By Tony D’Altorio
The world watched with baited breath last week as all 33 Chilean miners emerged into the sunlight. Trapped for 69 days underground in a copper mine, their story inspired people everywhere. It should inspire investors too, as it tells a tale of metals becoming ever more scarce.
Not far from where the miners were trapped, lies the world’s largest copper mine, Escondida. There, 20 years of digging has left a hole the size of downtown Manhattan. At its peak in 2007, Escondida accounted for 10% of the world’s copper output, but no more. Production has fallen 25% despite the best efforts of majority owner, BHP Billiton ADR (NYSE: BHP).
The faltering dig illustrates the challenges facing mining companies. With rising demand for metals in high-growth economies like China, mines developed in the 1980s boom can’t keep up. Those commodities have soared in price as a result. From copper and iron ore to tin – which recently hit an all-time high – prices are on their way up.
The London Metals Exchange index of prices recently rose to its highest level in two years. It hasn’t hit that since the 2005-2008 metals price boom and, even then, only for a few months.
The Industrial Metal Super-Cycle Returns
The combination of resurgent demand and anemic supply feeds into the idea that aluminum, copper, lead, nickel, tin and zinc are in a super-cycle. That is a decades-long period of higher prices due to the emerging middle classes, as power behind the global economy shifts eastward.
Not that long ago, many bears argued against the entire idea of a super-cycle. That was about two years ago, during the financial crisis, but they can’t really say the same today. China alone indicates a strong, ongoing, structural shift. Its rapid economic and industrial development has made it the largest consumer of almost every metal out there.
Consumption of copper, for instance, has more than quadrupled there since 1995. Meanwhile, its share of global copper demand has risen from less than 10% to nearly 40%. And China is currently entering the most intensive phase of its growth in terms of metals consumption. As its middle class grows, demand for consumer goods does too. The same holds true for China’s infrastructure plans. As it builds roads and railways, power lines and sewage systems, it needs all the resources it can get. So since it isn’t set on slowing down anytime soon, neither should metal demand.
Supply Can’t Keep Pace With Demand
While demand is significant, the real story lies on the supply side. Quite simply, mines can’t keep pace with demand on anything except for aluminum. Around the world, mining firms have to move more and more earth to find the same amount of metal. In other words, they are relying on lower quality ores.
And these days, bad weather, strikes and other disruptions get in the way even further. Just a few weeks ago, Indonesia’s PT Timah [PTTMF.PK] – the world’s largest tin exporter – said it couldn’t meet supply contracts in 2010 thanks to heavy rains and ensuing declines in output.
Also, no new supplies are readily available; it takes a long time for mining investments to pay off. The process of exploring, developing and bringing a major deposit to market can take up to 20 years. Of course, the way mining companies cut spending on exploration and development during the recent financial crisis to conserve cash means an even worse shortage of new projects for the medium term.
In addition, mining companies have been forced to turn to countries such as Mongolia and the Congo as deposits in the so-called first world have been depleted. The best remaining metals deposits are in physically and politically challenging locations.
Finally, mining companies face challenges such as lack of financing, higher taxes, and government demand that they pay for water, power, infrastructure and environmental footprints. Add it all up and you get one very constrained pipeline.
Industrial Metals Super-Cycle Investments
The last time we had a metals super-cycle like this was back in the late 1800s and early 1900s, during the American industrialization. Today, this one appears only about halfway through.
With plenty of time to still get in, investors have a goldmine of choices to exploit…
- There are, of course, large global mining companies like BHP Billiton or Vale ADR (NYSE: VALE).
- Or ETFs such as Global X Copper Miners ETF (NYSE: COPX) and the First Trust ISE Global Copper Index Fund (NYSE: CU) offer more broad-based selections.
- The same goes for ETNs that tie directly to the performance of industrial metals. UBS E-TRACS CMCI Industrial Metals Total Return ETN (NYSE: UBM), for one, tracks copper, aluminum, nickel, zinc and lead.
- And if you care more for one metal over another, iPath has ETNs for copper (NYSE: JJC), nickel (NYSE: JJN), lead (NYSE: LD) and tin (NYSE: JJT), etc.
Regardless of what you ultimately choose, remember that super-cycles don’t happen very often. So consider any weakness in metal prices a buying opportunity.
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