Mining Industry 2024: Key Insights for Financial Advisors

The mining industry has faced falling commodity prices since the highs set with Russia’s invasion of Ukraine, the subsequent sanctions on Russia, and the rerouting of supply chains. Still, prices remain elevated compared with historical levels and cost support. How might this trend impact investors?

By understanding the global landscape on mined commodities, financial advisors can offer value and find the right investment strategies for clients. Morningstar examines key industry themes, market share and concentration, the sources of potential economic moats in mining, the outlook for key commodities, and more.

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A durable low-cost advantage with high capital efficiency is the primary potential source of an economic moat. Switching costs, network effect, and efficient scale aren’t moat sources as mining firms generally produce largely undifferentiated commodities that are often highly fungible. Wide moats are also very rare, requiring decades of reserves and persistent low costs. However, a case could be made that the Western Australian iron ore assets of BHP and Rio Tinto justify a wide moat—particularly as a large proportion of investment was prior to the China boom when rates were much cheaper.

It’s important to note that cost advantage can break down with factors such as demand changes, capital allocation missteps, new low-cost supply and disruptive technology. Additionally, high-value reserves may deteriorate or deplete.

For the past decade, China has accounted for nearly all growth in global copper and iron ore demand. Its large construction and manufacturing sectors and significant infrastructure spend mean China accounts for more than half of global copper demand.

Producing more than 50% of global steel, China is also responsible for roughly 70% of traded iron ore. Almost all metallurgical coal is used with iron ore to create steel via the blast furnace/blast oxygen furnace method. China is the largest consumer of metallurgical coal—but large domestic reserves mean it accounts for roughly 20% of traded demand.

At 370 metric tons in 2023, China is the world’s biggest producer of gold, accounting for about 10% of global supply. However, it’s still a meaningful importer of gold, with jewelry and investment demand totaling 910 metric tons in 2023.

Prior to China’s rise around the year 2000, global demand for most commodities was largely stable for decades. However, economic reforms and China’s investment-focused growth saw rapid demand growth for commodities like iron ore and copper. Prices also rose materially during the 2000s and 2010s and generally remain elevated.

Major miners such as BHP, Rio Tinto, Vale, and Anglo American dramatically increased supply, leading to a downturn in the mid-2010s as supply caught up and demand from China cyclically weakened. More recently, as supply chains have adjusted to interruptions from covid-19 and Russia's invasion of Ukraine, commodity prices have generally fallen but are elevated versus their 10-year average. This is incentivizing the miners to tilt toward growth through new developments, expansions, and mergers and acquisitions.

Amid an evolving mined commodities landscape, it’s crucial for advisors to ask engaging questions and identify investors’ unique goals. By understanding the latest industry trends, it may be easier for you to help clients make better financial decisions.

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