The bull case for miners

From Credit Suisse:

Equities have not priced in current commodity prices With uncertainty around economic policy direction in both the US and China, it is no wonder mining investors are nervous. For our part, we are firmly of the view that: i) the risk to mining sector earnings is to the upside; and ii) that current commodity prices can’t hold. We don’t see this as contradictory. Rather, we think commodity prices will retreat and that even at the low levels that we forecast two years out, mining valuations are (mostly) fair. The bears wills say that falling commodity prices means miners will come under pressure. Our counter is that we’d use any meaningful sell off to increase mining sector weightings. Even under our conservative base case numbers balance sheets are healthy and capital management will likely become a sector focus in the year ahead. The latest China data releases point to a slowing in the rate of monetary expansion. Money growth is still expanding (Figure 2) but at a lower rate and this sees our lead indicator now flattening out (Figure 3). Commodity prices (spurred by one-off supply side issues) have moved up sharply (Figure 4) and run ahead of forecasts. That said, our lead indicator is supportive of China steel production remaining at strong levels – and in the last two months it has run at around 840mtpa on a seasonally adjusted basis.

To me it is very obvious that iron ore is bubble and that China is tightening enough already to pop it so I wouldn’t buy. But the momentum is still with traders so you never know.