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Welcome to the superslump.
Four years after the commodity supercycle began to ebb in 2011, prices for raw materials are hitting surprising new depths. From aluminum to iron ore to nickel to zinc, the basic building blocks of global industry are in free fall.
The forces driving the great decline in commodity prices are no secret – it’s the result of too little demand from a slowing Chinese economy meeting too much supply from mines launched in better times. Still, the ferocity of the downturn has shocked executives and investors. Most frightening of all, there is no sign the rout in raw materials will let up any time soon.
Miners are trapped in a world where next to nobody sees reason to cut production despite obvious gluts. Major producers in some sectors are now following a Saudi Arabia-like strategy of producing at full capacity, with the goal of driving out higher-cost operators.
Over the past week, the commodity collapse has accelerated, with many metals skidding to multiyear lows. Even industry leaders are starting to acknowledge that more pain looms ahead. Jean-Sébastien Jacques, chief executive officer for copper and coal at Rio Tinto Group, one of the world’s biggest miners, said on Thursday the market for copper will remain weak for the next two to three years, while coal prices will take even longer to show signs of life.
Mr. Jacques may actually be erring on the side of optimism if industry observers are right. Many mine projects commissioned at the height of the supercycle are only now moving into production, dumping new supply onto already clogged markets. “We see weak prices for most base metals for the next four to five years,” says Dane Davis, a commodity analyst at Barclays PLC.
The obvious question is why miners don’t cut back production to put a floor under sagging prices. Mr. Davis says they are trapped in a commodity-industry version of a classic Economics 101 game known as the prisoner’s dilemma.
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