Mining stocks are set to take another beating with a raft of brokers coming out overnight to warn of more doom and gloom in the sector.
It will be interesting to see how much of the negative sentiment will be offset by the overnight bounce in the iron ore price to its highest level since the start of the month.
While much has been written about the collapse in commodity prices, especially iron ore, Credit Suisse warns that earnings in the sector have not bottomed and believes that iron ore prices have more room to fall in the second half of this year.
The broker is estimating that the iron ore price will average $US45 a tonne over the next 12 months or so.
What this means is that dividend payments to shareholders will not be covered by free cash flows with the iron ore market only part way through a multi-year downturn that's driven by waning demand from Chinese property developers.
Weak demand and rising supply of the steel-making ingredient will leave iron ore surplus standing at around 100 million tonnes, or 7% of the market, by the end of 2016.
Another ringing the warning bell is asset management group Investec, which has done a backflip on its view on the sector. It's now pointing to a bleak outlook for the sector due to rising commodity price volatility with iron ore and coal having further to fall.
Ironically, the things that are helping the embattled sector are actually prolonging the pain. Falling input costs and the stronger US dollar are keeping the weaker players in the game and adding to the over-supply problem.
The pain isn't confined to iron ore and coal. Alcoa's warning that the aluminum market is oversupplied when it released its latest quarterly result is sure to add to the gloom.
Then there's the call by Goldman Sachs for investors to assume the brace position as a number of iron ore producers will face bankruptcy.
We have already seen Atlas Iron Limited (ASX: AGO) go in to a trading halt as it tries to salvage its business. Is Atlas the proverbial canary in the iron ore mine? As my colleage Sean O'Neill wrote yesterday, the answer seems to be "yes".
On the flipside, the big miners that can support relatively generous dividend payments from capital expenditure cuts will find support.
But that is not enough to save BHP Billiton Limited (ASX: BHP) with the stock falling 0.7% this morning to just under $30. Credit Suisse and Investec have both downgraded the stock and are urging investors to sell BHP.
Rio Tinto Limited (ASX: RIO) is faring better with a 0.2% fall, but investors should be prepared to stomach more volatility as the dust is yet to settle for the sector.
