The post-Brexit rush for stocks with vast international exposure has continued to propel mining giants like Anglo American (LSE: AAL) and BHP Billiton (LSE: BLT) in recent sessions.
Indeed, the FTSE 100’s (INDEXFTSE: UKX) surge to fresh peaks just shy of 7,100 points included Anglo American striking £10.43 per share at one stage this week, marking a 50% rise since June’s EU referendum and the most expensive since June 2015. And BHP Billiton strode to 16-month highs, to £12.67 per share, taking gains since this summer’s vote to 46%.
I fail to share this rampant market enthusiasm however, and believe both diggers remain in danger of a significant retracement.
Sterling support
The firms’ explosive ascent has been helped by a further decline in the value of sterling, playing into the hands of the world’s mining giants, which report their earnings in US dollars.
And the British currency’s value erosion shows no signs of stopping — this week the pound slumped below $1.22, marking fresh 31-year troughs. And further weakness can be expected as the government tackles the difficult EU separation process, providing the likes of BHP Billiton and Anglo American a handy boost.
Trade turmoil
But sterling weakness alone isn’t enough to merit recent mass inflows into the mining sector, in my opinion, particularly as commodities demand data remains on shaky legs.
Latest Chinese trade data released this week showed exports — in greenback-denominated terms — hurtled 10% lower year-on-year in September. This marks a sharp deterioration from August’s 2.8% decline.
However, slumping global trade isn’t commodities-glutton China’s only problem — imports also fell 1.8% last month, with stimulus from the People’s Bank of China still failing to stoke domestic consumption to required levels.
Iron sales grow
But Anglo American and BHP Billiton will no doubt point to bouncy iron ore import data as reasons to be cheerful. Inbound shipments of the steelmaking component clocked in at 92.99m tonnes in September, the second highest monthly amount on record and up 8% on an annual basis.
Asian buyers are out in force as Chinese mine closures have prompted mass stockpiling. But this doesn’t mean underlying steel demand is robust enough to warrant purchases on such a massive scale — indeed, foreign shipments from China’s mills dipped 2.3% in September from the previous month, to 8.8m tonnes.
Meanwhile, the steady decline in the country’s construction activity threatens to keep local inventories locked at high levels well into the future, as could Beijing’s decision to shutter between 100m and 150m tonnes of steelmaking capacity on environmental grounds. A significant supply overhang could deliver a hammerblow to iron ore purchases looking ahead.
Too pricey?
This worrisome outlook leads me to believe that earnings from the world’s major iron ore producers could continue to languish, particularly as aggregate ore production continues to tick higher.
And I don’t believe these risks are currently reflected in Anglo American or BHP Billiton’s share price. The latter changes hands on a forward P/E rating of 15.2 times, while its rival deals on an even-worse multiple of 25 times.
These figures are far above the benchmark of 10 times indicative of stocks with dodgy earnings prospects. As such, I reckon both firms are in danger of a shocking share price reversal should Chinese commodity demand begin to cool.