We wait …

In its presentation of its annual study of trends on the top 40 global mining companies, accounting group PWC noted that based on last year’s numbers there were two types of companies; the haves and have nots. The haves are predominantly Chinese companies, as well as Vale and BHP, those with a lot of excess cash to buy promising opportunities should they come along.

However, it does not really seem as if promising opportunities are coming along that frequently, or at least opportunities that seem promising enough for companies to abandon their new sense of caution. Those companies with promising projects are hanging onto them, trying to see out the downturn, rather than being forced into a sale of desperation.

Everyone in the industry is waiting to see. Is the current uptick in the price of many commodities, to levels that two or three years ago were regarded as something to get excited about, the real thing? Can one base projects on these numbers?

One of the trends over the past half year is that while numerous projects and expansions have been postponed, few have been cancelled outright. Instead companies refine and undertake their feasibility work. It is as if the industry is poised, waiting. The dilemma is rather clear for both suppliers and project companies, for both mining and development companies.

Companies, at least in this part of the world, seem to have tried hard to minimise retrenchments of their skilled workforces. They fear being caught short of skills when the revival comes. Many of us expect the downturn to take its toll and then inevitably the demand for commodities will return strongly. To shed too much of a group’s competencies will make it a loser in the future.

The dilemma is this; develop too soon, with expensive capital, would be foolish, if not suicidal. But wait too long, and lose capacity, then miss out on the next spike. Those who read the situation, or get lucky with their timing, and get it right will be among the winners.

One key indicator people wait on is how the typically hard-nosed hard bargaining between the major iron ore providers and the steel mills goes. Predictions are that there will be a significant decrease in iron ore prices, and the mining world watches with interest. Similar negotiations with seaborne coal prices will be equally telling.

The signals are mixed. Some say the financial meltdown is far from over, with more distress likely to emerge from the global financial sector. The same school of thought gloats over how right it was that Asia, China in particular, did not decouple from the West and relies on the now more cautious western consumer for its economic growth.

Others, however, say that the big stimulus packages, particularly China’s massive infrastructure build programme is already reflected by the upward move in the early indicator, copper. Copper prices have trended upward, as it is seen as the metal most indicative of infrastructure demand. This implies that distortion of an export driven economy is now dissipating and rebalancing. It implies that this build programme and its associated demand for commodities, together with the fact that stockpiles have now been drawn down, will shortly see the resumption of the trend we had seen up until mid-2008.

For what it is worth I have always tended towards the latter view, that the massive urbanisation and industrialisation of a massive population node like China can only mean one thing for commodities. I have claimed in the past and claim still that we remain in a long term super cycle in terms of commodities demand.

However, even if you share that view, that does not resolve the dilemma of timing. That there will be a recovery in demand seems to be a fairly universal view. How soon the recovery will happen, and at what rate the curve upwards will trend, remains opaque, and few are willing to venture a forecast.

Thus, it seems that for much of the mining industry right now, it is wait and see….