Major mining firms streamline operations to stay afloat
Cape Town, South Africa this week hosted the Investing in Africa Mining Indaba. This annual gathering of leading mining industry executives provides a platform for key industry personnel to engage and discuss strategy. However, this comes with the global economy enduring the worst possible start to the year with commodity price weakness in crude oil, natural gas, iron ore, copper, steel and molybdenum.
The Chinese economic downturn has dramatically affected production levels at African mines, and profits have all but evaporated. Major industry players such as Anglo American, BHP Billiton, Rio Tinto, Vale and Glencore are reeling as global demand decreases and mining companies continue to downsize their operations with mass layoffs, the shuttering of unprofitable business units and other belt-tightening measures.
Mining stocks recorded some of the sharpest declines in 2015: Anglo American closed yesterday at 315.95p is currently trading at 315.95p, down around 73% over the past year; BHP Billiton closed at 634.10p, down around 57% over the year; Rio Tinto closed down roughly 44% on the year at 1705.00p; and Glencore closed down roughly 68% on the year at 87.68p.
Some of the many problems plaguing the South African mining industry include:
- BHP Billiton abandoned South Africa in 2015 leaving just 12.5% of the major commodity producers in the country
- A broken power grid in the form of Eskom makes it impossible to efficiently mine natural resources
- South Africa comprises just 4.4% of worldwide mining stocks, sharply lower than the 47% in 1980
- Black empowerment initiatives in the form of 26% mandatory ownership in company assets/equity are causing an exodus of overseas investors and capital flight, made worse by the fact that there simply is no profitability in the mining industry at this time
- Labour unrest and instability remains a critical problem in South Africa and impacts on mining operations in a big way
Anglo American CEO weighs in
The price of copper has plunged 28% since the 2015 high while iron ore prices have dropped 27% over the same period. But the CEO of Anglo American, Mark Cutifani, is of the opinion that we have not seen the bottom of commodity prices yet. He believes that 2016 will be more challenging for the mining industry than 2015.
Cutifani’s sentiment is shared by many industry executives, who are feeling increasingly anxious about the mining industry’s prospects in 2016 and remain unconvinced about the sustainability of increased demand, attributing it to a weakening of the US dollar.
A recently held poll by Citigroup found that an overwhelming majority of respondents (92%) are of the opinion that Anglo American’s share price will move lower this year. Some 71% of those polled are expecting the mining industry to remain in bearish territory for the next six months, while a minority of respondents (14%) remains optimistic about the industry’s prospects.
The problem according to many is that we are watching the chickens come home to roost; this is not a flash in the pan downturn – it has been going on for several years already. The issue is not demand-related; it is a supply-side problem. Low-cost producers are churning out production of iron ore, copper and other commodities so as not to lose market share. By doing so, they are jeopardising the delicate demand/supply balance.
Anglo American is in the midst of a restructuring plan to cut expenses, with some 85,000 jobs slashed and cost reductions amounting to 30% being put into effect. One of the poorest-performing commodities of late has been platinum, and Anglo has to make important decisions in this regard. In 2015, Anglo American Platinum Limited posted a loss of $757.1 million in a sharp reversal from the previous year’s takings.
Gold mining industry is booming
While commodities like copper, platinum and iron ore are struggling the same cannot be said of gold. The gold price has been surging in recent weeks, pushing over $1253 this week, a gain of over $200 on the December 2015 low. Traders and investors are flocking to the precious metal as an equities meltdown grips major averages.
Janet Yellen’s testimony to Congress this week helped drive investors to gold, as the US Fed chief intimated that a March rate hike may not take place. Gold is a commodity that does not generate interest for its owners, and demand for the precious metal spikes during times of equities turmoil and geopolitical uncertainty. Major gold mining companies and ETFs have been surging while financials, technology stocks and others have been faring poorly.
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