Glencore Has Good News for Metal Bulls Starting to Doubt Rallyby
`Record low sector margins setting scene for price upswing'
Investments insufficient to maintain production levels
The resurgence in mining shares this year may be just getting started, if Glencore Plc’s assessment is right.
Demand is set to exceed supply for zinc and some other industrial metals, the mining and trading company said at a conference Tuesday. The outlook comes after supply gluts and three years of declining prices deterred production. BHP Billiton Ltd., the world’s biggest mining company, said separately that it isn’t waiting for prices to recover as it boosts investments in copper and oil.
“Structural deficits are returning, led by zinc,” Glencore said in a presentation posted on its website for the mining conference in Miami. “Supply challenges for copper and zinc remain due to resource quality and scarcity at current prices.”
A gauge of 18 producers tracked by Bloomberg Intelligence has jumped 31 percent this year as metal prices rose on output cuts and easing concerns on the economy in China, the world’s biggest user. Shares of Vancouver-based Teck Resources Ltd. have more than doubled, leading gains in the index. Zinc has climbed 16 percent this year, behind tin’s 18 percent rally. Copper is little changed in 2016.
Citigroup Inc., the bank that was ahead of the game back in 2012 when analysts declared the end of the super cycle of rising demand and prices, now expects a weaker dollar and China’s stabilizing economy mean most commodity markets have reached their bottoms. Investors have poured $49 million into exchange-traded funds backed by industrial metals this year, data compiled by Bloomberg show.
Refined zinc production will trail consumption by 352,000 metric tons this year, the International Lead and Zinc Study Group said in April, widening its deficit forecast from 152,000 tons in October. The shortfall in refined copper will reach 56,000 tons in 2016, the International Copper Study Group said in March. In October, the group predicted a surplus of 175,000 tons.
Still, not all mining CEOs are ready to call an end to the slump. While Tom Albanese of Vedanta Ltd. said the worst may be over for commodities, Rio Tinto Group’s Sam Walsh said earlier this month that “calling the bottom is brave.” The BI index of 18 producers has lost 14 percent this month as doubts on China resurface.
“Markets remain oversupplied, sentiment cautious and we expect a period of prolonged lower commodity prices and volatility,” Andrew Mackenzie, BHP’s CEO, said in a statement before the conference in Miami. “Notwithstanding new macro-economic realities, we are confident in the outlook for our portfolio of commodities.”
Capital expenditures by the top five diversified producers have fallen to $24 billion this year, from a peak of $71 billion in 2012, Glencore estimates. That means current investment is insufficient to maintain production levels over the medium term, it said.
Commodity prices are “now close to pre-supercycle levels,” when growth in Asia fueled a surge in prices, Glencore said. “Record low sector margins are setting the scene for the next price upswing.”
The Bloomberg Industrial Metals subindex of prices has rebounded about 9 percent since dropping to the lowest since 2004 in January.
Peter Grauer, chairman of Bloomberg LP, the parent of Bloomberg News, is a senior independent non-executive director at Glencore.