Iron Ore

Stock markets are officially in bear territory. At least in Europe and Japan, they are, as shares fell more than 20% below their 2015 highs last week.

The US S&P 500, the Dow Jones Industrial Average and the NASDAQ composite briefly fell more than 3% to more than 10% below their prior peaks, meaning they entered a market “correction,” before recovering slightly. What caused such widespread chaos isn’t hard to find.

Equities have been dragged down by rising concerns over China, both growth and the falling yuan, by the wider global economic growth prospects, by sliding commodity prices, particularly oil, and questions over whether central banks remain willing to act as a backstop. With so much to worry about, investors dumped shares and bought safer government debt.

Resource Producers Hit Hardest

All markets have seen falls, but the most vulnerable and most resource-focused were hit hardest.

FT_Stockmarkets

Source: Thomson-Reuters Datastream.

All share groups have been hit, but mining and commodity related shares have been hit hardest as the Bloomberg Commodity index fell to its lowest since at least 1991, and crude oil prices fell below $27 a barrel during US trading. Read more

Freeport McMoRan is selling part of a major Indonesian asset to generate cash as iron ore prices keep falling. The International Energy Agency said oil prices will fall even lower this year.

Selling Part of its Crown Jewel

Freeport McMoRan‘s Indonesian unit has submitted a divestment price to the Indonesian government for an additional stake in one of the world’s biggest copper mines, an energy ministry official said last week.

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Freeport Indonesia must sell the Indonesian government a 10.64% stake of the huge Grasberg copper and gold complex in remote Papua as part of the process to extend its right to operate beyond 2021.

Freeport valued its Indonesian asset at $16.2 billion, Bambang Gatot, the ministry’s director general of coal and minerals told Reuters and other reporters, adding that the divestment offered to the government was worth $1.7 billion.

IEA: Yes, Oil Could Go Lower

The oil price is set to fall further this year as supply vastly exceeds demand, with major oil exporter Iran’s return to the market offsetting any production cuts from other countries, the International Energy Agency told Agence France-Presse on Tuesday.

“Can it go any lower?” the IEA asked in its monthly oil market report.

“Unless something changes, the oil market could drown in over-supply. So the answer to our question is an emphatic yes. It could go lower.”

On the face of it, China’s record iron ore imports last month suggest the uptick in prices during the month wasn’t an aberration.

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But even though December’s strong import figure of 96.27 million metric tons will boost 2015 iron ore imports to 953.36 mmt, nearly one billion, it masks an edifice that is crumbling before our very eyes.

Iron Ore_Price

Source: Business Insider Australia

China’s iron ore imports are so high in part because domestic miners have finally begun to respond to the current low price situation and shutter production. Port stocks have risen in line with imports. Inventories have been rising for six of the last seven weeks, according to Bloomberg to 93 mmt.

Chinese Steel Production

China is churning out steel in spite of a slowdown in domestic demand with its surplus powering rising exports. China’s steel exports rose by almost 20% in 2015 to a record 112.4 mmt. To put that in perspective that is enough to meet demand in Germany and Japan for a year and still leave almost 9 mmt to spare.

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Today in MetalCrawler, Vale SA is drawing $3 billion from its credit line and one member says OPEC won’t meet about low oil prices after all.

Maybe OPEC Won’t Meet

The United Arab Emirates moved to quash talk of a potential emergency meeting of the Organization of the Petroleum Exporting Countries (OPEC) after Nigeria’s oil minister said on Tuesday a “couple” of members had requested a gathering.

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Benchmark Brent crude futures slipped towards $30 a barrel to a near 12-year low before rising slightly. They have shed almost three-quarters of their value since mid-2014 due to oversupply.

Vale Taps Credit Line

Vale SA, the world’s largest iron ore producer, said on Tuesday it drew down $3 billion from a revolving credit line to pay debt due this quarter, a move that shines a light on its fragile finances amid low commodity prices and faltering asset sales.

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Brazil-based Vale, which analysts expect to have a cash shortfall in 2016, said it took the action due to a delay in closing a deal announced at the end of 2014 to sell a stake in its Mozambique coal project to Japanese trader Mitsui & Co Ltd.

As we’ve noted for much of the last month, commodities took a big hit in 2015. Mined raw materials, including iron and copper ore, had a rough year.

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At the end of December, coal was down 32% from its price at the end of last year; iron ore, down 24%; palladium, down 30%; copper down 25%; zinc was down 30%; and aluminum was down 19%.

