Wednesday, February 23, 2011

Rio Tinto (RIO), Vale (VALE), Teck Resources (TCK), BHP (BHP) Battered as Commodity Futures Drop

Equities linked to commodities took a big hit, as Rio Tinto (RIO), Vale (VALE), Teck Resources (TCK) and BHP (BHP) all ended down on Tuesday.

BHP Billiton did better than its competitors, as the company announced a deal to acquire the Arkansas shale-gas assets of Chesapeake Energy (CHK) for close to $4.75 billion.

The selloff had an impact the shares of almost every company that plays in natural resources, from steelmakers to miners of industrial metals to chemicals producers to agricultural companies to the shipping concerns that transport those raw materials across the waters.

The drop in cyclical names came on the heels of a huge decline in the broader equities market Thursday, with the DJIA posting triple-digit losses as investors reacted to the prospect of a continually destabilizing Middle East and what that would do to oil prices.

Commodities futures led the tumble into the red. The front-month copper contract was falling nearly 17 cents to $4.32 a pound on the Globex division of the CME, declining from a record high of $4.66.

Agricultural commodities were also plunging. In Chicago trading, the May corn futures contract was losing 30 cents to fall below $7 a bushel.

The several reasons for the commodity declines. First, a growing number of traders believe the run-up in commodities prices has resulted a priced-to-perfection environment in basic materials stocks.

Recent concerns over the contagious Middle Eastern political unrest reached the first major oil producing nation in Libya this weekend, driving crude prices up.

Energy prices are connected with food prices, and inflation in both sectors has raised the possibility of central banks around the world putting inflation-cutting measures in place on their economies, which would slow growth.

The greatest uncertainty remains the Federal Reserve's zero-interest rate policy and quantitative-easing programs, and what the consequences to the economy, and commodities markets will be, once that rug is pulled out from under them.

The supply side of the commodities sector continues to look bullish, with the macro-trends still in place: food stocks are tight, and metals production still faces challenges.

It's demand that investors seem to be concerned about now, and the level to which any interest-rate tightening by monetary authorities around the world impacts international growth.

Steelmakers, already under pressure, probably fared the worst. ArcelorMittal's (MT) plummeted 5.3%, U.S. Steel (X) almost 7%, and AK Steel (AKS) 7.5%.

Fertilizer giants Potash (POT), CF Industries (CF) and Mosaic (MOS) were hit hard as well, falling 6.3%, 4% and 3.7%, respectively.

Dry-bulk shipping firms were also getting blasted. Diana Shipping(DSX) dropped close to 5%. DryShips (DRYS) was falling by a about the same, while Genco Shipping & Trading (GNK) plunged 7%.

No comments: