Resource stocks set for a bumpy road

Sentiment has turned more positive on the bourse but investors will have a bumpy road, according to stockbroker Bell Securities Limited.

In a recent report, it said a combination of production cutbacks and a change from the negative sentiment previously exhibited by the investment houses has resulted in a rally both in hard commodity prices and in resource stocks.

The change in sentiment has been led by OPEC and the impact production cutbacks, announced in April, have had on the oil price. So far this year, the oil price has risen over 60 per cent from a low of US$11.40 per barrel to a peak of US$18.60.

Recent prices have retreated from their highs, as one might expect after such a dramatic and sustained rise.

Bell said in the metals market nickel has been the star performer at plus 35 per cent, followed by lead plus 18 per cent, zinc 17 per cent, aluminium plus 15 per cent, copper plus 13 per cent and tin plus 11 per cent.

“Can these rallies last?” the stockbroker asked. “Sentiment has certainly changed and equity markets often herald a change in the underlying trend.

“There would, however, want to be a follow-through in some of the fundamentals such as GDP growth and cutbacks in the supply-demand ratio.”

In this regard, nickel and zinc are in the most positive situation and copper in the worst. Nickel inventories have plateaued and the demand/supply equation is in balance at 1.04 million tonnes per annum.

Aluminium stocks continue to be drawn down both on the official markets and in producers’ hands whilst demand, particularly from United States auto manufacturers, remains strong. By comparison, copper has increased inventories amid weakening consumption growth.

Gold remains a unique beast. After showing some promise, the British Treasury announced it would sell 60 per cent (415 tonnes) of its gold reserves over five years.

In the longer term, the market will be able to absorb the sale. However, the announcement killed the positive sentiment that was returning to the sector.

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