Glencore PLC's collapse on Monday night brought Australia's resources sector to its knees, so investors will hope its overnight recovery will spark a rebound locally as well.
Glencore, the world's biggest commodity trader, plummeted more than 23% in London on Monday despite the absence of any news released by the company to explain the fall. The fact is investors are becoming increasingly concerned about the company's high level of debt, and its ability to withstand a slowdown in the Chinese economy and further falls in commodity prices.
This sparked a selloff in Australia's own resources sector, which led to a 3.8% mauling for the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), wiping $55 billion from the market's value.
BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) were among the hardest hit, falling 6.7% and 4.6%, while Fortescue Metals Group Limited (ASX: FMG) and Santos Ltd (ASX: STO) were down 6.4% and 9.1% respectively.
Thankfully, Glencore regained some composure last night, gaining 12.3% after management reassured the market that it can withstand current market conditions, despite its heavy debt load. This could have a positive reaction on Australian miners today, although investors shouldn't get too comfortable.
In my opinion, companies like BHP Billiton and Rio Tinto are capable of withstanding the headwinds facing the mining industry. Their low cost operations, and BHP's diversification, should allow them to keep turning profits while others are potentially forced to cease their operations.
But that doesn't mean I think they're good investments today. Further weakness in commodity prices will constrict the miners' margins and will act as a drag on overall earnings. While this would likely see the shares fall even further than their current levels, their dividends could also come under immense pressure which would see even more investors head for the exits.
