Focus on Africa for next commodities ‘supercycle’ – by Paul Murphy (Financial Times – October 30, 2015)

Battered miners will pivot to continent when excess capacity is finally squeezed out

There was a frenetic air to trading in London’s listed miners this week — things were faster, wilder and even more uncontrolled to the downside than battered sector players have come to expect.

No one mentions the concept of a commodities “supercycle” these days, not after four years of a downturn with no end in sight. The themes of oversupply and faltering Chinese demand are well-worn, but the focus recently has moved to corporate debt levels and dividends. Or rather debt and the non-deliverable nature of those dividends.

There is also the slightly unintuitive issue of rapidly falling production costs in the mining industry, noted by Investec’s sector specialist Marc Elliott this week as he and his research team again chopped their commodity price forecasts across the board.

Taken in tandem with a belated realisation that China itself built massive new mining capacity during the latter stages of the boom years — becoming a competitor as much as a customer — there is now a sense that commodity prices simply have not yet bottomed. And they will not do so until excess mining capacity is genuinely squeezed out.

Throw in the odd supplementary issue, such as a collapse in diamond demand and prices, and the spectacle of a 25 per cent shrinkage in Anglo America’s share price over the past fortnight becomes understandable — as does the persistent weakness in Glencore, despite all its promises to cut capacity and bolster its balance sheet.

The mining sector as a whole has underperformed the wider UK market by about 30 per cent so far this year, according to Mr Elliott. But Anglo has halved in price and Glencore is down 60 per cent. That looks very much like capitulation on the part of investors.

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