Tailings Tragedy

Another dam-collapse tragedy in Brazil, and the mood at the WEF meeting in Davos reflects nervousness over the global economy. Despite this, it is another positive week for metals prices.

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A tragedy in Brazil's Minas Gerais province dominated the mining scene last week, with the collapse on Friday of a tailings dam at Vale's Córrego do Feijão iron ore mine near Brumadinho. Over 60 bodies have been recovered to-date, with more than 300 people still missing. Vale's  CEO, Fabio Schvartsman, flew over the area and said "Vale is putting everything it has available, all equipment and human resources, without limits".

The dam failure came as Vale prepared to reopen its Samarco mine, jointly owned with BHP, where 19 people died when a dam failed in November 2015. Last month a congressional commission reported that only 3% of the country's 24,000 dams were checked annually, with more than 700 being thought to represent a "high risk" of failure.

The tragedy came as the four-day World Economic Forum (WEF) meeting in Davos came to an end. The Financial Times concluded that there was a "distinctly downbeat" atmosphere. The negativity was not at the corporate level, with almost all CEOs predicting an improved operating performance this year, rather a concern over the macro scene. The nervousness centres on tightening monetary policy, heightened political risk, and the economic slowdown in Germany and China.

China's vice-president, Wang Qishan, told delegates at the WEF meeting, however, that the country's GDP growth rate of 6.6% in 2018 was "a pretty significant number, not low at all". Although he admitted that China's economy faced risks, and the annual growth was at its lowest in almost three decades, Mr Wang stressed that the "quality and efficiency" of the economy mattered more than the speed.

Nevertheless, the slowdown in Chinese economic growth and large falls in technology stocks in 2018 resulted in China-focused equity funds suffering their worst year since the global financial crisis. The MSCI China index fell 20.4% in dollar terms last year, the largest annual decline since 2008.

The country is also grappling with a bad debt crisis as non-performing loans have reached a reported 2% of total loans, and the actual proportion is believed to be much higher. The reduction of corporate indebtedness is a key element of President Xi Jinping's financial agenda, and the disposal of bad debts has reached levels not seen for two decades.

On the positive side, Chinese companies were the biggest buyers of mining assets in 2018, with deals valued at over US$7 billion according to Dealogic. In contrast to the more cautious approach last year of western mining companies, China's miners have maintained their appetite for overseas assets.

Much of the interest has been in the minerals needed for electric car batteries, particularly copper, cobalt and lithium. Deals last year included the US$4.1 billion purchase in December of a 24% stake in Chilean lithium miner SQM by China's Tianqi Lithium, and Zijin Mining's acquisition of Nevsun Resources in September for US$1.4 billion.

Other News

The International Monetary Fund warned last week that the global economy is weakening faster than expected. The IMF predicts that the advanced economies will grew only 2.0% this year and 1.7% in 2020, compared with the growth of 2.3% in 2018. It expects the global economy to grow 3.5% this year, compared with 3.7% in 2018.

Meanwhile, the European Central Bank has sounded the alarm over the eurozone economy, saying that the slowdown might not be as temporary as it had earlier predicted. The changed outlook comes just six weeks after the ECB removed the most important element of its crisis-era stimulus (halting new purchases of bonds that had been used to inject liquidity into Europe's banking system).

The news came as Wall Street's expectations for corporate profit growth dimmed significantly. Citi reports that the consensus of investment bank analysts is for earnings per share to rise just 6.5% this year, compared with the 2019 forecast in October of 10%.

Commodity Market

The US dollar reached a three-week high on Thursday against a basket of goods but retreated sharply on Friday, which helped gold reach a seven-month high of US$1,300/oz.

Despite the continued gloom over the global economy, last week was a second consecutive positive one for base metals. Zinc led the way with a 3.9% week-on-week improvement, closing in London on Friday at US$2,683/t. This followed the 3.5% gain the previous week. The price of aluminium improved 2.6% to US$1,913/t, nickel rose 2.0% to US$11.950/t and copper improved 1.0% to US$6,077/t. Iron ore (62% Fe) was the only major metal to decline last week, slipping 0.7% to US$75.4/t. 

The coal sector remains in the wars. In Germany, a government-appointed commission has recommended that the country's coal-fired power stations are phased out by 2038. The government has welcomed the finding. In the US, the Energy Information Administration has predicted that the country's coal production will decline 21% over the next 20 years. This is despite support for the industry from President Donald Trump, and the anticipated decline is even worse than the 18% fall predicted two years ago — which was made under the assumption that Barack Obama's Clean Power Act would come into force.

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.