Bulk commodities to suffer in early 2017, warns JP Morgan

14th Dec 2016 09:44

(ShareCast News) - Taking a more cautious view of the metals and mining sector into early 2017, JP Morgan Cazenove said it felt bulk commodities such as coal and iron ore would suffer, while precious metals offered scope for recovery.JPM picked through the likely winners and losers in the coming months, downgrading Glencore and Antofagasta, moving BHP Billiton off its focus list and highlighting the attractions of Anglo American.While it believes the risk of a China hard landing is low, it expects the effect of Beijing's stimulus will fade and, assuming a stronger dollar to also weigh, believes industrial commodities have "moved ahead of fundamentals".Analysts said they believed bulks were more vulnerable to a pullback than base metals, with prices having enjoyed gains of 70-250% in 2016 and with supply now returning to the market.JPM forecast 42% downside to coking coal, 21% for thermal coal and 24% to iron ore, while base metal forecasts range from -4 to -16% against spot prices."We see scope for precious metals to recover recent underperformance, particularly if doubts emerge over the growth implications of US government policy, and forecast gold, silver & platinum prices 1-11% above spot in 2017."For the effect on mining companies, analysts said: "While equities appear to be discounting lower commodity prices, we see a risk of an earnings momentum-led sell-off in early 2017".Glencore was downgraded to 'underweight' from 'neutral' primarily on valuation grounds, with FCF and dividend yields now the lowest of the group; while Antofagasta was also cut to 'underweight' but its target price upped to 430p from 390p.After Anglo's De Beers confirmed a near-70% increase in rough diamond sales on Tuesday, JPM maintained its 'overweight' and pointed out that "compellingly", if backing out the value of its listed subsidiaries leaves the rump of the business trading on a near-40% discount versus peers.