Since mining companies do not control commodity prices, they forecast demand to drive decisions on production and capital investment. As no communication occurs between the various players globally, mining companies fall prey to the strongest form of game theory; they all do the same things at the same time while hoping for differentiated results. Further impeding wealth creation is the industry’s inability to reverse supplier bargaining power through productivity. Whatever success in production growth is met with even greater operating and capital cost growth. In the decade from 2004 to 2013, productivity fell 28%. Since 1892, the industry recorded three leaps of human ingenuity in productivity – manual, mechanised, and in-situ remote production. Automated production, achieved in late comer industries such as electrical appliance and automobile manufacturing, is a pipe dream for the mining industry. Three quarters of initiatives to structurally shift mining costs lower fail. Without this protective layer, mining companies remain overly dependent on commodity prices for profitability. Forecasting errors on demand combined with the detrimental influence of game theory on supply, lead to perpetual cycles of capital investment and impairment thereof. Periodically, investors may successfully speculate on listed resource equities but not consistently enough to build wealth.
Click here to read the full version of Issue 18 of The Burgundy which expands on the above topic in detail.