The recent collapse in commodities prices, and correspondingly even greater falls in the values of commodities stocks, is, ironically, leading towards another global commodities bubble – starting in perhaps as soon as a couple of years depending on how fast the global economy can move from reverse gear to a growth phase again. Furthermore the longer global growth remains in the doldrums, the more steep and rapid the rise in commodity prices is likely to be when the markets turn – as they inevitably will.
That has to be the lesson of the past few years. The commodities boom was not fuelled just by double digit growth in China, but by long term lack of investment in mining development brought about by a long period of low commodity prices. With global growth building up steam there was just not the corresponding supply increase to feed it, leading to shortages with consumers outbidding each other to corner supplies to keep their plants going. This will happen again – perhaps sooner rather than later.
When analysts glibly talk of a return of metals prices to historical levels in a rather condescending tone, they are missing the point. It is possible prices could fall back to ‘historical’ levels extremely briefly, but at true historical price levels probably 50 percent of the world’s mining industry would be out of business – and how long could prices remain at these levels with the decimation of the global mining sector? Base prices have moved on.
Already we are beginning to see shutdowns and curtailments in the mining and smelting sectors – and this is only the thin end of the wedge. If prices remain at or where they are, or horror of horrors move lower, the whole new project development sector will come to a grinding halt creating an enormous supply gap down the road. What some people fail to realise is that mines are finite resources. They run out of ore to mine at various price levels and many of even the world’s biggest mines are already well past their peaks. Production from these relatively solid sources, which may be able to withstand a relatively prolonged downturn, is likely to fall as reserves are depleted.
But that’s only a part of the picture. A large sized mining operation may well take six years or more to come into full production from a development decision to full capacity as there are so many regulatory hurdles to cross, not to mention the construction and pre-production periods. Who is going to take a decision to build a major mine now with prices so low and money so tight? A mining company, even one the size of any of the industry’s major players, will find it virtually impossible to fund a brand new large-scale development costing billions of dollars without huge financial support from the banks – and such funding is well-nigh impossible to find in the current climate – particularly in any area where there is the smallest degree of political risk. And increasingly tomorrow’s big potential mines are being found in areas where political risks are higher.
That’s only half the problem, though. You can’t find new deposits – major or minor – without exploration and the exploration sector is being decimated. Much exploration is junior funded, and juniors need capital to do this – either from equity, or again from bank loans or private finance. While the last of these methods of capital raising may still be open to a degree, although the market crash has seen the availability of even private funding almost disappear, the first two really are not an option in the current scenario. Stock prices are so low that raising equity capital is hardly an answer without so much dilution as to make the investment unattractive – even should investors have the money to buy stock the first place. The second is a no-no. Virtually no bank is prepared to finance a junior explorer at the moment.
So we are met with declining supplies from existing miners as ore runs out, or only lower grades are left to mine, new development decisions are on hold, and ma be deferred almost indefinitely and the exploration sector is almost defunct so major new deposits won’t come into the picture at all. Even on a global zero growth scenario that paints a pretty bleak picture for future metals commodity supply – and that means we are going to reach a stage, sooner rather than later, where commodity supply prices are going to start being bid up again. That’s positive for commodity stock investment, but perhaps negative for manufacturing industry. This will happen. It’s only the timescale which seems to be in doubt.