July 30, 2013 / 3:57 PM / 4 years ago

European mining stock rally joy may prove fleeting

* European miners’ 10 pct rally in June seen fading

* China growth, iron ore price concerns hurt sentiment

* Global miners like Rio, BHP may feel pressure

By Atul Prakash

LONDON, July 30 (Reuters) - A rally in Europe’s battered mining shares this month has flown in the face of worsening economic data from the world’s biggest metals consumer China - making a return to form likely in the coming weeks.

A 10 percent surge in the basic resources index has put it on course for its best month since January 2012, buoyed by a 13 percent rise in the price of iron ore , which provides 60 percent of sector earnings.

Prices of other industrial metals such as copper, however, have steadied. And while short-term traders may benefit from the rebound in iron ore in July, analysts say price hikes were largely due to Chinese mills replenishing inventories.

As that is now mostly complete it is unlikely to spark a longer-lasting recovery as Chinese data points to a prolonged slowdown in demand in the world’s No. 2 economy.

“After falling hard for a long time, there could be an element of ‘dead cat bounce’ to (the share price recovery),” Daniel McCormack, strategist at Macquarie, said.

Rio Tinto and BHP Billiton, the world’s two biggest miners by market capitalisation, have been among the best bets, with both shares rising more than 10 percent in July. Others with less exposure to iron ore have lagged, including Glencore Xstrata which is up 3 percent.

The European mining index is still down 20 percent this year, even after this month’s rebound, and is just shy of levels last seen in 2009. But that reflects excess metal supply and declining demand that will encompass iron ore again as well soon.

“I don’t think this bounce in share prices is sustainable. The mining sector was driven by stronger iron ore prices, but quite a lot of iron ore supply is going to come in the next two quarters and that’s going to really pose a surplus in the market,” Nik Stanojevic, mining analyst at Brewin Dolphin, said.

“On valuation grounds, miners offer reasonably good value, but the risk-reward is really on the downside and mining shares could hit new lows if more supplies come.”

Rio Tinto and BHP Billiton, for example, are trading at forward price-earnings ratios of 8.98 and 11.74, respectively, against a FTSE 100 average of 13.62.

But metals prices remain weak. Even with this month’s rally, the price of iron ore - China’s top commodity import by volume - is 17 percent below its 2013 high due to supply and demand concerns.

Although many state-owned Chinese steel plants keep operating in an effort to maintain high employment and avoid social unrest, iron ore prices there have dipped 1 percent in recent days as the mills buy less in the face of softer steel prices.

Steel stockpiles have yet to fall markedly and while iron ore prices may not fall more sharply for some weeks, the longer-term trend is lower and that bodes ill for the sector.

“I don’t think there is too much fundamental behind (the bounce),” Nomura mining analyst Sam Catalano said. “Concerns about Chinese growth, in particular investment and construction, will continue to weigh on sentiment.”

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