Press release

Super-cycle hangover: threat of substitution for miners

Sydney, 23 September 2013

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Mining and metals companies face an increased threat of substitution with many commodities including copper, steel, platinum, nickel and rare earths in the firing line, according to EY.


  • Speed and scale of shale gas for coal substitution highlights risk

EY’s report, The super-cycle hangover: the rising threat of substitution, notes that the super-cycle has produced new technologies, regulatory changes and market dislocation – key drivers of product substitution.

EY Global Mining & Metals Leader Mike Elliott says most companies are not doing the necessary horizon watching.

“There is generally high awareness of possible substitutes, but historic price relationships, regulations and technologies tend to reinforce the thinking that the status quo will be preserved,” says Elliott.

“This thinking causes the risk to be underplayed in enterprise risk management activity, where the likelihood of substitution is often considered remote, hence adaptive planning is not seen as a priority.”

“What this misses is the likelihood of an individual disruptive event giving momentum to a substitute. While this may seem improbable, the unprecedented duration and scope of the super cycle has sown the seeds for the next disruption to business models.”

Elliott says the speed and scale with which shale gas replaced thermal coal in the US in the past 18 months should have raised the threat of substitution on the agenda for CEOs and directors of all mining and metals companies.

Super-cycle hangover

Elliott says that the prolonged existence of large scarcity premiums in many metals during the super-cycle provided the economic incentive for metals consumer to look for alternatives.

Those companies most at risk are single-commodity organizations, or organizations where one commodity dominates the product mix or profit share.

“The smart companies are actively monitoring substitution threats and have evolving risk management strategies in place,” he says.

The major market drivers of substitution can be used as an early warning system and prudent companies are considering risk mitigation strategies that include diversification, improved business intelligence, research and development investment, and even early divestment.

Elliott says no example of substitution is starker than the switching of shale gas for coal in North America which helped wipe 30% off the combined market capitalization of the top five coal producers in the US from the beginning of 2012 to mid-September 2013.

In 2002 coal’s share of power generation in the US was 50% compared to just 18% for shale gas. In 2012 the numbers were about a third and 30% respectively.

“An increase in gas production, an associated fall in gas prices driven by technological breakthroughs allowing large-scale shale gas production, and a change in regulations created the perfect environment for large-scale coal-to-gas switching in the US,” says Elliott.

Other substitution threats noted in the report include:

  • Aluminium for steel
  • Aluminium, plastics, fiber optics or steel and graphene for copper
  • Palladium for platinum
  • Pig iron for nickel
  • Potential rare earths substitution


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