Fortescue cracks a new correction low below $14 as UBS declares “don’t buy miners now!”
UBS View: Start of the commodity down cycle – too early to Buy the miners
In June (Topping out) we highlighted that we did not believe we were at the start of a commodity ‘super-cycle’ and, even though the demand outlook appeared solid, fundamentals were not strong enough to support prices at elevated levels. What’s changed? The outlook for commodity demand has deteriorated as: (1) Evergrande’s financial issues have triggered a slowdown in China property sales (note); (2) Power shortages & power rationing in China (to meet the 2021 energy intensity target) has slowed industrial activity materially since July (note); (3) The post Covid demand impulse in developed markets has peaked as reopening drives a shift in spending from goods to services. Offsetting this are the near-term supply constraints in smelting/ refining in China due to power shortages/ rationing. The macro backdrop for commodities has also deteriorated with inflationary pressures pushing central banks closer to policy normalisation/rate hikes. In our view this is not the backdrop for a sharp recovery in commodity prices; we expect prices fall further over the next 12mths.