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Commodity Super-Cycle and Decline

NEWS RELEASE: Slower, lower, weaker… but not defeated – PwC Mine 2016 report

2015 was a race to the bottom with many new records set by the world’s 40 largest mining companies

JOHANNESBURG, South Africa, June 7, 2016/APO (African Press Organization)

  • The first collective net loss in the Top 40’s history (US $27billion)
  • Market capitalisation down 37 per cent (%), in some cases below Net Book Value
  • High debt sees some miners fighting for survival , committing to asset sales
  • Focus on costs continues, but so do economic headwinds

Click here for the report: https://pwc.docalytics.com/v/pwcs-mine-2016

2015 was a race to the bottom with many new records set by the world’s 40 largest mining companies, according to PwC’s annual Mine report released today (www. PwC.com).

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PwC mining report: top 40 firms squandered boom benefits – by Barry Fitzgerald (The Australian – June 7, 2016)

http://www.theaustralian.com.au/

Last year’s commodity price rout ravaged the global industry, with the top 40 mining companies posting their first collective net loss in history of $US27 billion, compared with a $US50bn net profit in 2014.

According to the “Mine 2016’’ report by PwC on the top 40, released yesterday, asset impairment charges to take account of the commodity price rout also soared.Total impairments for the year were $US53bn, taking impairments in the past five years in the wake of the collapsed mining boom to a staggering $US200bn.

PwC Australia’s mining leader Chris Dodd warned that more impairments were in the pipeline, saying there were instances where balance sheet values were above company market capitalisations.

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Commodities break into bull market, turning TSX into a global leader – by Ian McGugan and Tim Shufelt (Globe and Mail – June 7, 2016)

http://www.theglobeandmail.com/

Commodities from oil to gold have ended their epic swoon – and, in the process, turned Canadian stocks into some of the world’s hottest offerings. The Bloomberg Commodity Index, which tracks 22 raw materials, finished Monday more than 20 per cent above its low on Jan. 20, meeting the most common definition of a bull market.

The new exuberance in raw materials prices has shaken the Canadian stock market out of last year’s slump and transformed it one of the best-performing exchanges in the world so far in 2016.

Monday’s trading extended the winning streak in the S&P/TSX composite index, which entered a bull market of its own late last week. Since the market bottom in January, the S&P/TSX composite has been led by a 43-per-cent gain in the materials sector, and an 18-per-cent advance in energy stocks. 

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End of commodity supercycle is still hurting – by Gavin Keeton (Business Day – June 6, 2016)

http://www.bdlive.co.za/

THE dramatic rise in global commodity prices that started in 2003 took everyone by surprise. For 30 years, commodity prices had fallen steadily in real terms. There had been brief periods of rising prices, but these upswings had become increasingly modest, and their duration shorter.

It was soon clear the 2003 upswing was different. Prices of raw materials rose rapidly, and soon reached previously unimaginable heights. In five years, the oil price jumped fourfold, to $130 per barrel, while copper rose from $0.60 to $3.50 per pound.

These prices were driven by rapid growth in China. Whereas developed countries had for decades shifted to less resource-and energy-intensive sectors, growth in China was focused on substantial infrastructure investment and construction.

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China’s huge cement industry latest to face massive cuts – by Nathan Vanderklippe (Globe and Mail – May 31, 2016)

http://www.theglobeandmail.com/

BEIJING — China’s cement industry, the largest on earth, needs to rapidly dismantle large numbers of factories as part of a newly urgent effort to cut overcapacity, the country’s top administrative authority says.

China should slash 500 million tonnes of cement-making capacity in three years, an amount equivalent to more than four times total U.S. production, the State Council said in a policy document on boosting efficiency in the building materials sector.

Cement production is the third major industry to face the threat of major change in China, which began high-profile efforts earlier this year to cut back overcapacity in coal and steel. Dislocations in those industries threaten to displace millions of workers, and are among the most visible of the wrenching problems facing China as it struggles to move beyond the industrial-heavy growth that it relied upon for decades.

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David Rosenberg says there’s a big problem with Canada’s ‘face-ripping rally’ in material stocks – by Eric Lam (Financial Post – May 18, 2016)

http://business.financialpost.com/

Bloomberg News – Canadian raw materials stocks are having their best start to the year in at least three decades. Some analysts say the rally is missing a fundamental underpinning — economic growth.

