Forecasting is always precarious, particularly given current economic and political volatility. The truth is, no one knows if dark clouds will be rolling in for 2012, but there are subtle indicators as to what mining supply firms might expect in demand for their goods and services.
At the time of writing this article, leadership in the United States is deadlocked and it seems difficult to expect much improvement in the market south of the border that takes some 75 per cent of Canadian exports. Even more serious is the situation in the Eurozone where the economic collapse of countries – if not the Euro currency – is predicted by some.
Meanwhile, there are the high growth economies of India and China, as well as other Asian, Latin American and African countries. Developing countries that are urbanizing and expanding their middle classes are key to the growth in demand for mined commodities. The World Bank says that in 2000, developing countries were home to 56 per cent of the global middle class; by 2030, that figure is expected to reach 93 per cent.
According to the International Monetary Fund, the share of emerging and developing economies in world GDP is expected to overtake advanced economies by 2014. More than shifting the flow of capital, this is also shifting in the way in which commodities move over borders. Thus, the mining industry could be sustained by the third world, even if Europe and North America falter.
Commodity prices are the barometer of the mining industry. The past 40 years have shown us that the commodity cycle is six to ten years. When prices rise, exploration is stimulated, discoveries are made, mines are constructed and then go into operation, and existing operations are expanded. This part of the cycle is wonderful for suppliers to the mining industry.
However, when commodity prices fall, exploration is curtailed, mines cut production and some close. This part of the cycle is clearly not good for mining suppliers, and much of what will happen to mining suppliers in 2012 will depend on commodity prices.
IndexMundi (www.indexmundi.com) offers a Commodity Metals Price Index, with 2005 = 100, which includes a basket of copper, aluminum, iron ore, tin, nickel, zinc, lead and uranium price indices. This index stayed below 100 from 1981 to late 2005. From then it took off, doubling in 2007 and remaining high until mid-2008. In the spring of 2009, it crashed, returning to about 100. After that, it rose steadily, hitting 250 in April 2011. From April to September 2011, the index dropped to 225.
Gold is another matter. It is a key commodity for companies providing goods and services to the exploration industry, since 50 per cent of world investment in mineral exploration is focused on the yellow metal. From 1980 to 2004, gold remained under US$450 per ounce, after which the price soared, rising to nearly US$2,000 before settling back recently.
On the supply side, high commodity prices allow mining of lower grades. However, the rock outcrops of the world have been well prospected, so new discoveries will be harder to make as they will be hidden under cover or at depth. Further, the permitting of new mines is becoming more difficult and expensive. It is doubtful, therefore, that major increases in supply will overcome demand increases, thus forcing prices down.
So, what is the forecast? Barring a major catastrophe like the credit crisis and recession of 2008 and 2009, we are in a new era of economic expansion, led by the developing world, that will keep mined commodity prices at high levels, which, despite increasing costs, will keep mining companies profitable and continuing their quest for new resources.
Thus, based on commodity prices, the forecast is for relative stability over 2012 for the mining industry and its suppliers, even if the economic news in developed countries is disappointing. If, however, the world economy does run into a major crisis, it is to be expected that mined commodity producers may suffer less than other industrial sectors. Even if there is a plunge in commodity prices as there was in 2008, the downturn should be as short-lived as it was then, because prices will be supported by demand from emerging economies.
Jon Baird, managing director of CAMESE and the immediate past president of PDAC, is interested in collective approaches to enhancing the Canadian brand in the world of mining.