[miningmx.com] -- REFLECTING on the financial crisis between September 2008 and mid-2009, economic historians might regard the retreat in metal prices over that period – during which the cash price of copper fell to $4,000/tonne from $7,000/t – as a mere blip.
Certainly, there's not much trace in the commodities sector of the panic that gripped all asset classes amid the sub-prime credit crisis.
At the time of writing, the cash price of copper was back at $7,921/t, having traded at $8,000/t in the early part of 2010 until Eurozone debt concerns pushed it lower.
Notwithstanding the April sell-off in metals, there's no doubt the commodities bull run – while not quite living up to the billing of the super-cycle expected in between 2005 and 2007 – is back.
Look no further than a report from Citigroup in March, which said cash flow was so vastly improved in the mining industry this year it was due to be net cash of $4.5bn by 2011, a development that could lead to renewed merger and acquisition activity.
Capital expenditure for the industry was estimated to be $10bn, a 27% increase over the past 12 months above budgeted capital expenditure this year, while planned capex for next year had grown 37% over the past year, it said.
So what put the fizz back into the metals market?
The expectation that China's gross domestic product would continue to grow, possibly a double-digit rate of growth, is one. Restocking of exhausted inventories during the financial crisis was another factor. And then there's the rising cost of production, which is providing support to commodity prices.
"Steepening cost curves owing to projects typically coming into the third and fourth quartile of the cost curve – and stretched markets – promise attractive returns for incumbents and entrants with more attractive projects," says Heinz Pley, principal at McKinsey & Company's global mining practice in Johannesburg.
Pressure on production costs is also brought to bear by other unforeseen and exogenous factors. The risk of Australia's government imposing a tax on super profits generated within its borders was a earlier manifestation of growing resource nationalism. More recently, there have been moves by China to institute tax reform on its minerals production.
Goldman Sachs, in a report dated 18 May, said: "Although implementation remains uncertain, we conclude China's switch to a value-based royalty from a production-based royalty could directly affect prices by increasing the cost of marginal production, and Australia's "resource super profit tax" could delay needed investments as the market digests a changing cost of capital."
There's nothing particularly new in changes to taxation as a form of "resources nationalism," as it's become known.
There's been resources tax reform in South Africa with its Royalty Act, implemented for the first time this year.
Chile, Brazil and even parts of the United States, such as Nevada, have introduced new taxes – the aim being to better capitalise on corporate super profits.
However, the effect of higher taxation is that it raises the price required to motivate new production and can affect the marginal cost of production from producers in countries with critical swing capacity.
The Australian government's push for higher taxation on mining profits – which would have seen the effective tax rate on company profits balloon to 57% from 43% from 2013 – saw companies hold back on future mining projects.
Xstrata, the London-listed miner, said in June it was reconsidering spending A$586m on two coal projects, believing they wouldn't be viable at the higher tax rate.
In the case of China's tax reform, its government is considering switching resources tax calculations from a quantity-based approach to a pricing-based approach.
In the words of Goldman Sachs, that's to better reflect the supply:demand economics and resolve any externalities associated with resources production.
"Societal demands for participation in the mineral wealth of countries are omnipresent," says McKinsey's Pley.
"Besides Zambia, Mongolia and other developing resource countries, Britain increased its take from British Gas during the boom of 2008. The mining industry risks inadvertently sliding towards a similar outcome, as margins are attractive and societal demands and technical competence are growing in resource countries."
