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A Drop In Iron Ore Prices May Dampen The Mining Stocks Rally
By Isaac Ndegwa
A drop in Iron ore prices may lead mining stocks to weaken this week marking a pause to a recent rally. Prices had earlier on rallied as industrial metals demand had eased the pressure to restructure. Mining companies have in previous times resulted to restructuring and cost cutting whenever demand weakens or if there is an economic slump. However, the companies have learnt from previous mistakes and made operations and debt restructuring a permanent effort in order to keep their profits optimized.Longer term rally expected to resume on good fundamentals
The longer-term rally has boosted companies that were earlier-on the target of harsh criticism due to fragile balance sheets. They now enjoy more reprieve from bankruptcies, forced buyouts and mergers that took center stage whenever prolonged spells of low demand were experienced. The current rebound is also greatly linked to a new influx of available funds for investment, owing to a recent Chinese financial stimulus plan. Most mining stocks have so far doubled in prices if a quick comparison is made to their multi-year bottoms experienced in January.
The tide has recently started to turn as many mining companies announced that they are finally managing to cope with their excess capacity. Excess capacity had made the mining stocks lose momentum when demand for precious metals like gold and platinum reduced when the major economies showed signs of slowdown in the previous financial year. Only the smaller firms such as Randgold (S.Africa) had shown great reaction to the downturns in gold, which had otherwise remained a safe haven commodity when the fears of slowdown started to creep in.
Restructuring and lowering costs remains vital to the miners baselines
The mining industry experienced great uncertainty in January 2016, as weak balance sheets and slowed Chinese demand led the total capitalization of mining firms to drop below $300 billion. That translated to a 75% drop from the March 2011 figures. At the moment, the capitalization is estimated to be $480 billion going by data from the MSCI global mining index. Larger players like Glencore, Rio Tinto and BHP Billiton have announced an increase in asset sales, meaning that they are now focusing on lowering costs and streamlining production. Glencore for example put a stop to its plans to sale off their copper mine.
At the ASX, Monday saw mining stocks suffer the biggest losses as Iron Ore prices dropped. Rio Tinto dropped 3.4% to trade at $48.04 while gold miner Newcrest dropped 4% to close at $24.51, on the back of reduced full-year profits. The companies have still announced dividend payments for the first time in more than 3 years.
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By Isaac Ndegwa
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