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pencilvanian
1000+ Penny Miser Member
USA
2209 Posts |
 Posted - 07/27/2007 : 19:44:12
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Message to pessimists: super-cycles can last decades
Date Published | Jul. 26, 2007
Are we five years into a commodity super-cycle that will last for decades due to China’s explosive growth or is this just a routine mining boom followed by a bust?
Every time there is a slight decline in the price of metals the conventional “boom-bust” crowd gets ready to say “I told you so.”
Notwithstanding my natural optimism toward the mining sector, I am inclined to side with the commodity super-cycle crowd due to some very compelling facts.
A commodity super-cycle is a decade or longer rise in metals prices caused by the industrialization of a major economy. During the past century and a half, there have been two major commodity super-cycles.
The first was the economic growth of the United States in the late 1800s and early 1900s, while the more recent one was the post-war reconstruction of Europe followed by the economic development of Japan, South Korea and Taiwan from 1945 to 1977.
During those times, the prices of metals did not increase in a continuous straight line. Well respected analysts at Deutsche Bank, Citigroup and Goldman Sachs all believe we are currently in a commodity super-cycle that will last for decades.
Four emerging economies are leading the pack of industrializing countries. They are the so-called BRIC counties: Brazil, Russia, India and China. There are also other developing countries such as Mexico, Turkey, Argentina and South Africa, just to name a few that are also rapidly industrializing. However, it is China, due to its size that is having the most impact on the world’s economy.
Over the past decade China has grown nine percent a year recently surpassing Britain to become the world’s fourth largest economy. In the second quarter of this year Chinese growth rates registered 11.9 percent, the fastest pace in 12 years.
It is China’s scorching expansion through urbanization and industrialization that is on the forefront of the most significant economic transformation the world has seen since the industrial revolution of the late 1700s that began in Britain with the invention of the steam engine.
Combine this economic transformation with the massive rural migration of Chinese to the coastal cities – estimates range from 100 to 300 million over the next decade – the largest in human history and the rapidly growing middle classes among China’s 1.4 billion people and India’s additional billion, and we can understand the tidal wave of metal demand around the world.
As people become wealthier, they move into better houses and apartments, buy fridges, stoves, cars, cell phones and other consumer goods all made out of metal.
The 33 percent premium that Rio Tinto is willing to pay on top of Alcoa’s previous hostile bid for Alcan sends a strong message that the commodity super-cycle has a long way to go.
The financial services company said,
“Nowhere are the drivers and determinants of the commodity super-cycle more clearly on display than in copper.”
Over the past quarter century up to 2002, low metal demand and prices have created the perfect storm of underinvestment in new deposits, decreased exploration and lack of skilled professionals.
In addition, societal changes, aboriginal issues, much stricter environmental regulations – which is a very good thing – and increased costs ensure that the average development time for new mine development can be as long as 10 years.
...No one in their right mind could have thought that almost $25 a pound nickel was going to last!
But keep in mind that all price forecasts will be thrown out the window and a quick return to nosebleed territory if there are any long-term technical problems or further delays to the two laterite projects: BHP Billiton’s Ravensthorpe in Australia and CVRD Inco’s Goro in New Caledonia. The entire world is counting on these gigantic projects to help feed its growing hunger for nickel.
Whereever the price of nickel will be in the next few months or years, one issue will remain constant, the urbanization and industrialization of hundreds of millions of formerly impoverished people around the world. That can not be done without enormous quantities of iron ore, aluminum, copper, zinc, lead and nickel needed to build the necessary infrastructure.
With resource nationalism rampant throughout Latin America, South Africa and Russia and political instability in many other mineral producing countries around the world, the geologically rich Sudbury Basin will continue to be one of the most geo-politically safest places to invest the billions needed to meet the next generation of global metal demand.
*US dollars
Stan Sudol is a Toronto-based communications consultant and policy analyst who writes extensively on mining issues. stan.sudol@sympatico.ca.
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Prices 'will stay sky-high for years'
By Tom Stevenson
Last Updated: 9:25pm BST 27/07/2007
Europe's top-ranked natural resources investor has given warning that sky-high metal prices will defy the sceptics for years to come.
