Boom and Bust … and back again
Recently there is more and more talk about the recovery of the mining industry. For sure, copper prices recovered, zinc is at a decades high and cobalt saw a phenomenal price rally recently. While the mood is definitely brightening up among executives, the question remains – is this just a fluke, or is there something more substantial coming.
To get insights into this topic, and make any predictions one has to understand two things better, though. First, one has to answer what constitutes a mining cycle (ie. boom vs. bust), and second at what relative point are we in a historical context. Only then one can get some sort of idea where the mining industry is heading.
What is a mining cycle
There is in a fact a pretty simple answer to this. It starts all with the fact that whenever the world economies expand, they suddenly require lots of metals. Since mine supply is inelastic (ie. they can’t just ramp up production since they usually already operate at full capacity and additional metal supply require a lot of capital to get into production) they can’t cope with this extra demand. First any inventory, say in warehouses is drawn down to cope with the extra demand. Prices won’t change a lot when this is the case, but when demand for metals increases further, prices rise eventually. A boom is under way now and induces producers first to crank up current operations but ultimately they need to take some money into their hands and either expand the current mine or build another one. This however can take years (and finding a viable deposit and building a new mine can take a very long time indeed – 20 years or more is very common, depending on the deposit type). The additional supply will eventually help to keep any further price rises in check. If the supply addition is overshooting the demand (and in competitive markets that is very common) the economy will end up with more material then what is required. This in combination with a potential retraction of demand (say economic crisis) will bring down prices yet again. To offset this trend there are a two main options and they either imply to reduce supply (mostly to close mines that are uneconomic at the now lower price levels), or to reduce costs of current production (which is either done by expanding capacity that brings down unit costs, or by retrenching people .. so the operation is competitive longer). A bust started and the process goes on until a new balance between supply and demand is found and the cycle starts all over again.
So at what point are we within the mining cycle now?
To judge where we are and whether the next boom is looming or not one needs to see the current state in its historical context. This poses a problem however, since it seems very difficult to track down a chart that depicts this temporal relationship. So I decided to come up with my own, using price data (or rather their temporal variations) that I painfully collected over the last couple of years. At this point I do not want to go too much into detail on all the technicalities on the many sources I used and how I standardized and transformed them – it would be a boring read for many. Instead I want to show the resulting chart of what I believe is a good representation of the state of the mining industry over the last 180 years. This graph encompasses the bulk of time since the onset of the industrial revolution, which in itself was started by the mining industry.
As one can see, with the data charted, many mining cycles can be revealed, and a lot of surprising observations can be made. Some of which I want to point out here:
- Scale and frequency of mining cycles
Depending on how one reads the chart one can distinguish up to sixteen cycles (not all of them end up necessarily in a recession) that range between eight and fourteen years in length from peak to peak*. As can be seen, during all of this time, the maximum average monthly growth rates for most of the cycles never touched one percent during peak times. Notable exceptions to this are the time periods of the first world war, the times of the great inflation in the 1970s and early 1980s, as well as the period of the last super-cycle, driven by the emergence of China as an economic superpower. Among these three cycles, each subsequent boom was stronger than the previous one. The last cycle peaking at the beginning of 2008 was thereby truly a super cycle. The biggest boom ever had a price growth rate of almost triple at its peak than most of the other cycles during the last 150 years.
- Length of mining booms and busts
It is apparent that the frequency of booms and busts decreased over time. At the same time though a change in the length of the booms and busts themselves happened. Before the Great Depression booms (positive growth) lasted on average around six years while after it they almost doubled to 11 ½ years. It also appears that busts (negative growth) before the Great Depression were deeper but only significantly shorter than the more recent ones (2 ¼ vs 2 ½ years). Speaking of crisis, it is worth to point out that the longest crisis in the last 180 years, if not since the start of the Industrial revolution, was the Great Depression. However, the deepest was in fact the one in the mid 1980s followed surprisingly by the one we just left behind us. Interestingly enough, those two significant downturns also follow the two biggest booms… the old saying “who flies high, falls deep” holds – and maybe that is not so surprising after all.
- Economic policy and mining cycles
When looking at the frequency of booms one realizes that two distinct phases exist in the considered time period. The first phase from 1840 up until the Great Depression in the 1930s is characterized by cycles that range between eight and ten years. The subsequent second phase sees cycles with increased lengths of around fourteen years. I postulate that this step change for the longer economic cycles is a direct result of the introduction of Keynesian economics. Policies by Keynes imply that the government has a role to play in the general economy, not necessarily in running businesses, but in providing a policy framework and providing financial means that allow for economic expansion of an economy. By stimulating demand during economic downturns a government can ease the downturn and in fact turn it around and jump start an economy. The New Deal was such a program that ended the Great Depression and brought the US and world economy back on track. Such policies of course have positive repercussions on the resource industries since government programs mainly revolve around resource intensive infrastructure projects. With its proven track record Keynesian policies became the staple of any policy maker around the world up to this day.
