Like it or not, miners are still a proxy of China

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Mining executives have talked for years about how a “supercycle” of energy transition was about to reshape the industry — transforming it from a bet on China’s burgeoning demand for raw materials into something decidedly more global and more strategic.

It didn’t happen. The sector remains a proxy for China. The past week has crystallized how closely tied the sector’s fortunes remain to the outlook for the world’s second-largest economy.

Shares in the “big four” diversified miners – BHP, Rio Tinto, Anglo American and Glencore – have risen about 10% in the past month after China announced efforts to boost its economy, including measures to support the property industry. Previously, they followed China’s downward trend.

Despite efforts to grow in copper, other battery metals and so-called “future-facing” commodities, global miners (with Glencore as a notable exception) still depend on the steelmaking commodity of iron ore. Meanwhile, even those forward-looking commodities have seen sluggish demand and weaker prices, with the boom in electrification, electric vehicles and other sources of demand taking longer than expected to arrive.

That leaves the sector’s fortunes still tied to iron ore prices, which have risen about 20% in Singapore over the past week. China is still the largest steel consumer, despite a roughly 30 percent drop in demand from its battered real estate sector compared to a peak in 2000.

The rally may not last. There were seasonal factors already pointing to a rebound in iron ore prices in the fourth quarter. This is traditionally when Chinese steelmakers start stockpiling to meet production needs around the Lunar New Year. It’s also when supply can be disrupted by weather conditions in Australia and Brazil, notes Citi analyst Ephrem Ravi.

Few expect the stimulus to change the outlook for iron ore this decade. The property stimulus seemed largely designed to work through unsold inventory. There was nothing to boost construction activity in the near term, BMO’s Colin Hamilton pointed out.

With supply set to rise, from Rio Tinto’s Simandou in Guinea, miners are scrambling to cut costs. BHP has focused on reducing production costs: free cash flow generation per tonne of iron ore is almost $8-10 higher than its nearest competitor, said chief financial officer Vandita Pant.

The sector’s real hope is that copper and battery metals will eventually take off. Better prospects for these commodities (and higher valuations for copper specialists) are driving deal-making in the sector. But China is also the world’s largest buyer of copper. Like it or not, miners will remain a proxy for China for the foreseeable.

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