Prediction is a risky business. Until a month ago, Australia’s Labour government was predicting that long-term expansion in China would fuel massive growth in the land of the kangaroo. In early December, China announced that exports had fallen for the first time in seven years.
Exports were down 2.2 per cent in the engine of world expansion. Worse yet, Chinese imports fell 17.9 per cent. China had become the world’s largest consumer of raw materials, and China was losing its appetite.
So is it the end of the mining supercycle? Are suppliers in for a decade of grinding gloom before the sun shines again? Like other commentators, the author of this column has been predicting a 20-year supercycle for the mining industry based on Chinese demand for metals. But if China goes down, can mining suppliers be far behind?
There certainly are enough purveyors of doom. Even the new American President is warning that we could be in the worst economic crisis of our lives. In a recent article on the World Socialist Website, Michael Head quoted a dozen solid sources – mainly bankers and economists – who think the good times are over.
But the walls are probably not coming down this time. In fact, it might be smarter to bet on Supercycle Part II.
Bank of Canada Governor Mark Carney thinks the Canadian economy will come up with a sizzling 3.8 per cent growth rate in 2010. Canadian Finance Minister Jim Flaherty noted that the average of private-sector forecasts for Canada is a GDP loss of only 0.8 per cent for 2009. Forecasters are actually predicting growth in the last quarter of the year.
And out in the mining sector, Vale chairman Roger Agnelli said last week that his company is increasing capital spending from a record $10 billion last year to $14 billion in 2009. Vale is positioning itself to take advantage of Round II of the Supercycle.
But is there any foundation for this optimism?
China is still forecast to grow 6 to 8 per cent in 2009. The 2.2 per cent drop in exports for November should be kept in perspective. Year over year, exports were still 19.2 per cent higher than a year before. According to China Business News in January, imports of lead, zinc and refined nickel, all grew in 2008. And just last month, officials in Beijing announced a $586 billion stimulus package. The U.S. just ratified another $819 billion. Even Canada’s Conservatives have promised to deliver a $30 billion fiscal kick-in-the-pants for the economy. We are seeing coordinated global action to boost demand.
If the next round of global growth starts in six to nine months, the next escalator ride for metals prices could start even sooner.
There are two reasons to expect a fast turnaround in metal prices. On the demand side, we will see another round of speculation. On the supply side, we see a hockey stick. In the climate-change literature, a "hockey stick" is a line describing global temperatures. It is roughly flat and then turns sharply upward. Global supply curves for many metals, including nickel, look like hockey sticks. They are mostly flat because most operating mines can produce at relatively low prices. They wouldn’t have been operating before the boom if they hadn’t been profitable at the low pre-boom prices. In fact, the price of most metals has been trending down for a century.
But when we need a big increase in production, there is no queue of low-cost mines just waiting to open. Faced with a large increase in demand, we start to run up the blade of the hockey stick. And when we run into the supply constraints, we get rapidly rising prices instead of rapidly rising output. Existing mines become very, very profitable.
It isn’t obvious during a recession, but normal demand crosses the supply curve part way up the blade. When growth returns to normal, prices have to rise. That’s where the speculators want to be, so look for another round of takeovers.
And Vale’s Agnelli is not the only one with a bag of money to spend. There is a lot of monetary expansion going on and the world will soon be awash in money.
Prediction is risky, but look for 2009 to be a good year for mining suppliers.
