One of the themes that has dominated my articles over the past few years has been the idea of the scalability of tech, especially anything digital; the digital economy has seen growth that has obliterated anything the physical economy – mining, farming, traditional industry – has achieved.
While the physical economy may have grown, perhaps by around 3% or 4%, since the early 1990s, the digital economy has gone from almost nothing to become, probably, the biggest economy on the planet.
Will the physical world ever make a comeback? Or even catch up?
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Tech has dominated because it is so easy to scale
My go-to statistic to illustrate the rapid growth and current dominance of technology is that in 1990, the three biggest companies in Silicon Valley had a combined market cap of $36bn. Today the three biggest – Facebook, Google, and Apple – have a combined market cap of around $4.5trn. That’s over a hundred times bigger.
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Trademarks, software companies, intellectual property, data – this where the value is. Data is described as the new real estate. Yet when I was a kid, I don’t think it even existed, certainly not in the way it does now.
Even money itself has gone digital. Only about 3% of money globally is now in physical form. Bitcoin is now (measured by market cap, at least), the 13th largest currency in the world. It didn’t exist 15 years ago.
The key to this rapid growth is scalability. A digital product can be endlessly and instantly copied. I can design a fantastic app once, upload it to the app store once, and it can be downloaded a million or a billion times. If Google can get some new groovy feature in its search engine, then once implemented it’s almost infinitely scalable.
But let’s say I design a fantastic washing machine. It takes much longer to get this washing machine to the world – the fabrication and distribution are all tricky, but perhaps most difficult is the burden of regulation in the physical economy, particularly as it attempts to cross the national borders.
By contrast, the economy of the internet is (almost) borderless. The digital space, or certainly the areas where the innovation is, is largely unregulated – how do you regulate something that hasn’t been invented? So digital escapes the ties of regulation that curb the growth of the tangible.
Then, because of the extraordinary speed of growth in digital, there is the potential for investors to make far quicker returns on their investment. And so the digital economy attracts the most capital, the most talent and so on.
With this in mind, let us turn our attention to metals.
The physical world is treacherous and time-consuming
You don’t get much more tangible than metal. Mining is in many ways the most analogue industry there is; it is the very opposite of the dynamic digital world. A geologist is studying rock formations that took thousands of years to take shape, and will take decades to mine.
Even compared to the production of other commodities, mining is slow. To take an oil well or a gas field from discovery to production might be possible in a couple of years. A farmer can get a new crop to market in a year; mining takes ten. Metals are a very different beast, yet they underpin everything we do.
Who’d want to go into mining? It’s a horrible business. Geologists have to go to some of the most unwelcoming and dangerous places on earth – from the freezing frontiers of the Arctic to darkest depths of war torn Africa. That’s before they even know if they’ve discovered anything.
At a grade of roughly 4.5%, Alphamin Resources has, in Mpama North, probably the richest tin mine in the world. If it was a software company, developers from all over would want to work for it, yet one of Alphamin’s biggest problems is attracting talent. Why? The Kivu province of the Democratic Republic of Congo, where it is located, has a long reputation for outbreaks of both conflict and Ebola.
Once you make a discovery (and many geologists make only one or two discoveries in their entire career), you’ve then got to prove the mine is economic. Variable metals prices make this a nightmare – a mine could work at a copper price of $4 per pound – but not at $3 a pound. How do you even know what the copper price will be in five years’ time, by the time you’ve got this thing producing?
Then you’ve got to raise the capital to build the mine. Who wants to invest in a mining company when you’ve got to wait ten years before it starts profitably producing? It could go to zero. Do you know what? I’ll just buy a Nasdaq tracker.
Then there’s the regulation. If you think the cross-border logistics of the washing machine industry are tricky, wait until you see the regulatory burdens placed on mining. Perhaps not without good reason, they are enormous, especially environmentally. That means further delay.
Let’s say you get your mine producing profitably. Who’s to say a government won’t then seize it – either taking control of the mine (as happened in Venezuela, for example) or via windfall taxes? Or actual crooks might try and steal the product (this is a major risk, for example, to the gold miners of Mexico).
Even ignoring all of those risks, to take a mine from discovery to production takes an average of ten years. It often takes longer. Who has ten years? I struggle to find a spare hour.
The result is an industry starved of talent, starved of investment and starved of innovation. Yet the metal it produces underpins everything we do. I could not be writing and you could not be reading this article without boring old copper, aluminium, tin, lead, iron and zinc.
Mining got a wake-up call in the 2000s and billions of dollars of investment went into metals, buoyed by the prospect of a huge Chinese infrastructure spending.
Some of that investment resulted in new discoveries and mines; much resulted in nothing. We spent the money, we explored, we developed, but the mine won’t work at today’s prices (especially so since the fall in metals prices post-2012). Some resulted in the multiple scams which perennially soil this business. Some simply got blown on expensive stays at the Savoy.
However, since 2012, with metals prices flat or falling, the industry has been starved of investment. It’s been surviving on diesel fumes. But something changed last year.
Tech’s one big weakness: it is still dependent on “real” world materials
Never mind the impact Covid-19 has had on supply chains: coronavirus is the great accelerator. Stuff that was going to happen anyway has been brought forward – and metals prices have been rising.
I’ve spent a lot of time on the phone this past week to metals traders and dealers. You might not think so to look at the gold price, but at the precious end of the market, physical bullion dealers are reporting unprecedented demand. One of the biggest US dealers has seen its turnover go from from $651m to $1.5bn to a record $3bn in just the past three years. There’s a similar story in Germany.
Talking to one trader from the floor of the metals exchange, he says this bull market is way bigger than the one we saw in the noughties. “I’ve been here since the 90s. I’ve never seen anything like this. Tin. Copper. There is just no excess stock in the concentrate markets.”
Just to explain that term, mines produce “concentrates” and sell to smelters who produce metal. The concentrates markets are rather opaque to outsiders; the surplus or deficit between mine supply and metal consumption gets hidden there as concentrate stocks go up and down.
“The concentrate stocks are at zero”, he says, “which means the maximum metal supply equals mine supply. It also means that metal production is dropping because there is no more draw down on concentrate stocks possible.”
We saw what happened with China in the 2000s, and a plethora of other countries want similar economic growth. America’s infrastructure needs rebuilding and increasingly interventionist governments the world over are getting involved in infrastructure spending of one kind or another to make themselves popular and secure their re-election.
We talk about the rise of the Asian middle class, but it hasn’t finished yet. And there’s the African middle class to come, not to mention South America.
The large mining companies have relied on acquisition rather than discovery. The smaller companies are finding it increasingly difficult to make discoveries. True elephants (huge deposits) are more and more rare, especially in accessible places. The quality of the grade is falling.
The bottom line is this: there is not enough metal. There hasn’t been enough metal for a long time because there has not been enough investment. Why? The money has all gone into tech – scalable tech.
There is one thing that will solve all of this: higher metal prices. I rather suspect the bull markets we have seen this past year are just the start. We might well now be seeing the physical economy starting to make a comeback.
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