Mining: what a difference a year makes
• Analysts will ponder wild swings in fortune at indaba
The mining industry could justifiably claim it is suffering from schizophrenia given the wild swings in its fortunes over a few short years. Twelve months ago commodity prices appeared to be in free fall with little on the horizon to provide much cheer. One year on and fortunes have reversed — and in the case of some commodities, like iron ore, this reversal has been astounding.
How does one make sense of such volatility over such a short time span? Importantly, how does one plan in the face of tremendous uncertainty?
Industry participants, investors and government officials attending this year’s Investing in African Mining Indaba in Cape Town will be seeking some answers to these questions as they ponder the prospects for the industry in the year ahead.
On a global scale, big question marks are being raised over the sustainability of the price rise in the likes of iron ore that climbed 80% in the past year, and coking coal that shot up by 130%.
While in the throes of the commodity super cycle, increases such as this were not unusual. China’s demand for raw material to feed its rapid expansion justified these everrising prices, and in the wake of this demand waning by 2015 it was only natural that prices would bottom out.
The rapid rise in the past 12 months is almost as much cause for concern due to doubts about the sustainability of higher prices. According to a Bloomberg report in midJanuary, the 6.1% rise in iron ore since the beginning of this year has led analysts to question whether this could continue.
“Fundamentals don’t explain the full price movement since last week, and that’s why I think speculation is playing the main role,” Di Wang, an analyst at researcher CRU Group in Beijing, is quoted as saying.
It is this level of uncertainty and volatility that is probably the biggest inhibitor to industry analysts getting a better grip on prospects for this coming year. So, while it is a fact that mining is a cyclical sector and the industry has adapted to this reality, the wild swings over a short period of time introduce new levels of discomfit.
Andrew Lane, head of Deloitte’s energy and resources unit, acknowledges that this turnaround appears to be unprecedented. “The downward cycle certainly feels short because when it started we all predicted it to be long. Whether it is absolutely short or long I can’t really comment, but it is definitely recovering a lot more quickly than many of us had expected,” he says.
If 2016 is any measure of the global capacity for disruptive events — such as the Brexit vote and ongoing disharmony threatening the future of the European Union, as well as Donald Trump’s presidency — there seems little reason for 2017 to differ materially.
The problem for investors and miners, however, is that they cannot adopt a wait-andsee attitude. Large projects can take up to a decade to reach production, so they simply have to continue regardless.
Hanré Rossouw, Head of Resources in Frontier & Emerging Markets at Investec Asset Management, believes the performance of the US’s economy under Trump could be a significant factor in the global economy’s fortunes.
“The election of Trump has certainly been a surprise, and his drive to grow the economy through infrastructure development will remain one of those big variables,” he says. “The policy implementation around this programme is the big question. Even through it is over a decade, the trillion dollars he has mentioned is of reasonable size. If you compare it to the Chinese stimulus package between 2008 and early 2016, it is of a similar size. So, I think that could be interesting for commodities.
“The market actually moved dramatically on this promise of infrastructure development, which could be significant.”
By the same token, a stronger dollar due to improved US performance could weaken commodity prices.
Rossouw says despite this uncertainty, the mining industry does appear to have entered a more “normalised cycle” since the collapse of the super cycle. This scenario, he suggests, will be marked by a better balance between supply and demand.
“This will continue to drive cyclicality, but in contrast to the super cycle it will be less correlated than it was before because we don’t have the Chinese industrial demand. This may drive more M&A as companies recognise that their ability to forecast commodity prices are severely limited.”