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Can Commodities Recover in the Second Half?

Rio Tinto (RIO), a diversified U.K. mining stock in everything from coal to aluminum to diamonds, just raised its full-year copper output guidance.

The move comes thanks to the company recovering from a spectacular landslide that struck a Utah mine and destroyed some $100 million worth of equipment, as production at the site is progressing faster than expected.

But you have to wonder why a materials stock like Rio Tinto would be moving so fast to get back on track if base metal prices remain so soft.

Is it because the demand picture remains strong long-term? Or how about a U.S. Energy Information Administration report this week that says coal inventories are way down thanks to the a cold winter and spring and relatively expensive natural gas prices? If demand stays strong and inventories remain low, that could boost coal stocks including Peabody Energy (BTU), Arch Coal (ACI) and Alpha Natural Resources (ANR).

And then there’s natural gas prices, with the fossil fuel hitting a 20-month high in April. Should that bode well for stocks like Chesapeake Energy (CHK) or Range Resources (RRC)?

If you’re wondering why all these items are phrased in the form of a question, it’s because the idea that these headlines could provide some strength to commodity stocks is logical … but hasn’t added up thus far.

Natural gas has dropped significantly off its April highs, and most commodities continue to stay soft in pricing thanks to two simple reasons: China continues to issue disappointing growth numbers, and the U.S. dollar is strong and keeping a lid on prices.

The U.S. dollar index, which measures the strength of the greenback vs. a basket of global currencies, hit a three-year high a few weeks ago. And as for China, its GDP growth rate could drop below 7% this year — the slowest in decades.

Until these macro issues change, it’s unlikely that any commodity stocks will have much of a tailwind in the second half of the year regardless of any pleasant press releases you see.

It’s tempting to bottom-fish in these picks given that many metals stocks have forward P/E ratios well below 10 and the hopes of a cyclical recovery in the next year or two could lift these stocks substantially. But for now, the rosy data points of the past few months seem to be little more than noise and short-lived strength for commodity stocks.

Consider that Rio Tinto is near a new 52-week low, down an ugly 23% year-to-date. Peabody Energy has bounced back a bit lately, but is still sitting on a 37% decline since January.

You get the picture.

At the end of the day, materials and energy companies need a sustainable recovery and strong global demand to ever break out of their funk. So don’t let one or two pleasant headlines fool you.

Stay away from commodity stocks for now.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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