By Sam Boughedda
Jefferies analyst Christopher LaFemina upgraded several metal and mining stocks Tuesday as China's shift in policy is likely to spark a gradual recovery in Chinese demand.
LaFemina said that even though macro risks are elevated, and mining shares should be volatile, the sector is undervalued and poised to outperform as China recovers.
As a result, Jefferies has raised iron ore and coal price forecasts and upgraded Anglo American (OTC:NGLOY), Rio Tinto (NYSE:RIO), BHP Group (NYSE:BHP), Vale (NYSE:VALE), S32 (ASX:S32), Arch Resources Inc (NYSE:ARCH), Peabody Energy Corp (NYSE:BTU), Warrior Met Coal (NYSE:HCC), and Ramaco Resources, Inc. (NASDAQ:METC) from Hold to Buy.
"Chinese demand has recently been very weak due to the catastrophic impact of COVID lockdowns and a collapse in the country's property market," said LaFemina. "Recent evidence of a shift in policy indicates that the government has become increasingly focused on the economy. Stimulus is being rolled out in steps and COVID lockdowns are reportedly being relaxed (although more lockdowns may happen in response to COVID flare-ups). We are cautiously optimistic that a slow recovery in Chinese demand is coming, and this should partly offset weaker demand elsewhere."
The Jefferies analyst noted that the demand environment is still very risky, and mining shares will likely be volatile, but explained that "eventually, we should be in an environment of a synchronized recovery in global demand, with commodity prices rising to new highs in some cases."
However, the analyst noted that the cycle will take a decade to play out and continues to be underappreciated.