Resources endure torrid times
Warning: investing in resources can be hazardous to one’s health. The graph at right, and the performance tables that follow, all attest to the extremely difficult time resources companies — and the funds that invest in them — are enduring.
The industry has had a particularly torrid time over the past year. The best performing fund (not reviewed here) showed a decline of 11%, while the worst performing fund (also not reviewed here) sustained losses of more than 20%.
Over three years, results are not quite so bad. Most funds posted annual returns that were positive, but still behind the inflation rate (see graph). In what can be described as a good advert for active management, all of the funds reviewed here beat the performance of the FTSE/JSE Resources Index over three years, which is a popular benchmark among many of the managers.
So what has made the environment so tough for investors? The “fairy tale” that we have come to know as China, has changed. It’s responsible for as much as 70% of total annual demand for some commodities, so its slowdown has caught everyone by surprise. We knew China was transitioning from an infrastructure-led economy to a more consumer-orientated one, we just didn’t know it was going to happen quite so quickly.
It’s really in the junior space that we begin to see a picture of the carnage that is emerging. Deloitte publishes an annual “Tracking of the Trends” survey, which provides a view of the mining industry and the challenges it faces.
The 2015 edition observes that between June 2013 and September 2014, nearly 200 Australian mining companies filed for bankruptcy. In Canada, another big home for exploration and development mining companies, through the TSX Venture Exchange, more than 700 juniors had negative working capital. With such long lead times involved in bringing projects to fruition, we can rest assured that the seeds of the next commodity cycle are already been sowed.
In SA, declining labour productivity and increasing costs have proved challenging for the industry despite the saving grace of the depreciating rand, which has artificially inflated revenues at a time when commodity prices have been stagnant. In the course of a few weeks, Anglo American Platinum, Harmony Gold and Lonmin completed or initiated retrenchment programmes in an attempt to get a grip on costs.
But it’s a combination of China’s transition and competitive dynamics that has contributed to the price decline in the world’s single biggest commodity market — that of iron ore. Iron ore majors, including BHP Billiton and Rio Tinto, are hellbent on increasing supply into a market where iron ore has fallen from over US$130/t at the beginning of last year, to its current $60/t. (It fell below $50/t at one stage.)
Criticism has come from all quarters, including from Glencore CEO Ivan Glasenberg, who recently proffered an economics lesson to the industry at a conference in Barcelona. (Glencore, incidentally, does not own any iron ore mines.) Glasenberg argued that iron ore producers should restrict supply in order to increase the value of the commodity in the ground.
In reply, BHP Billiton and Rio Tinto have defended their decision, saying it entrenches their long-term position and what has happened to the iron ore price in the past decade was exceptional. “Many producers were attracted to the dynamics of the iron ore market when prices were flying, and it’s probably time for that to correct,” says Stanlib’s Kobus Nell.
The debate is fast turning political in Australia, where most of Rio Tinto’s and Billiton’s iron ore operations are located. “Parliament should look closely at the iron ore price war,” suggested one of the headlines in an Australian paper.
“Isn’t it time for a cartel in platinum?” should read the headline in one of our papers. Platinum prices have been in the doldrums for ages now. The fund managers we spoke to were divided in their opinion on what lay ahead for the price of platinum and the shares of its miners. Some think the market for the commodity is about to turn as above-ground reserves dwindle; others are not so convinced.
With Southern Africa in control of 70% of total reserves, and in light of some of the job losses we are seeing in the sector, perhaps now is the time we should put the question back on the agenda.
The history of De Beers might provide some obvious clues on how to go about doing this. If that were to happen, the statue of Cecil John Rhodes might well find a new home in Rustenburg.
The debate is fast turning political in Australia, where most of Rio Tinto’s and Billiton’s iron ore operations are located