- Economic periods and mining activity
As already noted earlier, the last mining cycle was driven by the ceaseless economic expansion of mainland China. Such a relationship between industrial development and mining booms is not new, though. When looking back one can clearly see that mining booms coincide very well with the industrious and peaceful Edwardian Era (UK), the New Deal (US), the post war reconstruction of Europe and Japan, the times of the New Frontier (US) and the emergence of the Asian Tigers. The correlation gets less pronounced during the times of the roaring twenties and a bit more shaky when looking into the 1800s. The period of the Great Inflation or Stagflation as it is also known is also an exception. It represents a time when energy prices skyrocketed mainly due to armed conflict in the Middle East, an area where most of the worlds oil reserves are concentrated. These conflicts resulted in oil embargos and therefore oil price increases. Since the production of metals is a very energy intensive process it does not come as a surprise that metal prices increased significantly over this time period, as well.
- War and mining
Another fascinating pattern emerges when looking at onsets of wars and the start of a mining boom. Especially in the 1800s and the early 1900s did mining booms coincide with the start and length of a war. Wars did definitely get more resource intensive over time. For instance, while the wars of the Napoleonic era were based on single shot guns, the emergence of the machine gun as a powerful tool of war during the US civil war created an unprecedented demand for shells and bullets. Demand for metals of an industrial scale, with the emergence of steel and ever bigger guns, found its biggest expression with the start of the Great War in 1914. Mines ran at full capacity and prices for metals skyrocketed. Mining barons made fortunes, such as the Guggenheims with their investment in Kennecott. War profiteering as it was known and decried back then was never better. After World War I, as the Great War is known now, this intrinsic relationship changed somewhat. For instance, one of the first measures when World War II started, was that the US government set the prices for the metals that were necessary for the war industry. This allowed the allied forces to plan their expenses better and ultimately win the war. One could see a whiff of a spike during the 1950s during the Korean war. However, weaponry represented a much smaller share of total metal demand already and hence this war helped demand for mining products but by far was not the trigger for the boom.
Now that we gathered some insights on the history of the mining cycles, lets revisit the initial question – Is the next boom at hand? I think when looking at the right hand side of the extended chart below one definitely can answer with a resounding “YES”! After the peak of the last super-cycle in early 2008, and reaching the bottom in early 2016, we are on a upswing yet again. If history is any guide, we will see another boom that will peak at some point in late 2022.
The underlying economic reasons of why we will have this boom will remain in the dark for some time and only in hindsight will we know. After all, only very few people knew back in 2001 that China will drive the commodity markets for almost two decades. There are candidates for the coming boom, though. Be it India, the rise of the global middle class or my favourite, the radical pivot away from a global economy based on petroleum to one based on electric power. The latter would indeed require enormous quantities of copper, lithium, cobalt, nickel, uranium and aluminum. In fact mining would become a sexy and forward looking industry again, like it was a long time ago. We will surely know in some eight years or so what the trigger was. Regarding the scale of the next boom, one has to wonder though if we see such price growth as during early 2000s. It might be very likely that we fall back to the historic average peaks of around one percent growth as we have seen since the 1860s.
No matter what, it would be wise to invest in the mining industry yet again and take a ride along to new riches. Companies should also make sure to get the young mining engineers and geologists lined up now for the big projects to come. Successful shall those companies be that get their timing right to cash in when times are rolling again! For sure, billions will be made, economies transformed and living standards raised. Exciting times are to come for mining, yet again!
…Time moves fast! For an update on this story visit Boom and Bust .. an update!
* The cycles after the Great Depression are pretty consistent in their length bar for the little downturn in the mid 1990’s. I call this the “Russian Dip” since I believe it is an outlier of the general picture that emerges in the last 150 years. One has to recall that the resource based economy of Soviet Union collapsed at the beginning of the 1990s. The resources that found their ways into tanks, ships and SS-20 rockets suddenly had no other way to go than to the west. Russian metals subsequently flooded the world markets, especially since local production costs were so low, too. This episode therefore represents the reintegration of the Soviet bloc into the world economy. This took 18 months, which is impressive given the fact that Russia is the biggest country in the world, and one rich in resources, as well. In any case, it had a significant influence on the commodity prices and was painful for the western mining industry. However, in the bigger picture of economic history it is only a blip and is an exception that proofs the point.