Oh how the worm turns. In 2001, Goldman Sachs' star economist Jim O'Neill coined the term 'Brics', spotting before most others that demographic shifts in emerging markets would send shockwaves through the global economy. He noticed that between them Brazil, Russia, India and China covered a quarter of the earth's land, contained two-fifths of its population, and had reached a point in their economic development where rapid industrialisation would follow, creating a wealthier citizenry that would demand the trappings of good living to which the west had grown accustomed to. And that would need metal. Lots of metal.
So technology analysts like myself fell out of favour, and instead mining became the star of the show. The Aim market, in particular, attracted a wave of small resource companies looking to ride appreciating commodity prices. There are now 160 miners traded on Aim, more than twice the number of software companies, while the FTSE 100 is also heavily skewed towards raw materials - 13 per cent of its value by market capitalisation is represented by large mining groups.
Unfortunately, that means the index has underperformed other major indices this year as a slowdown in China and softening metal prices hit miners' prospects. The sector is overcome with bearish sentiment, with a strong sense that the good times are behind it.
A more rational view suggests that the secular growth story that has underpinned the decade long mining boom is set to continue. Consultancy McKinsey notes that another 3 billion people are set to enter the middle classes over the next twenty years - that's far greater than the scale of earlier demographic shifts the West had experienced, and suggests demand for raw materials is set to remain strong.
But that doesn't mean miners can continue to simply rely on rising commodity prices to prosper. As McKinsey notes, commodity prices in fact fell throughout the twentieth century despite a twenty-fold increase in demand, thanks to improvements in productivity and the discovery of new low cost sources of supply. The consultant argues that a similar "resource revolution" is now required to keep prices down to a level that won’t presage a period of heightened economic volatility, which wouldn’t necessarily be good for miners. Indeed, the very rise in commodity prices that underpinned this boom now threatens to undermine it, manifested in issues such as resource nationalism, declining grades and ballooning costs.
As we discuss in this week's special feature, these challenges are not insurmountable, and demand for resources will not simply evaporate. But, as technology investors once also discovered, boom times don't tend to last forever.
