What's going on?
Glencore, the major miner and commodities trader, saw its stock jump 5% on Wednesday after it said its profits quadrupled in 2017. It’s a far cry from near-bankruptcy just a few years ago…
What does this mean?
Glencore was in a deep, dark hole back in 2015, as commodity prices crashed and its heavy debt load led to concerns that it might go bankrupt. But Glencore’s stock price has risen more than 500% since then after it dramatically reduced its debt, cut costs and benefited from a broad increase in commodity prices.
Even higher commodity prices – as well as a strong performance from its trading division, which looks to profit from investing in commodities (rather than just mining them) – helped Glencore to enjoy resounding success in 2017: debt fell by 30% and the firm boosted its payout to shareholders (a.k.a. dividend) by way more than expected.
Why should I care?
The bigger picture: The global mining industry is in good shape.
Rio Tinto and BHP Billiton, two other big miners, also reported encouraging results in recent weeks. There’s no need to do much digging: higher commodity prices, most likely driven by the demands of an improving global economy, have pushed up miners’ profits. Aggressive cutting of costs when commodity prices collapsed is also pumping up profits now prices have recovered.
For markets: Miners are warning about their rising costs – another sign of increasing inflation.
Apart from higher profits, the other constant across miners’ recent earnings was commentary on rising costs – higher energy prices, increased wages for skilled labor and a weaker US dollar have all pushed up the cost of extracting commodities. Keep in mind that as the US dollar weakens, the cost to the miners in dollar terms tends to go up, since most of their operations are outside the US. Companies worldwide appear to be facing inflationary pressure – which could lead to depressed profits in the future, and/or higher prices for the end consumer.