MARKETS SPECTATOR: Deepening mine shaft?

This month marks the two-year anniversary of the bear market for commodities. The S&P/ASX 200 Materials Index has dropped 42 per cent since April 2011. In the last two months its descent has been rapid, having slumped 21 per cent.

But as the ASX opened for trading this morning, a trader, unfazed by the double digit declines in the shares of BHP Billiton and Rio Tinto, mused aloud that the stocks were a 'buy'.

The world’s biggest mining stocks were trading close to the net present values, he said. For example, Rio, he said, was trading as though the price of iron ore was between $US80 to $US90 a tonne rather than its current price of about US$126..

Sure enough, Rio and BHP have stopped the S&P/ASX 200 Index from a swoon. Rio has surged $1.48, or 2.8 per cent, to $53.55 at 1:29pm. AEST. BHP was up 49.5 cents, or 1.6 per cent, to $31.145.

Iron ore miners Fortescue Metals Group has risen 17 cents, or 5 perc ent, to $3.60 and Atlas Iron shares have gained 5 cents, or 5.8 per cent, to 91.5 cents.

Atlas and Fortescue sell almost all their iron ore to China. Morgan Stanley strategist Malcolm Wood, unlike many of his peers, says Chinese economic growth is poised to rebound.

BHP and Rio have also been at pains to stress their commitment to cut costs. Yesterday in London, Rio chief executive Sam Walsh said the company wants to cut costs by $US5 billion over the next two years as against 2012 costs. Moreover, Walsh said: “we are targeting significant cash proceeds from disinvestments”.  That may mean a buyback of Rio shares and/or an increased dividend to shareholders.

But, overall, few in the market are bullish about miners. Iron ore supply is increasing as miners such as Rio and Fortescue ramp up production in the Pilbara. Global copper supply is also set to rise, helped by Rio’s new mine in Mongolia. Meanwhile, the drop in coal prices has forced many projects to be shelved. The exploitation of shale gas reserves in the US is boosting the supply of gas and prompting many to predict a price slide.

Wood and his Nomura counterpart, Tim Rocks, expect investors to continue to be attracted to so-called yield stocks. Record low interest rates and bond yields globally have forced money into high yielding stocks such as Telstra. Its shares have risen to $4.77 from $4.50 in two weeks. REITs, banks and infrastructure stocks may too be favored.