Is the Resource Boom Over? A Resounding No!


"Adrian Day argues that China's growth is bullish for copper in particular, China's consumption having quadrupled in the past 15 years."

Not surprisingly, given metal price performance at the time, the audience at the New York Hard Assets Investment Conference was a little depressed. With gold heading down to the low $1500s—the lowest for several months and, of course, junior mining stocks, which is the sector most of the audience would be there to hear about, having been particularly hard hit.

What the audience really wanted advice on was addressed in one of the earlier keynote presentations by Adrian Day. Is the resource boom over? was the title of his talk and he prefaced it with an immediate No! In particular, he made some very salient points about global copper production and the copper market itself. He pointed out that the shortest full copper price cycle in recent history was 17 years, while the current copper cycle only started in 2001, so if this is the end of the current resource boom this would be the shortest such cycle in over 200 years by a very long margin, which he did not see as likely.

Also, he made the very apposite point that most of the world's copper production comes from old mines where production is declining, either for technical or falling grade reasons, while it takes at least a 10 year lead time—mostly a lot longer to bring a significant new copper mine on stream so it is relatively straightforward assessing he future production scenario given that almost certainly there will not be a new major copper mine opened in the next 25 years which is not already known about.

He also pointed out that the longest and strongest booms in resource history have occurred when a new industrial giant emerged and he pointed to China as epitomizing this in the current scenario where the changing pattern of consumption has had a huge impact on global copper demand and pricing through major changes in consumption patterns. For example, China is already the world's largest automobile manufacturer, while 26% of Chinese questioned in a recent survey said they would be purchasing a new car in the next six months; this can't happen as there aren't that many cars available, but it does demonstrate the potential.

Thus, the ever-growing Chinese middle class has exactly the same aspirations as their Western counterparts, but growing from a far lower base with a much larger population to service.

What this means for metals is shown already by growth in copper consumption there which has quadrupled in the past 15 years. This means that there is not enough growth to be seen in global copper output in those new mines we already know about to meet Chinese anticipated consumption needs alone before around 2020/2025 and that this applies to most other commodities, too.

While Day was extremely bullish on the likely effects of Chinese growth on the world copper market, Paul van Eeden speaking the next day was not so optimistic on China's growth over the next few years pointing to huge over-construction of housing leading to a housing collapse, increasing the strains on the banking system which he put as being in far worse shape than that which faced the U.S. banking sector back in 2008. He also pointed out that China's GDP is calculated on production rather than consumption, which meant that the country could manage its GDP in a way which was fundamentally different to the West and that the figures were thus not directly comparable. However, he did feel that China was capable of sorting out these problems but it might take the country a few years to do so.

Coming back to Day, he suggested that the currently high Chinese copper inventories were not as significant re future pricing was concerned, in part being balanced by low LME and COMEX stocks. Thus the Chinese stock position may have a temporary mitigating effect on what he sees as a continuing growth in consumption and price.

Overall Day believes that the resource cycle has a long way to run yet in an upwards direction and that his investment advice would be to buy and hold gold and copper in particular, which would be good news for the resource investor should his analysis prove to be correct.

Lawrence Williams

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