Mining industry’s short-termism will restrict growth

Bearish reaction to financial crisis will have knock-on effects for the sector

There’s a thing or two the global mining industry can learn from the global financial crisis and its effect on the sector. Most notably, that short-term thinking is not conducive to long-term growth. 

Albemarle, the world’s largest lithium company, is like so many other mining companies grappling with the fallout from a struggling economy. It recently announced that its net income dropped 65% in the third quarter. The company also recently revised its annual sales growth forecast downwards, from 40%-55% three months ago to 30%-35%. 

The downturn of the lithium industry — and the mining sector more broadly — is a product of efforts to rein in inflation by increasing interest rates. When credit is expensive, households are less likely to take out high-cost loans to buy electric vehicles (EV). 

Given that one more interest rate hike is now expected in the US — and the likelihood that many central banks will follow suit — we’re likely to see the global chokehold on the EV sector continue. In fact, high interest rates subdue demand for most mineral-heavy luxury electronic items. 

SA is no exception. The country’s mining firms have experienced a decline of almost 50% in profits in 2023, which amounts to roughly $5.2bn (R962bn). Company valuations are also struggling. Mining giants such as Anglo American, BHP, Rio Tinto and Vale have an average forward price-earnings ratio of 8.5, compared to 18.5 for the S&P 500. 

The current struggles of the mining industry are reminiscent of the global financial crisis 15 years ago. The years leading up to the crisis saw a prolific rise in profitability, the IMF noting that “soaring commodity prices were a hallmark of the global economic boom from 2003 to mid-2008”. 

However, the financial crisis brought an end to that period. In the years thereafter mineral price weakness became widespread and mining company share prices declined significantly. 

That’s bone-chillingly similar to what the mining industry is experiencing after the boom of 2021 and early 2022, and the bearishness of the mining sector is unfortunately having a knock-on effect on mining investment and sectoral expenditures. BlackRock, the world’s biggest asset manager, recently noted that this investor hesitancy is limiting the deployment of capital in key commodities required for the clean energy transition.  

This will have a ripple effect on employment and growth. Neal Froneman, CEO of Sibanye-Stillwater, SA’s biggest employer within the mining sector, recently noted that the company will likely be forced to undertake “significant restructuring” to be profitable. This would require closing loss-making mines and cutting jobs. 

The platinum group metals (PGM) sector has been a microcosm for this price trend. In 2021 PGM profits soared after Russia’s invasion of Ukraine. Demand remained high due to low interest rates, while supply fell short when Russia, a key PGM producer, was sanctioned by many advanced economies.

During this period the rhodium price reached nearly $30,000/ounce, up from a previous record high of $13,400/oz in 2020. Similarly, palladium prices exceeded $3,400/oz in 2021 and have fallen to $981/oz today — a decline of 80% in two years. 

But perhaps the most important takeaway from the global financial crisis is that eventually the mining industry recovered. The downturn doesn’t last forever — it’s simply part of the sector’s cyclical boom-and-bust trend.  

BlackRock has highlighted that the short-term response of the mining sector to suppress investment will have long-term consequences given that the demand for minerals needed for the clean energy transition will “surpass all previous estimates”. 

Barrick CEO Mark Bristow said recently that the mining industry is “plagued by the short-termism of governments and investors alike who demand instant gratification and reach for immediate solutions, dismissing the long-term nature of mining”.

He said that this short-term thinking would undermine the mining sector’s long-term growth goals. He is right.