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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Get in touch with our editor Dale Benton at [email protected]