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