Written by Tim Goldsmith, PWC.
Not many in the resources sector were sad to see 2013 come to an end. It really was a shocking year for the sector which started badly and got consistently worse. It was a year where many CEO’s were changed by the big companies, where the gold sector saw 30% lopped off their commodity price and capital seemed totally unlikely to flow to the sector. On top of all that, we had our savior slowing its economy and looking less interested in supporting the sector than it had for any time since the time Deng Xiaoping first started opening China up.
In early 2014 there is still some sense that times are still hard. While I understand that view, I can also see many reasons for optimism – I think the greenshoots of recovery are easy to see, albeit no one would suggest that we are off to the races yet – but hopefully that won’t be too far away!
Put simply, I have always hated the terms boom and bust, however, whenever we get into the top and the bottom of the cycles, we are the ones that exacerbate the cycle and do cause the boom and bust – near the top of the cycle, nobody can ever see anything but clear blue skies and why the good times will roll indefinitely – conversely in the bad times (such as now!) it is hard to see anything other than storm clouds and thus it is easy to miss the positives that lurk out there.
So let’s start with China. What a wonderful story that country has been to the global economy for the last 30 years and what a difference it made to the mining industry in the last 10 years. Now the country has evolved incredibly in recent years and the relatively new government is pretty intent on reform to make the story more sustainable – but still with growth rates of 7%+ mind you! Never forget that 7% on an economy twice the size of 7 years ago is equivalent to 14% back then. So let’s be clear, the absolute growth is not much changed, so the need for new commodities is also not much changed. After all, the China story is about moving people from rural lives to being city dwellers. In simple terms, there were only 20% in the city 30 years ago and today there are 50%. Most country analysis reflect end games of 80%+ in cities – so China still has a long way to go.
The demand side of the equation has so much more than China to contemplate, and in my view can be summarized with 3 other regions, each of 1 billion plus people, being other Asia, India and Africa – those guys are still at the early stages of industrialization – so imagine the fun when they start needing the commodities that industrialisation requires.
The converse side is the supply side of our industry. Perhaps the miners got carried away in the good times when funding for new developments was too easy. Personally, I am not convinced that was the case, however, I seem to be in a minority in this thinking at the moment. There is little doubt that the fact everyone was trying to build at the same time meant that costs of construction flew upwards. This is one of the many factors that has led to a rapid brake being applied to new projects and exploration alike.
As night follows day, rest assured that lack of exploration and new projects will lead to supply shortages, particularly when demand is consistently growing. My sense is that opportunities abound today while most don’t see these dynamics yet.
Tim Goldsmith is a partner of PWC based in Melbourne. He has had extensive experience in the resources sector and has spent quite a lot of time in Asia especially China so understands these current market dynamics well.
Tim Goldsmith will be giving a keynote address at the Resources Investment Symposium in Broken Hill – 25–28 May 2014;
To register and secure your place – click here.