Global miners steel for worse after torrid year

SYDNEY — Global miners are battling to stay afloat after enduring one of the toughest years in recent times, with tumbling commodity prices and supply gluts set to force more closures and massive cuts in 2016, analysts say.

China's once insatiable appetite for commodities, boosted by an unprecedented investment boom in the world's second-largest economy, has waned, with its shift towards consumption-driven growth dampening demand.

At the same time, large producers have continued to lift output levels, which critics say is designed to flood the market and push out smaller competitors, accelerating the decline in prices.

The iron ore price sank below $40 in early December, its lowest since May 2009, thermal coal prices are 80 per cent off their 2008 peak, while world oil prices have spiralled down to an eight-year low. 

The sharp falls have ravaged the bottom line of miners across the world, pushing smaller players to the brink while tearing billions of revenue out of the government budgets of resources-dependent economies such as Australia.

Even major players such as London-listed Anglo-American has had to slash its workforce by almost two-thirds and shut loss-making mines amid the deepening rout, while Swiss giant Glencore is planning to trim its debt by cutting investment and selling assets.

"You only need to look at any share price to know it's been an absolutely shocking year for commodity markets and for mining companies," indicated CLSA's head of resources research Andrew Driscoll.

Anglo-Australian BHP Billiton, one of the world's largest miners, has seen its Australian share price dive by more than 40 per cent this year, while stocks in rival Rio Tinto have dropped by 26 per cent.

Rio's Chief Executive Sam Walsh said the firm's competitors were in so much trouble that they were "hanging on by their fingernails".

"Sooner or later the adjustment will take place," Walsh told Bloomberg Television this month.

End of commodities super-cycle      

The slump comes on the back of a commodities supercycle over the past decade, led by China but also fuelled by other resources-hungry developing nations growing their economies at a rapid pace, which pushed prices to record levels.

But as miners borrowed heavily and ramped up output, they overestimated the growth in demand, analysts said.

"They've added far too much capacity for that new, more moderate demand outlook, so we have surpluses in every commodity," indicated UBS commodities analyst Daniel Morgan.

"I think it's definitely one of the toughest years the mining industry has faced in many years," he said, noting that the woes were comparable to previous slumps sparked by the 2007-08 global financial crisis, the 1997 Asian financial crisis and even the 1991 fall of the Soviet Union.

Goldman Sachs said last week the iron ore sector might need to "hibernate for an extended period", predicting that prices would stay below $40 for three years.

The International Energy Agency said in mid-December that "the golden age of coal in China seems to be over", with demand slowing as the East-Asian nation turns to cleaner energy sources.

Meanwhile, the Organisation of Petroleum Exporting Countries recently left its output ceiling unchanged despite crashing energy prices in a move likely to further depress the market.

"We had the big party from 2005-2011, and now we are suffering the big hangover," said Breakaway Research senior resources analyst Mark Gordon. 

"The so-called supercycle was a real anomaly in history, so the upward trend was an anomaly, and the downward trend is also an anomaly," he added.

More shutdowns, cost-cutting      

With demand projected to soften along with China's slowing economic growth, the adjustments have to come from the supply side, according to analysts.

They warned that miners have been too slow to shut operations even as their revenues and cash reserves are severely eroded, in part due to the dive in energy prices that have helped push down costs.

This meant shutdowns were likely to accelerate next year as cash losses become too significant to avoid.

"I think that sets us up for some sort of supply-driven improvement in markets in the second-half of the year as sufficient supply exits, the markets rebalance and prices can start migrating up the cost curve," Driscoll indicated.

"[There's] a bit of light at the end of the tunnel but if you are a high-cost producer, if you've got too much debt, then things will remain very challenging," he said.

Separately,  the Tongmei Group is typical of the lumbering and inefficient state-owned firms that dominate cities in China's industrial heartlands

Coated in thick black dust, hundreds of miners emerge from deep underground after another shift gouging out the coal that fuelled China's boom and its choking pollution, an industry now crippled by oversupply, but whose companies are seen as too big to fail.

The firm is the lifeblood of Datong, a city of 3 million people. It employs some 200,000 staff with nearly a million family dependents, housing and entertaining its workers and even running hospitals.

And it is in trouble.

For decades coal has been the backbone of the northern province of Shanxi, providing livelihoods for millions of miners, while private jet owning bosses became notorious for their nouveau riche lifestyles.

China's consumption of the fuel doubled in the decade to 2014 as the economy soared, reaching more than four billion tonnes a year.

Now some observers say China's coal demand may have peaked, a confluence of economic growth slowing to its lowest rate in 25 years and Beijing starting to reduce the carbon-dioxide-spewing fuel's share of the national energy mix.

That has dragged coal prices down to their lowest level in a decade, putting the squeeze on Tongmei.

But manager Liu Congying says despite the shrinking market, he has little choice but to supply even more, the mine operates 24 hours a day with a maximum output of 6,000 tonnes an hour.

"If we didn't increase production, we could not continue to run the business as we do now... including paying wages," said Liu. "It's clearly not a sustainable policy".

Social stability 

Relatively poor Shanxi's population is nearly 40 million, more than Canada's, and official statistics show its gross domestic product grew just 2.8 per cent this year.

Many of China's giant state-owned enterprises (SOEs) are unviable and plagued by overcapacity, with reports in September saying a mining group in the northeastern province of Heilongjiang will sack 100,000 workers, in what analysts called a taste of the pain to come.

Liu, who began toiling in the pits five decades ago, denied that Tongmei planned layoffs, telling AFP: "We need to preserve social stability."

But the firm is "probably running out of money", said industry analyst Zhang Zhibin.

He and other industry insiders think that China's coal consumption has peaked and may even decline in the next few years.

That is a potential boon to China's attempts to reduce smog and cut greenhouse gas emissions, but a disaster for cities such as Datong.

"We will see bankruptcies in the sector in the next few years," Zhang added.

China's Premier Li Keqiang this month called for a "cut back on overcapacity in traditional industries as well as a large number of zombie enterprises", in remarks state-run media said were directed at coal and steel.

But there are few signs the government is willing to turn off the financial taps and risk widespread unemployment, with the potential for anger and unrest, anathema to the Communist Party.

"The state sector is inefficient and wasteful," indicated Joe Zhang, an SOE manager turned commentator. "But it has a central role in the Chinese social fabric."

Golden carp

In his company-funded flat, equipped with central heating and an aquarium for golden carp, a miner surnamed Xu said: "Our homes are much better than before."

His daughter played in front of a flat-screen television.

Xu's pay rose nearly tenfold in the good years after the late 1990s to peak around 6,000 yuan ($930) per month, but this year he has seen a 15 per cent cut.

Shanxi officials are trying to diversify by boosting tourism and luring manufacturers away from China's coast.

Meanwhile, Tongmei is moving into electricity and chemical production.

Even so, the buzzcut 38-year-old scoffed at the idea that service industries such as tourism could be his city's future.

"Who will we serve? If tens of thousands of us start up businesses, who will buy our products?" he asked. "We have nothing here apart from coal."