A global rebound in raw-materials prices has boosted the profits of mining companies. But it also threatens to pinch German manufacturers. Many depend on imports like iron ore, copper, and coal, as well as lithium, graphite, and cobalt for electric autos, batteries, wind turbines and other new technologies.
Germany’s seemingly invincible export economy has thus discovered its Achilles heel. Europe’s industrial powerhouse relies on imports for most of its raw materials. Germany spends more than $100 billion a year on imported oil, gas, coal, ore, metals and other basic commodities. Virtually all metals come from outside the country, often in the form of semi-finished goods like pipes, sheets, wire or castings. In all, Germany gets four-fifths of the periodic table of elements from abroad – twice the share it imported a century ago.
The bad news for German industry is that prices for iron ore, coal, nickel and copper have risen more than 75 percent on average from their lows two years go. The big global mining companies – Glencore, BHP Billiton, Rio Tinto and Anglo American – reaped combined profits of $23.6 billion in 2017, almost 20 times more than in the previous year.
Germany gets 80% of the periodic table of elements from abroad.
And there is no end in sight. Demand for lithium, a vital component for the batteries in electric autos, is expected to quadruple by 2035, according to the German Mineral Resources Agency. Demand for more basic metals and energy sources is being driven by ambitious infrastructure plans in the world’s two biggest economies, the United States and China.
China, in particular, explains the demand increases. It accounts for 40 to 60 percent of demand for industrial metals by itself, according to Julian Kettle at Wood Mackenzie. China is now building out its so-called “Silk Road Economic Belt”, a gigantic rail-to-ports project linking China to markets in Europe, Asia and Africa. It is estimated to cost more than $100 billion.
This boom in input prices “increases the costs for the manufacturing industry in Germany,” Henry von Klencke, a raw materials analyst at the BDI German Industry Federation, told Handelsblatt. And no increase in supply is likely in the foreseeable future. It can take five to seven years for a new mine to become operational, so those investments should already be under way. They are not. There will be a shortage of copper within two years, analysts at Australia’s Bank Macquarie reckon.
“The times when one mine after the other was opened up are past,” said Ernst Frankl at Oliver Wyman consultants. The companies will hold back until they are sure the new mines will produce commensurate earnings in the very long run.
Investors, too, have been hesitant bid up mining stocks, despite the record profits. “It surprises me a lot that the market is so guarded toward raw materials producers,” said Evy Hambro, who heads up the sector for giant money manager BlackRock. “The companies are once again producing free cash flow; they are paying high dividends, and there’s a whole array of raw materials experiencing supply shortages while the global economy is growing and demand is increasing,” Mr. Hambro said. And yet, investors are not clamoring for these stocks.
Michael Brächer is a financial editor in Handelsblatt’s investment team in Frankfurt. Franz Hubik is the editor of Handelsblatt’s energy and industry team. Matthias Streit is a finance reporter. Darrell Delamaide, a Handelsblatt Global editor in Washington, DC, adapted this story into English. To contact the authors: firstname.lastname@example.org, email@example.com, and firstname.lastname@example.org.