The mining sector plays a significant role in Zimbabwe’s economy. The sector accounts for over 15% of GDP, generates over US$2 billion in exports (58% of total exports), contributes over 13% to the fiscus and employs over 45 000 people.
There is no doubt that the mining sector plays a critical role in the development of the country. So what is the outlook for commodity prices and when do we expect commodity prices to recover?
According to South African economist Mike Schussler, if you believe that history repeats itself, then you may feel vindicated by analysing the Economist’s All Commodity Price Index for the last 130 years. The trend is depressing and if history is to repeat itself and the world follows the last four cycles since 1887, commodity prices are likely to remain suppressed for another 15 years or so.
The cycle currently shows that the world has entered the fastest slowdown in commodity prices since 1931 on a four-year basis, and we are currently on track for the fastest five-year decline since then. The result will see a significant re-alignment of the world economy. Power will shift back to the consumption-based economies with developed markets being the biggest beneficiaries.
In contrast, commodity and oil producers in Latin America, Africa, Middle East and Russia will struggle over the next two decades. The result has important implications for many African countries, including Zimbabwe. If history is anything to go by, then commodity prices are likely to remain depressed till 2030, posing significant challenges for our economy.
As illustrated in the chart below, there are four clear peaks in the commodity cycle and they are approximately 30 years apart. This shows that commodity cycles last for around three decades long each. Each cycle has a surging decade, which is followed by a massive collapse of around five years and then a slower downward decline, which lasts another 15 years. The peak years were 1917, 1951, 1980 and 2011. The troughs were 1931, 1971 and 2002.
The first peak in 1917 has more to do with the demand for iron and food during war and the end of the first wave of globalisation. The supply of foodstuffs was very limited and during the First World War, the extraction of minerals was in some cases interrupted. From 1903 to 1917, the index rose 40% in real terms.
The Second World War did result in a rise in prices of around 66% in real terms, but it was the vast rebuilding after the war that ignited the rise of commodity prices. The rebuilding of the United States economy led to a growth burst in the late 1940s and early 1950s. This resulted in a rise of 155% in real terms between 1938 and 1951. This was the longest and strongest rise, driven by Keynesian economics, post-war demand for iron ore and oil as well as the difficulty in getting food to markets.
Apart from the supply and demand challenges, the world started to abandon the gold standard. The subsequent downward cycle bottomed out in 1971. It was halted by the growing global trade and the oil crisis. This led to gold rising for the first time in a decade and peaking in 1980. Oil too peaked at a price far higher in 1981 than it is currently. From 1971 to 1980, real prices rose 145%.
The most recent peak was reached in 2011, 31 years later, and followed a decade of massive growth driven by China and other emerging markets creating an unprecedented demand for commodities. From 2001 to 2011, real price in US dollars rose by 140% and was quickly named the “Super Cycle”.
History certainly appears to be repeating itself as we find ourselves firmly in a downward trend that may last for two decades. Ironically, in each of the cycles described above, the growth faltered at the point when there was a major increase in the supply of new commodities.
History also shows that the average decline in price from peak to trough is around 56% in real terms. The index has declined by only 38% during the past four years, more worryingly; nominal prices fell at the fastest rate for any four-year period since 1931. This means the world can expect further declines in commodity prices over the next decade, but probably at a slower pace.
The implications for Zimbabwe are significant. In order to survive, one has to be the lowest cost producer. With the exception of platinum, most mines in Zimbabwe are certainly not the lowest cost producers. We have seen a number of mines shut down recently and I expect many more to close down over the next three to five years.
Most of our mines are old and require significant capital. It’s unlikely that we will see any significant investment in the sector given the depressed commodity outlook and our unfavourable investment policies. I have long argued that Zimbabwe needs to diversify it’s economy away from primary production and focus on developing the service sectors. All that glitters is not gold and that’s true for the mining sector at the moment.