Dec '12/Jan '13

MAC Economic Commentary

A bumpy road to a bright future

By Brendan Marshall

This was an active year for the mining industry. China’s weaker demand for mined products and other global market forces sent price fluctuations through several mined commodities. The continued credit crunch adversely affected exploration prospects. Resource nationalism continued to rear its head as miners’ number one risk worldwide. These events shaped the past year in mining and have affected forecasts for 2013. Although the industry’s outlook remains favourable over the long term, there is no shortage of challenges to face over the coming year.

China, an enormous consumer of minerals and metals and a driver of growth in the mining sector, made headlines in March by cutting its annual growth target from eight per cent – its goal in place since 2005 – to 7.5 per cent. In October, the IMF followed suit, also reducing its growth projections for China. To put these figures in perspective: 7.5 per cent growth is still robust, and China still accounts for upward of 40 per cent of global base metal demand, compared to five per cent in the 1980s. If the past is the best indication of the future, then China is unlikely to run out of gas overnight, and will continue to drive demand for minerals and metals.

Despite these moderately reduced growth projections, the prices of certain key products remained buoyant, albeit volatile at times. For example, iron ore prices slumped 42 per cent from April’s high to a three-year low of $87 per tonne, only to rebound to $110 per tonne in September, as Chinese investors anticipated domestic stimulus measures to increase demand for steel. Potash, though buoyant, has also descended from price peaks in recent years. Meanwhile, some speculate gold will reach $2,000 per ounce in the short term while copper remains strong – both supporting multi-metallic operations across Canada.

Even with historically buoyant prices, factors beyond supply and demand played larger roles for some mined products in certain jurisdictions. The price of nickel, for example, has tripled over the last decade to $17.7 per tonne. However, when production input cost increases are factored in – such as oil and coal’s respective 349 and 296 per cent increases – the facts change. In Canada, when changes in labour costs (up 26 per cent), consumer price index (up 25 per cent) and dollar value (up 56 per cent) over the decade are factored in, the ­reality becomes clearer: high prices do not necessarily equal high profits.

In Canada, the significantly reduced availability of capital is a challenge for prospectors. Although it is also true for some majors, today’s environment has been particularly demanding for junior companies. The current risk-averse sentiment among investors, linked to uncertainty about global economic strength, is likely to endure until U.S. and European economic fluctuations stabilize. This prospect is difficult for many Canadian companies and may carry on for some time yet. Ambiguity over the length of global economic uncertainty, the adverse impact this uncertainty has on the ability to raise funds, and the crucial exploration role that junior companies play present significant challenges to the industry, especially considering the marked decline in Proven and Probable Canadian base metal Reserves.

Finally, according to Ernst & Young, resource nationalism remained the number one risk to miners. Perhaps the most ­glaring example is Australia’s July 1 Senate approval of a ­30 per cent tax on iron ore and coal mining profits – proof that no jurisdiction is immune to this phenomenon. Similar examples are spurring mining companies to exercise heightened precaution when investing in future projects. But Canada’s aggressive trade expansion has helped increase both flexibility and investment security in resource-rich countries. Examples from 2012 include bilateral agreements with China, Tanzania, other strategic partners and the Trans-Pacific Partnership, whose importance and scope are poised to surpass NAFTA.

Despite concerns, particularly over Chinese growth rates, the Canadian mining sector’s future is bright. Proactive ­measures ­– such as preserving Canada’s attractive and stable domestic regulatory and investment environment, while enhancing international growth opportunities through bi- and multilateral trade expansion – provide Canadian industry a degree of certainty and flexibility in a volatile time. Growth, even if at a moderately reduced pace, is likely to remain strong over the long term. As a country rich in mineral resources and mining talent, Canada has the opportunity to capitalize on a growing mining sector, even if there are some bumps along the way.

Brendan Marshall is director of economic affairs at MAC. He works to advance the mining industry’s interests and understanding of key economic issues such as taxation, international trade and investment, transportation, energy and climate change, and innovation.

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