2016 in mining - Chinese demand and government intervention
2016 has been an unpredictable year for the mining industry. Mining equities have gone full circle from market pariahs to market darlings and government intervention, namely the changing mining policies, have hugely affected the mining sector.
International specialist banking and asset management group Investec, in its Sector Review note, has admitted the “largely unpredictable” year with mining companies now on a more certain financial footing but has stressed that due to developed market players such as Japan and Europe still struggling, it does not mean that the global market is returning to a cyclical upturn.
Here’s what we learned from the report:
- China is growing more and more in stature as one of if not the largest consumer and producer of several commodities, shifting the centre of “price discovery” away from Western markets
- With this in mind, Investec expected something of a rally for companies to increase supply, but the industry has remained disciplined. The report cites the recent announcement that Vale’s S22D project will be scaled up to full production at a must slower timetable than originally indicated.
- The cause of China’s increasing growth has come from direct intervention from Chinese government to stimulate their economy, especially in the residential construction sector. This of course has naturally changed the outlook of the mining sector, for example, the price of thermal and coking coal surged
- Looking around the industry, the nickel industry has been impacted heavily by the Government bans on Philippine mining, the stockpiling of Palladium in Russia is believed to be responsible for the strength in the price of the commodity
- In the UK, the Brexit vote has played its part on the mining industry. The weaker Sterling has created a higher demand from companies with US$ earnings
When the clock strikes five:
With commodity prices rising, there has been a revived interest from investors. As mining companies have recapitalised and repaired strained balance sheets, investors are suddenly seeing the brighter side to sector investment again. As a result of this, the Investec Mining Clock now sits at 5 o’clock, which recognises the unpredictable 2016 and extreme volatility resulting in an increased difficulty for mining companies and long term planning.
Investec specifically highlights Anglo American’s plans to divest coal and Glencore’s coal hedging, which was announced just before we saw a surge in coal prices.
It is this volatility, that Investec cites as the reason to remain cautious of calling the current market a cyclical upswing.
The Investec Mining Clock is designed to ullustrate the mining cycle, providing key information on when to buy and when to sell.
You can read the full note here.
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Copper, iron ore surge as Chinese investors unleash demand
The reopening of major industrial economies is sparking a surge across commodities markets from corn to lumber, with tin climbing above $30,000 a tonne for the first time since 2011 on Thursday.
In the wake of mounting evidence of inflation fuelled by higher raw materials prices, investors are also increasingly focused on when the U.S. Federal Reserve might start throttling back its emergency support.
Many banks say the rally has further to run, particularly for copper, which will benefit from rising investment in new energy sectors. Copper is at the highest in a decade, fueling bets it will rally further to take out the record set in February 2011. Steel demand is surging as economies chart a path back to growth just as the world’s biggest miners have been hampered by operational issues, tightening ore supply.
“The long-term prospects for metals prices are ‘too good’ and point to higher prices in the next few years,” said Commerzbank AG analyst Daniel Briesemann. “The decarbonization trends in many countries, which include switching to electric vehicles and expanding wind and solar power, are likely to generate additional demand for metals.”
Trading house Trafigura Group and several major Wall Street banks including Goldman Sachs Group Inc. and Bank of America Corp. expect copper to extend gains.
Copper rose as much as 1.6% to $10,108.50 a ton on the London Metal Exchange before trading at $10,080 as of 4:07 p.m. in London.
Benchmark spot iron ore prices rose to a record, while futures in Singapore and China climbed.
The boom comes as China’s steelmakers keep output rates above 1 billion tons a year, despite a swath of production curbs aimed at reducing carbon emissions and reining in supply. Instead, those measures have boosted steel prices and profitability at mills, allowing them to better accommodate higher iron ore costs.
Spot iron ore with 62% content hit $201.15 a ton on Thursday, according to Mysteel. Futures in Singapore jumped as much as 5.1% to $196.40 a ton, the highest since contracts were launched in 2013. In Dalian, prices closed 8.8% higher.
Erik Hedborg, Principal Analyst, Steel at CRU Group commented: “Recent production cuts in Tangshan have boosted demand for higher-quality ore and prompted mills to build iron ore inventories as their margins are on the rise. Iron ore producers are enjoying exceptionally high margins as well, around two thirds of seaborne supply only require prices of $50 /dmt to break even.”
Still, some analysts including Commerzbank’s Briesemann expect a short-term correction as metals become detached from fundamentals. There’s also a risk that China could engage in policies that may cool demand for iron ore and copper.
The metals rally has boosted concerns about short-term Chinese demand. Some manufacturers and end-users have been slowing production or pushing back delivery times after costs surged, while weaker-than-expected domestic consumption has opened the arbitrage window for exports.
Tin climbed as much as 2% to $30,280 a ton on the LME, boosted by rising orders for the soldering metal. Tin is at the highest since May 2011, with a 48% gain this year making it the best performing metal on the LME.