Another Difficult Week

Metals prices are volatile in the face of further signs of a slowing global economy, and mining equities remain weak as investors seek defensive holdings.

Like Comment

Although last week was not as traumatic for the mining sector as the previous one (or as it was for UK markets) it was still another uncomfortable period for most metals. Equities also remain in the doldrums, with the 2,000 listed mining companies tracked by S&P Global Market Intelligence being valued at only some US$1.4 trillion, compared with US$2.3 trillion at the start of 2011.

A draft agreement for the UK (Great Britain plus Northern Ireland) to exit the European Union (EU) has been agreed between the UK government and EU negotiators in Brussels. The details of the agreement, however, triggered chaos in the UK, and it is far from certain that the Prime Minister, Theresa May, will be able to secure the necessary parliamentary agreement for the deal. Both sterling and the euro tumbled on the increased likelihood of a 'no deal' exit by the UK from the EU. Indeed, as measured against the US dollar, both currencies have tracked each other closely as they have fallen over the past seven months.

The Brexit chaos does not, fortunately, have much impact directly on metals prices but it certainly doesn't help the mood of international investors, many of whom are based, of course, in Britain. The problems have already had an impact on carbon markets in Europe, which face an uncertain few weeks because the UK's twice-monthly carbon auctions have been postponed beyond December. This is over fears that the emissions permits issued in 2019 might become invalid.

Stalling momentum for the global economy was demonstrated last week by Japan and Germany, which both reported larger than expected contractions in economic activity. Japan was affected by natural disasters and lower exports, and the German economy suffered its first quarterly contraction in more than three years as its exports to China fell.

Credit growth in China is growing at its slowest pace on record, and the country's central bank has been loosening its monetary policy in response. This is reflected by the trend in short-dated bonds, with China's two-year yield having fallen this year (from over 3.5%), compared with the steadily climbing equivalent in the US (from 1.9%). However, analysts quoted in the Financial Times suggest that the weakness in credit growth in October means more supportive policies are needed. Chinese exports have been strong this year, despite President Trump's tariffs, but an export slowdown is expected to appear early in 2019.

There are positive reports, however, that US and Chinese negotiators have stepped up their efforts to reach a truce over trade sanctions. This follows a telephone conversation between President Trump and Xi Jinping, his Chinese counterpart, during which the two leaders agreed to discuss trade at the G20 summit in Buenos Aires on November 30. Nevertheless, expectations of a broad trade deal being reached in Argentina at the end of this month remain low.

Investors continue to switch into defensive stocks, especially in sectors such as healthcare and utilities, and there has been a speedy retreat from the technology sector after its heavy sell-off in October. According to a survey by Bank of America Merrill Lynch, one in three investors now thinks US equities have peaked — double the proportion from October. Of the 225 investors polled, 44% expect global growth to slow over the next year — the gloomiest outlook since November 2008.

In the survey, 45% of the respondents expected non-US equities to be the best-forming asset class in 2019, with commodities garnering an encouraging 15% of the votes. The worst-performing assets are expected to be corporate and government bonds.

Despite the uncertain market conditions, the prices of zinc and copper improved last week. It was another difficult seven-day period, however, for aluminium, gold, nickel and iron ore. Zinc recovered much of the ground it had lost in the two previous weeks with a 4.0% improvement to close in London on Friday, November 9, at US$2,604/t. Similarly, copper recovered some of the ground lost earlier this month with a 2.8% price improvement last week to US$6,213/t.

It was a difficult week for the other major metals. Iron ore (62% Fe) dropped 2.8% to US$75.1/t after the strong price increases the previous week, and aluminium fell 1.4% to US$1,935/t on Friday. Gold slipped 1.0% to US$1,212/oz and nickel was slightly lower at US$11,410/t.

The most worrying announcement last week came from South Africa, where President Cyril Ramaphosa supported changes to the constitution that will allow the seizure of land without compensation. The prospect of land expropriation has worried investors about the wider issue of property rights. 

Perhaps the weirdest announcement last week came from the International Monetary Fund, when the agency's head, Christine Lagarde, said central banks should look seriously at issuing digital currencies. This was, she said, to "fill the void left by the decline of cash". Ms Lagarde is concerned that too much power will fall into the hands of a "small number of outsized private payment providers".

Chris Hinde

Chief Commentator, Mining Beacon

Previously editorial director of Mining Journal, and more recently head of S&P Global Market Intelligence's metals and mining team, Chris is now Mining Beacon's editor-in-chief and lead commentator. He posts two blogs every week, one on Monday reviewing market conditions over the prior week, and a second on Thursday looking at issues on the global mining scene. There is also a quarterly blog on business opportunities in the sector.