Sometimes when it looks, sounds and walks like a duck…then
it is duck! The continuing decline in the price of some metals
including nickel has many analysts clucking that this mining
boom is over.
That is definitely not the case according to Europe's
top-ranked natural resources investor BlackRock Merrill Lynch
Investment Managers. Blackrock is one of the world's largest
publicly traded investment management firms with assets of
about $1.23 trillion (US). Let me emphasis that the figure is
trillion not billion!
Evy Hambro, who manages Blackrock's World Mining Fund, recently
said in Britain's Telegraph newspaper, "We find it astonishing
that, six years into a cycle, the analysts are still getting it
wrong. They have been too pessimistic for six years in a row
and seem to be behaving like desperate gamblers, always betting
on the same number."
According to Hambro, the four emerging giant economies - the
BRIC (Brazil, Russia, India and China) countries - will need
more oil, aluminum and copper by 2015 than the entire planet
used last year. According to current projections, the BRIC
countries alone will need 121 percent of oil, 140 percent of
aluminum and 105 percent of copper produced globally last year.
Hambro also feels the consolidation in the mining industry -
Norilsk, CVRD Inco, BHP Billiton and Xstrata control almost 50
percent of the global mined nickel market and 56 percent of the
refined market - should result in prices staying higher for a
longer period of time. Large diversified companies are less
pressured to increase the supply of a single metal than smaller
producers only focused on a individual commodity.
The Australian Institute of Mining and Metallurgy has stated
that over the next 50 years the world will use five times the
mineral resources that have been mined to the year 2000. Hambro
believes that the commodity super-cycle has a long way to go.
Chinese want cars
If we look at the metal intensive auto sector, as just one
example, Hambro is definitely on the money. In 1979, there were
60 privately-owned cars in China. In 2005, China became the
number two auto market with 5.92 million sales. The United
States is the number one market and Japan fell to number three
with 5.8 million autos sold.
A 2006 Economist Special Report said, "Some experts predict
that over the next 20 years more cars will be made than in the
entire 110-year history of the industry."
The BRIC countries with their growing middle class markets and
low labour costs will command and demand most of the new auto
assembly plant investment. How this will impact southern
Ontario's auto economy is frightening to predict.
As large parts of the BRIC country's populations reach middle
class status, they will buy cars, appliances, move into new
homes and apartments that have electricity, plumbing and other
modern conveniences.
But there will be some economic disruptions and volatility in
metal prices along the way.
During the last commodity super-cycle that lasted from 1945 to
1977, metal demand also did not go up in a continuous straight
line.
A good example is employment levels at the then Inco nickel
operations in the Sudbury Basin during the previous commodity
super-cycle.
The recession of 1957-58 combined with the American
government's decision to end its strategic stockpiling of
nickel and other metals caused Inco to lay-off 1,000 men. The
company also laid-off an additional 300 men during failed
contract negotiations in 1958 which caused enormous bitterness
in the community.
Just an aside, the 1958 strike set the ball rolling for one of
the most notorious union takeover battles in Canadian labour
history. The Mine Mill union which represented the Sudbury
Basin workforce at that time fought and lost against the
raiding conservative United Steelworkers of America. The
Steelworkers legally took over the Inco employees in the fall
of 1962 while Falconbridge remained with Mine Mill.
Another recession in the early 1960s and a significant slowdown
in the rapidly industrializing Japanese economy caused Inco to
lay-off 2,200 workers in 1962, all of whom were rehired by
spring 1964.
In the early 1970s, due to an oil-price hike, recession and
increased global competition, Inco cut about 4000 employees in
1972, half of whom were rehired by 1976. But by the fall of
1977 this commodity super-cycle had finally come to a
thunderous end with the announcement on Oct. 20 that 2,200 men
were to be made redundant the following spring. It was
overwhelmingly downhill from that point onwards for the next 25
years.
But, during that quarter century slump in metal demand and
prices, a mini-boom occurred between 1986 and 1988 when the
price of nickel hit a then record of $10.84 and also between
1996 and 1997.
In 1997, the notorious Bre-X scandal and a financial crisis in
Asia and ensuing recession finally returned global mineral
activity and prices towards its long-term downward trend until
2001.
Currently, the implosion of the American housing market and the
uncertainty among banks to keep lending enormous sums for
business takeovers and mergers, may cause an economic slowdown
or recession. I am definitely not suggesting we will see any
layoffs in the Sudbury Basin. About one quarter of CVRD Inco's
workforce has more than 30 years of experience and is able to
take retirement when they want. The shortage of skilled miners
and other technical support staff is at critical levels.
Once we recover from any possible recession, the same problems
of a quarter century of underinvestment in exploration, a
shortage of skilled people and increased demand for all metals
due to the BRIC countries' continued industrialization will
still exist.
So yes Virginia, notwithstanding all the naysayers, there is a
commodity super-cycle and we are in it now.
Stan Sudol is a Toronto-based communications consultant and policy analyst who writes extensively on mining issues.[email protected]