The S&P/ASX 200 (INDEXASX: ^AXJO)(ASX: XJO) rallied strongly today, rising 2% to 4,974 points on the back of a strong jump in commodity stocks.
These four shares considerably outperformed the market today, and here’s why:
Rio Tinto Limited (ASX: RIO) shares rose 9% to $40.37 today after the price of iron ore rose above US$44 a tonne overnight. With prices seemingly no longer in imminent danger of dropping below US$40 per tonne, Rio and its major competitors enjoy comfortable profit margins at prices of around A$60 per tonne.
However, investment bank Goldman Sachs warned this morning of further pressure to come on iron ore, as China is looking to cut its domestic steel production, a major source of demand for Australian iron ore. Goldman estimates the lost output could be equivalent to 90-150 million tonnes of iron ore, or 15% of the seaborne iron ore market, which is the market that Rio and Fortescue supply. Investors should be prepared to see continued volatility in Rio’s share price.
Fortescue Metals Group Limited (ASX: FMG) also jumped 9.2% to $1.77 today for similar reasons as Rio Tinto. Rising iron ore prices mean greater profits for Fortescue, whose average cost of production has dropped rapidly in recent months. If a reduction in Chinese steel output eventuates as intended however, it could have a big impact on prices and demand for Fortescue’s product.
Fortescue has been one of the ‘strongest performing’ iron ore companies on the market in recent months.
Sims Metal Management Ltd (ASX: SGM) gained 10% to $7.34, continuing the theme regarding iron ore prices and demand for steel. In Sim’s case, a reduction in Chinese steel production could mean more appetite for Sim’s recycled steel, or higher prices for global steel overall as supply is reduced. Sims is also partway through an ambitious plan to boost earnings significantly without acquisitions or an improvement in market conditions.
Sims shares have languished for several years under tough trading conditions, and are down 39% in the past 12 months.
Santos Ltd (ASX: STO) – last but not least – soared 13% to $3.13 on the back of recent rises in the value of Brent Crude oil, which gained some 8% yesterday according to Reuters. Additionally, recent market talk that oil producers are discussing capping production in order to set some kind of floor on the commodity’s price is boosting support.
While today’s rise is a positive development, I wrote in this article in December last year that, as a result of wider market factors, investors should be prepared for further disappointment and volatility from the oil market in 2016.
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