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Miners work about 500 meters underground at the Boleslaw Smialy coal mine in southern Poland. The ongoing slump in commodity prices has put mining companies in a classic prisoners’ dilemma.KACPER PEMPEL/Reuters

Welcome to the superslump.

Four years after the commodity supercycle began to ebb in 2011, prices for raw materials are hitting surprising new depths. From aluminum to iron ore to nickel to zinc, the basic building blocks of global industry are in free fall.

The forces driving the great decline in commodity prices are no secret – it's the result of too little demand from a slowing Chinese economy meeting too much supply from mines launched in better times. Still, the ferocity of the downturn has shocked executives and investors. Most frightening of all, there is no sign the rout in raw materials will let up any time soon.

Miners are trapped in a world where next to nobody sees reason to cut production despite obvious gluts. Major producers in some sectors are now following a Saudi Arabia-like strategy of producing at full capacity, with the goal of driving out higher-cost operators.

Over the past week, the commodity collapse has accelerated, with many metals skidding to multiyear lows. Even industry leaders are starting to acknowledge that more pain looms ahead. Jean-Sébastien Jacques, chief executive officer for copper and coal at Rio Tinto Group, one of the world's biggest miners, said on Thursday the market for copper will remain weak for the next two to three years, while coal prices will take even longer to show signs of life.

Mr. Jacques may actually be erring on the side of optimism if industry observers are right. Many mine projects commissioned at the height of the supercycle are only now moving into production, dumping new supply onto already clogged markets. "We see weak prices for most base metals for the next four to five years," says Dane Davis, a commodity analyst at Barclays PLC.

The obvious question is why miners don't cut back production to put a floor under sagging prices. Mr. Davis says they are trapped in a commodity-industry version of a classic Economics 101 game known as the prisoner's dilemma. The game uses two hypothetical prisoners to demonstrate to students why perfectly rational people may decide not to co-operate although it is in their best interests to do so.

Like the hypothetical prisoners, real-life miners face an ugly choice: They know things would be better if everyone would ease back on production, which would thereby boost prices. But they also realize that any single miner who cuts back on output will just open up space for competitors to grab market share.

That, Mr. Davis points out, is exactly what happened when Glencore PLC, the giant commodity-trader-cum-miner, decided in early October to cut its annual zinc output by 500,000 tonnes, or 4 per cent of global supply. After an initial bump in zinc prices, the metal quickly resumed its downward course as other miners rushed to fill the gap.

It's easy to see why producers are eager to seize any room that is vacated. Many operators have invested billions in their properties and have debts to pay. Others risk losing their concessions if they shut mines in politically unstable foreign jurisdictions. Several figure it's cheaper to operate on a break-even basis rather than bear the punishing expenses involved with laying off workers and closing a site.

"If you suspend a project, the costs are huge," said Paul Conibear, CEO of Lundin Mining Corp. "The repercussions to everyone would be far worse than finishing the project."

For all those reasons, most miners see logical reasons to keep on producing in volume. All the individually rational decisions result in a collectively irrational dedication to maintaining output despite miserable prices.

The muscular U.S. dollar has only made the problem worse. Most commodities are priced in greenbacks, so the soaring value of the currency over the past few years has raised the cost of many raw materials to buyers outside the United States. That has not been good for global demand.

But the lofty U.S. dollar has also had the paradoxical effect of increasing potential profit margins for producers that operate mines in countries with much cheaper currencies. That, in turn, has encouraged them to stay in business and even raise their output.

The net result is booming supply despite woeful prices. Russian diamond giant, Alrosa, which is churning out precious stones at a frantic pace, provides a great example of this confounding trend: "They really don't care that diamond prices are going down in U.S.-dollar terms, because the ruble has fallen by half over the past year or so," William Lamb, CEO of rival producer Lucara Diamond Corp., said in a recent interview. "In ruble terms, it still makes sense to increase output."

Rather than trimming production, some miners are going in the opposite direction and taking a page from Saudi Arabia's book. Like the oil-exporting giant, they have committed themselves to producing at full capacity, market conditions be damned.

This is most obvious in iron ore, where the Big Four producers – Rio Tinto PLC, Anglo-Australian BHP Billiton Ltd., Brazil's Vale SA and Australia's Fortescue Metals Group Ltd. – have collectively spent tens of billions of dollars to increase production. It has allowed them to slash costs below $20 (U.S.) per tonne.

Since 2011, the price of iron ore has dropped 80 per cent to $43 a tonne, but the Big Four have continued to pump out huge quantities of the steel-making mineral as they seek to drive higher-cost producers out of business.

"I don't like to see it. But speaking objectively, if I were them I would do the same," said Sandy Chim, CEO of Century Global Commodities Corp., which was forced to put its iron ore projects on the back burner and made the rather improbable shift to selling eggs to China. The company is now looking for an acquisition in base or precious metals.

Metallurgical coal, another steel-making ingredient, is also wallowing in a global glut. Although producers have cut some production, prices continue to soften. The hard coal is selling for around $80 a tonne, down 75 per cent over the past four years.

