Alliance Trust has issued a forecast that a combination of rising demand from Asian economies and a continuing global tightness of supply will result in another strong year for the mining sector.

Selective investors will be able to benefit from exposure to larger players, while the prospect of a mega-merger between sector giants BHP and Rio could boost mining stocks across the board.

Alliance Trust expects valuations in the mining sector to continue to increase, benefiting from a realisation that any US slowdown will not affect the dynamics between supply and demand, particularly in base metals and copper, since developing Asian economies will snap up any excess supply.

Angus McPhail, global oil & natural resources analyst, said: “The prospects for investment in the mining sector look particularly strong this year, as expectation grows of a mega-merger which could lead to an overall sector re-rating, while the appetite of India and China for core commodities shows no sign of abating.”

“The companies that will benefit most from these factors, along with cost inflation, are those with long mine lives, high quality assets and low unit costs of production. This equates to larger players in the industry such as BHP/Rio, Anglo’s, Vedanta and Xstrata.”
McPhail highlights that different commodities have mixed prospects for 2008. The price of gold will remain high for as long as the dollar remains weak, and diamonds are also worth looking at, particularly at the quality end of the market. Base metal prices will remain volatile until fears over the fallout from the sub-prime crisis subside, however China’s demand will help bulk commodities perform.

McPhail added: “Bulk commodities will continue to do well, particularly Australian coal and iron-ore producers, which supply China. Gold is expected to remain strong but this is very dependent on continued weakness in the dollar and continuing concern about the fall-out from the sub-prime crisis. Diamonds, like gold, offer a safe haven to preserve value in uncertain times. Demand for autocatalysts in the US also means that platinum will do well.”