Growing talk of a new supercycle for mining is encouraging, but a totally different kind of supercycle may be more important for mining supply firms.
The supercycle of the first years of our new millennium was a sustained period of rising commodity prices, supported by population growth and infrastructure expansion in emerging markets. The broader economic boom collapsed with the global financial crisis of 2007–2008. The mining sector saw an orgy of investment and acquisitions that left major players over-extended and created excess capacity that held prices down for years. The past decade was nothing like a slump. Global output of metals continued to rise, only prices dropped. It is an oddity of GNP accounting that increased production can appear as lower GNP when prices drop.
Now, growing demand and rising prices are driving talk of another supercycle. The World Bank reports that tight supply should push up prices for base metals, including lead, nickel and zinc. Chinese demand may have slowed, but India and Africa are growing. The Trump bump has become a Trump slump as “ChiMerica” stages its battle over trade, but longer-term economic indicators are looking solid.
Supercycle or not, this is good news for suppliers, as is the rapidly building transformation of the global energy system.
There will be enormous new investment in the so-called “energy metals,” including aluminum, cobalt, copper, lead, lithium, nickel, manganese, platinum group metals, silver, titanium, zinc, and rare earths as the world moves away from fossil fuels. Base metal production will rise too. Steel production alone tripled between 1970 and 2016 and is likely to double again before 2050.
But there is another supercycle in the wings. John Michaelson, CEO of Michaelson Capital Partners, argued in the Wall Street Journal that a supercycle of innovation is about to start. Past recessions set off waves of innovation that turned entire industries upside-down. According to Michaelson, we are overdue for the fundamental restructuring that should have followed the 2008 downturn. Mining may be especially ripe for disruptive change. Because ore grades are falling as known reserves are depleted, newer mines will need more and different technology to keep up with demand.
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For supply firms, a wave of disruptive innovation creates both opportunities and dangers. Innovation typically undermines dominant firms. Incumbent companies have invested in yesterday’s infrastructure and ways of working.
Newcomers push their way in with new ideas. There is room for explosive growth for firms with better solutions to old problems.
In the recent past, however, large firms have increased productivity rapidly while smaller firms struggle to adopt new technologies. The result could be a cycle of consolidation, with larger suppliers grabbing an increasing share of the pie and pulling workers from the smaller firms.
The company life-cycle pattern in the tech sector may begin to invade the mining supply sector as well. Mining tech start-ups may develop and test new technologies just to sell out to the big players. In the tech sector, however, innovation can be cheap, development cycles are very fast and payoffs can be huge, making start-ups very attractive for investors and competitors. The customers for mining supply firms are largely conservative miners.
The firms that succeed will be investing heavily in research and product development. Bill Sanders, principal and senior consultant with Roebling Strauss, recommends his clients reinvest 60-75 per cent of net returns in testing, listening to customers, and innovation in products, services, and ways of operating that deliver increased value.
The firms that succeed will have to test ideas quickly. They need to be prepared to fail sooner and learn faster. They need to draw heavily on their employees for ideas. They will need innovations in management and organization as well as in technology. These are lessons already learned by leaders in other sectors.
The mining supply sector is on the edge of two waves of change. A real super-boom may be unlikely, but there will certainly be dramatic growth in demand over the next 10 years. At the same time, a tsunami of innovation has already begun. The combination will shake the mining supply sector to its core.
