China’s continued deceleration has significantly impacted countries such as Canada, Australia and Brazil, which all have resource-dependent economies.
That slowdown has also weighed on global demand for many commodities, including iron ore, coal, coke and copper, says Scott Vali, vice-president, Equity, for CIBC Asset Management. He manages the Renaissance Global Resources Fund.
In particular, China’s transition from an industrialized to consumer economy has hurt steel demand, he adds. “We’re seeing auto sales [and] steel sales peaking. That has a direct correlation on the demand for coke and coal, and [for] iron ore.”
As a result, countries like Brazil, and companies such as Canadian mining company Teck Metals, are suffering, says Vali. We’re seeing a double whammy for minerals such as iron ore: “While China has scrapped demand, companies like Rio Tinto, BHP Billiton and Vale have increased production — and that’s bringing new supply into the market at a time when demand is not as robust. So that has put pressure on the price of iron ore.”
There’s good news, though, says Vali. “We think Rio Tinto, for example, is a company that can produce iron ore at very low cost. It will still earn a very good return even in a lower commodity environment. But the commodity itself will [still] be under more pressure.”
Given the generally negative outlook for minerals, Vali has shifted his focus to oil. “We think oil is a faster-cycle commodity, and that prices are depressed compared to where we think they need to be to incentivize production longer term.”
But, for the time being, his portfolio is overweight cash. “As equities have sold off, we’ve been looking to deploy into what we believe are the high-quality producers of commodities like oil.”