If the wheels come off the supercycle
Tuesday, 21 August 2012 13:49
A decade of boom within the mining industry may be coming to an end, writes Datasat Communications general manager Bernie Branfield
The commodities ‘supercycle’ began in 2004 and there are already signs that it is slowing down. Some commentators have suggested we are now facing 20 years of downturn. Although this seems unlikely, cost management will be increasingly important for mining companies.
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Mining and financial publications this summer seem to have been full of headlines like ‘End of the supercycle’ or ‘Death of the supercycle’. In this scenario, we have entered a vicious circle.
The slowing of the Chinese economy is impacting commodity prices, which is impacting mining share prices; both of which are impacting the growth plans and profitability of mining companies.
The result is the period of boom the industry has experienced since 2004 will come to a natural conclusion. The most pessimistic outlook is for a return to the dark ages of commodities between 1973 and 2003.
Not everyone agrees with this prognosis. Although the Chinese economy is not growing as quickly as before – only 7.5 per cent forecast growth for 2012 – the Australian mining sector continues to expand rapidly.
In fact, the Australian government estimates that around 60 per cent of all capital expenditure on building and construction in the country are related to mining. Many analysts point out that there is still a very pronounced upward curve in global demand for almost all minerals and metals.
Allied to diminishing supplies and you have a situation where prices may fall slightly in the short term – but not off a cliff.
Of course, the difficulty is that, at the same time as prices and share values are in flux, the cost of production is rising.
Deutsche Bank estimates the cost of running and building mines increased by between 10-15 per cent in 2011. You don’t have to look too far for the reasons for this. Copper mines, for example, now have to dig up 50 per cent more rock than they did in 1994 for the same amount of the metal.
It is against this backdrop that BHP Billiton announced it is to shelve US$80bn of investment it had planned for 2015. Yet, Latin America and Africa still offer many potentially attractive opportunities. So, the supercycle may not be coming to an end, it may simply be changing shape.