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.

The commodities business turned into a chainsaw contest this week.

In mining, Anglo American ditched its dividend and said it would shrink its workforce by the equivalent of a small country. Glencore, shorn of its dividend already, doubled down on its commitment to cut its debt by the end of next year. In the energy world, Kinder Morgan chopped away 75 percent of its dividend, while both Chevron and ConocoPhillips said their investment budgets would shrink again next year.

All these companies are unhappy in their own way. Still, misery loves company, and they can share some common commiserations.

One thing uniting all of this week’s cuts was the need to not only preserve capital but also portion it out carefully.

For Anglo and Glencore, both sporting five-year credit-default swap spreads north of 800 basis points, the key constituency to appease is the debt market. So shareholder goodies like dividends and investment both get slashed. Kinder Morgan’s shareholders have also taken it on the chin to protect the company’s investment-grade credit rating. This being the pipelines sector, they at least didn’t lose all their income, and much of the cash will be diverted into investing for growth. As for the oil majors, dividends are sacrosanct for them, so it is growth prospects that take a hit, in the form of lower capital spending and asset disposals.

Debt is the one largely immovable constituent here. Miners and energy companies spent big on the way up the supercycle and must now handle the resulting debts with less on the way down.

Cheer and Loathing
Source: Bloomberg

Maybe it’s just coincidence, but it is hard not to be struck by the litany of cuts this week, as well as their savagery. This feels like industry executives who are either at or close to capitulation. Certainly, there is no other way to read Kinder Morgan’s or Anglo’s drastic moves. Meanwhile, though Glencore’s CEO Ivan Glasenberg was still talking up his company's order book in China on Thursday, his announcements of even more cuts was the real message.

Chevron and Conoco, with their higher credit ratings, aren’t as closely backed up against the wall: Their combined capital expenditure budget for next year is still about $34 billion, down from $45 billion this year. But within that new guidance, Chevron has cut its budget for exploration -- an oil company's down-payment on future growth -- to just $1 billion. To put that figure in perspective, it is roughly the same as this year's exploration budget for Anadarko Petroleum, which produces less than a third the oil and natural gas Chevron does. And less than two years ago, Chevron’s CEO John Watson was declaring $100 oil was “becoming the new $20” oil.

There is a hopeful, if decidedly nuanced, aspect to all of this for commodity bulls. Prices can't recover until the last vestiges of excess from the last upswing are cut away, and there was definitely some of that this week.

The nuances are threefold. First, just as it took time for investment in new supply to weigh on metals and energy prices in the commodity upswing, so cuts announced now will not have an immediate impact. Indeed, one reason the likes of Glencore are making deeper cuts than previously announced is that the earlier ones no longer look like enough. Half the decline in Anglo's workforce is planned to come beyond 2017. In oil, meanwhile, the International Energy Agency said in its monthly report on Friday that it expects the glut weighing on prices to persist until late 2016.

Second, there are still important sectors on the supply side that might be bowed but haven't yet fallen fully to their knees. An obvious candidate is the exploration and production sector, where, as fellow Gadfly columnist Brooke Sutherland noted this week, merger activity has yet to really pick up. When the holdouts finally sell out, it will be a sign that supply is really being taken off the table. Talks with lenders scheduled for the coming spring look like an obvious trigger point.

Third, don't forget how much politicians obsess over the natural resources sector. China, the great benefactor of the commodity supercycle, has edged into frenemy territory for certain markets such as iron ore and aluminum. As China's own demand growth slows along with its economy, Beijing is doing its best to cushion the blow with support -- and thereby keep excess capacity open, as my colleague David Fickling explained here. China isn't alone either. Platinum miner Lonmin announced on Friday that almost 30 percent of its latest rights offering to stave off bankruptcy went unsold. It looks likelier than ever that South Africa's state-owned Public Investment Corp. will end up owning an even bigger proportion of the billions of new shares Lonmin has spewed onto the market, in order to protect thousands of jobs in the country (for now, anyway).

Keep those chainsaws buzzing.

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