UK mining and energy stocks slump on rising USD and declining commodity prices

Mining and energy stocks slumped on the FTSE 100 index in London on Tuesday as commodity prices continued to erode on the back of a strengthening US dollar and persistent concerns over the health of the Chinese economy.

Midday in London, shares in mining stocks slumped with Kaz Minerals down 4.9%, BHP Billiton off 3%, Antofagasta down 2.9%, Vedanta Resources down 2.8% and Fresnillo losing over 2%.

Similarly, energy stocks on the London benchmark index plummeted with Tullow Oil down over 6%, Royal Dutch Shell off 3%, BG Group down 4.7% and Petrofac off 2%.

The deep losses by mining and energy firms pulled down the FTSE 100 by 58 points or 0.9% to trade at 6818.The UK index, which is heavily weighted toward commodity-linked equities, underperformed its core European peers as traders cut exposure to both mining and energy sectors on the back of the continued erosion in commodity prices.

In the metals market, copper prices slumped 2.2% while palladium dropped by 1.1% and platinum fell 0.8%. Spot gold fell 0.4% to $1154 per troy ounce while spot silver traded broadly flat at $15.72. In oil markets, Brent crude for April tumbled 1.4% to $57.69 a barrel while the corresponding Nymex crude contract shed 0.9% to trade at $49.50 a barrel – below the key $50 mark.

The battering of commodity prices is on the back of two dominating driving forces; strong US dollar and weak Chinese economy.

The dollar index, which measures the US unit against a basket of its peers, is up nearly 1% to 98.45, its highest level since August 2003 as markets view the recent string of healthy US economic data as a tell-tale sign that the Federal Reserve will raise interest rates this year.

Furthermore, overnight data from China showing that the country’s factory gate prices dropped 4.8% in February reignited worries about the health of the economy. The latest data from China marks the 36th month in a row of deflation and worryingly for miners, suggests the country has a slowing appetite to consume raw materials.

In its latest note to clients, UBS made some key changes to its steel and iron ore price forecasts. The bank cut its China steel production forecast to -0.5% year on year in 2015 from +2%, representing the first decline in China's steel production since the 1980s. “The effect is, in combination with a lift in low cost supply in 2015, the iron ore surplus and the scale of cuts needed to rebalance the iron ore trade are higher than our previous estimates,” said UBS.

It also downgraded its iron ore price forecasts by 6-11% to $59/t, $58/t and $68/t in 2015-17. “Structural headwinds persist in the iron ore market and it remains our least preferred commodity,” added the Swiss Bank.

Separately, UBS downgraded the rating of Royal Dutch Shell to ‘neutral’ from ‘buy’ and reduced the target price to 2130p from 2400p.

UBS said it was disappointed with company’s response to challenging operating conditions in its latest earnings report. “We felt at 4Q the unwillingness of Shell to provide hard numbers for capital expenditure cuts or cost improvements was disappointing,” added UBS.