Energy and resources hit by ASX plunge

StockAnalysis author Peter Strachan

StockAnalysis author Peter Strachan

Australian resources and energy companies are licking their wounds after the ASX hit its lowest point in more than two years yesterday.

The benchmark ASX200 plummeted 3.8 per cent to 4918.4 during the day’s trading, trimming more than $55 billion from the bourse.

Concerns over the Chinese economy’s growth and the subsequent impact on Australian investment and tourism laid the foundations for the selloff. Australia’s largest coal miner Glencore’s shares fell 30 per cent, which then set the scene for other resources and energy stocks to plummet.

All in all the energy sector fell 6.68 per cent after yesterday’s close. Karoon Gas, Origin Energy, Santos and Liquefied Natural Gas stocks all experienced declines of more than 9 per cent.

The S&P ASX200 Energy Index has been in freefall for the past year, down 42 percentage points since this time last year to 8,041 – the benchmark’s lowest point in more than a decade.

Meanwhile, the resources index has fallen more than 33 percentage points during that same period.

And according to Peter Strachan, author of StockAnalysis.com.au, hopes of reinvigorating investor interest in Australia’s energy and resources stocks are fading fast. In fact, he says simply “they will not.”


Why the fall?

In searching for a reason behind the market’s recent record-breaking falls – on 24 August the ASX200 closed down 4.1 per cent, the biggest decline since July 2013 – Strachan says alarming media reports of the commodities sector’s decline have played a part.

“Weekly feedback sessions have emphasised that the bottom for the resource market will be seen when daily papers are headlining the collapse or near collapse of mining companies and the closure of mines, resulting in mass job losses,” he said.

“This process of commodity supply reduction will eventually flow through to improved market stability and a more balanced supply and demand position. However, equity markets look forward 6-12 months to determine value. So a weakening economic situation is predicted by a fall in equities and does not necessarily coincide with that economic weakness.”

“We are probably seeing the final stages of this 7 year bear market. Metal prices are well below the marginal cost of production. A supply response will steady prices by mid-2016.”


Glencore on the brink

Glencore stocks have fallen a whopping 89 per cent over the past 18 months and the company is harbouring a net debt position of US$27 billion. Mr Strachan says the troubling decline paired with low demand for Glencore’s commodities is slowly but surely killing the company.

“How the mighty have fallen! Late in 2014, Glencore wanted to merge with Rio Tinto and now we know why. Basically Glencore has flown too close to the sun and this Icarus must now be on the endangered species list.”


Hold onto your hats, the resources fall is imminent

According to Mr Strachan, the ASX resources index could experience another, even more traumatising fallout in a matter of days, which will likely result in small to medium sized firms surfacing as the survivors.

He says the index is poised to fall another 15 per cent to a normalised position of 2000.

“Many of Australia’s mining favourites have little or no debt with net cash in their balance sheet,” he said. “So ASX listed mid-tier miners are in an excellent position to emerge from the current downturn and then to thrive as commodity prices recover into 2016, while acquisition opportunities abound as their less well funded peer companies struggle.”

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