Commodities

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

If understatement was a salable commodity, Anglo American would have no problems at all. 

Mark Cutifani, chief executive of the embattled mining conglomerate, kicked off Tuesday's investor call with the announcement that Anglo would be "materially downsizing" its portfolio. Among other things, "materially" equates to shedding 85,000 jobs. That would fit most reasonable people's definition of extreme.

What is worrying for the entire mining sector is the reaction to Anglo's bombshell. That Anglo's stock slumped isn't terribly surprising. Apart from its new supershrink-me strategy, it suspended its dividend and said that, despite renewed emphasis on cost-cutting, it still expects to burn $1 billion of cash next year.

Not Minor
All major London-listed mining stocks slumped on Tuesday
Source: Bloomberg

The barrage of questions from analysts on Tuesday's call asking when Anglo would resort to selling more shares tells you what weighs on the market's mind: Its debt. That promises to can the dividend, cut costs further, reduce capital expenditure again and sell yet more assets didn't reassure on this front is truly frightening for Anglo.

The same goes for its competitors. Which is odd is that Anglo's cuts, while a shocking spectacle, should actually be positive. They ought eventually to take supply off the market and reverse the slump in everything from copper to iron ore -- in theory, anyway. 

As the falling share prices of Anglo's peers demonstrated on Tuesday, there are a couple of problems with the theory.

First, Anglo's strategy of selling or idling assets that aren't generating positive cash flow isn't an unalloyed boon. Yes, it will take some volume off the market. Yet it will also add to a glut of assets that are for sale as everyone hunkers down in the sector.

This is a particularly sensitive point for Glencore. Like Anglo, its debt has spooked investors and its shares have been locked in a race with Anglo's to see which can be the worst performer in the FTSE 100 this year (Glencore is currently, er, winning that one by a nose).

Who Can Dig Faster?
Indexed share-price performance
Source: Bloomberg

Glencore's debt was 3.5 times trailing Ebitda at the end of the first half of the year, according to Barclays, actually a bit above Anglo's own leverage. Glencore has moved faster to address concerns, cutting jobs and dividends, selling some assets and even announcing a silver-streaming deal. Yet it also plans further asset sales to reach its debt-cutting targets, with investors due an update on Thursday. And while differences in quality matter to some degree, the more assets for sale, the less return they are likely to fetch, especially if the whole industry is facing pressure on cash flow. Deflation is the specter haunting the mining asset market, even if Cutifani insists there will be "no fire sales."

The root cause of that deflation is the bigger issue that hangs over the entire sector. As in the similarly depressed oil industry, hopes for relief rest chiefly on supply cuts. Yet the experience in both energy and mining so far in this downturn is that cuts are materializing too slowly. For example, Glencore's announcement in October that it would cut zinc output caused the price to jump 10 percent that day. As you can see, that didn't exactly last long.

Zinc and You Missed It
Three-month rolling forward price
Source: Bloomberg

The unwavering gaze on the supply side may be blinding investors to risks on the demand side, particularly in China.

An unusual feature of the current commodities downturn is its breadth, with the prices of oil, industrial metals, and even crops all falling in tandem -- a pattern reserved usually for events like the 2008 financial crisis or the 1990s Asian crisis.

Today, there is no such apparent crisis. But consider that, on the same day Anglo announced its cuts, China released its latest set of official monthly trade numbers. On the face of it, miners and oil producers might have welcomed these. Copper imports are running roughly 11 percent higher, year over year, through the first 11 months of this year. Crude oil imports are up almost 9 percent for the same period. And even iron ore imports, which jumped in November, are slightly higher this year.

Commodities markets shrugged anyway. Copper rose all of 0.7 percent, after having dropped 11 percent in the past three months alone. Brent crude dipped below $40 a barrel for the first time in many years. And iron ore -- a particularly sore point for Anglo -- echoed crude by falling beneath $40 a tonne.  

Look beneath the headline import numbers, and China's appetite for raw materials looks more questionable. It is sucking in imports, but big jumps in exports of refined products and slowing domestic sales of fuels suggest many barrels are flowing into storage tanks. Similarly, increased iron ore imports must be viewed against China's monthly steel exports rising above 100 million tonnes for the first time, even as protectionist measures against dumping rise around the world. Copper actually looks better, which may reflect its exposure to consumer demand in China, but also simply stockpiling amid recent drops in price.

The backdrop to all of this is that China's imports and exports both sank in November, year over year. That, more than anything, epitomizes how much the world has changed for miners since the go-go days of just five years ago. And it may provide a clue as to why Anglo's capitulation isn't helping its rivals.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net