It’s an obvious question, given that shares in most of the major miners have more than doubled in price over the past 12 months, BHP (LON:BHP) has just announced the payment of a record dividend, and commodities are riding high.
Is the mining supercycle back?
Back in the middle part of the first decade of the current century, the old argument went like this: a new economic paradigm is being created by the rapid industrialisation of the BRIC countries, also known as Brazil, Russia, India and China, and that the consequent increase in demand for raw materials constituted something over and above the normal economic cycle, a supercycle.
Adherents usually identified the emergence of the US industrial economy at the end of the nineteenth century as another prime example.
And detractors, who argued that every new mania gets its own special branding, were all but drowned out as every man and his dog hit town to raise money on the back of this story, to the point that by the end, scant regard was being paid to fundamentals at all.
So far, so typical of the standard cycle of manias, panics and crashes, as outlined classically by Charles Kindelburger back in the late 1970s.
Because we all know what happened next. Someone lit a match to some nearby tinder and the whole thing went up in the conflagration now commonly referred to as the global financial crisis.
This time round things seem a little different. Perhaps that’s only because we’re still early on in the cycle – it’s always harder to tell where you are in a cycle when it’s still ongoing.
But it’s also because the world’s economic structures are different.
Thus, when Robert Friedland, arguably the world’s greatest mining promoter, tells the Mining Journal that this time round the boom will be “bigger” than a supercycle, not only is he exercising his usual mellifluous skills in wish-fulfilment, he’s also, as the best salesmen always do, basing his pitch around the truth.
In January Goldman Sachs a made similar pronouncement.
What’s different, then, and what’s the same?
Firstly, saying a cycle is different this time round is what promoters have been doing since the dawn of time – so paradoxically, that’s the same.
More seriously though, back in the Supercycle of the early 2000s we were still unequivocally living in the world of Davos Man. Globalization was the key to future global prosperity and harmony, and free trade was the way to get there.
That’s no longer such a popular mantra, never mind that the coronavirus has put physical barriers up around the world to the extent that travel is restricted in a way that it hasn’t been for four hundred years.
What changed was the success of China, the reaction as embodied by President Trump, and a new understanding that the old assumption that prosperity leads to democracy was just that – an assumption. Paradoxically, the world in the grip of the virus is governed more like China than the nightmares of any free-trade liberals could ever have imagined.
But even before the virus, trade barriers were going up. Is the US self-sufficient in rare earths? No, we learn, and so the drive to autarky begins. Does the UK have enough lithium to power its local car industry? – perhaps, perhaps not, and so the government grants pour in to the likes of Cornish Lithium and Wardell Armstrong. Does China have enough copper? It does if it extends its economic hegemony into the Democratic Republic of Congo. And so it goes.
If each economic bloc decides to lock up its own supply, then supply-chain efficiency and cost are no longer paramount. Instead, security of supply comes ahead of everything else, meaning that markets will wear higher commodity prices and build more mines to support them. Or so the argument goes.
At this point in time, there’s not much in its way.
Yes, those who talk only of fundamentals can point to the dramatic commodity price rises of the past 12 months as a result of the globally co-ordinated and unprecedented stimulus packages. And it’s also possible to argue that with currencies so debased, the rise in the value of the commodities in question is relatively over-cooked.
But there’s not much arguing, in general, with statistics that show an 80% increase in the iron ore price over the past 12 months, a 79% increase in the tin price, a 56% increase in silver, a 46% rise in copper, and 44% rise in nickel.
These are not safe-haven assets for those running scared of global political uncertainty. These are the metals that power global economic activity and global growth.
Will it all fall away in due course? Of course it will, just like every other cycle has done. But there may be years to the upside yet, in which billions and billions of dollars will be there for the making. Thus far, the major mining companies have been relatively cautious. The extra cash is going back to shareholders, who remain twitchy about ESG issues.
But Rio Tinto’s (LON:RIO) attempt to rebrand itself after the fiasco at the Juukan Gorge as a company that is positioned to provide all the necessary materials for the green revolution shows where the next chapter of the supercycle story is heading. The mining companies are going green. And their profits are going up.