China’s ongoing currency devaluation is proving a major headache for the Aussie share market. Unfortunately for major mining stocks, the weaker Renminbi (yuan) is hitting the commodities sector the hardest.
The outlook for the mining sector on the ASX is grimmer still. China’s slowing economy, on top of falling demand for resources, could weigh on mining stocks for the foreseeable future. With this week’s yuan devaluation, demand will fall again as the price of importing minerals rises.
Throw in declining commodity prices into the equation, and you have a recipe for long-term stock price decline on the ASX.
The first major sign of trouble for commodity exporters came yesterday. The mining stocks had a torrid day on the trading floor.
BHP Billiton [ASX:BHP] fell 4.3% at the close of trade, to $25.27 a share. Rio Tinto [ASX:RIO] saw a similar fall, down by 5.4% to $51.73. Meanwhile, Fortescue [ASX:FMG] saw the steepest fall, down 8% to $1.79 a share.
Wednesday’s mining stock selloff sent the ASX down 1.7% for the day. The ASX finished on 5,382 points. Worryingly, the ASX has fallen by 10% since the start of April. With mining stocks making up roughly 15% of the index, it’s enough to put the ASX in correction territory.
The ASX could decline further still, depending on how far the yuan falls.
Mining stocks bear the brunt of weakening yuan
The sharp decline in mining stocks followed two straight days of yuan devaluations. But the People’s Bank of China (PBoC) didn’t stop there.
Today, it weakened the currency by another 1.1%, sending the spate of devaluations into their third consecutive day. Since Tuesday, the PBoC has devalued the yuan fix by 4.65%.
It’s a major blow to commodity exporters for one single reason. It makes Aussie iron ore and coal exports more expensive for Chinese buyers.
Of course, higher prices weigh negatively on demand too. In turn, that potentially limits future export volumes.
But today’s Renminbi devaluation didn’t send mining stocks lower.
Despite the devaluation, the mining stocks are faring better in late afternoon Thursday trade.
BHP is up 1.55% for the day, trading at $25.73 a share near close of trade. Rio Tinto rose 0.72% for the day, with shares selling for $52.00 apiece.
But the day’s best performer so far is Fortescue. Australia’s third largest resource exporter is trading at $1.83, up 2.37% for the day.
This doesn’t necessarily mean things are looking up for the miners. In Fortescue’s case in particular, it had the most to gain after yesterday’s heavy price fall.
It probably has to do with the fact that markets are coming to terms with the yuan’s devaluation.
Yet there’s no telling when the yuan’s devaluation will end. Analysts predict the yuan could weaken by 10% once it’s said and done. That’d mean a further 5% devaluation from current levels.
In other words, more pain for mining stocks is on the way.
Short sellers attack mining stocks
Cadence Asset Management analysts reckon mining stocks haven’t hit a floor just yet. They see further stock price falls at both Rio and Fortescue.
‘We have no interest in buying stocks that are falling in price. At the end of all of this there will be some survivors’.
That could be a warning to Fortescue in particular. As the weakest of the major Aussie mining exporters, it stands to lose the most.
With the price of iron ore tipped to fall below US$40 a ton, the worst may be yet to come. Goldman Sachs analysts believe iron ore prices will bottom out over the next four years.
In any case, you’d be brave to predict a bright future for smaller iron ore exporters. Those without the market share, or favourable profit margins, to weather the storm are in for a rough couple of years.
It doesn’t mean BHP and Rio are going to collapse anytime soon. But the likes of Fortescue need to find ways of staying competitive.
One of the things they’ve done recently is to engage foreign buyers in taking stakes in its infrastructure assets. The latest rumours involve highly capitalised Chinese buyers. Such deals would help lift the pressure off Fortescue.
But it’s a grim outlook for the resource sector whichever way you cut it.
Prices have tumbled as market share driven strategies flood the market with supply. China’s sluggish economy has only forced down demand for minerals. And now we have a yuan devaluation that makes imports costlier for Chinese buyers.
It all points to one thing: a period of steady decline for mining stocks.
Contributor, The Daily Reckoning
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