The 40-second video, created in August in the southern Chinese city of Kunming, provides a graphic account of the country’s housing bubble. It shows controlled explosions turning 15 apartment towers into rubble. They were built seven years ago and have never been occupied.
Since then, China’s housing crisis has been highlighted by a liquidity crisis at Evergrande, the world’s most indebted housing developer. The company’s shares are in freefall — they’re down more than 85 percent over the past year — and S&P Global Ratings said a default on bond payments is “likely.”
While Evergrande indicated on Wednesday it had struck a deal with creditors to make relatively low payments on domestic bonds, the company’s collapse, except for a government bailout, is not being ruled out as Beijing cracks down on excessive leverage. which fueled the building. Orgy of Chinese developers.
It was China’s urbanization drive, along with a relentless demand for steel to cover the landscape with apartment and office towers and infrastructure, that turned the world’s iron ore producers into spectacular wealth-creating machines. The slowdown in the Chinese property market threatens the end of the party.
Iron ore is the main component of steel. Companies such as BHP, Rio Tinto, Anglo American, Vale and Fortescue Metals were happy to drill large holes in the planet to extract the ore and send it to China’s enormous steel mills. Canada’s Tech Resources, one of the main suppliers of coking coal used in mills’ blast furnaces, was also riding the wave of profits.
Even before the Evergrande debacle, steel prices were falling as steel production slowed in China. The global market was in overdrive, and vast reserves were building up in Australia – it and Brazil are the world’s largest producers of iron ore.
Iron ore prices touched USD 233 a tonne in mid-May. It has been downhill since then, and news of Evergrande’s potential default helped propel the price down to US$94 earlier this week – a 60 percent drop in four months. While larger companies can still make money at that price, their cash flow will suffer.
Certainly their share prices are hurting. Rio, Anglo and BHP are well off their spring and summer peaks and another fall last week, when Evergrande’s crisis hit the news. Rio, one of the mining companies most exposed to iron ore, has lost nearly a quarter of its value in recent months. On September 17, UBS downgraded Anglo to “sell”. Swiss Bank Said “Fundamentals of Iron Ore” [are] deteriorating faster than expected” and it expects Anglo’s cash return to shareholders to decline sharply in 2022.
Evergrande isn’t the only threat to the big iron ore players. In a few years, Guinea’s Simandou mountain range, one of the world’s largest untapped deposits of iron ore, is expected to bring a flood of fresh supplies to the global market.
The Simandou project was stalled for years due to engineering and funding constraints and a series of epic corruption cases. But it is now moving under the control of China’s Rio and Aluminum Corp, better known as Chinalco. Some mining company owners feel that the Simandou iron ore gusher could push prices down to US$60 a tonne.
The second big threat is climate change, with mining companies pushing to reach net-zero emissions by 2040 or 2050. Their plight is made worse by the immense difficulty of mitigating and ultimately eliminating so-called Scope 3 emissions. These are indirect emissions into a mining company’s value chain, particularly from the use of processed commodities by their customers.
Scope 3 emissions account for about 95 percent of the mining industry’s total emissions (the rest are Scope 1 and 2 emissions, such as the diesel fuel used by mining trucks, over which companies have substantial control). Mining companies that produce coal and iron face the toughest hurdles trying to reduce Scope 3 emissions. Investors are increasingly focusing on that category of emissions, governed by environmental, social and governance (ESG) norms.
Large, diversified mining companies are already ridding themselves of their coal operations by direct sales or spinoffs (among them, Glencore is the only one without iron ore operations) to reduce their carbon footprint and make themselves more attractive to ESG funds. and its dwindling coal reserves, making its pledge to reach net-zero Scope 3 emissions by 2050 relatively easy). His idea is to focus on the “green” metals – copper, cobalt, zinc, nickel and ferroalloys, among them – needed to make electric vehicles, batteries and wind turbines.
Large mining companies focused on iron ore have done well over the past 15 years because China bought everything they could produce. Iron ore is not looking so good today. The price is falling, and Evergrande Mays could accelerate the decline. The difficulty in eliminating iron ore’s Scope 3 emissions makes it even harder to love the product.
Iron ore-laden mining companies can schedule exits just as they are running out of coal. Expect a round of deal-building and restructuring designed to reduce their iron ore load, if not put an end to it. A product that has been shining like gold for so long is suddenly looking a little less shiny.
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