Jim Armitage: When copper-bottomed shares turn into little more than basket cases

Investors have finally decided to cut their losses and move on

(Reuters)

Outlook Funny how the stock markets take so long sometimes to catch up with the real world. Yesterday, a 6 per cent fall in the price of copper was greeted by share slides of as much as 20 per cent in some of the world’s biggest mining companies. The truth is, copper prices have been falling faster than mining giants Glencore and Anglo American, not to mention specialists such as Kazakhmys, for a while. Until yesterday.

The reason? Naturally, most of the bigger players do not just dig for copper but, variously, for coal, aluminium, iron ore and other metals which have fallen at different rates due to their varying scarcity. So Rio Tinto, with relatively stably priced iron ore in its mines, gets a less rough ride than copper-heavy Anglo American. Or Alcoa manages to post its best profits in years from aluminium.

Meanwhile, some of these companies have been promising chunky dividends after losing investors so much money overexpanding in the boom years. That’s a big attraction for pension fund managers at a time of near-zero interest rates, staving off some of the share price rout, helping them keep the faith with the shares.

But most importantly, when you buy shares, you’re buying the future value of a company, not the present: buy in a weak commodities market and you could benefit big time when the price comes up. Keep holding on and the market is bound to turn.

Well, yesterday was the day investors decided that, in copper, it won’t.

All that pent up optimism vanished, replaced by a vision of red, red, losses. Gloom took over.

Now the talk was all: why should copper stop falling if the oil price won’t? Why buy a proxy for the world economy when the eurozone’s so scared it’s launching QE? Can Anglo cover its dividends without digging into debt? (Answer: no.) And what about Glencore, with its exposure both to copper and that other basket case, thermal coal?

As one mining executive said last night: investors have finally decided to cut their losses and move on. To Apple, perhaps, which is now singlehandedly worth considerably more than the world’s biggest mining companies put together.

Meanwhile, mining’s loss is Apple’s gain. As commodities get cheaper, Apple’s profit margins get wider.

Every trade has a winner. These days, it’s usually based in Cupertino.