On the way up, the catchphrase of the commodities supercycle was “stronger for longer.” Now, its demise feels just as enduring.
The mining sector once seemed invincible thanks to China’s rapacious appetite for raw materials. But China’s economic growth has cooled and recent signs of life in areas like its property market haven’t shifted the negative mood. The meltdown in its stock market is now raising fears of a sharper slowdown.
With the price of metals down again this year, the industry is now truly in the pits. Share prices in the sector have sunk again to their lowest levels since the financial crisis and it is hard to see what could meaningfully revive them in the near term.
Iron ore’s bounce this year, from lows of about $47 a metric ton to about $65 last month, has evaporated: low-cost supply will pick up in the second half of the year and keep on rising. Metallurgical coal is suffering too as Chinese steel production falls. Meanwhile, thermal coal-used in power stations—seems well on its way to becoming a global pariah.
Base metals haven’t fared much better. The copper price has wilted: likely supply constraints haven’t yet outweighed concerns about what China’s problems mean for metals demand. And Chinese production of most metals, including aluminum, nickel and zinc, is up this year, notes Deutsche Bank.
For the biggest miners— BHP Billiton, Rio Tinto, Anglo American and Glencore—worries about ailing cash flows have pushed dividend yields to 6%, the highest level since the 1990s, apart from a few panic-stricken months during the financial crisis. With commodities prices and share prices no longer enjoying solid support from China, the wisdom of progressive dividend policies should be called into question. But given miners’ ironclad commitment to payouts thus far, another round of cost-cutting instead seems inevitable when they report half-year results, due soon.
There should at least still be room to prune. About $1 billion, or about 15%, of Rio’s planned investment this year had yet to be approved by the board when it reported its full-year results in February. Meanwhile, about 40% of Glencore’s investment budget relates to expansion, rather than essential spending. And, if nothing else, the strength of the U.S. dollar against most producing currencies may help reduce headline spending figures.
This could create space for dividends, helping share prices. But further efforts to raise efficiency, while welcomed by investors, also have the effect of cutting the marginal cost of production, which could keep prices lower for longer. The biggest miners, like Rio and BHP in iron ore, seem unlikely to back down from their entirely rational stance that the lowest cost producers should be the ones that keep digging, undermining the pricing landscape for all.
This not-so-supercycle has a while to run yet.
The Wall Street Journal
