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ASX CLOSE: Commodities detract points and push market lower

IG Markets Ltd

Thursday 21st January 2010

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In Asia, regional markets are mixed this Thursday after Chinese one-year swap rates rose after China announced its economic growth rate accelerated to 10.7% in Q4 2009, the fastest pace since 2007. The Hang Seng is the biggest decliner, down 0.6% while the Shanghai Composite is 0.1% softer. Both the Korean Kospi and Nikkei 225 are managing to buck the trend, up 0.3% and 1.3% respectively.

Further south, the ASX 200 closed the session 0.8% weaker at 4827.2 after trading as low as 4822.2 this morning. Those sectors leveraged to China and commodities detracted the bulk of the points, namely the energy and materials sectors.

There's two sources of concern at play here - worries over China's growth rate and the prospect of a disappointing US Q4 earnings season.

It is not surprising to see the materials and energy names selling off today, after the over-played lending concerns emanating out of China.  Unfounded concerns about China's growth (and the 10.7% GDP print supports this) saw some of the froth coming out of the commodities trade to the benefit of the USD and the detriment of those names leveraged to the global recovery story.

In our opinion, the "Chinese lending concern" sell- off in global markets yesterday was a massive and unwarranted over reaction to what should have been seen as a prudent government initiative.  Are we a slow learning society?  Surely we have learnt from recent mistakes and now understand that rampant growth and unchecked capitalism are what ultimately led to the financial crisis we are now only just emerging from.  China's steps to temper inflationary pressures and prevent the creation of asset bubbles should be seen a positive move to achieving sustainable growth.

On the earnings front, companies seem to be meeting or beating expectations. Last year, share prices reacted to earnings reports whereas this year, prices have pre-empted earnings. Hence the reason why earnings reports are having to justify current prices.

As expected, the commodity focused sectors were the biggest detractors. The materials sector led the market south, finishing down 2.2% after commodities, in particular base metals were routed overnight. Alumina led the way, down 4.4% while the major gold producers in Lihir Gold and Newcrest Mining were down 4.3% and 3.6% respectively. The diversified miners didn't fare much better with Rio Tinto, Fortescue Metals Group and BHP Billiton all down between 1.7% and 3.2%.

Not surprisingly, analysts upped forecasts for BHP Billiton following their 2Q production report featuring higher spot iron ore sales and a US$467 million copper provisional pricing gain. Citigroup increased their 1H10 earnings estimate 7% to US$5.5 billion and indicated BHP is now their preferred pick of diversified miners for production growth and potential share buyback. Citigroup maintains their ‘buy' rating with a $45 price target. Deutsche Bank said "higher iron ore spot sales and copper price adjustment boosts FY10 EPS by 7%" but kept BHP at ‘hold' with $44 target. GSJBW said "BHP's 2Q production was very strong compared to forecasts and together with tax benefits and iron ore pricing, results in 7% upgrade to FY10 earnings". The GSJBW broker also notes a buyback is likely in the next year given capex spend and iron ore JV payment due to Rio Tinto. Royal Bank of Scotland said "2Q output mixed but FY10 earnings boosted about 4% on iron ore, petroleum and copper price adjustment". RBOS maintained their ‘buy' recommendation and upped their price target to $51.05 from $50.37. 

Still among materials and OZ Minerals beat full year production guidance for their Prominent Hill mine on the back of strong fourth-quarter output. 2009 copper output of 96,310 metric tons exceeded guidance for between 85,000 and 90,000 tons; gold production of 75,535 ounces topped forecasts for between 60,000 and 70,000 ounces. In their release, OZ Minerals said 4Q 2009 copper output of 36,497 ounces and gold production of 30,526 ounces beat expectations and they now believe they can run their processing plant consistently above nameplate capacity at 8.8 million tons per year. This leads to guidance for annual production of between 100,000 and 110,000 tons of copper and 80,000 and 90,000 ounces of gold in 2010, 2011 and 2012. The continued strong performance at the mill is a positive for OZ Minerals. Full year production figures while good, are not a surprise as the miner flagged in November they were on track to beat guidance.    

Elsewhere, the energy sector finished 2% lower after oil futures fell overnight. Caltex Australia, Oil Search, Paladin Energy and WorleyParsons were the biggest decliners, all down between 1.4% and 5%, with Caltex the worst.    

There were no big surprises in Santos's (-1.1%) 4Q production revenue numbers, with output in line with guidance, annual revenue slumping 21%, and 4Q revenue down 7% on a lower average oil price. Gas prices in 4Q were down 16% due to oil price-linked gas sales contracts. As expected, Santos sticked to their 2010 production, capex guidance, and reiterated final investment decision for Gladstone LNG is due mid-2010. One unexpected positive was the reduction in production cost guidance for 2009 to $530 -$550 million from previous guidance of $550 -$570 million, due to cost efficiencies realized in 4Q and favourable forex impacts. Royalty related tax expenses for 2009 are also expected to be lower at $80 -$90 million from previous guidance of $110 -$120 million, although Santos says this is because 4Q oil prices were lower than anticipated. 

Industrials (-0.4%) weakness detracted further points with Toll Holdings and Macquarie Airports the biggest fallers, both down 3.2%.

Financials tried to mount a bit of recovery in the middle part of the session but couldn't hold onto gains late. The sector finished marginally in the red, down 0.1%. The big four banks were mixed, with Westpac Banking Corporation the best performer, up 0.5%. Commonwealth Bank of Australia and ANZ were flat while National Australia Bank lost 1%. AMP was the best performer, rising 2.5%.

 

Prices are in AUD unless otherwise stated.
IG Markets Ltd, Australian Financial Service Licence No. 220440. ABN 84 099 019 851.
This information is provided for information purposes and should not be regarded as financial product advice. This information does not take into account your specific objectives, financial situation or needs. Therefore you should consider the information in light of your specific objectives, situation or needs before making any trading or investment decision. IG Markets recommends you take independent financial advice before any decision whether to trade with IG Markets in the products we offer.



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