V-shaped recovery looms for commodity prices: Jefferies

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Market indices, diversified mining equities and commodity prices sank at the start of this week amid concerns about the impact of the virus which originated in China, with the country accounting for about half of global demand for mined commodities. 

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RBC's Tyler Broda had warned earlier this week the coronavirus could have a far greater effect on demand than the SARS epidemic of 2003. However most investors agreed "a V-shaped recovery in commodity prices is coming," Jefferies analyst Christopher LaFemina said in a note on Wednesday. LaFemina said the extension of the Chinese national holidays, restrictions on domestic travel and a slowdown in industrial activity in general due to the coronavirus were likely to lead to very weak Chinese macro data for January and February and perhaps longer. "Assuming the spread of the virus is controlled sometime in 1H20 and increased stimulus measures are ultimately started to support the [Chinese] economy, we would expect the subsequent recovery in demand to be strong and commodity prices to sharply recover as a result," he said. "In our recent discussions with investors, most seem to share this view, yet almost nobody is willing to step in and buy before there is evidence of a recovery in progress. "In other words, we are in the midst of a severe risk-off in mining shares due to what is perceived to be short-term dynamics rather than a true cyclical decline.  "The reversal of this share price sell-off should be a strong recovery, but the timing is most uncertain due to the lack of visibility regarding when coronavirus fears will peak." He tipped buying shares in copper miners Freeport-McMoRan (NYSE: FCX) and First Quantum Minerals (TSX: FM) for maximum leverage to the recovery. Jefferies analysts also considered Vale (NYSE: VALE), Anglo American (LSE: AAL), Rio Tinto (LSE: RIO) and Glencore (LSE: GLEN) "deeply undervalued" and recommended buying shares in those miners now for a six to 12 month horizon.

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