Near-term weak but long-term trending to strong commodities demand
There is near-term weakness in the mining business but the future points to trillions of dollars worth of growth.
Tough short-term demand conditions do confront the industry, but long-term demand and supply scenarios continue to point to the modern world being mining’s oyster.
Projections to 2025 point to cities around the world constructing the equivalent of the entire land area of Austria – 80 000 km2 – in residential and commercial floor space, which will require $80-trillion worth of investment.
Moreover, demand growth from now to 2025 for container traffic is expected to grow at a compound annual growth rate of 7.2%.
The global car fleet is expected to double to 1.7-billion by 2030, covering ten times the average distance between the earth and the moon.
Cities will need an additional $10-trillion in yearly investments.
Anglo American CEO Cynthia Carroll told that story with force and conviction in presenting Anglo’s latest set of results, which saw operating profit fall 38% to $3.7-billion. Vale of Brazil tells a similar story, as does BHP Billiton, which expects another 250-million Chinese to swop their villages for cities in the next 15 years, which follows the 200-million that did so between 2000 and 2010.
As development in emerging countries shifts over time from investment to consumption, the pattern of demand will change – but still keep mining in the money.
While the shift from investment to consumption transitions, the rate of demand for steel – and thus iron-ore, coking coal and manganese – should moderate.
But then the expanding middle classes in many emerging countries should boost consumption of precious metals and minerals – in Anglo’s case, platinum and diamonds – as that transition occurs.
One-billion people are forecast to enter the consuming classes by 2025 and Carroll sees Anglo’s diversified and time-balanced portfolio as positioning the company well to take advantage of the structural changes in the global economy.
Carroll sees what is happening on the supply front as being as important as the long-term demand picture as what is projected to happen on the demand front.
Supply constraints – as well as difficulties producers face to deliver that supply – will underpin prices.
Projects are facing significant delays as a result of increasingly complex planning and permitting regimes, exemplified by what Anglo itself is experiencing with its Minas-Rio iron-ore project in Brazil, a country where 40 projects worth $225-billion are currently facing delays averaging 24 months.
Developing and developed countries alike are seeking a larger slice of the mining cake, whether it is through joint ventures with mining companies, windfall taxes, increased royalties and in some cases mining-asset expropriation.
Remaining resources are located in places difficult to access and which have underdeveloped or nonexistent infrastructure.
At the same time, mining itself is becoming more difficult, more challenging, with existing operations facing grade declines and higher waste stripping.
In an industry that thinks in decades rather than years, capital allocation and balance sheet management require discipline and sound judgment and Anglo is invested in the right commodities and the right high-quality and low-cost assets at the right time.
Time will tell, but in the meantime Anglo put its money where its mouth is by increasing its interim dividend by 14%, despite 46% lower earnings of $1.7-billion for the sixth months, and expressed its determination to maintain and build on that new dividend base, which points to its faith in the medium- and long-term fundamentals of the currently struggling commodities business.