There has been growing conjecture for some time that the massive commodities boom witnessed over the last three decades has come to a grinding halt. These claims can be attributed to the sharp decline in the momentum of China’s economic growth, which has seen GDP fall from double-digit growth a decade ago to now be under 7% annually and falling.
With the exception of crude, China is the world’s largest consumer of commodities and the world’s second-largest economy; it was plummeting demand from China that triggered the commodity slump.
Yet in a surprising announcement, a member of the board of the Reserve Bank of Australia, one of the most China- and commodity-dependent economies globally, claimed that the commodity boom is far from over. While contrary to claims of a number of prominent economists that the last great commodity boom of modern times has come to an end, this announcement has sparked considerable optimism among miners.
Now what?
These claims are essentially focused on the view that commodities are still in the midst of a multi-decade-long boom.
Demand from China surged through the second half of 2016 as Beijing’s economic stimulus kicked in, much of which was focused on infrastructure investment, boosting activity in the ailing property sector and bolstering failing state-owned enterprises.
According to a range of pundits, this is just not sustainable because much of the stimulus is credit led, only adding to China’s ballooning national debt.
Nevertheless, this alone was not sufficient to push iron ore, coal, zinc, and copper to their highest prices in almost two years. This significant spike in demand was accompanied by a marked decline in global commodities supplies.
You see, the multi-year commodity slump forced miners to slash investment in exploration and mine development; in conjunction with an intentional reduction in operational tempo, thee cuts saw output across the mining industry fall.
While China’s development may be slowing, thus impacting the demand for commodities, its rapid growth should only be considered as the first act. There are a wide range of countries to follow; India is probably the most important at this time.
India recently embarked on the journey of modernization, and its economy is growing at a startling rate. For 2016, GDP expended by an impressive 7% and is expected to edge higher, reaching around 8% annually in four years. Some economists believe that India could very well transform into the world’s third-largest economy by 2030. For it to do so would require massive development, including investments in basic infrastructure that would require a prodigious volume of materials such as steel, copper, and zinc.
Along with enduring demand from China as well as an explosion in consumption of resources from other Asian countries as they grow, India will attract commercial investment and boost infrastructure will drive higher demand for commodities.
So what?
This will be a boon for miners such as Teck Resources Ltd. (TSX: TECK.B)(NYSE: TECK), First Quantum Minerals Limited (TSX: FM), and HudBay Minerals Inc. (TSX: HBM)(NYSE: HBM). Already, Teck’s share price has exploded, multiplying six-fold since December 2015, while First Quantum’s has grown five-fold and HudBay’s has more than tripled.
While metallurgical coal prices have softened from 2016 highs, the expectation is that copper and zinc will firm over the course of 2017. Coupled with the significant inroads made into cost cutting by all three miners, this will boost earnings and profitability, which has led to talk of Teck hiking its dividend in 2017.
