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Bursting the Boom-to-Bust Bubble

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

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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.

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Stocks Mentioned

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

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

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