Financial Times analysts are the latest ones singing the “supercycle is over” song, as the paper points today to the latest profit reports from major miners, including Anglo American, BHP Billiton, Rio Tinto and Xstrata as the most recent evidence.
It is not news the mining industry is being affected by falling commodity prices, with iron ore recently dropping to the lowest level in three years. But FT says miners face a number of negative factors that are crushing earnings and, as a result, a dramatically more challenged outlook than even a year ago.
The backdrop to the lacklustre results is the concern over whether the so-called supercycle is drawing to a close after years of surging Chinese demand combining with supply constraints from decades of under-investment to send prices higher for commodities such as copper, coal and iron ore.
The debate is crucial to mining companies and their investors. Over the long term, the performance of mining equities is largely correlated with commodity price fluctuations. Increases in costs, especially wages and payments to governments, tend to lag behind booming profits as prices rise, putting severe pressure on the sector’s profitability.
Mining chief executives argue that China’s hunger for steel-producing commodities, iron ore and coking coal, as well as copper and other metals will remain robust.
“The bull run can’t last forever,” says Rachael Bartels, managing director of Accenture’s mining industry group. “But the underlying demand for commodities is not going to go away. China and India are not finished with urbanisation and Africa hasn’t even started yet.”
On the flip side, the end of the supercycle, shows a recent study by Ernst & Young, is also spelling the end of radical resource nationalism, as the world's biggest miners are slowing down – or even talking about cancelling – their investment programme, allowing them to play country against country.
Of the world's 30 largest miners, resource nationalism jumped to the top of the risk list, says Ernst & Young, after 25 countries announced their intentions to increase their take of the mining industry’s profits and others contemplate outright nationalization.
A growing list of nations – and not just radical fringe territories such as Zimbabwe or Venezuela – but stable jurisdictions including Poland, Ghana and Botswana have been pushing for greater control and ownership of the resource sector on top of higher taxes and royalties as cash-rich mining companies become easy targets for politicians.
South Africa recently stepped back from nationalization, but is nevertheless tightening its grip on its industry.
Zambia has publicly acknowledged that the period of state-controlled copper mining was disastrous, but is also looking at ways to increase state ownership and intervention.
Changes in South American governments' attitude towards greater state control and revenue from mining are less evident, with a country like Peru struggling to contain protests against new mega-mines and Argentina seizing outright control of energy assets.
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