|
For the better part of four years now, commodity prices
have been rising as the unexpectedly rapid pace of urbanisation of Asia,
running in a not-entirely unrelated concurrence with the deepening
industrialisation taking place in Eastern Europe, Latin America, the Gulf,
the FSU – and even parts of Africa – has boosted demand to levels
totally unforeseen during the resource industry’s Pharaonic famine of
the 1990s.
Given both the scale of the increase and its longevity
to date – and taking account of Wall St’s predilection for
memorable marketing tags – some pundits have gone so far as to call
this episode a "Supercycle."
Others are not so sure and point out that such
reasoning smacks rather too much of the cries of "it’s different
this time" which eventually accompany any boom – and whose
increasing stridency usually signal its imminent demise.
After all, one of the underlying tenets of economics is
that the emergence of a greater scarcity of some resource is made known in a
higher price and that this, in turn, induces consumers to be more sparing in
its use – or to seek for substitutions – while it also alerts
producers to the fact that there are extra profits to be made either by
supplying more of the good, or by finding ways to make what we do have
go a lot further.
So basic is this that at least one highly vocal critic
has used this concept – if only by way of a kind of
extrapolation-squared – to predict that, because
base metals prices are currently so far above what he sees as their marginal
cost of production, the market will soon be shivering through a "nuclear
winter" of shrinking demand and long-term over-supply.
In passing, we should note that this same marginal cost
seems to be escalating rapidly (e.g., BHP Billiton’s recently announced
64% budget blowout at its Ravensthorpe nickel project or the IEA’s
admission that 95¢ in $1 of extra energy E&P spending has been eaten
up in inflation, these past five years) and that it is dangerous to attach
too much significance to one, fairly static datum in a dynamic world of
rapidly shifting variables.
More generally, the idea that the higher prices which
result from greater scarcity will entrain their own solution may be all very
good in theory, but the hard practical experience is that a solution will not
be achieved automatically, even
given the entrepreneurial will and the supply of ready capital with which to
make the attempt.
Let us take a few examples of what may go wrong, here
from the world of mining.
Zinc giants Teck Cominco recently told us that third quarter
sales of the metal would be reduced by 28%, or 50,000 tonnes, thanks to a
burst of unseasonably cold and foggy weather which hampered the firm’s
ability to ship concentrate from its Red Dog mine in Alaska. A convenient
excuse for management failings, perhaps, but, nonetheless, testimony to the
problems encountered in an industry running absolutely flat out.
Nickel major Inco, for its part, not only had to cope
with a long-lasting industrial dispute at their Voisey’s Bay property,
but also had to endure a veritable attack of the gremlins, as listed in their
third quarter report:
"... repairs to an electric furnace damaged by
fire… took longer than originally anticipated… a motor failure on
one of the oxygen plants in July 2006 [led to a] long lead-time to purchase
and install a replacement motor… a production incident… damage to
the furnace and a converter and has led to the temporary suspension of the
operation of one of the two smelter furnaces..."
The result of all this? At a time of record prices and
insistent end-demand, the company’s nickel production fell 12% below
target and copper missed by close to 20%.
BHP, of course, made the wrong sort of headlines thanks
to the labour dispute at its signature Escondida copper mine in Chile, an
event which was enough to lower output by up to 40% over the course of
several fraught weeks.
Meanwhile, top gold miner, Newmont owned up to a
300,000-ounce shortfall in gold output, citing a wide range of mishaps. As
Exploration Vice President Steve Enders told a Denver audience
– echoing the views of many of his peers – the main worry,
though, remains reserve replacement.
"Newmont and the rest of the industry are really
behind in greenfields and generative exploration," he said, noting that,
at the same time, "the 14.5% escalation in drilling costs in one
year… is killing us."
Then there is another bogie to beat for, as David
Humpreys of Norilsk Nickel told us last month, the company will invest
"the better part of $1 billion" in each of the next four years with
the main result, not of delivering appreciably more metal to the market, but
merely of "serving to avert what would otherwise have been a significant
reduction in production resulting from declining ore grades."
Ahh! Costs! Equipment backlogs! Skill shortages!
Delays! Depletion and overdue maintenance!
Add to this litany of woe the likely cartelisation and
hidden inefficiencies involved in the current wave of both horizontal and
vertical integration being driven partly by Wall St short-termism and partly
by executive hubris.
Notice the political banditry inherent in the creeping
nationalisation being enacted, whether covertly via permitting issues, by the
insistence on allowing national champions into what were previously private
ventures, or through post-hoc demands for confiscatory levels of royalties
and the imposition of "windfall" taxes.
