Population growth reports say we can expect, barring WW
lll or a virus like Ebola going airborne, upwards of 11.4 billion people on
the planet by the 2060s. There�s just over 7 billion of us now. A possible 50
percent plus gain in our numbers over such a short time is going to put
enormous strain on our abilities to source the needed inputs for survival let
alone bring those in the developing world up to the same level of amenities
that we in the developed world have or expect to obtain.
Rising global scarcity of minerals � the metals our
industrial and connected society uses every day to sustain its lifestyle - is
a subject we will all become very familiar with. That�s because there�s no
getting around the fact we live on a planet with a finite resource base and a
growing population.
Lets state the obvious:
- For over the last twelve years supply
has struggled to keep pace with demand
- Metal supply is finite and subject to
compounding demand from developing nations
- Metal production is highly cyclical,
with intermittent peaks and troughs which are closely linked to economic
cycles - declining production has historically been driven by falling
demand and prices, not by scarcity
- Rates of production and amounts of reserves
continually change in response to movements in markets and technological
advances
- Most mineral resources will not be
exhausted in the near future
- If energy was cheap and unlimited then
recoverable resources would be unlimited
But
- Discovery and development is
increasingly becoming more challenging and expensive
- Average ore grades are in decline for
most minerals, yet production has increased dramatically
- Our most important metals are suffering
from declining ore quality and rising extraction (ore is a different and
inferior chemical or structural composition) costs
- Our prosperity has always been based on
the fact that producing resources yielded more resources than it cost.
However the cost of *energy is climbing, the amount used is climbing but
the returns from energy expended is declining. Eventually the quantity
of resources used in the extraction process will be 100% of what is
produced
- Most older existing mines, the
foundation of our supply, have increasing costs with production rates
stagnating or even declining
- The rate of discovery is not keeping
pace with the rate of depletion, let alone being higher
*Energy can be thought of as a proxy for labor,
materials, energy and externalities � environmental, community impact etc.
The Global Middle Class
The newly emerging middle class are a major contributing
factor to the fundamental demand shift in global commodity markets and per
capita consumption of commodities in developing countries is still only a
fraction of the level it is in developed countries.
Infrastructure spending and increased discretionary
spending by consumers are the key factors driving this rising demand � as
more and more people in emerging markets move from rural areas to the cities,
consumption will increase putting massive upward pressure on commodities.
 The World Bank estimates that the
global middle class is likely to grow from 430 million in 2000 to 1.15
billion in 2030. The bank defines the middle class as earners making between
$10 and $20 a day - adjusted for local prices.
Most of the world's middle class has, until recently,
been located in Europe, North America and Japan.
In the 1970s and 1980s South Korea, Brazil, Mexico and
Argentina built sizeable middle-class populations. Today its China, India,
Asia and Africa adding to the world's middle class. In 2000, developing
countries were home to 56 percent of the global middle class, by 2030 that
figure is expected to reach 93 percent.
The following graph is from PricewaterhouseCoopers (PwC)
�Minerals and metals scarcity in manufacturing: the ticking timebomb.�A
survey of senior executives of leading global companies on the impact of
minerals & metals scarcity on business.
PwC
Let�s take an in-depth look at the challenges the mining
industry is facing going forward. Copper is a very good representative metal
to use.
Copper Consumption
Per capita consumption of copper in the United States was
10 kilograms per person 1965, the same in 1995. In Japan per capita
consumption increased from 6 kilograms per person to 11 kilograms per person
over the same time period. Copper consumption in Korea in 1965 was less
than 1000 tons. By 1995, Korea's consumption of copper had reached
637,000 tons, or more than 14 kilograms per person.
In China, even after years of economic growth, per capita
copper usage is about 5.4 kg. As China�s populace urbanizes, builds up its
infrastructure and becomes more of a consuming society, there�s no reason to
suspect Chinese copper consumption won�t approach or even surpass U.S.,
Japanese and South Korean levels. There�s 1.3 billion people in China, even a
slight increase in Chinese consumption will translate into enormous demand
growth.
The preliminary purchasing managers� index (PMI) for
China rose to 50.5, up from Augusts 50.2. Any number above 50.0 indicates
expansion in the manufacturing sector; any number below, contraction. This is
the fourth consecutive month that China�s PMI has remained above the 50 mark
� meaning manufacturing is stabilizing.
