Daily Update: August 6, 2024

Investors in the metals and mining sector rarely sleep well. Price volatility is constant, and short bursts of windfall cash flows are followed by years of depressed prices. Continual investment is required. In mining, economically viable deposits are quickly exploited, forcing mining companies to invest in new discoveries or more efficient processes for less economically viable deposits. Many metals processing plants such as steel mills are reaching the end of their productive lives, and manufacturers need to choose between investing in upgrades or replacing facilities with more sustainable options. In either case, the costs are massive. Finally, there is China. For decades, China has been a major consumer and producer of metals, but a slowdown in demand due to a downturn in its property sector has upended industry dynamics. 

The challenge for the sector is that it requires huge amounts of capital, mostly from credit markets, but the unpredictable nature of returns creates uncertainty and doubt. S&P Global Ratings published an industry credit outlook in January providing context for the long-term challenges of the metals and mining industry. 

Price volatility remains a challenge for the industry in 2024. Although there appear to be limits on how low prices can go, prices for most metals fell 20%-30% in January from record highs in 2021 and 2022. Among other factors, the property slowdown in China has created a drag on prices. For the better part of two decades, construction in China generated huge demand for metals, supporting the development of an expanded Chinese domestic steel industry. The Chinese metals industry has reacted to lower domestic demand by intensifying its efforts to expand internationally, leading to accusations of dumping, or selling steel below its normal value. However, S&P Global Ratings believes that supply constraints for many metals have reduced supply-demand imbalances. Processing metals is energy-intensive and generates high levels of carbon emissions. This creates a global disincentive to overproduce, which could help steady the industry’s historically volatile prices. In addition, the time it takes to develop a new mine stretches beyond two decades in most regions. Even as prices climb, the industry cannot pivot quickly to increasing supply. 

The carbon footprint of the metals and mining sector will also require substantial investment as certain regions aggressively decarbonize heavy industry. Some steel producers are investing in electric arc furnace steel minimills, while others are replacing coal-fired furnaces with hydrogen. Steel is responsible for between 7% and 9% of global carbon emissions and has earned a reputation as a leading hard-to-abate sector. Mining has its own environmental and social issues to confront.

Capital expenditures will remain high for the metals and mining sector regardless of price pressures. Existing mines and factories will require ongoing investment, and the discovery of mines, as well as the building and retrofitting of factories, will require new investments. Unlike many sectors, mergers in the mining sector rarely generate efficiencies since mines continue to require the same resources as before.

Today is Tuesday, August 6, 2024, and here is today’s essential intelligence.