Back in 2011 Glencore (LSE: GLEN) and BHP Billiton (LSE: BLT) seemed unstoppable. Glencore’s IPO had proved popular with investors and China’s seemingly insatiable demand for commodities had sent shares in BHP to their all-time high of £26.10.
Unfortunately, the good times didn’t last long. By the end of 2011 shares in BHP and Glencore had lost 21% and 26% respectively, setting the pace for the next four years.
New lows
Since the beginning of 2011, shares in BHP and Glencore have lost more than three-quarters of their value and many investors are now asking if these mining giants will ever be able to return to their former glory.
Well, for BHP’s shares to go back to their all-time high of £26.10, they would need to rise 320% from current levels, while Glencore’s shares would have to rise sixfold before returning to their IPO price. These gains aren’t wholly unrealistic. Both BHP and Glencore have a history of navigating volatile commodity markets and the two companies spent years building up their operations before hitting a cyclical peak back in 2011.
There’s no reason why Glencore and BHP can’t repeat this performance, it’s just a question of time.
Waiting out the cycle
Like almost all markets, commodity markets are cyclical. Riding out the peaks and troughs of the market is just part of the job for Glencore and BHP. These two industry giants have what it takes to ride out the trough while smaller, more inefficient producers get pushed to the sidelines and struggle to compete. When these smaller producers start to collapse, BHP and Glencore’s profits will surge as supply dwindles and commodity prices recover.
The two miners are pulling out all the stops to ensure that they’re in the best financial shape to weather the storm, no matter how long it takes.
For example, BHP is slashing capital spending and the company already has some of the industry’s lowest production costs, which gives it an enormous advantage over smaller peers. Meanwhile, Glencore is selling off non-core assets, future production and paying down debt to reassure investors. Also, the group’s trading division continues to rack up profits, giving the group an edge over smaller producers. Glencore announced a few weeks ago that its debt reduction plan should be completed ahead of schedule, surprising City analysts and restoring some confidence in the company.
Patience is a virtue
All in all, Glencore and BHP have what it takes to ride out the commodity cycle, but there’s no telling how long the downturn will last. Some City analysts believe that low commodity prices are here to stay. On the other hand, some analysts are forecasting that by the end of the decade, supply/demand will have rebalanced, and prices will recover.
It’s impossible to tell which group of analysts is correct. It’s clear that it will take some time for commodity markets to rebalance. For the time being investors are being paid to wait for this recovery. BHP’s shares currently support a dividend yield of 13.9%, and analysts expect that Glencore’s shares will support a yield of 1.6% next year.
