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Costs, lower prices weigh on mining shares

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By Matt Chambers

LITTLE went right for mining investors in the fiscal year as pressure in just about every direction sent stocks back down towards levels they plumbed during the global financial crisis.

The materials sector index, which is mostly made up of miners, was the worst-performing on the ASX this financial year, finishing at its lowest point since April 2009 and leaving no doubt the industry is going through a reversal of its post-GFC boom.

This calendar year, as turmoil in financial markets related to Greece’s dire economic predicament smashed sentiment, mining companies came under increasing cost pressure while commodities prices started to slide.

At the same time, China, whose demand saved many miners in 2008 and 2009 and who our big mining chiefs assure investors will keep buying our minerals, slowed more than many had expected and a US recovery idled.

The only relief that came towards the end of the year was a sliding Australian dollar and oil price.

“There’s been a backdrop of disappointment from Europe specifically and global growth generally and in the meantime the US has sputtered in the last quarter and China’s slowdown has continued,” Pengana Capital fund manager Tim Schroeders said.

“At the same time, capacity has continued to grow in the resources sector when the market is becoming increasingly sceptical about price rises from here on.”

In the past quarter the market has also started to downgrade growth forecasts for the so-called BRIC countries other than China — Brazil, Russia and India — who were mostly immune to the GFC, Mr Schroeders said.

One of the worst months for miners was May, when the materials index slid 11 per cent as Europe’s woes worsened. This was also the month when first Rio Tinto and then BHP Billiton became more vocal about the headwinds they were facing.

In the two weeks leading up to his company’s Brisbane annual general meeting on May 11, Rio chief executive Tom Albanese fronted Julia Gillard, institutional investors and conferences with uncharacteristically loud warnings that the high costs of doing business in Australia were making projects hard to get off the ground.

A week later, BHP fired a twin salvo from chief executive Marius Kloppers at a Miami conference and Jacques Nasser at a Sydney lunch. BHP explained its long-term view on China saw global iron ore demand peaking in 2025, while recent slides in commodity prices meant the world’s biggest miner would not have the cashflow to pursue all its $US80 billion of expansion plans.

But Mr Schroeders said it was not all gloomy.

“There is value there, it’s what’s going to catalyse that into higher share prices. There will I think be increased mergers and acquisitions which will start to do that,” he said.

“The growth outlook is not looking positive enough to get excited about increasing commodities prices but we are seeing supply-side response, closing mines and not starting planned ones, so there is an adjustment starting to occur.”