Clouds loom over miners' stocks

In a year less nervous than 2010, BHP Billiton's strong production report yesterday would have seen its share price rise.

The world's biggest mining group is producing ever greater amounts of materials such as iron ore that are in ever greater demand, shown by steadily rising metals prices. BHP summed up a view common in the commodities trading world: "Government stimulus measures appear to have supported a gradual return to normalised trade levels, albeit from a low base."

But BHP shares lost 3.6 per cent in London, while the FTSE mining index fell 4.7 per cent. Mining stocks dragged down global indices around the world.

The cause was another signal from Chinese officials that the world's biggest metals consumer is reining in loan growth, and slowing spending on infrastructure that use copper, iron ore, and other mined commodities as building blocks.

This highlights the insecurities behind today's higher-than-expected metals prices and mining company share prices.

Investment funds, supported by an appetite for hard assets, have poured into aluminium, copper, and platinum in the past six months. Investors can in effect buy these industrial metals in the same way, and for similar reasons, as buying gold. This has done much to distort the picture of whether rising metals prices point to "real" demand.

"We continue to lack conviction on copper prices in the near term," said Liberum Capital mining analysts. "It is unclear to us that buying is backed by underlying physical demand rather than speculative arbitrage and stockpiling in China."

Analysts see three-quarters or more of the world's aluminium stocks tied up in financial deals dependent on low interest rates and low warehousing costs.

"Our concern is not focused on the fact that metal prices are elevated by strong commodity investment trends but that mining equity models now seem to price in such trends as a long term feature in the market," Citi analysts said last month. "This is a risky assumption."

China remains the centre of physical demand. Cars and bridges continue to be built at a robust pace, backed by stimulus spending. Any indication that this demand might slow - as emerged yesterday - can send the metals and mining complex sharply lower, feeding fears that valuations have got ahead of fundamentals.

Copyright The Financial Times Limited 2010. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.