The FTSE miners have taken a bit of a beating over the past few weeks.
Rio Tinto’s (LON:RIO) shares are now hovering at just over 3,000p, down from a three year high of 3,691.5p hit in mid-February, BHP Billiton’s shares are down from a January 12-month high of 1,477.5p to a current 1,185p, Glencore’s shares are down from a mid-March 12 month high of 341p to the current 295p, and Anglo American’s (LON:AAL) shares are off from mid-February high of 1,416p to the current 1,114p.
And mid-tier UK broker Liberum has a pretty clear idea of why this is happening.
“In 2016 supply was the major driver of commodities tightness,” the broker wrote in a note released earlier this month.
“Iron ore and coal accounted for 87% of the EBITDA uplift for the big four miners. In 2017 these factors are reversing sharply and supply is accelerating quickly in iron ore, coal and aluminium.”
The Liberum note is entitled: “Drivers of the bear market unwinding,” and is full of negative-sounding headings, including “Credit growth has peaked, steel consumption to follow” and “iron ore supply lifting structurally, cyclically and seasonally.”
But for the UK miners there’s even more to it than that. Strength in sterling following Theresa May’s decision to hold an early election this year has weakened the investment proposition of the FTSE miners which are priced in pounds but which book revenues and incur costs primarily in dollars.
And that currency pressure is likely to intensify, at least in the short term. Credit Suisse has now raised its outlook for sterling twice within the last four weeks, first on a more resilient than expected post-Brexit economy, and now on the election.
Its first upgrade suggested a range of between US$1.20 and US$1.30 range for the pound this year. “With the latest developments, we are inclined to revise higher our GBP forecasts vs USD,” Credit Suisse said.
More of an uphill struggle for London’s diversified miners
All of which will make it more of an uphill struggle for London’s diversified miners as they try to maintain the strong upward momentum that has been built up over the past 18 months or so.
It’s perhaps not helpful that Liberum’s doom-saying extends into next year. “The risk of commodity demand turning negative again in 2018 is material,” the broker said, referring principally to iron ore, aluminium and coal.
It’s an outlook that will continue to hurt the majors on the premise that lack of supply in the bear market years has now been overcompensated for.
But it’s perhaps worth noting elsewhere that the fall in Antofagasta’s (LON:ANTO) shares has been less pronounced than the weakness in the major mining companies.
Fags is down from a mid-February 12-month high of 885p to the current 815.50p, or just under 8%.
Rio’s drop amounts to just over 18% of its value, BHP Billiton’s to just under 20% of its value, Anglo American’s to over 21% but Glencore’s to a more modest 13%.
What Glencore has in common with Angofagasta is copper, a metal which has consistently traded at or around US$2.50 per pound since the election of Donald Trump.
UK miners with the biggest iron ore exposure have underperformed
Putting it another way, the UK miners with the biggest iron ore exposure have underperformed those with exposure in other commodities.
The picture on the North American side is more nuanced. Shares in Southern Copper Corp (NYSE:SCCO) have dropped by a more modest US$5.00 or so since their mid-February high of US$39.10, or around 12%.
But company-specific issues have bedevilled other big names. Thus First Quantum (TSE:FM) has fallen by close on 25% on higher costs and a hedging hit, while Freeport McMoRan (NYSE:FCX) is also down by around 25% on jitters around intermittent strike action at its giant Grasberg mine in Indonesia.
All of which indicates that the market is entering a new phase: after several years of hefty falls followed by a short eighteen month recovery period, fundamentals are finally beginning to get the better of sentiment again.
It may still be that Donald Trump will spend big in the US on infrastructure, but the positive sentiment around that is now wearing off, as any financial outlay looks years away.
Instead, shares are moving once more on supply and demand and on company-specific news.
What this means for company directors interested in share price performance is that investor sentiment will now no longer be enough to carry them along. It’s time to get down to the nitty gritty of real value creation. The market is back: it’s time to get to work.