Analysts and investors usually hang on the lips of Glencore CEO Ivan Glasenberg at the group’s results presentations to hear where one of the world’s top commodities traders thinks commodity prices are headed.
Glencore and South32, both with a significant exposure to energy and industrial metals, have reported lower profits for their recent financial periods because of weak prices.
But they are showing strong cash generation and their optimism about current conditions, after a general firming in commodities since February/March, is reflected in their dividend policies.
South32 declared its first dividend and Glencore said it could resume dividend payments at the end of its current financial year.
Both companies are coming back into favour with investors because industrial metals are usually early beneficiaries of an upturn in the commodities cycle.
South32 has more than doubled since its January low of R10.25 while Glencore has run from R15.41 last September to above R33. If the cycle continues on this trend, they have scope for further appreciation.
Capital Economics says in its latest commodities chart book that supply concerns have underpinned a rally in most industrial metals, particularly zinc and nickel, but not copper, where there appears to be more than enough supply. It says improved investor sentiment has also supported prices.
Despite an apparent upturn, Glencore and South32 are taking a cautious stance on expansions and acquisitions.
Glasenberg says Glencore will look at opportunities to add to its agricultural interests.
South32 has made only one recent acquisition, an option to partner in the Huckleberry exploration project in Quebec, Canada.
CEO Graham Kerr says South32’s focus is on growing the cash profile of the business and it could do that from its existing operations, without making overpriced acquisitions. South32 is busy with or planning brownfield investments in SA and Australia.
Glencore’s portfolio includes copper, nickel, zinc, coal, oil, lead and ferrochrome. South32 is in coal, aluminium, nickel, zinc, lead and manganese.
Macquarie’s latest Commodities Comment shows the strongest base metals up to last week, based on London Metals Exchange (LME) cash prices, were zinc at US$2,282/t, showing an 18% rise on its 2015 average price; tin up 17.3% at $18,859/t and lead, up 3% to $1,843/t.
Copper, the main gauge of global industrial activity, was still 16% below its 2015 average at $4,615/t.
Macquarie analysed China’s July trade statistics, which showed imports of raw zinc, copper concentrates and coal were strong but imports of refined metals were generally weaker.
Glencore says Chinese copper demand was strong in the first half of the year, reflecting orders from the power and construction sectors, while outside China demand was also slightly better than a year ago.
Supply is steady, but it is contracting in Chile, the world’s biggest producer, because of depleting mines and falling grades. There have been production shutdowns in African and Chinese copper mines.
Glencore has deferred the re-start of its Katanga copper mine in the Democratic Republic of Congo and Mopani in Zambia. Macquarie says this has removed about 205,000t from its 2017 forecasts and 100,000t from its 2018 forecast, resulting in a meagre refined copper market surplus of 172,000t for 2017.
Glencore says zinc prices reflect growing shortages, as some mines have reached the end of their lives. China has not responded by increasing its zinc production. Instead, its imports of zinc metal have doubled.
Glasenberg was asked repeatedly on a conference call about Glencore’s plans for zinc because Glencore is, outside China, the biggest zinc producer. He said Glencore would not bring back mothballed production, which it could do in a matter of months, unless it was at attractive margins.
An analyst suggested that if Glencore did not bring on more zinc, China would. Glasenberg said China did not have the capacity to expand zinc output significantly from its current level of 6Mt/year. Anyway Glencore’s decision was not influenced by what other producers were doing, but by pricing.
South32, which produces zinc from its Cannington mine in Australia, had record production in the past year to June at 79,000t, reflecting better grades, and it expects to increase zinc output by 3% this year.
Glencore says 70% of the world’s nickel producers were operating at a loss at the end of last year and through the first quarter of this year at prices below $7,600/t.
The price has since risen to $9,941/t as demand exceeded supply and the market was moving into a deficit, with risks of further supply disruptions.
Manganese ore prices surged in the first quarter but fell back again as more production was brought back into the market. South32 is not bringing back mothballed manganese mines and smelters at this stage, Kerr says.
Aluminium prices increased in the first quarter and demand remained healthy and growing. But Glencore foresees an oversupply in the second half as new Chinese aluminium production ramped up and other producers restarted smelters. South32 is readying itself to restart stalled production lines but not until aluminium prices are at better levels, Kerr says.
In coal, South32 is considering an investment in its Klipspruit mine and is discussing with Eskom an extension to the life of Khutala colliery.
Both South32 and Glencore show a declining thermal coal production profile in SA, as mines are reaching the end of their lives.
This is certainly an early sign of the future coal shortfall that analysts have warned Eskom would face unless it provided incentives for new mine investments.