(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By Kevin Allison
LONDON, July 13 (Reuters Breakingviews) - Mining investors are at a critical juncture. The coming months should reveal just what’s going on with the super-cycle, the collective term for the multiple drivers of the now-fading commodity boom.
The sluggish global recovery and worries about Chinese raw materials demand have pushed Thomson Reuters’s UK Metal & Mining Index down 28 percent from its first quarter peak, and almost 40 percent from its post-crisis 2011 high. Commodity bulls are pinning hopes on more aggressive Chinese stimulus, which there’s good reason to expect given the weakness of recent data. But Beijing may struggle to revive the building boom that has fed the super-cycle.
A three-year, stimulus-fuelled construction binge has left Chinese private property developers with stretched balance sheets. Even if Beijing launches more stimulus, developers may lack the appetite to borrow and build, analysts at UBS argue. UBS also sees a financial twist to this bearish macro dynamic.
In the go-go days, raw material prices got a boost from the rampant shadow banking system and a debt orgy in Western economies, which drove speculative capital into commodity-hungry emerging markets. Now that this structural support has fallen away, more quantitative easing by Western central banks may be the only thing left to prop up prices if fresh Chinese stimulus falls short. Even then, the boost would probably only be temporary.
The big, diversified miners can probably afford to take the long view. Ongoing mass urbanisation should ensure reasonable demand for raw materials over the next decade or two. Miners can still tweak capital budgets to adjust to changes in the timing of demand growth and the potential impact of lower prices on the economics of new projects.
For investors, a lot of pain is arguably priced in. A recent de-rating has left BHP Billiton (BLT.L) (BHP.AX) and Rio Tinto (RIO.AX) (RIO.L) trading near the low end of their 10-year enterprise multiple range. Reuters consensus estimates already imply double-digit earnings declines this year for both BHP and Rio, with growth resuming next year. But after a decade of super-normal profits, more than humdrum growth will be needed to reverse the sector’s recent underperformance.
- China’s imports of major commodities fell in June from month-ago levels, according to trade data released on July 10. Annual net imports in the world’s second-biggest economy grew 6.3 percent last month, about half the rate economists had expected.
- The latest Chinese data also showed consumer and producer prices easing more than expected in June - a sign of falling demand. Some analysts expect Beijing to respond to the softening economic picture with more aggressive policy stimulus.
- China has already taken some steps to spur growth. Last week the central bank unexpectedly cut rates. It has also moved to reduce bank’ reserve rate ratio in attempt to spur more credit creation.
- Faltering demand in China has contributed to recent price declines for key commodities such as crude oil, copper and iron ore, pressuring shares in the world’s biggest mining and energy companies. - For previous columns by the author, Reuters customers can click on [ALLISON/]
(Editing by Chris Hughes and David Evans)
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