In a world where everything is changing, it can be hard to keep track of the currents that matter most. It is especially hard in the mining supply industry, which depends on a mining sector that flaps around like a kite on a string. Falling metal prices can seem like the end of the world for mining companies and their suppliers.
Prices have certainly slumped as ballooning supply met slowing demand, but despite the short-term pain, talk of the end of the supercycle for metals is just misguided. Metal production will continue to grow because demand will grow.
Forecasts still show three billion more people will be looking for new homes in cities by 2050.
Furthermore, the British Geological Society reports that the world’s output of smelter copper increased by 22 per cent between 2013 and 2014 alone. Bismuth output jumped by 21 per cent and mercury by just under 21 per cent. For the five-year period 2010 to 2014, global output of mercury increased by 38 per cent, smelter copper by nearly 32 per cent, alumina by 27 per cent, iron by 28 per cent, phosphate rock and tungsten by 35 per cent, refined nickel by nearly 33 per cent and potash by 30 per cent. These growth rates are significantly higher than the 15.6 per cent growth of the world economy for the period. They are a clear indication that there is still a boom underway.
Low and uncertain prices were not a result of low demand growth. They were the result of wild swings in investment — irrational exuberance combined with long lags to get new mines into production. It is an old story. Exploration and new mine development will continue to be a boom-bust business, but supply businesses will continue to grow. And since production does not vary nearly as much as exploration and development, mining supply will be more stable than the speculative parts of the industry.
Other, longer-term trends will have more subtle and more significant impact. For example, climate change will bring at least one surprise to mining suppliers. The Visual Capitalist, a site that posts an informative business-related graphic each day, recently published one showing how metal mining compares to the oil industry. Oil production per year is about 94 billion barrels worth $1.7 trillion. By comparison, gold production was worth $170 billion - one tenth as much.
The value of iron production was only two-thirds of the value of gold, while copper and aluminum each generated just over half the revenue gold did. You can see where this is leading.
Production of all the metals together was worth only $660 billion, or just 39 per cent of the value of oil production in 2015. One surprising implication is that the oil industry may have twice the talent and twice the innovation capacity of the rest of the mining sector. And one implication of the implication may be even more surprising. As the fight against climate warming cuts demand for oil, big pools of talent and technology will come looking for a home. So will many suppliers. Sometime in the next 10 years, the mining supply sector is going to get more competitive and more exciting as a result of climate change.
Another trend – outsourcing by mining companies – means that more and more of the mining industry is actually in the supply sector. This trend interacts with a trend that has been called the next industrial revolution. “Servitization” is the ugly name for a trend well underway in the Sudbury mining supply and services sector.
Servitization is the shift from selling a product to selling a whole bundle of services related to the product. For example Sony provides Telemadrid with its whole media system, including technical services, upgrades and maintenance on a pay-per-usage basis. In Sudbury, a local company manages starter motors for all the equipment in a series of mines.
Cementation provides mine development and production services for companies around the world. Software companies provide training, and ventilation companies provide maintenance, data collection and analysis services.
Growing demand, competition, outsourcing, and servitization mean that mining employment may not grow, but that we can expect to see growth in the mining supply sector. They also mean that mining supply firms will face new challenges.