EDITOR: | September 29th, 2015 | 5 Comments

Glencore’s problems leading to a commodity meltdown?

| September 29, 2015 | 5 Comments

MeltdownGlencore’s problems have lead “many analysts to question whether this might be the commodity sector’s Lehman Brothers moment”. Those words were on Tuesday included in a news report from the Australian Broadcasting Corporation after the local share market lost more than A$40 billion in morning trade, with BHP Billiton falling to its lowest price since the worst days of the global financial crisis, and after global commodities giant Glencore lost 30% of its value in Monday trading.

Yet, looking on the bright side, technology metals might be a relatively comfortable sector in which to be at the present. Everything else in metals (except gold, of course) is looking terrible. Thermal coal futures are back at 2003 levels and now tantalum has joined tungsten, antimony and other specialist metals in the doldrums.

Actually, it may turn out to be blessing for the majority of the new graphite players, and most of the rare earth ones, that they are not actually in production and, generally, have raised equity finance not debt. Ditto with the uranium sector which, surely, cannot get beaten down any further?

Because it is the companies swimming in debt that are now going to feel the chill winds.

In fact, the analysts at London-based global specialist bank Investec are now warning that the equity value of majors Glencore and Anglo American could evaporate without significant restructuring.

Investec’s Hunter Hillcoat has been reported saying that mining companies gorged themselves on cheap debt to increase production to meet Chinese demand after recovery from the GCF. “The consequences are now coming home to roost,” he added (as Chinese demand plateaus and mine capacity has been expanded).

A well known Australian stockbroker , Marcus Padley, told ABC radio Tuesday that, after the Glencore hit, “every analyst will be going through Australian companies working out how much debt they have, much like everybody was looking for who’s in debt during the global financial crisis”. You can count on that happening in every market.

Goldman Sachs says that, in spite of raising $2.5 billion this month, cutting production and looking to sell assets, there are still concerns about Glencore. “Investors are yet to be convinced that Glencore has gone far enough to totally allay fears that the industrial (mining) assets can service the new, lower, debt level,” Goldman Sachs said. (That $2.5 billion raising was done at £1.25 as share; Glencore closed at 68.62 pence on Monday in London.)

A study by Charlottesville, Virginia, based SNL Metals & Mining has just compared the mining commodity bear market that began in 1997 to the present situation. From 1997, mining industry capital spending fell by 42%. But sustaining spending (that is, keeping existing mines operating) held up relatively well and had recovered by 2000. Yet expansion spending stayed subdued for another two years, and did not begin to turn around until 2002.

This time around, SNL estimates that total capital spending since 2012 will have declined by 30% by the end of this year. “So, if history is any guide, capex could fall a further 12% over the next two years,” the report says. “Worryingly, metal prices have already fallen 12% further than they did during the bear market in the 1990s”.

SNL believes that, if the 1997-2002 cycle is repeated, the industry should brace itself for two more years of falling capex, followed by several years of subdued recovery.

The International Monetary Fund (IMF) on Monday warned of slower economic growth for commodity exporters over the 2015-2017 period against the background of falling commodities prices.

China’s Xinhua news agency reports that, in an analytical chapter of the IMF’s flagship World Economic Outlook report, which is to be published next week in Peru, IMF economists found that the weak commodity price outlook could subtract almost one percentage point annually from the growth rate of commodity exporters over the 2015-2017 period as compared with the 2012-2014 period.

So, to paraphrase Bette Davis’s famous line in the 1950 movie All About Eve, hold tight it’s going to be a bumpy ride. But, I suggest, the rare earth and tech metal sectors have already had their bath of pain. Re the REE lot, weak players have departed, leaving the stronger ones still standing. Be grateful to be in rare earths and graphite and uranium if your finances are in good shape. It’s going to be lot more comfortable that trying to make a buck mining iron ore or coal in the next little while.



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  • Bill Keenes

    Interesting story Robin, thank you.

    Now which non-Chinese rare earth producer is swimming in a sea of debt and is still operating thanks to the good grace of its generous Japanese lenders who recently restructured its massive debt. The problem has not gone away, it has just been deferred to be addressed another day.

    September 29, 2015 - 11:16 AM

  • Robin Bromby

    I did use the word “most” in relation to REE companies, and did specify I was talking about ones not yet in production.

    September 29, 2015 - 5:00 PM

  • Tim Ainsworth

    Bill appears unaware that the ONLY ROW RE producer of any consequence has been granted virtually a three year window to ride out the current weak state of the industry with exceptional terms over its debt, particularly if they hit NdPr production targets.
    IF any of the wannabes manage to raise CapEx in that time frame highly unlikely it will be on anything remotely like the same terms.

    September 29, 2015 - 5:48 PM

  • Lok Chong

    Syrah Resources is in a very strong position having recently raised a placement of over AUD$200m to bring its massive Balama graphite into production by early 2017, as well as establishing a plant or two to produce spherical graphite for the anticipated growth in storage in lithium-ion battery both for EV and homes.
    Lynas is like Greece having got a roll-over of debt. It has a couple of years of life and the Chinese will pick it up for a song.
    REE and graphite miners with good off-take agreements particularly with established Chinese supply chain will prevail.

    September 30, 2015 - 5:20 AM

  • JJ Beswick

    Lok Chong, maybe you haven’t noticed that a big part of the appeal of ex-China RE supply is that it’s not Chinese.
    It’s pretty clear that JARE (a Sojitz/Japanese Govt partnership) want Lynas to survive and underpin a rebuild of the Japanese RE supply chain. Why else refinance the project? With the same interest as before, unless Lynas meet production & financial targets; if that happens the interest can drop from 7% to 2.5% pa!! Hardly the actions of an unsupportive partner.
    Lynas is now supplying 60% of Japan’s NdPr needs.
    Everyone’s struggling to get by in today’s RE market, the Chinese included. But Lynas has at least +ve cash flow last time they reported it.

    September 30, 2015 - 6:58 AM

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