From Barron's Stocks to Watch blog:
Pick a mining stock, any mining stock, and there’s a very good chance
that its future earnings are highly dependent on commodity prices. Rio Tinto (RIO) and Vale (VALE)? That’s iron ore. Freeport McMoRan Copper & Gold (FCX)? That’s copper. Alcoa (AA)? That’s aluminum.
The problem: Analysts are really bad at predicting commodity prices,
which inevitably leads to earnings forecasts being wrong as well. Bernstein’s Paul Gait and team explain:
Over the last ten years, consensus has been the best at
forecasting prices for aluminium, zinc and nickel and the worst at
forecasting copper, iron ore, gold and silver. The average error over a 1
year time frame for aluminium has been 4%, and over a 2 year period 5%.
For Zinc this is 2% and 4%, Nickel 5% and 3%. By contrast, the error on
the copper forecast has averaged -7% and -19% and iron ore -8% and -21%
for 1 and 2 year horizons, respectively. This suggests that a counter
consensus view on aluminium, zinc and nickel prices is unlikely to be
the correct course of action, while it for copper and iron ore one has
to be contrarian to stand any chance of being right. In other words, the
pricing dynamic of aluminium, zinc and nickel appears to be well
understood while the market still finds copper and iron ore opaque.
The upshot: While “it is hard to justify a call on the value of
aluminium, zinc and nickel equities based on a commodity call, while it
is imperative to do so for iron ore and copper,” Gait says....MORE
