Resource stocks could fetch decent returns in the medium term

In the last 2 months, the resource prices have started improving substantially. Crude oil price hit a 12-year low of around $27 a barrel (for Brent) in January and then recovered 66% to trade near $45 a barrel now. Coal prices fell 61% from $137.53 per metric tonne (pmt) in February 2011 to $53.37 pmt in January 2016. However, from this record bottom, they have inched up 6% to trade around $56.33 pmt now. Manganese ore prices have gained 35% from bottom of $1.48 per kilogram in December 2015 to trade at around $2.0 per kg now. The international prices of iron ore jumped 74% in the last 4 months, despite many analysts constantly predicting very weak outlook for this commodity over the last 1 year.

In contrast to the proposal of cutting down 100 to 150 million tonne of steel capacity over next two years, there are reports of Chinese steel producers actually reopening their factories this month. About 89% of production capacity across China is being used up this month as compared to 80% at the end of 2015. This development could keep the prices of iron and manganese ores quite firm in the current year.

The US energy firms cut oil rigs for a fifth week in a row to the lowest level since November 2009. Drillers cut eight oil rigs in the week to April 22, bringing the total rig count down to 343. The number of US oil rigs currently operating compares with the 703 rigs operating in the same week a year ago. The International Energy Agency (IEA) says that 2016 would see the biggest fall in non-Opec production in a generation, helping to rebalance a market dogged by oversupply. It added that low oil prices had cut investment by about 40% in the past two years, with sharp falls in the US, Canada, Latin America and Russia. Thus, there are fair chances of oil prices firming up another 15% to 20% by end of 2016.

Similarly, there is a possibility of significant rebound in the coal prices, which crashed badly in the last two years as its competing energies oil and gas also crashed. While the recovery in the oil prices should be positive, China's plan to cut down the coal production (about 500 million tonne of coal production over the next 2 to 3 years) should also augur well for the coal prices to firm up further. Hence, investing in these resource companies (producers of oil, iron ore, manganese ore and coal), which have relatively strong balance-sheets, could fetch decent returns to the investors in the medium term.