Published: January 8, 2016 |

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Mining investors that have been enjoying their Christmas pudding and now drinking wine over the festive holiday are mulling over what 2016 will bring in the beleaguered sector.

Commodity prices have been ravaged in 2015 as the Chinese economic downturn hit demand for staples such as copper, iron ore and zinc.

The crisis has sparked radical cost-cutting moves by the sector’s giants, such as Anglo American’s decision to axe dividends this year and next.

Some analysts are glass half-full types, saying commodity prices are bound to bounce back eventually.

But the glass half-empty mob says the industry — and investors — need to adjust to “the new reality” of low prices and sluggish demand.

The commodity price boom of the last few years came about when China’s industrialization met 25 years of under-investment in the mining industry.

Some experts say it may have been a one-off and the industry could be returning to pre-boom norms.

Independent analyst and bear Andy Xie believes the iron ore industry is set to become characterized by low prices, stable margins and low growth.

Xie said that Chinese demand for steel was dropping and iron ore prices could stay south of US$40 a tonne in 2016.

Iron ore, priced at US$180 a tonne not so long ago, was worth about US$10 a tonne just over 25 years ago.

While others such as Gina Rinehart is taking the long view with her Roy Hill iron ore project in the Pilbara on stream as iron ore prices have fallen. Although it helps to have locked in joint venture partners such as POSCO, Marubeni and China Steel which are keen to have security of supply.

For iron ore at least, large miners have moved to slash costs to be competitive - no small order when prices have sunk so low.

One thing is clear, just when you think that all is gloom and doom in the commodities sector, an exogenous factor can change the market dynamics when least expected.

Where might that come from? Well, China is still the wild card.

Source: (January 4, 2016) Proactive Investors

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