It should be no surprise that commodity shares have been pretty volatile during the bear market of the past few weeks. But amid the chaos of the S&P/ASX 200 Index (ASX: XJO), a clearer picture has started to emerge across various commodities.
Iron ore companies
The iron ore price has fallen around 8% since Monday of last week. This is a very volatile and unpredictable market.
On one hand, Vale closed a Brazilian mine, reducing supply by over 10 million tonnes. On the other hand, ex-China producers are clearly headed towards hibernation. Lastly, there is an expectation of post-virus stimulus on infrastructure globally.
In my opinion, Fortescue Metals Group Limited (ASX: FMG) is the iron ore miner best positioned to outperform over the medium term. This commodity share is a pure play iron ore company with a price to earnings ratio of 3.8 at the time of writing. It is 7% down, year to date (YTD) and at this price it has a dividend yield of 10%. The miner is well managed, in my view.
Copper is another metal in a strange place. The copper spot price at time of writing is US$2.18 per pound. The copper price has hit a 4-year low at the same time as global inventories are at a 4-year high.
Right now manufacturers in China are emerging from lockdown at the same time as copper manufacturers elsewhere enter a critical phase. However, the large scale wave of copper mines that have either been closed down or throttled lower will see inventory levels drawn down significantly.
A leading commodity share in the copper sector is Sandfire Resources Ltd (ASX: SFR). Sandfire’s DeGrussa mine is undoubtedly one of the premier high grade copper mines in the Asia region with a grade of 5%.
Nickel commodity shares
The geology required for nickel exists only in a very few countries on earth. One of these, Indonesia, banned all export of nickel ore in January, which took 220,000 tonnes out of the nickel market. In addition, a sharp draw down on London Metals Exchange inventories has added to the reduction in supply.
The worlds fifth largest nickel producer is BHP Group Ltd (ASX: BHP) via its Nickel West assets predominantly. It is also the worlds third largest copper producer and the worlds third largest iron ore producer.
This commodity share has been innovative in organising its workforce around COVID-19. At the time of writing, its share price has dropped by 23% YTD and has a price to earnings ratio of under 10. For a company like BHP, I believe that is a great price.
Commodities investors know that fortunes are made when things are bad. The coronavirus pandemic has temporarily pushed all demand for metals lower. When choosing a commodity share at the low part of the cycle there are a few items to check.
Does the company have a manageable debt load? Is there a plausible end to the situation within this market? Lastly, is the company reasonably priced?
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Motley Fool contributor Daryl Mather owns shares of Fortescue Metals Group Limited. 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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