Tag Archives: steel

There are still some gems among Anglo American’s junk heap

This week, Mike van Dulken and Augustin Eden from Accendo Markets mine a little deeper into Anglo American’s “reversification”.

Shares in Anglo American (AAL), a mining giant that’s always had diversity at the centre of its business model, were the worst performing on the FTSE 100 in 2015. Such diversity was key to maintaining profitability in all commodity price conditions, which had been good for so long. But it’s clear that there’s now just one set of conditions: awful. It’s now become necessary to divest and Anglo American is just the latest miner to announce its plan to streamline its exposure. In this case, we’ll see its portfolio reduced to just three products from nine.

High growth emerging markets are, of course, seen as a bellwether for the commodities space as a whole. It’s little surprise that a perceived slowdown in China has dented a steel industry that’s been producing at very high levels for years. Iron ore and coal, the latter also highly out of favour as an energy source, are thus prime candidates to be dropped from a highly diversified miner’s repertoire. Copper, on the other hand, is a commodity that’s able to move with the times, present as it is not just in heavy industry and infrastructure, but also essential in the microelectronics that will dominate any economy that makes the transition from manufacturing and export-led to consumption and services-led.

With precious metals miners clearly benefitting from renewed safe haven demand in early 2016 and a global car industry that’s not only too big to fail (forget about the banks – this one really is), but subject to tighter controls given global warming and a certain car manufacturer’s recent antics, it makes sense to keep producing these products. Furthermore, the luxury goods market may well be oversold at the moment as investors connect slowing EM growth with a corresponding slowdown in the growth of the middle classes in that part of the world.

It’s pretty clear that slowing economic growth – or “continued transition” – needn’t automatically mean people are getting poorer. If anything, the western lifestyle should only pervade emerging markets more as their populations, more exposed to international markets every day, are increasingly freer to strive for material success. So things like diamonds, if you’re lucky enough to be mining them, look good too.

As far as Anglo American is concerned, there are of course positives and negatives in all this. The company is the world’s largest platinum group metals miner and owns DeBeers diamonds. Tick! However, with such a large portfolio of things no one wants (iron ore, coal…) for sale, Anglo finds itself operating in an already oversupplied buyer’s market as it tries to offload them. That, unfortunately, puts a big fat cloud of uncertainty over the company’s efforts. Yet with the entire sector plagued by exactly this type of uncertainty, what’s new?

And with ratings agency Fitch having today downgraded the miner’s credit rating to junk, one might be spooked by the news and worried about the miner’s future. However, its shares remain on a northerly charge from January all-time lows, almost doubling on improved sentiment towards its turnaround strategy, and they haven’t even batted an eyelid at this morning’s downgrade (AAL shares are currently up 7 per cent, near their highs of the day). Post crisis, we all know the ratings agencies are last to the party.

This analysis was provided exclusively for Hot Commodity by Accendo Markets: https://www.accendomarkets.com

Why we need to give up on UK steel

As Jennifer Aniston’s relentless array of terrible movie roles demonstrates, sometimes you just need to accept something isn’t working, will never work and move on. Because if you don’t, you will be throwing money down the drain that could be better spent elsewhere and will inevitably look back on it as a costly mistake.

Just as Jen should put the rubbish rom-com scripts down, the UK’s steel industry needs to accept its shortcomings and cut its losses.

Over the past few months, mill closures and job cuts have grabbed headlines, with the UK’s steel crisis blamed on a handful of things: the dumping of cheap steel from China; high energy costs; a strong pound; and high business rates for capital intensive firms.

Out of these factors, China has broadly been seen as the largest culprit in making UK steel unprofitable. After a slowdown in the world’s second largest economy, the People’s Republic has had a surplus of steel on its hands that it has been offloading for a cheaper price. Plentiful state subsidies give Chinese steelmakers an even more unfair advantage in the global market, its critics say.

I’m not disputing the validity of these arguments. China is a big problem. Energy costs and business rates are higher for steelmakers here than overseas. But I do not see any way that UK steel could become truly profitable without heavy state subsidies.

The industry has received £50.4m from the UK government since 2013 to offset environmental levies and is currently waiting for EU state aid approval for the Energy Intensive Industry Compensation Package, which will provide hundreds of millions of pounds for energy-intensive industries including steel.

And the sad truth is it would take even more than this to keep it afloat, due to the myriad of problems hammering the sector.

European politicians have this week promised “full and speedier” measures to address Chinese dumping, but knowing Brussels bureaucracy this is likely to be nothing near speedy, if anything is achieved at all.

Even if China were tackled AND the UK government lowered business rates AND energy rates, you still have the strong pound to worry about – and the fact that it’s cheaper transportation-wise to make steel in countries such as China, which are closer to where iron ore is mined, especially as the end-user is often in the Far East.

For me, the situation draws immediate parallels with UK coal. We still get a significant part of our energy from coal, yet our coal-fired power plants continue to shut down. Instead, we rely heavily on cheaper, imported coal. We simply can’t compete on price.

It may seem harsh to want to curtail support for domestic industries and I am not intending to diminish the devastating impact of job cuts on local communities in any way. But the UK needs to look to its strengths and replace investment in loss-making industries with investment in new ones.

Rather than provide a temporary panacea for steel plants with a support package that will inevitably run out and need renewing, why does the UK government not invest in the communities affected, providing new jobs in more sustainable industries?

Giving up on UK steel does not mean giving up on UK industry – it’s about adapting to our strengths and accepting our weaknesses.