Going by yesterday’s FTSE 100 movements, I think we’d be forgiven for thinking that we’re in the midst of a boom rather than a slowdown and prepared for a second stock market crash. Multi-commodity miners like Anglo American, BHP, Rio Tinto, and Glencore made gains. In fact, as I write, they are still rising. Typically, miners are cyclical stocks, which means they tend to perform better during upturns. A Reuters report ascribed the rise to improved data on the Chinese economy, which saw a bounce back in industrial production.
China’s impact on mining
This may well be the case. But it’s only the starting point for long-term investors who may now be tempted to consider buying FTSE 100 mining stocks. I’d ask at least two more questions before buying. The first is: Even if the Chinese economy has shown signs of recovery, is it sustainable? And relatedly, how far does it impact miners?
As far as the Chinese economy goes, it is expected to grow at 1% in 2020 according to the IMF. I think that’s a positive, given the severity of the clampdown on economic activity seen this year. But, clearly, this is also a vast decline from the over 6% growth seen in 2019. The 2019 level of increase isn’t going to be seen even in 2021.
China dominates global metal demand. So, slow growth there can tell on the future of the metals and mining industry. I’d also keep an eye out on the US-China trade war, which is quickly seen as developing into a new cold war. This could also keep metal demand comparatively muted.
Company level performance of FTSE 100 miners
The next question I’d ask before buying any of the metal stocks is: How is each of the FTSE 100 miners placed for the near future? For instance, Glencore has struggled with graft charges in the recent past. Similarly, Rio Tinto recently came under fire for indiscriminate mining decisions, which led to its CEO stepping down. These may well impact the share price of these FTSE 100 stocks over time. If charges against GLEN are proven right or RIO takes a long time to hire a new CEO, investors could start losing confidence in these stocks.
However, there are other drivers for stock prices too. I think it’s key to look at the financials. The good news is that all four of the FTSE 100 stocks are robust. They are also all profit-making, except GLEN, which recently reported losses. The longevity and size of these companies also inspires confidence, making them potentially good investments in the long run. For this reason, they also have an advantage over smaller and younger mining companies. As long as they are able to capably manage issues that may arise, as in the cases of GLEN and RIO, irrespective of stock market crashes and recessions, I think they can prevail and be profitable for investors.