Teck Resources Inc., one of the world's major metallurgical coal exporters, slowed output from its six coal mines in Western Canada over the summer. However, its production cut amounted to only 1.5 million tonnes, which was less than 10 per cent of the excess coal in the market.

Other North American-based coal companies, Walter Energy Inc. and Patriot Coal Corp. have filed for bankruptcy protection. But their woes have actually helped producers in Australia, namely BHP, which reached record metallurgical coal production this year.

In copper, the picture is slightly more positive, but still problematic. The red metal, used in construction and power generation, has lost a quarter of its value this year, dropping to a low of $2 a pound, a price not seen since 2009. Despite the drop, Codelco, the giant Chilean producer that controls 10 per cent of the world copper market, vowed last month to stick to its output target. Codelco, sometimes referred to as copper's Saudi Arabia, also slashed the premium it charges Chinese buyers, another sign it is more interested in cutting prices rather than production.

However, Freeport McMoRan Inc., one of the world's biggest copper producers, recently trimmed production at one of its U.S. mines. Glencore also reduced output at its mines in the Democratic Republic of Congo and Zambia.

"I think you will see more supply coming off," said David Garofalo, chief executive officer of Hudbay Minerals Inc., a Toronto-based producer. "Glencore and Freeport have taken that leadership role already. I expect that among senior producers, we will see more of that."

Hudbay, however, has no plans to curtail its own production. It recently built two new mines, in Peru and Manitoba, which has helped push the Canadian company's production costs to below $1 a pound.

Lundin Mining, a mid-sized Canadian-based copper producer controlled by mining magnate Lukas Lundin, also has no plans to cut output. "We don't see ourselves getting to that," said chief executive officer, Mr. Conibear.

The modest reductions announced to date may be enough to provide support for some base-metal markets. However, analysts at BMO Nesbitt Burns Inc. argued in a research note earlier this month that the cuts "have largely kept pace with weak underlying demand; hence, while prices appear to be bottoming, there is not enough evidence to suggest a meaningful near-term recovery in prices."

Hopes for a vigorous rebound hinge on China. As a result of booming growth, the Asian giant has consumed about half of the world's iron ore, copper, nickel and zinc in recent years. Unfortunately for mining optimists, recent indicators of industrial activity in China are falling dramatically short of forecasts – a bad sign for future metal demand. Mr. Davis, the Barclays analyst, notes that some Wall Street forecasters had called for Chinese auto production to grow at a healthy 8-per-cent clip this year. Instead, over the first nine months of the year, it has declined 0.9 per cent.

He says Beijing may move to support the industrial sector in the new year, which could provide limited support to metal prices, but he figures that miners will continue to labour under a cloud until the end of this decade.

"After 2020, if you look at the supply horizon, mine closures and mine depletion really start to add up," he says. "Then you start to see a precipitous drop in supply along with rising demand. A large gap opens, and at that point you have a massive surge in prices."

For now, miners can only hope that the next supercycle – whenever it comes – will be big enough to wipe away memories of today's superslump.


Three forces weighing on commodity prices

China's slowdown

The Asian giant has gobbled about half the world's iron ore, nickel, aluminum, copper and zinc in recent years. Now China is decelerating and GDP growth has slid from a double-digit pace to below 7 per cent. The slowdown is particularly acute in the industrial sector and that is squelching demand for many raw materials. It's not clear what can replace the Chinese appetite for key metals. Dane Davis, a commodities analyst at Barclays PLC, notes the global copper market grew from 15 million tonnes to 22 million tonnes between 2005 and 2015. During the same period, Chinese consumption by itself rose from two million tonnes to 10 million tonnes – in other words it was responsible for all the growth in global demand and then some.

Ample supply

Mines take years to move from planning stages to completion. The long lag means many projects commissioned during the heady years of the commodity boom are only now coming into production, pouring new supply into already glutted markets. Iron ore provides a dramatic example. Prices for the mineral have nosedived from $191 (U.S.) a tonne in 2011 to below $45 a tonne now. Despite the swoon, massive new projects are still bursting onto the scene. In Australia, mining magnate Gina Rinehart, the richest person in the country, is finishing the Roy Hill mine, an $11-billion project. In Brazil, Vale SA plans to open its S11D project next year, which will be the world's biggest iron ore mine when it hits full production.

The mighty U.S. dollar

A slowing China and a troubled Europe have left the United States as the most attractive economy in the world. Its currency has surged against global rivals, and thereby sent tremors through commodities markets. Nearly all raw materials are priced in U.S. dollars so a stronger greenback means commodities are suddenly more expensive to buyers outside the United States. This is not good for demand. However, the heavyweight buck also swells potential margins for producers outside the U.S., encouraging them to keep up supply. That is not good for prices. One strong force driving down commodity prices in recent weeks has been the growing conviction that the U.S. Federal Reserve will raise rates at its next meeting on Dec. 16. If so, the U.S. dollar will strengthen, meaning even more pressure on commodity prices.

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