By Adriano Marchese
Among the heavyweights of U.K. business, blue-chip miners were
the jewel in the crown for investors last year. As 2020 drew to a
close, the FTSE 100's biggest miners paid out hefty dividends --
some even distributing record-high payouts -- in a time when the
coronavirus tore through global economies.
BHP Group PLC, the world's largest listed miner by market share,
declared a 55% increase in its interim dividend.
Rio Tinto PLC, the second-largest mining company, opted to pay
$5 billion in dividends accompanied by a special payout of $1.5
billion to its investors for the year.
Meanwhile, Glencore PLC said it would resume dividends in 2021
after the company gave priority to lowering its debt below the $16
billion mark the previous year.
The success of the sector is the result of several factors
coming to a head, according to AJ Bell's investment research
director, Russ Mould. Namely, the promise of economic recovery
lifting commodity prices and lowering debt profiles, and, for some,
the need to repent for past profligate spending.
Spot Price Increase
First, 2020 saw a steep rise in commodities prices. In the past
12 months -- for almost as long as Covid-19 has been deemed a
pandemic -- the price of copper rose nearly 61%, while the spot
price of iron ore almost doubled to over $170.00 a metric ton. In
2021 alone, copper has risen 17%.
These higher prices helped buoy profits last year.
Riding the tailwinds of surging iron-ore prices, Rio Tinto --
which runs one of the world's biggest iron-ore export hubs -- beat
expectations with a 20% increase in underlying earnings in
BHP's average realized price of iron ore rose 33% on year and
28% for copper, offsetting weaker prices for other commodities,
including oil, and giving it the confidence to top up its investor
In part, this is the result of demand for commodities far
outpacing supply, and in no small part from China, which had gained
control of the pandemic faster and earlier than most countries.
But demand isn't the only force driving prices.
Many central banks and governments have introduced record fiscal
stimulus to keep economies afloat, leading investors --
specifically speculators -- to look at commodities with a different
"Speculators flipped from selling to buying commodities more
aggressively by mid-third quarter of 2020 and then again after the
U.S. elections," Aakash Doshi, Citi's North America head of
commodities research, said.
The Stuff of Speculators
According to U.S. bank Jefferies, the supply of copper won't be
able to keep up with global demand projections.
"We are entering an extended period of strong demand growth
combined with major supply constraints for some key commodities.
Prices should go higher as a result," Jefferies said in a
For example, in 2021, global supply of refined copper is only
expected to cover around 23.3 million metric tons out of a demand
of 23.8 million tons -- leaving a deficit of about 453,000 tons. In
five years' time, that deficit is expected to widen to 2.33 million
tons, with demand from China expected to account for almost half of
This expanding deficit will only add more pressure to
commodities prices going forward -- a profitable prospect for
Herein lies an element of speculation for future prospects of
continued generous dividends, Mr. Mould said. Though the economy in
China is in the midst of rebuilding, those of Europe and the U.S.
have yet to begin their own economic recovery in earnest.
For these countries, there is cautious optimism as the vaccine
rollout across the world promises to usher a return to normality
for hard-hit economies.
A Hint of Guilt
FTSE 100 miners are approaching their balance sheets with more
discipline than in the late 2000s and early 2010s when miners set
lofty merger-and-acquisition plans.
In 2010, BHP attempted to buy Potash Corporation of Canada in a
hostile takeover bid, which ultimately floundered, while Rio
Tinto's $38.1 billion acquisition of Montreal-based Alcan in 2007
raised fears of potential bankruptcy.
Mr. Mould suggests that new dividend levels from these companies
could be a form of repenting for failed and imprudent mergers and
acquisitions in the past.
Keeping Expectations in Check
Some analysts are heralding the coming of a new supercycle for
the commodities sector -- a period of sharply rising prices as
demand outpaces supply, causing wild volatility. Copper has been
one such victim of this speculation.
The rise of electric vehicles and the great investment in
renewable energy -- which isn't carbon intensive, but metal
intensive -- make commodities a long-term story and, as other
industries struggle, commodities are becoming more synonymous with
On the other side of the debate, a more moderate case is made
for the long-term play for commodities. As economies open and begin
the process of rebuilding, demand will rise, but not necessarily in
a supercycle, speculative frenzy.
"I wouldn't argue for a commodities supercycle [but I would]
call the recent jump in commodities and that of 2021 as just a bull
cycle or bullish environment for commodities," Mr. Doshi said.
As the world recovers from the pandemic, global trade will
rebound, inflation will return slowly, and consumption in the U.S.
and China will normalize, Mr. Doshi said.
Despite the positive signs, optimism for the near-term future
sits on a tenuous perch. In many countries, vaccine delays and
distribution issues have meant that fewer people than hoped have
received their shots, while new, more contagious variants of the
virus threaten vaccine efficaciousness.
A double dip in the global economy would harm miner profits,
which would increase the burden of their debt and ultimately affect
the ability to distribute cash, Mr. Mould said.
The pandemic will continue to pose a threat to not only
record-breaking dividends, but healthy ones as well, he added.
Under such a scenario -- one that is quite possible given the
flare-ups of new variants from the U.K., Africa and Latin America
-- the burden of debt could return and weigh on confidence such
that it would be wiser, and perhaps necessary, to hold on to their
Write to Adriano Marchese at firstname.lastname@example.org
(END) Dow Jones Newswires
March 05, 2021 06:07 ET (11:07 GMT)
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