Industry Trend Analysis - Weekly Mining & Projects Roundup - DEC 2014

The Bloomberg World Mining Index will continue to face headwinds on account of subdued metal prices. Weakening Chinese economic growth, evidenced in the decline of China's official Manufacturing Purchasing Managers' Index in October and driven in part by a slowdown in the country's real estate and wider construction sectors, will reduce demand growth for metals. At the same time, we expect ample seaborne supply for coal, copper, and iron ore over the coming quarters. Nevertheless, we maintain our view that the index will respect mid-2013 lows around 200 rather than face continued losses, as weak valuations should encourage consolidation within the sector and boost wider market sentiment.

US coal equities are likely to see further equity upside in the coming weeks on the back of bother higher Powder River Basin thermal coal prices and the success of the Republican Party in the US midterm elections. Coal prices have headed higher in recent weeks - supporting revenue growth for mining firms - yet remain relatively competitive with natural gas prices. Moreover, a stronger Republican majority in the US House of Representatives, and a new Republican majority in the US Senate, will strengthen efforts to delay new greenhouse gas emissions rules proposed by the Environmental Protection Agency (EPA) or even cut the agency's funding. Nevertheless, President Obama is likely to veto any legislation that seeks to reverse the administration's environmental agenda, limiting any longer-term equity upside for coal firms stemming from a friendlier Congress.

Gold mining equities will continue to face significant headwinds after gold prices saw a decisive break lower. Continued weakness in gold prices affirms our view that the metal is likely to test USD1,000/oz in 2015 ( see 'Gold: Break Bolsters USD1,000/oz Target,' November 5), increasing downside risks to our already below-consensus forecast for prices to average USD1,200/oz in 2015. Ultimately, we believe higher real interest rates in the US, multi-quarter appreciation of the US dollar, and persistent outflows from gold exchange-traded funds (ETFs) will together put downward pressure on gold prices in the coming months ( see ' Weaker Gold Prices To Present Opportunities ' November 7).

Mid-2013 Low To Be Respected
Bloomberg World Mining Index (Monthly Chart)

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