Commodity investors often say, "high prices cure high prices." This phrase is more catchy than it is true. In reality, high prices do not get reinvested in the projects that "cure high prices" unless valuations encourage reinvestment. Since COVID, commodity producers have enjoyed high prices, but the ESG and divestment movements have kept valuations low, preventing high prices from being reinvested in the new projects which ultimately bring prices down.
01 / The expected response
High prices were supposed to cure high prices.
In a traditional commodity cycle, rising prices and rising profitability create an incentive to invest. New mines get approved, supply eventually expands and scarcity begins to ease. By mid-2022, the first half of that cycle was obvious. The second half was not.
Across four of the world's largest miners, 2021 adjusted EBITDA averaged 43% above the previous cycle's profit peaks. Yet capital spending remained far below historical highs. Strong economics had returned without producing the investment response that investors might normally expect.
The profits were there. The spending response was not.
02 / Capital discipline
Even peak economics were not enough to restart the old capex cycle.
The restraint was visible in company plans. Rio Tinto reduced its 2022 capex guidance by 7%, while its 2023 and 2024 guidance remained roughly 40% below the prior peak. Glencore's guidance remained about 42% below its previous peak. Management teams were continuing to prioritize capital discipline despite unusually strong cash generation.
What we were watching
+43%
Average 2021 adjusted EBITDA versus prior profit peaks across four major global miners.
-7%
Rio Tinto's reduction to 2022 capital-spending guidance at mid-year.
-40%
Rio Tinto's 2023 and 2024 capex guidance versus its previous capital-spending peak.
Source: Recurrent Research, Bloomberg. Data and company guidance as discussed in the July 2022 commentary.
03 / Why it mattered
Commodity shortages are ultimately solved by supply.
Our 2022 research argued that monetary tightening could pressure demand, but a durable easing of commodity scarcity required investment in new supply. If high prices and peak profitability still could not produce a meaningful capex response, the adjustment could take longer than investors expected. For natural-resource investors, restrained spending was not a side note. It was central to the cycle.
Recurrent Research
This research note is adapted from the Natural Resources discussion in Recurrent's July 2022 Monthly Investment Commentary.
Historical research reflects the views and information available as of the original publication date. It is presented for informational purposes and should not be construed as investment advice or a recommendation to buy or sell any security.