South32 crashes into bear market in June as recession fears bite

The miner and metals producer has had a challenging month.

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Key points

  • The South32 share price fell into a bear trap in June with losses exceeding 20% over the month
  • It's generally perceived ASX mining shares should be better placed in economic downturns due to their strong balance sheets
  • But metal prices, like copper, are on the wane amid worries that an economic slowdown will hurt demand for commodities

The South32 Ltd (ASX: S32) share price tumbled into a bear market last month despite perceptions that miners are better placed to weather economic turmoil.

Runaway inflation, the war in Ukraine, and strong balance sheets should put ASX mining shares in investors’ good books.

But these weren’t enough to save the South32 share price from losing more than 20% in June. This means the diversified miner is officially in a bear market, which is defined as a peak-to-trough drop of 20% or more.

The South32 share price steps into a bear trap

The recent retreat in commodity prices is mainly to blame. Worries of a global economic slowdown, or even a recession, is dragging on metal prices.

This is why Dr Copper dived to its lowest level since February last year. Copper consumption is closely linked to economic activity and is seen as a bellwether for other metals. The red metal has lost around 25% of its value since its high in early March.   

That’s bad news for other industrial metals. The price of nickel shed 3.9% and zinc fell nearly 10% last week, the Australian Financial Review reported.

The South32 share price is sensitive to the weakness. The company produces a range of metals, including copper, zinc, nickel, and alumina, among others.

Conflicting market signals

But herein lies the irony. Markets have been pricing in both higher for longer inflation and weaker commodity prices for some weeks now.

Inflation expectations have been pumped up by soaring input prices – this means commodities. Rising prices are forcing central banks, including ours, to hike interest rates. That, in turn, is putting the broader S&P/ASX 200 Index (ASX: XJO) under pressure.

But if commodity prices weaken, this should theoretically flow through to slowing inflation. If so, markets may be overestimating how far the US Federal Reserve, and its global counterparts, can hike rates.

It’s difficult to see how both the falling prices of the South32 share price (and Dr Copper) and inflation expectations can be right at the same time!

Can bad news be good news for the South32 share price?

As we speak, we might already be seeing some of this inflation expectation unwind. The ASX 200 is gaining ground today following a positive lead from Wall Street on Friday. At the time of writing, it’s up 1.72% in early trade. The rally is fuelled by a retreat in bond yields – a signal that investors are paring bets on where interest rates will peak in the US.

That is not only good news for all risk assets but also ASX miners like South32 because lower rates are good for equities.

Let’s hope the renewed enthusiasm is enough to offset the falls in commodities.

Motley Fool contributor Brendon Lau has positions in South32 Ltd. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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