We are going to post trends in major industries from time to time to keep readership up to date for interviews with industry covfefe groups. Trends are a better fit for the blog as opposed to individual industry pages as industries are dynamic and we do not want to update them every three months.
Practically every mining trend has something to do with China, as the world continues to pivot towards Asia.
Gold In and Out of Favor
Post financial crisis, demand for gold spiked because of falling interest rates and heightened volatility. China and India boosted purchases for reserves and for jewellery, and investors poured assets into gold as a hedge, with the attractiveness of the yellow metal bolstered by the lack of yield on other safe havens. Gold hit around US$1800 in late 2012.
In April 2013, gold fell violently to ~US$1,200, and has since been within a US$200 band trending downwards. Fear has subsided amidst a strong American economic recovery and gold has continued to sell off as returns on other asset classes lure investors back into equities.
Post-Trump, with the dollar strengthening and inflation poised to pick up and pushing up yields on default risk-free government bonds, the lustre of gold continues to fade, and we may see a second round of consolidation as miners lower on the cost curve are forced to shutter. A floor for demand remains, as China’s ambitions to make CNY a reserve currency to rival the dollar involves backing the Yuan with gold.
Death of Thermal Coal
Thermal coal (subbituminous) has performed poorly as its use as a fuel source for power generation falls precipitously. A growing societal demand for reduced carbon emissions coupled with a precipitous fall in substitute costs has led to distress for pure play coal giants of yesteryear (Peabody, Alpha Natural Resources, Arch Coal).
Legal movements to pare back coal’s footprint has ranged from punitive carbon taxes to moratoriums (Ontario, with traction in various other provinces and states). However, this is not limited to the developed world as emerging countries have presented plans with coal making up a much smaller portion of their future generation mix.
Coal’s longstanding competitive advantage has been its relative cheapness due to its abundance and low cost of extraction (especially from the Powder River Basin). However recent developments have made coal less competitive than natural gas as well as certain renewables inclusive of subsidies. However, while natural gas will have a floor price (the cost of extraction, although associated gas and liquids-rich gas may have zero or even negative breakevens), the marginal cost of solar and wind is zero, and the cost of the equipment (panels especially) has been getting exponentially cheaper.
In North America, advances in hydraulic fracturing technology and know-how have allowed for extremely economic exploitation of shale and tight gas basins. Reserves have skyrocketed, especially in various Texas shales and the Marcellus, and a strong network of energy infrastructure has helped provide cheap feedstock for gas-fired power plants. Gas continues to be a regional commodity due to difficulties in transport (needs to be compressed (CNG) or liquefied (LNG) before it can be shipped overseas), so coal continues to have pockets of support.
Chinese Shift from Manufacturing & Construction to Services
China is slowly getting wealthier and less corrupt, and life in any major population centre is becoming closer to any other global metropolis in the developed world. The government desires a shift towards a skills-based economy and will favor services while shuttering overcapacity at industrial and manufacturing projects.
With a lack of oversight and controls for prudence and appropriate project hurdles, China previously had ample questionable debt-fueled construction, and has enormous quantities of white elephant real estate scattered throughout the nation. This has come to an end, and with that the components needed for construction have seen pullbacks in demand, especially steel. Steelmakers are consolidating and shutting down even in state-owned enterprises (where provision of employment and serving as a conduit for kickbacks may trump profits).
Iron ore is a key component in steel, and pain in the industry was accentuated as the lowest cost producers with the largest reserves (BHP, Rio Tinto, Vale) ramped up production to accelerate the curtailment of overcapacity.
By extension, met coal or coking coal (bituminous, used in steelmaking) also was in a precarious situation as many producers above the cost curve began to go underwater, with producers who would be below the market price in a proper equilibrium forced to draw on bank credit lines and restructure to wait out closures.
Fertiliser’s Day in the Sun
Potash is a mineral where Canada holds the largest reserve in the world (primarily out of Saskatchewan). Like most other mining commodities, potash has suffered from a price drop since the early ‘10s. Potash is essential for fertilizer (along with nitrogen and phosphate), and by extension, agriculture, which made it particularly hot as the world gains new mouths to feed.
Interestingly, there is no shortage of potash in the world, but the potash is concentrated in a few countries – overwhelmingly Canada, less overwhelmingly Russia and Belarus with small holdings Brazil, Chile, China, the US, Israel and Germany. Logically, there was an oligopoly structure run by two cartels (CanPoTex in Canada and Belaruskali-Uralkali in Belarus/Russian Federation) before accusations of cheating resulted in the cartel collapsing and prices being halved in 2013.
Although talks to resurrect the cartel have come up from time to time, there has been no firm action, and PotashCorp and Agrium, the two biggest players in North America, have entered an agreement to merge for cost synergies in a weaker environment (PotashCorp is more production and Agrium has a sophisticated retail channel). Potash looks to be a sleepy space for some time to come.