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The End of the Commodities Boom

July 11th, 2014 · Greg Atkinson · 5 Comments

Unlike a few years ago, mining company CEO’s these days are somewhat more cautious about the outlook for commodities and have shifted from talking about the commodities super-cycle to commenting about the need to reduce operational costs and scale back investment. Yes the commodities super-cycle or boom is over despite many experts saying it would run for decades.

Recently the CEO of BHP Billiton, Andrew Mackenzie, was interviewed by the Nikkei Asian Review and was asked about his thoughts regarding the end of the super-cycle. His resp0nse, which I have posted below, touches on many important points which will have implications not only for BHP Shareholders but also for the Australian economy.

” It was a somewhat strange phenomenon, and it was one that came about because of the incredible pace of Chinese growth, that nobody predicted. The major resource suppliers of the world were caught short. They simply had not invested enough to meet the increased demand with their supply. As a result, there was a big increase in price and a big increase in investment, so that those companies could catch up.

     The reality is that most of the supply has now caught up with that growth in demand, and though demand continues to grow, it is growing at a more gradual rate, but still off a much larger base. During that time, a lot of the capital was invested relatively inefficiently, and many companies did not have time to really optimize the performance of a lot of that capital.

     Now we have a situation where demand continues to grow at a slower pace, and we have the opportunity to add substantially more production to meet that demand, simply by better running what we invested (in) during the supercycle.

     If I were to make an analogy with Japan, I would say that we in the mining industry have to apply the principles of lean manufacturing, or kaizen, that were made famous by Toyota Motor. What we hope we will do at BHP Billiton is turn mining into more of an advanced manufacturing industry. What that will mean is that prices will be more stable, they will be more sustainable, for a period, and we are unlikely to see a repeat of some of the things of the supercycle.

     The other reason we are unlikely to see the repeat of that is that I do not see anything analogous to the very rapid industrialization of China over the last 10 years happening in the next few decades. I can not see any country industrializing and urbanizing at the pace and scale that China did.”

Source: BHP Billiton CEO talks about the planet’s post-supercycle future.

(Nikkei Asian Review, 9th July, 2014)

In his response, the BHP CEO quite clearly states the super-cycle is over and that he doesn’t see it coming back any time soon.

I share this view and I am on the record as saying years ago that the commodities boom would come to end and not keep running for decades as many people were predicting.

Secondly he talks about supply catching up to demand and thus confirms as I have always said, that mining moves in cycles just like everything else and that eventually the cycle would turn no matter how crazy the reporting became in the mainstream finance media.

Those heady days when Wayne Swan and the Treasury were counting mining dollars years in advance based on overly optimistic forecasts have gone. Now mining companies are winding back investment and looking at ways to increase productivity & reduce costs. The reduction in mining investment has already hit the Australian economy and over the next few years we may see a scaling back of existing operations as well which will also have a negative impact on the economy.

Although iron ore export volumes have been up recently this growth is unlikely to be sustained and if volumes drop and prices keep falling then things might get a little ugly.

The 10 year chart of monthly iron ore prices below clearly shows how prices peaked (again as I was suggesting they were a few years ago) and are now trending downwards. How far iron ore prices will fall nobody knows for sure (although there will be plenty of guesses) but what the chart does show is below $50 per tonne is not out of the question.

iron_ore_montly_price_10_year_chart_jun_2014

10 Year Iron Ore Price Chart. Source: www.indexmundi.com

Now of course just about everyone has jumped on the end of the mining boom band wagon, but a few years ago I was being criticised for simply having a cautions view of the mining sector and for even daring to suggest the boom was coming to an end.  Now all the talk is about managing the end of the boom which in reality means reacting to whatever happens because the time to manage things was a few years ago.

For years I have been stressing for example to need for the government and policy makers to have a Plan B, i.e. a plan to manage the economy after the commodities boom. Sadly there is still no Plan B apart from signing free trade agreements and infrastructure spending.

In regards to the trade agreements, it’s hard to see them doing much more than making Australia more focused on mining, energy & agricultural experts since the decline in the manufacturing sector is unlikely to be reversed at least over the short to medium term. Nothing has highlighted this better than the decisions by Toyota, Ford and Holden to cease production in Australia.

As further trade agreements are signed it’s most likely that the manufacturing sector will suffer further set-backs although hopefully this can be offset by an increase in mining & farming exports…maybe. Or maybe LNG will save the day?

One thing however is sure, the commodities boon, mining investment boom or mining super-cycle is over and that the Australian economy will undergo a period of adjustment over the next few years.

Perhaps the adjustment will be relatively painless, or perhaps now that the party is over the hangover is about to kick-in!

This article was written by Greg Atkinson who is the Managing Director of Ohori Capital. Greg is from originally from Sydney but now works and resides in Japan. He can be followed on twitter via GregAtkinson_jp


5 responses so far ↓

  • 1 Greg Atkinson // Jul 21, 2014 at 10:04 am

    BHP shares are still doing pretty well as of today at around $38 but the Baltic Dry Index at 732.00 is really struggling.

    I still reckon there is more downside to come in regards to the big mining companies so I don’t feel inclined to be a buyer at current prices.

  • 2 lachlan // Jul 21, 2014 at 8:23 pm

    Greg I might have a bet here for a higher XJO but I agree that the commods rout is not officially over. My New Hope shares are beaten down even more.

  • 3 Biker // Jul 30, 2014 at 1:09 am

    An interesting link adjacent the For Old Lang’s Iron piece ‘Aussie Iron Queen’ provides a contrarian view to Jessica Irvine’s plea to Tony Abbott to save us with austerity:

    http://asia.nikkei.com/Viewpoints/Economeister/Stephen-Grenville-Gloomy-Australians-underrate-the-lucky-country

  • 4 watcher // Jul 30, 2014 at 4:51 pm

    The asx 200 keeps inching up despite Greg and others saying there being no fundamental reasons why.

  • 5 Greg Atkinson // Aug 2, 2014 at 1:02 pm

    Hi Watcher,

    As I have clearly outlined numerous times in various posts, I reckon that at levels above 5200 the All Ords/ASX 200 looks overbought and most of the run up to that level and past that level took place last year.

    This year the All Ords/ASX 200 has spent most of the time bouncing around 5400 and has not been “inching” up or down. The recent burst up to 5600 looks like it is already coming unstuck and we may very well see the All Ords/ASX 200 back to around 5400 again soon.

    So in summary, if people feel confident buying into the market at the current level then that’s their call. However I simply don’t see enough upside from this point to make me that interested and am quite content to sit back and wait for the correction that many people seem to think won’t happen.

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