It feels as though this bear market in commodities has much further to run

3 mins. to read
It feels as though this bear market in commodities has much further to run

Surveying the Damage

Monday’s China-led stock market sell-off (dubbed “Brutal Monday” by Reuters and “The Shanghai Shockwave” by City AM) was a horrendous day of losses for most stocks globally. But for the mining sector in particular, it was just the latest slump in a formidable, four-year bear market.

Whilst it may be premature to call a bottom for commodity stocks, surveying the damage gives an insight into where the greatest losses have been and by dint, where the greatest opportunities will be, when markets do finally turn. “Bad news is bad news and good news is no news,” said Jessica Fung, a commodity strategist at BMO. “That’s the environment we are in.”

Diversified Majors

As the FTSE 100 dipped below the 6,000-mark yesterday, Rio Tinto and BHP Billiton took a pummelling, down 7 and 9 per cent, whilst Glencore dropped 13 per cent to a new, all-time low, adding to heavy losses last week.

The relative strength of Rio, which has been the best performer amongst the mining majors in recent weeks, is largely owing to its overweight position in iron ore; whilst copper’s sell-off only began in earnest in May, iron ore fell sharply earlier this year, such that bearishness is already baked in. For Rio bulls however, yesterday was a stark reminder that relative performance doesn’t pay school fees: even after rallying 5 per cent this morning, its shares have still fallen by a third in six months.


Pure-play copper miners have been whacked. HudBay Minerals fell 8 per cent in Toronto, whilst Lundin Mining, the copper vehicle of mining billionaire Lukas Lundin, chugged 9 per cent lower. Antofagasta in London, which is majority owned by Chile’s Luksic family, has meanwhile dropped by two-thirds since copper peaked in 2011.

Its half-year results on Tuesday offered some visibility on the extent of the damage and helped to lift shares, but nonetheless showed a 31 per cent drop in revenue and a 49 per cent plunge in earnings. “Antofagasta has had a rigorous approach to cost control,” CEO Diego Hernandez, who previously ran Chile’s state-owned copper titan Codelco, assured the market.


Diamond giant De Beers, which sells its production through monthly auctions known as diamond “sights”, has reportedly been forced to slash prices for this week’s sight by 9 per cent. The diamond market is famously opaque, due to each stone’s unique characteristics, but diamond pricing specialist Rapaport estimates even more bearish price reductions this month of 11 per cent.

In coal and iron ore, the largest producers have responded to falling prices by increasing production, only making the supply-demand dynamic worse, but in diamonds, De Beers has shown remarkable production discipline. At the end of last year it was guiding for output of 34 million carats in 2015, but since then, that figure has been cut twice and now sits at 29 to 31 million carats, a reduction of 9 to 12 per cent.

De Beers’ production restraint, which has been echoed by Russia’s diamond giant Alrosa, should help mitigate the impact of weakening consumption and preserves the value of its resources in the ground. But it does little in the short term to restore earnings for parent company Anglo American, which relies on diamonds for around a quarter of its revenue.

Exacerbated by falls in coal, copper and iron ore, Anglo lost 10 per cent on Monday and despite rallying 7 per cent this morning, shares are still trading at their lowest level for 15 years. Gem Diamonds, Petra and Toronto-listed Lucara similarly shed between 5 and 8 per cent, whilst emerald heavyweight Gemfields was sucked into the sell-off, losing nearly 9 per cent.

African Gold

Despite the market’s unapologetic “risk-off” mood, gold failed to offer a bright spot for investors. Aureus Mining, which was riding high earlier this year having commissioned its New Liberty gold mine in Liberia, fell more than 7 per cent yesterday and is sitting close to all-time lows.

Hummingbird Resources and Ivory Coast-focused Amara Mining have traded more in line with the gold price, level pegging in the last week, whilst Tanzania’s Shanta Gold somehow climbed, up 6 per cent on Monday on zero news flow.

Mwana Africa however was hammered, losing more than 9 per cent, in the wake of a hostile board shake-up in June. A one-time favourite for investors on AIM, in addition to its Freda Rebecca gold mine in Zimbabwe, Mwana also has nickel operations in the country and the nickel price was slammed 10 per cent lower.

A broad-based rally in shares this morning suggests “The Shanghai Shockwave” has passed and done its worst. But somehow, it feels as though this bear market has much further to run.

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