Please ensure Javascript is enabled for purposes of website accessibility

Bursting the Boom-to-Bust Bubble

By Christopher Barker - Updated Apr 5, 2017 at 7:03PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Major spending cuts foretell the end of the commodities correction.

Shakespeare said, "all the world's a stage," but lately, the world has resembled the kind of epic Hollywood production where every scene is larger than life and almost unrealistically complex.

This week's revelation that global mega-miner Anglo American (NASDAQ:AAUK) may cut its 2009 capital expenditures in half with a $4 billion reduction opens the stage to a sneak preview for Fools eager to know what happens next. In this blockbuster that we'll call "21st Century Outfoxed," we've followed a cast of corporate characters through a collapsing housing bubble, an instant ice-age for global credit, and a dazzling array of government interventions.

Although I consider the word "bubble" about as overused as "oversold," I am ready to spoil the movie by revealing the next scene: the bursting of the boom-to-bust bubble. You see, now that virtually every major miner and metal products manufacturer in the world has rushed to scale back production or slash spending budgets, any substantial resumption of metals demand will run into formidable supply constraints that could send prices soaring once more. 

Here is just a sampling of the cuts that are sweeping the metals industry:

  • Steelmaker ArcelorMittal (NYSE:MT) doubles its fourth-quarter production cuts to more than 30% in early November, and more recently announced a plan to reduce the global workforce by up to 9,000 employees.
  • Aluminum Corp. of China (NYSE:ACH) has halted more than 4 million tons of alumina capacity, mothballed 720,000 tons of aluminum smelting capacity, and cut more than 5,000 jobs.
  • Copper giant Freeport-McMoRan (NYSE:FCX) slashed its 2009 capital expenditures in half and will reduce molybdenum production by at least 25%.
  • BHP Billiton (NYSE:BHP), Rio Tinto (NYSE:RTP), and Brazil's Vale (NYSE:RIO) have all made deep cuts to iron ore mining volumes, while the latter has also trimmed aluminum production.

Just as the massive interventions of the Federal Reserve risk a sudden whiplash of hyperinflation if the trillions of dollars pledged suddenly succeed in thawing the credit glacier, the simultaneous responses of the world's miners and metal producers to the abrupt collapse in near-term demand and prices could create an epic backdraft of their own. If the scale of production cuts overshoots the erosion of demand, the resulting supply shortfall and hampered production pipeline could spell a violent resumption of the secular bull market for metals.

Further Foolishness:

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

BHP Group Stock Quote
BHP Group
$54.13 (-3.65%) $-2.05
Freeport-McMoRan Inc. Stock Quote
Freeport-McMoRan Inc.
$29.20 (-0.20%) $0.06
Rio Tinto plc Stock Quote
Rio Tinto plc
$59.83 (-1.92%) $-1.17
ArcelorMittal Stock Quote
$22.89 (1.28%) $0.29
Aluminum Corporation of China Limited Stock Quote
Aluminum Corporation of China Limited
$9.54 (0.32%) $0.03

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.