Michael Rawlinson: The commodities cycle hasn’t bottomed out yet

Michael Rawlinson, Global Co-Head Mining & Metals at Barclays, looks at market sentiment as the Mining Indaba in Cape Town sets the scene for the mining industry in 2015.

Michael Rawlinson, Global Co-Head of Metals and Mining
Michael Rawlinson, Global Co-Head of Metals and Mining at Barclays

By Michael Rawlinson

While the sharp drop in global oil prices has reduced costs for mining companies, it has also added to uncertainty in the market and may prolong the wait for the commodity cycle to turn upwards again.

Gold is likely to benefit most in 2015, from higher margins but also because of gold’s role as a safe haven in times of political and market uncertainty.

At last year’s Mining Indaba there was a bit more optimism that the commodity cycle had bottomed. Since then however, there have been two big events – the drop in iron ore prices and the sudden collapse of the oil price.

No one thought the oil price would halve, and it happened within two months. It was incredibly sudden, a high beta event for which no one has a good explanation. This makes people more risk averse, and the mood in boardrooms is a lot less aggressive. M&A thoughts are being put on hold.

Last year there was also the expectation that private equity groups would start buying, signalling an upturn in the market. This may well happen this year, as funds available for investment have grown and private equity groups have a greater appetite for risk than the major mining groups.

Nor can we expect Chinese investors to come to the rescue in 2015. They have lost a lot of money in recent acquisitions, such as in DRC and Guinea. In fact, there have not been many happy stories about Chinese investment in mining. The Chinese government’s crackdown on corruption is also likely to increase investor caution.

Nevertheless, we are getting to the bottom of the cycle, though it’s not the same for all commodities. For some, such as iron ore and thermal coal, it will take a while before they start rising. Copper has come off a bit but is looking positive and platinum is likely to turn this year.

But it is gold where there is most cause for optimism in 2015.

Gold is the anti-dollar. The dollar has been in the ascendancy, and that is not great for gold. But because it’s a safe haven commodity, the run on the euro has helped gold. As such, gold is coming back into favour and will probably appreciate in terms of the euro and the yen.

Producers of gold are probably looking at higher margins because of the lower cost of fuel oil. Things are looking better for gold, and we think we will see some hedge funds coming back into gold this year.

The market is factoring in the prospect of slower economic growth rates in China after years of very rapid growth.

Chinese demand for commodities is still growing, but at a slower rate. Now people are getting used to the idea of China growing at 7% and have adjusted their modelling to more reasonable margins.

Commodities prices are affected most by changes in supply, rather than demand which has been remarkably consistent for years. This year will be no different – there is not going to be a huge change in global demand for commodities. It will be any changes in supply that make the markets move.

After previous rises in commodity prices, there have been long periods of low prices, such as now.

The market is worrying about a deflation cycle. We can see that in iron ore and some other commodities. The market will wait for the lack of money going into new mines to tighten up supply again and lead to price rises.

These are some of the issues that will frame debates at the 2015 Mining Indaba – concern over when the commodities cycle will turn, investment prospects and what this means for the supply of various commodities and, as always at the Indaba, the future of gold.