A gauge of the country’s largest raw-materials companies including gold, copper, lumber, and fertilizer producers soared 41 per cent through May 16, the best year-to-date performance since at least 1988, according to data compiled by Bloomberg. The rebound comes after materials stocks slumped 23 per cent in 2015, capping a record five-year decline in which the gauge lost 63 per cent of its value.

“I’ve got three words for you: Dead. Cat. Bounce,” said David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates Inc. in Toronto. His firm manages about $8.2 billion.

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Sliding Down the Super-Cycle: Resource Doom Postponed Indefinitely – by Ronald Bailey (Reason.com – May 13, 2016)

http://reason.com/

Legendary investor Jeremy Grantham admits he was wrong about “peak everything.”

“Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever” was the title of an urgent report written by the legendary asset manager Jeremy Grantham in 2011. Grantham proclaimed the advent of a resource scarcity “paradigm shift” that was “perhaps the most important economic event since the Industrial Revolution.”

As evidence, he noted that “the prices of all important commodities except oil declined for 100 years until 2002, by an average of 70%.” Since then, he continued, “this entire decline was erased” by the price surge, which he took as a signal that the world was using up its natural resources at an alarming rate. The result, he declared, would be a permanent shift where the prices of raw materials rise and shortages become common.

Grantham also pointed to a slowdown in crop productivity, suggesting that it would be impossible to feed the world’s burgeoning population. “How we deal with this unsustainable surge in demand and not just ‘peak oil,’ but ‘peak everything,’ is going to be the greatest challenge facing our species,” he wrote.

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Ivan Glasenberg’s advice is buy not build, but rival miners aren’t listening – by Matthew Stevens (Australian Financial Review – May 14, 2016)

http://www.afr.com/

Annually in May global mining bosses assemble in Miami for an industry summit described as “speed dating for chief executives”. “They fly into Miami, they get a chance to talk directly to their big US investors and then they all retreat into private meetings with each other,” one miner suggested this week. “That is the real value of going there, they get to look the whole industry in the eye.”

If that is the rule for Miami, then Ivan Glasenberg followed it to the letter. Glasenberg is a headliner whenever he speaks and Tuesday in Miami was no different. But every illuminating, eye-watering utterance he offered his audience in Miami was shaped more for the ears of his mining peers as much as it was the attention of his investors.

Rhetorically recharged after Glencore’s slightly humiliating 18 month-long brush with financial calamity, Glasenberg allowed himself to return to the pre-crisis conversational themes.

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Miners going broke – worst still to come – by Frik Els (Mining.com – May 11, 2016)

http://www.mining.com/

Already high bankruptcy and default rates in mining & metals and oil & gas will only accelerate this year and the prolonged downturn in commodities will increasingly spill over into other sectors.

So says Moody’s Investors Service in a new report which forecasts global speculative-grade (sometimes called junk) default rates will continue to rise this year, to reach 5% in November due to continued stress in the commodity sectors. Thereafter, it will stabilize in the range of 4.5%-5.0% through April 2017 says the ratings agency.

“We expect the oil price slump to continue to place upward pressure on corporate defaults,” said Sharon Ou, a Moody’s Vice President and Senior Credit Officer. “Nonetheless, high-yield spreads have tightened noticeably in the past two months, signalling that the default rate could taper off next year.”

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Glencore Has Good News for Metal Bulls Starting to Doubt Rally – by Luzi-Ann Javier(Bloomberg News – May 11, 2016)

http://www.bloomberg.com/

The resurgence in mining shares this year may be just getting started, if Glencore Plc’s assessment is right.

Demand is set to exceed supply for zinc and some other industrial metals, the mining and trading company said at a conference Tuesday. The outlook comes after supply gluts and three years of declining prices deterred production. BHP Billiton Ltd., the world’s biggest mining company, said separately that it isn’t waiting for prices to recover as it boosts investments in copper and oil.

“Structural deficits are returning, led by zinc,” Glencore said in a presentation posted on its website for the mining conference in Miami. “Supply challenges for copper and zinc remain due to resource quality and scarcity at current prices.”

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Glencore CEO Lists Mining’s Mistakes After $1 Trillion Spree – by Agnieszka De Sousa (Bloomberg News – May 11, 2016)

http://www.bloomberg.com/

Glencore Plc’s billionaire Chief Executive Officer Ivan Glasenberg wants the mining industry to learn from past mistakes after a $1 trillion spending spree left the world awash with metals.

