Major oil producers, who have been the most profitable in the natural resources industry for decades, are overshadowed by their ever-smaller peers, who are making record profits thanks to the glowing metal markets.
Unexpected mining is the latest sign of a boom in iron ore, copper and other metals, which is sending an inflationary wave through the global economy, raising the price of everything from electrical wires to construction beams.
In the corporate world, the five largest iron ore companies are on track to achieve the lowest profit of $ 65 billion combined this year, according to estimates compiled by Bloomberg. That’s about 13 percent more than the five largest international oil producers, reversing the hierarchy for decades.
“It’s wild,” said Mark Hansen, chief executive of London-based Concord Resources Ltd. “Value is currently shifting from energy to metals.”
Attractive mining profits are mainly a product of iron ore, the world’s largest commodity after oil. The crucial steelmaker sells just a mustache for less than $ 200 a tonne, on par with record prices a decade ago, when insatiable Chinese demand triggered what became known as the supercycle of goods. Australia’s largest mining companies can pull a ton of iron ore from the ground for less than $ 20 a ton.
Copper prices have also jumped to record highs, crossing the $ 10,000 per tonne barrier for the first time in a decade. Baskets of base metals, including aluminum, nickel, copper, tin, lead and zinc, are trading at levels only twice in modern history: in 2007-08 and 2011.
For the big five iron ore miners – BHP Group, Rio Tinto Group, Vale SA, Anglo American Plc and Fortescue Metals Group Ltd. – This financial year will be only the second time in this century when they will win their oil peers, calculations show. This would be only the first time if their oil competitors had not been burdened by huge write-offs in 2020.
During the previous commodity boom, which peaked between 2008 and 2011, Big Oil easily made bigger profits than Big Mining. A decade ago, for example, the five energy specialties – Exxon Mobil Corp., Chevron Corp., Royal Dutch Shell Plc, Total SE and BP Plc – delivers adjusted profits that are twice as large as those of the big five iron ore miners.
Now, rising profits from profits are another headache for big oil companies as they struggle to attract shareholders amid growing concerns about climate change. While miners are now returning more money to investors, oil producers are only now beginning to do so, after some cut dividends last year.
Miners also have a better history: while oil is contributing to global warming, some metals – especially copper – are key to building a greener future based on electric cars.
Unexpected extraction is important beyond the natural resources industry. This is an indication that companies in many sectors will face rising costs, which at some point could turn into broader inflation, potentially hitting bond and currency markets.
“After a year of strong commodity price increases, inflationary pressures are now accumulating down the supply chain,” said John Mattersoul, director of price and purchasing research at IHS Markit Ltd.
So far, central banks – in particular the US Federal Reserve – have largely ignored this pressure, saying it is a one-off price jump that is unlikely to create an inflation problem. The Fed said on April 28 that while inflation has risen, the increase largely reflects “transitional factors.”
Iron ore is in the dream scenario: demand, especially from China, is widespread, while supply is limited. China, which accounts for about half of the world’s steel production, produces a record amount of the metal, while industrial production is growing in the rest of the world as huge stimulus packages stimulate recovery from the pandemic. At the same time, manufacturers are struggling to maintain the mines at full capacity.
Still, supporting metal tightness is a strategic decision made by the great miners half a decade ago. After spending years pumping up the ever-growing supply of the global market, they thwarted growth plans and instead focused on shareholder returns. The result was that supply largely stopped growing and prices began to rise.
The good news for investors is that during this wave of high prices, they are likely to see more than profits. Unlike the last commodity supercycle, miners – still hurt by a series of disastrous deals and projects – are reluctant to pour their extra profits into acquisitions or new mines instead of choosing to distribute record dividends.
This statement became clear from the CEO of Vale last week, after the Brazilian mining giant published its the best quarterly result from the top of the supercycle a decade ago.
“You should not expect extreme costs,” Eduardo De Sales Bartolomeo said on Tuesday. “There is nothing like it on our radar. And secondly – the question that many people ask, so I will take this opportunity to clarify it – there is no transformation and mergers and acquisitions on our radar either. “
Now Big Oil is doing the same, with companies from Exxon to BP abandoning plans to grow oil production in an attempt to regain shareholder confidence: they cut spending on new projects and, after paying off the debt, promise to reward investors instead of developing new fields and refineries, as in the previous cycle. This is likely to lead to lower oil supply later in the decade, which in turn could support prices.