Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
In New York trade on Thursday copper for delivery in December fell sharply after economic data out of China showed growth in fixed investment – a key driver of copper demand – at a 15-year low.
After a week of declines copper traded at a day low of $2.1585 per pound or around $4,760 a tonne on Thursday, down more than 2% from Wednesday’s close and the lowest since May 2009.
Copper traded below today’s level for seven months at the height of the global financial crisis on its way to a record above $4.40 a pound 18 months later. For a sustained period below $2.20 you have to go back a decade.
The red metal’s latest leg down comes after statistics from China, responsible for more than 45% of global copper demand, indicated a broad measure of credit growth in the economy – so-called total social financing or TSF – edged down to 11.8%, bringing credit expansion close to the all-time low of hit in June.
For metals and mining, fixed asset investment data released earlier was even more damaging with growth estimated at 10.2% year on year for the first ten months of the year. While on the face of it a robust number in absolute terms it represents the slowest growth since 2000 and the 17th straight month of declines.
Fixed investment was hurt by an intensifying slump in the property sector with investment growing a tepid 2% in October, the slowest pace since the country’s statistics agency started collecting the data in 2004. Industrial production growth also disappointed, edging down to 5.6% in October, matching the six year low touched in April while cement production and electricity investment also slowed down.
The slowdown in fixed investment is a function of Beijing stated policy to overhaul China’s investment-led economy into one driven by services and consumption.
While not nearly enough to offset the slowdown elsewhere in the economy there are signs that Chinese consumers could take up some of the slack in the infrastructure sectors. Passenger car sales jumped by more than 13% in October to 1.9 million units, the best performance in 17 months. China’s vehicle market is the world’s largest and some predict the market could top 30 million units per year by the end of the decade.
Troubles on the demand side are being exacerbated by the strong dollar. Depreciating currencies in most producing countries and cost-savings brought about lower oil prices have kept marginal in the market for longer than expected adding to oversupply.
The FT quotes Guy Wolf, global head of market analytics at broker Marex Spectron as saying marginal costs will govern metal prices for longer:
“Costs of production have been relentlessly driven lower and are not providing a floor to prices.
“People don’t really know where the floor is,” he says.
Base metal weakness saw another round of selling of mining stocks led by shares in Anglo American falling 9.5%, their lowest level since listing in London in 1999 after the company announced a management shake-up. Worries about Glencore debt levels returned and the Swiss-based miner and commodities trader slid 7.5% on the London Stock Exchange.
Other copper miners also pulled back with US-based Freeport McMoran losing 4.6% in New York, Chile’s Antofagasta giving up a similar percentage while Rio Tinto and BHP Billiton were both down 2.3%.
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