metals `super cycle' is intact
June 28 (Bloomberg) -- The metals `super cycle' is intact, and mining stocks such as BHP Billiton are likely to recoup their recent losses as continued demand for raw materials offsets rising interest rates globally, according to Merrill Lynch & Co.
Resources stocks including BHP and Rio Tinto Group, the world's biggest and third-biggest mining companies, lost a fifth of their value along with metals prices in May and early June as central banks in the U.S., Europe and China lifted rates.
Sydney-based analysts including Vicky Binns affirmed their `buy' rating for BHP and Rio Tinto in a June 20 note, assigning a 60 percent chance that commodities prices will resume their three- year rally over the next decade.
``We continue to believe the probabilities favor a bull trend case, which indicates that share price dips over the next two to three months is a buying opportunity,'' said Binns, Head of Australian Research at Merrill Lynch. She was ranked fifth among Australian metals and mining analysts in a 2005 survey by Business Review Weekly.
The U.S. Federal Reserve will probably increase rates this week for a 17th straight time. The European Central Bank raised borrowing costs this quarter, while China's government this month ordered banks to hold more money in reserves after lifting rates in April. Japan's central bank is also considering raising its key interest rate, near zero for more than five years.
Demand Vs Supply
Copper, used in wires and pipes, has fallen 21 percent since touching a record on May 11 in London. Aluminum, used in packaging and auto parts, has dropped 22 percent.
Shares of BHP and Rio are likely to be supported as global demand for metals exceeds supply, according to Merrill Lynch.
BHP has climbed 8.2 percent since June 13, after plunging as much as 21 percent from its May 11 record. Rio has rebounded 4.8 percent since June 13 after tumbling 19 percent from a May 12 high.
Demand for aluminum is expected to grow 5.7 percent in 2007, according to Merrill. Demand for copper may grow 4.4 percent, while rates of 3 percent and 4.3 percent are expected for zinc and nickel.
Binns expects BHP and Rio to report record profits for the first half of 2006. She raised her 2007 earnings estimates for BHP by 29 percent to $13.4 billion in a June 9 note, and lifted her 2007 estimate for Rio by 14 percent to $7.6 billion.
Further Weakness?
Still, Binns said there's a 30 percent chance mining shares may drop further in the next three months as concerns escalate that the U.S. will extend its policy of raising borrowing costs and China takes more steps to slow its economy. A 10 percent chance also exists that shares will shrug off the slump and set new highs in the next three months, she said.
Binns said BHP may drop to as low as A$23, 16 percent below today's close, before rallying. Rio Tinto may reach A$65 a share, 13 percent lower than today's close.
She advises existing investors should hold their BHP and Rio shares, and suggests those who don't should wait for further declines before buying.
JPMorgan Chase & Co. Australian-based equity strategists Martin Duncan and Charles Jones on June 15 recommended investors cut holdings in BHP and other mining companies, saying metals prices have tended to peak ahead of U.S. interest rates over the past 25 years.
The brokerage unit of JPMorgan cut its rating on BHP to ``neutral'' from ``overweight'', and reduced allocations to the resources sector.
JPMorgan argued that demand growth for metals from China is slowing. Chinese consumption of base metals grew 15 percent in 2005, down from 23 percent in 2003, the analysts said.
`Still Happy'
``The question of the moment for the Australian resources sector is whether the current sell-off is merely a correction before resumption of boom conditions or the onset of a sustained pullback,'' Duncan and Jones said. ``We believe it is more likely to be the latter.''
Gary Armor at AMP Capital Investors is holding onto his BHP and Rio shares, betting Chinese demand for commodities will keep growing fast enough to fuel more share price gains.
China, the world's fastest-growing major economy, is also the world's biggest user of metals such as copper. The economy grew an annual 10.3 percent in the first quarter, the fastest among the world's 20 biggest economies.
``We're still happy with our investments in BHP,'' said Sydney-based Armor, who helps manage $2.9 billion at AMP. ``The fundamentals that drive demand for metals are still intact, and over the long term we'll look back and see the recent loss as a correction.''