Nowadays not a day seems to go by without some significant base metals producer, or prospective producer, announcing major base metals project delays, cutbacks and curtailments. Add to that the announced, and so far unannounced, cessations in exploration programmes and we are looking at a near term very substantial fall in base metals output – and in other industrial and precious metals too.
OK – this is because we are facing a recession through much of the industrialised world and demand is falling, but is it falling as much as the cuts would suggest? Probably not. The spectre of falling demand has led to the decimation of metals prices in an incredibly short period of time, and it is, in part, the fall in metals prices to below the cost of production which is the major cause of closures and curtailments, but it is not the only cause. Recently we have seen major mining companies, who are far from being cash strapped, announcing cutbacks because of the difficulties in raising finance for project development or continuation. How much more so is this a problem for mid-sized and junior miners and explorers?
Recession – what does this mean? The generally accepted definition is two successive quarters or more of zero or negative growth. If economists are correct in calling the current downturn a recession, then almost certainly the fall in metals prices and the cutbacks seen by the mining companies have been overdone in strictly economic terms and the bounceback will be relatively quick, and almost certainly very substantial as the world suffers from a severe lack of supply and prices are bid up to secure whatever is available to maintain their outputs.
But what scares economists is that recession should turn into depression – which in effect is a very severe and long lasting recession – with lack of consumer confidence resulting in a self-sustaining downturn which can have dramatic economic and political consequences. The rise of fascism in Europe for example during the 1930s is blamed on the great depression which could thus be said to have been responsible for the Second World War!
According to a Wikipedia entry on the subject, what turns a usually mild and short recession or “ordinary” business cycle into a great depression is a subject of debate and concern. Scholars have not agreed on the exact causes and their relative importance. The search for causes is closely connected to the question of how to avoid a future depression, and so the political and policy viewpoints of scholars are mixed into the analysis of historic events eight decades ago. The even larger question is whether it was largely a failure on the part of free markets or largely a failure on the part of governments to curtail widespread bank failures, the resulting panics, and reduction in the money supply. Those who believe in a large role for the state in the economy believe it was mostly a failure of the free markets and those who believe in free markets believe it was mostly a failure of government that compounded the problem.
A number of the factors prevalent ahead of the Great Depression are in play now. The strong availability of easy credit, bank collapses as a credit crunch developed, lack of consumer confidence, rising unemployment, a housing price collapse and stock market crash were all features of the Great Depression. Plus ça change.
However one hopes that economists and governments will have by now learnt the lessons which were responsible for turning what was a severe recession into a major depression. Moves being made now across the world are designed to shore up financial institutions and avoid wholesale panic which, if it develops, just breeds more panic and contributes to a downward spiral which can continue for years. Hopefully protectionist policies in the U.S. and elsewhere, which are thought to have exacerbated the situation in the 1930s, will be avoided by the politicians, otherwise the future could indeed be dire. Government priorities in avoiding a depression situation are going to be to maintain or rebuild consumer confidence and stimulate spending and most measures we have seen are pointing to this – even if it ultimately means an increase in inflation. In many views price inflation is infinitely preferable to global depression.
However, enough talk of depression. If the current downturn is simply a recession, albeit a severe and prolonged one, production cutbacks necessary to maintain a company’s profitability, or existence even, are looking to be far more drastic than would be justified by the world supply/demand balance. It’s not that the world was going into vast global oversupply of most metals and minerals prior to the market downturns. Indeed some metals were in or close to an undersupply situation so if global growth is say only zero for perhaps a year, the cutbacks are going to push us into negative supply territory for a significant period. If overall global growth continues, but at a much slower rate for a year or two – and this is most economists’ expectations, with continued growth in China and India in particular offsetting falls elsewhere – then even in the short term we are going to be faced with supply shortages for certain metals, and for most industrial metals in the medium term.
Lack of exploration and deferred project go-ahead decisions are going to extend the period of tight supplies even further into the future and while markets may be too nervous to support the kind of price escalations we have seen in the past two or three years, we will indeed see price rises and probably fairly substantial ones in the not so far distant future.
Let us pray, though, that the media, and some economic sages, do not succeed in talking the current recession into another great depression. It’s all about consumer confidence. If this can be rebuilt the downturn in metals prices and mining stocks will be one of the first sectors to make a real, substantial and sustainable recovery. If we do enter a depression in the true sense then the short to medium term effects on the mining sector could be dramatic and long lasting.