China reopening a boon to Australian assets?

With China striving for a growth renewal and aiming for 5 percent GDP growth as it reopens after three years, Chinese infrastructure spending will likely get a boost in 2023, as well as the coal-hungry power sector to drive it. Investors have begun increasing exposure to the coal and metal sectors, as they will likely benefit from China, the world’s biggest consumer of commodities, ramping up buying in the first half of 2023. Metal prices have already rallied 20-50 percent and the supply outlook remains constrained. Here we explore what to watch among Australian metal and coal companies.

To avoid a power crunch, China has cranked up thermal coal production, aiming to produce a record (4.6 billion tons) this year, while it also started buying Australian coal for the first time in two years, a sign that domestic supplies are tight. Reopening the safety valve of imported coal supplies could cool what has been a hot market in late 2022, with a coal company like Whitehaven Coal seeing the most earnings growth and share price that rose over 300 percent in 2022. This also could mean investors may potentially be taking out excess capital and profits from energy markets, and moving them into metals markets, given the ingredients are there for a strong surge in metals as discussed in Ole’s commodity outlook.

Metal prices mount; moving into bull markets, taking mining giants shares to record highs

Iron ore, the major ingredient in steel-making, has seen its price gain over 50 percent in China from its October low. Copper, a critical industrial metal and essential in the green transformation and housing, has gained 28 percent in price from its July 2022 low, while aluminium, important for construction, automotive and electronics, has gained 23 percent from its September 2022 low. Many affiliated mining companies are rallying. With strong demand and under-investment in supply fundamentally supporting prices over the medium to longer term, stocks for key producers have already started to rally and boost the return for respective equity markets (like Australia’s ASX). These trends will likely continue in 1H2023. In the first weeks of 2023, shares in commodity juggernaut companies who produce such metals, including BHP, Rio Tinto and Fortescue Metals, hit record high neighbourhoods, in anticipation of higher earnings and cash flow growth on China’s reopening. Another ingredient supporting higher prices in 2023 is the weaker US dollar, which has broadly lost about 10 percent already, as the market expects the Fed to slow its pace of rate hikes and even begin reversing course by later this year. A weaker US dollar supports buying in commodities, as they’re traded in US dollar terms. 

Australia’s share market, home to the largest mining companies; could see greater earnings growth than the US in 2023

Just weeks into 2023, the Australian share market (ASXSP200.I) trades a whisper away (~2 percent) from its highest level in history, supported by the strength of the mining sector, which makes up 25 percent of its market cap. Noting Steen and Peter’s focus in this outlook on contrasting tangible assets (Australian mining companies very much dealing in tangible goods) versus intangible ones (the US S&P 500 market cap largely comprised of intangible/tech companies), consensus estimates suggest aggregate ASX200 earnings will grow 32 percent this year, where consensus expects the S&P 500 to produce earnings growth of 21 percent, with 13 percent earnings growth for the tech-heavy Nasdaq 100. 

Zeroing in on Australia’s mining sector: earnings growth anticipated over 70 percent. What sub-sectors and companies could benefit?

The Australian mining sector’s earnings are expected to rise over 70 percent according to Bloomberg consensus. Although metal prices are volatile, also driving share price volatility, consensus sees the most upside earnings growth potential in lithium producers, followed by gold companies, copper companies, and then iron ore and other metals companies to follow. If you are seeking inspiration or a list of Australia’s largest resources companies, refer to Saxo’s Australian Resources theme basket. However, if you want to keep your focus on copper, iron ore and aluminium, below are Australia’s largest for your reference: 

BHP – BHP is the biggest diversified mining company in the world by market size, with an AUD 249 billion valuation. It is future proofing its business, aiming to take over another copper giant, Oz Minerals, and also moving into potash (fertilisers), with plans to be the biggest fertiliser company in the world. BHP has historically generated some of strongest cashflows across the globe. Consensus expects a full-year dividend yield of 9.6 percent. For the last reporting period BHP made about 48.7 percent of its revenue from iron ore, 26.7 percent from copper and 24.6 percent from coal.

Rio Tinto – Rio is the second biggest diversified miner in the world, with an AUD 178 billion valuation. Last reporting year, Rio made 58.1 percent of its revenue from iron ore, 21.5 percent from aluminium and 10.9 percent from copper, and the remainder from other metals. Rio is expected to pay a yield of about 7.9 percent for its next full-year dividend (consensus). 

Fortescue Metals – Fortescue is the biggest pure-play iron ore company in Australia, with an AUD 68 billion valuation. Fortescue earns about 89 percent of its revenue from iron ore and the remainder from shipping. However, it wants to eventually become a major producer of hydrogen. It also has a $6.2 billion decarbonisation strategy to eliminate fossil fuels from its iron ore business, which includes replacing its diesel fleet with battery electric and green-hydrogen powered long-haul trucks. Fortescue is expected to pay out one of the highest dividend yields in Australia, with a 9.3 percent dividend yield (consensus).