The natural resources industry is in dire straits – which is bad news for the rest of us

I wanted to talk about the natural resources industry today – energy and mining – because I see an industry stuck between a rock and a hard place.

If I get a little upset, I apologize. But this impossible situation makes me foam a little, because a lot of it is so pointless – and not the making of the industry itself.

As investors, however, we need to understand the difficulties that companies find themselves in, so there you have it.

And we’ll start with supply chains.

Mining and oil production has been deprived of outside investment

Supply chains are still not functioning as they should, having been disrupted first by Covid-19, then Russia’s invasion of Ukraine, then further lockdowns in China.

You don’t need me to tell you that delays cost money. Imagine a ready-to-go, paid workforce, but without the right equipment to get started. Money flows out one side and nothing comes in the other.

This is particularly penalizing when capital is limited. And boy, capital is limited in mining.

Then, as we all know, there is dramatic inflation in the cost of inputs, especially energy. Production budgets grow, grow, and grow.

Money is also scarce due to lack of investment.

This lack of investment takes many forms. First, there is under-investment from outside. ESG (environmental, social and governance) guidelines determine where many fund managers allocate capital, and oil, gas and mining – for obvious reasons – tend not to perform as well on ESG, so capital is not allocated to it and the industry is starved of funds.

What’s so hypocritical is that ESG requirements, and the decarbonized future they desire, require huge amounts of the very products that his investment guidelines steer him away from: metals.

Copper, tin, silver, lithium, cobalt, palladium, platinum, nickel, manganese, rare earths – the list goes on – are all essential to a low carbon future. But how to produce them without investment?

Large amounts of carbon must be burned to achieve decarbonization, but oil and gas have also suffered from lack of investment. This is one of the reasons prices are now so high – the lack of new supplies. Yet instead, the companies involved are accused of raising prices and making profits.

The industry is also wary of expanding

Then there is a lack of investment from within. The industry still has memories of 2013-2014, when mining in particular had, as metals analyst Nicholas Snowden of Goldman Sachs puts it, a “near-death experience.” The collapse in oil prices has also decimated energy.

This near-death experience followed the windfall of the 2000s, when it seemed that metal and energy prices could only rise, driven first by China’s seemingly insatiable appetite for resources. and then by money printing after 2008, during which the United States was exporting incredible amounts of inflation.

But this price spike suddenly stopped. Supply met demand, prices crashed and with them the oil, gas and mining industries. Many companies went bankrupt; people lost their jobs and their livelihoods. Worse still, those working in the mining industry also tend to invest in mining – so their investments have also fallen in Swannee.

As a result, there is “internalized trauma” – again Snowden’s words – and the industry is now extremely cautious. Nobody wants to be the dumb guy who blows up fortunes on projects that turn out to be unprofitable, so despite all the energy and metal shortages we keep reading about, the industry is still cautious – probably a mental space reasonable to be in.

Rising commodity prices, particularly oil and gas, may be largely due to a decade of underinvestment, but the industry is still hesitant to go all out.

But can you blame him? Look at what is happening in the markets at all levels. We have a spiraling US dollar, bonds and stocks crashing, and money tightening. Even the UK property market looks dodgy.

I’m beginning to think that the next asset class to crash will, after all, be oil (and policymakers would welcome that). Although the trend, for now, remains upwards.

Yesterday I was listening to a debate on Bloomberg between someone from the US government and someone from the US oil and gas industry. The first required oil companies to reinvest their profits back into the ground – into exploration – so that production could be increased and the burden on the American consumer lightened.

The latter argued that profits should be returned to investors in the form of dividends, because that is why they invested in the first place. The first one said then, basically, that if you don’t reinvest your profits back into the ground of your own free will, we’re going to force you to do it on government orders.

This will hardly attract new investment!

What happens if companies are forced to put their profits back into the ground and the price of the underlying commodity crashes? This is what the industry is so terrified of, so it tries to balance reinvestment with rewards for existing investors.

You (literally) can’t get the staff these days

This leads (tangentially) to the question of talent. Few people desire the aggravation of working in such tough industries, when you could go work in tech and earn more. Lack of talent leads to further delays; you can’t find the people you need to build what you need until next year or when they become available. And, by the way, their fees are also higher.

Let’s say a company finally manages to navigate all of this and produce an essential product. With the high prices he charges, he is accused of profiting, so an exceptional tax is levied. Even the US is now talking about windfall oil and gas taxes (windfall taxes, by the way, won’t make oil and gas cheaper for consumers, they will just make companies even more reluctant to invest and lead to further supply shortages).

No wonder talent and investment are going elsewhere.

Then there is another obstacle: allowing. Look at the arguments in the UK on hydraulic fracturing; it’s an obvious problem solver, but it’s toxic. Any money invested for this purpose is only used for legal and political fights. Where is the return?

Nuclear energy is another obvious solution. But look at the opposition; look at the rules; look at the timelines for building nuclear reactors – we’ll all be six feet under by the time it’s done. Why venture capital in there?

You’re better off buying the metal itself and stockpiling it in anticipation of higher prices – in many ways the equivalent of stockpiling land. Buy uranium and base metal exchange-traded funds (ETFs). But that just means more metals are being held out of the market and prices are still rising.

Cheaper energy and metals would mean lower inflation, but the regulations, permits, and arguments that come with it only add cost, by delay and by process.

I can see price crashes coming with this broader stock market correction – and then investments drying up completely. But I can also see prices skyrocketing and life becoming very expensive for ordinary consumers.

Preservation of capital is paramount. The natural resources industry is caught between a rock and a hard place – and, sadly, that rather implies that the rest of us are too.

Dominic’s film Adam Smith: Father of the Fringe about the father of economics’ unlikely influence on the world’s biggest arts festival is now available to watch on YouTube.

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