Yesterday’s collapse of the S & P / ASX 200 (ASX: XJO) was enough to wipe out all of the previous day’s gains. The main culprits were declines in various ASX mining and energy stocks, which were enough to push the index down despite good news regarding the distribution of the COVID-19 vaccine in the United States.
Keep in mind that November was an impressive run for the ASX 200, with over 10% hike throughout the month. December has added 1.7% so far and it looks like some of the initial enthusiasm is waning as COVID-19 only looks to get worse in the United States and Europe.
When the first COVID-19 vaccine was announced last month, investors turned to the energy sector and other recovery actions in travel and recreation. Now some of those industries have retreated as the worst of COVID-19 continues to unfold overseas.
Recent losers: coal
Relations between Australian exporters and Chinese authorities have grown even more strained after the recent official announcement of the Australian coal ban in China.
Recently, more than 80 ships carrying Australian coal remained stranded on the Chinese coast. However, Australia is not entirely dependent on China as an importer and has a diverse customer base in Japan, South Korea and Taiwan. Hopefully some of these shipments can be redirected to other nearby markets.
It is not known how the ban will be resolved, but some Citi Analysts predict the ban will be lifted by mid-2021 due to China’s reliance on high-quality metallurgical coal.
While the producer Whitehaven Coal Ltd (ASX: WHC) is not shipping directly to China, sentiment is lower nonetheless as the stock price fell 5.8% yesterday. Are also affected New Hope Corporation Limited (ASX: NHC) and BHP Group Ltd. (ASX: BHP), down 2.7% and 2.2% respectively.
The boycott of our commodities is another flex from China after Australian government calls for an investigation into the origins of the coronavirus pandemic. The relationship was strained before by the ban of a tech company Huawei, as well as allegations of human rights violations in China.
Lower oil prices
Stock prices of oil and gas exploration companies are often highly correlated with the price of the underlying commodities.
Thus, the recent decline of producers such as Santos SA (ASX: STO) and Woodside Petroleum Limited (ASX: WPL) was the result of a drop in the price of oil following new concerns about COVID-19.
Just recently, UK Health Secretary Matt Hancock revealed that new cases in England could be the result of a new variant of the virus.
To further exacerbate sentiment toward oil, Monday, the Organization of Petroleum Exporting Countries (OPEC) announced that it had reduced its forecast for oil demand growth in 2021 due to lingering uncertainties surrounding COVID-19 and the job market.
I find it interesting that these stock prices are so sensitive primarily to sentiment about a global economic recovery. Keep in mind that these are only forecasts, so whether these price movements are justified or not is another question.
Holding ASX energy stocks like Santos and Woodside which are heavily exploited for an economic recovery is a pretty safe bet in the medium term, in my opinion, provided the vaccine outcome is positive.
I see the value in owning these stocks as the price of oil (hopefully) hits its pre-COVID level, but not as long as a long-term game.
What about iron ore?
After hitting record highs, iron ore futures fell 4% yesterday, contributing to a weaker overall index. the Fortesque Metals Group Limited The share price (ASX: FMG) also hit an all-time high of $ 22.95 per share, but has since fallen slightly.
If you thought the trade war between Australia and China had nothing to do with iron ore exports, think again. Due to increasing global demand and supply shortages, the spot price of iron ore has skyrocketed.
Chinese steelmakers have expressed frustration with soaring prices, which has started to eat into profit margins. Ironically, their increased demand is partly responsible for the higher price, which is not actually set by producers.
Given China’s dependence and Australia’s powerhouse position on iron ore, the search for alternative suppliers could have the same increasing effect on the spot price, so no one can guess. how it will unfold.
If there is one thing we are sure of, no commodity seems to have been spared in this recent trade war, with coal, iron ore, beef, barley, cotton and wine all being scrapped. ‘honor.
From an investment point of view, I would personally like to avoid companies with high exposure to China, as that could present a fairly significant headwind in the short term.
Investing in companies that leverage an underlying commodity price can be easy, but only if you correctly predict the direction of the price. For this reason, I usually stay away.
However, if I had to pick a commodity sector, I would probably go with oil producers. I think these are solid bets for next year, provided the global economy continues to recover. If the price of oil continues to rise as expected by many, producers of pure oil and highly correlated to the price of oil should also see a gradual recovery in their stock prices.