DOMINANT STRATEGIC THEMES OF THE NATURAL RESOURCE INDUSTRY
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Rethinking The Fundamental Analysis
The historian John Lukcas wrote that the twentieth century began in 1914 and ended in 1989. It is that year which I pick as the next decisive political watershed in the affairs of the natural resources industry. By 1989 there was virtually no government left anywhere in the world believing that mineral extraction was an abnormally profitable undertaking that could be tapped as a cash cow for public financial purposes. Instead, it had been identified as a sector that was fundamentally unsuitable for public investment. It is characterized by high price volatility leading to unstable earning flows. It involves high risk exploration activities, significant environmental management problems and above all is a highly capital-intensive sector which cannot properly be financed by heavily indebted governments.
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Themes For The 21st Century
(a) The Asian Miracle:
This brings us to the future. The first and most obvious development that will affect these industries is what I will call the Asian Miracle. It is clear that the countries of South and East Asia have reached the point of economic take-off, equivalent to where Japan was 40 years ago. Just as Japan drove world natural resources demand between 1955 and 1973, the Asian countries will almost certain exert a similar influence on the markets over the period to 2015. Although India and China have average per capita incomes well below the level of about $2,500 which appears to be the trigger for such a take off, the averages are misleading. The emerging Indian middle-class numbers at least 100 mn people and has the entrepreneurial and intellectual basis for such development. India is, for example, already in the top five countries worldwide in the production of computer software.
The same comment can be made of China, which is really two distinct economies -- a booming outward-looking coastal region whose prospects will be greatly enhanced by a successful return of Hong Kong, and a relatively backward and impoverished interior.
From the perspective of the natural resources industries, these developments are of enormous importance, principally because of the impact that they will have on demand for metals and minerals of all kinds. In fact, the underlying rate of growth of world demand for many key metals like aluminum, copper and nickel has already begun to accelerate although, for the past five years, this accelerating trend has been masked by a sharp decline in demand from the former Communist countries. This is obviously a one-time event that reflects a major structural adjustment in these countries. Once it is complete, which may be very soon indeed, the underlying strength of demand will begin to exert a very positive influence on these industries.
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Conclusion
I have attempted to highlight the dominant strategic themes that I believe will characterize the natural resource industry as we enter the new century. It should be a period of solid underlying growth for minerals demand, although I am sure that periodic interruptions reflecting the usual cycles in the world economy will occur. Against this market background, the industry will be dealing with a number of unresolved issues from the late 20th Century, of which the taxation of economic rents, the cost-effectiveness of environmental regulations and the impact of privatization and deregulation on the competitive cost structure of the industry appear to be the most important. I believe that the companies that correctly understand and manage these issues will be more likely to succeed than those who do not.
Robin G. Adams, President
June 11, 1997 International Bar Association Conference |
