Global mining index soars as China, US stimulus converge

The S&P/TSX Global Mining Index has surged 14% since September 6, marking its largest increase of the year. This rally follows central banks' interest rate cuts, the U.S. government signaling additional funding for battery metals, and China's economy is growing slowly.

The index, which includes major players such as BHP (LSE: BHP; NYSE: BHP; ASX: BHP), Rio Tinto (NYSE: RIO; LSE: RIO; ASX: RIO), and Freeport-McMoRan (NYSE: FCX), reached 203.6 points on Tuesday, up from 177 points just 19 days earlier. Tuesday’s jump of 3.5% represents the strongest single-day gain for the index this year.

The US Federal Reserve cut its benchmark rate by 50 basis points on Sept. 18 in a move going beyond tackling inflation to help boost employment. Also, Washington conditionally handed out some of its $7 billion in Biden administration funding for the domestic electric vehicle supply chain.

Beijing, which controls the world’s largest mining and metals industry, said it will start using asset prices and inflation to set monetary policy targets instead of credit growth. It also lowered the reverse repo rate, which sets the cost of short-term borrowing for commercial banks, by 20 basis points. It moved to cut interest rates on outstanding mortgages by 50 basis points, which could benefit 50 million households, it said.

China Rally

Colin Hamilton, the commodity research director at BMO Capital Markets, noted in a recent report that the policy shift in China is expected to involve significant purchases of domestic debt and equities, with major banks being recapitalized using foreign currency reserves. He emphasized that the key question will be whether this interest rate stimulus can effectively boost weak consumer sentiment. Following this announcement, Chinese equity and commodity markets experienced a strong rally.

This week, the U.S. Department of Energy announced it might allocate $225 million to the joint venture project between Standard Lithium (TSXV: SLI, NYSE: SLI) and Equinor (NYSE: EQNR) in South West Arkansas. The department also suggested providing $166 million each for South32’s (LSE: S32; ASX: S32) Hermosa manganese project in Arizona, as well as for Element 25’s (ASX: E25) high-purity manganese sulfate monohydrate plant in Louisiana.

The Federal Reserve's first interest rate cut since early 2020 has contributed to a rise in gold prices, boosting equity markets as well. Experts, including Ryan McIntyre, managing partner at Sprott, predict that gold producers will benefit from reduced costs of capital while their metal assets increase in value.

As of mid-Wednesday in Toronto, the S&P/TSX Global Mining Index gained less than 1%, reaching 127.43, which represents a 22% increase from 104.11 a year ago.

Index Members

Other prominent companies included in the index are Southern Copper (NYSE: SCCO), Newmont (TSX: NGT; NYSE: NEM), Agnico Eagle Mines (TSX: AEM; NYSE: AEM), Barrick Gold (TSX: ABX; NYSE: GOLD), Wheaton Precious Metals (TSX: WPM; NYSE: WPM; LSE: WPM), Teck Resources (TSX: TECK.A, TECK.B; NYSE: TECK), and Franco-Nevada (TSX: FNV; NYSE: FNV).

Hamilton also highlighted that China’s National Development and Reform Commission has approved a series of new infrastructure projects after easing restrictions on transportation, industrial, and office developments.

“With steel and coke prices trending higher, we are becoming increasingly confident about improved demand conditions in the fourth quarter,” he stated. “Concerns are rising that Beijing may not meet its 2024 growth target of around 5%, which leads us to anticipate significant economic stimulus announcements toward the end of the year.”

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