On Wednesday, analysts at Morgan Stanley made an announcement that has since caused quite a bit of stir. The experts predicted commodity prices rising significantly, by 19% within the next two years. The increasing prices for copper and iron ore of late are being cited as the beginning of this trend, as the two metals are often seen as bellwethers of the entire sector.
Iron has selling for $54.50 per tonne, or 24% higher than the record low it experienced in July. Copper increased 1.7% to $2.3960/lb, or $5,280 a tonne. Copper’s ascent is nothing to scoff at, considering the metal experienced a six-year low just last month.
“Emerging markets and China in particular remain key to commodities demand. In the next few months we expect the perception around this demand to improve. In particular the acceleration of financial and administrative stimulus policies in China in recent weeks should start to feed through in both actual activity levels and equity market expectations,” wrote the analysts from Morgan Stanley in a note.
Several mining companies experienced advances following the announcement. Glencore (LON:GLEN) and Anglo-American (LON:AAL) had some of the most impressive gains with Glencore enjoying an 11% increase. Nevertheless, many potential investors have shied away from the Glencore because of its $30 billion debt. To put these investors at ease, Glencore recently revealed plans to institute a debt reduction program. They hope to eliminate nearly a third of their debt in the near future.
Glencore plans to sell 2.5 billion dollars of worth of shares and assets worth 2 billion dollars. Dividend payments will also be temporarily suspended. The company is determined to mitigate the debt without once again lowering their credit rating, which is currently BBB.
Shares of AAL rose by more than 11% on Wednesday after the Morgan Stanley announcement, but have still lost 44% year-to-date. Meanwhile, the world's largest miner based on output, BHP Billiton (NYSE, ASX:BHP) had advaned 12% this week and another major, Freeport-McMoRan (NYSE:FCX), also gained 10% on Wednesday.
Is it too early to cast aside our pessimism about such a swift turnaround being sustained?
The consensus of the trading public seems to be contrary to the assumptions made by Morgan Stanley. Many point to wage stagnation, decreases in economic activity caused by worker strikes, and uncertain inflation as clear indication that the market for commodities and the companies that mine them is not improving anytime soon.
Is this simply a ploy to bolster confidence in the market or will Morgan Stanley’s prediction come to fruition?
We anxiously await the answer.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.