© The Financial Times Ltd 2016 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
June 12, 2013 9:06 pm
Eighteen months ago, when Polymetal and Evraz were admitted to the blue-chip FTSE 100 index, they were the first Russian groups to join, and their arrival set the seal on the dominance of the mining and metals sector.
Their demotion to the FTSE 250 – following a similar move in March for Kazakhmys, which had been in the FTSE 100 for more than seven years – highlights how far the sector has fallen.
From early 2009, the mining and metals sector has accounted for more than a 10th of the market value of the FTSE 100, reaching as high as 17 per cent. It has shrunk to less than 10 per cent.
Analysts say it is unlikely the sector will ever again matter so much to the City. The reduced likelihood of new London listings and the nature of the commodity cycle both suggest it will be less influential.
“I don’t think that miners and metals will ever be as important to the FTSE 100 again,” says Michael Rawlinson, head of natural resources at Liberum Capital. “Yes, it’s a cyclical industry and cycles come and go. But the last cycle was unusual in that it coincided with the internationalisation of the London stock market.”
In 2008 three mining and metals groups joined the FTSE 100: Eurasian Natural Resources Corp, a Kazakh mining group 44 per cent owned by three oligarchs and memorably tagged “more Soviet than City” by an ousted director; Ferrexpo, a Ukrainian iron ore company controlled by Kostyantin Zhevago; and Fresnillo, a Mexican silver producer controlled by billionaire Alberto Baillères. In all three cases, the UK Listing Authority waived its own rules that require a company to have a free float of 25 per cent.
When Evraz, the steelmaker part-owned by Chelsea FC owner Roman Abramovich, joined the FTSE 100 in 2011, it too had the free float requirement waived.
The UKLA’s flexible approach, which contributed to London’s appeal, has been widely criticised for leaving minority shareholders too weak. Now the authority is introducing a stricter regime intended to rein in controlling shareholders, and will give minority investors a vote on independent directors.
Alongside this less accommodating environment is a dearth of likely candidates.
“I don’t think there will be that many mega-listings to come to London in the future,” says Mr Rawlinson. “Most of the former Soviet Union groups have been done. There aren’t that many state-controlled or privately owned groups left to list, and the governance and indexation bar is high.”
Analysts also agree that the cycle that produced such stellar earnings growth and supported corporate valuations is a rare occurrence. “It’s a once in a generation event,” Mr Rawlinson says.
“We have had the greatest bull run in mining and metals over the past decade, and now it’s time to tighten belts and generate cash. It will take a good length of time to reach those heights again” says Des Kilalea, mining analyst at RBC Capital Markets.
He also believes that a recovery will not necessarily mean a revival of large diversified groups with a broad range of operations. “What will probably happen is that the boom will come in a specific way, perhaps in uranium or a recovery in aluminium. So companies that want to raise capital will be more focused.”
When the cycle does turn, the flipside to how much the mining and metals sector matters will be the performance of the rest of the index – which is looking stronger than when the miners were riding high.
Analysis by the Share Centre shows that miners and metal companies contributed about one-eighth of total FTSE 100 profit last year, against more than one quarter in 2010. Over the same period, the proportion of pre-tax profit from oil and gas companies has more than doubled to 27 per cent.
At the end of 2010 and 2011, mining and metals was the second largest sector by market value in the FTSE 100, behind oil and gas producers. But at the end of last year, it slipped into third place, overtaken by the banking sector, which still holds the second spot.
“While the miners were doing well the financial sector was being beaten up, and now a measure of health has returned,” Mr Kilalea says.
Helal Miah, investment research analyst at The Share Centre, says: “Cyclical weakness in the commodities markets has made investors’ profit dependence on miners much smaller, even if revenues are still large. And in market capitalisation terms, the revival of the financial sector has brought much greater balance to the FTSE 100.”
Demotion from the FTSE 100 can just be temporary – housebuilder Persimmon, which is being promoted, dropped out of the index in June 2008 when Ferrexpo was one of the entrants. But even if Evraz and Polymetal stage a recovery, the FTSE 100 mining and metals sector they rejoin is unlikely to be restored to its former glory.
Copyright The Financial Times Limited 2016. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.
Sign up for email briefings to stay up to date on topics you are interested in