An oversupply in commodities and a strengthening rand makes it unlikely mining shares on the JSE will repeat 2016’s strong performance in 2017.
Global commodity prices made a sharp correction from highs in February, led by iron ore tumbling from more than $94 per tonne to $50. It has now stabilised at about $60.
"Investors were too excited about last year’s bounce, with the imbalance between mining supply and demand continuing," said Aeon Investment Management portfolio manager Jay Vomacka.
The JSE’s resources-10 sector is down 6% so far in 2017, having gained 26.4% in 2016. The platinum index has lost 7.3% and the gold index has dropped 3.15% after gaining 28.8% in the same year.
The rand has firmed 7.5% against the dollar so far in 2017, from 11.2% in 2016 after having lost 33.8% in 2015.
Despite a lack of profitability among platinum producers, companies have been reluctant to close mines, Bank of America Merrill Lynch analysts said on Monday. The upside for the sector was limited, they said, until producers cut production, which they were hesitant to do due to labour issues.
"However, production may be curtailed through the second half of 2017," they said.
Gold and platinum producers have been holding out for a weaker currency, or higher commodity prices, but have been frustrated on either side. This led to global miners falling, with Anglo American down 13% in 2017. It rose 182% in 2016.
The carnage among platinum producers continues, with Lonmin losing 47% so far in 2017. Impala Platinum is down 14.7%, but Anglo American Platinum has eked out marginal gains.
All eyes have been on gold producer Sibanye. As a diversified miner with gold and platinum interests, and with the Stillwater palladium takeover in the US set to contribute to the bottom line, it is saddled with debt and has lost 38.6% in 2017.
"The problem is there is no immediate industry leader in the platinum sector although Sibanye has now highlighted the need for output cuts," said Bank of America Merrill Lynch.
The weaker dollar has not yet benefited commodities. Chinese demand is expected to remain tepid as GDP growth softens.
"More surprises to the downside may be expected until at least 2019," said Vomacka.
Analysts at Momentum SP Reid said the lack of technical momentum for commodities indicated weak Asian demand.
The World Bank highlighted the plight of the local mining sector on Sunday, saying the sector was unlikely to benefit from an expected recovery in commodity exports.
"Recent activity in some metal exporters had been held back by special factors including production bottlenecks in Papua New Guinea and policy uncertainty in SA," the bank said.
This was despite upbeat local data for March that showed mining output jumped an annual 15.5% from 2016’s low base.
Nedbank economist Johannes Khosa said stronger global growth and firmer commodity prices should support higher local production and exports. "But the general operating environment is likely to remain challenging," he said.