METALS COST INFLATION


There are several generalisations that can be made about resource quality: 1) The quality of a specific resource usually declines over time (at a rate which is unique to the geology of the resource).


2) Overall industry resource quality generally declines over time. Intermittent reversals often being a function of a decline in political risk opening up new regions for exploitation.


3) Differentiation in resource quality is usually greatest after a sustained period of high prices as high prices encourage the exploitation of relatively inferior resources.


Figure 4: US Energy; Net Imports Oil Products


1,000 2,000 3,000 4,000 5,000


0


-2,000 -1,000


1995 2000 Sources: EIA, Deutsche Bank


4) The decline in resource quality can be offset by unpredictable advances in technology.


The aging of the world’s resources, combined with the recent


elevation of prices, has resulted in a significant ramping-up of industry costs – the addition of inferior new capacity resulting in a sharp rise in costs at the top end of the cost curve combined with a much slower but nevertheless relentless rise in costs at the bottom of the cost curve.


Figure 5 illustrates the evolution of


costs within the copper industry, note the increase in cost differentiation over the past decade. We would ascribe this to be almost entirely a function of ore/resource quality. Chinese domestic iron ore


production has expanded by more than six times over the past seven


2005


Imports


Exports 2010


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