Flicker of optimism
Analysts and investors usually hang on the lips of Glencore CEO Ivan Glasenberg at the group’s results presentations to hear where one of the world’s top commodities traders thinks commodity prices are headed.
Glencore and South32, both with a significant exposure to energy and industrial metals, have reported lower profits for their recent financial periods because of weak prices.
But they are showing strong cash generation and their optimism about current conditions, after a general firming in commodities since February/March, is reflected in their dividend policies.
South32 declared its first dividend and Glencore said it could resume dividend payments at the end of its current financial year.
Both companies are coming back into favour with investors because industrial metals are usually early beneficiaries of an upturn in the commodities cycle.
South32 has more than doubled since its January low of R10.25 while Glencore has run from R15.41 last September to above R33. If the cycle continues on this trend, they have scope for further appreciation.
Capital Economics says in its latest commodities chart book that supply concerns have underpinned a rally in most industrial metals, particularly zinc and nickel, but not copper, where there appears to be more than enough supply. It says improved investor sentiment has also supported prices.
Despite an apparent upturn, Glencore and South32 are taking a cautious stance on expansions and acquisitions.
Glasenberg says Glencore will look at opportunities to add to its agricultural interests.
South32 has made only one recent acquisi- tion, an option to partner in the Huckleberry exploration project in Quebec, Canada.
CEO Graham Kerr says South32’s focus is on growing the cash profile of the business and it could do that from its existing operations, without making overpriced acquisitions. South32 is busy with or planning brownfield investments in SA and Australia.
Glencore’s portfolio includes copper, nickel, zinc, coal, oil, lead and ferrochrome. South32 is in coal, aluminium, nickel, zinc, lead and manganese.
Macquarie’s latest Commodities Comment shows the strongest base metals up to last week, based on London Metals Exchange (LME) cash prices, were zinc at US$2,282/t, showing an 18% rise on its 2015 average price; tin up 17.3% at $18,859/t and lead, up 150 140 3% to $1,843/t.
Copper, the main gauge of global industrial activity, was still 16% below its 2015 average at $4,615/t.
Macquarie analysed China’s July trade statistics, which showed imports of raw zinc, copper concentrates and coal were strong but imports of refined metals were generally weaker.
Glencore says Chinese copper demand was strong in the first half of the year, reflecting orders from the power and construction sectors, while outside China demand was also slightly better than a year ago.
Supply is steady, but it is contracting in Chile, the world’s biggest producer, because of depleting mines and falling grades. There have been production shutdowns in African and