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Coal is among a number of commodities fueling a mining boom. (AP/ Anupam Nath)
For the normally staid mining sector, these are heady times. Sector indices have easily outpaced the Dow Jones Industrial Average for five years running (see chart below). Now some industry watchers see signs of a bubble (FT). At the same time, one industry giant, the British-Australian firm BHP Billiton, is attempting a hostile takeover of another British-Australian conglomerate, Rio Tinto. Whether or not the bid goes through—it initially met a sharp response from Rio's board and is currently under EU scrutiny (AFP)—some analysts say it could spawn a period of consolidation that will have geopolitical consequences for years to come.
The reason for the mining boom is simple—rising commodity prices—but the underlying pressures causing prices to rise are numerous and complex. New demand from emerging markets certainly plays a role. Chinese demand for aluminum (MarketWatch), coal (NPR), gold (Bloomberg), and other mined commodities has spiked. So too has demand from India, Russia, Brazil, and a host of other emerging economies. Beyond demand, market speculation also affects prices. As institutional investors have increasingly sought alternatives to equity investments, they have competed for purchases on commodities futures markets, pushing up prices. Michael W. Masters, a prominent hedge fund manager, explains this dynamic in recent congressional testimony (PDF).
The price jump has meant a bonanza for certain well-placed mining regions. Australia and New Zealand, for instance, have profited handily from commodity exports to China, particularly coal and aluminum exports. The Economist notes several firms riding this wave. Rio Tinto's share price roughly doubled in 2007. The Brazilian mining firm Vale has seen its quarterly earnings rise nearly tenfold since 2002. Some Central Asian countries—Kazakhstan is a good example—have seen similar booms, and firms have rushed to forge relationships with African countries flush with commodities. A Reuters analysis notes that a banner year for mining firms has also led to a spike in demand for mining services firms in the United States and Canada.
Yet some analysts see risks to the commodities boom. For starters, mining firms haven't been able to find enough skilled personnel (NYT) to actually increase output, despite growing demand. Moreover, rising commodity prices may prove a double-edged sword, as some parts of the mining industry are highly energy intensive. A recent report from PricewaterhouseCoopers shows that profits for the top forty mining firms rose 32 percent in 2007, but that the firms' costs rose 38 percent in the same year.
Perhaps the most dramatic aspect of mining sector's wild ride has been the push toward consolidation it has ushered. A Financial Times article says BHP's bid for Rio Tinto sparked a turf war that could lead to a major sector consolidation in the coming years (a fair amount has already happened—"the volume of mining deals in recent years has actually been staggering," says the CEO of the Swiss firm Xstrata in a recent interview with Reuters). The FT article says Rio may seek to buy up smaller firms, or team up with Vale, to make the firm too large for BHP to buy a controlling stake. But Vale, if it wants to protect itself, might seek a similar strategy, possibly teaming with Xstrata or the U.S.-headquartered Alcoa. Indeed, dozens of global players—even those not directly related to the BHP-Rio deal—might seek similar moves in the next few years.
The impact of such a shake-up would be felt globally. Several smaller U.S. firms could emerge as takeover targets, particularly given the weakness of the dollar. Depending which buyers are interested, such moves could prompt the kind of protectionist reaction seen in 2006 when a Dubai-based company tried to buy a company that ran U.S. ports. Other analysts question whether resource nationalism could increasingly grip the sector, adding unknown geopolitical twists to the rush for access to materials. Even putting these concerns aside, a major sector consolidation would have ramifications for the mining business itself. Investors Chronicle notes that a period of rapid acquisitions isn't necessarily the best way for the sector to boost growth at a time of rapidly rising global demand.
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