Commodities rebound returns Anglo to former heights

Just more than five years ago Anglo American was in deep trouble. The natural resources giant, beset by a collapse in commodity prices, scrapped its dividend and announced plans to close mines and cut thousands of workers. Amid talk of an emergency capital raise, its market value fell to less than $3bn.

This week, the trials of 2016 probably seemed like a parallel universe to CEO Mark Cutifani when he announced record first-half earnings and billions in dividends, fuelled by a rally in iron ore and other commodity prices. Anyone who took a punt on Anglo’s shares when they reached their nadir, would have seen a 14-fold increase as the market capitalisation soared to $55bn.

“High commodity prices have been very important to us,” Cutifani told investors earlier this week. “We don’t think this is as good as it gets.”

With raw materials prices surging, the entire natural resources sector is showering shareholders with special dividends and buybacks as miners, oil drillers, trading houses, steelmakers and farmers reap billions in windfall profits. The sector, marked down by investors because of its contribution to climate change and a reputation of squandering money on mega-projects, is again a great cash machine.

The economic rebound from 2020’s Covid slump has powered an explosive rally in commodity prices as consumers forgo holidays and dining out and spend their money loading up on physical goods instead: everything from patio heaters to state-of-the art TVs. Politicians are helping, too, lavishing hundreds of billions on resource-heavy infrastructure projects.

The Bloomberg Commodity Spot index, a basket of nearly two dozen raw materials, surged to a 10-year high this week and is rapidly closing in on the record set in 2011. Brent crude, the global oil benchmark, has again surged above $75 a barrel, copper is headed back towards $10,000/tonne, European natural gas is at its highest ever for the northern hemisphere summer season, and steel is changing hands at unprecedented levels. Agricultural commodities such as maize, soya beans and wheat are also expensive.

“Demand continues to improve with increasing global vaccinations,” Joe Gorder, CEO of Valero Energy Corporation, one of the world’s largest oil refiners, said earlier this week.

Even commodities long left for dead, such as thermal coal, are enjoying a new life in 2021. Coal, burnt in power stations to produce electricity, together with huge volumes of carbon emissions, is trading at a 10-year high.

Structural factors

While commodities prices are the main reason behind the turnaround, there are structural factors at play as well. Miners and oil companies have slashed spending on new projects, creating a supply shortfall. The miners were first, as they curbed investment from 2015-2016 as investors demanded more discipline; oil companies followed up in 2020 and some major energy companies this week announced  further cuts in spending for 2021. The result is that while demand is surging, supply is not, at least for now. The oil majors are benefiting too from the work of the Opec+ alliance of oil producers, which is still holding back a large share of output.

Anglo American, which announced $4bn in dividends, is probably the most remarkable turnaround story in the natural resources sector, but its profits were still dwarfed by its bigger rivals. Rio Tinto Group and Vale, the world’s two leading iron ore miners, together vowed to hand back more than $17bn in dividends last week. There is still more to come for investors, with BHP Group, the world’s biggest miner, and Glencore, another big miner and commodity trader, yet to report.

And for once, the world’s biggest steelmakers were not only able to absorb the costs, but pass them on. An industry that has spent much of the past decade in crisis is now also able to reward long-suffering shareholders. The world’s largest steelmaker outside China, ArcelorMittal SA, which was forced to sell shares and scrap its dividend just five years ago, posted its best results since 2008 this week and announced a $2.2bn share buyback programme.

The miners have stolen the spotlight from the energy industry, traditionally the biggest dividend payer in the natural resources industry.

Still, Big Oil recovered from the historic price collapse of 2020, when a vicious Saudi-Russian price war and the Covid-19 pandemic briefly sent the value of West Texas Intermediate, the US oil benchmark, below zero. Supported by rising oil, natural gas, and, above all, the chemicals that go into plastics, ExxonMobil, Chevron, Royal Dutch Shell and TotalEnergies delivered profits that went to pre-Covid levels. BP, the smallest of the top five oil majors, will report results next week.

With cash flow surging, Shell, which in 2020 cut its dividend for the first time since World War 2, was able to hike it nearly 40%, and announced an additional $2bn in buybacks. “We wanted to signal to the market the confidence that we have in cash flows,”  Shell CEO Ben van Beurden said. Chevron and Total also announced they will buy shares. Exxon, though, is still licking its wounds and focused on paying down debt.

The more opaque world of commodity trading has also cashed in. Glencore said this week it was expecting bigger trading profits than forecast, with rivals Vitol Group and Trafigura Group, two of the world’s largest oil traders, also benefiting from lucrative opportunities created by rocketing prices.

The agricultural traders have cashed in on higher prices and unusually strong demand from China. Bunge, a trader that is the world’s largest crusher of soya beans, told investors it expected to deliver its best earnings per share since its initial public offer two decades ago. Archer-Daniels-Midland, another big American grain trader and processor, also flagged strong earnings. And Cargill, the world’s largest agricultural trader, is heading towards record earnings in its 2021 financial year.

Whether the natural resources boom can last is hotly contested. Many investors worry climate change makes the long-term future of the industry hard to read and they also fret about the tendency of executives to approve expensive projects at the peak of the cycle. Mining executives fear Chinese demand will slow down at some point, hitting iron ore in particular. But the lack of investments may support other commodities, such as copper and oil.

Shell’s Van Beurden summed up the bullish case earlier this week: “Supply is going to be constrained and demand is actually quite strong”.

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