Throughout the 1990s, companies in the natural resources sector, from oil to mining to farming, were, in the eyes of mainstream investors, the paradigm of the “old economy” – little glamour and less investment. But, in the past decade, the sector has been reshaped by the so-called commodities “supercycle” – higher than usual raw materials prices on the back of the industrialisation and urbanisation of emerging countries such as China.
At the same time, a wave of consolidation has created super-natural resources companies. The trend started in the oil sector, with the mergers of household names such as Exxon and Mobil, British Petroleum and Amoco, Chevron and Texaco, and Total, Fina and Elf, among others. The miners followed suit soon after: BHP merged with Billiton to create the world’s largest mining company by market capitalisation, Vale bought Inco of Canada, forming the second-largest mining group, and others bought company after company.
While investors’ appetite for oil and natural gas companies is old and stable, over the past few years they have at last discovered the rest of the natural resources sector. Copper and other base metals prices have risen steadily since 2003 and investors have started to buy shares in mining companies; the price boom in bulk commodities such as iron ore and coal has further boosted their interest.
Agriculture, long a backwater, came under the investment spotlight in the wake of the global food crisis of 2007-08. As the cost of commodities such as wheat and corn soared to record highs, the shares of fertiliser and seed companies jumped to nearly bubble levels.
These changes are reshaping the FT500 list. Mining is paradigmatic of the shift: the sector, which a year ago was the ninth largest, is fifth this year. As such, market wealth is influenced not only by the skyscrapers of Wall Street and the City of London or the internet start-ups of Silicon Valley, but is also tied up with iron ore mines in Australia and Brazil, gold deposits in South Africa and Canada, and copper mines in Chile and Indonesia.
Much of the miners’ growth in the past year is thanks to a long unloved commodity: iron ore, used to produce steel. Although most investors have focused instead on copper or aluminium, iron ore is crucial for developing countries such as China, Brazil and India. Urbanisation and industrialisation are built on top of huge quantities of steel. And, since steel represents almost 95 per cent of the metal used in the world each year, iron ore may be more integral to the global economy than any other commodity, other than perhaps oil and food staples such as wheat and rice.
For decades, miners and steelmakers settled annual prices for iron ore in secretive meetings. Year-on-year changes were often small. But last year the so-called “benchmark system” collapsed, leading to soaring prices.
The breakthrough, long sought by the miners and resisted by steelmakers, marked the end of the 40-year-old benchmark system of annual contracts and lengthy price negotiations. Instead, the industry agreed to move to quarterly contracts, linked to the nascent iron ore spot market. Overnight, the cost of iron ore went from $60 to about $120 a tonne. Since then, it has reached nearly $180 a tonne, a windfall for the world’s three largest producers – BHP Billiton, Vale and Anglo-Australian miners Rio Tinto. A decade ago they were selling it for $20 a tonne.
Rio Tinto is the paradigm: iron ore accounted for more than 60 per cent of the company’s $26.6bn annual earnings before interest, tax and amortisation last year.
With commodities prices likely to remain high on the back of demand from emerging markets and a slow supply response after years of underinvestment, natural resources companies are set to stay at the top of the FT500 list. Even so, investors are embracing the sector slowly, in spite of bumper dividends.
While the sector – energy and materials – accounts for nearly 30 per cent of the expected profits of the S&P500 this year, it represents only 17 per cent of the capitalisation. “The companies that make the bulk of the earnings are still undervalued and underappreciated by investors,” says Evy Hambro, co-head of natural resources at fund manager BlackRock, a leading investor in the sector.
Yet the arrival of new companies is raising the sector’s profile. Glencore, the world’s largest commodities trader, has become almost overnight a household name. The company, which was floated only a few weeks ago, is set to make its FT500 debut next year. At its current market capitalisation of $60bn, it will rank at about 120.
Cargill, the world’s largest trader of agricultural commodities, is unlikely to join the list any time soon as it has vowed to remain private. The 146-year-old company is still controlled by about 80 members of the Cargill and MacMillan families and has never publicly disclosed its valuation. But the details of its deal to spin off a subsidiary earlier this year have allowed outsiders to calculate its worth. At about $50bn-$55bn, it would be ranked at around 130-155, pointing to the strength of the sector.
Javier Blas is the FT’s commodities editor