Investors Get Commodities Super-Slump Jitters

From super cycle to super slump. Europe’s top mining companies and steel makers bore the brunt of heavy selling on stock markets Wednesday as the renewed slump in commodity prices caught investors off guard amid an increasingly bearish outlook for global economic growth.

Slowing demand for raw materials like iron, copper, coal, nickel, and steel as well as oil—all the life blood of global industry--are making investors reassess the earnings and dividend prospects across the resources sector. With oil prices falling further below $50 a barrel, copper prices, in particular, fell sharply late Tuesday and Wednesday, ensnaring other commodities in their wake.

No better example of the shift in investor sentiment Wednesday was the performance of shares in Glencore PLC. The London-listed, Swiss-based metal-mining and commodities-trading group, lost a tenth of its market value, or more than £3 billion, as its shares slumped to their lowest level since its 2011 IPO.

At the time, Glencore and its advisers made much of the fact that its business model combining mining and physical trading of commodities would deliver superior value to shareholders. Just under four years on, the Swiss-based giant's shares have under-performed those of pure-play miners like Rio Tinto PLC and BHP Billiton PLC.

“[Glencore’s] marketing division needs price volatility to be more profitable, but as we have found out over the last few years, it needs to be the ‘right sort of volatility’,” said analysts at Deutsche Bank. “Glencore has said many times that higher commodity prices are also generally conducive to making higher margins,” the analysts said, hence the bank’s decision to lower its earnings forecasts for Glencore for 2015 and 2016.

Still, investors were almost as big sellers of other London-listed mining stocks Wednesday. Take platinum and iron producer Anglo American PLC, down 9.4%, copper producer Antofagasta PLC, down 7.3%, and BHP Billiton, down 7.0%. Steel makers, like ArcelorMittal, whose shares fell 5%, were also hard hit.

The twist is that is the world’s biggest mining groups, with low average production costs and diversified commodities portfolios, are most likely to come through a prolonged slump relatively unscathed. Less efficient producers with exposure to only a few commodities could be in more trouble. That's certainly the market’s verdict on Vedanta Resources PLC, the London-listed India-based base metals producer, whose shares were down nearly a fifth.

But as profit-squeezed commodity producers shelve expansion plans and, among the more vulnerable, close mines and refineries, supply will start to edge back in line with demand. Buying Glencore shares today is a bet that is bound to happen sooner or later.

--Andrew Peaple contributed to this post