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 [send him mail] writes from Switzerland.