Arguably the major investing story of 2015 was the steady rout in commodity prices, a scenario that prompted a huge share price collapse for many of the world’s largest mining and energy producers.
Bellwether metal copper – so-called because of its usage across a wide variety of applications – fell for its third year in a row and hit levels not seen since 2008 in November, below $4,500 per tonne. And just last month the Brent oil benchmark tipped to its cheapest for 11 years. At around $36 per barrel it had fallen from the $115 marker just 18 months earlier.
Diversification provided little comfort for Rio Tinto (LSE: RIO) and Glencore (LSE: GLEN) as commodities of all classes toppled, causing their stock prices to rattle 34% and 69% lower, respectively, between last January and December. And oil explorer Enquest (LSE: ENQ) also fared poorly, the company’s share value falling 47% in the period.
Hand China a hankie
And there’s little reason for either commodity values or share prices to pick up in 2016, in my opinion – at least not while Chinese economic indicators continue to chill.
Latest manufacturing data from the Asian behemoth caused reasons to groan rather than New Year cheer – December’s PMI number released in recent days came in at 49.7, marking the sixth successive month of contraction.
And signs are that the economy is set to remain in a tailspin, despite a steady stream of initiatives from the People’s Bank of China to avoid the dreaded ‘hard landing’.
Most brokers expect GDP growth for 2016 to clock in at around 6.5%, down from around 7% last year. For many this year’s projections remain wildly optimistic, however, and investors should be braced for further commodity price falls should the financial landscape steadily worsen.
Production continues to soar
In addition to these worrying demand signals – China is responsible for almost half of all copper off-take, for example – most of the world’s commodity markets remain troubled by producers’ reluctance to scale-back output.
In October, Glencore announced plans to slash zinc production by a third, or 500,000 tonnes, following huge cutback announcements in the copper and coal markets.
But the London business is fighting a losing battle in a bid to improve these supply/demand balances, with resources giants like BHP Billiton, Rio Tinto and Anglo American instead raising output across many segments to put high-cost producers out of business.
This is particularly the case in the iron ore market, an arena from which Rio Tinto sources almost two-thirds of underlying earnings, and where prices toppled to multi-year troughs of $38.30 per tonne in December.
In this climate it came as little surprise that Moody’s cut Glencore to one rung above ‘junk’ last month, the ratings agency discarding recent measures by the business to mend its balance sheet by issuing shares and binning the dividend.
Dollar dancing higher
On top of these market pressures, the mining and energy sectors also face pressure through the prospect of an ever-strengthening US dollar. Expectations of Federal Reserve monetary tightening, combined with safe-haven purchasing of the world’s reserve currency, helped propel the dollar against most major currencies last year.
And a similar economic climate in 2016 looks likely to add further pressure over at Rio Tinto, Glencore and Enquest. Given the litany of problems facing the global commodity community, I believe the resources sectors remain a risk too far at the present time.
