If you were clinging onto embattled commodity stock Glencore (LSE: GLEN) throughout last year’s troubles, the earth will have moved for you lately, and in a good way. The stock has soared from a low of 72p on 20 January to 132p today, a rise of 42% as the dollar weakened, Chinese stimulus kicked in, oil prices started rising and management acted to tidy up the company’s balance sheet.
Don’t blame it on Rio
Commodity rival Rio Tinto (LSE: RIO) didn’t end up in as deep a hole as Glencore last year and its recovery may be slightly less earth-shaking as a result, but it’s still up nearly 20% from its mid-January low. Global tectonic shifts in sentiment have triggered a commodity revival across the board, but now it looks like the earth is ready to move again, and in a less good way. Both stocks are plunging again, falling 18% and 14% over the last week alone.
One problem with investing in commodity stocks is that you can pore over all the annual reports, production updates and interim statements you like, but individual company performance doesn’t matter a hoot when global investment sentiment shifts on its axis.
Survival tips
Management at both companies have ripped a sheaf of pages from the How to survive the commodity downturn survival guide. They’ve cut staff, slashed capex, streamlined operating costs, shrunk investment, sold assets, ramped up production from existing mines to maintain revenues and paid down the debt they ran up in the good times. All of which is to the good, and in the case of Glencore, it has helped the company retain the confidence of investors. But when the earth moves, all they can do is tremble and sit it out.
Today, few things can shake the world with the force that China can. The rise of the world’s second biggest economy is what made commodity producers such big FTSE 100 players in the first place. In 2014, it took 65% of global iron ore output, with the EU a distant second on a measly 11%.
Shake, rattle and roll over
What China makes, China can also break. Despite massive government borrowing and stimulus, its export sector has posted year-on-year declines for nine of last 10 months. In April, exports fell by 2% and imports by 11%. Fears over a Chinese hard-landing may have eased slightly in March after better-than-expected data, but now investors are trembling again, and you know what that means for commodity stocks.
Glencore and Rio Tinto may be very different operations (with Rio the more resilient) but they’re both operating on the same shaky ground. Last year’s troubles may have been salutary, especially for Glencore, which has been forced to become a tighter, more humble operation. But they’re still at the mercy of wider forces, and these are currently heading in the wrong direction, as Chinese stimulus loses traction.
Glencore fell 8.96% and Rio Tinto fell 7.92% on Monday alone. They could just as easily reverse these losses today. But this kind of volatility leaves me shaking all over.