Long term/short term investment conflict builds certainty of metals price surge

It seems inevitable that we are in for a surge in metal prices as current financial strictures will lead to severe supply shortages medium to long term – but the question is when.

LONDON - 

The mining industry as a rule looks to the long term but investment nowadays is more and more dependent on rapid short term gains. Day traders and hedge funds for example increasingly look to short term profits and in the case of the latter, the size of some of them, and the necessity to achieve these short term gains, may well mean they will act against the long term interests of a company – and this is particularly apposite to the global mining industry.  The result is financial incompatibility, particularly in times of market stress.  Short term gains are just not what mining as an industry is about.  A decision to construct a new mine today may well not lead to a single ton of metal or mineral being produced for several years yet.

Markets in general are not really behaving logically and mining stocks have been amongst the worst hit.  True we are in a downturn and it is probably also fair to say that a major correction from the heady days of only a few months ago was almost certainly likely to happen at some stage.  But the speed and the severity of this ‘correction’ has been virtually unprecedented – with mining and metals stocks affected most of all.

There is talk of deflation, but in reality deflation could be considered a recession where negative sentiment gets out of control - and with mining stocks we may have been there already.  The problem is partly that the young guns who drive the markets and run the hedge funds and some other key investment institutions have never seen a downturn of anything approaching the current magnitude and are running around like headless chickens, disposing of the good alongside the bad and indifferent.

But most of all it is the unavailability of finance that is the most damaging to the industry, and the principal reason it finds it difficult to break the cyclical nature of metals and minerals prices.  At boom times everyone climbs in to invest in mineral commodities and new mining projects.  Funds become readily available for new mine development and expansion with the result that this can rapidly lead to an oversupply situation exactly at the time the economic cycle may be beginning to show signs of a downward correction.  This is very much what has happened in this cycle, but in this case the correction was more severe than usual and the effect on commodity prices was correspondingly drastic.

Now we are seeing the mirror image of the up cycle, and mines are closing, new projects are being halted and even really good exploration targets and development projects are not being followed up purely through lack of availability of funds.  It doesn’t take a rocket scientist to understand what this is building up to as the world economy picks up, as it undoubtedly will.  Once demand returns to the market there will not be the supply available to meet it and prices will inevitably soar again.  This will happen.  The only uncertainty is the timescale. 

Much will depend on the global economy – once this starts to pick up commodity prices will likely lag at first, but then forge ahead and with the amount of metal being taken out of the market by the current spate of closures, coupled with cutbacks by major and mid-sized miners and the lack of ongoing new projects, severe shortages of some metals  are certain to arise and prices will move accordingly.

SUBSCRIBE to Mineweb.com's free daily newsletter now.

Disclaimer

MINEWEB is an interactive publication, with rolling deadlines through each day, commencing in the Sydney morning,  and concluding, 24 hours later,  in the Vancouver evening.  If you believe your side of an issue deserves inclusion, but has failed to meet one of our deadlines, you are invited to notify the Editor in Chief in Johannesburg, and we will include you in our editing and expanding on our stories. Email him at alechogg@gmail.com

Print story      Email story      Subscribe to free newsletter

Back

 

responses to this article

Good analysis Good analysis. When the short term money is gone the mining and energy sectors will rally again-they are the backbone of all human development. The finance guys think Google and Rio Tinto are "equal risk"---they dont know that metals have been in . .more vogue for 5000 years, while Internet search is for 10 years...:-) Investors won't make any money if everyone was right! Sanjay www.sanjayjohn.com . .less by Sanjay John Gandhi on January 05 2009, 09:31 Find this comment inappropriate? Report it

Name
Subject
Comment