The chronic whipsawing across financial markets has been nothing short of breathtaking in recent weeks, but no more so than in the commodities sector.
Metals giant Anglo American (LSE: AAL) started the year around 300p per share, before frantic selling following more troublesome Chinese data sent prices to fresh troughs at 221.5p in January. But prices have clipped higher since then thanks to massive short-covering and a weakening US dollar, and the stock was recently at three-month highs of 435p.
Dedicated copper play Antofagasta (LSE: ANTO) has endured a similarly-tumultuous ride, sinking to seven-year lows of 346.1p per share last month before leaping higher again. The stock is now back dealing at levels seen at the start of 2016, around 470p.
While Antofagasta has seen its share value ascend 7% over the past month, Anglo American has leapt an astonishing 90% during the period. I see this as nothing more than a great opportunity to sell up, however, as more trouble is fast coming down the line.
Agencies warn of prolonged pain
Anglo American recorded a pre-tax loss of $5.5bn in 2015, it advised this week, with revenues sinking 26% to $23bn and impairments clocking in at a mammoth $3.8bn.
In a bid to stop the rot, the business unveiled a vast restructuring plan to cut debt and axe its exposure to flailing bulk commodities iron ore and coal. Indeed, Anglo American plans to tailor its attention to the copper, diamonds and platinum markets only, with subsequent project sales reducing its asset base to 16 from 45 at present.
But a flurry of fresh ratings downgrades in recent days suggests Anglo American still has plenty of problems to overcome. Moody’s lit the touch paper on Monday by downgrading the firm to ‘junk’, commenting that “the [commodities] downturn [is] likely to be deeper and longer than previously anticipated.”
And Fitch slashed Anglo American’s rating to the same level on Wednesday, advising that planned reshaping makes the company more dependent on the volatile and cost-intensive South African mining industry. The agency also warned that Anglo American may struggle to sell its assets given the wretched state of commodities markets.
Copper play in peril
Similarly, I believe Antofagasta also faces a murky outlook as intensifying economic cooling in China — combined with huge capacity increases at gigantic mines like BHP Billiton’s Olympic Dam and MMG’s Las Bambas — puts copper prices in peril.
Chile-focused Antofagasta is attempting to hurdle this issue by steadily hiking output and recovering lost revenues through higher volumes. The company plans to produce between 710,000 and 740,000 tonnes of the red metal in 2016, up from 630,300 tonnes last year. And planned expansions of its Los Pelambres and Antucoya facilities promise to keep the market amply supplied well into the future.
Of course such a strategy — pursued not just in the copper market but across resources classes — significantly undermines the profits outlook across the entire commodities segment. So until global demand significantly picks up, I don’t expect earnings at the likes of Anglo American and Antofagasta to step higher any time soon.