Evy Hambro, who manages Blackrock's World Mining Fund, said investors continued to underestimate the mismatch between soaring demand for raw materials and the mining industry's ability or desire to increase supply.
"We find it astonishing that, some six years into a cycle, the analysts are still getting it wrong", Mr Hambro said. "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."
Commodity analysts have underestimated the price rises for almost all industrial metals in the first half of 2007. In January, the consensus forecast for the average nickel price in 2007 was $11.76 a pound, but in the six months to June it has already averaged $20.27. Analysts have also underestimated the price of both lead and tin by more than 50pc.
According to Mr Hambro, who has topped the S&P Commodity and Natural Resources sector over three and five years, just four developing countries will use more aluminium, copper and oil by 2015 than the entire world consumed last year. He said that, on current growth projections, Brazil, Russia, India and China will by themselves need 140pc of last year's global aluminium demand, 105pc of copper output and 121pc of all the oil pumped around the world in 2006.
"Because of this, although prices will be volatile, they will remain stronger than most people anticipate," Mr Hambro said. "This is why Rio bid for Alcan."
Blackrock believes that the natural resources "super-cycle" - an unusually large and extended price cycle - is still relatively immature. The fund manager said that the final "optimistic" phase of the cycle remained well in the future. Instead, investors are mired in a "pessimistic" frame of mind, during which analysts typically underestimate earnings growth and undervalue companies.
Although Rio Tinto's shares have more than doubled in the past two years, they have failed to keep pace with soaring earnings and are priced at little more than half the multiple of earnings they were valued at only four years ago.
In this middle phase of the super-cycle, which developed out of an earlier "despair" phase of rock-bottom prices and little investment in the sector, companies usually prefer to buy cheap corporate assets rather than take the risk of building up their own productive capacity. Since the start of 2005, deals in the sector worth over $200bn (£100bn) have been struck, with many of the leading producers of metals - companies like Inco, Falconbridge and Alcan - taken out by stronger competitors.
Consolidation has dramatically changed the mining landscape, with the top three nickel producers controlling 72pc of the market, compared with 52pc in 2000. In aluminium, the top three control 34pc against 23pc seven years ago.
.....(I am not too sure I like the sound of "metals staying sky high for years", due to the fact they said the same exact thing about housing in 2005 and stocks in 1929. I will be happy if metals stay very high in the future, Not Sky High.)
I should have chosen "Cut-n-Paste" as a forum name, since that is what I do, mostly.
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Edited by - pencilvanian on 08/31/2007 19:48:24 |
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pencilvanian
1000+ Penny Miser Member
USA
2209 Posts |
Posted - 07/28/2007 : 13:37:59
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Metals are taking a beating right now, but so is Wall Street. While the future prices of of metals, base and PM's, is still a mystery, the fundamentals are still there, high demand, lower price means buying opportunity, etc.
Another viewpoint as far as base metal demand is concerned.
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The Casey Files
Base Metals Bears
David Galland
Managing Editor
Doug Casey's International Speculator newsletter
Jul 30, 2007
Recently, we asked readers to propose scenarios that might cause things to break in a direction other than that we expect. In response, a subscriber forwarded an article from Bloomberg with a very sound-sounding bearish view on base metals.
To save you some reading time, the theme of the article is that, due to high prices, the supplies of base metals coming onto the market will quickly reach the point where they'll overwhelm demand, driving prices down. This scenario will be exacerbated, according to the base metals bears, because China's rocket-like economic expansion must surely slow, thereby simultaneously reducing the demand at the same time supplies are increasing.
...Even so, just because they have been wrong in the past doesn't mean they are going to continue to be wrong, and so one shouldn't use that as an excuse to dismiss their arguments.
...Always happy for a second opinion, I forwarded the Bloomberg article on to long-term friend Clyde Harrison, the brains behind the Rogers International Commodity Index.
After reading it, he gave me a call. His view can be summed up as "They may be right, in the short term. But a year down the road, the base metals are going to be trading much higher than they are today."
According to Clyde, the debate about China's growth is already over, underscoring that contention by sharing just a few data points.
For instance,
there are currently 168 power plants being built in China.