Growth for the metals industry should mean cash flows and earnings, not digging up as many tons as possible, Glasenberg said in a presentation on Tuesday. Profit can be improved by accepting lessons from the 12 years when mining companies poured cash into boosting production of everything from copper to iron ore.

“Accept that volume growth cannot be an end in itself,” according to Glencore’s slides from the Bank of America Merrill Lynch mining conference in Miami. Under a headline of “Recipe for Better Returns,” the company wrote that management incentives in the industry need to encourage “rational behavior.”

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[Commodities] The World’s Most Extreme Speculative Mania Unravels in China (Bloomberg News – May 10, 2016)

http://www.bloomberg.com/

From the Dutch tulip craze of 1637 to America’s dot-com bubble at the turn of the century, history is littered with speculative frenzies that ended badly for investors.

But rarely has a mania escalated so rapidly, and spurred such fevered trading, as the great China commodities boom of 2016. Over the span of just two wild months, daily turnover on the nation’s futures markets has jumped by the equivalent of $183 billion, outpacing the headiest days of last year’s Chinese stock bubble and making volumes on the Nasdaq exchange in 2000 look tame.

What started as a logical bet — that China’s economic stimulus and industrial reforms would lead to shortages of construction materials — quickly morphed into a full-blown commodities frenzy with little bearing on reality. As the nation’s army of individual investors piled in, they traded enough cotton in a single day last month to make one pair of jeans for everyone on Earth and shuffled around enough soybeans for 56 billion servings of tofu.

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Rio Tinto CEO a non-believer in commodities rebound – by James Regan and Sonali Paul (Reuters U.S. – May 5, 2016)

http://www.reuters.com/

SYDNEY/MELBOURNE – Mining giant Rio Tinto is not counting on an upturn in commodities markets anytime soon despite recent gains in prices of iron ore, its main source of revenue, as much of the world’s economies continue to underperform.

Chief Executive Sam Walsh said factors such as the looming U.S. election, a softer outlook in China and immigration woes facing Europe were suppressing a recovery in commodities. His view, however, is a departure from others calling for an end soon to the commodities rout that has sent just about every major mining company into the red.

“I believe in that environment, calling the bottom is a brave move,” Chief Executive Sam Walsh told reporters. Walsh, who will be replaced by Jean-Sebastien Jacques as CEO in early July, also doused speculation that Rio Tinto was coiled to pounce on assets put on the block by rivals suffering more from the downturn.

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After sector’s huge advance, mining shares are ‘starting to look vulnerable’ – by Ian McGugan (Globe and Mail – May 04, 2016)

http://www.theglobeandmail.com/

The eye-popping run-up in mining shares since the start of the year is hitting a rough patch.A weak reading on China’s manufacturing sector hammered the stocks of many miners on Tuesday, demonstrating the fragility of the new optimism surrounding commodities.

Analysts cautioned that the recent surge in mining shares may have been too much, too fast, for a sector that was devastated in 2015. “We are a little concerned about the scale of recent gains,” Caroline Bain and her team at Capital Economics wrote in a note on Tuesday. “Prices are starting to look vulnerable if, as we expect, the U.S. economy bounces back.”

Any fall in mining shares would be painful for Canadian investors. Since the start of the year, stocks in the S&P/TSX materials index have jumped 38.2 per cent, by far the best performance of any industry in the market benchmark.

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China’s Investments in Africa: What’s the Real Story? (Knowledge@Wharton – January 19, 2016)

http://knowledge.wharton.upenn.edu/

In December, Chinese president Xi Jinping offered a whopping $60 billion loan and aid package to Africa, according to Voice of America. Xi said that China aims to develop infrastructure, improve agriculture and reduce poverty on the continent.

This is only the latest example of China’s burgeoning economic presence in Africa. Its investment there has skyrocketed in recent years from $7 billion in 2008 to $26 billion in 2013, according to figures cited at a Wharton Africa Business Forum held last fall. But the relationship is fraught with controversy.

Opponents assert that it is exploitative for China to finance African infrastructure projects in exchange for the continent’s natural resources. Some accuse China of “neo-colonialist” behavior as it acquires the raw materials like oil, iron, copper and zinc that it urgently needs to fuel its own economy.

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