As an example, Norrish noted that the marginal production costs of most industrial metals had almost doubled over the last three years or so. “We’ve had rising energy prices, rising labor costs and rising costs of other materials as well,” he says, noting that cash operating costs had been shooting up, but the capital costs of building new mines had increased enormously in a relatively short time.
“So, for example, we think now compared to the average over the last ten years the capital intensity of a copper mine is almost double what it was. The capital intensity of a new nickel project is almost three times what was just a relatively short period of time ago. That means that miners and producers of metals are going to react far more quickly, far earlier in the cycle and at much higher price levels that they did back in 2008 and 2009,” Norris says.
Rising metals costs are being firmly underpinned by rising costs in other parts of the commodities complex. He noted that for oil pricing it would be very difficult for Saudi Arabia to break even on the extra social spending it is making as a result of the unrest in the Middle East if oil prices go much below $90.
Food prices also are rising and setting “a very high wedge for wage negotiations in many emerging markets where mining is so important,” he says.
“I think what we are seeing in general is a much greater interconnectedness between commodity markets. We see rising energy prices and we see more food, American corn for example, being used to make ethanol.” That he noted is pushing wages higher in many mining countries and in turn pushing up metals prices. The higher prices also lead consumers to hold down inventories,” Norrish noted. “Very few copper consumers want to hold any more than they really need in order to meet their immediate requirements.”
The result is that “we’ve seen a big change in market psychology,” Norrish says. “Many, many more people now understand that you have to have much higher prices because otherwise the mining business simply doesn't work.”
While prices will rise, Norrish acknowledge that this will be a year of slower economic growth around 3% for global gross domestic product with China’s government engineering a soft landing for Chinese inflation.
“What does that mean for the metals and mining sector? That, I think, is a good number. It's a little bit less than we had last year but a lot of things have changed on the demand side of business over the last five or six years.” With 3% global GDP growth in the 1990s “you might have expected to see some negative numbers for metals,” Norrish noted.
Barclays thinks 2012 will be quite a good year for supply growth. “There are quite a few new projects coming on stream,” Norrish says, “and in gold prices will be high enough to attract gold scrap into the market.”
However, Norrish says he expects production this year to be flat to down for platinum, lead, zinc and silver. Aluminum and palladium supply constraints that have been a big cost for the mining sector for a long time are not going away anytime soon. While copper supply is seen accelerating this year, Norrish said that supply will tighten again by 2014.
“We've seen a huge amounts of investment activity coming to that a commodities market in a relatively short space of time,” Norrish noted, estimating about $400 billion has been invested in commodities globally by institutions like pension funds and other asset managers. “We certainly didn't see a big very big contraction in the rate of investment flows coming into the commodities market in the second half of 2011,” he said.
“I think what we've seen already so far this year [is that] a very strong rebound in industrial metals and precious metals prices does suggest that we are seeing a turning point. Now I'm not optimistic enough to think it’s likely to be plain sailing from here,” Norrish says. “We’re definitely going to see some twists and turns with the European sovereign debt crisis and that might again get people very, very nervous.”
But, he added that Barclays expects to see the prices of most commodities increase over the course of this year and that this will be led by the industrial metals and the precious metals complex. “These two sectors were the two that fared the worst of all commodity sectors over the second half of last year and we think coming into 2012 they’ll recover.”