Mining and Heavy Industries

Analyst urges counter-cyclical investment in mining

Zinc is one commodity highlighted by Wood Mackenzie. Photo: Xstrata

Market analyst Wood Mackenzie says despite slowing growth in mineral demand, the global mining industry will need to invest more than $150bn to meet medium- to long-term supply needs, with lead and zinc two particular industries in need.

Wood Mackenzie vice chairman of metals and mining research Julian Kettle said slowing Chinese demand should not be interpreted as the end of the mining era.

“Across base metals, iron ore and steel Chinese consumption growth rates are set to fall dramatically in the next five years, compared with the previous half decade,” Kettle conceded.

“However, we caution against this being interpreted as a bleak outlook – Chinese consumption hasn’t hit a great wall.”

While further production cuts are needed to get base metal commodity prices back to economic levels, Wood Mackenzie said, the sheer volume of Chinese demand still translates into significant incremental demand and good growth in tonnage terms, with China tipped to account for between 58% and 69% of global total demand growth for base metals over the next decade.

To meet that demand growth, the mining industry – in a time where spending is minimal – needs to invest more than $150bn, Kettle said.

“This need for investment is becoming desperate in zinc and lead and will become an issue in copper in the next few years,” he warned.

“Unfortunately there is little appetite to invest with prices cutting into the cost curve, low free cash-flow, surpluses building, difficulty in financing and shareholders demanding dividends.”

Kettle suggested the companies who buck the trend could be those to win out in the long term.

“As we’ve witnessed in our cyclical industry, we believe that the winners will be those producers who invest counter-cyclically,” he said.

“The industry needs to sow the seeds for its future – without investment a critical shortage will follow.”

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