New mines, new areas, new challenges

One of the challenges of supplying a developing world with metals and minerals is that the distribution of resources round the globe is misaligned with the spread of population.

It is a factor that helps project how markets will develop and throws light on understanding the long run potential for supply, including geological prospectivity, technological developments and the challenges of operating in different geographies.

A US Geological Survey map shows where the greatest concentrations of metals and minerals are on the face of the Earth, and combines this with the distribution of population. This shows, broadly speaking, that most of the metal and mineral deposits are in countries with relatively low populations like Australia, Canada, South America and Russia, while the most populous parts, Asia, the Middle East and Europe, have a relative deficit of resources.

So the “have” countries may be expected to become increasingly significant suppliers of resources to the “have not” countries, like China. For the mineral explorationist and investor this makes prospective countries, such as Russia and neighbouring Mongolia, attractive, because of their proximity to China, which has a low value of resources per head of population. Similarly, Canada, with a high average ratio of resources to population, and also South America, lie adjacent to the US, which has a relative metals deficit.

An interesting anomaly is sub-Saharan Africa, which has strong resource potential and large populations, putting it in the low average value of resources per head category.

Realising Africa’s role as a supplier will depend on further exploration and the conditions for investment on the continent.

For the present, it is well understood that much of the current strength in most commodity prices has been the result of four years of strong growth in world gross domestic product, and the current highly resource intensive stage of economic development of China.

Along with strong demand conditions, the second key factor leading to high metal prices has been constrained supply, leading to historically low stocks. And many of the production constraints affecting the industry are unlikely to be resolved next year. Rio Tinto therefore believes prices will remain well above their long run trend.

China has been and will remain a key driving force in resource markets for the foreseeable future. Its pattern of growth may be an indicator for future development in countries such as India. Rio Tinto expects China’s annual growth will average more than eight per cent over the next decade, so providing a consistent underlying momentum to the global demand for most commodities. Any downturns associated with the typical investment and global trade cycles are expected to be temporary.

Nevertheless, the bottom line is that metals and minerals markets are cyclical and will remain so. Markets have different characteristics. When prices revert from today’s highs they will do so at different speeds depending on the commodity.

Historically, iron ore has taken an average of more than five years to return to trend from a peak, while for non ferrous metals reversion has taken around three years.

The reasons for the differences lie in different market structures, the speed with which new capacity can be brought on stream and the volatility of demand. Supply constraints will take some years to unwind and this could extend the current cycle for at least a little longer than the historical average.

The implication is that capacity at existing mines will continue to be stretched in order to meet growing demand until greater capacity comes on stream.

And because of the misalignment between resource distribution and population, new mines will present challenges. They will need to be found and developed in those parts of the world, such as Russia and central Asia, that have not in the past been major minerals exporters but are close to centres of demand.