Are we five years into a commodity super-cycle that will
last for decades due to China's explosive growth or is this
just a routine mining boom followed by a bust?
Every time there is a slight decline in the price of metals the
conventional "boom-bust" crowd gets ready to say "I told you
so."
Notwithstanding my natural optimism toward the mining sector, I
am inclined to side with the commodity super-cycle crowd due to
some very compelling facts.
A commodity super-cycle is a decade or longer rise in metals
prices caused by the industrialization of a major economy.
During the past century and a half, there have been two major
commodity super-cycles.
The first was the economic growth of the United States in the
late 1800s and early 1900s, while the more recent one was the
post-war reconstruction of Europe followed by the economic
development of Japan, South Korea and Taiwan from 1945 to 1977.
During those times, the prices of metals did not increase in a
continuous straight line. Well respected analysts at Deutsche
Bank, Citigroup and Goldman Sachs all believe we are currently
in a commodity super-cycle that will last for decades.
Four emerging economies are leading the pack of industrializing
countries. They are the so-called BRIC counties: Brazil,
Russia, India and China. There are also other developing
countries such as Mexico, Turkey, Argentina and South Africa,
just to name a few that are also rapidly industrializing.
However, it is China, due to its size that is having the most
impact on the world's economy.
Since the late 1970s, China's economy has grown ten-fold when
the country began its transition to a free-market economy.
Over the past decade China has grown nine percent a year
recently surpassing Britain to become the world's fourth
largest economy. In the second quarter of this year Chinese
growth rates registered 11.9 percent, the fastest pace in 12
years.
It is China's scorching expansion through urbanization and
industrialization that is on the forefront of the most
significant economic transformation the world has seen since
the industrial revolution of the late 1700s that began in
Britain with the invention of the steam engine.
Combine this economic transformation with the massive rural
migration of Chinese to the coastal cities - estimates range
from 100 to 300 million over the next decade - the largest in
human history and the rapidly growing middle classes among
China's 1.4 billion people and India's additional billion, and
we can understand the tidal wave of metal demand around the
world.
As people become wealthier, they move into better houses and
apartments, buy fridges, stoves, cars, cell phones and other
consumer goods all made out of metal.
The 33 percent premium that Rio Tinto is willing to pay on top
of Alcoa's previous hostile bid for Alcan sends a strong
message that the commodity super-cycle has a long way to go.
Rumours indicate CVRD or BHP-Billiton may take a run at Alcoa.
Citigroup metals analysts increased their price forecasts for
copper on Monday up to $3.50/lb. in 2008 and $3/lb. in 2009/10.
The financial services company said,
"Nowhere are the drivers and determinants of the commodity
super-cycle more clearly on display than in copper."
Over the past quarter century up to 2002, low metal demand and
prices have created the perfect storm of underinvestment in new
deposits, decreased exploration and lack of skilled
professionals.
In addition, societal changes, aboriginal issues, much stricter
environmental regulations - which is a very good thing - and
increased costs ensure that the average development time for
new mine development can be as long as 10 years.
The booming Sudbury Basin economy with the lowest apartment
vacancy rates in decades and the highest property price gains
(22 percent) in Ontario among Census Metropolitan Areas (CMA's)
during the past year clearly indicates China's global impact on
mining communities around the world.
However, the recent drop in the price of nickel is causing the
negative boom-bust crowd to smile. The world's largest
securities firm by market value, Goldman Sachs Group Inc. said
nickel may fall to as low as $25,000* a metric ton in the next
few weeks as inventories are increasing.
Before anyone starts slashing their wrists in despair, that low
point is about $12 a pound, more than enough to make
substantial profits. In 1998 anyone talking about $12 a pound
nickel would have been told to sober up.
No one in their right mind could have thought that almost $25 a
pound nickel was going to last!
But keep in mind that all price forecasts will be thrown out
the window and a quick return to nosebleed territory if there
are any long-term technical problems or further delays to the
two laterite projects: BHP Billiton's Ravensthorpe in Australia
and CVRD Inco's Goro in New Caledonia. The entire world is
counting on these gigantic projects to help feed its growing
hunger for nickel.
Whereever the price of nickel will be in the next few months or
years, one issue will remain constant, the urbanization and
industrialization of hundreds of millions of formerly
impoverished people around the world. That can not be done
without enormous quantities of iron ore, aluminum, copper,
zinc, lead and nickel needed to build the necessary
infrastructure.
With resource nationalism rampant throughout Latin America,
South Africa and Russia and political instability in many other
mineral producing countries around the world, the geologically
rich Sudbury Basin will continue to be one of the most
geo-politically safest places to invest the billions needed to
meet the next generation of global metal demand.
*US dollars
Stan Sudol is a Toronto-based communications consultant and policy analyst who writes extensively on mining issues.[email protected].
