Materials

Growth fears smash ASX resource stocks: Lithium, coal and iron ore

Mon 26 Sep 22, 1:59pm (AEST)
Mining 1 metals iron ore ocpper

Key Points

  • Materials and Energy sectors headline losses as growth concerns weighed on commodity markets
  • Still, the fundamentals of commodities including lithium, coal and iron ore remain sound, at least for now
  • Does the diverging performance between the stock and commodity price act as a red flag or a buying opportunity?

Growth concerns and ever tightening financial conditions pummeled commodity prices last week, forcing a sharp downward re-rate for ASX materials and energy stocks on Monday.

Things were looking pretty dire for the S&P/ASX 200, which revisited June lows in early trade following a brief -2.12% dip. The downside move was headlined by resources, with the ASX 200 Materials and Energy Indices down -3.95% and -5.7% respectively at 1:00 pm AEST.

XJO chart
XJO chart (Source: TradingView, Annotations by Market Index)

"The bond market is telling us they firmly believe Fed Chair Powell has rolled up his sleeves and is ready for this fight with inflation to get ugly," said Oanda senior market analyst, Ed Moya.

"It appears that a hard landing is becoming more likely and that is driving this current round of risk aversion."

Nobody can escape

When the markets pull in, everybody drowns.

That's just how it is and the unfortunate case for one of the most dominant resource sectors, lithium.

Still, lithium fundamentals remain sound and there's no shortage of bullish headlines. Last week, Chinese lithium carbonate prices marked a fresh all-time high of 501,500 yuan and Pilbara Minerals' (ASX: PLS) locked in another record auction result at its spodumene auction.

Even if fundamentals remain strong, sentiment is now the dominant price driver. The sharp selling across global equity markets and upwards spike in volatility indices creates a rather unsettling environment for risk-assets, lithium included.

Lithium names that took the staircase up to all-time highs are now taking the escalator down to earth. Large cap names and barometers for the sector like Pilbara Minerals and Allkem (ASX: AKE) are posting sharp declines, down -7.4% and -5.1% respectively. Most names are down between 5% to 13%.

Coal burns

Coal has been another dominant resources sub-sector with most names up at least 100% year-to-date following an extraordinary rise in spot prices.

Still, most mid to large cap coal stocks are down around -10% on Monday, even as Newcastle coal futures remain mostly unchanged at US$435 a tonne.

The same for iron ore

Iron ore prices are starting to stabilise around the high US$90s, with many experts holding the view that China's steel production bottomed in late July.

Singapore iron ore futures chart
Singapore iron ore futures (Source: TradingView)

The World Steel Association reported a -5.1% year-on-year decline for steel production among 64 countries between January and August. But production in August rose 1.1% month-on-month.

Between 16 and 22 September, Mysteel observed a decline in finished steel inventories in China amid an "improvement in steel demand and some end-users building inventory in advance of the approaching National Day Holiday."

Again, the recovering fundamentals were greatly outweighed by growth concerns, with heavyweights BHP (ASX: BHP) and Rio Tinto (ASX: RIO) down -4.4% and and -5.6% respectively.

Bottom line

Some resource stocks are beginning to diverge from fundamentals as deteriorating market and economic sentiment prevails. Do falling valuations present a buying opportunity or perhaps a warning sign that still sound fundamentals will soon decline as well?

With stocks posting steep losses on Monday, it reminds me of a line I used in the Morning Wrap from Smart Karma saying that "sentiment readings are sufficiently washed out that a relief equity rally can happen at any time. However, the intermediate-term direction is still down."

Written By

Kerry Sun

Content Strategist

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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