resources looking cheap

Resources 'looking cheap'
May 19
Stephen Wisenthal



With Chinese demand towing the rest of the world along, it's no wonder that when the Middle Kingdom sneezes, the market braces for a nasty cold.

But analysts and investors say that the mass sell-off of resources stocks since the Chinese government said it would put a brake on the economy is the wrong prescription.

If there was ever a sign that China has a good chance of slowing its growth, rather than putting it into reverse, it is in the actions of the speculators. They've unwound their exposure to base metals, but instead of going short, they've turned their attention to the oil market.

"They saw it as too great a risk to take a bet against China," said Tim Barker, resources portfolio manager at BT Financial Group.

He sees the decline in mining stocks - the S&P/ASX300 Materials Index is down 10 per cent since its early April peak - as an opportunity.

"The whole resources market is quite cheap," Mr Barker said.

Diversified miners such as Rio Tinto and BHP Billiton will benefit from supplying China's seemingly insatiable demand for everything from coking coal to copper, and they're also getting an extra kick from the recent slide in the Australian dollar.

Market concern about the effect on base metals producers such as WMC Resources might also be overdone, Mr Barker said.

"All we've heard from China is basically what we wanted to hear from them," he said. "We'll almost certainly see a pause. I don't think it will stop growing."

The Chinese government was likely to work to switch investment from speculative construction into areas where it was needed, particularly energy projects. And every power station uses copper, steel and concrete, every transmission line is made of aluminium.

"There's been no immediate slowdown in demand whatsoever," said Perpetual Investments portfolio manager Matt Williams. "The demand outlook's going to still be pretty solid over the next little while."

In a recent report, Citigroup Smith Barney forecasts a soft landing in China, with industrial production growth slowing to 15 per cent in 2004, and 13 per cent in 2005, from 17 per cent in 2003.

Even in a hard landing, the "acute tightness" in markets for iron ore and coking coal markets would probably prevent a major slump. "Under any hard landing scenario, the highly metals-intensive growth in China is most unlikely to reverse," Smith Barney said.