Credit: Anglo American

How low will commodity prices go?

There's more misery as Anglo American falls to a $5.6bn full-year loss, but frantic asset sales may not be enough to save the mining empires.

by Adam Gale
Last Updated: 07 Mar 2016

Like many a good tragedy, the tale of the mining giants is one of hubris. When China’s explosive growth created a shortage in base metals in the first decade of the 21st century, the big miners happily devoured smaller rivals to capitalise on spiralling prices. There was little regard for what would happen when prices dropped, as inevitably they would do, and now they’re paying the penalty.

Anglo American just posted a $5.6bn (£3.8bn) loss for 2015 – its fourth straight year of losses, and by far the worst. It still makes money, of course, albeit a good deal less than it did before. Underlying earnings before tax and interest were down 55% to $2.2bn, but the company faced impairments of $5.7bn as sinking commodity prices brought the value of Anglo’s mines down with them.

Like rival Glencore, Anglo is frantically trying to stay afloat, cutting capex and now the dividend, and throwing once-precious assets overboard. It disposed of $2.1bn of them last year, with net assets declining by a third to $21.3bn. Another $3-4bn is planned for this year. Boss Mark Cutifani said Anglo will sell the Kumba Iron Ore company as it tries to focus more on its platinum, copper and De Beers diamond businesses.

Whether this will be a painful crisis from which the mining empires will recover, or something rather more permanent, largely depends on when and by how much commodity prices recover. A quick look at the charts doesn’t bode well.

Copper hovered between $0.6 and $1.5 a tonne for 15 years, before the super-cycle began. Source:

Copper is fairly typical. Prices rose in the early 2000s, peaking in 2011 after a vicious dip during the financial crisis, and then began to fall. The rise was caused by the market’s inability to keep up with unexpectedly soaring Chinese demand – a problem that it hasn’t had for several years now. On the face of it, prices seem to be steadily returning to what they were during the fifteen years before the super-cycle. Indeed, it’s already happened with nickel, which now trades for $4 a tonne, down from $12 in 2011.

Of course this may not happen, and underinvestment caused by the slump will probably constrict supply sufficiently to create some sort of price recovery. But long term, there’s just no reason for prices to be as high as they were during the super-cycle. This isn’t oil – it’s difficult to meet growing demand, at least when you know it’s coming.

To untangle themselves from their excessive debts (Anglo has $12bn in net debt, which it wants to cut in half over the next few years; Glencore has rather more), the mining giants will essentially have to shrink. Barring another rapid and unexpected industrial boom (perhaps in India?), their days as some of the largest companies in the world would appear to be over.

Investors in Anglo seem to agree anyway. Shares fell 5% to 373p by lunchtime, having lost 70% of their value this year and nearly 90% since early 2011. 

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