Idea of the Day: Miners to benefit from continued metal strength

Metals have been surging ahead in recent weeks, the steel price has risen more than 15% since June, while copper is at its highest level since the end of 2014.

What: metals have been surging ahead in recent weeks, the steel price has risen more than 15% since June, while copper is at its highest level since the end of 2014. This is having a positive impact on mining stocks, as you can see in the chart below. BHP Billiton and Rio Tinto follow the steel price closely. This chart has been normalised to show how the price of steel and the miners move together, as you can see they virtually move in lock step with each other.

How: The close nature of this relationship highlights how the price of steel and other metals can have a major impact on the share price of the miners. In the chart below we look at BHP Billiton and Rio Tinto, both have rallied in recent weeks, but remain some way from their highs from earlier this year. Commodity analysts expect to see metals prices continue to rally because of the following fundamental reasons:

  • Global economic recovery
  • Reduced China stockpiles that could drive more production
  • Speculative demand in China

Rio and BHP also have very strong positive correlations with the steel price. Over the last 12 months Rio has had a correlation with the price of steel at 62%, while BHP’s has been 52%, the positive correlation has increased in the last three months to more than 70% for both companies, which highlights how important a driver the steel price is to the share prices of the miners.

Due to this, if we continue to see metals prices surge then it is possible that we may see miners like Rio Tinto and BHP Billiton return to their highs from January, when BHP Billiton reached 1480.50 and Rio Tinto reached a high of 3679.50 in mid-February.

Chart 1: 

Source: City Index and Bloomberg 

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