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The global mining community is out of competition. Why it is important for the GCC

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The global mining community is out of competition. Why it is important for the GCC

An employee walks into a view of the Rio Tinto mine in Boron, California, on November 15, 2019. (REUTERS / Patrick T. Fallon / Photo)
An employee walks into a view of the Rio Tinto mine in Boron, California, on November 15, 2019. (REUTERS / Patrick T. Fallon / Photo)

The world’s leading mining companies reported their profits earlier this week. They have ruined it: BHP had its best results in seven years; Rio Tinto returned $ 9 billion to its shareholders, a record in its 148-year history; Fortescue increased its dividend by a whopping 93 percent; and Glencores dividend payment is $ 1.6 billion.

So why did these industry leaders do so well despite the pandemic? What do they have in common? And why does this matter to GCC countries, especially Saudi Arabia?

First, the more exposure each company had in iron ore and China, the better the results. Ninety percent of Rio Tinto’s profits came from iron ore. Iron ore prices doubled between April 2020 and January 2021, reaching $ 170 / tonne on January 11, largely thanks to Chinese economic growth and stimulus to infrastructure.

China has once again been the locomotive after rising commodity prices. Indeed, JP Morgan hailed a new freight supercycle, perhaps ahead of time. The last freight supercycle lasted from 2000-2008. It was fed by debt free; a low US dollar; and Chinas unquenchable thirst for raw materials. Things are similar and different now. Interest rates are lower than ever, the dollar index has lost about 33 percent in 12 months, and China is the only major economy to grow in 2020. However, it will take longer for this to materialize a super freight engine.

China’s GDP grew 2.3 percent in 2020, which is far from its double-digit growth model at the turn of the century. Moreover, much will depend on whether the IMF forecasts for global GDP growth of 5.5 percent in 2021 and 4.2 percent in 2022 come true. And most of them, in turn, will depend on how countries manage to control the spread of COVID-19. The spread of vaccines sparks optimism, but this is mitigated by the emergence of rapidly spreading mutant strains.

Like most other mining companies, Maaden would benefit greatly from a global economic recovery, especially in terms of its aluminum business. Unlike most mining companies, however, Maadens exposure to gold provides it with a natural countercyclical protection.

Cornelia Meyer

Infrastructure and incentive programs in OECD countries will be a further indicator. The $ 2 trillion infrastructure program of the Biden administrations, if approved, would undoubtedly be a major boost to goods.

Energy transition and its connection to stimulus programs will be a boost for copper and zinc. Not surprisingly, the first one reached a peak nine years ago this week.

Mining companies have good reason to be optimistic and they used their good time wisely by paying off debt and increasing their CAPEX guidelines.

They have also adapted to new realities in finance, in which ESG principles are fast becoming a major consideration in both capital and debt markets.

BHP is exiting the thermal coal business and Glencore, which still holds coal assets, has announced it will adhere to Field 3 emissions accounting (including its customers’ CO2 emissions at its targets). Rio Tinto followed suit. Most large mining companies have also stated their intention to reach zero by 2050, if not earlier.

All of this matters to GCC countries, which are looking to give up their excessive dependence on oil, resulting in huge infrastructure costs and the creation of new manufacturing businesses, all of which require goods. New renewable projects or the planned Lucid Motors production plant near Jeddah will also require large quantities of copper and zinc.

The success of the mining companies is of particular interest to KSA, which formed its own mining company, Maaden, in 1997. This state-owned company is one of the greatest success stories in the Kingdom. It is one of the 10 largest mining companies in the world by market capitalization and among the largest globally. Like its international counterparts, its revenues beat expectations last year by drastically reducing its deficit and paying off debt. Its CEO, Mosaed Al-Ohali, has said he envisions a further debt reduction of between 5-10 per cent this year.

Like most other mining companies, Maaden would benefit greatly from a global economic recovery, especially in terms of its aluminum business. Unlike most mining companies, however, Maadens exposure to gold provides it with a natural countercyclical protection.

For now, the future looks good for the mining community, but how bright it will be and how long the good times will last depends on how the global economy emerges from the pandemic.

Cornelia Meyer is a Ph.D. with 30 years of experience in investment banking and industry. She is the chair and CEO of Meyer Resources business consulting.

Twitter: @MeyerResources

Responsibility: The views expressed by the writers in this section are their own and do not necessarily reflect the views of Arab News.

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