World Bureau of Metal Statistics data shows 12 month
average copper consumption rising to a record in China (already the world�s
largest user of copper), while over the same time period use in the U.S.
climbed to its highest since 2009. The U.S. is the world's second-largest
consumer of the red metal. U.S. manufacturing activity hovered at a near
4-1/2-year high in September and factory employment surged. According to
Morgan Stanley U.S. copper demand is expected to grow by 4.4 percent this
year and is on track to expand for two consecutive years, the first time
since 2000. New-home sales surged in August to the highest level in more than
six years.
India, with its 1.2 billion people, is presently using
0.4 kg of copper per person. The country is modernizing and needs to invest
heavily in electrical power infrastructure. According to the International
Energy Agency (IEA), India's power production will need to rise by up to 20
percent annually to keep pace with its economic and population growth. Just
meeting the required power target would double India's annual copper
consumption.
India's economy grew by 5.7% in the three months to June,
its fastest pace in two-and-a-half years. The new government of Narendra Modi
is focusing on Asian partners China and Japan for enhancing investments in
infrastructure and manufacturing. The growth model pursued by China and Japan
� export oriented manufacturing, heavy infrastructure building and
urbanization - has become India�s blueprint for pushing growth up to and
beyond the 7 percent mark.The annual world average per-capita consumption of
copper is 2.7 kg.
Resource Nationalism & Political Risk
Resource nationalism is the tendency of people and
governments to assert control, for strategic and economic reasons, over
natural resources located on their territory.
The major benefit for developing countries from natural
resource development comes in the form of:
- Employment/wage�s
- Government revenues � taxes, royalties
or dividends
- There can also be indirect benefits
such as knowledge and technology transfers.
- Foreign investments, made for off-take
agreements, can also involve infrastructure investments, sometimes on a
massive scale, like electricity, water supplies, roads, railways,
bridges and ports.
Indonesia�s President Yudhoyono prohibited ore exports
from Southeast Asia�s largest economy in January. He�s betting that
investment and higher prices would more than offset job cuts and lost revenue
from unprocessed ore shipments. The Energy and Mineral Resources Ministry
said on August 14th the ban on ore exports will remain in place. The curbs
could spur as much as $18 billion in investment in processing plants by 2017,
US$4.5 billion has been invested so far this year..
Resource extraction companies, because the number of
discoveries was falling and existing deposits were being quickly depleted,
have had to diversify away from the traditional geo-politically safe
producing countries.
The move out of these �safe haven� countries has exposed
investors to a lot of additional risk.
 �National governments are no longer
the only, or even in many cases the primary, source of political risk in
mining projects. Political risk can stem from local governments,
international and local NGOs, community groups, local competitors or any
other group advancing political objectives. Similarly, the types of issues
that mining companies have to deal with are quite varied. These range from
having to deal with things like corruption, NGO scrutiny, maintaining a
social license to operate, a lack of clarity over the implementation of
mining legislation through to poor infrastructure and HIV/AIDS.� Ben Cattaneo, Managing political risk in mining
Human Resources
The Mining Industry Human Resources Council (MIHRC)
estimates that over 60,000 people employed in the mining sector are expected
to retire by 2020 but that the industry will need an additional 100,000
people just to maintain current levels of production.
The Petroleum Human Resources Council of Canada warned a
severe oil patch labor shortage is looming and that the �patch� will need to
hire 24,000 new employees by 2014.
In both industries the biggest demands will be for workers to replace staff
who reach retirement age.
The existing shortage of skilled personnel and the
imminent retirement of so many baby boomers (many are mid level managers)
means the mining sector is in direct competition with the energy sector for
people to train and prospects are bleak for either industry to obtain the
necessary bodies and minds.
