The IMF’s “low for long” scenario and the Yukon

We have all heard mining CEOs and government ministers talking about how slipping global mineral prices are hurting the Yukon's resource sector. It's a famously cyclical industry. The big question is when the next big rebound will be.

We have all heard mining CEOs and government ministers talking about how slipping global mineral prices are hurting the Yukon’s resource sector.

It’s a famously cyclical industry. The big question is when the next big rebound will be. If it happens in a couple of years, then we will see exploration and development jobs surge in the Yukon to take advantage of higher prices.

Your guess on this is as good as mine, and also as good as most of the pundits you see on television. Opinions are like man-buns these days; everyone seems to have one.

The International Monetary Fund has now waded into the debate. There’s a reason no one ever shows up at a party and says, “I wish more IMF economists were here.” That sentiment has been confirmed by the way they have harshed our mellow with the publication of their Commodity Special Feature report in the latest World Economic Outlook.

They took a step back from the daily mayhem in commodity markets and looked at some long-term trends. Citing “dramatic demand and supply shifts over past decades,” they conclude that the “balance between demand and supply forces points to a ‘low-for-long’ scenario in metal prices.”

In layman’s language, this means that if you are wagering on a major rebound in mineral prices in the next few years, then you’re probably betting at much longer odds than you think.

The IMF might be wrong. Experts often are. But they have lots of ammunition to back up their thesis.

Let’s look at demand first. The IMF notes that their metal price index declined 13 per cent between February and October, continuing a declining trend since 2011. “China’s currency decline and stock market correction have raised concern over the strength of metal demand,” they say. Remember that China consumes around 50 per cent of global copper and nickel.

Yes, one country consumes half of global production. And that share is double what it was in 2005. IMF econometric studies suggest 60 per cent of metal price variation can be explained by fluctuations in Chinese industrial production. A major sag in Chinese demand would represent so much metal that it’s hard to imagine other countries stepping up to replace the demand. In fact, global demand for copper (other than China) has actually gone down since 2002. Same for nickel.

It’s quite possible that higher metal prices leading up to 2011 did the expected thing and encouraged companies to substitute cheaper alternatives where they could.

All in all, the demand picture is not robust.

How about supply? The IMF points to a number of interesting trends here.

One is that the investment climate in Latin America and Africa has significantly improved in recent decades. From 1950 to 1990, almost half of major mines were discovered in industrialized countries like Canada. Since 1990, however, Latin America and Africa have doubled their share of major mine discoveries. The number of major mines found in industrialized countries fell by half during the same period.

This is expected to continue. The IMF reports that there are on average $130,000 in known sub-soil assets below each square kilometre of an industrialized country. The figure in Africa is $25,000. This is not because Africa has worse geology, but because of political and economic policies and risk in the past that have prevented mines from being discovered. You can expect more major finds in Africa, which will contribute to global competition for Yukon mines.

Furthermore, the mining industry has been investing on an epic scale in new capacity. The top 10 mining companies invested around $5 billion in 2000. Between 2011 and 2014, the figure never went below $40 billion. That’s a lot of new mines pumping out metal, also competing with Yukon mines.

Investment is said to be slowing rapidly now, but it will take years for existing mines to reach the end of their lives and stop contributing to supply. The IMF notes that low oil and gas prices will even help some marginal mines stay in production for longer.

So what does the future look like? The IMF says that futures markets suggest further declines in mineral prices, although the slippage will eventually bottom out. “The balance between weaker demand and a steady increase in supply suggests that given the existing cost structure, metal markets are likely to experience a continued glut, leading to a low-for-long price scenario.”

The IMF report didn’t look at the gold market, which has its own dynamics. And despite the harsh macro picture, existing mines with good economics will continue to make money throughout the cycle. The Christmas parties at many mining companies will be grim enough this year, even if they don’t invite the IMF.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. He won this year’s Ma Murray award for best columnist. You can follow him on Channel 9’s Yukonomist show.

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