The World, Right Side Up
I was at the 49 North Resource Conference in Manhattan recently, meeting with mining companies and gathering intelligence. And I heard a guy give a talk with the title, “A Mining Supercycle?”
I thought to myself: “Of course he’ll say we’re in a mining supercycle and how wonderful mining is. I’m at a mining conference, for crying out loud, surrounded by mining companies and geologists. To expect otherwise would be like expecting to find Victoria’s Secret models at an Amish quilting bee.”
Yet he surprised me. He said no, this isn’t a mining supercycle. In fact, he turned the idea on its head, and what he said folds in neatly into a bigger idea I’ve been working on. One that I think has important long-term implications for investors.
The guy who delivered the talk was Christopher Ecclestone, a mining strategist at Hallgarten & Co. Ecclestone’s main idea is that what we’re seeing isn’t anything new. It’s not a new supercycle for mining, but more a return to normal. The aberration, he says, was the period from 1973-2003, when mining experienced its dark age.
The aberration was the kind of thinking that took natural resources for granted. “Metals and agricultural commodities were the epitome of cheap – regarded with some contempt as common and plentiful,” he said. “The apogee of this disdain for minerals was during the tech boom.”
Back then, even marginal companies like Pets.com could command a market cap of billions of dollars. You could’ve bought any number of mining companies for a fraction of that. “Today, Pets.com has evaporated into thin air,” Ecclestone says, while the mines remain and are very valuable. This is a good reason why we favor tangible assets. They tend not to evaporate.
The 1973-2003 time frame “was a calamitous period for miners and commodity producers,” he continued. “The only commodity for which the sun shone was oil, and even then the late 1990s were gruesome.”
There was a brutal thinning of the herd of mining companies, particularly in the 1990s and particularly in the US. During this time, we “lost” many mining companies – Anaconda, Kennecott, Utah Corp., Magma Copper, Asarco and many others. “And these were just the big ones,” Ecclestone added. The mid-size and smaller miners were almost wiped out. We saw the “virtual annihilation of the US-listed mining sector.”
Metals became loss leaders. Capital spending fell. Exploration came to a near halt. Most of the mines in Africa closed. Miners also shut down many marginal or low-grade mines. Instead, they focused on the highest-grade ore, the low-hanging fruit of the mining world, just to stay alive.
Why did this happen?
Ecclestone cites a number of reasons that combined to create a kind of perfect storm. The postwar period created a proliferation of mega mines. China, too, became a low-cost producer of a number of metals. It has come to dominate certain sectors entirely (such as zinc and rare earths). Many mines in Africa and South America fell under state control. These states operated them without regard to economics. Later, the Soviet Union’s industrial base collapsed, releasing a lot more commodities on the market. And Cold War stockpiling of metals stopped and reversed, releasing even more supply on the market.
But now, Ecclestone says, we are returning to something that more closely approximates what prevailed for a much larger slice of history.
The normal state is one that understands and recognizes the value of mineral commodities. The normal state is one in which the producers of these useful rocks and metals earn rewards for the risk and ownership of scarce resources.
The Chinese get what’s going on. This is why they are making deals with Brazil and all over Africa and in a bunch other places. They are trying to secure supplies of key resources. China alone consumes more than 40% of the world’s iron ore, coal, steel, lead and more.
Ecclestone had a good line about the Chinese. He said they are more interested in natural resources than they are in intellectual property “because they know they can rip those off. It’s harder to rip off a coal mine.” Funny, but it says something true about resources.
Today, there are no new mega mines. The stockpiles are dwindling. That low-hanging fruit is gone. Today, for example, copper miners have to dig up 50% more rock than they did in 1994 to get the same amount of copper. And demand continues to grow apace.
You can make the same point with any number of metals. “Where are the downturns in this?” Ecclestone asks. They are comparatively minor and short in a long climb upward. “There is no reason to think copper use shouldn’t go onward and upward.”
Far from being a special case or an outlier, the growing use of commodities looks normal against a long time series. So the hunt for new supply is on. Latin America is abuzz with mining projects, as is Africa. “Everybody is crawling all over Africa looking for stuff,” Ecclestone adds. Yes, and that is one reason why I am heading to South Africa to meet with a number of investors and companies based here.
As commodities get more expensive, we’ll have to change how we use and apply them. “If a lot of commodities get too expensive, then you have replacement and rationing,” Ecclestone said. We could see this soon, as commodities price themselves out of some markets. Boeing opened a window into this future with its announcement that it is considering making the 737 – the most widely flown commercial jet – out of plastic!
Also, Ecclestone predicts the Developing World will start to behave more like the Western world when it comes to some metals (lead, for example), with recycling largely replacing the need for mining. “In rare earths,” Ecclestone offered by way of example, “there is little recycling, but there will be more recycling soon.”
Many interesting investment ideas spin off these last few paragraphs that are not necessarily mining related, but more about specialty materials and getting more out of what we have. I am talking about the kinds of companies that make things more efficient, better and/or longer-lasting.
Even so, the business of mining will remain vital for many commodities. Ecclestone sums up: “[What we are seeing] is a reversal of the late-20th century trend, which gave all the value to the service and intellectual property… The whip hand is now back with the owners of the inputs.”
This idea folds into a bigger idea I’ve been working on.
In the past, we’ve looked at how the emerging markets are shaping things and how now they are on par with the West in terms of size. Some have called this “a world turned upside down” because the traditional leaders (the US, Japan and Western Europe) are being pressed by former backwaters (China, India, Brazil and many others).
But I’ve given a lot of thought to this and have come now to a different view. Our present age is not so much a new era as a return to a more historical norm. It was an anomaly that China, for instance, had an economy smaller than Belgium’s in 1970. Looked at over many centuries before, China has always been among the world’s largest economies.
There are many other examples, and I am working through the bigger implications of these ideas. But viewed with a longer perspective, the world is really a World Right Side Up…and it is bullish for commodities.