EY Mining & Metals Quarterly Briefing

Market fundamentals

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  • The IMF has lowered its global growth forecast again from 3.2% to 3.1% in 2016. If not for Brexit, the global forecast would have been slightly higher. The Chinese growth forecast is 6.6% in 2016 and 6.2% in 2017. If, however, growth in the EU is significantly impacted as a result of Brexit, the adverse effect on China could be material.1
  • There has been some recovery in commodity prices in the second quarter, which persisted post Brexit. US and Chinese hot-rolled coil steel prices have recovered by 64% and 28%, respectively, since January, but remain lower than that in 1H 2015. Iron ore prices also rose and averaged US$55.96/t in the second quarter of the year, up from US$48.75/t in the first quarter. While oil prices have fallen by 7% in July, they have rallied by 25% since January.2
  • Copper prices may improve in the longer term as the outlook is for a tighter copper market given the lack of financing, political issues, technical challenges, and the scarcity of water and electricity, which are pushing back deadlines for the development of copper projects worldwide.
  • To drive increased consolidation and eliminate excess capacity in the steel and coal industry, the Chinese Government has delegated authority to four Chinese major mining and metal companies: Shenhua, China Metallurgical Group, Baosteel and Wuhan Steel. The companies will have the rights to deepen reforms among state-owned enterprises (SOEs), including taking shares, and manage state-owned assets.
  • The EU’s decision on China’s “market economy” status has been delayed until a full impact assessment is conducted. Some member states back granting market economy status (MES) to China but others have concerns it will open the floodgates for ultra-cheap imports. The European steel sector is particularly concerned as rising Chinese steel imports have had a significant impact on the sector.3
  • M&A activity almost doubled in the second quarter, rising 93% from US$4.1b to US$7.8b; however, it remains down 51% from the same period in 2015 (US$16b, including the US$8.7 BHP Billiton demerger). Deal volume increased 27% Q-o-Q and 13% Y-o-Y. Total capital raised was down 5% q-o-q and down 28% y-o-y to US$60b. There was an overall increase in volume, up 30% q-o-q and 43% y-o-y to 770 transactions taking place. Several divestments closed during the period, including the sale of some of Freeport-McMoRan’s stake in the Morenci copper mine to Sumitomo, and the sale of First Quantum Minerals Kevitsa asset to Boliden.
  • Deal activity is expected to pick up slightly in the second half as further asset restructuring and deleveraging takes place. The announcement of two large deals by China Molybdenum — for Freeport-McMoRan Inc.’s stake in the Tenke Fungurume asset and the Anglo American’s niobium and phosphate operations — in the quarter reflects early signs of Chinese appetite for top-quality outbound assets.4 New divestment programs have been announced, including another US$400m worth of nonessential asset disposals by Alcoa,5 while Anglo American appears close to selling its remaining Australian coal assets.6
EY - Energy prices EY - LME price chart
EY - Precious metals prices EY - Steel, iron ore and coking coal prices

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1 “IMF Cuts Global Growth Forecasts on Brexit, Warns of Risks to Outlook,” IMF News Articles, imf.org/en/News/Articles/2016/07/18/18/11/NA07192016-IMF-Cuts-Global-Growth-Forecasts-on-Brexit-Warns-of-Risks-to-Outlook, 19 July 2016.

2 “Commodity price forecasts,” Oxford Economics, July 2016.

3 “The EU sidesteps China Market Economy decision: plans introduction of new trade defence rules,” The Parliament Magazine, 21 July 2016.

4 “Chinese firms back on the hunt for mining treasure as majors offload assets,” South China Morning Post, 25 July 2016.

5 “Alcoa signals more noncore asset sales to bolster balance sheet,” SNL Daily, 12 July 2016.

6 “Anglo American moves closer to Australian coal mines sale,” The Australian, 27 July 2016.