Governments, not markets, could fuel the next mining boom

The mining industry underwent an uncharacteristic outbreak of optimism in 2022. The continued hopes of a new energy demand boom, combined with the shockwaves of the war in Ukraine, and the global post-COVID recovery, spurred hopes of growth after a long period of underinvestment. For the first time in years, the word ‘supercycle' started to be spoken once again. Commodity supercycles are triggered when the steady growth of demand, driven by rising populations and economic development, runs up against cyclical downtrends in mining and processing investment. The result is a period when prices and supply investment run up together, reaching a wave that only crests when supply finally outstrips demand. The last such cycle, between 2004 and 2007, was a boom time for miners - and for mining investors. But hopes that the industry was about to enter such a purple patch have ebbed away since early 2023, as metals prices have trended down since the start of the year and fears grow about Chinese demand. However, the truth may be that the investment supercycle is indeed about to start. It's just that rather than being driven by Asian growth and market forces, it will instead be spurred by Western demand and government intervention, and will be aimed at preventing commodity shortages, not at waiting for them to develop. China disappoints Since the 1990s, the key driver of commodity demand has been the growth of China, which in 2009 overtook the US as the world's biggest exporter. China's huge manufacturing industry, not to mention its massive domestic property sector, was the key driver for base metal and iron ore demand. As China rose to become the top metals user, it also moved up the value chain. Steelmaking and base metal smelting capacity boomed in China, as it ebbed elsewhere. And though China's own mining sector remains small, relative to demand, Chinese companies headed overseas, investing in projects around the world, particularly in Africa and Central and South East Asia. But now, for the first time, commodity analysts are losing their faith that Chinese demand will permanently grow. "China is more likely to be a headwind than a tailwind for demand over the next decade," Jefferies analysts, led by Christopher LaFemina, said in a note in July. China bears are hardly a new phenomenon. A vocal minority of economists have been eagerly predicting the imminent collapse of the Chinese economy for decades now, citing an ever-worsening demographic profile, weak domestic consumption, and an overheated property market. However, these naysayers have until now been stymied by consistently strong growth. Now, perhaps for the first time, the bears have some real figures to cite. Chinese PMI data, a key measure of sentiment, has been negative for much of 2023. Although the measure turned very slightly positive in August, there is little to reassure markets that a permanent improvement of fortunes in the sector is imminent. "Things could be worse," Robert Carnell, at ING said. "But markets are not likely to take too much comfort from this set of data." And news from the all-important Chinese property sector is adding to worries, given the slow-motion collapse of the Evergrande group, which threatens a massive default, and spreading concerns about the creditworthiness of other large property and construction companies, including Country Garden. In response, China has unveiled some economic stimulus, but this has fallen well short of the sort of "big bazooka" needed to spur a new boom. China cut its one-year benchmark lending rate on August 21, but markets were surprised that the five-year rate was left unchanged. Also, Beijing halved the stamp duty on stock trading effective August 28 "in order to invigorate the capital market and boost investor confidence". This is the first such cut since 2008. Still, markets are watching and waiting for more substantive action from Beijing. "We believe metals will stay under pressure in the second half of the year as the sluggish recovery in China will likely continue to weigh on demand, with most industrial metals remaining dependent on economic stimulus from the world's biggest consumer of metals," Ewa Manthey, at ING, said in August. "We believe that any improvements in metals prices will depend on the eventual implementation of China's stimulus measures and actual demand improvement." Western governments step in But if the Chinese government is sitting on its hands, other jurisdictions look to be taking a more active role in spurring demand. The US and the EU have led the charge, with major new legislation designed to spur domestic demand, and onshore supply, with the UK, Canada and Australia running to catch up. For Western countries, the argument is clear. The energy transition, the massive global project to switch away from fossil fuels, both for electricity generation, industrial processes and transport, is well underway. Every technology currently available to enact this transition requires metals, in large quantities. This is spurring demand for a wide range of commodities, most importantly copper, but also a host of other base metals, not to mention battery materials, rare earths, and a host of industrial minerals. This story, of coming metals shortages, will be familiar to anyone who has read an analyst note, or attended a mining conference, in the past couple of years. But for mining investors, bullish commodity forecasts alone are not a buy signal. There is also the key question of how soon those demand forecasts will carry through to investments in supply. When Mining Journal attended the FT World Commodities Summit in March, there was no shortage of copper bulls. Jeff Currie, global head of commodities for Goldman Sachs, told the summit that he was "extraordinarily positive" on copper, with a long-term price target of US15,000/t. But the argument for that positive outlook should give investors pause for thought. The bull case for copper, as with other metals, is based on the shortage of big new greenfield projects, and the lack of investments in mines. While everyone agrees the market will have to balance eventually, there is not a clear way for equity investors to capitalise on that, given that the forecast price rises are based on a assumption of underperformance by miners. Underpinning all of this is the shortage of investment. Guy Wolf, global head of market analytics at Marex Spectron, said at the FT Summit in March: "There's been no investment in new supply, and there's no real prospect of new supply… The prices need to be $15,000 to trigger investment." US and Saudis lead charge Where is this much-needed investment going to come from? The answer could be ‘governments', directly or in partnership with the private sector. The biggest opportunity is perhaps where the biggest growth in demand is expected, in the US. "We see potential for a US mining boom after decades of underinvestment," Morgan Stanley said in a note in September. The US has long been an unpopular jurisdiction with mining investors. A painfully slow permitting system, combined with high labour costs, make it less than appealing. But the fact remains that the US has plenty of junior projects, and is now starting to see real government support for mining. Perhaps the most important pillar of this development would be mine permitting reform, a perennial issue in US politics, given the strengths of the lobby groups both for and against such change. "Given the majority of permitting reform is geared toward promoting the development of mining projects, the most likely beneficiary, in our view, of policy reform and new investment into the US mineral industry will be the junior mining and exploration industry," Morgan Stanley said. "Cutting red tape and streamlining the domestic mine permitting process will potentially allow these companies to develop and ramp new mining projects faster than in recent decades." "Amid a growing recognition of the strategic importance of critical mineral independence and the necessity to safeguard national interests, we believe there is potential for more investment and initiatives in US mining." And outside the US and the EU, a new player has emerged. Saudi Arabia looks willing to push money into the global mining economy, in order to stave off shortages at home. Riyadh plans to invest in overseas mining assets through Manara, a tie up between Ma'aden and the Saudi Public Investment Firm. Manara was set up in January 2023, with the intention of deploying some of Saudi Arabia's massive oil revenues to secure supplies of metals. Manara has already made one big investment so far this year. In July it took a 10% stake in Vale's base metal unit, while US investment firm Engine No. 1 acquired 3%. Speaking to Mining Journal in January, Ma'aden chief executive Robert Wilt said the new investment fund was looking for the raw materials to fuel Saudi Arabia's industrial strategy. "We're looking at the minerals required for downstream industrial development," Wilt said. All of this points to an important lesson for the mining industry. Overfocusing on the future of commodity prices misses a key factor. Metals prices rise because of a shortfall in investment. In simple terms, things have to get worse before they get better. But in a new era of onshoring, friendshoring and deglobalisation, governments are increasingly focused on preventing, not encouraging, such shortfalls in investment. As a result, new opportunities can emerge, and new mines can open, and make profits, without the sort of commodity bull market that spurred the last tranche of new mines back in the 2000s.

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