Why ASX mining stocks could catch a second wind

The outperformance of our mining stocks could have more longevity than many suspect as a top broker believes China's economy is kicking back to life. Here's why…

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The outperformance of our mining stocks could have more longevity than many suspect as a top broker believes China's economy is kicking back to life.

This could be why our largest miners are firing up even as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index shed 0.2% in after lunch trade.

In contrast, the Fortescue Metals Group Limited (ASX: FMG) share price is jumping 2% to $6.75, the Rio Tinto Limited (ASX: RIO) share price is rallying 1.3% to $94.99 and the BHP Group Ltd (ASX: BHP) share price is up 0.6% to $37.78.

These stocks, which are most leveraged to China's construction industry, may be getting a boost by a UBS report that the Chinese economy is doing better than expected after its analysts toured Beijing, Tangshan and Shanghai to gauge commodity demand and supply.

Why China is feeling more upbeat

"Recent trips in Dec-18 and Jan-19 suggested hope of fiscal stimulus to drive demand. These suggested a sense that infrastructure projects were being approved but not yet translating into real demand," said the broker.

"In this trip, there was a clear shift in this view with a real sense that infrastructure activity was occurring, offsetting weakness in steel demand from property, appliances and autos. Fiscal stimulus is supportive and VAT cuts of 3% are also boosting confidence downstream."

UBS also noted that tight credit conditions in 2018 have eased and that trade tensions between the US and China didn't seem to faze people the broker spoke with, although UBS pointed out that its analysts were in the north of the country, which may be less impacted by international trade.

The pick-up in infrastructure activity is offsetting weakness in property, automobiles and appliances with most Chinese steel mills saying they expected flat to 3% higher demand for steel on a year-on-year basis (y/y).

"Modest steel demand growth, lower EAF output and lower scrap use means that iron ore demand is likely higher y/y," said UBS.

"On iron ore supply, there is no consensus on the amount lost in Brazil. But in general terms, domestic iron ore supply growth is seen limited by approvals, around 0-20Mtpa is the incremental amount available at current prices."

Foolish takeaway

If UBS is on the money, fears about a slowdown in China feeding through to lower demand for Australian iron ore is overblown.

Several sceptics believe the stubbornly high iron ore price is unsustainable but the commodity may stay at the upper end of its trading range for most of this calendar year if infrastructure construction activity starts ramping up.

It's not only miners like BHP and Rio Tinto that stands to benefit. I think this thematic will also lift sentiment towards the BlueScope Steel Limited (ASX: BSL) share price.

Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, BlueScope Steel Limited, and Rio Tinto Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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