Sliding prices, sliding demand and sliding growth has seen mining stocks accelerate the declines seen in the last four years.
It was in 2011 that the Reuters CRB index peaked at $370 and since then the direction of travel has been pretty much one way as a slowing Chinese economy and overcapacity in the sector has served to drag prices the building blocks of economic growth back to levels last seen in 2008.
In the years since that peak while equity markets have gone on to post new all-time highs, commodity prices have done the exact opposite.
This has by no means been a bad thing given the sharp rises we saw in commodity prices in the aftermath of the start of the Federal Reserve’s massive QE program and the People’s Bank of China own stimulus plan.
In fact the falls in commodity prices have been a welcome boost to consumer spending at a time when the economic recovery in the UK, US, and to a lesser extent the EU, had looked as if it were going to falter at the beginning of the year.
It therefore isn’t too much of a surprise that there is so little underlying price inflation in the world when we’ve seen widespread declines in commodity prices across the board, as well as a sharp decline in oil prices, in the last twelve months.
On the flip slide the slide in commodity prices has been nothing short of disastrous for the broader commodity sector which has had to slash costs and cut investment, as the low prices continue to bite, in a manner that is anything but transitory.
Miners
The biggest casualties this year have been companies with high levels of debt with trading and mining giant Glencore (L:GLEN) the biggest high profile casualty.
When Glencore chief Ivan Glasenbergfinished his $41bn takeover of Xstrata in 2013he could have not imagined that over two years later he would be facing the prospect that the company he IPO’d in 2011 at 530p would be staring at share price losses in excess of 80%.
The slide in the share price along with the collapse in commodity prices has forced the company to acknowledge that the collapse in revenues is raising significant concerns about its ability to finance its debts. In 2014 revenues were $221bn and at current estimates the expectation is that the company will be lucky to get close to that for 2015.
Furthermore with debts of over $40bn, over double of what they were in 2013,investors who bought into the 125p share placement in September are now sitting on significant losses as the company’s restructuring plans look to be in tatters.
While Glasenberg can take comfort from the fact that he is not alone, South African platinum miner Lonmin (L:LMI) has done even worse with the company facing a battle to survive with the company announcing a deeply discounted rights issue in an attempt to keep itself going, after reporting losses of $2.2bn.
A slide in platinum prices, net debt of $185m, along with the prospect of $550m worth of debt rollovers due next year has seen confidence in the management slide, with the share price down over 90% year to date, which has seen the company’s market cap slide to £56m.
Commodity price performance 2015.
The slide in commodity prices above highlights the extent of the problem and unless prices hit bottom soon then we the prospect of further cuts to investment and possible consolidation in the industry can only increase.
This morning’s news that Anglo American (L:AAL) has finally succumbed to the inevitable and has decided to cut its dividend could well be the shape of things to come with BHP Billiton (L:BLT) and Rio Tinto (L:RIO) likely to come into the firing line if iron ore heads towards $30 a ton, after breaking below $40 earlier this week.
At these sorts of levels these two mining giants will feel the squeezeeven more as they look at a potential reduction in revenues for 2015 of around 25%, as well as reduced profits.
At the beginning of this year Sam Walsh CEO of Australian giant Rio Tinto asserted that the prospect of $30 a ton iron ore was in the realms of fantasy land, and would never be reached. Given that we are now $9 away this fantasy could well be about to turn into a very real nightmare
In BHP’s case there is also concern that the dividend is likely to face a significant reduction. The current yield is over 10%due to the slide in its share price,and with a dividend cover of 1,it almost seems inevitable there has to be questions as to whether the company needs to take steps to shore up its balance sheet in the event that the commodity downturn becomes much more entrenched, something that continues to look increasingly likely.
In the past five years the company has seen a 25% increase in the dividend from 101c a share to 124c a share for the financial year end June 2015.
Sentiment hasn’t been helped by the Brazil dam burst in its Samarco joint venture, with total costs estimated to be in excess of $1bn, and maybe even more if litigation costs are considered.
As we look ahead to 2016 it is clear that the overcapacity in the mining sector seen in the past few years is going to take some time to work its way through, and with key benchmark commodity indexes below levels last seen in the 1990’s it is clear that commodity prices remain some way short of giving any evidence of bottoming out, and Chinese demand set to remain weak, which means the prospect of further downside risk to share prices cannot be ruled out.
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