Written By: Diana Bailey – Corporate Finance
The S&P GSCI® is recognized as a leading measure of general price movements and inflation in the world economy. It includes a weight of 24 commodities and is designed to include the most liquid commodity futures and provide diversification with low correlation to other asset classes. The S&P GSCI index has increased from 2,115 on March 8, 2016, to 2,358 on March 7, 2017, reflecting the upward movement of many commodities’ quotations, from wheat and cotton to oil, steel and copper. Of course, the optimism following US President Donald Trump’s election and the agreement to reduce oil production boosted the index; but the price evolution of industrial metals is also worth looking at.
According to the World Bank’s last publication on commodities’ prices, metal and minerals have increased by 4.6 percent over one year. A few examples from the World Bank’s price list include:
- Copper’s 2016 average price increased from $4,868 per metric ton to an average of $5,941 per metric ton in February 2017;
- Iron ore’s 2016 average price increased from $58.4 per dry metric ton to an average price of $89 per dry metric ton in February 2017;
- Aluminium’s 2016 average price increased from $1,604 per metric ton to an average price of $1,861 per metric ton in February 2017.
Both Donald Trump and China have boosted industrial metals’ prices.
Industrial metals, such as iron ore, aluminium and copper, were particularly boosted by the announcements of both the US and China stating plans to invest more in infrastructure. These policies have pushed prices of industrial metals up. The new US president wants to devote $1 billion to the renovation of the country’s infrastructure. And China’s president, Xi Jinping, who should enter a second five-year term this fall, also confirmed China’s orientation toward investing big in infrastructure. There’s no doubt that investors should anticipate increases in metal quotations.
Investors are not the only ones to thank for the increases in prices.
Industrial leaders of the metal market have improved their financial situations over the past year. BHP Billiton and Anglo American are taking full advantage of the surge in commodity prices. A year ago, no one would have bet on such a turnaround. The unexpected surge in commodity prices has allowed two of the world’s largest mining groups, BHP Billiton and Anglo American, to record impressive rebounds in their results, unprecedented in at least 10 years, according to Bloomberg.
BHP Billiton, the world’s largest mining company, announced for its interim period ending on December 31, 2016, a net profit of $3.2 billion in the six months, compared to a loss of $5.7 billion in the same period one year earlier. Together with this good news came the announcement of an increase in dividends from 16 to 40 cents per share. Anglo American followed the lead of its competitor Rio Tinto with its first annual profit since 2013, announced in early February, and has also decided to reward more shareholders. Rio Tinto made an annual profit of $4.6 billion in 2016, with underlying earnings increasing by 12 percent over one year. It decided to increase its full-year dividend to $ 1.70 per share, above its commitment to a minimum payout of $1.10 a share. Glencore also reported a net income attributable to equity holders of $1.4 billion for 2016, compared to a $5 billion loss for 2015. Glencore signalled that it may pay the special dividend this year or next. And it also explained that its net debt had dropped 40 per cent to $15.5 billion at the end of 2016, and could fall below $10 billion by the end of 2017.
Of course, prices are participating in the recovery of the industry, but companies may still implement hard policies to improve productivity and restructure business processes. Most of them have stopped big investments, closed unprofitable units, sold assets and frozen big projects.
In between, China had the chance to become an important price-maker.
As the world’s largest consumer of a range of commodities from iron ore to soybeans, China has progressively introduced its own commodity exchanges, such as the Shanghai Futures Exchange (SHFE) and the Dalian Commodity Exchange (DCE) in the 1990s.
China-originating has gained real power in pricing on both the spot and futures markets, particularly for heavily traded products such as copper or iron ore. If there are still some limitations on Chinese exchanges, due to lack of liquidity, non-convertible currencies or regulation, the situation is expected to change progressively. And China’s weight on the world market is substantial. For instance, China increased by 12 percent its year-over-year iron-ore importation in January 2017, the second-highest monthly import volume on record.
Even though the prices of iron ore and steel rallied in 2016, the long-term outcome depends on China’s moves.
On the one hand, China has demonstrated its willingness to reduce pollution; but on the other, it wants to continue large infrastructure investment. Overcapacity in the steel industry has been mentioned by China, which seeks to reduce it. And inventory levels at ports as of December 2016 were assessed as high; they could be reduced in 2017.
No doubt 2017 will be a test year for the metal industry’s rebound, and its sustainability will depend on moves by the US but more importantly China.