BHP Billiton saw its stock decline by 44.76% in 2015, a number that’s likely to fall further as fallout from Brazil’s Samarco mining disaster continues to hurt BHP and its joint venture partner in Samarco, Vale SA. Iron ore miners may be the worst off of a bad lot in the mining sector. China’s steel production is expected to decrease to 800 million metric tons in 2016 and, with it, demand for the steelmaking ore. Shares of Vale hit their lowest mark in 12 years in early December.

Iron Ore Under Pressure

Anglo-American and Teck Resources are slashing payrolls facing such a dismal economic environment. Anglo American is cutting 85,000 jobs over the next few years and Teck has already announced that it’s laying off 1,000. Lack of demand in China and low prices are commonly cited as the culprits.

Source: Bloomberg

Values of major miners as the price of iron ore has fallen. Source: Bloomberg.

With iron ore hovering around $40 per metric ton, even the major producers are facing prices that are below their break-even point. Read more

As we entered the final month of 2015, what we’ve known for some time became all but cemented: 2015 will go down as one of the worst years on record for metals producers. Great news for buyers, sure, but was it ever lean to be a producer this year.

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Our final MMI report of the year showed another batch of all-time low prices and not a single sub-index showed positive growth. The best any of our metals could do was hold steady. You may remember us saying something similar — all-time low prices and little, if any, upward movement in the sub-indexes — in November, October and September… and June… and March.

Commodities’ Bad Year

How bad is it? The last time raw materials like copper and oil were this cheap, an economic depression loomed. the Bloomberg Commodity Index, which tracks a wide swath of raw materials, plummeted to its weakest level since June 1999.

The last time US oil reserves were this flush with crude was 1972. What’s a major miner to do as raw materials are historically low, too? Well, If you’re Anglo American, this week, you announce you’ll cut jobs, sell mines and retrench. 85,000 Of Anglo American’s 135,000 workers’ jobs are on the line.

There will be less loading of iron at Anglo American mines next year. Source: Adobe Stock/nikitos77.

There will be less loading of iron at Anglo American mines next year. Source: Adobe Stock/nikitos77.

It’s not surprising and no one can really blame Anglo American for finally cutting jobs and production. It’s now more expensive, depending on where it’s mined, to pull iron ore out of the ground than to sell it at these prices. Alcoa‘s move to shut down smelters came from the same economic conditions.

Steel Reels

For steelmakers, it’s the worst downturn in 15 years. US steel shipments were down about 11% through the first nine months of 2015 compared with the year-ago period, according to the American Iron and Steel Institute (AISI). The industry, which employs about 150,000, has announced 12,000 layoffs the past year, the group says.

What’s most disturbing is this downturn is nothing new and it’s been afflicting producers since last year. It would be great to say that the overproduction problem and supply gluts are being curtailed and the shutdowns are having their desired effect.

Except that’s not true. So far, oversupply still exists and producers are still in the same boat. So things could, indeed, get a lot worse in 2016. Umm, Happy New Year?

Low commodity prices may be great for industry and for consumers, but for those engaged in the heavy industry, it is brutal.

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There have been mass layoffs in the oil sector from the US shale industry to the offshore oil and gas markets around the world as energy companies slash investment. This week it is the turn of miners to hit the headline, in the Financial Times Anglo American is reported to be slashing 85,000 jobs from a total of 135,000 worldwide.

Over the next two years, the multinational will suspend dividends and demand its assets either move down the cost curve or be sold. CEO Mark Cutifanis is quoted as saying once the restructuring is complete, Anglo is likely to own “between 20 and 25” assets compared with the 55 mines and smelters it owns today as it focuses on copper, diamonds and platinum, moving out of iron ore, coal and base metals generally.

Path to Profitability?

Even so, dramatic as the moves sound some feel they are not radical enough. Deutsche Bank is reported as saying “The chief executive and Anglo American appear in denial,” to the seriousness of their situation. Nor is the firm alone, even Rio Tinto Group, one of the architects of the collapse in iron ore prices, is slashing $1.5 billion of capital expenditure over the next two years to cope with prices that have sunk below $40 per metric ton, a ten-year low, in spite of continued strong Chinese imports.

Rio is still investing in new capacity aiming for 360 million mt of production by 2017 as low prices have finally taken their toll on high-cost domestic Chinese mines and forced steel mills to increase imports.

