Citi says ASX mining stocks hit eye-catching valuations but global risks loom

Australian mining stocks have been stuck in a rut, underperforming the ASX 200 by more than 30% since October 2023, even as commodity prices have ticked upward.

Citi says the sector’s valuations are now at their most attractive in years, with bulk miners trading at a 0.76x their discounted cash flow (DCF), a level that screams value to long-term investors.

Yet, persistent global economic headwinds, from looming US tariffs to faltering demand outside China, are keeping the sector in a holding pattern, with analysts urging caution for those eyeing near-term gains.

China’s Resilience Amid Mixed Signals

China remains the key support for bulk commodities like iron ore, providing some stability in a turbulent global market. Citi notes that China’s pig iron production rose 0.7% year-on-year in April and is up 0.8% year-to-date, providing a steady floor for iron ore prices.

China's monetary conditions are easing, with money supply (M2) and Total Social Financing growing for five consecutive months, signaling potential support for steel demand into 2026. This sustained monetary easing, a reliable leading indicator for industrial activity, could drive stronger commodity demand if it continues.

However, China’s economic picture is far from rosy. The residential property sector, once a powerhouse of steel consumption, continues to drag. Housing starts and completions plummeted 22% and 28% year-on-year in April, respectively, with year-to-date declines of 24% and 17%.While property sales have declined a modest 2.8% this year compared to housing starts and completions, the sector’s destocking cycle is nearing its end, which could pave the way for a tentative recovery in construction activity."

Citi suggests that a positive shift in the supply-demand balance, evident since May 2024, might eventually spur new housing starts, offering a potential tailwind for steel and iron ore demand by late 2025 or early 2026.

Infrastructure spending, a key driver of commodity demand, shows promising signs. Excavator sales in China surged 18% year-on-year in April, indicating strong non-residential construction activity.

However, Citi warns that Chinese infrastructure contractors’ order books are down 6% from last year, suggesting potential softening in steel demand for fiscal 2025. A rebound in orders later this year could shift sentiment, driving iron ore and steel prices higher as projects transition from planning to execution.

A recovery in property prices could unlock a wealth effect, boosting consumer spending and, by extension, manufacturing activity, but this remains a longer-term prospect.

Global Headwinds Cloud the Outlook

Outside China, the global economic landscape is increasingly fraught. Citi’s economists project global growth will slow to 2.3% in 2025, down from 2.8% last year, with developed markets barely scraping by at just over 1% growth.

The phased introduction of US tariffs is a major culprit, already disrupting global trade flows. From October 2023 to March 2024, US import volumes surged nearly 30% as businesses rushed to stockpile goods ahead of higher duties. This front-loading has artificially propped up demand, but Citi warns of a “calm before the storm.”

As tariffs take full effect over the coming months, reduced purchasing power and the payback of preemptive spending could trigger a sharp demand contraction.

Global manufacturing activity is teetering on the edge, with the manufacturing Purchasing Managers’ Index (PMI) hovering near the 50 mark that separates expansion from contraction.

The services PMI, while still above 50, has begun to weaken, signaling broader economic softness. In Europe, Germany’s IFO expectations index remains in contractionary territory, flagging the challenges facing developed markets.

Base metals and oil, which rely heavily on global demand, are particularly vulnerable, while bulk commodities like iron ore benefit from China’s policy-driven resilience.

Valuation Bargains vs. Timing Risks

The Australian mining sector’s steep underperformance has left it trading at historically low valuations, with the average price-to-DCF ratio for bulk miners at 0.76x. This discount reflects market pessimism about near-term demand but also signals a potential opportunity for patient investors.

Within the report, Citi downgraded South32 (ASX: S32) from Buy to Neutral, with a target price of $3.40. This was driven by a cautious stance on metals demand outside of China, which will keep the shares 'undervalued' for longer.

For investors, the sector’s low valuations are tempting, but timing entry points is key. The interplay between China’s policy support and global economic pressures creates a tug-of-war. While China’s infrastructure and monetary stimulus could drive a recovery in commodity demand by mid-2026, the immediate risks of tariff-induced demand shocks and slowing global growth loom large.

Iron ore, anchored by China’s industrial needs, appears more insulated than base metals, which face greater exposure to faltering developed markets.

The Bottom Line

Citi’s analysis paints a picture of a mining sector at a crossroads. The compelling valuations suggest a long-term buying opportunity, particularly for bulk commodity producers tied to China’s economic engine. However, near-term risks, including US tariffs, weakening global demand, and China’s uneven recovery, call for a measured approach. Investors may find value in waiting for clearer signals, such as a sustained rebound in Chinese infrastructure orders or a stabilisation in global manufacturing indicators, before diving in.

For now, the sector remains a story of value trapped by uncertainty. As China navigates its property destocking and infrastructure ambitions, and as global markets grapple with tariff fallout, the Australian mining sector’s path to recovery will depend on how these forces balance out over the next 12 to 18 months.