Issue: 53
Sent: 28-08-2006 07:02:17
In this issue:

FINSIA Research 2 - Lester WillsResources Industry: Production by Stealth - John A RobertsonA Sicilian Tale - Tony CrillyThe Lessons of Bleak House - Tony Negline
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Resources Industry: Production by Stealth - John A Robertson

John A Robertson

Raw material supplies rose even while prices were at their least attractive. Without spectacular new projects, the resources industry has still been able to achieve near record rates of growth.

There are two charts at http://www.thebigpicture.com.au/atc/mining_output.htm accompanying this article, one showing a 90 year history of crude oil and copper mine output movements and another showing how Australian exploration spending has changed since 1989.

There is a commonly held view of the 1990s that it was a period of relatively little activity in the natural resources sector. Low prices and weak exploration spending meant few major projects being brought on-stream. Financiers and speculators turned their attention to other industries, not least of which was information technology, in preference to natural resources.

Reduced interest in the sector in the late 1990s has been held partially responsible for currently high prices since industry supplies have been insufficient to meet growing demand especially from places like China. There is truth in this analysis, almost by definition, since inventories have been run down to accommodate the rising demand.

However, the industry might not have done such a poor job during the 1990s and, despite its apparent lack of preparation, has been able to respond quickly in the 2000s to a period of unprecedentedly strong global economic growth.

Aluminium production has risen at an average 5.1% a year so far in the 2000s. Annual iron ore output growth of 7.3% has been higher than at any time in the last 100 years including the 1950s when the industry expanded to accommodate a nascent Japanese economy. Copper output growth averaged 3.7% a year in the 1990s and, while the industry had a slow start to the 2000s, its output growth has averaged 4.2% in the last three years, well above the average pace of the past 100 years.

Oil supplies, too, have been growing more rapidly than in the 1980s or 1990s.

In part, additional output is to be expected as a response to more buoyant global economic conditions. However, the industry usually takes some time to respond fully to changes in its economic circumstances normally moving through four phases.

1. Higher rates of capacity utilisation within existing operations initially boost output.
2. Previously mothballed plant or operations are then brought back into production.
3. Project plans that had been prepared but put aside because of less propitious economic conditions or because of inadequate technologies are dusted off.
4. Revived exploration activities begin to throw up new mining opportunities and, with them, new processing plants are also investigated.

In this context, the global industry is probably in the early part of the third stage response.

Australian exploration spending, for example, has begun a cyclical renaissance. An Australian Bureau of Statistics survey of industry spending intentions conducted in March and released in June 2006 suggested that spending in the six months ending June 2006 would be 26% higher than in the corresponding period of 2005 but it is too early for this to have an impact as yet.

In other words, the supply response to the sector's improved business conditions since 2002 is still building with the strongest growth in industry supplies still to come, making for a vibrant industry with further investment opportunities ahead.

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