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Highlights
- Mining stocks face subdued global growth and weak commodity prices.
- Australia’s miners continue to struggle after a rough 2024.
- Economic challenges point to tough conditions ahead for the sector.
After a challenging 2024, many investors are considering if it's time to re-enter the Australian mining sector. While valuations of the sector's giants seem attractive, Citi analysts suggest that global economic conditions and softening commodity prices make it premature to dive into stocks like (ASX:FMG) Fortescue, (ASX:BHP) BHP, and (ASX:RIO) Rio Tinto. Despite the price dips of these mining stocks, it's important to remember the tough backdrop against which the sector is operating.
Last year, the ASX’s mining stocks were hit hard, with the S&P/ASX 200 Resources Index sinking by 17%. The global backdrop is still filled with uncertainty, which has made growth prospects remain largely underwhelming for Australian miners. The price of iron ore, a vital commodity for Australia's mining giants, experienced a sharp 28% drop due to a global slowdown and a reduced demand from China, which affected the revenues of companies like (ASX:FMG) Fortescue. As a result, stocks across the big three miners experienced significant declines: Fortescue shares slumped by 36%, BHP dropped by 20%, and Rio Tinto saw a dip of 13%.
Citi analysts believe it is too soon to expect a robust recovery, given the persistent economic headwinds. Despite the favorable valuation metrics of mining stocks, the ongoing volatility and macroeconomic risks mean it might still be too risky to commit. Additionally, global concerns about demand, including potential tariffs and the uncertain trajectory of China’s economy, cast doubt on whether the mining sector will bounce back in 2025. In fact, Citi has adjusted its outlook, anticipating continued softness in the market.
Among the concerning trends highlighted by Citi, the global manufacturing sector remains weak, with many key indicators showing signs of contraction. China, the world's second-largest economy and a major consumer of Australia’s mineral resources, is expected to slow its growth in 2025, hampered by deflationary pressures and trade uncertainties. This is exacerbated by a global shift toward consumption-driven growth rather than industrial demand, which is particularly negative for mining stocks that rely on industrial consumption.
Even with the Australian dollar’s weakness against the U.S. dollar and its potential benefits for exporters, Citi believes the global demand slowdown and volatile prices for key commodities like iron ore, base metals, and battery materials will keep the pressure on the sector throughout the year. Until clear signals of demand stabilization emerge, it's important to approach investments in the ASX’s mining stocks with caution, including companies like (BHP), (RIO), and (FMG).
As such, while it might be tempting to consider mining stocks after a sharp dip in prices, the broader economic pressures on the sector could mean that the recovery remains distant. Until the macroeconomic landscape stabilizes, it would be wise to tread carefully in the ASX mining space.
