As China-related panic spread this week, the mining sector slid. BHP Billiton, Anglo American and Glencore all fell by more than 7% on Monday, and have each slumped by between 33% and 60% over the past year as base-metal prices have crashed.
China buys 45% of the world’s industrial metals. Glencore reported a 56% fall in earnings in the first half. Sliding prices wiped 71% off Rio Tinto’s first-half profits. This week Antofagasta saw profits plunge by 49% as it announced more cost-cutting. BHP Billiton impressed the markets by vowing to maintain or grow its dividend despite a 61% drop in operating profits to £8.7bn.
What the commentators said
BHP’s headline figures look “ghastly”, said Alistair Osborne in The Times. But dig deeper and the firm looks resilient. Its operating margin remains high despite price falls, and its cost-cutting has been “impressive: $4.1bn of productivity gains two years ahead of schedule”.
Cost cuts are a key reason the likes of BHP have been able to keep growing payouts, said John Foley on Breakingviews.com. “But for how long? Growth must come from somewhere.” BHP, Anglo and Rio all yield around 8%, far more than the FTSE 100’s 4%. That suggests investors are sceptical they can keep it up. Note that Australian miner Fortescue has just cut its payout. The big miners could take on debt or reduce investment, but in the longer term, committing to ever-increasing dividends “makes sense only if prices rise with time”.
But that’s perfectly plausible, said Julian Jessop and Mark Williams of Capital Economics. In the past year, commodity prices have slumped by almost as much as they did in 2009, when we were in a global recession. Yet the economic data have been nowhere near as bad – the pessimism in raw materials is overdone. Surely, agreed Frik Els on Mining.com, the slowdown in China as it shifts from investment to consumption-led growth has been priced in by now.