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Fear and loathing in the mining sector, as Anglo cuts dividend

Published: 14:15 11 Dec 2015 GMT

Mine-shaft---black-hole

"Miners in meltdown,” screamed the headline in the Daily Telegraph’s business section. “Mining stocks plunge to 11 year lows.”

Never mind that some pundits have had the mining sector at 11 year lows since August, the paper then followed up with another apocalyptic attention-grabber: “Fear grips market as oil leads commodity crash.”

But while the first article revelled in its own dramatic intensity, liberally employing words such as “rout”, “panic” and “mass sell-off” in the wake of Anglo American’s (LON:AAL) dramatic decision to cut its dividend, the second offered a much more nuanced analysis.

Indeed the writer, Ambrose Evans-Pritchard, though focussing mainly on oil actually set out a couple of reasons why investors may have cause to feel more optimistic in the long-term.

Evans-Pritchard once hitch-hiked round Rhodesia while the bush war against Robert Mugabe’s Zanu PF guerrilla fighters was raging in the 1970s, so this is not a man who’s easily phased.

He’s also been on the Telegraph for nigh on 25 years and has seen bull and bear markets come and go.

So, while noting that the Bloomberg commodity index has fallen to “within a whisker” of lows last seen in 1998, he argues that this is not likely to be a sign that the world economy is falling into recession.

Instead, he says, the latest sell-off has a different character and is down to a “positive supply shock.”

By this he means that the overproduction from the commodities industry will allow manufacturers to pass on savings to customers and there by stimulate demand.

This could, reckons Evans-Pritchard, actually be good for growth.

And though it’s looking out a bit, that growth will in turn feed back into greater demand for commodities and eventually end up lifting the sector.

What happens in the meantime, though, is open to question.

The collapse in Anglo’s share price and the eight-year spike in volumes has not gone unnoticed by analysts.

The comments of some bring to mind the sentiments of the great poet WB Yeats when he wrote in The Second Coming: “Things fall apart, the centre cannot hold.”

“Is it enough?” wrote Barclays.

“Too late,” wrote Citi.

Dividend cuts and asset sales will not stave off Anglo’s doom. Or so at least runs the narrative of a market in capitulation mode.

But not all were quite so bearish.

Canaccord kept a 650p target for Anglo, more than double the 290p price hit on Wednesday.

Credit Suisse has set a 750p target.

And Deutsche was even more optimistic, holding onto the dream of 1,070p, although that’s still actually some way off Anglo’s 1,259p 12 month high.

Deutsche said Anglo had “the bones of a plan” but that “more detail and delivery” was needed.

Long-term pragmatists, like the Telegraph’s Evans-Pritchard, might well apply that turn of phrase to the wider mining sector.

BHPBilliton has now completed a major round of asset sales, with the spin-out of South32. And there’s now talk that South32’s London listing may disappear, so the realignment continues.

Glencore (LON:GLEN) has been selling assets for some time, as has Rio Tinto (LON:RIO), which off-loaded a major Australian coal asset in September.

So far, so good.

But structural problems remain. As in the oil industry, in both the copper and the iron ore industries the mentality of an inefficient cartel remains in the ascendant.

Thus in copper, Chilean major Codelco, which accounts for around 10% if supply, continues to maintain output and has been focusing instead on slashing costs.

Likewise in iron ore the major producers Vale (NYSE:VALE), BHPBilliton (LON:BLT) and Rio Tinto continue to pump out volume even as prices plunge to a 10-year low below US$40 per tonne.

Indeed, Australia’s richest woman, mining magnate Gina Rhinehart, has just brought a new iron ore mine on stream at Roy Hill.

This is sort of behaviour doesn’t exactly exemplify an industry that is prepared to cut its cloth according to market conditions.

And given that dynamic it looks inevitable that there’ll be more short-term pain before the effects of “positive supply shock” can truly be capitalised upon.

Anglo has already blinked once, and it may not be the last time.

Who blinks next will depend partly on how commodities prices react to the anticipated rate rise that’s coming out of the Fed soon.

But ahead of that, as the latest research from Capital Economics notes, cheap prices are already stimulating new demand.

Last month, Chinese imports of commodities rose at their strongest pace since early 2014.

If that’s because prices are cheap it won’t be of too much comfort to miners in the immediate term.

But at least it shows that demand is still there.

 

 

 

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