Lastly, consider the affliction of that anthrophobic,
anti-capitalistic and wholly irrational environmentalism, whether exemplified
by cuddly panda(r) pressure groups or in the compulsory purchase of those
contemporary green indulgences which masquerade as carbon permits.
This last may be the most pernicious of all since it
serves so many disparate, destructive interests all at once.
Big business can enjoy it – as it does all
regulatory blankets – as a means of disadvantaging smaller, would-be
competitors. Boardroom egoists can bask in the vainglory of the eco-plaudits they can win from both kings and credulous
crowds, while disregarding their primary duty to maximise shareholder
returns.
Union leaders relish it, because
it allows them to dress their selfish restrictionism up in the colours of
compassion. "No!" they cry, "You mustn’t move the
factory to China – they pollute too much! Here at home, we may be
relatively expensive, but at least we’re clean. Pay us more for the
sake of your children!…"
Messianic political leaders – each lustful of his
precious "legacy" – Jacobin fanatics, and the kind of
frustrated dirigistes who secretly bemoan the fall of the Berlin Wall
can all exploit Green scaremongering to order their twisted Dystopias, to
impose whole new rafts of taxes upon their electors, and to interfere ever
more closely with individual liberties as they do.
National Security Strangeloves have a certain
coincidence of interests here, too, for not only can they hope that the
adoption of the Cult will inhibit the economic ascent of any potential rivals
to their own Hegelian deity, but they can easily substitute the
militarists’ hallowed concept of "autarky"
whenever they encounter the nauseating
buzzword, "sustainability."
Then there are whole faculty buildings packed with hack
scientists whose uninspired work promises to deliver neither fundamental
insight nor commercial usefulness, but who can enhance the importance of
their pronouncements – and better harvest public funding – by
uncritically endorsing the new atmospheric atavism.
Next up we have the unwashed hordes of woad-painted New
Age warriors – dole-devouring, didgeridoo-droning addle-heads –
all convinced that if they throw a few brickbats outside a WTO meeting they
will soon usher in the kind of faux-Celtic
fantasy world best restricted to the escapist realms of the RPG addict.
In contrast, we have an entire concours
d’elegance of those fad-ridden fortysomethings who are the latest
designer-labelled devotees of the Earth Goddess, their Kensington mews coffee
tables groaning under the forest-felling weight of the pretty picture books
issued as holy writ by Gaia’s own High Priest of the Britons, the
Attenborough.
Finally, we have the same hoi polloi-hating coterie of
Michelin-munching, silk-suited Platonic elitists – of the kind so
mercilessly exposed in John Carey’s seminal work, The
Intellectuals and the Masses.
These sanctimonious, self-appointed meddlers can
usually be found advocating higher taxes for budget holidaymakers while
hypocritically flying first class from one five-star NGO summit to another.
These are the Davos Dominicans – mendicants who nonetheless manage to
live high on the hog as they seek to impose their narrow and stifling
orthodoxy on all us poor, toiling peasants, while wielding Bell, Book, and
Biofuel in the attempt to exorcise us of that most diabolical of fiends, the
dreadful demon, Carbon.
Given all of the above, we can perhaps begin to see why
the supply-demand issue for commodities is not exactly guaranteed to meet as
smoothly and predictably as the crossed lines on an economist’s chart.
Therefore, while not wanting to give any credence
whatsoever to the Peak Oilers’ and Climate Catastrophists’ dismal
Malthusianism by claiming that mineral and energy resources are in any
meaningful sense "finite," what we must recognise is that the
world’s diggers, drillers, dairyman and dirt farmers will have to spend
ever more prodigious amounts of capital, while employing ever more sophisticated
techniques, in seeking to exploit finds in ever more remote, physically
extreme, and politically uncertain regions, if they are to meet the basic
needs of this, the ongoing, second industrial revolution.
Sean
Corrigan
Diapason
Commodities Management
Sean Corrigan is Chief
Investment Strategist at Diapason Commodities Management (Lausanne and
London)
Copyright © 2006 - Copyright © Diapason Commodities Management
- Sean Corrigan
Information
contained herein is obtained from sources believed to be reliable, but its
accuracy cannot be guaranteed. It is not intended to constitute individual
investment advice and is not designed to meet your personal financial
situation. The opinions expressed herein are those of the author and are subject to change without notice.
The information herein may become outdated and there is no obligation to
update any such information. The author,
24hGold, entities in which they have an interest, family and associates may
from time to time have positions in the securities or commodities discussed.
No part of this publication can be reproduced without the written consent of
the author.
|
