By Chris Berry (@cberry1)
As contrarian opportunities go, nickel offers an interesting case study. Throughout much of 2014, nickel market participants were almost universally bullish based on the Indonesian government’s plan to ban exports of nickel-bearing laterite ore. Nickel ore exports from Indonesia account for approximately 15% of global supply, so any curtailment in exports would have a material effect on pricing. It was also believed that other metals including tin would follow suit.
As China, the main destination for global nickel supply, had no real options to satisfy its insatiable demand (the Philippines is an exporter but on a smaller scale), the belief was that upward price pressure on nickel would ensue. While there was a rally after the ban went into effect, it was not sustained.
By Chris Berry (@cberry1)
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· The mining sector remains challenged by multiple headwinds including a lack of investment, currency headwinds, slower productivity, excess capacity, and deficient global demand.
· Debt overhangs and slowing emerging markets – specifically China – appear to be the culprits behind slack demand. These forces must be reckoned with.
· Longer-term, however, innovation, sustainability, and urbanization are legitimate drivers of growth and help promulgate “good” deflation which enhances productivity and can drive returns.
· This note examines these phenomena and which sector(s) of the mining industry may benefit.
Groundhog Day
After three-plus years of a dismal mining investment environment and the potential for it to continue for some time, a number of questions arise from the soul searching many of us have done to try and make sense of this. According to Bloomberg, the value of the TSXV has fallen from its peak by almost 72%. This market environment necessitates a different method of thinking and evaluation about publicly traded mining companies. The good news is that it appears that many metals prices have bottomed, though this doesn’t mean that the cycle has definitively turned. The bad news is that the global economy still appears to be struggling with excess capacity AND muted demand. China, the seemingly endless engine of metals demand is unquestionably altering its paradigm for economic growth from one of infrastructure build out and exports to one more focused on internal consumption. With China’s debt to GDP ratio of 282% according to McKinsey, this move to a new growth model is absolutely necessary to maintain a sustainable growth rate, but there is no overnight fix to achieve this type of change. The success of this transition won’t be known for years, though the effects are already being felt.
