If you are disappointed by the performance of the UK stock market this year then here’s who to blame: the big global mining companies. The troubles afflicting the embattled mining sector have cast a dark shadow over the entire UK plc. Without them, things would look a lot more impressive.
Mining Disaster
The latest batch of results from UK company results was “decidedly upbeat”, but only if you ignore the mining sector, according to the latest Profit Watch UK from The Share Centre.Â
Collective pre-tax profit on the FTSE 100 PLUNGED by just over a third to £13.5bn, but that was primarily down to a collapse in mining profits, notably at BHP Billiton (LSE: BLT). Strip out the miners and pre-tax profits actually CLIMBED a whopping 19.8% to £8.8bn. The figures also show that UK profits are rising faster than revenues, as companies turn rising sales into higher margins.
It was the 5% slump in the mining sector wot done it. Otherwise, most sectors enjoyed impressive double-digit pre-tax profit growth, The Share Centre says. The outlook is most favourable for companies exposed to the strongly growing UK economy (although management at troubled supermarkets Tesco, J Sainsbury and WM Morrison may beg to differ).
Chinese Arithmetic
All of which is good news for the UK generally, but bad news for BHP Billiton and other FTSE 100 listed miners Anglo American (LSE: AAL), Antofagasta (LSE: ANTO), Rio Tinto (LSE: RIO) and of course Glencore. They enjoyed years of outperformance thanks to the rampant China growth story, and now they look set for years of underperformance as that story runs its course.
One of the best investment decisions I have ever made was dumping BHP Billiton a couple of years ago, while I was still in profit. I couldn’t see how China could carry on building at breakneck speed while the countryside was littered with gloomy ghost cities of empty tower blocks. Miners racked up production to meet this voracious demand, leaving this notoriously cyclical sector dangerously exposed to the inevitable slowdown. Excitable talk of a 40-year commodity super cycle only served to reinforce the error.
Not-So-Super-Cycle
At some point, however, the cycle will turn again, as cycles do. Are we there yet? Chinese imports and exports fell in October, by more than expected. The growing threat of an interest rate hike by the US Federal in December will heighten the pressure on emerging markets.
Yet maybe the future is more hopeful than many people think. China also posted a larger-than-expected trade surplus of $61.6bn in October, up from $60.3 in September. This will bolster its GDP growth rate, as Jan Dehn, head of research at Ashmore has pointed out. He reckons that Chinaâs high savings rate of 49% gives the country enormous potential to grow through higher consumption, and notes that the Shanghai Composite has regained bull market status after surging 20% from its lows earlier this year.Â
If China’s revival is driven by domestic consumption it won’t help the miners, which are still flailing. BHP Billiton is down 17% in the last month. Anglo American is down 24%, Antofagasta is down 12% and Rio Tinto down 9%. All four are a blight on the performance of the UK economy. At some point, they will rise again. That moment may finally be getting closer.