Tag Archives: copper

There are still some gems among Anglo American’s junk heap

This week, Mike van Dulken and Augustin Eden from Accendo Markets mine a little deeper into Anglo American’s “reversification”.

Shares in Anglo American (AAL), a mining giant that’s always had diversity at the centre of its business model, were the worst performing on the FTSE 100 in 2015. Such diversity was key to maintaining profitability in all commodity price conditions, which had been good for so long. But it’s clear that there’s now just one set of conditions: awful. It’s now become necessary to divest and Anglo American is just the latest miner to announce its plan to streamline its exposure. In this case, we’ll see its portfolio reduced to just three products from nine.

High growth emerging markets are, of course, seen as a bellwether for the commodities space as a whole. It’s little surprise that a perceived slowdown in China has dented a steel industry that’s been producing at very high levels for years. Iron ore and coal, the latter also highly out of favour as an energy source, are thus prime candidates to be dropped from a highly diversified miner’s repertoire. Copper, on the other hand, is a commodity that’s able to move with the times, present as it is not just in heavy industry and infrastructure, but also essential in the microelectronics that will dominate any economy that makes the transition from manufacturing and export-led to consumption and services-led.

With precious metals miners clearly benefitting from renewed safe haven demand in early 2016 and a global car industry that’s not only too big to fail (forget about the banks – this one really is), but subject to tighter controls given global warming and a certain car manufacturer’s recent antics, it makes sense to keep producing these products. Furthermore, the luxury goods market may well be oversold at the moment as investors connect slowing EM growth with a corresponding slowdown in the growth of the middle classes in that part of the world.

It’s pretty clear that slowing economic growth – or “continued transition” – needn’t automatically mean people are getting poorer. If anything, the western lifestyle should only pervade emerging markets more as their populations, more exposed to international markets every day, are increasingly freer to strive for material success. So things like diamonds, if you’re lucky enough to be mining them, look good too.

As far as Anglo American is concerned, there are of course positives and negatives in all this. The company is the world’s largest platinum group metals miner and owns DeBeers diamonds. Tick! However, with such a large portfolio of things no one wants (iron ore, coal…) for sale, Anglo finds itself operating in an already oversupplied buyer’s market as it tries to offload them. That, unfortunately, puts a big fat cloud of uncertainty over the company’s efforts. Yet with the entire sector plagued by exactly this type of uncertainty, what’s new?

And with ratings agency Fitch having today downgraded the miner’s credit rating to junk, one might be spooked by the news and worried about the miner’s future. However, its shares remain on a northerly charge from January all-time lows, almost doubling on improved sentiment towards its turnaround strategy, and they haven’t even batted an eyelid at this morning’s downgrade (AAL shares are currently up 7 per cent, near their highs of the day). Post crisis, we all know the ratings agencies are last to the party.

This analysis was provided exclusively for Hot Commodity by Accendo Markets: https://www.accendomarkets.com

Allianz GI’s UK equities fund manager on the merits of oil and why defensive stocks are losing their edge

In the first of Hot Commodity’s investor series, I chat to Simon Gergel, chief investment officer, UK equities at Allianz Global Investors, about which stocks are set to become a hot commodity next year and which ones will be yesterday’s news…

Simon says: oil majors

The fund manager is pretty bullish on large oil companies, which suggests that the sector is suitably distressed enough to become attractive. Simon thinks the oil giants are in a more promising shape than oil itself, as the depressed pricing environment has made the likes of BP and Shell cut costs and improve their business models. Although he is expecting the price of oil to rise in the medium term.

So will Allianz GI be ramping up its allocation to oil-focused equities? Simon did not rule this out. “We’ve already got quite a big position on oil companies and we have increased our position before,” he says.

Simon says: copper

Surprisingly commodities are not the pariah one might expect in the current pricing climate, dragged down by the growth slowdown in China. Or should I say SOME commodities. “It’s dangerous to generalise”, says Simon.

“A lot of production has been taken out of copper this year. It is much tougher to increase output for copper than for some other metals such as iron ore, as it uses deeper and more difficult technologies”, he says, the implication being that tightening supply will push up the price. “It is also less dependent on Chinese infrastructure. We’ve bought [FTSE 100-quoted Chilean copper miner] Antofagasta in the last six to nine months.”

Simon says: leisure

Other sectors on the Christmas wish-list are leisure stocks, such as gambling firms William Hill and Ladbrokes, cruise company Carnival, pub chain Greene King and satellite firm Inmarsat – “I see growth in marine and aviation communications”.

I asked Simon what he thought about fund guru Neil Woodford’s bullish stance on tobacco and healthcare.

“The problem with tobacco is that the valuations are so high now,” he says. “The product is on the decline in most parts of the world.”

Simon likes GlaxoSmithKline – “the Novartis deal transformed the business” – but that’s the only pharmaceuticals stock in his portfolio.

So what is leaving him cold?

“Defensive stocks/bond proxies have done well at a time of low rates,” he said. (Bond proxies are companies with healthy dividend yields and low volatility, that are seen as a safe-ish bet in poor market conditions).

But with rate rises imminent in the US and the UK, which will increase bond yields, Simon expects defensive stocks, including the likes of Unilever and Reckitt Benckiser, to become less attractive.

Simon expects an EU referendum in late spring/early summer. “Uncertainty around a Brexit could lead people to focus on global companies, which are less dependent on the UK economy,” he says.