Disruptive Discoveries Journal

efficiency

Is this the Final Leg Down in the Commodity Cycle? How Much Lower for How Much Longer?

Chris Berry2 Comments

By Chris Berry (@cberry1)

For a PDF version of this note, please click here.

 

If anything is clear after the start of 2016, the global economic rebalancing that central banks around the world are trying to engineer is not proceeding according to plan. The circuit breaker fiasco in the Chinese equity markets is the latest example giving investors pause with respect to what is truly “going on” in China. The Shanghai composite equity index has lost almost 15% of its value YTD and few see good reason for this slide to halt aside from intense government support and RMB devaluation. Money continues to flow out of China as we speak.

Productivity and Energy Metals: You Can't Have One Without The Other

Chris BerryComment

By Chris Berry (@cberry1) 

For a PDF of this note, please click here

 

“Love and marriage, love and marriage,

Go together like a horse and carriage.

This I tell ya, brother, you can’t have one without the other.”

– Frank Sinatra

 

Ol’ Blue Eyes Was Right

With structural challenges still facing the metals sector as we head into 2015, finding a way to lower production costs is a must. A company’s sustainability (regardless of where it sits on the value chain) is arguably the most important issue for investors to consider. Lowering costs through either reducing operating or capital expenditures is the most obvious and easiest method, but this doesn’t create lasting value. The key is enhancing productivity through investment. It’s paradoxical to think that increasing investment can lead to lower costs in the long run, but this has been proven again and again many times.

Increased investment implies increased commodity intensity and this is why I used the Frank Sinatra quote above. Productivity goes hand-in-hand with increased investment and commodity use. In other words – you can’t have one (productivity or growth) without the other (increased metals use).

 To be sure, there are other ways to drive productivity. In his excellent book Capital in the 21st CenturyThomas Piketty argues that favorable demographics – specifically population growth – can, in part, spur overall economic growth and the productivity gains which go along with it. The challenge here is that it takes decades for this phenomenon to play out.