Commodities giants forced to suspend dividends

Andy Uhler Nov 12, 2015
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Commodities giants forced to suspend dividends

Andy Uhler Nov 12, 2015
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Copper prices are trading at a six-year low, causing some major mining companies to talk about suspending dividends.

Glencore, Anglo American and BHP Billiton hoped that investing billions across multiple metals and fuels would cushion the blow. The idea was they could withstand the low prices and keep pumping and mining to keep up their cash flow and the little guys would have to shut down. But that’s not happening.

Everybody blames it on China, which by some measures is fair. That country drives about 40 percent of the world’s copper demand and a downturn in its economy means it’s building fewer skyscrapers. But what about the other emerging markets like India? 

Bilge Erten, an economics professor at Northeastern University, said there’s potential in India, but that country’s demand is not there yet.

“You know, the manufacturing sector is booming in India,” she said. “But India is nowhere near a major consumer of commodities to the extent that China has become.”

It’s not just copper. Coal is trading at a 12-year low. Around 70 percent of Chinese coal miners operate at a loss, but they’re still operating and the majors aren’t getting a piece of the dwindling pie. So they’re investing in other commodities. BHP Billiton invested in oil and gas and Anglo American invested in iron ore. Glencore’s biggest investments are still in copper and coal, but it also has major investments in agriculture commodities.

Michael Greenberger, a law professor at the University of Maryland, said diversification in commodities might not be the right bet.

“So, what we’ve seen over the years is that commodities are rolling in sync, and now they’re rolling in sync to a supply/demand price,” he said. “So you can’t hedge because there’s not going to be any commodity that’s going to do better than the rest. They’re all moving in sync.”

In other words, the Glencores of the world are running out of places to move resources in order to hit pay dirt. As a result, they’re cutting costs — shutting mines, getting rid of debt, and suspending dividends, which is bad news for investors.

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