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Mon May 30 01:06:43 SAST 2016

The tide, it seems, has finally turned

David Shapiro | 09 March, 2016 00:44
David Shapiro. File photo
Image by: SUPPLIED

For the first time this year we've had something to cheer about.

Last week the JSE surged 6%, eradicating two months of losses accumulated since the beginning of January. We're still a few percentage points down from our April 2015 peaks, but, at least, we seemed to have checked the corrosive decline in sentiment that contributed to our market's worst calendar start in decades.

What's notable is that the rush up in share prices was propelled by mining shares, a segment of the market that was responsible for the JSE's feeble performance in 2015. Slumping commodity prices, the outcome of a slowdown in demand from China - the world's biggest consumer of materials - and mounting supply wrecked the outlook for mining profits, igniting a sell-off in shares that took the JSE's resource index down 40%.

More remarkable is that the recent 20% or so recovery in the resource index, admittedly off a low base, followed soon after the world's leading commodity producers released financials that highlighted distressing conditions in the industry.

BHP Billiton, the world's largest mining business, slashed its dividend after recording a $5.7-billion first-half loss, largely the upshot of a colossal write-down of its energy assets. Management tried to assure investors by promising to assume a path that would safeguard the group's balance sheet in what they expect will be a prolonged period of low commodity prices.

Other majors, including Rio Tinto and Glencore, are conserving cash by reducing operating costs, abandoning low margin operations and cutting back capital expenditure on existing projects in an endeavour to position themselves better to survive an extended downturn in prices as China shifts its priorities away from developing its infrastructure to advancing its service economy.

It is not only the operators that remain cautious. Rating agency Moody's recently cut Anglo American's credit rating to junk after the miner reported a $5.5-billion loss in 2015, its fourth consecutive year of declines. Management's life-sustaining plan will focus on lowering debt, increasing productivity in key operations and reducing its number of mines to 16 from 65 in 2013. Moody's believes the current environment is not a normal cyclical downturn but a fundamental shift in the prospects for the global mining sector.

Yet, Anglo America's share price has roared in the past few weeks, doubling from its recent lows and piloting the extraordinary rebound in the resource sector.

I have the utmost respect for the market as a discounter of news. One of the surest signals of an impending change in direction is when good news no longer pushes share prices up, or when bad news no longer pulls share prices lower. The pace of the recovery in mining shares is making me question whether or not the worst is over. Despite increasing inventory levels, oil prices have steadied, iron ore and copper prices have moved higher on Chinese restocking, and Ivan Glasenberg, Glencore's CEO, recently advised analysts that he believed commodity prices had bottomed.

My instinct warns me that it might be too early to call an end to the commodity slump, but, at the back of my mind, is a nagging thought that the commodity run might be telling us that, maybe, a broader economic recovery is on the way. Now that would be something really big to celebrate.

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