The mining sector has went from excess supply to famine
The mining sector
as a whole is very cyclical. It bounces from feast to famine, from famine to feast.
When prices start rising, lots of money goes into the mining sector, Dominic Frisby in Money Morning UK
explains. Supply struggles to keep up with demand. This results in producers becoming very profitable.
Mine owners even look to low-quality, expensive mines to exploit as prices rise.
Money entering the industry starts to fund exploration. This leads to discoveries of new sources. The people involved make lots of money.
But then reality hits. Supply starts to exceed demand and the metal prices start to fall. And when this happens, all the new exploration stops. So companies don’t make new discoveries.
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This fall is what’s happened in the market over the past three years.
After the plunge, eventually there comes a time when supply is on the tight side. Supply starts to struggle to keep up with demand. And this is where we are.
It certainly looks like the worse is over for the mining sector. It looks like the start of the next up cycle is beginning.
What sort of metals should you look at?
Lead and zinc are feeling the effects of chronic underinvestment. Zinc is now trading at a near three-year high. Stockpiles are at their lowest levels in four years.
Analysts from JP Morgan expect zinc to continue to outperform. Helping push demand is the growing number of new car sales.
But it’s not just zinc. Aluminium, nickel and copper are all looking likely to climb higher. In fact, across the board, the majority of metals are suffering from undersupply. And this is going to set their prices higher.
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How to profit from the metal price climb
The place with the potential to make the most profit are small-caps. But if you can’t stomach the risk, stick to the large diversified miners, like Anglo American and BHP.
So there you have it, what you should buy now mining stocks are starting to look attractive.