Surge in commodities was a fluke, not a revival
Metal prices surged at the start of the year, but this was in response to an expected increase in Chinese economic activity, rather than concrete events.
The January increase in both steel and iron ore prices was nothing more than a quirk of circumstance. Data released for January by Statistics SA showed that iron ore production fell 13.2% compared to December.
not so fast on the renaissance in diversified mining shares. Following a high-octane start to 2016 during which Anglo American gained more than a 100%, while Glencore and BHP Billiton were 45% and 26% higher respectively, the breaks are being put on the spike in China activity that is thought to have spurred the shares.
According to a report by Goldman Sachs, borrowing in China – which indicates the amount of real economic activity that is likely to take place in the foreseeable future – is likely to flatten. And the January increase in both steel and iron ore prices was nothing more than a quirk of circumstance.
Aggregate financing was CN¥780bn (yuan) – around $120bn – in China during February, according to the People’s Bank of China, which compares to a median forecast of CN¥1.84tr ($280bn). New loans totalled CN¥726bn, a paltry $111bn against an estimate of CN¥1.2tr or $180bn.
“The significant rally in mining stocks was kicked off and supported by the record loans data in January, which drove China steel prices up in expectations of an aggressive restock – and this in turn pulled through higher commodity prices,” said Goldman Sachs in a report.
The reality, however, is that record financing in January was just an enthusiastic response to the Chinese government’s setting of a 13% targeted increase in total social financing (TSF). TSF can best be described as a broad measure of liquidity in China.
And the quirk of circumstance that sent the steel price higher was in anticipation of restocking rather than a response to it, which indicates quite different things.
IMPACT ON SA-BASED MINERS
Chris Griffith, CEO of Anglo American Platinum (Amplats), expressed some exasperation with equity prices. “Share prices are not reflective of anything,” he said. “For us, it’s the price of the metals and it’s anticipated to be another tough year,” he said of the platinum group metals market. Amplats is about 80% owned by Anglo American.
“South Africa and world macroeconomics are largely unchanged. The contribution of mining to South Africa’s economy will still be low this year,” he added.
And significantly so in some cases.
Kumba Iron Ore accounts for about half of all SA iron ore exports, therefore its restructuring efforts are going to have a negative impact on the country’s foreign exchange earnings in 2016.
Data released for January by Statistics SA showed that iron ore production fell 13.2% compared to December and some 23% yearon-year.
There are reasons for fearing the depreciation of the rand, but in the short term it did help the top line for iron ore producers, which saw the mineral’s contribution to total exports increase 14% from December.
This contribution is expected to be higher in February and March as the iron ore price in dollars has also increased, as alluded to with the China restocking activity. But analysts don’t think the iron ore rally will persist.
An analyst, who asked for his research not to be attributed, said that the recent rally in iron ore prices would likely result in a considerable increase in iron ore export revenues for the first quarter, but “should normalise in the second quarter as we expect prices to retract from current highs”.
The other main bulk mineral SA exports is coal. Coal exports were also under pressure in January, and revenues from the mineral are likely to remain depressed, according to David Brown, CEO of Coal of Africa.
“There’s no surprise the coal price has continued to underperform,” he said. “Market commentators have underestimated the trough in the market.
“We believe any recovery will come through in 2017 and 2018. We are seeing some positive positioning as there are low levels of new investment in coal output, which will have an impact on future supply,” he said.
“But 2016 has not started as strongly as we would have liked.”
Chris Griffith CEO of Anglo American Platinum
David Brown CEO of Coal of Africa