Editorial: The new year starts with a lurch

Those returning to work on Jan. 4 with a bit of optimism for the mining industry after a brutal 2015 were hit with a sick feeling in the stomach as global markets dove on the first day of trading in the new year, in defiance of the usual salutary “January effect” on stocks, when investors typically buy back stocks they sold in December for tax-loss purposes.

This latest global market weakness has been fuelled by more disappointing economic news out of commodities-hungry China, coupled with a new wrinkle in global geopolitics: a ratcheting up of tensions between Middle East heavyweights Saudi Arabia and Iran.

In China, fresh manufacturing data shows that activity contracted for the tenth straight month in December, and dipped below levels that show expansion. Chinese stocks markets crashed on the year’s first trading day as a result, with Chinese authorities halting trading and implementing other restrictive measures to temporarily stem the decline. Chinese markets have wiped out most of 2015’s gains, and market watchers predict more declines ahead, as China’s economy slows and the yuan is devalued — all with markets still well above levels seen before the start of the Chinese stock market bubble in mid-2014.

The long-standing rivalry between Saudi Arabia and Iran turned red-hot as the new year began, with the Saudi regime executing Shia Muslim cleric Sheikh Nimr al-Nimr and 46 others, which the Iranian government has called “a crime.” After the executions, Saudi Arabia’s embassy in Tehran was ransacked and torched by a mob on Jan. 2, along with its mission in the Iranian city of Mashhad, prompting Saudi Arabia to break off diplomatic and commercial relations with Iran. Saudi allies Bahrain, Sudan and Kuwait followed with similar moves.

What’s remarkable about this particular eruption of the Saudi-Iranian blood feud — as it relates to commodities — is that the usual formula of “Middle East tensions equals higher oil prices” has been turned on its head this time around, with oil hitting 11-year lows below US$36 per barrel at press time.

Saudi authorities have reportedly lowered their prices for crude and kept high production levels in response to the flare-up with Iran, so that it can deprive the Iranian regime of oil revenue at a crucial time when the country is accelerating its compliance under the new nuclear agreement with the international community, in order to get long-standing oil export restrictions and sanctions lifted sooner.

If all goes to according to the Iranian government’s plans, it could soon add 1 million barrels per day to the global oil market, at a time when demand from Europe is flat and softening in China, and the U.S. is lifting its own outdated domestic export restrictions — all factors that lead some observers to predict sub-US$20-per-barrel prices ahead.

The knock-on effect in Canada, with its currency tied to oil prices above all other sectors in the economy, is an even weaker loonie. At press time the Canadian dollar had retreated to just US71¢ in the face of declining world oil prices, and the outlook for high-cost oilsands development in Alberta continues to deteriorate.

In Canada, gold producers with mines in the country are coming out as the biggest winners in the mining sector. Having already found support throughout 2015 well above US$1,000 per oz., gold prices in U.S. dollars have gotten stronger in response to the Mideast troubles as investors seek safe havens, while Canadian gold miners reap the benefits of lower labour costs with the falling loonie. Similar effects are seen worldwide in other gold mining countries such as Australia and South Africa, where currency valuations are intimately tied to commodities exports.

With gold miners having been at the vanguard in the past few years in cleaning up their corporate act by slashing costs and selling or closing underperforming assets, it all leads to gold miners entering the new year on firmer footing, compared to just about everyone else in the mining sector.

NEW YEAR, NEW OFFICE!

Our Vancouver bureau has packed up from its Hornby Street location to relocate 3.5 km south across False Creek to set up shop at 303 West 5th Avenue. We’re delighted to now share offices with the prestigious Business in Vancouver magazine, with both our publications owned by Vancouver-based Glacier Media, which specializes in business and commodity-related trade publications and related data.