A Stop Spike Event

Richard (Rick) Mills
Ahead of the Herd

Page 1 of 4

As a general rule, the most successful man in life is the man who has the best information

Population growth reports say we can expect, barring WW lll or a virus like Ebola going airborne, upwards of 11.4 billion people on the planet by the 2060s. There’s just over 7 billion of us now. A possible 50 percent plus gain in our numbers over such a short time is going to put enormous strain on our abilities to source the needed inputs for survival let alone bring those in the developing world up to the same level of amenities that we in the developed world have or expect to obtain.

Rising global scarcity of minerals – the metals our industrial and connected society uses every day to sustain its lifestyle – is a subject we will all become very familiar with. That’s because there’s no getting around the fact we live on a planet with a finite resource base and a growing population.

Lets state the obvious:

• For over the last twelve years supply has struggled to keep pace with demand
• Metal supply is finite and subject to compounding demand from developing nations
• Metal production is highly cyclical, with intermittent peaks and troughs which are closely linked to economic cycles – declining production has historically been driven by falling demand and prices, not by scarcity
• Rates of production and amounts of reserves continually change in response to movements in markets and technological advances
• Most mineral resources will not be exhausted in the near future
• If energy was cheap and unlimited then recoverable resources would be unlimited

But

• Discovery and development is increasingly becoming more challenging and expensive
• Average ore grades are in decline for most minerals, yet production has increased dramatically
• Our most important metals are suffering from declining ore quality and rising extraction (ore is a different and inferior chemical or structural composition) costs
• Our prosperity has always been based on the fact that producing resources yielded more resources than it cost. However the cost of *energy is climbing, the amount used is climbing but the returns from energy expended is declining. Eventually the quantity of resources used in the extraction process will be 100% of what is produced
• Most older existing mines, the foundation of our supply, have increasing costs with production rates stagnating or even declining
• The rate of discovery is not keeping pace with the rate of depletion, let alone being higher

*Energy can be thought of as a proxy for labor, materials, energy and externalities – environmental, community impact etc.

The Global Middle Class

The newly emerging middle class are a major contributing factor to the fundamental demand shift in global commodity markets and per capita consumption of commodities in developing countries is still only a fraction of the level it is in developed countries.

Infrastructure spending and increased discretionary spending by consumers are the key factors driving this rising demand – as more and more people in emerging markets move from rural areas to the cities, consumption will increase putting massive upward pressure on commodities.

The World Bank estimates that the global middle class is likely to grow from 430 million in 2000 to 1.15 billion in 2030. The bank defines the middle class as earners making between $10 and $20 a day – adjusted for local prices.

Most of the world’s middle class has, until recently, been located in Europe, North America and Japan.

In the 1970s and 1980s South Korea, Brazil, Mexico and Argentina built sizeable middle-class populations. Today its China, India, Asia and Africa adding to the world’s middle class. In 2000, developing countries were home to 56 percent of the global middle class, by 2030 that figure is expected to reach 93 percent.

The following graph is from PricewaterhouseCoopers (PwC) ‘Minerals and metals scarcity in manufacturing: the ticking timebomb.’A survey of senior executives of leading global companies on the impact of minerals & metals scarcity on business.

PwC

Let’s take an in-depth look at the challenges the mining industry is facing going forward. Copper is a very good representative metal to use.

Copper Consumption

Per capita consumption of copper in the United States was 10 kilograms per person 1965, the same in 1995. In Japan per capita consumption increased from 6 kilograms per person to 11 kilograms per person over the same time period. Copper consumption in Korea in 1965 was less than 1000 tons. By 1995, Korea’s consumption of copper had reached 637,000 tons, or more than 14 kilograms per person.

In China, even after years of economic growth, per capita copper usage is about 5.4 kg. As China’s populace urbanizes, builds up its infrastructure and becomes more of a consuming society, there’s no reason to suspect Chinese copper consumption won’t approach or even surpass U.S., Japanese and South Korean levels. There’s 1.3 billion people in China, even a slight increase in Chinese consumption will translate into enormous demand growth.

The preliminary purchasing managers’ index (PMI) for China rose to 50.5, up from Augusts 50.2. Any number above 50.0 indicates expansion in the manufacturing sector; any number below, contraction. This is the fourth consecutive month that China’s PMI has remained above the 50 mark – meaning manufacturing is stabilizing.