Aluminum, Copper, Iron Miners Buried In Billions Of Debt After "Colossal Misjudgment Of Demand"
From ZeroHedge:
If one had to craft a narrative around the state of the global
economic “recovery”, it might go something like this. Wildly optimistic
assumptions about the sustainability of China’s torrid economic growth
(and the voracious demand for raw materials which accompanied it), led
to overbuilding and oversupply in the lead up to the crisis. In the
aftermath of 2008, not only have multiple rounds of central bank money
printing failed to provide a meaningful boost to aggregate demand, but
global trade has also been hampered by China’s transition from an
investment-led, smokestack economy to a model driven by consumption and
services.
As Goldman put it in May,
"there are no other markets large and/or dynamic enough to offset a
slowdown in China in the foreseeable future, and we forecast trade
volumes to stabilize in the period to 2018." This has been bad news for
commodities as the following chart makes abundantly clear:
It’s also bad news for the global mining industry which, as WSJ
reports, borrowed “heavily” in anticipation of neverending Chinese
demand. Here’s more:
As forecasts predicting endless growth in China’s
appetite for raw materials became a matter of industry faith, mining
companies borrowed extensively to build networks of pits, railway lines
and port terminals. Megadeals abounded as a merger-and-acquisition
frenzy took hold. Cheap borrowing costs, thanks to low global interest
rates, fueled the splurge.
Now, as China’s hunger for resources ebbs and mining companies'
profits suffer amid falling commodity prices, those debts have become an
albatross around the industry’s neck.
Amid a slump in Chinese share prices last week, metals such as
copper and aluminum fell to near six-year lows. Iron ore at one point
hit its weakest level for a decade.
"There’s been a colossal misjudgment of future demand," said
Dali Yang, professor of political science at the University of Chicago.
“That long boom made it especially difficult for people to expect
anything otherwise. Many bought the big story about urbanization,
instead of thinking how things could go bad.”
The world's largest mining companies by market value had accumulated nearly $200 billion
in net debt by 2014, six times higher than a decade ago, according to
consultancy EY, while their earnings only increased roughly
two-and-a-half times. Large mining companies have written off roughly
90% of all the acquisitions they made since 2007, according to Citigroup
Inc....
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