Banks, too, are feeling the pain. Morgan Stanley is the latest to announce layoffs saying this week it would close its base metals trading desks globally as part of up to a 25% cut in jobs in its commodities and fixed income division.

Enough Pain to Go Around

Nor is the rout limited to the metals markets. Following the collapse of any form of agreement at the Organization of Petroleum Exporting Countries  (OPEC) Vienna meeting, the Brent oil price fell below $40 per barrel this week for the first time in almost seven years. At this level, not only will American fracking firms begin collapsing next year but so will oil majors be slashing investment around the world.

Many are asking, surely, the darkest hour is just before the dawn, right? The world is not in recession, are commodity prices not positioning for a major rebound next year? With capacity being cut here, there and everywhere, with oil-producing countries budgets nearly universally in deficit, surely the stage is set for a strong rebound? Prices across the board are back to where they were before the super-cycle took off, such input costs should spur global growth and drive demand in a more constricted-supply landscape pushing up prices, no?

Surely, a Turnaround Must Come Soon, Right?

No. Eventually mine and oil/gas well closures and lack of new investment will translate into a more constrained supply market, but we are talking years. For oil, we have Iran about to enter the supply market and Saudi Arabia shows little sign of wanting to give way market share to their old adversary.

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Coal will continue to struggle against the headwinds of climate change legislation while metals great demand driver, China, is moving away from industrial and infrastructure-led investment growth towards internal consumption sharply reducing the prospect for a dramatic turnaround in Chinese imports, even if GDP generally continues to grow at a healthy 5-6%.

We have a bear market and, while some metals may be reaching their cost of production, the industry globally isn’t in enough pain yet to do more than trim output. Lower for longer remains the order of the day for 2016.

A major miner is cutting jobs after reporting losses and more evidence of a carbon emissions cover up is coming out of Volkswagen.

Anglo American Will Cut Jobs, Reports a Loss

Anglo American PLC on Friday reported a $3 billion loss for the first half of 2015 and said it would cut 53,000 jobs over the next few years, as plunging commodity prices continue to wreak havoc on the bottom lines of miners worldwide.

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Chief Executive Mark Cutifani said in a presentation to investors that the company would slash about 35% of its total workforce over the next several years, including jobs in operations the miner plans to sell.

Evidence That Volkswagen Hid Emissions Data Mounts

Long before Volkswagen AG’s emissions-cheating scandal erupted, the German auto giant withheld information from regulators in the US, according to internal documents.

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In 2004, the car maker’s US environmental-compliance employees alerted their bosses in Germany that they needed to tell US regulators about a faulty emissions sensor that required replacement in dozens of Audi vehicles brought to dealerships with a faulty sensor. The executives’ response? Don’t.

Brazil’s government got more aggressive about penalizing the owners of what it says is its worst mining disaster ever and India wants to unlock the potential of its citizens hoarded gold

Samarco Disaster Lawsuit

Brazil filed a lawsuit on Monday against two of the world’s largest mining companies for 20 billion Brazilian reals (about $5 billion) to clean up what it says was its worst environmental disaster, caused by the collapse of a tailings dam at a joint venture iron ore mine the two operated.

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The governments of Brazil and those of two states hit by the damburst sued iron ore operator Samarco and its co-owners, the world’s largest miner BHP Billiton Ltd. and the biggest iron ore miner Vale SA.

India Wants Citizens To Sell it Their Gold

India is discussing changes to a scheme to unlock the country’s massive stash of gold at a high-level meeting this week, after a muted response to the program in the first month of its launch, according to banking sources.

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Prime Minister Narendra Modi launched the plan on Nov. 5 to lure an estimated 20,000 metric tons of gold hoarded in households and temples into the banking system. But only 400 grams trickled in over the first two weeks as low returns and worries over income tax kept Indians away.

This week started with the horrible Samarco mine disaster in Brazil. Two mine dams burst and waste from tailings ponds created to service the iron ore mine flooded local villages and affected water supply within a 60-plus-mile area. The death toll has now reached eight people.

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My colleague, Stuart Burns, warned that the co-owners of the mine, BHP Billiton and Vale SA, could be in deeper water than anyone. Remember BP after the oil spill?

BHP CEO Andrew Mackenzie hopped the first flight to Brazil to put as best a face as he can on the response. Yet the Brazilian government has already set its sights on Vale and BHP as the responsible parties and literal owners of the disaster.

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