In 2016, listed mining contractors and companies had a great year as commodity prices surged and the miners used prudent cost-cutting schemes to reduce their debt. Some of the mining companies were so successful that they even had excess cash, which was returned to shareholders.
However, the scenario is very different today. With Beijing trying to control its spiralling credit growth, the UK mining sector is finding it difficult to hold onto last year’s gains. China is the biggest consumer of commodities in the world. Beijing’s actions have had an adverse effect on the market, and the FTSE-listed mining contractors and companies are bearing the brunt, with the index falling by over 13 per cent.
Experts predict negative outlook for mining industry
Goldman Sachs analysts stated that the direction of growth would be downward, and this in turn will have an adverse effect on the demand for commodities. As a result, Goldman Sachs has downgraded the ratings of many mining majors.
BHP Billiton also predicted that in 2017, the company would witness a reduction in demand for iron ore and coking coal, which are used in manufacturing copper and steel.
The cost of short-term credit in China is at its highest level in two years, and this has prompted the government to check the unfettered credit growth. The effects have already been felt. Besides the global mining sector, China’s robust real estate sector has also been affected.
One of China’s largest real estate developers, China Vanke, decided not to go ahead with a bond sale last week due to uncertain market conditions.
Northern Trust Capital Markets Head of Global Equities Gary Paulin stated that real estate was the end market for several commodities, and therefore anything that affects the commodity market would also affect the property market.
The prices of nearly all commodities have fallen, with the iron ore price falling by nearly 30 per cent after reaching $94 per tonne in February 2017. Even copper prices have been adversely affected.