It's no secret ASX 200 mining shares have been the star performers of the new trading year since play resumed in January.
The S&P/ASX 300 Metals & Mining Index (ASX: XMM) has jumped almost 6% this year to date. That's after trucking it up north from its low points in November 2021. Meanwhile, the S&P/ASX 200 Index (ASX: XJO) has fallen around 2%.
The fierce rally the commodities sector is staging in 2022 is underscoring much of the upside. Many commodity baskets now sit well within a supercycle, surpassing previous highs and setting new records.
Leading the charge are underlying markets in energy, precious metals and industrials. And many of these are under pressure due to the conflict in Ukraine.
However, the sector is starting to cool off as market pundits finish digesting the news.
So, is it too late to jump on board? Take a look.
Is the party over for ASX 200 mining shares?
The question isn't if the party is over for some Aussie mining stocks, but rather if the hangover has started. Many markets are starting to equalise, but volatility can dampen the mood fairly quickly.
Underlining the most recent spike in global commodity baskets was the tension in Ukraine. Of course, Russia is one of the largest exporters of metals in the world.
Many of the pricing strengths are transposing into earnings upgrades on ASX 200 mining shares. This includes BHP Group Ltd (ASX: BHP), Santos Ltd (ASX: STO) and Rio Tinto Limited (ASX: RIO), whose shares are up 12%, 21% and 11% YTD respectively.
However, these gains are paltry in size compared to the gains on some of the commodities these giants produce. We're talking here of steel, iron ore, oil and nickel, for instance.
Or is the party just getting started?
The lag of ASX commodity producers to the underlying assets could be an opportunity for the sector to stage a further rally, according to Ben Cleary of the Tribeca Natural Resources Fund.
Cleary noted this gap plus the dislocation in company pricing versus market-forward pricing in what ASX producers are estimating in 2022, speaking to the Australian Financial Review (AFR).
"If you look at oil producers, Santos and Woodside are only pricing in about $US65 a barrel crude at their current share prices, which is way below spot price," he said.
Given the widespread growth, Cleary reckons there could be "material earnings upgrades in the sector". He thinks energy could be potentially undervalued.
"We like energy because it is very undervalued, particularly in Australia," Cleary said.
Romano Sala Tenna of Katana Asset Management said coal could be one specific energy pick.
"If you picked out one in particular, it would be coal because met coal prices are over $US600 a tonne, which is off the scales," portfolio manager Sala Tenna said, also speaking to the AFR.
Levelling off
However, the run may soon be starting to level off in some corners of the sector. That's according to ANZ senior commodity strategist Daniel Hynes.
Speaking to Bloomberg Media today, Hynes was asked where he sees equilibrium in commodities moving forward, after he noted oil markets have already started to cool.
"You have to look at some of the markets that haven't had the supply risk premium built into their price, and you could look at some of the smaller metals outside of nickel and aluminium… and those prices haven't moved as much and we're starting to see them stabilise as well," he said.
Hynes was prompted on his view regarding the impact of a recent surge in COVID-19 cases out of China. He responded that the Shenzen lockdown might push demand for key metals higher.
"The metals exposed to the construction sector will probably see some sort of downside," Hynes said. "We've already heard of construction activity in several areas being impacted."
"That's why we've seen prices [in these markets] weighed down particularly as those fears of supply shock have eased in recent times," he added
"I would certainly expect to see further downside over the coming days or weeks on the metals side considering their exposure to China."
Where to next for ASX 200 mining shares?
But taking a long-term view, many portfolio and fund managers have tilted their positioning to commodity baskets. They are taking into account themes like 'energy transition' and 'resources boom'.
"Over 50 per cent of [our] portfolio is invested in companies exposed to copper, nickel, lithium and uranium," David Franklyn, chief investment officer at Argonaut Funds Management told the AFR.
Whereas investment bank Merrill Lynch just released its FAANG 2.0 analysis. Merrill Lynch has assigned its own FAANG group to represent fuels, aerospace, agriculture, nuclear/renewables and gold/metals/minerals. (Instead of the original acronym representing Facebook, Amazon, Apple, Netflix, and, what was then, Google.)
Each of these experts points to a bullish stance on the long-term outlook of particular commodities, most notably energy. And this makes an interesting case for ASX 200 commodity players.
