Signs that metals prices have bottomed out buoys miners

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Ivan Glasenberg is feeling better about the outlook for metals prices – and this time he may be right.

The chief executive officer of Glencore PLC, the giant miner and trader, indicated on Tuesday that he is growing more upbeat about commodities after a brutal 2015 in which his company lost 70 per cent of its market value as raw materials prices plummeted.

"Have we bottomed? I think so," he told reporters.

To be sure, that is pretty much the positive sentiment you would expect any mining chief to spout during one of the most brutal downturns in decades. But this time around, Mr. Glasenberg's optimism may have the additional virtue of being true.

No one is calling for any immediate bounce-back in metals prices.

However, it is at long last possible to detect early signs of a bottom.

After five years in which prices kept sinking lower, there is now tentative evidence that the market is finally finding firmer footing.

One encouraging sign is evidence of supply cuts in some key markets, most notably a decision this week by the Chinese government to lay off 1.3 million workers in the coal sector in an attempt to curb overcapacity.

Another positive indicator is the recent bounce in the shares of some of the miners that were most hard hit in 2015.

Despite losing $4.9-billion (U.S.) in 2015, Glencore has watched its shares rally 44 per cent so far this year.

Meanwhile, the stock of its even more troubled rival, Anglo American PLC, has zoomed ahead 64 per cent since New Year's Day.

At least some people must see value in these beaten-up mining stocks.

Investors who believe history repeats itself can also take heart from the surge in gold prices over the past two months. Citigroup Inc.'s mining analysts argue that the yellow metal has typically been the first metal to swing upward during the past six bull markets in commodities.

Then there is the simple fact that many mining sectors have been so battered in recent years that it is difficult to see how they can fall much further. BHP Billiton PLC, the world's largest miner, estimates that more than 30 per cent of the world's production of iron ore and metallurgical coal production is losing money at today's prices.

On a positive note, those rock-bottom prices also mean that nobody is embarking on fresh mining projects. Given that, it would not take much in the way of demand growth to brighten the industry's outlook in the years ahead.

"At least we can talk about a recovery now," Jessica Fung, a commodities researcher with BMO Nesbitt Burns Inc., told an industry conference in Florida.

She cautioned that the recovery will be plodding and arduous, with demand for metals expanding much more slowly than it did over the past couple of decades, when China's meteoric growth sent demand soaring and encouraged a wave of mine building that has swamped the world in supply.

However, Ms. Fung believes that the mining industry can once again begin to grow if the global economy continues to expand. "We're moving into a recovery, or at least growing more comfortable talking about one," she said. "But it's going to be a long, hard climb."

Any rebound in commodity prices would come as good news for Teck Resources Ltd., Canada's largest diversified mining company.

The Vancouver-based miner exports steel-making metallurgical coal and is a major producer of zinc and copper. Teck also has a 20-per-cent stake in the Fort Hills oil sands joint venture led by Calgary-based Suncor Energy Inc.

Teck CEO Don Lindsay said the Fort Hills project in northern Alberta is slated to be completed by mid-2017, providing some breathing room for oil prices to recover before production begins.

"Whether it's zinc, copper, oil, coal – in any one of those, it's always very cyclical businesses. You get all of your capital back in two or three good years. You just don't know when those two or three good years are going to be," he said.

Among base metals, "the outlook for zinc in particular looks pretty good."

In contrast, the downturn in the copper market is the longest and deepest since the 1920s, Mr. Lindsay added. "But we do know that low prices are generally the best cure for low prices. Ultimately, demand will exceed supply again."

Depressed prices for metallurgical coal have shaken the industry and forced an array of mines to shut down. "The bottoming-out process is happening," Mr. Lindsay said.