Note: This is part one of a two-part series.
The mining sector saw $70 billion in transactions during 2006 alone, and a recent study from Ernst & Young suggests that this number will rise in 2007 and 2008, particularly if BHP Billiton moves forward in their bid to overtake Rio Tinto — a topic that was discussed on MetalMiner earlier this week. Consolidation shows no signs of slowing, and high metals and mineral prices are fuel for further acquisitions. In addition, the report reveals another finding that metals experts and analysts might consider interesting: The accuracy of outcomes for the recent metal price forecasts has been consistently disappointing, reports the paper, EYeSight on Consolidation: Backpedalling on the Cycle. This is a crucial piece of the report, as metal price forecasts, accurate or not, can be responsible for consolidations, acquisitions, and the choices investors make.
There were three key themes in the report, and authors Lee Downham and Tim Williams asked:
- Looking further back than the usual 5-10 year timeframe, how cyclical is the sector, and, in real terms, how high are current metal prices?
- Given the huge number of variables to consider, what chance do metals analysts really have of accurately forecasting metals prices even 12 months forward?
- What could this mean for the sector going forward as the consolidation seems to continue apace?
Let’s take a deeper look at each of these questions. Today, we’ll focus on the question of the cyclical sector.
In real terms, the report analyzes a century of fluctuating metals prices and their cycles, concluding that they really aren’t as high as we might think. In fact, we read that there was nothing real about the lower prices in the past, since economical factors depressed the cost and these factors — such as the collapse of the Soviet Union — will not be repeated. According to the writers, high metals prices are “normal” metals prices. It is our view, the analysts explain, that current metal prices are actually a return to sustainable price levels following an extended period of artificially depressed prices, rather than the conventional wisdom that the industry is near the top of a cycle.
While the analysts focus on the averages and use statistical modeling and other quantitative tools, we, as sourcing specialists, tend to focus on issues related more to supply and demand. So although there may be a shorter term blip in 2008 for some metals (our belief is that the prices will come down), the fundamentals are in line with what the E&Y analysts suggest, at least for now. Higher mining costs and more tightly managed processes to match supply with demand suggest prices may be returning to sustainable levels.
The analysts add, It should also be recognized that the availability and the use of so many of the metals that we take for granted is actually a relatively recent phenomenon, partly driven by technology. These technologies take the form of new methods/means of extracting industrial metals and also the fundamental end-industry innovations — i.e. the rise of titanium and uranium — as well as material substitutions.
On Monday, we’ll discuss the rest of the report and further examine the accuracy of metals price predictions.
–Lisa Reisman & Amy Edwards