�One of the challenges facing Teck Cominco is the
pending labor shortage. Almost 50% of our labor force is eligible for retirement
over the next 10 years.� Donald Lindsay,
President and CEO, Teck Cominco Limited
Copper Talk
Kitco has a few things to say regarding copper:
�Further urbanization and industrialization of China,
and to a lesser extent India, will continue to increase copper intensity;
persistently threatening to overwhelm annual global copper production by
2019�
For many developed nations within the Organization
for Economic Co-operation and Development (OECD), developing significant
new (Greenfield) copper mining projects has become a serious challenge as
stricter regulations, environmental concerns, and an inability to accurately
predict capital expenditures (Capex) prohibitively increase project costs
without removing the risk of significant political opposition�
Though mined production of copper is set to increase
over the next few years, increasing demand and reduced capital investment for
exploration and development of new deposits will likely lead to material
supply shortfalls around 2020�
The long run trend of falling head grades for copper
is an additional concern. Since 2000, average head grades for copper, without
adjusting for production weightings, declined from 1.3% to 1.1% in 2012.
Furthermore, the weighted average head grade for mined copper is
likely less than 1% as several of the world�s largest copper mines have been
in production for many decades and are now mining extremely low grade ore
(less than or equal to 0.5% Cu). As head grades decline, costs rise for a
given tonnage.� Kitco.com, Multi-Year Global
Copper Market Outlook
A Yale University study said new discoveries of copper
have raised global reserves by just 0.63 percent per year since 1925 but
usage has risen at 3.3 percent per year.
Mining Facts:
- The low-hanging mineral fruit has been
picked
- Metallurgy is becoming more complicated
- Energy is expensive and using more to
achieve the same amount of production
- There is no substitute for many metals
except other metals � plastic piping is one exception
- There hasn�t been a new technology
shift in mining for decades � heap leach and open pit mining come to
mind but they are both decades old innovations
- Increasingly we will see falling
average grades being mined, mines becoming deeper, more remote and come
with increased political risk
- Labor shortages loom, baby boomers are
starting to retire en masse, and the resource-orientated talent pool is
thinning out
- We're rushing headlong into shortages
of resources and the conflicts generated from a lack of security of
supply
Mine production of many metals shows us a number of
similarities:
- Slowing production and dwindling
reserves at many of the world�s largest mines
- The pace of new elephant-sized
discoveries has decreased in the mining industry
- All the oz�s or pounds are never
recovered from a mine - they simply becomes too expensive to recover
Conclusion
On September 16th 2014, copper futures on the Comex
jumped the most in 13 months, triggering a brief trading halt. The cause? A
news report had said China, the world�s top metal user, had increased
government stimulus measures by 500 billion yuan or US$81 billion.
Copper�s price jumped as much as 4.1 percent on the news,
the largest intraday increase since May 3, 2013. The increase triggered a �stop
spike event� � a trading halt. Bloomberg said copper trading across all
contracts was 70 percent more than the average of the past 100 days.
Now that�s a jittery copper market and no wonder.
This author believes that today�s worries have only
temporarily unseated the commodities super-cycle with the recent sell-off
being nothing more than a short downturn within a secular bull market for
commodities.
Are metals, and perhaps a couple of copper junior
resource companies, on your radar screen?
If not, they should be.
Richard lives with his family on a 160 acre ranch in
northern British Columbia. He invests in the resource and
biotechnology/pharmaceutical sectors and is the owner of Aheadoftheherd.com.
His articles have been published on over 400 websites, including:
WallStreetJournal, USAToday, NationalPost,
Lewrockwell, MontrealGazette, VancouverSun, CBSnews, HuffingtonPost,
Beforeitsnews, Londonthenews, Wealthwire, CalgaryHerald, Forbes, Dallasnews,
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HongKongHerald, Moneytalks, SeekingAlpha, BusinessInsider, Investing.com and
the Association of Mining Analysts.
Please visit www.aheadoftheherd.com
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please contact him for more information, rick@aheadoftheherd.com
***
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This document is not and should not be construed as an
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Richard Mills has based this document on information
obtained from sources he believes to be reliable but which has not been
independently verified.
Richard Mills makes no guarantee, representation or
warranty and accepts no responsibility or liability as to its accuracy or
completeness. Expressions of opinion are those of Richard Mills only and are
subject to change without notice. Richard Mills assumes no warranty,
liability or guarantee for the current relevance, correctness or completeness
of any information provided within this Report and will not be held liable
for the consequence of reliance upon any opinion or statement contained
herein or any omission.
Furthermore, I, Richard Mills, assume no liability for
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