After a torrid five years of declining prices, commodity prices appeared to put in a decent base at the beginning of 2016, posting their first annual gain since 2010.
It was back in April 2011 that the Reuters CRB index hit its peak at $370 before finding a base at $155 in early 2016.
At the beginning of the year there was widespread speculation we might see a significant boost from new US President Trump and his plans to implement a significant fiscal stimulus. This hasn’t played out as expected but rising Chinese demand appears to have come to the rescue in the second part of the year.
Price moves haven’t been all one way traffic this year - worries about global demand and the ability of the US President to deliver on his promises prompted some concern that markets could still be oversupplied.
We certainly saw that at the beginning of the year with iron ore prices, which moved within touching distance of $95 a ton in February having been as low as $40 in the early part of 2016. By the middle of the summer they had moved back down to lows of $53.50 before rebounding and finding some semblance of stability above $60 and slightly down on the year so far.
Iron ore prices have been the exception, as copper and other base metals prices have fared a little better when it comes to price gains. Zinc and aluminium prices hit ten year highs, with all of them showing gains of over 20% year to date. A lot of this demand has come from China as a result of a significant stimulus push at the beginning of the year.
We’ve also seen big gains in palladium prices which have overtaken platinum prices for the first time since 2001. This big increase in palladium demand has come about as a result of the diesel emissions scandal and its use in petrol engine cars to help curb emissions, as demand for these cars has increased.
The increased focus on limiting emissions and the fact that palladium was much cheaper than platinum, which is also used in emissions devices, has created a global shortage and driven prices to all-time highs. Good news for palladium miners, not so much for the rest of us.
Commodity price performance 2017
Source: CMC Markets
As a result of the gains in base metal prices mining stocks have also had a fairly decent year, though the gains haven’t been anywhere close to the gains seen in 2016, but that was never likely given how low valuations had fallen to by the end of 2015.
The pattern has been familiar with the big two, Rio Tinto and BHP Billiton, underperforming relative to their peers. That’s not too surprising given that they avoided the worst of the price falls as their sheer size insulated them from most of the slide in commodity prices.
Commodities trader Glencore has had another decent year helping push the FTSE 350 mining index to its highest levels since August 2014, near 18,000, though we have lost momentum in recent weeks slipping below 17,000.
Source: CMC Markets
As can be seen from the graph above most of the gains this year have come in the second part of the year. Chilean copper miner Antofagasta led the way closely followed by Glencore, which has itself managed a Lazarus like turnaround after hitting lows of 70p way back at the beginning of 2016.
Glencore’s turnaround has been extraordinary having overcome concerns over the sustainability of its balance sheet and its profitability at a time when commodity prices were in freefall and its net debt levels were eye-wateringly high, at levels of $30bn. Debt levels are now much lower at $14bn and the share price has recovered to levels above 350p a share, still well below its IPO price of 500p but in a much better place than it was almost two years ago.
Glencore’s position as a commodity trader is also likely to reap benefits from the recovery in prices particularly where demand for metals like cobalt is concerned. It is a key component in lithium batteries, along with nickel and zinc which have outperformed this year.
Chilean copper miner Antofagasta has benefitted from the recovery in the copper price to three year highs this year with profits growing by 88% in the first half of this year. This allowed the company to pay an interim dividend of 10.1c a share, helped by an improvement in margins.
In the case of BHP it’s been a difficult year troubled by boardroom unrest, with respect to its US shale assets, and Canadian potash business. Activist investor and shareholder Elliott Management has been increasingly vocal in its assertion that the shale business needs to be sold to unlock the full potential of the company and boost returns.
In recent days the company has announced that it will look to do just that, and also announced it would be looking to sell its nickel business. This is curious timing at a time given that nickel prices are starting to rebound.
The company still has to deal with the legacy of the Samarco dam disaster in 2015 which has seen claims made against it and Vale of $47bn along with a separate $6.1bn claim in respect of the deaths and damages caused by the dams collapse. Expectations are for some form of agreement by April 20th 2018, and having only set aside just under $3bn in provisions there is a big gap between this provision and the claim itself.
Against this backdrop it is perhaps not surprising that the shares have underperformed, however the picture should become clearer by late April next year.
Rio Tinto on the other hand has done slightly better year to date returning to profit in the first part of the year, also posting a 93% rise in profits in August, on the back of a rebound in commodity prices which have been driven by Chinese demand.
A sharp rise in coal and iron ore output was the main driver, though this was also helped by the recent recovery in iron ore prices which went as high as $90 a tonne in the early part of the year before settling around an average of $62 a tonne for the rest of the year.
The company also raised the interim dividend to a record 110c a share, as well as announcing a $1bn share buyback program.
As we look ahead to 2018 it is clear that demand in commodities has picked up this year and could well work its way through in other areas of the mining sector. But, we are starting to see a move away from the more traditional metals towards higher demand for metals that are used more for technological purposes, rather than in construction.
Metals like nickel, zinc, palladium and platinum fit this description with the latter two already acting as a boost to Anglo American, who own Anglo Platinum as demand for auto catalysts has risen sharply.
Lonmin which for a while has seen its fair share of problems ought to be in a good position to take advantage of this, but has thus far been unable to put its problems in South Africa behind it as it seeks to resolve a long running dispute with its lenders, as well as its work force.
The big conundrum for the mining sector is how to pullback from the more traditional and environmentally unfriendly high-intensity commodities of coal and iron ore and invest in some of the newer and rare earth minerals. These are becoming more and more common in daily life products, and are likely to become more prevalent in the new technologies that are set to power electric vehicles and renewables.
This could well be the story for the next few years as metals like neodymium and praseodymium, which are used in magnets in electric vehicles, will see increased demand, along with cobalt which is used in the production of lithium ion batteries that we all use in our mobile phones and tablets.
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