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.

Finweek English Edition - - CONTENTS - ed­i­to­rial@fin­week.co.za

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

Plat­inum

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.

Iron ore

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”.

Coal

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

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