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M&A megadeal quarter, but metals price concerns remain amid China 'uncomfortable recovery'

Greenhouse gas and gold mines Nearly 1 ton of CO2 emitted per ounce of gold produced in 2019

Essential Metals & Mining Insights - September 2020

Essential Metals & Mining Insights - August 2020

State of the Market: Mining Q2-2020


M&A megadeal quarter, but metals price concerns remain amid China 'uncomfortable recovery'

The globalmetals sector has seen a substantial surge in megadeals in the first quarter thisyear, and average deal sizes were up some 158% to US$624.3 million compared to thefinal quarter last year.

Accordingto PwC's latest quarterly analysis of M&A activity, the first quarter saw 14deals at or beyond US$50 million, a decline on the previous quarter. However, totaltransaction values went up to US$8.7 billion.

PwC: Q1 M&A value grows toUS$8.7B

"Theincrease in deal value was driven by substantial increase in megadeal value comparedto 4Q'15," the report noted.

Two particularheavyweights stood out amongst those fetching at least US$1 billion — China-basedCRED Holding came in first amid plans to acquire aluminum manufacturer and wholesalerLiaoning Zhongwang Group for an estimated US$4.7 billion, while Shandong NanshanAluminum took over Shandong Yili Electric Power for more than US$1.1 billion.

Together,the two deals accounted for US$5.8 billion, or 66%, of the total deal value duringthe first quarter, and also contributed to the aluminum segment shifting higherin terms of total deal volume, accounting for 36% in the quarter from 12% in theprior quarter. Steel deals made up some 50% of all deals.

"Thisis unsurprising, given the current state of aluminum and steel prices. Producersuse consolidation in an effort to increase efficiencies, thus lowering average costs.These reductions allow producers to better compete on the basis of cost, a traditional competitiveadvantage needed by commodity producers," PwC's team concluded.

The twotop deals of the quarter also underpinned that there is an increasing trend forlocal M&A, constituting some 89% of total deal value and outstripping cross-borderactivity by far, especially in emerging and developing markets. In line with this,China was the most active country throughout the quarter, scoring eight of 12 dealsin the Asia and Oceania region, which was the largest acquirer and bagged 86% ofdeals.

All eightChina-based deals were local-market, PwC flagged. This came on the back of metalsproducers continuing consolidation in an effort to "increase scale, reducepollution by closing inefficient plants, and increase exports by means of lowercosts and the concomitant reduction in prices that this allows."

Lookingahead, PwC's Michael Tomera and Jim Forbes remained "cautiously optimistic"that continued U.S. GDP growth and increased demand in the automotive and constructionsector will lead to the need for more capacity and, together, will see an improvedenvironment for deals.

However,concerns remain that overcapacity could interrupt this trend, particularly comingfrom China.

Theystated, "While growth has decelerated from recent highs, both China and India'seconomy continue to expand, driving increased need for metals, particularly steeland aluminum.

"Atthe same time, a number of analysts are forecasting an upturn in commodity pricesin 2016. Based upon these factors, we are optimistic about the deal environmentin the short-term and look for a modest increase in activity over the coming months."

Uncomfortable Chinese recovery

However,questions around the health of China's economy remain, and in the U.S. volatileeconomic data has further spurred speculation about the timing of further interestrate hikes and its effects on the U.S. dollar. Alongside output cuts and oversupplyworries, both factors play a crucial role in the outlook for commodities.

DegroofPetercam's chief economist, Hans Bevers, recently described the situation in Chinaas a "very uncomfortable […] recovery."

In anApril 26 blog he wrote that Chinese hard-landing fears have been receding over thelast couple of weeks, after a large one-off depreciation has been avoided. However,he did flag that this is "for now."

"Thecombination of monetary, budgetary and relaxation measures with regards to housingare driving a cyclical recovery. But […] we are still convinced that the mediumto longer term outlook remains extremely challenging."

"Moreover,it would not be surprising that worries about the sustainability of the currentrecovery soon pop up again. Indeed, the background of fake growth figures, soaringhouse prices and continued rapid credit growth is far from comfortable and willgive rise to more and more concerns about the state of China's economy."

"Howwill Chinese policymakers reconcile the ambition of strong growth and the need forfurther economic rebalancing while at the same time avoiding the stop-and-go policiesseen in recent years? The short answer is that this will prove close to impossible.That's why, despite the recent calmness, concerns about China look set for a comebackin the not so distant future."

The WorldBank predicted in an April 26 paper that metals prices are set to decrease by 8%in 2016 due to slowing demand in emerging economies, notably China, as well as dueto increases in new production capacity.

Nickelis forecast to record the largest decline at 22% due to weak demand and insufficientproduction cuts. The bank also sees iron ore down 10% this year and copper falling9%.

"Mostother prices are expected to fall as markets remain in surplus amid high stocks,"the report warned. "Markets are expected to tighten in the medium term dueto reduced investment in supply capacity, rising global demand, and some specificfactors, including Indonesia's ore export ban and closure of large zinc mines dueto exhaustion."

Preciousmetals prices are projected to decline 2% this year, mainly due to lower investmentdemand. Platinum in particular is tipped to retract strongly, falling by 10% in2016 due to surplus supply, while silver is thought to shift 5% lower. The WorldBank expects that gold will record "only" a 1% drop this year, but isset decline going forward on expectations of a rising dollar and tightening in U.S.monetary policy.

Nickel 5.6% gains make it thisweek's frontrunner

The April27 meeting of the U.S. Federal Reserve's Open Market Committee was the most importantevent in last week's calendar as another interest rate hike of the central bankis still outstanding. As expected, interest rates were kept at 0.25 to 0.50% fornow, sparking speculation that the committee will only go ahead with such move inJune.

For gold,this was good news, driving the safe haven asset up 0.5% to US$1,256 per ounce onthe back of a weakening dollar.

Withthe exception of iron ore, all other major metals also shifted higher in the weekto April 29.

Copperprices grew 0.6% to US$5,051 per tonne over the week, the London Metal Exchange'sthree-month nickel contract gained 5.6% to US$9,495 per tonne, aluminum rose 1.9%to US$1,679 per tonne, and the three-month zinc price strengthened 1.8% to US$1,943per tonne.

However,62% Fe iron ore fell 0.5% to US$65.20 per tonne. 

The week ahead

The vaststring of economic announcements this week will see readings of U.S., European,German and U.K. purchasing managers' indices, or PMI, widely seen a real-time barometerof the current of the economy.

Moreimportant stateside will be the release of nonfarm payrolls and unemployment ratefor April, both due May 6. Also out this week are U.S. Balance of Trade, ISM Non-Manufacturingand U.S. Crude Oil Inventories.

On themining front, the earnings season continues, with Randgold Resources Ltd.'s first-quarter report being oneof the highlights. The South African miner will publish results May 4, before is due to hold itsannual shareholder meeting in London a day later. May 6 will see publishing operational figures,followed by AngloGold Ashanti Ltd.and Sumitomo Corp. onMay 9.