Resources review: Performance, iron ore, lithium & more

The S&P/ASX 200 Resources Index is heavily exposed to iron ore and related steel making (33.18% of the revenue exposure). The VanEck Australian Resources ETF (MVR) has a broader lens, and is designed to capture the full breadth of the local resources industry. By capping individual stock weights at 8%, it uplifts segments within the sector that are often overlooked by market capitalisation approaches.

Over the last 3 months, a diversified exposure to the Australian resources market has enabled the ETF to outperform the S&P/ASX 200 Resources index. A major factor in this outperformance has been exposure to sub-industries such as minerals and non-ferrous metals. As we always say past performance should not be relied upon for future performance. For reference, MVR’s full performance is available here. At the time of writing, in addition to outperforming over the past 3 months, MVR had outperformed the S&P/ASX Resources Index over 1 month, 6 months, 3 years, 10 years and since the ETF’s inception.

Chart 1: VanEck Australian Resources ETF (MVR) v S&P/ASX 200 Resources

Source: Bloomberg. The S&P/ASX 200 Resources Index is shown for comparison purposes as it is the widely recognised benchmark used to measure the performance of the resources companies included in the S&P/ASX 200, weighted by market capitalisation.  MVR’s index measures the performance of the largest and most liquid ASX-listed companies that generate at least 50% of their revenues or assets from the Australian resources sector, with a maximum weight of 8% in each company at rebalance. Consequently it has fewer companies and different industry allocations than the S&P/ASX 200 Resources Index. ‘Click here for more details’.

While large players in the industry are often labelled ‘Diversified Metals & Mining’, as per their Global Industry Classification Standard (GICS), the reality is that they typically have large exposure to individual base metals or energy commodities.

Chart 2: MVR v S&P/ASX 200 resources revenue by segment breakdown

This heavy concentration presents risk to investors. As one of Australia’s largest importers of iron ore, for example, China’s recent economic woes (which have stifled infrastructure and property investment) have significantly impacted the price of iron ore. The charts below show an inverse relationship between the mounting inventory of iron ore at Chinese ports and the price of iron ore, which has declined 17.52% since the start of the year.

The S&P/ASX 200 Resources is also underweight in lithium-producing companies, despite global demand for lithium forecast to increase significantly off the back of growing demand for electric vehicles and government-led decarbonisation efforts. Australia is the world’s largest producer of lithium, yet the market index has minimal lithium exposure of 2.95%, compared to 9.9% exposure in MVR.

Late last month Tesla dropped its electric vehicle prices in several major global markets, including China, US, Germany and Australia, in a bid to increase sales against a growing cohort of cheaper competitors. Increased affordability for EVs complements the policies of many governments that have prioritised decarbonisation efforts and incentivised EV purchases, which has driven significantly higher forecasts for the demand for lithium –an export of many Australian mining companies that aren’t held in the S&P/ASX 200 Resources Index.  With even allocations of capital across the resources industry, this is an example of the VanEck Australian Resources ETF providing diversified exposure to the industry.

Chart 5: Number of EV Price-cut models this year the same in first 3 months as total for 2023

Source: China Passenger Car Association

Investors should be mindful of diversification within the asset classes in their portfolio, particularly for resources, where stock prices have shown to be highly sensitive to changing economic and political conditions. Ensuring a portfolio that doesn’t concentrate on certain segments of the market or stocks can add diversification, reduce risk and facilitate a more stable return profile.

Key risks: An investment in our Australian Resources ETF carries risks associated with: financial markets generally, individual company management, industry sectors, stock and sector concentration, fund operations and tracking an index. See the VanEck Australian Resources ETF PDS for details.