The not-new, not-a-cycle mining supercycle – by David Robinson

Dr. David Robinson is an economist at Laurentian University in Sudbury, Canada. His column was originally published in March 2011 issue of Sudbury Mining Solutions Journal a magazine that showcases the mining expertise of North Bay, Timmins and Sudbury.

Mr. Keynes had it right: the financial community is very, very emotional. We are barely climbing out of what many were calling the great recession, and suddenly a flock of bankers and business reporters are babbling about a new economic supercycle.

Well, I have news for them. There is no new supercycle. Don’t run off and sell all your mining stocks, though. This isn’t bad news – it’s just a better way of understanding the good news.

To start with, the supercycle isn’t new. Even Gerard Lyons, the guy who wrote The Supercycle Report, shows the cycle starting in 2000. It is the same old supercycle that we were talking about five years ago in this space.

Second, it isn’t a cycle. An interesting thing about the figures from Gerard Lyons is that they show a gradually rising growth rate, not a series of cycles. Each of the so-called high cycles got a bit higher. The growth rate during the 1973-1999 low was 2.8 per cent – higher than the 1.7 per cent annual growth during the supercycle high of 1870-1913. It is like a cranky ratchet mechanism that slips a tooth or two every now and then but still only goes one way overall. At the end of each of these episodes, there are more scientists, more inventors, more discoveries and faster technological progress.  Lyons actually wondered if “secular shift” might be a better description than “supercycle,” but a little birdie probably told him The Supercycle Report would get a lot more readers than The Secular Shift Report.

The not-new, not-a-cycle supercycle has another problem. It may be the last of its kind. The supercycles of the past have all been created by expanding markets. As the people of China, India, Brazil and Indonesia raise their standard of living, they have produced the greatest market expansion of all time. World output is going to more than double in the shortest time ever. The economy starts to look like the snake that swallowed the elephant in Antoine de Saint Exupéry’s story, The Little Prince. It is going to take a long time to digest that elephant, and the long boom can’t end until the elephant is gone.

But what then? Who will the snake eat next? By then, the world economy will be much larger and the remaining population a lot smaller. Most of the world will be at roughly the same consumption level as the developed countries are now. We will have built new cities for more than half of the current population of the world. There will be no more supercycles like this one.

For the mining supply and service industry, it doesn’t matter whether we call the next 30 years a supercycle, a rocky-ratchet or the last great meal of the world snake. As the demand for metals grows, the demand for mining supplies and equipment will grow. According to analysts at the 26th International Ferro-alloys conference in Berlin, demand for steel-making raw materials – especially nickel – will significantly exceed supply in the long run. Excess demand means high prices. High prices will mean big orders, and pressure to produce fast. Let the good times roll.

It won’t all be fun. Dealing with an accelerating world economy has already caused one crash. There will be more.

Companies that keep building through the periodic crises will do very well. The companies that invest most in using and making new technologies will do best of all. The frenzy of mergers and acquisitions will continue. It will be less intense for supply companies than for companies with mining properties, but as the scale of mining ramps up, international suppliers will struggle to grow. The easiest way to grow is always to buy another company. With lots of capital available, the supply and service industry will see a lot of action. For a lot of our companies, it will be eat or be eaten.

Supercycle or not, we are in for interesting times. There will be lots of money to be made, but there will be lots of competition for that money. There will be more innovation and more pressure on firms to innovate. Like the Olympians, mining will be faster, deeper and stronger, and the supply industries will make it so.