Mining may come back by mid-2016


Analysts have forecast mining’s commodities return by mid-next year, going against the market grain.

Van Eck global commodity strategist Roland Morris believes the resources industry will begin its recovery mid next year as the market reacts to reactions take to address oversupply and waning Chinese demand.

“The emerging market discussion that we see reflected in the financial markets however remains heavily focused on weak demand for commodities. It does not, in our view, adequately deal with the meaningful supply side response that we have seen since 2011 from energy and mining companies,” Morris said.

Currently iron ore, coal, and base metals are in an uncontrolled slide downwards.

Iron ore has fallen below the US$40 mark, with prices trading at pre-GFC 2007 lows, and the market bearish on its future.

"The first thing I would say is we're relatively bearish about the long term projections for prices," BHP Chief Executive Andrew Mackenzie stated.

Analysts are also forecasting a continued weak market, with the potential for the price to slip to US$30 per tonne.

In terms of coal, it is believed that two thirds of operators are currently working at a loss.

Industry research by Wood Mackenzie shows lowering commodity prices for both thermal and coking coal has created an unsustainable market.

This has come despite wider production costs and miners addressing the current oversupply issues.

“Producers have exercised supply restraint; it hasn't been enough to support prices as demand has dropped even more," Bloomberg analysts said.

Anglo American most recently attempted to address the pressure felt in coal, announcing a massive restructuring and massive layoffs, cutting its workforce by almost two thirds, from a 135,000 employee business down to less than 50,000 workers globally.

It will also divest or close a number of assets, having pegged some of its Australian thermal coal operations for disposal.

Yet Bloomberg believes this won’t be enough.

"A continuing divergence between the Australian dollar and export Newcastle thermal coal prices may mean more production cuts are announced in the months ahead," the Bloomberg Intelligence report stated.

Overall, ongoing commodity weakness with little sign of respite, and a negative investment environment ahead, has created a continued poor market for mining yet tax burdens and stakeholder expectations remains just as high as during the boom.

This has created an extremely negative market as mining struggles through the bottom of the cycle.

"It's an interesting time in the mining industry, just as during the super cycle, people imagined prices would go up forever, people now imagine the market will never recover," Philip Hopwood, Deloitte's Canadian and Global Mining leader said.

 "Neither extreme is true, but cycle times are lengthening, which means it could take years to adjust to current market forces — but it's still a cycle."

Van Eck analyst Roland Morris believes that this cycle is coming to an end mid-next year due to actions already taken by miners to slash oversupply.

“Since the peaks of supply in 2011, industrial miners have significantly cut back their capital expenditure. Investment into coal is down by 60 per cent, iron ore by 50 per cent, gold by 27 per cent and copper by over 33 per cent; these are meaningful reductions in investment that will result in significant reductions in future supply,” Morris said.

“At Van Eck Global we believe that given the supply side response from industry, and assuming stable global growth, we will see a much tighter commodities market and even shortages in some materials next year, leading to an upward correction in many commodity prices.”