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 Century, Thomas 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.