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Investors brace for more losses as commodities crunched

Miners are struggling to keep their heads above water as commodity prices continue to tumble. Photo: Robert RoughBHP shares have dropped below $17 each and South32 under $1 for the first time after commodities were crunched again overnight and mining giant Anglo American cancelled its dividend.
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Brent oil dipped below $US40 a barrel for the first time since early 2009, before recovering, while iron ore continued its descent, with the Qingdao benchmark shedding another US41¢, or 1.1 per cent, to $US38.65 a tonne.

On the London Stock Exchange, investors dumped Rio Tinto, driving the price of its shares down 8.4 per cent, while BHP Billiton dropped a further 5.5 per cent.

In morning trade on the ASX, BHP was down a further 1.5 per cent to $16.80, while Rio Tinto was 4.2 per cent lower at $40.64. South32 fell as much as 3.2 per cent to below 99.75¢ before recovering to trade 1 per cent lower at $1.02.

Energy stocks, however, bounced after enduring a torrid session on Monday.

The Aussie dollar also slipped below US72¢ overnight, completing a US2¢ turnaround from its Friday highs of close to US74¢, before recovering to last fetch US72.2¢.

In addition to the falling commodity prices, mining investors were also hit by news that Anglo American would shelve its dividend and cut two-thirds of its workforce. Anglo shares dropped by more than 12 per cent to a record low.

“Any asset that is cash-negative will not remain in the portfolio,” Anglo chief executive Mark Cutifani said. ”It is a strategic call and we are not going to look back.”

That built on yesterday’s announcement by Rio that it would reduce next year’s capital spending by almost $US1 billion to $US5 billion.

But even the heavy-handed cuts announced by Anglo were not enough to assuage the market, with one analyst telling clients that “the chief executive and Anglo American appear in denial”.

“Production, cash flow, earnings are all under pressure and the group is not moving quickly enough. The poor newsflow and downgrades are likely to continue until there are asset disposals or somebody else steps in.”

While the big job losses at Anglo were “headline grabbing”, the real focus for investors is the miner’s decision to scrap its dividend payout policy until 2018, IG market strategist Evan Lucas said.

“The 2016 commodity thematics make BHP’s progressive dividend policy hard to swallow and the Anglo-American moves overnight just adds pressure to scrap what is an out-step program,” Mr Evans said.

“The likely write-downs coming at [BHP’s] half-year [profits announcement] in February, due to the mass decline in commodities, will lead to a [dividend] policy change.” Heavy selling

The heavy overnight selling in the big ASX-listed miners might have been, at least to some degree, catch-up for Monday’s n trade, where Rio fell 4.3 per cent to $42.40 and BHP 5.2 per cent to $17.05, again in response to commodity price weakness. The Aussie miners’ shares are at six- and seven-year lows, respectively.

Futures trading suggests the S&P/ASX 200 index will open 23 points lower, which would push the benchmark index below the 5100-point mark. The measure has now shed 5.6 per cent for the year.

The n dollar dropped as low as US71.87¢ overnight, tracing the drop in oil prices, before recovering to fetch US72.09¢ in early local trade. The currency has fallen by 2.4 per cent from its Friday high of US73.85¢.

While oil has been stealing the headlines, iron ore remains the weaker story long term, reckon analysts at Societe Generale.

“Once the post-OPEC concern about a lack of storage and on-going excess supply fade, there’s a good chance that oil will continue to outperform iron ore, which is obviously more tied to the (soggy) Chinese economic outlook,” SG strategist Kit Juckes said.

“The view of SG’s oil experts is that there is adequate storage to meet the market’s needs in the coming months and that the supply/demand mismatch continues to be met (slowly) by falling supply,” Mr Juckes said.

“That should support prices in 2016, but doesn’t prevent a further near-term, sentiment-driven fall.”

“Beyond the thin December market we’re in now, I’d rather be short the Aussie dollar (or New Zealand dollar, or any other Asian China-sensitive currency except then yen), than short [the oil-tracking] Norwegian kroner or Canadian dollar.”

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