"Boom". "Super-cycle". "Surge". Just some of the names given to the 2003-2011 period in global commodities markets – one underpinned by spectacular growth in global demand.
The price of many commodities reached record levels during this period, with industrial, or ‘base’, metals performing especially well.
At the start of the millennium, a tonne of iron ore, the key ingredient in steel, would have set you back around $13. By the end of the decade, the same amount of ore was worth $167 – that's an increase of nearly 1,200%.
Feeding the Dragon
There was a key reason for this: China. Rampant industrialisation, coupled with a mass migration of people into China’s major cities, created a sudden colossal demand for new homes, infrastructure and vehicles – and the materials with which to build them.
Amid waning metals demand in most Western markets following the global financial crisis, Chinese consumers were more than able to pick up the slack. Between 2000 and 2015, China’s copper usage grew by a compound annual growth rate of 12%. For nickel, a key component in steel-making, it was 20%.
All the while, demand for both metals in advanced economies was dropping by around 1% annually.
As they cast their glances eastwards, mining CEOs were quick to sanction lavish investments in new projects and infrastructure. In the space of a few years, the world's leading iron ore miner, Australia's Fortescue Metals Group, increased its capital expenditure (Cap Ex) ten-fold to around $6.5 billion a year.
And when the music stops?
But then the Chinese economy, which had been expanding solidly at about 10% a year throughout the 2000s, started slowing. Years of stockpiling of commodities during the boom saw the country slam the breaks on imports.
Anaemic growth in developed markets had ripped away the safety net, and so global metals markets plummeted. Between 2011 and 2015, average copper prices fell by about 38%. Nickel and iron ore contracted by 48% and 59%, respectively.
Many smaller mining companies, who had bet the farm on long-term expansion in Chinese demand, went bust. One by one, the larger 'majors' began slimming their workforces, shuttering mines and abandoning their expensive expansion projects.
Investors fled in panic. Between July 2010 and July 2015, Fortescue's share price fell by nearly 55%.
Accelerating the slump were the actions of commodity speculators. Convinced of a long-term slowdown in China's economy, traders and investors holding commodity 'futures' contracts (a type of financial derivative allowing investors to buy or sell a product based a projected future price without taking physical possession of it) liquidated their positions.
Regaining their shine
Having hit rock bottom in early 2015, metals markets have been creeping back. The 10 months to November 2017 saw copper prices rise by 26%, matched by similar increased in aluminium and zinc. The S&P GSCI Industrial Metals Index, a composite index that tracks metals futures prices, had risen by 27% since the start of the year.
Doomsday predictions of China's demise have proved exaggerated, with the world's number two economy tracking forward steadily at around 6% a year (about twice the rate of global GDP).
After burning through much its stockpiles, the People’s Republic is again hungry for commodities, consuming the same amount of copper in 2016 as the rest of the planet combined.
And where China’s importers go, the investment community is quick to follow. Positive Chinese industrial data and encouraging price growth has given mining stocks back their shine – and a place in investors’ portfolios.
For those trading commodities directly, there is also a secondary benefit. Commodity prices usually increase during periods of rising inflation – like the one we’re currently seeing – with commodity futures offering a hedge against further inflationary pressures.
There are other reasons to be cheerful. Around the world, new technologies are driving a second wave in metals consumption. Smartphones, now a staple in most households, are made up of around 40% metals, including copper, gold, platinum, silver and tungsten.
Meanwhile, the rapidly-emerging electric vehicle (EV) sector is boosting demand for copper, aluminium and nickel. According to UBS, an investment bank, the EV market will account for about 14% of global car sales by 2025.
Braced for rockier times
Whether the current recovery is sustainable remains to be seen. The fragile supply-demand balance in modern metals markets – not to mention the effects of economic headwinds and speculation – puts miners in a tricky position.
As recent trends have shown, investing in staff and equipment and new projects can prove a costly gamble if the positive projections fail to materialise.
To ward against this, mining companies are increasingly diversifying their operations. Gold mining, for example, can offer a ‘hedge’ against weak economic growth, as precious metals are often bought by investors as a “safe haven” play during times of financial market volatility.
Having fingers in multiple pies might mean modest profits margins, but it may protect against the heavy losses seen across the industry in recent years. To be sure, China will remain a key market for metals producers for years to come, but it’s not the only game in town.