Episode Details

I wanted to discuss the natural resources industry today – energy and mining – because I see an industry caught between a rock and a hard place. 

If I get a bit ranty, I apologise. But this impossible situation makes me get a little frothy at the mouth, because it is in large part so unnecessary – and not the making of the industry itself, but of idiotic policy.

We, as investors, however, need to understand the binds in which businesses find themselves, so here goes.

We’ll start with supply chains.

Disrupted first by Covid-19, then the Ukraine War, then more lockdowns in China, supply chains are still not working as they should. 

You don’t need me to tell you that delays cost money. Imagine a workforce ready to go, and being paid – but without the right equipment to get started. Money is draining out of one side and nothing is coming in on the other. 

This is particularly punishing where capital is tight. And boy, is capital tight in mining.

Then there is, as we all know, dramatic inflation in input costs, especially energy. Budgets to production are going up, up and up. 

Money is also tight because of lack of investment. This lack of investment takes many forms. 

First there is under-investment from outside. ESG (environmental, social and governance) guidelines determine where many fund managers allocate capital. Oil, gas and mining, for obvious reasons, tend not to score so well on ESG, so capital is not allocated there and the industry is starved of funds.

What’s so hypocritical is that ESG demands, and the decarbonised future it wants, require enormous amounts of the very products that its investment guidelines steer it away from: metals. 

Copper, tin, silver, lithium, cobalt, palladium, platinum, nickel, manganese, rare earths – the list goes on. They are all essential to a low-carbon future. But how are they to be produced without investment?

Vast amounts of carbon must be burnt to achieve decarbonisation, yet oil and gas have also suffered from lack of investment. It’s one of the reasons prices are now so high – lack of new supply. Yet instead the companies involved are accused of ramping up the price and profiteering. 

The industry is wary of expansion too

Then there is a lack of investment from within. The industry still has memories of 2013-14, when mining in particular had, as metals analyst, Nicholas Snowden of Goldman Sachs puts it, a “near death experience”. The collapse in the oil price decimated energy too.

This near-death experience followed the bonanza of the 2000s, when it seemed that metals and energy prices could only go higher, driven first by China’s seemingly insatiable appetite for natural resources, and then the money printing post-2008, during which the US exported incredible amounts of inflation. 

But those soaring prices suddenly came to a halt. Supply met demand, prices collapsed and with them the oil, gas and mining industries. Many companies went under. People lost their jobs and their livelihoods. Worse still, those who work in the mining industry tend to have a habit of investing in mines too – so their investments went down the Swannie as well.

As a result there is “internalised trauma” – Snowden’s words again – and it is now uber-cautious. Nobody wants to be the stupid guy who blows fortunes on projects that prove uneconomic. So despite all the shortages in energy and metals we keep reading about, the industry is still cautious – probably a sensible mental space to be in.

Rising commodities prices, especially those of oil and gas, may largely down to ten years of underinvestment, yet still the industry is reluctant to go all in. 

But can you blame it? Look at what’s happening in markets across the board. We’ve got a spiralling US dollar, crashing bonds and equities, and money is tightening. Even the UK housing market looks dodgy. 

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