Concerns about a recession and slowing growth in China have been weighing on mining sector stocks this year. But Greg Barnes, Managing Director and Head of Mining Equity Research at TD Securities, tells Greg Bonnell that in the long term the supply and demand dynamic could lead the sector into a new supercycle.
- Threat of a recession, slow growth in China have been bad news for the mining sector as of late. But according to our featured guest today, longer term, the supply and demand dynamics could be leading to another super cycle in commodities. Joining us now, Greg Barnes, Managing Director at TD Securities. Always great to have you on the show.
- Thanks, Rick.
All right, so notwithstanding today, because we're seeing a bit of a different kind of market flavor than we have in the past, this has been a pretty tough go for the mining space. What are we seeing in the here and now?
Well obviously, the economy-- the global economy is slowing. And I think a particular drag has been the COVID zero policies in China. And weakening economy, slowing growth, you know, China's struggling is not a good recipe for metals demand, which is what we've seen. Plus the fight against inflation, higher rates, strong dollar, very strong dollar also drags on commodity prices.
So I understand why the sentiment is where it's at currently. And the fears about recession are obviously very high. And that's not a time generally, that you'd-- you'd own mining stocks in a big way.
- Right, so inflation obviously plays into the picture, not only the effect that it has because central banks take the actions they do, US dollar reacts, gold reacts, the entire space reacts. But even in the sense of, I guess, some of the budgets for these companies, I mean, every sector is seeing you know, increased cost, whether it's running the business or paying the workers to work on the business.
- Yeah, look, mining costs at the operating level are up 10, 12% year to date. And that's-- it's a bad combination when you've got costs going up and prices coming down. Obviously, you get a margin squeeze.
So the companies are fighting hard against this. They're doing all they can to increase efficiencies and to reduce costs where they can. But we've had significant supply dislocations. We've had higher energy prices, although those, those are coming down.
What I will say is the commentary we're getting from the companies currently is that it looks like that inflationary pressure has peaked. It's not coming down yet. And inflation will remain high through well into next year. But at they're beginning to see the first signs, as we get towards 2024, that some of the supply costs that they are seeing in their budgetary process are beginning to come down. So it looks like we're just about to come over the peak and see some perhaps, brighter days ahead on the cost side.
- If we just took today in a vacuum, which of course, we cannot do as investors. But this seems to be a brighter date. Does this speak to the volatility right now in the market, that you can see these kind of swings on a daily basis, depending on a headline?
- Yeah I think people are trying to figure out what the outlook looks like. And it's pretty unclear at the moment on how-- if we're going to recession, how deep will it be. Do we, in some potential world not have a recession? I'm not sure. People are struggling with that.
So yes, a little bit of good news goes a long way, right now. And quite frankly, the biggest overhang in this space right now is the US dollar. And we've seen over the last couple of days, as the US dollar comes off a little bit, you will see commodity prices react quickly to that because it is such a drag on pricing. So I think what we've seen in the last couple of days, today in particular, is the US dollar coming down, commodity prices going up.
- Longer term, obviously, there's a great deal of fear that we will hit a recession. If the central banks and the Fed is true to its word, they've got to stay the course, got to slay inflation. That means higher unemployment. That means economic growth pulling back, that we're going to end up in that slow period.
When we emerge from that-- because I mean, everything moves in a cycle, the business cycle as we know it. And we come out the other side, how do commodities start looking on the other end of it?
- I think very good. Supply is particularly difficult right now. And I don't think that's going to change much. There hasn't been in copper, gold, no matter what commodity you talk about, there hasn't been a lot of discoveries over the last 5, 10 years. Building a mine today is very, very difficult, particularly in an inflationary environment like we have right now.
But it's not just that. It's permitting, it's environmental factors. It's social license to operate. All of these things are very, very difficult to achieve. And the mining companies have stepped back, understandably. So I don't see the next generation-- let's take copper, for example. We're going to have some supply growth in 2023 and a little bit in 2024.
But in my view the next big supply growth isn't even possible until probably 2028. Because the mines are not being built. And they need to be sanctioned right now to achieve 2027, 2028. And that's simply not happening.
So with the supply constrained and coming out of recession, we will see improved demand. And I do believe we are setting the stage for a potential super cycle in some of these battery-driven metals like copper, like nickel, cobalt, lithium. The stage is being set.
- You have to imagine that the companies at the heart of all of this have the same analysis, are seeing the same market dynamics. What is it about the current environment that they just can't put that money to work and say listen, we know, going out further if electrification is the big thing, if this happens and this happens, and we come out of a recession, which we will, that thing could be a huge demand. Why not build it now?
- A couple of factors, some of which I've talked about-- the inflation inflationary environment we are in right now it's very difficult to put a pin in, what that project is going to cost you to build. It's getting the government permits in place. That takes years.
Shareholders are very cautious about companies building big projects. They'd rather have the capital or the money back in their hands, rather than the companies building big projects. Because big projects are difficult to build and very expensive. So there are headwinds towards developing or sanctioning the next big projects that are, that are pretty high right now. And it is delaying management teams from making those decisions.
- When we talk about past commodity super cycles, as you're saying, where there's a setup here and a few years later that we could be entering another one, will it have similar characteristics, a similar feeling? And people always like to look back in history and say, well, if I can understand what a commodity super cycle looks like, I'll just look at the last one.
- Yeah, the last one, which was the mid early 2000s was driven by China industrializing and growing and urbanizing. This one will be different. I think it will be driven by decarbonization. And it will be driven by a lack of supply.
How those play out-- the decarbonization element of it will take some time to play out. But it's happening. The lack of supply, I think that's a longer term issue as well.
We need higher prices to justify building the next generation of mines. So super cycles have different elements to them. How this one will play out, I think those are the two key two key themes we have to watch.
- In terms of the investment obviously, and you laid out the reasons why even though we can see further down, the road the investment is just not there for these mines, are the materials there, ultimately, to meet the demands of humanity going forward? Do we have enough of the copper in the ground, enough gold?
- Ultimately, they are. It just depends. You know, you have to mine lower and lower grades of copper. Like copper grades have come down dramatically over the last 30 years from what we were mining in the 1990s to what we're mining today. And that's going to continue.
Mines get deeper. They get into different more difficult jurisdictions of the world. So those pressure costs, they ultimately mean that copper prices for example, have to go higher to justify building those mines.