Canada’s mineral sector is an odd collection of quite different industries, united by big trucks and high wages.
Suppliers in for the long haul should think about the peculiar character of each segment of the mining industry. The differences can be dramatic.
For example, it is hard to get two products more different than tar-sands oil and gold. For anti-mining activists the two industries seem rather similar: both use big trucks and impact local water. They are both the target of massive speculative activities, and both exhibit high price volatility.
But looking more closely, it is clear they couldn’t be more different. As the main transportation fuel, oil is critically important to the world economy. Gold, on the other hand, is basically a luxury good with a limited practical use. It has wonderful technical properties, but it is primarily valued for its exchange value, not its use value.
Oil turns to smoke when it is used. Every ton of gold ever mined is still around. Oil is ugly, necessary and cheap. Gold is beautiful, unnecessary, and costly. Oil is a major contributor to global insecurity. Gold seems to offer security in the face of global risks.
The differences mean that oil and gold have different futures. The world will reduce its dependence on oil or suffer greatly. Canadian policy will eventually turn against the oil industry. Vast reserves of oil and other hydrocarbons will become “stranded assets,” causing vast write-downs for oil companies and pension funds.
Gold, on the other hand, useless or not, is not going out of fashion. The only threat to the gold industry is Bitcoin and its brothers. To keep its value up, Bitcoin uses a weird analogy to mining, but normal mining suppliers won’t find any business here. Canada will continue to support gold mining because it produces jobs. A better reason for Canada to encourage gold mining may be because we can sell our useless gold to buy useful investment goods. It might even be smart to ramp up gold production before electronic gold squeezes out yellow gold in more markets.
Two other siblings in the Canadian mining industry are similarly similar and similarly different. Coal mined in bulk is cheap, like gravel, sand and aggregates. Like oil, coal turns to smoke when used, while sand and gravel become permanent parts of the cities we live in. Coal is the most important stationary energy source in the world and one of the worst threats to the future of humanity. It emits more radioactivity than the nuclear industry, and more particulates and CO2 by far than oil.
The only industry that does comparable damage to the environment is agriculture. The aggregate industry can change the landscape, but is surprisingly benign by comparison. Coal will be around a while, but it is going to be an increasingly cutthroat business.
Oil, coal and gas are especially vulnerable because they actually contribute so little to the economy compared to other members of the mineral family. Recent figures for Natural Resources Canada show that metal production generates 20 times as many downstream jobs per dollar as oil, gas or coal production.
For every dollar worth of oil Canada exports, the country does about 8 cents worth of manufacturing. A dollar’s worth of metal production leads to $1.70 worth of manufacturing in Canada.
The base metals, despite their thuggish sounding name, are the good guys in the family. They generally are less costly to extract than the precious metals. Like gold, they can be recycled almost indefinitely. Like gravel, they are cheap enough to be used for thousands of everyday purposes: they make like easier, more comfortable and safer, and they last.
Demand for these heroes of the human-made world will keep growing while coal and oil decline. The mining supply and services sector, especially the base and precious metals suppliers, will grow with them. And it will be up to the supply industry to solve the two biggest problems facing mining. Mining companies of all sorts will be forced to reduce their environmental footprints, and at the same time they will face steadily declining grades. That is where the challenge and the profits will be for suppliers.