Yes Virginia, there is a commodity super-cycle (August 3, 2007) – Stan Sudol

This column was originally published in the August 3, 2007 issue of Northern Life.

Stan Sudol is a Toronto-based communications consultant who writes extensively on mining issues.

Emerging economies are growing at record levels

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 supercycle.

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.