More slightly dubious finance

[fivemack]

Mining companies.

I thought I just about understood mining companies. You own some unprepossessing land in Australia, or Kazakhstan, or Chile, under which are rocks made of copper. You buy incredibly expensive machines for grinding the rocks to impalpable dust and getting the copper out. You sell the copper. You pay royalties to the government whose land you own, which they invest wisely in upgrading the railway from Alice Springs to Perth.

Machines wear out on a fairly well-understood schedule; copper is needed both in things that people want, like iPods, and things that people need, like washing-machine motors. In the long term there's the risk that you might find new copper mines more slowly than you use yours up, and there's the risk (faced by mercury miners) that demand might change in secular ways; on the other hand demand might change in other ways - ALCOA used to give away lumps of gallium in the hope that someone find a use for this critical component of microwave amplifiers for mobile phones. But if you're a big miner you might well have a copper mine, an iron mine, a mercury mine which you closed in 1995 and an oil well, and a small amount of funding to a bloke in a back room at CUED perfecting the electrolytic refinement of scandium; as copper gets replaced by plastic, so money that would have gone in your copper purse ends up in your oil wallet, and as people start wanting even lighter, fuel-efficienter aircraft made with aluminium-scandium alloys, so your bloke in the back room at CUED gets to buy a big house in Cherry Hinton.

Over the last few years the shares of the big miners have gone up significantly, with the usual justification being that China has lots of people, and lots of them will want houses, in which are copper pipes and copper wiring.

China still has lots of people; it is not clear that fewer of them want houses in the middle of August than wanted houses in the middle of July. So why have the big miners usually been the reddest and most plummetting shares on the LSE when the LSE goes all red and people start watching Liverpool Street for falling bankers?

Comments

[lnr]

I have absolutely no idea whatsoever, but just want to say I loved reading this.

[dd-b.livejournal.com]

In general, don't commodity markets really move more in response to speculator beliefs about the future than direct demand? And aren't mining stocks heavily tied to the commodity markets for the things they produce? Or is that all far too intellectualized?

[drplokta]

I suspect partly because economic recessions affect demand for commodities very directly -- as many people may want houses in China in August as in July, but they will be less likely to actually be able to buy houses if the US has stopped buying as much stuff from China -- and partly because mining is a capital-intensive industry that is likely to be hard hit by the drying up of low-cost loans on easy terms.

[jojomojo.livejournal.com]

I wonder if the US housing market has anything to do with it. It's still a big market, and US new-housebuilding is, I read today, at its lowest level in decades.

[martin-wisse.livejournal.com]

So why have the big miners usually been the reddest and most plummetting shares on the LSE when the LSE goes all red and people start watching Liverpool Street for falling bankers?


Because the LSE has little to do with real world needs, wants and behaviour and much more with how the people operating it think about things?

One reasoning being that in times when credit is cheap, it's easy to finance capital intensive industries like mining, but now the banks are collapsing, it will become much more difficult for mines to a) get capital for new investments and b) make enough money to pay off the jacked up sharply now doubt interest on the capital they can get.

Also, copper may be expensive, but I'm not sure the mines get the lionshare of that money...

[kaet.livejournal.com]

Perhaps, if banks are over-exposed, they'll not willing be to lend for capital projects, which consume a lot of raw material, and the overall rate of growth may decrease, particularly in capital heavy industries?