Beleaguered Glencore boss Ivan Glasenberg might not like the comparison, but there’s something very Roman about the way the commodities firms have behaved in recent times. Presented with tremendous opportunities, they expanded relentlessly, right up to the point that yesterday’s opportunities became today’s threats and it was too late to retreat.
The mining firms are currently paying the price for this imperial overstretch. Attributable profits fell by at least 80% at BHP Billiton, Rio Tinto and Glencore in their most recent respective results, as commodity prices dropped. Investors, meanwhile, appear to have realised that the enormous debts these firms accrued to meet the booming Chinese demand don’t seem like such a great idea now that the Chinese have gone off building stuff.
Glencore has had the most dramatic fall from grace. Earlier this week, its share price bombed after an analyst’s note questioned whether its equity value could be ‘eliminated’. It’s since rebounded somewhat (shares were trading up 10% at 89p at lunchtime), but that’s still down nearly 72% since May.
The others are doing better – but not well by any means. Rio Tinto shares have lost roughly 28% of their value in the same period, BHP Billiton’s are down nearly 40% and Anglo American’s have lost 53%. This isn’t just because profits are down (in Glencore’s case, so far as to become a loss). It’s because investors realise, or at least fear, that things could get worse before they get better.
Commodities are inherently cyclical – something companies in the sector should know better than anyone, and prepare for accordingly – and this is clearly the down cycle. The problem is that it’s the down-cycle following an up-cycle on steroids. As Lance Armstrong discovered, that can be a steep decline.
Led by Glencore, the over-leveraged mining firms are busy battening down the hatches to try to reduce their debts and ride out the storm, which in most cases involves selling assets and cutting capital expenditure. Rio Tinto, for instance, announced today that it’s selling its stake in an Australian coal mine for $606m (£399m).
The problem is that nobody knows how long the storm will last. Predicting the future is hard at the best of times, but having to peer through the veil of Chinese economic data makes it next to impossible when it comes to commodities.
To make matters worse, there’s uncertainty about looming interest rate rises (not great news for a company like Glencore, with nearly $30bn in debt) and the Paris climate change talks later this year. The immediate risk with the latter is, of course, that a robust international commitment to a ‘2C world’ of lower warming through cutting emissions could rubbish the value of the commodities firms’ coal mines.
Such impairments could prove to be the straw that broke the commodity camel’s back, especially as they would increase the firms’ leverage on their (diminished) assets.
BHP Billiton doesn’t seem too concerned, releasing a reassuring report today that shows how resilient it is to a low carbon future. Even in a 2C world – which given the history of international co-operation on most major issues is far from a foregone conclusion – the firm predicts its revenues will double by 2030 as metal ore and natural gas demand surge, while its portfolio would lose only 5% of its value due to a relatively low exposure to thermal coal.
The company’s almost certainly right that demand for commodities in general is only going one way in the long term. The sector will survive and thrive, but that doesn’t really help the firms that currently dominate it and are desperately trying to cling onto their empires.
So unless the super-down-cycle proves to be short-lived, firms like Glencore may be forced to keep selling assets to the barbarians at the gates – acquisitive companies unburdened by colossal debts. It’s too early of course to say the mega mining empire will fall, but with no sign of a return to boom-time in China, time is running out.