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Supply and service sector headed for good times

The mining supply and service sector will do much better than the rest of the economy over the next 50 years. Here’s why. And here is what we ought to do. There are three stylized facts that matter.

The mining supply and service sector will do much better than the rest of the economy over the next 50 years. Here’s why. And here is what we ought to do.

There are three stylized facts that matter. For economists “stylized facts” capture the most important features of a situation. For the mining supply and service sector, the stylized facts are “Harold Hotelling,” “China,” and “technology.” “Technology” obviously stands for the fact that in mining, as in other fields, labour is being replaced by capital and services.

That means the mining supply and service sector will be getting a bigger and bigger share of the value-added of the mining sector.

“China” stands for the huge growth in demand for minerals that we know is coming. No one really doubts that we will need to produce as much copper over the next 30 or 50 years as has been produced in the whole history of mining.

You might quibble about whether the right time frame is 25 or 55 years, but this stylized fact tells us that the pie will get a lot bigger.

This means the supply sector will be getting bigger share of a bigger pie. The third stylized fact comes from and old piece of economic theory. In 1931, Harold Hotelling published a paper that showed resource prices should rise exponentially. It was a brilliant bit of analysis, and it became a foundation stone in the field of Resource Economics. It also became the biggest embarrassment faced by theorists in the field because resource prices actually fell throughout most of the 20th Century. Even by the 1990s, researchers didn’t have statistical evidence that resource prices were starting to trend upward.

The sharp spikes that they were seeing could have been accidents.

Now, we are almost certain that we are into a long period of rising prices. This rise may be the result of a “Super Cycle” in the world economy. If that is true, then we may only have 30 years of relatively high prices. If the Hotelling Effect kicks in, we can expect to see a permanent change in the relative price of what the mining sector produces. In any case, we have positive fact number three: rising prices for metals will mean more lavish spending on equipment and services.

If the share of mining value-added increases by 50 per cent and total output increases by a factor of five, the supply sector will have to grow by a factor of 7.5. Add in rising prices and the sector’s revenues will increase by at least 10 times. Supplying the mining sector will be a very good business to be in. For supply firms, the question is how to position themselves for this bonanza. The answers are fairly obvious.

Invest heavily and soon. Buy competitors. Do a lot of research. And play politics in a strategic way: support industry organizations like SAMSSA and encourage governments to spend more on research related to mining and much more on research for the supply sector.

For industry organizations like SAMSSA, the first job is to make Canadian governments understand that we have an historic opportunity to expand Canadian trade.

The supply sector is still languishing in the government’s blind spot. It is overshadowed by the drama of high-stakes gambles in the mining industry, outshone by the financial sector and outshouted by the major mining players.

It is hard for policy makers to see that there could easily be more revenue for government from growing the supply sector than from growing the mining industry itself.

For Canada, the big question is what the country can do to make sure Canadian firms grab a much bigger share of the much bigger pie. The country needs a national strategy to supply mining companies around the world with Canadian equipment, consumables and services.

A good start would be a road-mapping process for the mining supply industry. The U.S. did it 15 years ago for its own mining industry. Our mining companies would be happy to help guide supplier research and innovation.

A great role for government would be to bring together a very diverse and scattered sector to plan for a very exciting future.