By Tirthankar MukherjeeGranted he said this in a metaphysical vein and was certainly not thinking of metallic ones, there is much truth even for readers of this journal in Isaac Bashevis Singer’s comment, “Our knowledge is a little island in a great ocean of non-knowledge.” And it is not just our imperfect knowledge, but also myriad imponderables that make it difficult for even expert analysts to agree on the likely state of the global commodities market in the months to come. Does Mongolia’s, and maybe the wider world’s, economic future hang only on Chinese demand, and, if so, just how strong or weak this may be? Nobody can say with any certainty, though at the moment, most stakeholders are, if not distinctly despondent, cautiously watchful.
Most, but not all. This column has often warned Mongolia against counting its chickens before they are hatched, but this month, maybe in keeping with the optimistic note in the new Government’s action programme, I shed the mantle of Cassandra. That I say not all is lost is based on media reports of proceedings at the Toronto Resource Investment Conference on September 27 and September 28.
It is not that all speakers agreed that things are actually better than they seem or that they are certain to get better. Industry analyst and editor of the Melman Report, Leonard Melman, asserted that today’s global economy is made worse by the reliance on Keynesian policies. “Keynesian solutions remain the choice of virtually all governments,” the Mining Weekly quotes him as saying and then asking, “Are these remedies working?” His answer is an emphatic“No.”
Another doubter was the head of Kaiser Research, John Kaiser,who was quoted as saying, “If we do have inflation, then capital expenditure and operational expenditure will rise. Remember it’s all about the cash flow. Owning stocks in gold mining companies, for example, is not the same as holding gold itself. The profitability of extracting the gold, copper or whatever – that’s what it’s all about.”
Having thus paid deference to the general mood, however, Kaiser concluded by saying that overall,“we don’t know if the global economy will move into the dumps, or whether things will turn around next year. I place my bets on it going upwards.” He was supported by the even more bullish Ian Graham, president and director of Discovery Harbour Resources and a former Rio Tinto chief geologist.“Many doomsayers have been consistently wrong. Moving a large part of the world’s population through a GDP increase had led to a massive uptake of commodities across the spectrum,” he said.
The anticipated rate of per capita commodity utilisation in India and China “would require a gigantic rate of industrialisation; just in terms of copper production, we would need to see a five-fold increase in yearly output,” he said.The surge in downstream demand will naturally spur metal production, mine output and further exploration. “[We will need] to produce more metal and explore for more metal. In 1993, $3 billion was spent on exploration, while the figure last year stood at $18 billion.”
Of more interest in Mongolia would be his assertion that demographics will have a major influence on energy markets and energy resources, most notably coal. “In 1990, 2.3 billion people lived in countries that generated at least 40% of their energy from coal. Today, the level is three-billion people. By 2030, the figure will have increased to four-billion,” Graham said.“We live in a special time to be in the resource sector simply because it is the greatest cycle we will ever see. Never again will we bring 45% to 50% of the world’s population from a low GDP environment to a high GDP environment … this is the greatest resource boom the world has ever seen.”
That’s good news but even better was how Adrian Day, president of the eponymousasset management firm, argued that the world was currently experiencing the end of only the beginning of a long-term commodity boom. According to him, the commodities boom that started in the 2000s would last more than 17 years. That’s enough time for Mongolia to emerge strong enough to meet the downward progress of the cycle. “When one looks at historic trends of commodity booms, it becomes clear that commodity cycles last many years. Give or take some contractions and expansions, this cycle is set to remain with us for a long time,” Day said.
That developing economies need resources is obvious, but some sectoral data bolster the general trend. For example, automobile ownership per thousand people in China has increased from about 12 to 40 in only three years.“Automobiles require a lot more resources than owning a bicycle. This demonstrates the potency of economic development and the resultant demand on resources,” Day said. In this, he was supported by Graham.“This is the greatest resource growth economy boom … and population shift momentum suggests it will evolve to be the greatest demand-growth cycle the world has ever seen,” he said.
Day chose to concentrate on copper, whose supply, he said, was expected to be in deficit by the middle of this decade, owing to the expectation that China’s appetite would not diminish any time soon. Prices would spike too.He said the current demand of about 4 kg of copper per capita in China could increase to 12 kg per capita if the ‘waking giant’ sustained its “current, albeit slowed”, economic growth. And let us be realistic, China continues to grow at a steady clip, even if the world wants more.
Prospects for copper, for long but no longer the lynchpin of Mongolia’s mining efforts, are not so rosy maybe, but geography ensures that local activity, even when overwhelmingly export-dependent, does not display evident signs of contagion on the back of international problems,such as euro zone debt woes.Prices were last year at record high levels owing to record demand growth, and it is natural to wonder why there were not more copper projects coming on stream to take advantage of the increased prices.
Day’s explanation of the apparent disconnect was that copper production cannot be increased quickly. It takes between 20 and 30 years to bring a copper project into production, and that is why “there is not a copper producer that plans to start production by 2025 that we do not already know of today”.Despite an enormous amount spent on exploration, global copper reserves have been in decline since 1996. About half of the largest copper mines in the world today are about 50 years old, “and that generally resulted in lower copper grades, increased operating expenses and the operations became much more susceptible to mining interruptions”. Of the new copper mines expected to start production in the near term --OyuTolgoi(in 2013), Cobre Panama (in 2016) and TacaTaca(in 2017) -- only OyuTolgoiwould claim to be among the top ten largest copper mines in the world. But that is all to Mongolia’s benefit.
More good news comes from MINExpo in Las Vegas. There mining industry suppliers put on a brave face before 50,000 attendees. Caterpillar CEDoug Oberhelman said, “I know there are lots of headlines out there that said mining is dead, not one more ounce of coal will ever be mined, iron-ore will never come back, the world is going to stop spinning, it’s over. Well, it’s not over.”
By Tirthankar Mukherjee