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More pain ahead for miners before ‘slow grind’ up

A sharp fall in commodity prices has hit miners hard, with the sector showing a consistent decline since the end of April 2015. However, analysts are now suggesting there may be an opportunity for those who hold out in the long term.

China's economic slowdown is a key factor weighing on the commodity industry, with the nation's demand for commodities cooling as it transitions from an export-based economy to a consumer-driven economy.

Since the end of April 2015, Europe's STOXX 600 Basic Resources sector has slumped some 44 percent. In the past two years, the sector has slipped over 43 percent. However, the sector did see a strong rally on Wednesday, soaring 8 percent.

Europe's STOXX 600 Basic Resources Sector: 2 Year Chart. (Screenshot taken: 17th February 2016)
Europe's STOXX 600 Basic Resources Sector: 2 Year Chart. (Screenshot taken: 17th February 2016)

By cutting costs and scaling back on production, miners and oil producers are trying to manage the shift. But the pain is still obvious.

While producers have improved their margins recently, a bottom hasn't been reflected as firms are still reporting on 2015's turmoil, Paul Renken, senior geologist and mining analyst at VSA Capital, told CNBC via email.

In recent days, both Anglo American and Rio Tinto have posted an annual loss for 2015, and other miners are expected to follow suit. BHP Billiton will announce earnings onTuesday, while Glencore is expected to report results on March 1.

Saying that, mining companies are currently undertaking new restructuring and spending measures, with Anglo American's CEO telling CNBC Tuesday, that the group was "in the right place" having the "right conversations" to deal with the current environment.


China holds the key to any meaningful recovery however.

In March, the country will announce its 2016 growth target and its 13th Five-Year Plan, which outlines the government's main economic and development initiatives for this year until 2020.

"A recovery in commodity prices could come if China in particular surprises to the upside," Marc Elliott, mining analyst at Investec, told CNBC. However, support for commodities could "easily unravel" if industrial activity continues to weaken, he added.

David Hancock | AFP | Getty Images

Elliott said it was "too soon to say" whether mining stocks had bottomed out, but if and when a recovery arrives, Investec doesn't expect it to be a bounce, but rather "a very slow grind" depending on the commodity in question.

The excessive volatility is part of "a bottoming process which is well underway," says Jasper Lawler, market analyst from CMC Markets. He agreed however with Elliott, saying that once a bottom is in, share prices are unlikely to reach old record highs for several years.

"There is value all over the basic resource sector and for those with a longer term horizon a lot of opportunity, but over the next twelve months the risks are still skewed to the downside," Lawler added.