The switch from ‘demand-pull’ to ‘supply squeeze’ in the global resources market may provide opportunities for WA miners.
The switch from ‘demand-pull’ to ‘supply squeeze’ in the global resources market may provide opportunities for WA miners.
It has been a long time since anyone mentioned the Panton Sill, a geological structure in the Kimberley once considered Australia’s great hope for the development of a platinum mining industry.
However no-one has officially blown the dust off the project, which is worth remembering as supply-side surprises, rather than Chinese demand, emerge as driver of the resources sector.
In effect, the resources world is flipping from demand-pull to supply squeeze, for a variety of reasons including:
• political events overseas;
• workforce unrest;
• the natural decline of ore bodies; and
• a corporate cash-flow switch, with more money returned to shareholders and less spent on exploration and development.
Nickel has so far been the biggest beneficiary of a political decision, with the Indonesian government’s move to ban the export of unprocessed ore triggering a 40 per cent price increase, which has boosted confidence in the WA nickel sector and added greatly to the fortune of Clive Palmer.
Bauxite, another unprocessed speciality of Indonesia, is also starting to be affected.
Platinum is the first in the current commodity price cycle to be affected by workforce unrest, with an estimated 50,000 workers in South Africa’s all-important platinum mining industry walking off the job 18 weeks ago. This has led to a squeeze in the supply of a metal that has critical uses as a catalyst in removing environmentally damaging particles from car exhausts.
A substitute for platinum is its sister metal palladium, which is largely supplied by Norilsk Nickel from its mines in Russia – another candidate for a politically induced supply surprise should the situation in Ukraine worsen and trade with Russia be curtailed.
The trend away from unbridled demand growth for commodities courtesy of Chinese demand to a time when restrictions on supply is the key factor in commodity pricing is evident across a number of metals and agricultural products.
What that means for investors is that it’s time to stop focusing solely on events in China and start looking for squeeze points that will drive commodity prices – and share prices.
Two other examples of potential supply events are:
• the threat of a strike by tug crews at Port Hedland, which could have crimped the flow of iron ore and, while called off, could easily return until workers and their employer resolve their differences; and
• a squeeze from next year on the supply of zinc as a series of major mines, including Century in Queensland, reach their expiry date as ore reserves are depleted.
What’s happening is that excess capacity in the raw materials industry, which has kept a lid on most prices during the past three years, is being absorbed at an increasing rate as the global economy recovers.
China’s growth rate might be slowing but it is still steaming ahead at an annual expansion rate of 7 per cent, which means the country’s economy will double in size over the next 10 years.
That slower, but still very impressive (commodity consuming) growth is being matched by a recovery in the US economy and a welcome burst of faster growth in Europe.
On the other side of the coin, investment in new mining projects has slowed to a crawl and workers in some mining industries are becoming more militant as they’re forced to endure another year of pay freezes that reflect last year’s commodity prices, not next year’s prices.
A possible re-evaluation of the viability of Panton Sill is an example of what might happen as one of the supply-squeeze factors – the South African platinum industry strike – dries up the supply of freshly-mined material, and some of the big mining companies in the industry consider if it’s time to quit a loss-making business, or sell before it’s too late.
Anglo American Platinum, the world’s biggest producer of the metal, is actively considering its ongoing involvement, having already flagged that unless it can cut costs by sacking up to half its workforce it will sell, probably to a South African miner with closer government and union connections.
For the current owner of Panton, the nickel-miner Panoramic Resources, events in South Africa’s platinum sector will be stirring a little of the excitement which faded two years ago when the last feasibility study was run.
Back in 2012, Panton was shown to be a project capable of producing 83,000 ounces a year of platinum, palladium and gold at a cash cost of $US830 an ounce for the cocktail of metals.
The platinum price has retreated since then but the palladium price has risen, with the net effect being no change, which probably means the numbers at Panton do not yet add up.
However, if the miners in South Africa remain on the sidelines for much longer, or if one of the big mining companies tosses in the towel, the world’s car industry will be looking for alternative supplies of an essential metal, and Panton could finally be developed after 20 years of near misses under a variety of owners.
Minotaur rising?
Speaking of blowing the dust off mothballed potential mining projects, there are signs of life emerging in the long-neglected nickel exploration industry.
After several years in the doldrums, explorers are using the Indonesian-inspired rise in the price of nickel to spruik the attractions of their assets and, no doubt, seek to raise fresh capital off the back of the nickel price.
First cab off the nickel rank is Minotaur Exploration, which last year acquired the troubled Breakaway Resources, mainly for its copper assets in Queensland, but now for dormant nickel tenements in WA’s eastern Goldfields.
With interesting prospects near Leinster and close to Kambalda, the former Breakaway nickel exploration assets could give Minotaur’s share price a kick along, or at least provide a fresh talking point for management.
Hop to it
For a final word on supply-side surprises with a touch of WA history attached, there is a shortage of hops emerging thanks to the rise in speciality beer production.
Once a big industry near Manjimup, hops is an essential ingredient in beer, with craft beers made by boutique breweries using more hops than the standard brew.
Perhaps hops represent an opening for an enterprising farmer in the deep south.
