The great commodity cash machine is back
Just over five years ago Anglo American Plc was in deep trouble. The natural resources giant, beset by a collapse in commodity prices, scrapped its dividend and announced plans to close mines and cut thousands of workers. Amid talk of an emergency capital raise, its market value fell to less than $3 billion.
Last week, the trials of 2016 probably seemed like a parallel universe to its CEO Mark Cutifani. Fuelled by a rally in iron ore and other commodity prices, he announced record first-half earnings and billions in dividends. Anyone who took a punt on Anglo's shares when they reached their nadir, would have seen a 14fold increase as the market capititalisation soared to $55 billion.
"High commodity prices have been very important to us," Cutifani told investors last week. "We don't think this is as good as it gets."
Anglo American is one of many: with raw materials prices surging, the whole natural resources sector is showering shareholders with special dividends and buybacks as miners, oil drillers, trading houses, steelmakers and farmers reap billions in windfall profits. The sector, marked down by investors because of its contribution to climate change and a reputation of squandering money on mega-projects, is again a great cash machine.
Anglo American, which announced $4 billion in dividends, is probably the most remarkable turnaround story in the natural resources sector.
And for once, the world's biggest steelmakers were not only able to absorb the costs but pass them on. An industry that has spent much of the last decade in crisis is now also able to reward long suffering shareholders. The world's largest steel maker outside China, ArcelorMittal SA, that was forced to sell shares and scrap its dividend just five years ago, posted its best results since 2008 last week and announced a $2.2 billion share buyback programme.
The economic rebound from last year's Covid slump has powered an explosive rally in commodity prices as consumers forgo vacations and dining out and spend their money loading up on physical goods instead: everything from patio heaters to start-of-the art TVs. Politicians are helping, too, lavishing hundreds of billions on resource-heavy infrastructure projects.
The Bloomberg Commodity Spot Index, a basket of nearly two dozen raw materials, surged to a
10-year high last week and is rapidly closing in on the record set in
2011. Brent crude, the global oil benchmark, has again surged above $75 a barrel, copper is headed back toward $10,000 a tonne, and steel is changing hands at unprecedented levels. Agricultural commodities such as corn, soybeans and wheat are also expensive.
Even commodities long left for dead, like thermal coal, are enjoying a new life in 2021. Coal is trading at a 10-year high.
Structural factors are also at play in the turnaround. Miners and oil companies have cut spending in new projects savagely, creating a supply shortfall. The result is that while demand is surging, supply isn't— at least for now.