A Year of Transition

The mining sector is evolving. Following the exuberance of the China-led ‘super-cycle’ from 2003 to 2011, the last three years have been a sobering experience as commodity markets have normalised and the froth in the mining sector has been blown away. This normalisation has driven significant positive change in the industry and investors are now asking if this is the right time to re-enter the sector. In our view, we are past the point when sentiment towards the sector was at its worst. The outlook is improving and we view 2014 as a year of transition. Understanding this transition is crucial and we believe that at this stage in the cycle a more selective approach is required to take advantage of a number of interesting themes appearing across the sector.

Mining cycles

The mining sector has been through many cycles in its history. The ‘super-cycle’ comprised a significant period of market expansion as China transformed from a modest consumer of commodities to become the world’s largest over a relatively short period of time. As with other market cycles, we saw a peak and subsequent correction, but this time the correction’s magnitude was exacerbated by the duration of the up-cycle. A correction is typically followed by a transition period as capital is reduced and future supply curtailed, once again tightening commodity markets and sowing the seeds for the next upswing. In general terms, we view the mining cycle as having three phases, described by the behavioural states investors are pulled through – despair, pessimism and optimism.