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Mayhem Amongs The Miners (2)

Question – does it make sense for the worlds giant mining companies to be ramping up production when metal prices are in freefall. The answer must surely be – of course not – so why are they doing it ?

In iron ore Rio Tinto and BHP Billiton have increased production so much that they have created a glut and caused a slump in prices. On the 8th July iron ore hit an all time low of $44 per tonne.  The following day it rocketed by 9% and a further 3% on the day after that and now stands at over $50 per tonne. These are huge unexplained movements in the price of one of the worlds major commodities.

But these prices have to be seen in perspective. Iron ore halved in price in 2014 and has fallen a further 30% this year but for 25 years until 2004 the price had remained comparatively steady at never less than $10 and never more 14 per tonne. And then the great super cycle started. In 2005 the price rose by 71%, in 2008 it rose by 68% and in 2009 it reached the magic $100 per tonne. On the 16th February 2011 it peaked at a massive $191 per tonne and wasn’t the world a happy place in those halcyon days when the worlds bankers had just woken up to their new role as masters of governments and rulers of countries. Economic power had arrived.

In May South African production of platinum was increased by 88% over the previous May’s figure and the price of platinum fell to 2008 levels. Surprise, surprise.

In the first half of 2015 diamond prices fell by 3.4%, despite the fact that they don’t create diamonds any more. Every diamond dug up is one less for the future.

Gold is still collapsing and last week hit a 5 year low at $1080 per oz. Gold mining shares had a blood bath after an alleged bear raid by the Chinese. But despite that, gold is still worth nearly 3 times more than it was in 2004 when it stood at $400 per oz. before the start of the supercycle.

In the financial world, nothing goes up for ever, be it shares, commodity prices or whatever. A share which has a massive spike, always collapses even if the fundamentals for that share have not changed. The law of gravity always takes over in the end.The spike in gold and other metals was huge. All that has changed is that China is not growing as fast as it was. But believe the media and you would conclude that in a couple of years time, the Chinese will all be back working in the paddy field. How many times does one read that a fall in this and a fall in that is caused by slower growth in China. How can slower growth lead to a fall in anything. It can’t, it can only lead to a further rise. But from molehills come great mountains and thus can trends be accelerated and magnified until the next expert comes along and decides to try and reverse the trend.

So, why do those miners keep ramping up production – perhaps it is something very simple, like misguided fairly cluless management, trying to plan things too far in advance.

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