This has encouraged talk of a resources super-cycle – an extended period of high prices – much in the same way as for oil. However, analysts have been hesitant to see this cycle as being different from previous ones – that is, high prices encouraging new supply, ultimately leading to overcapacity, falling prices and falling earnings.
Nevertheless, this time it may be different. Firstly, the last 10 years have seen considerable consolidation in the industry, a process which is ongoing. This has resulted in much greater producer discipline, demonstrated most notably last year when BHP Billiton, Rio Tinto and CVRD (who between them control 80 per cent of iron ore supply) pushed through a record increase in ore prices.
Second, and perhaps more importantly, the supply response has been much weaker than expected. For example, the copper market was forecast to be in significant oversupply by the second half of 2005, whereas the January to October period showed a cumulative production deficit of around 203,000 tonnes, not because of stronger demand (global usage actually fell by 1.2 per cent), but because mine production only increased by 2.5 per cent.
This pattern has been repeated for almost all metals, resulting in stockpiles falling to historically low levels, which in turn has underpinned prices. The timing of new mine capacity is notoriously susceptible to delay, but particularly noticeable this time has been their frequency, with companies announcing project overruns almost on a daily basis.
One common factor behind this has been the lack of investment over the last decade in mining infrastructure. This has also extended to equipment and skilled manpower. Companies have been scrambling to remedy these shortages, but this takes time and has pushed up costs, perhaps posing a threat to sector earnings, but equally requiring a higher end-price to justify the new investment.
Many of these factors are difficult to model and analysts have accordingly tended to overlook or underestimate them when making forecasts. Nevertheless, as metal prices continue to remain at high levels, it is clear that the constraints on the supply side may be even more important. Perhaps it really will be different this time.
Simon Weston fund manager, Asia Select Fund, Old Mutual Asset Managers.
