Mining 'going nowhere fast': Investec

UK INVESTMENT bank Investec says it sees no meaningful recovery in commodity prices until at least 2017.
Mining 'going nowhere fast': Investec Mining 'going nowhere fast': Investec Mining 'going nowhere fast': Investec Mining 'going nowhere fast': Investec Mining 'going nowhere fast': Investec


Kristie Batten

Investec said the near-term economic outlook was overshadowed by weak signals from China, lower-than-expected US growth and the Greek debt crisis.

“Despite the stimulus measures in China, demand growth for commodities is waning as the economy is guided away from fixed asset investment toward consumption-driven growth,” Investec said.

“In this regard, iron ore is particularly exposed as peak steel demand [in our view] coincides with increased seaborne supply stemming from major new developments.

“Falling input costs, aided by weakening producer currencies, serve only to preserve marginal supply and prolong the down-cycle.”

However, Investec noted iron ore had performed better than it expected, although the outperformance was expected to be temporary, which was already evident in the 15% price slump over the past week.

Investec expects iron ore fines to average $US56.30 per tonne this year and $57.50/t next year.

Metal Bulletin 62% iron ore fines have averaged $60.31/t so far this year.

Investec noted the second half of the year was generally weaker for commodity prices as seasonal industrial activity weakened during the Chinese summer.

“While the year-end may provide a clearer outlook for the future, including some indication that the sector has bottomed out, we do not expect a meaningful recovery in commodity prices until at least 2017,” Investec said.

Analysts believe companies have largely picked the low-hanging fruit in terms of cost-cutting.

“Under our commodity price forecasts this generally leaves companies able to meet their dividend commitments and stay within targeted gearing ratios,” Investec said.

“However, if spot prices persist or worsen, we see ongoing dividend commitments at risk, for the majors in particular. This may necessitate difficult decisions, such as moving to close or divest assets.”

Investec predicts the coal and platinum group metals sectors were at the greatest risk.

Glencore is the only diversified major with a buy rating from Investec, with BHP Billiton, Rio Tinto and Anglo American all rated as holds.

“While the companies appear to trade at attractive multiples, ongoing commodity price volatility and our view of no significant recovery in prices until 2017 favour a cautious investment strategy,” Investec said.

Investec said a potential positive could be the deployment of private equity capital, with Mick Davis’ X2 Resources yet to make a move.

While X2 has been linked to just about every major asset on the market (and some that aren’t), reports emerged this morning that the London-based company has appointed Goldman Sachs to prepare a bid for Rio Tinto’s New South Wales coal assets.

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