Resources Stocks Tumble

Sydney Morning Herald

Wednesday June 3, 1998

By KATE ASKEW and MORGAN MELLISH

Across-the-board falls in commodity prices because of wilting Asian demand hit financial markets yesterday.

Falling resources stocks pushed the sharemarket's benchmark index, the All Ordinaries, down more than 50 points in morning trading before it recovered to close down 18 points at 2671.

Stocks such as RGC, Newcrest, and Rio Tinto were the hardest hit with the All Resources index falling 12 points (1.1 per cent) to 1080.

This index has lost 13.3 per cent from 1246 in less than five weeks, taking it back to where it was in October last year.

The weaker commodity prices also hurt the dollar (see story below).

Gold was worst affected, falling $US3.85 an ounce overnight Tuesday to five-month lows of $US288.45. Traders blamed the fall on speculation that demand in India would drop off after it raised import tariffs on the precious metal.

Copper fell US1.55c a pound to US75.95c while oil, aluminium, lead, nickel and zinc were also weaker.

"I don't know whether metal prices have got much further to fall, it's just that with Asia I don't see them going up much," said Bankers Trust head of asset allocation Mr Olev Rahn.

"I can't see any sustained recovery in metal prices before next year. We're already underweight resources so we haven't been selling during this latest weakness."

The recent commodity price falls have prompted brokers to downgrade their commodity price forecasts, also pushing down earnings outlooks for mining companies.

Macquarie Equities cut its nickel price forecasts for the remainder of this year by 5 per cent to $US2.62 a pound, aluminium prices by 3.9 per cent to US67.2c a pound and copper to below US80c a pound.

Salomon Smith Barney also downgraded metals prices, saying forecasts of US80c a pound for copper and US80c a pound for aluminium appeared too aggressive.

Nevertheless, some fund managers are beginning to look for buying opportunities. "We've been aggressively underweight in resources, and we've been right, but there is some value we are beginning to see emerging," BNP Investment Management head of Australian equities, Mr Brian Ingham, said.

"Commodity prices have fallen, which is negative, the dollar has fallen, which is positive . . . the big question is what is going to happen with volumes," Mr Ingham said.

"While we are not upgrading our position substantially, we are thinking of moving to a more neutral position."

The commodity price falls were blamed on weakening demand in Asia where, in less than two months, the yen has depreciated against the US dollar by more than 8 per cent.

The depreciation has further slashed the purchasing power of Japanese companies which already face a fall in industrial production, lower consumer demand and the highest unemployment rate since World War II. Australian resources companies, particularly those that produce coal, iron ore and base metals, are heavily dependent on Asian economies, especially South Korea and Japan, which take the bulk of their production in long and short-term contracts.