BUSINESS DAY TV: If Trump is true to his word, it’s good for resources
Peter Major is director of Mining at Cadiz Corporate Solutions.
BUSINESS DAY TV: President-elect Donald Trump holds his first press conference today. We’ve got lots of expectation around the incoming administration’s pledges to boost infrastructure spending, which has already worked to lift metals and producers alike. The Bloomberg World Mining Index has advanced about 4.6% since Trump’s victory in November while the London Metal Exchange Index of six key metals has jumped about 6%.
Peter Major of Cadiz Corporate Solutions joins us in the News Leader studio now with his outlook for the resources sector this year. Peter ... so BHP has already engaged with president-elect Donald Trump on the industry. What real impact do you see the planned infrastructure spend in the US having on the sector? Let’s look beyond just the rhetoric here.
PETER MAJOR: For 100 years, from 1900 until the year 2000, when the US talked infrastructure spend it was real, it had a big impact on commodities because the US for most of that 100 years was 25% to 30% of the world economy. But as we all know, things have changed; since 2000 China has way out-distanced America, so if China talks infrastructure spend, boy, we all sit up and take notice. But a 100-year habit is still hard to kick. The States is still important, but it’s not using a quarter of the minerals China is.
BDTV: In fact, on that note I picked up 10% surge in US copper demand, for example, would be equivalent to just a 1.5% gain in consumption in China.
PM: Exactly, but the US is still the world’s economic powerhouse and also the world still wants to take its cues from what America says and does. So it’s not so much rhetoric but its more speculation; its more wishful thinking, but it’s great. And hey, it might be a sparkplug; maybe China will say, well if Trump in America says they’re going to do infrastructure spend we’re going to increase ours even more. And I have seen reports that China is not slowing down its infrastructure spend, it wants to speed up certain bits of it, as if they weren’t doing that over the last 15 to 20 years anyway, but I believe it’s over-rated.
BDTV: Absolutely, so what is your sense of demand globally — because, as we’ve highlighted, the US remains a smaller metals consumer and less reliant on imports than China is?
PM: Yes, global demand is okay, it’s global supply that worries me. There has been no reduction in supply, we know there’s been zero reduction in iron ore. If anything, the Australians and the Brazilians have increased by another 100m to 150m tons, just on last year. So I don’t think demand in the world is much greater than last year, which wasn’t much greater than the year before. But the supply, whether its copper, base metals, iron ore, I worry that the supply is going to tone down the kind of prices that we see. These are all great prices.
BDTV: So while supply is one of your big concerns here, do you see more investments, in fact, being made in the US because while it’s expected to bolster demand, one wonders whether there’s enough to actually warrant any further spend to add to that supply metric?
PM: When you ask, do I see any increase spending in what, infrastructure or production?
BDTV: No, in investment in production.
PM: Man, I don’t want to see any more investment in production...
BDTV: You don’t want to see it, but do you see it coming to the fore?
PM: It’s probably going to come in a very sober form because look at Anglo’s and Billiton today, they’re still way down from where they were 18 months ago, so yes they’ve had a nice run the last 12 to 14 months, but Anglo’s is pushing what, maybe 210 to 215 \- and what was its heyday, 550? That was six to eight years ago.
Most of the mining companies are talking sense. They’re showing very small capex but they’re showing great improvements in cost efficiencies. They’re showing good balance sheet strengthening so investors will continue to invest in existing mining companies that are showing the kind of prudence we’ve seen, but I don’t see anywhere near the unbridled optimism in investing in new start-up projects.
BDTV: Absolutely ... iron ore led commodity gains in 2016. Zinc, natural gas, amongst the year’s best performers where in the year before they were amongst the biggest losers. To what extent are you pricing in a continuance of the commodities price revival, which has, in large, part been driven by China’s stimulus?
PM: It depends what broker you’re talking to. If you look at the Australians and Macquarie, I think they’re being very realistic. They show iron ore going down to $50 by the end of this year and they’re showing other commodities falling just about as much, including coal. Then you look at Barclays; they say, "Are you kidding?" This infrastructural spend, this increase in commodity prices is going to hold for the rest of the year. The world is on a good wicket. I’m leaning with the Australians, Macquarie’s ... there’s no slowdown in supply of any minerals and yet look at these prices. These prices are way above long-term averages, they’re acting like the start of the bull run not the tail end of a 10-year bull run.
BDTV: So how do you see that influencing investment demand, what kind of trend or activity are you picking up on that front?
PM: What I’ve picked up and heard just in the last 30 days, again it’s very sober investment demand. People see a lot of company’s haven’t run, like the big mining houses, and like Glencore. A lot of mining company’s haven’t run. The gold and platinum has pulled way back so investors have lots of money. They don’t want to miss out if there’s even a mini commodity boom, but they’re being much more selective in what they’re going in.
And on the private equity side we’ve seen a lot of interest in private equity because those prices haven’t budged at all from 15 months ago. The listeds have gone up multiples, but the private equity, the owners of those assets are talking very realistically. So I think there’s going to be probably more interest in private equity than going for listeds.
BDTV: Of course, this as we have the Mining Indaba on the horizon next month. What do you see the key themes or discussion points being at this year’s Indaba? Do you imagine it to be eventful given the lift-off in commodity prices we’ve seen?
PM: It’s going to be a great Indaba. Just think, last year was still too early to see commodity prices really going up. You had five negative years of Indaba, you had five years of falling commodity prices. This is the sixth year, commodity prices have shot up, they’ve held year for year, they’ve shown it’s not just a bounce ... it’s going to be a very positive Indaba. I saw somewhere in the paper someone thinks there’s going to be more deals done at this Indaba than the last six. I fully agree with that ... there will be a lot of transactions done.
BDTV: We’ll wait and see...