Calls for action
Hedging
Commodities, including metals, have typically tended to be effective during supercycles, offering a hedge against inflation and disruption. Hedging is therefore viewed as a viable strategy to lock in trading prices irrespective of whether the commodity is in a supercycle or not. Considering the price volatility of the past few months, companies should have a prudent hedging strategy so miners and consumers can safeguard themselves. For instance, as of April 2022, 31 Chinese mining and metals companies had released hedging strategies, 14.8% higher than the same period in 2021.¹¹
Revisit the capex program
There has been a change in the economic scenario, especially in the last few months, with the economic slowdown kicking in. Those companies that are aggressively building their portfolios without factoring in the slowdown must revisit their capex plans in the current scenario of rising interest rates.
Companies may need to slow down their capital spending depending on how demand shapes up. For instance, in its Q1 earnings call, Kinross Gold lowered its capex forecast to US$850m from US$939m for 2022.12
Take a cautious approach
Miners need to exercise caution, since every supercycle gives rise to a new basket of commodities that experience an upswing in a particular phase. Though there is an uptick in most commodities, miners should be cautious of certain commodities that may structurally go down, particularly fossil fuels such as coal.
The current commodity boom is focused on energy transition metals, including aluminium, copper, cobalt and lithium, particularly as renewables and electric vehicles are at the forefront of driving consumption. However, their proportionate share in overall consumption may remain low considering there may be a structural slowdown impacting infrastructure projects globally.
In the short to medium term, we see supply-demand shifting towards supply on an overall basis. A prudent approach would be to survive during downturns by keeping the prices below the industry average and increasing production to cash in during upturns.
Think long term by integrating scenario planning
- Due to the cyclical nature of the mining industry, miners should factor in a long-term planning outlook, thinking beyond the upswing and downswing of the supercycle and focusing on long-term assets that bring value.
- Companies should integrate detailed long-term scenario planning to consider different geopolitical situations and price volatility to improve preparedness to operate under volatile short-term events.
Consider sharing infrastructure
Typically, the mining industry lags other sectors, such as oil and gas, in terms of shared infrastructure. Miners should consider sharing infrastructure or joint ventures to reduce risk and improve capital efficiency, particularly during a supercycle. Railway lines, shipping lines, roads, pit-to-port linkages, concentrators, transmission lines, tailing facilities and desalination plants are a few areas where companies could reduce financial risk and environmental footprints by sharing infrastructure.
Summary
Though the current upswing observed in the mining and metals sector exhibits some similarities to previous supercycles, it has structurally different catalysts. There are reasons to be skeptical about its sustainability. The recent correction in commodity prices and the aggressive stance to reduce inflation make us wary that this cycle may defuse sooner than expected.
Ultimately, the future of the commodities cycle depends on how the macroeconomic environment pans out over the next year or so. In case inflation persists and economic growth falters, we may have already seen the peak of this ongoing commodity cycle.
To ride out the downswing and capitalize on the upswing cycle, mining and metals companies should work towards including scenario planning, sharing infrastructure, taking a cautious approach, revisiting capex plans and hedging commodities.
