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Merrill Lynch is confident the global economic recovery is already under way. It sees growing demand for raw materials which will, in turn, be good news for the big mining companies.
Merrill has jacked up its forecast for the copper price by a whopping 59% to $7000 a tonne because stockpiles of the metal remain low. It has raised its forecast for other metals, including nickel, up 32% to $18,500 a tonne. Bulk commodities, such as iron ore, goes up by 10% compared with its previous forecast of a 5% fall by 2010. Coking coal is raised 9% to $140 a tonne whereas it had been looking for a decline of 10% to $115 a tonne year-on-year.
The broker also argues that rising commodity prices could provide the catalyst for a renewed burst of merger and takeover activity as companies take the view they are missing out on a chance to acquire growth options or bulk up on the cheap.
It has decided to upgrade some of the more-leveraged mining companies and attributes the move to the expectation of higher metal prices and the global economy gathering pace. It has a buy rating on some of the big names including Xstrata, up 6p to 853½p, with a price target of 1150p, Vedanta, up 27p at 1874p, target 2750p, and Kazakhmys, 36p better at 949p, (1250p). But it has cut Fresnillo, 6½p better at 634p, to neutral from buy with a 765p target. Fresnillo is regarded as a well-run company with “excellent assets”, but Merrill thinks precious metals could lag industrial metals for a period and it now looks fully valued.
Also on the buy list are Rio Tinto, 46p lower at 2524½p, Lonmin, 28p higher at 1444p, and Anglo American, up 16½p at 1987½p.
Leading shares turned early gains, led by the miners and the banks, into losses. The Institute of Supply Management reported a further shrinkage in the US service industry orders during July with its new orders index dropping from 48.6% to 48.1%, while the number of private payrolls fell by a bigger-than-expected 371,000 in July. The experts had been looking for a decline of 345,000. The Dow Jones was off 94.99 at 9225.20. The FTSE 100 index baulked at the figures falling 32.9 to 4638.4, having earlier touched 4696.6. Second-liners traded below their best levels with the FTSE 250 index paring back its lead to 15.6 at 8258.1.
UBS points out that the 10-week net buying average is now at its highest level since mid-March, but this has been achieved on low volumes. It reckons hedge funds are now turning net sellers of the equity market, having been buyers since March, but long-only investors remain buyers.
The lower-than-expected losses from state-owned Lloyds Banking Group were greeted with a huge sigh of relief and the shares responded with a rise of 7.7p at 92p as stock-market bears raced to cover their positions. The Government has a 43% stake in the UK's biggest mortgage provider after providing it with £17 billion of emergency cash following its merger with HBOS last year.
Barclays, which reported a big jump in profits on Monday, was up 9.5p to 338.1p with Goldman Sachs raising its target from 295p to 305p with a neutral rating. Royal Bank of Scotland, reporting on Friday, rose 2.2p at 48.8p, while HSBC also put on 5p at 634.3p.
Aero-engines maker Rolls-Royce firmed 3.3p to 415.7p after Bernstein raised its target from 305p to 370p. But it has an underperform rating.
Ferrexpo climbed 16.9p to 174.8p despite posting an 80% plunge in first-half profits and delaying the interim payout to shareholders. But the Ukrainian producer of iron ore was upbeat about prospects and said it was looking for a better performance in the second half following a pick-up in iron ore prices. Spot iron ore rose above $100 a tonne in China last week. Cazenove has already upgraded its full-year earnings-a-share forecast by 186% and Merrill Lynch has started the shares at buy following today's update.
Dana Petroleum rallied 12p to 1390p. The shares were sold off yesterday after plugging its TAJ-1 well in Morocco because it had proved to be commercially unviable. But Collins Stewart has taken the opportunity to repeat its buy rating and lift its target from 1450p to 1625p.
Property investment specialist Wichford marked time at 19¼p after announcing details of a heavily discounted rights issue to £52.2 million. A total of 929.3 million shares will be issued on the basis of seven-for-one at 6p.
