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Strength and volatility: Andrew McKenzie highlights mining’s difficult juggling act

Strength and volatility: Andrew McKenzie highlights mining’s difficult juggling act
There may be more volatility on the horizon for miners?

On Tuesday - after issuing the biggest corporate loss in its history - BHPBilliton (LON:BLT) was the biggest riser on the FTSE 100. By mid-morning on the day, the shares had leapt by 8% to 1,080p, although they later gave up some of those gains to close out at 1,051p. Still, it wasn’t flash in the pan – two days later the shares pushed back towards that 1,080p, rising in mid-day trade to 1,072p

For any recent buyers of BHPBilliton in London, this is all to the good.

The shares were trading as low as 716p at the end of February and have steadily risen since, notwithstanding ongoing fallout from the Samarco disaster in which 17 people died, and continuing losses related to low commodity prices.

What’s more, the bulk of the record pre-tax losses of US$7.3bn related to a US$4.9bn write-down on the company’s US shale assets.

This, analysts noted, was not operational and would not be repeated next year. Nor would the additional US$2.1bn charge related to Samarco, although further related charges can’t be ruled out.

In a rising market for miners, all this bad news could be taken on the chin.

So, while Andrew McKenzie, BHPBilliton’s chief executive, spoke of the “very disappointing” outcome, he was also in the same commentary able to state that the business is “strong and getting stronger”,

He added that the freefall in commodity prices had “paused”.

“The world economy is still growing, demand is still growing and supply is still not being replaced,” he added. “But these are volatile times and we can’t necessarily assume the worst is over.”

That last comment was perhaps the most interesting, because, although it’s clear that sentiment towards the mining sector has picked up considerably since the start of the year, investors right across the equities board are beginning to wonder how much recent rises are really based on smoke and mirrors.

Locally, there’s the Brexit factor of course. Sterling has swung wildly and exaggerated gains on the FTSE 100, especially in regard to companies like BHP Billiton which do most of their business in other currencies and principally in US dollars.

In this context, it’s instructive to look at how BHPBilliton’s dual-listed shares have performed on the Australian market since the recovery in mining began. Since it hit a low on February 29, BHP’s shares have risen from A$15.57 to the current A$20.86, very roughly speaking a rise of around 25%.

Meanwhile, in London across the same period the shares rose from 716p to 1,071.5p, a leap of around 33%. A considerable outperformance until the effects of the post-Brexit collapse in sterling are factored in: across the same timescale sterling fell 13% against the Australian dollar.

And if you factor that 13% drop in the value of sterling into BHPBilliton’s rise in sterling terms, what you get is in fact comparable overall rise of around 24%, which is within the margin of error of the rise in the Australian share price.

So markets are, it seems, efficient in that regard.

But whether markets are in fact artificially high across the board is another matter. Cheap money, and increasingly, negative interest rates, pushes the valuation of other assets up.

And the questions then become: is this a bubble and if so, will it burst? And when?

The answers to all are hard to quantify in a meaningful way, but lie at the heart of statements like Mr McKenzie’s about “volatility.”

At the outset, the US dollar will be key, and in particular just exactly what Janet Yellen’s team at the Fed plan to do to it. After all, one way or another they have been constrained to do nothing for a goodly long time now.

Then there’s the question of what’s next for sterling. Now that it’s fallen so sharply the pound looks likely to be trapped in a pincer movement between a need to keep a handle on inflation and a need to stimulate growth.

Whither interest rates in that conundrum?

The intelligent money is probably on growth, but it’s becoming moot how much of an effect cutting rates from the current 0.25% will really have.

In response analysts are increasingly arguing for fiscal as opposed to monetary stimulus.

But what this will mean in the English-speaking world, where political cultures are rapidly unravelling, remains to be seen. The “experts” surely have the spectre of Japan-style deflation lurking in the backs of their minds.

But whether those sorts of concerns will hold any sway with increasingly exasperated electorates is another matter. “Experts” are not currently much in demand.

China, by contrast, is unlikely to suffer from the threat of deflation for a few generations yet, even if Mr McKenzie does concede that “the supply creation on the back of the China boom is coming to an end.”

In China the uncertainty is not that democracy might disintegrate, or at least reconfigure, as it appears to be on the cusp of doing in the West, but that it might develop.

And with that range of dynamics at play, it’s no wonder McKenzie talks of volatility.

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