If one believes that the long term economic outlook is good and demand for metals is likely to continue for many years, the question is: what will happen to capital expenditure in the sector?
Perhaps looking at the past might give us a clue:
Lets look at the last two major price peaks, in the late 80’s and the mid 90’s: while commodity prices turned down, capex continued growing for another 3-4 years. THIS IS THE LAG EFFECT OF Capex behind declining prices.
Why does that happen? Because mining houses make long-term decisions not based on spot prices but on prices which reflect long-term trends, usually well below peak periods like today. And once an investment has been committed, it takes several years to carry out, and a program is not likely to be aborted once it started, even if prices decline.
Incidentally, do you remember I commented a few minutes ago that mining houses are smart and they know what they’re doing? Here is the evidence! Mining houses read the map correctly in three out of the last three SuperCycle periods. They started increasing their investment in capex several years before the major surge in metal prices in the late 80s, they were right on time in the mid-90s and again they preceded the current SuperCycle with major investment programs to meet the anticipated demand. Obviously they haven’t invested enough yet but they did a great job at anticipating the surge.