Editorial: Commodities rout tests miners’ pain threshold

July has been such a brutal month for commodities producers that even last year’s prices are looking pretty good now. The rout in commodities prices in recent weeks has been unrelenting, wide-ranging and driven by macroeconomic factors far beyond the ability of miners to control.

The Bloomberg Commodity Index has returned to levels not seen since 2002 — implying that the much talked-about “Commodities Supercycle,” sparked and sustained by unprecedented demand growth stoked by China’s booming economy, is effectively over.

The state of the Chinese economy is foremost in the minds of commodity price forecasters, and all signs point towards slowing growth rates and further sharp corrections in the Chinese stock markets in the months and years ahead. On July 27, the Shanghai Composite Index suffered its worst one-day drop (8.5%) in eight years, and it would have been worse without the 10% daily maximum-loss limits on blue-chip stocks and the strong-arm tactics of the Chinese government to buy shares and pressure companies into buying shares.

The other two dominant negatives at the macro level are the ongoing Greek debt crisis, and broad consensus that the U.S. Federal Reserve will raise interest rates later this year, further driving up the U.S. dollar and sinking commodities priced in U.S. dollars.

Oil prices are showing the strains of reduced global economic growth, with West Texas Intermediate prices dipping below US$48 per bbl at press time and Brent not far behind at US$53.30 per bbl., both down 16% from a month earlier. The loonie’s dramatic fall to just US78¢ from US92¢ only a year ago reflects Canada’s status as a “petro state” with high-cost production.

Oil prices are also under pressure on the supply side from two sources: U.S. frackers, who have cut costs dramatically at their operations and kept their unexpectedly strong production numbers; and from the prospect of Iranian oil hitting global markets in full force, as sanctions are lifted in the aftermath of the Iranian uranium deal with the international community.

Gold prices have had added downward pressure in recent weeks with the surprise announcement by the Chinese central bank that its gold holdings had grown 57% to 53.3 million oz. gold since it last announced its holdings six years ago. Despite such growth, which places China as the world’s fifth-largest holder of gold, many gold-bull analysts over the years had speculated that the country’s holdings had grown much more than that, and so the revelation was seen as gold-negative.

Copper prices have been more tied to the health of the global economy. That nice, simple US$3 per lb. enjoyed by copper miners as recently as November is long gone, with spot prices for the red metal touching a six-year low at just US$2.35 per lb. in late July, before recovering to US$2.40 per lb. on threats of supply disruption from Zambia due to electrical power issues in that country.

One of the bright spots during the current four-year bear market in mining has been the diamond sector, with its chronic difficulty in bringing on new supply as diamond deposit become harder and harder to find.

But even the diamond market is pulling in its horns in mid-2015, with industry leader De Beers reacting to languishing jewellery sales worldwide by lowering its production guidance for the second time this year to 29 million to 31 million carats from an earlier target of 30 million to 32 million carats. Six months ago the Anglo American subsidiary had anticipated mining up to 34 million carats this year.

“It’s been a tough couple of months,” Anglo American CEO Mark Cutifani said with respect to the diamond market during a conference call. “The market is currently tightening up. We’ve seen a flattening of demand … clearly the second half is going to be a tougher period.”

Meanwhile there has been a historic moment for the world’s other dominant diamond miner, Russia’s Alrosa, as it has officially shifted operations at its flagship Udachnaya mine in Yakutia from open-pit to underground mining. Udachnaya’s open pit had been in operation since 1967, yielding 350 million tonnes of ore producing diamonds worth perhaps US$80 billion. Underground mining at Udachnaya is expected to yield 5 million carats annually by 2019 to Alrosa’s account — part of its plan to boost annual output to 41 million carats in the years ahead.


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