But what would happen to the mining sector if the trade wars were to end overnight?
According to the heads of the world’s largest miners, the impact would be smaller than one might expect.
For starters, there would not be a sudden rush to develop projects and increase production because, as Glencore chief executive Ivan Glasenberg said in 2014, that is “not a pretty picture.”
Harsh lessons were learned in the aftermath of the 2007-08 global financial crisis when miners continued to produce raw materials even while demand in their key markets eroded and prices - along with profits - began to fall.
The over-investment and debt-binging eventually took its toll and led to an age of austerity that tempered the sector’s herd mentality and forced miners into a period of cost-cutting that has largely continued.
But miners say that they have left behind the industry’s traditional propensity to crank up production in pursuit of lower costs and end up destroying value, not just in the price but ultimately for itself. They say that such times will not return even if the uncertain trade backdrop goes away.
“We need to make sure we are not feeding oversupply in any of our target markets,” Mark Cutifani, chief executive officer of Anglo American, told Fastmarkets. “Keeping the physical supply balance in mind while investing in great projects is something we think and debate long and hard.”
The focus on volume and the recognition that real money in mining is made by not oversupplying a market has paid off in the form of higher prices and better yields. Sometimes, that requires production restraint; at other times, it is achieved by production cuts.
In October 2015, for instance, Glencore announced a 500,000-tonne reduction in contained zinc metal mine production at its operations in Australia, South America and Kazakhstan, citing weak market prices. London Metal Exchange prices gradually doubled until some capacity was restarted in 2018; they are still more than $500 per tonne higher four years later.
In August 2019, Glencore said that it would close its Mutanda mine in the Democratic Republic of Congo at the end of the year. Cobalt prices have gone up by around 38% since the beginning of August, according to Fastmarkets data, and the mine has not been shut yet.
This is an approach that has helped miners to weather the storm of tit-for-tat tariffs between the world’s two largest economies despite its drag on economic growth and business confidence. And it is a tactic that miners say will remain even when a more stable environment resumes.
It is a song sheet from which all the major miners - which inevitably have better access to financing and more switches to pull than smaller companies – appear to be singing.
Lack of projects
At the same time, miners do not really have much choice. Even if they wanted to increase production, there are not dozens of projects waiting in the wings for the current trade uncertainty to end.
“The big difference this time around is that there are not many project options available,” Glasenberg told Fastmarkets.
Even though resource nationalism, community and other issues can arise, the apparently easier projects have been identified for development, with the largely riskier jurisdictions left aside. At the same time, the global pipeline of projects progressing toward development across the industry is not dependent on an easing of the current geopolitical tensions.
Projects are instead being carried by more fundamental issues, Anglo’s Cutifani said, “such as permitting or environmental constraints, particularly for copper; the need for substantial infrastructure investment to accompany many new and remote projects, for example in iron ore; and a lack of new discoveries, in diamonds; as well as the availability of capital.”
Shareholders, too, have learned their lessons.
In the past, capital invested by the mining industry dwarfed returns to shareholders. But while miners’ drive to maintain strong balance sheets and find insulation from short-term volatility and cyclical swings has paid off, shareholders have benefited from their loyalty as well as a fresh approach to growth.
Now they would rather see a return on investment than growth for growth’s sake.
As a result, and despite the trade wars, it has been a time of strong returns to investors in the form of dividends, special dividends and share buybacks.
Instead of growth, miners are now employing new methods to build on prior productivity gains.
“We were very good at extracting a lot of productivity five, four, three years ago. That lowhanging fruit got picked up and we made a huge amount of progress. But it has slowed down,” BHP chief financial officer Peter Beaven said.
“We had to reinvigorate that with a series of new ways of getting productivity out, so we have what we call a transformation agenda,” he added, referring to a technology-focused strategy that has automation at its heart.
Fundamentals in focus
If stricter capital allocation and a targeted focus on productivity have helped miners to survive, underlying metals market fundamentals have also played a significant role.
Investor money in metals that eventually exaggerated price moves has been largely flushed out of the system, allowing companies to make clearer decisions based on supply and demand.
A focus on the fundamentals is a key reason why Rio Tinto’s CEO, Jean-Sébastien Jacques, does not expect a rush to deploy capital into the sector with a flood of new projects when the current trade tensions are resolved.
“Do I believe that suddenly, if things improve, the iron ore industry will suddenly have a lot of capacity at short notice? The answer is no,” Jacques told Fastmarkets. “Because the industry had to invest to offset depletion, additional investments will be marginal and very incremental in the foreseeable future.”
Aluminium producers worldwide are struggling with cost issues, meaning that additional investment is unlikely outside China, Jacques said, while expectations of demand growth in copper mean that projects will be forthcoming, but only over time.
“We acknowledge the uncertainty and volatility, but they’re not main drivers for us,” Jacques added. “We do have many levers we can pull. It’s about the quality of the product, the relationship with our customers, the cost position, being very disciplined in terms of capital allocation, and maintaining a very strong balance sheet. That’s exactly what we’ve done for the past two years, and in the short term we’ll stick to this regime.”
Perhaps a more pertinent area of focus for mining executives these days is the state of the global economy.
Growth in China, the world’s largest consumer of commodities, has steadily slowed. The Chinese government has warned that achieving GDP growth of 6% or more is very difficult, noting pressure from slowing global growth as well as the rise of protectionism and unilateralism.
The International Monetary Fund, the World Bank and the European Central Bank have downgraded global growth expectations for 2019, citing weakening sentiment due to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets.
There has been a knock-on effect on miners’ sentiment, albeit to varying degrees.
“No doubt we’re a little bit more cautious than we were a year or so ago,” BHP’s Beaven said. “The trade tensions are definitely not helping, but also, the business cycle - which has been very strong around the world over the past few years - is starting to show its age.”
Rio Tinto’s Jacques, meanwhile, said that the company remains “pretty positive” about the macroeconomic outlook.
“It’s absolutely clear that China is slowing down but that is as expected. I have no doubt whatsoever that the Chinese government will do whatever it takes to slow its economy in a very controlled manner,” Jacques told Fastmarkets.
“While it’s important to acknowledge that Chinese GDP growth has slowed, from a raw materials standpoint for Rio Tinto, and in particular iron ore, China has been very strong in the first half of this year,” he added. “So when people talk a lot about trade, the truth is that trade issues have had no effect on volumes for us so far.”
Certainly, miners are not reporting difficulties in selling their products, even if prices are easing. On the plus side, mining executives expect that an end to the trade wars would be positively reflected in prices.
With the US manufacturing sector contracting and firms becoming more cautious about investment spending in the face of trade policy uncertainties, the incentive for a truce with China ahead of the US presidential election in 2020 is growing.
Glencore’s Glasenberg said that a win-win scenario for commodities would be a double stimulus from an infrastructure spend package in China followed by an end to the trade war.
Maintaining the capital discipline of the past would then be even more critical.