Global miners are battling to stay afloat after enduring one of the toughest years in recent times, with tumbling commodity prices and supply gluts set to force more closures and massive cuts next year, analysts say.
China’s once insatiable appetite for commodities — boosted by an unprecedented investment boom in the world’s second-largest economy — has waned, with its shift toward consumption-driven growth dampening demand.
At the same time, large producers have continued to lift output levels, which critics say is designed to flood the market and push out smaller competitors, accelerating the decline in prices.
The iron ore price sank below US$40 early this month, its lowest since May 2009, thermal coal prices are 80 percent off their 2008 peak while world oil prices have spiraled down to an eight-year low.
The sharp falls have ravaged the bottom line of miners across the world, pushing smaller players to the brink while tearing billions of revenue out of the government budgets of resources-dependent economies such as Australia.
Even major players such as London-listed Anglo-American PLC has had to slash its workforce by almost two-thirds and shut loss-making mines amid the deepening rout, while Swiss giant Glencore PLC is planning to trim its debt by cutting investment and selling assets.
“You only need to look at any share price to know it’s been an absolutely shocking year for commodity markets and for mining companies,” CLSA Ltd’s head of resources research Andrew Driscoll said.
Anglo-Australian BHP Billiton Ltd, one of the world’s largest miners, has seen its Australian share price dive by more than 40 percent this year, while stocks in rival Rio Tinto PLC have dropped by 26 percent.
Rio’s chief executive Sam Walsh said the firm’s competitors were in so much trouble that they were “hanging on by their fingernails.”
“Sooner or later the adjustment will take place,” Walsh told Bloomberg Television this month.
The slump comes on the back of a commodities supercycle over the past decade, led by China, but also fueled by other resources-hungry developing nations growing their economies at a rapid pace, which pushed prices to record levels.
However, as miners borrowed heavily and ramped up output, they overestimated the growth in demand, analysts said.
“They’ve added far too much capacity for that new, more moderate demand outlook, so we have surpluses in every commodity,” UBS AG’s commodities analyst Daniel Morgan said.
“I think it’s definitely one of the toughest years the mining industry has faced in many years,” he added, saying the woes were comparable to previous slumps sparked by the 2007-2008 global financial crisis, the 1997 Asian financial crisis and even the 1991 fall of the Soviet Union.
Goldman Sachs Group Inc said last week the iron ore sector might need to “hibernate for an extended period,” predicting that prices would stay below US$40 for three years.
The International Energy Agency said this month that “the golden age of coal in China seems to be over,” with demand slowing as the East-Asian nation turns to cleaner energy sources.
Meanwhile, OPEC recently left its output ceiling unchanged despite crashing energy prices in a move likely to further depress the market.
“We had the big party from 2005-2011, and now we are suffering the big hangover,” Breakaway Research Group’s senior resources analyst Mark Gordon said. “The so-called supercycle was a real anomaly in history, so the upward trend was an anomaly, and the downward trend is also an anomaly.”
With demand projected to soften along with China’s slowing economic growth, the adjustments have to come from the supply side, analysts said.
They said that miners have been too slow to shut operations even as their revenues and cash reserves are severely eroded, in part due to the dive in energy prices that have helped push down costs.
This means shutdowns were likely to accelerate next year as cash losses become too significant to avoid.
“I think that sets us up for some sort of supply-driven improvement in markets in the second-half of the year as sufficient supply exits, the markets rebalance and prices can start migrating up the cost curve,” Driscoll said.
“[There’s] a bit of light at the end of the tunnel but if you are a high-cost producer, if you’ve got too much debt, then things will remain very challenging,” he said.
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