The world didn't stop turning when Lehman Brothers fell, but you could almost feel the wheels of global industry come to a grinding halt.
As we have since seen, of course, nations like China and India have effectively brushed off the dust of that financial fallout, and global demand for raw materials has recovered with noteworthy vigor.
For investors like us, still rightfully wary of undue risk as we countenance "the new normal", correctly assessing the landscape of global supply and demand is an absolute prerequisite to investing in the mining space with confidence.
On the supply side, investors are encouraged to follow the money. In the case of mined resources, this involves tracking trends in capital expenditures by the major producers, and carefully observing the operations of mining equipment manufacturers Joy Global
Recent earnings results from Bucyrus, for example, tell a story about supply that needs to be told.
You can't mine without equipment
It would be easy to presume that resurgent strength in commodity prices, combined with an outlook for long-term demand growth from emerging markets, has sparked an all-out blitz to invest in fresh mine supply. The truth is, however, that this response remains in its infancy. Shockwaves from the financial crisis (and the subsequent, short-lived collapse in commodity prices) continue to rattle the supply side of the mining industry. Bucyrus' tepid third-quarter results provide a snapshot of a mining industry that has scarcely begun to resume its adaptation to burgeoning long-term demand.
The equipment maker suffered a 16% decline in net earnings to $77.6 million, and without a handsome contribution from the product lines acquired from Terex
Order activity remains sluggish, although recent approval of loan guarantees by the U.S. Export-Import Bank -- corresponding to a major order from a coal project in India -- are set to improve bookings for the fourth quarter. New orders for underground equipment, meanwhile, fell 25%. Bucyrus' total backlog has increased nearly 35% to $2.5 billion this far in 2010, but here again the ex-Terex figures show an increase of only 6%.
The lost years
If this soft pace of equipment sales comes as a surprise, the lesson offered here is that mine development and construction is a time-intensive process even in the best of times. In the wake of a market shock like the one presented by the collapse in commodity prices from mid-2008 into late-2009, it can take a few years for the industry to hit its stride in responding to growth in demand.
With that said, we are finally beginning to see some very big numbers being thrown around in Capex forecasts by the world's largest miners. Rio Tinto
It must be pointed out, as well, that the observable trend of consolidation within the mining industry -- whereby miners purchase their capacity expansion instead of building new supply -- only kicks the can further down the road with respect to meeting growing demand.
The coming surge
To be sure, the shares of most mining companies have enjoyed a pleasantly buoyant return from the worst levels of the commodity price collapse. In order to apply our analysis of these supply and-demand dynamics to the construction of an investment thesis, we must consider the relative position of mining shares to these underlying phenomena.
Although shares have recovered well, as a whole they have not yet surpassed their 2008 peaks ... and I believe this portends meaningful upside potential for miners with substantial production growth in the works. Beginning with the coal industry, we find that the Market Vectors Coal ETF
By my estimation, the industrywide lag in responding to growing global commodity demand (not to mention ongoing currency impairment) portends further pricing strength going forward, and I believe the best-positioned miners are destined to profit handsomely as they finally grow their way toward meeting that demand.