Mining, Natural Resources and what lies ahead

The mining sector has provided excellent returns to investors over the years, however since the credit crisis it hasn't quite been the same.

Mining and natural resource based companies thrive during times of global economic growth and this was inherent between 2005-2007. Economic growth spurred by a huge amount of infrastructure and housing spending especially from China saw demand rocket for resources such as copper, tin and steel. But as the credit crisis hit, these companies were amongst the biggest fallers. Since then global growth has been anaemic which does not bode well for the natural resource investor.

Inventories of metals have reached 10 month highs recently as a lack of demand in China does not inspire confidence. Furthermore, hard commodities react heavily to geopolitical risks and recent news out of the Eurozone and issues with North Korea does not support future demand.

The main driver it seems for hard commodities these days is China.  A double digit growth rate in the past has meant the vast country has made up a significant proportion of global demand.  Worries over a hard landing were short lived, however investors came to terms with the end of double digit growth.  China now begins to focus on quality growth driven by structural reforms rather than mass export growth.  For the miners, this does not instil any confidence and as such we have seen a fall in prices and outlook for many of the top miners.  

We previously discussed the merits of gold equities, however whilst driven by different demand concerns, these miners continue to be out of favour and some major names have seen their prices almost half since the start of 2013.   

Many companies are looking fairly cheap and it begs the question is it time to buy? Those contrarian investors may be licking their lips.  

Natural resources covers a fairly varied sector and can encompass the commodities themselves (mainly metals) and the associated companies which offer more of a leveraged play. There are a number of funds are out there in this space one of which is JP Morgan's Natural Resources, whilst returns have been poor the last few years, it provides exposure to a number of large mining companies globally and positioned well to capture the upside from this sector.

This is one sector I would be wary of, the global out looks to remain pessimistic for growth and this will continue to put downward pressure on commodities as inventories continue to rise.  You may see a lot more pain here before you are rewarded for your bravery.