2011 started with a bang for the mining sector. Fresh from a year when metals prices continued to perform remarkably well, investors came into the new year feeling hopeful that the worst of the turmoil was now behind them, hopeful that Greece and Ireland would be able to sort out their financial woes and, that the world would get back to business.
This hopefulness resulted in, among other things, copper prices pushing up above $10,000/ tonne in the early weeks of the year. But, as the weeks turned into months, the mining sector and, indeed, the world was pummelled by a number of significant macroeconomic body blows.
The most obvious and tragic of these was the massive earthquake and resultant tsunami that ravaged Japan in March. The disaster devastated the Japanese economy but it also crippled the Fukushima Daiichi nuclear plant. The Fukushima event saw uranium stocks plunge and a number of countries (Germany, most notably) pull out of what many in the sector had touted as the nuclear renaissance.
And, while a number of analysts, including Scotiabank economist Patricia Mohr, noted that the renaissance in nuclear power is far from over, there is no doubt that it has been somewhat waylaid by the events in Japan. The disaster also had a number of other effects, as French Bank Natixis points out, “ As well as its direct effect upon the Japanese economy, this [the earthquake and tsunami] had a significant negative impact upon global supply chains due to the loss of key Japanese components, felt in particular among the automobile and electronics industries.”
At a macroeconomic level, the next body blow was the PR disaster that was the US debate on the ceiling for its rapidly ballooning deficit in July. The ratings agency, Standard & Poors downgraded the country’s long term rating to AA+ after politicians almost failed to agree an increase to the budget ceiling, which would have plunged the US into a technical default. While an 11th hour agreement was reached, investor confidence in the country did take a knock. And, talking of political ridiculousness, the Eurozone has, over the last year made investors increasingly nervous with the increasing scope of the sovereign debt crisis that has engulfed the region and, more so, with their various attempts to solve it.
And, as if that weren’t enough, as Natixis Bank explains, “In the developing world, monetary authorities became increasingly hawkish as high energy and agricultural prices pushed inflation well above central bank target ranges. As well as interest rate hikes, anti-inflation policies included quantitative measures such as increases to banks’ required reserve ratios and administrative controls upon some final goods prices...As the year progressed, this monetary tightening gradually began to bite, and when combined with the negative effects of a growing crisis in Europe, economic activity slowed quite abruptly in the latter months of the year.”
These various factors resulted in a rather poor showing for metals prices over the year with gold the only one managing to keep its head above water and turning in a creditable 11% increase. As Standard Bank’s Marc Ground wrote in the bank’s last daily commentary for the year, “Base metals have not fared well this year, with y/y falls recorded across the complex. The best performer has been aluminium which managed to limit losses to 18.6% y/y, while tin, the worst performer, has dropped 28.7% y/y. Copper has lost 20.7% y/y, set to record the first y/y drop since 2008.”
That being said, while metal prices have not fared as well this year, as they did in 2010, miners themselves, especially gold miners, have been turning in record profits. And, it is partly for this reason that the trend toward resource nationalism, which began to resurface in 2010, has continued apace.
Indeed, in the 2011 edition of Ernst & Young’s annual Business risks facing mining & metals 2011-2012 publication, resource nationalism. topped the list. Up from fourth place in last year’s survey, the concerns come on the back of a significant increase in focus from tax authorities across the globe on the resources sector.
As the report explains, “As many governments struggle with deficits or hold concerns over the effects of a two speed economy, the continuing boom in commodity prices has seen the mining and metals sector targeted as an area in which they can raise revenue.” As a result of this, EY says it has identified at least 25 countries that either increased or announced an intention to increase their government tax take. And, while analysts say that it is unlikely that countries will kill the goose that lays the golden egg through outright nationalisation, much closer cooperation between countries and companies could well be on the cards.
Investors too had marked the jump in earnings and began to agitate to see more of the money. Dividends and, especially, increasing dividends was the phrase on the tongues of many analysts come earnings season and, the companies responded in kind. M&A activity also increased somewhat, but, the most notable transaction had less to do with size and more to do with content - Barrick’s purchase of copper miner Equinox Minerals.
All in all, 2011 was marked both by a number of metals hitting records, copper and gold most notably, but, possibly, more importantly, those metals falling from their highs as well. In many respects, while there were some stories, one can’t help get the feeling that 2011 was more of a year of incubation than anything else, where changes were born but, have not yet had the time to fully develop - which makes the prospect of 2012 rather exciting. n
(A longer version of this article by Geoff Candy was posted at Mineweb.com.)