Anytime you hear the mantra “this time it will be different,” it’s probably best to assume the same old cycle will repeat itself.
This is especially true for commodity producers, who often appear to lurch from boom to bust and back to boom with little regard for learning from past mistakes.
Perhaps this is because commodity cycles can take decades to play out, meaning institutional memory is lost over time, allowing executives to repeat the mistakes of their predecessors.
But more likely it’s because most chief executives in listed commodity majors are either forced by investors to be seen doing something to boost growth, or by nature are driven to build and buy new mines.
The strong gains in many commodity prices last year, including a doubling of iron ore and coal, have given rise to optimism within the industry that the down cycle in commodities is finally over after five long years of falling prices.
If we are at the start of a new cycle of stronger commodity prices, the prudent thing for companies to do is to remain focused on costs, while also paring debt and steering exploration spending toward markets with the best long-term prospects for supply constraints or strong demand growth.
Put another way, commodity producers should resist the temptation to embark on an open checkbook approach to new projects just because they are now generating large cash returns as higher prices boost revenues.
So far the signs are somewhat encouraging, with major miners expressing caution in their recent results presentation.
It’s also to be hoped that this generation of leadership can resist the temptations of embarking on marquee projects or overly-ambitious M&A deals.
The main risk is that the longer the price rally does go on, the greater the pressure will become from equity analysts for plans to boost growth over the longer term, a situation that in the past has resulted in massive commitments of capital that has not delivered its promised returns.
Much of the optimism behind the last investment boom was that China would simply buy everything that commodity companies could produce.
While China remains the world’s top commodities importer, it’s become apparent that its appetite isn’t unlimited.
This alone should make companies more wary of re-starting an investment cycle.