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The time is right for the mining industry to invest in new projects. The fundamentals are clear: we forecast supply gaps across a number of key commodities by 2028.
Investors are understandably concerned that the mining industry will repeat the sins of the past. Meanwhile, macro-economic uncertainty is putting the brakes on project development, and the industry must contend with a widening range of above-ground risks.
But our view is that strong fundamentals mean that investors willing to step up will be rewarded.
China is a driving force in global commodity markets. Despite its best efforts, the country is geologically short on several important metals: copper, nickel, zinc, iron ore and aluminium.
In the long term, rising demand, declining grades and a lack of development will exacerbate the supply gap. Copper is the most urgent: if no new capital is committed, we forecast a 5.7 Mt supply gap by 2028. Greenfield incentive prices are either at or approaching the right level for copper, zinc and gold, making these metals ripe for investment in 2019 and 2020.
Overall, the industry needs at least US$200 billion in additional uncommitted capital over the next 10 years. Although this is an astounding number, this falls far below what the industry spent at the top of the last cycle.
While the opportunities are clear, the reluctance to invest is understandable.
Shareholders that had their fingers burnt in the last downturn are hesitant to allocate capital to large, costly projects. Miners have struggled to compete for investment with other asset classes and trade jitters have hit the market, undermining a commodity price recovery.
Regions with the most promising geological reserves are often the most exposed to a host of geopolitical, technical, environmental and operational risks. Even jurisdictions with traditionally low risk are no longer viewed as safe bets for investment.
The Brazilian tailings dam failures are just one example of an unexpected environmental risk that can have a far-reaching impact. The uncertainty over the scale and duration of production cuts in the wake of the accident rapidly changed the entire psyche of the iron ore market.
Since 2015, industry margins have been steadily improving to levels that are on a par with the peak of the last cycle. And we expect margins to get even better: we forecast there’s a US$200 billion potential upside on the cards from new, uncommitted project development.
Greenfield projects can have long lead times, which only adds to the urgency for mining companies to position themselves now to develop new projects, before the supply gap hits.