Fears over a pending global recession are causing carnage in the industrial metals market, but the sector is better prepared than in the past to withstand a prolonged downturn, strategists at Morgan Stanley say.
Nickel, tin, zinc, and metallurgical coal and copper all tumbled last week and are trading far from their peaks. Copper is down 25 per cent from its all-time high of US$5.02 a pound reached in March. Tin has lost 44 per cent of its value in the same timeframe to trade at US$26,985 a ton.
The shares of Canada’s biggest base metals miners, including Teck Resources Ltd., Ivanhoe Mines Ltd., First Quantum Minerals Ltd., Lundin Mining Corp., and HudBay Minerals Inc., have also gotten crushed over the past few weeks.
TD Securities Inc.’s commodities strategists wrote in a note on Friday that an “imminent slowdown” in global growth is exacerbating the meltdown in the metals markets.
“The outlook for growth remains severely challenged by a co-ordinated effort from central banks to tame inflation,” TD wrote.
Over the past few months, central banks around the world have become increasingly aggressive about raising interest rates. Earlier, this month, the U.S. Federal Reserve took the highly unusual step of raising its benchmark rate by 75 basis points. (A basis point is one 100th of a percentage point.) But so far, hikes have not succeeded in reining in inflation.
The consumer price index (CPI) in Canada rose by 7.7 per cent in May, its highest level since 1983. And that was after the Bank of Canada had already increased rates three times this year. Inflation was hurting the profits of mining companies even before rate hikes began, with costs creeping up on key inputs such as diesel for powering giant haul trucks, drills used in the exploration industry, as well as explosives.
The metals market is also being punished by a protracted slowdown in China’s economy, owing to its relentless drive to keep COVID-19 cases at zero, which has led to continuing lockdowns that have crimped factory output.
The fall to earth for metals also comes not long after many forecasters predicted the exact opposite scenario was likely to play out. A common thread running through forecasts in the first quarter of 2022 was that industrial metals, such as copper, were poised to skyrocket based on demand for electric car batteries. In March, Scotia Capital Markets Inc. urged investors to buy shares in Teck Resources and speculated its stock could hit $100 over the long-term. Teck shares closed at $40.86 a share on Friday on the Toronto Stock Exchange.
While recessions have historically always hurt mining stocks, there’s reason to be hopeful that the potential damage may not be as bad this time around.
Morgan Stanley looked at every recession over the past 50 years, and concluded the industry is much better positioned to weather turbulence owing to a considerably lower debt load. For example, just before the 2008/09 financial crisis, the combined debt of the world’s major mining companies stood at a staggering US$128-billion. As of the end of last year, the industry was carrying only US$52-billion in debt.
And unlike the last time the industry faced a great test, the share prices of miners are not overcooked.
“Valuations are more reasonable, removing prospects of equity stress under extreme commodity price moves,” a team of equity analysts and commodity strategists at Morgan Stanley wrote in a note on Friday.
Morgan Stanley also believes that over the longer term, supply shortfalls are likely to boost the prices of many workhorse metals. Discoveries are becoming rare, particularly in copper, and the mining industry has underinvested in new projects over the past decade, as paying down debt became the priority. Projects also take much longer nowadays to get into production, in part owing to difficulties obtaining permits because of stricter environmental laws and more stringent requirements for consultation with stakeholders.
Minister of Natural Resources Jonathan Wilkinson, in a speech this month at the Prospectors & Developers Association of Canada (PDAC) conference in Toronto, bemoaned the fact that developing new mines can take up to 15 years. He vowed in an interview with The Globe and Mail to try to improve interactions between government and the industry in order to move the permitting process along quicker.
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