Tis the season to be bullish on BHP and RIO
About the author:
- Author name:
- By Tom Sartor
- Job title:
- Senior Analyst
- Date posted:
- 18 November 2013, 10:14 AM
- Sectors Covered:
- Junior (Emerging) Resources, Bulk Materials
Tactical trade: Buy BHP or RIO for a 3-month trade on seasonality
When identifying opportunities for clients we like to find situations where good upside optionality exists, but where the downside risks are limited.
The Resources sector has already significantly underperformed their industrial peers through 2013, providing a relatively low base off which to consider more active positions. We think the majors offer a compelling, tactical 3-month trading opportunity on the bulks seasonality drivers as noted below.
We do remind investors that commodity price leverage is giving way to investor focus on free cash flows and cost out, so the theme may not play out as strongly as in previous years. However we think the upside optionality looks good while the downside scenario looks protected during this time.
Leveraging into the strongest exposures (balance sheets) in BHP Billiton and RIO Tinto look like the best way to play it.
Understanding seasonality among bulk commodities
Steel production, and therefore iron ore and met coal demand, tends to remain strong through the northern hemisphere winter reflecting inventory rebuild after the summer construction season. The industry also is less affected by maintenance and holiday periods during this time. Power consumption (thermal coal demand) can surge during the northern winter depending on the severity of cold weather on the major populations of Asia and Europe.
Conversely, bulk commodity supply is at most risk of disruption during this period as summer weather (cyclones, monsoons, floods) affects southern hemisphere supply from Australia, Brazil and Indonesia.
The result is that pricing for bulk commodities regularly tightens as customer concerns mount around the peak in seasonal supply disruption.
Seasonal price strength is an opportunity for investors
Since the pricing mechanisms for the bulk commodities started migrating onto shorter term contract terms from around 2007, we’ve noticed the impacts of seasonality on their pricing become more pronounced.
Recent pricing behaviour for iron ore, hard coking coal and the major miners show a clear seasonal effect. That is, the bulks and the majors regularly outperform into the Australian summer as price tension builds, then underperform as the seasonal impacts in bulks commodities markets abates into the Australian winter.
These are the right ingredients to support short term rallies in the miners, BHP & RIO.
More information
If you are interested in finding out more about BHP or RIO please contact your nearest Morgans office.
Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.