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It was interesting to listen to the debate in the last week or so about whether the mining boom is over. There were a number of elements at play ion the discussion. One was political-speak, which does not rank highly as a guide to the economic future. Secondly, there were analysts talking up their own books. Thirdly, there was a lack of definition in what was being debated. And finally, there was selective reporting by the media.
The debate lacked definition as some were talking about whether mining material out of the ground was going to slow while others were debating whether mining investment was now finished, prompted by BHP’s announcement of the deferral of their Olympic Dam project.
As a management trainee at BHP many years ago, I had the good fortune to sit alongside Sir James McNeill at the farewell dinner at the end of a two-month training program. He turned to me in response to a question and said: “Son, you do not buy your straw hats in summer.” These words resonated in my ears at the time and still do today. What he was meant was that planning in the mining, steel and infrastructure business sometimes requires 10 or 20 year horizons. Often even longer.
So we should be careful not confuse the mining process with the investment process.
As investors and traders, we are more interested in whether the mining process slowing. Well, mining is easing - that is true - but what does that mean in context?
Firstly let’s look at copper:
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This is a quarterly chart that takes us back to the early 1960s.
If we were to zoom in on some of these years, we would see quite marked movements in the price of copper but the big picture tells us that the last ten-years saw unprecedented prices. Prices that are untenable in the long-term.
But the more important point is that we are only part way into a global economic super cycle, a topic I have written much about over the last ten years in this newsletter and in other media.
Economic super cycles last for maybe 30 or 40 years and within these super cycles we have seen boom/bust swings that have lasted for 10 years or more, and within these we have seen counter-cyclical periods of weakness or strength.
If we are ten years into the economic super cycle, then it is possible we could still have 20 or 30 years to run. But that does not mean it will all be plain sailing – there will still be boom and bust along the way.
So short-term mining is easing but long-term it is alive and kicking. Prices - and therefore profits - may not be so buoyant because high prices for resources have brought new production on-stream. And these will kick in just as demand is easing!
We cannot chat about mining without looking at a chart for BHP:
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This is also a quarterly chart and you will note the high prices over the last ten years have mirrored copper prices. Again, you have to ask: are these prices sustainable?
I expect BHP to ease a little in the short-term:
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When the new low is reached, we can consider the next move. I would be very surprised if BHP fell over the cliff in the medium-term, but we must assume nothing.
Enjoy the ride
Tom Scollon |