Johannesburg - After being battered amid a four-year commodity price rout, global commodity companies including Glencore and Anglo American had recovered strongly, global investment bank Macquarie Group said.
The bank's senior metals and mining analyst, Alon Olsha, said yesterday that self-help measures introduced from 2014 onwards, had put the companies in a good position to take advantage of improved prices.
Speaking ahead of the London Metals Exchange Week to be held in London at the end of the month, Olsha said the biggest contributor to the stronger-than-expected commodity prices this year had been the resurgence of Chinese demand.
This as the Chinese government continued to prolong its more commodity-intensive phase of growth.
He said the enforcement of capital restraint had put the companies in a position to leverage the commodity prices.
“Some companies have had more progress in debt reduction than others,” Olsha said. “Rio Tinto and Glencore stand out as the companies whose self-help measures have helped the most, Anglo is somewhere in the middle and Brazilian giant Vale is at the back of the queue.”
Olsha said the companies had been reminded just how cyclical the global mining sector was after four years of a bear market.
“Commodity companies have been looking to restore the integrity of their balance sheets, which were under pressure amid a squeeze on commodity prices. Given the better market conditions, asset sales have slowed down, and there is not as much urgency to sell assets.”
“Anglo American, Vale and Glencore seem to have slowed asset sales. They are holding out for higher prices and are struggling to finalise valuations as prices are moving quickly,” Olsha said.
He highlighted how talk had shifted to capital deployment, from capital expenditure reduction, after companies convinced the market they had more cash than everyone was expecting.
“People are asking what will companies do with their cash? Build, buy or return cash to shareholders?”
Olsha said he believed building new projects was self defeating, and was unlikely at this stage because most companies were not convinced on prices. Mergers and acquisitions (M&A) were an option, he added.
“The year 2015 was one of the worst periods for M&A activity. M&A activity has picked up this year, but it remains subdued and it is difficult to pick up quality assets,” he said.
Olsha could not say if returning cash to shareholders was on the table.
“It is difficult to say whether companies will give cash back to shareholders. We will need prices to move higher to encourage companies to go down that route. I do not think companies are confident to return cash to shareholders,” he said.
On bulk commodities, Olsha saw a window of opportunity of up to nine months.
“Companies should take advantage of this opportunity to unburden themselves of unprofitable assets,” he said.
Turning to coal, the spot hard coking coal price rose 171 percent this year, while thermal coal gained 36 percent.
“This has entirely been the result of Chinese policy to cut domestic production run rates by 10 percent to 20 percent year on year since late March,” Olsha said.
BUSINESS REPORT