In addition to the massive amount of metal used in constructing those plants, consider the copper wire those power plants are going to be connected to.
"Will there be a fall-off in demand for copper? Not likely," Clyde replied, answering his own question.
He also noted that China built and sold as many cars as the U.S. last year.
And it is important to understand, Clyde continued, that today one billion people use 2/3 of the world's natural resources. The balance of 5.6 billion people use the other third, but they are quickly becoming more successful, setting up a serious competition.
Which goes a long way toward explaining why there are now 50,000 students studying geology in China, versus 900 in the U.S. (of which 300 are foreign).
Unlike businessmen from the U.S., the Chinese buyers don't insist that the sellers start labor unions or clean up their pay practices, they're just there to do business.
In that regard, the Chinese have no qualms of passing across a briefcase full of cash if that's what's required to get the deal done. That's something a U.S. executive would go to jail for. Behind Door A is a briefcase full of cash. Behind Door B is a Happy Meal and nothing else. Who do you think is going to get the deal?
Then there's this.
According to Clyde, historical data shows that when a country starts to industrialize, per-capita usage of oil typically goes from about 1 bbl at the beginning of the industrialization, to between 17 and 27 bbl per capita by the time the industrialization is completed.
That China is just beginning to industrialize, and has much further to go, is evident when you consider the Chinese currently consume just 1.7 bbl per capita per year. And the citizens of India use just 0.9.
Like Clyde, we believe there is no putting the Chinese genie back in the bottle. In fact, in our view, what we are witnessing in China is evidence that when the mainland Chinese, while preparing to take Hong Kong back from the British, came to the realization that free market capitalism with little hindrance from the state was the only way forward.
A New Economic Age in the Making?
The implications of that shift in thinking are making itself felt around the world, with the world's largest nation now super-charged by the world's best economic system.
That is not to say that there won't be rough spots in China's future - the level of stock market speculation there is bound to cause a problem - but the trend in China, and elsewhere, is well entrenched and not going to change any time soon.
If you take another step or two back, it is worth noting that Dubai, a patch of desert with little in the way of natural resources, has used the same laissez-faire economic approach to transform itself into a global economic powerhouse. It is not out of the question that other countries may begin to take note, and follow suit. In which case, the future is bright indeed... as is the case for all the natural resources.
I should have chosen "Cut-n-Paste" as a forum name, since that is what I do, mostly. |
Edited by - pencilvanian on 08/31/2007 19:54:03 |
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Ardent Listener
Administrator
USA
4841 Posts |
Posted - 07/28/2007 : 19:57:52
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As usual, you have presented us with some great posts here pencilvania. Thank you.
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Fanaticism is doubling one's efforts, yet forgetting one's purpose.
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pencilvanian
1000+ Penny Miser Member
USA
2209 Posts |
Posted - 07/28/2007 : 20:35:07
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Just glad I can find stuff worth considering.
Information shared enriches all.
I should have chosen "Cut-n-Paste" as a forum name, since that is what I do, mostly. |
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pencilvanian
1000+ Penny Miser Member
USA
2209 Posts |
Posted - 08/03/2007 : 19:16:35
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Still more on super cycles...
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Yes Virginia, there is a commodity super-cycle
Date Published | Aug. 2, 2007
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 []bmore
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[/b] 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 super-cycle.
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.
.......................(And now my thoughts on the issue, for what they are worth.
There are those who say that without the US Consumer the rest of the wolrd will grind to a halt.
This arguement ignores the fact that now, with three of the
B R I C nations moving from third world status to industrialized status, these nations might try the same tricks that were used in the 1930's in the US.
Examples: Inflationary tactics to increase the money supply,
Make work projects to get the population employed and spending (maybe eaiser to do in China than India or Brazil)
If these tricks don't work, then the nations might encourage spending and discourage saving via inflation or taxation.
The US as the main engine of economic growth is no longer the case, especially with so many US Consumers buried under credit card debt. People don't spend & rack up debt if they are out of work. A scenario that the economists keep overlooking.)
I should have chosen "Cut-n-Paste" as a forum name, since that is what I do, mostly. |
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Commodities & super cycles
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