BlackRock’s Hambro: miners are at risk of 'killing industry'
by Chris Sloley Nov 05, 2012 aP 14:29
Euro Stars A-rated manager Evy Hambro has warned that the mining industry is at risk due to a lack of coherent long-term planning when it comes to material supply.
In an investor note entitled ‘Mind Your Mine! Metals Challenges and Opportunities’, which was penned by Hambro, co-manager Catherine Raw and analysts from the natural resources team at BlackRock, there was a bleak outlook for resource heavy industries.
Hambro said short term price volatility had caused some of the issue, with markets such as China pricing on a much more immediate basis than other markets.
He said: ‘Prices for bulk commodities, such as coal and iron ore, where once agreed upon quarterly or even annually.’
‘These days, many are priced daily on the spot market. For the Chinese market the trend is cargo by cargo and day by day. This can create a disconnect between long-term supply planning and demand.’
Hambro said this scenario does not bode well for industries dependent on having long-term understanding of how supply will change, for example in the steel industry. Although, in most cases, Hambro said, the market can overcorrect.
‘This would be bad news for consumers if not for one balancing factor that has plagued mining throughout history: oversupply. This capital-intensive industry has a penchant for producing.’
‘This works well when prices rise, but really hurts when they fall. In other words, miners are at risk of killing their own industry.’
Weaker players die
The BlackRock natural resources team added that the mining sector tends to operate in a different way to other sectors when faced with pricing pressure.
‘In most industries, weaker players die. This sets the stage for less competition and more pricing power for the survivors.'
'In mining, the terminally ill are picked up for cents on the dollar. And the buyers crank up production again because their cost base is so low.’
Elsewhere in the note, Hambro and his team said there is likely to be a slowing in capital expenditure mainly driven by shareholder demand. The BlackRock team said investors are now focused on gaining a dividend and having miners ‘preserve their firepower’. |
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