On a US dollar basis, the index is down 9.6 per cent this year.