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Market Cap £95.21bn
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COLUMN-Some commodity producers lagging the rallies in red-hot metals: Russell

Thu 6th May, 2021 1:00pm
(Repeats story published earlier on Thursday. The opinions
expressed here are those of the author, a columnist for
Reuters.)
    By Clyde Russell
    May 6 - The global rally in commodities has seen some like
copper and iron ore probe record highs, but when it comes to the
companies producing natural resources the gains in their share
prices have been largely lagging and uneven.
    Benchmark London copper futures  CMCU3  came within a
whisker of their all-time high on Wednesday, reaching $10,040 a
tonne, just shy of the record $10,190 hit in February 2011.
 urn:newsml:reuters.com:*:nL1N2MS0G1 
    Copper has gained 28.1% since the end of last year and is up
114.9% from its 2020 low, hit in March of that year amid the
global economic fallout as countries locked down their
populations and halted travel in a bid to contain the spread of
the coronavirus pandemic.   
    Spot iron ore for delivery to north China  MT-IO-QIN62=ARG ,
as assessed by commodity price reporting agency Argus, reached
$193.50 a tonne on April 28, narrowly beating its previous
record of $193.00, also reached a decade earlier.
    The spot price has gained 16.7% from the end of the year to
Wednesday's close of $186.60 a tonne, and is 134.4% higher than
the 2020 low of $79.60, reached in late March.
    Other commodities, especially metals such as tin and
aluminium, have also performed strongly this year.
    Much of the rally has been built on China's seemingly
insatiable demand, with the world's second-largest economy
having boosted stimulus spending on commodity-intensive
infrastructure and construction projects in order to recover
from the pandemic.
    But while prices for metals have been robust, the share
prices of major producers have not quite matched the stellar
gains of the commodities they produce.
    Rio Tinto  RIO.AX , the Anglo-Australian miner that is
currently the world's biggest iron ore miner and a major
producer of copper, should be the standout beneficiary of the
current rally in metals.
    Certainly, its Australian-listed stock has performed well,
rising 10.4% since the end of last year and 72.7% since the 2020
low in March in local currency terms.
    But it's worth noting that in the rally after the 2008
recession, which like the current surge was built largely on
Chinese commodity demand, Rio's shares leapt 206% between the
low in December 2008 to a peak in April 2010, while copper only
managed a rise of about 179% over the same period.
    Comparing commodity price gains with those for the shares of
producer companies has an element of comparing apples and
oranges, given several factors affect the valuation of equities,
including the value of potential dividends, debt levels and
expected capital expenditure.
    However, with the huge rally in commodities, it may be
expected that dividends will also surge, which in turn should
help drive share price outperformance.
    Rio is especially well placed in iron ore, with the cost of
delivering a tonne of the steel-making ingredient to the export
port in Western Australia state around $15 a tonne.
    While there are other costs to take into account such as
taxes and royalties, there can be no doubt Rio is generating
massive amounts of free cash flow at the current prices for iron
ore and copper.
    It's a similar picture for BHP Group  BHP.AX , the world's
biggest mining company and the third-ranked iron ore producer.
    Its Australian shares have risen 13.2% from the end of last
year and 103% since the low last year in March, which is a
strong return, but again lagging the performance of the metals
the company produces.
    BHP has also outperformed Rio in the past year, which is
perhaps incongruous given the company has a substantial exposure
to some of the commodities that may be viewed as relative
strugglers, such as both coking and thermal coal and crude oil.
    Singapore-traded coking coal futures  SCAFc1 , based on the
free-on-board price in Australia have increased by just 10.2%
since the end of last year, and by 11.8% from their 2020 low in
November of that year.
    Australian coking coal has been hit by China's unofficial
ban on imports from Australia amid a political fight between
Beijing and Canberra.
    
    CRUDE OIL WINS?
    BHP also has exposure to crude oil, a commodity that seems
to be performing strongly amid hopes for a global recovery in
travel and transport as economies re-open from pandemic-led
closures, but in reality is most likely being propped up by
output restrictions by the OPEC+ producer group.
    Brent crude futures  LCOc1  have risen 33.1% since the end
of last year and 257% from the low in 2020, but these percentage
gains are largely misleading given the huge fall in the early
part of the pandemic.
    Brent has returned to the levels that prevailed for the
months prior to the coronavirus outbreak, while iron ore has
more than doubled and copper has nearly doubled.
    So, is it surprising that major oil and natural gas producer
Exxon Mobil  XOM.N  has performed as well as, if not better on
some measures, than Rio and BHP in recent months.
    Exxon shares have risen 47.9% since the end of last year and
by 93.9% since the 2020 low in March.
    It could be that investors are taking a view that iron ore,
copper and other metals have reached their ceilings, at least
for the time being, while crude oil and natural gas have a
better potential growth story.
    
    Disclosure: At the time of writing Clyde Russell owned
shares in Rio Tinto and BHP as an investor in a fund.
    

 (Editing by Kim Coghill)
 ((clyde.russell@thomsonreuters.com)(+61 437 622 448)(Reuters
Messaging: clyde.russell.thomsonreuters.com@reuters.net))
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