While it is entirely possible that prices have passed their low point, it does not follow from this that a sustainable recovery is imminent or that the supply side adjustment is complete. More likely, prices are in for a spell of bumping along the bottom and further supply adjustments will be required. 

The economist Joseph Schumpeter, in his 1942 work Capitalism, Socialism and Democracy, argued that capitalist economies advance by a process of ‘creative destruction’.  Innovation marginalises older plant and technologies. Recessions purge the economy of the redundant plant and loosen up capital and labour for other more productive purposes.  

Or, as he put it, creative destruction is the “the process of industrial mutation that incessantly revolutionises the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” In short, economic downturns are not just a necessary, but a positive, part of the process of economic regeneration and progress. 

While one can hardly expect those who have just lost a fortune – or their job – to find comfort in such theories, far less to celebrate them, it is not hard to see how well Schumpeter’s notions apply to conditions in the mining industry.

Economic booms and rising commodity prices lead to over-exuberance in mining, a surfeit of investment and, eventually, conditions of over-supply. The weaker prices that inevitably result from this are nature’s way of telling us that the market does not require any more investment and of resetting expectations. 

The job of recession is to rectify the errors of the boom; to kill off the more speculative exploration, the reckless over-priced M&A, the overblown head offices, the projects based on insanely optimistic prices which should never have got through the net, and to deny finance to those still stubbornly seeking to add new capacity.

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"There is still structural overcapacity in the mining industry and producers need to complete the job they have started to lay the foundations for recovery"

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It injects realism into the attitudes of host nations with respect to their taxation, management with respect to their pay packets and analysts with respect to their price forecasts. It should also lead to the closure of high-cost, badly polluting and dangerous small-scale mining operations which sprang to life in places like China and India to meet shortages in more buoyant times.

Nor is this purging of surplus capacity and unwanted investment the sole benefit of weak prices. There is much evidence to suggest that productivity growth in mining advances, not in a straight line over time, but in surges, and that these surges typically come during periods of weak prices, when pressure on margins force miners to get creative.  

Clearly the industry is going through just such a phase of creative destruction at the moment. It is, however, a rather unusual and half-hearted one.  

The industry was steeling itself for recession and a concomitant purge of production in 2009, in the wake of the global financial crisis, but the massive programme of fiscal and monetary stimulus launched by China put off the day, prolonging the market upswing to 2011-12, and driving a second wave of industry investment.  

The programmes of loose money and low interest rates in the US, Japan and Europe have also served to stave off a bone-crunching recession. Low interest rates have helped weak businesses which might otherwise have gone bust to survive; so-called zombie businesses. This has impeded the process of creative destruction amongst miners’ customers and resulted in debt remaining high and growth low. 

A full blown crisis may have been averted but the patient is still on life support. Thought leaders have referred to these as conditions of “secular stagnation” and a “new mediocrity”.  

If one looks back at previous periods of market slump, notably 1979-1982 and 1989-1992, there was a decisive and clear drop in metal demand right across the board. During the current market adjustment, despite a general sense that the industry is going through hard times, demand has continued to grow, albeit pitifully slowly.  

Nor can it be ruled out that the era of loose money is not having some more direct effects on the sector. The low cost of debt has enabled miners to put off the cuts that commodity prices were screaming for, at least until late in 2015, making it a longer drawn-out affair than it needed to be.  

For some metals we may yet discover that low interest rates have encouraged significant stock-building outside the statistical reporting system, creating the illusion that the stocks’ overhang is smaller than is actually the case. 

The significance of this year’s price rally will reveal itself in due course but it likely to prove another example of the sort of ‘risk-on risk-off’ behaviour that is a feature of most bear markets. Certainly it looks a little early for producers to be firing up shuttered operations. 

Quite when a sustainable recovery will arrive we can only speculate but in the past such recoveries have tended to require an acceleration in global demand, something which does not currently appear imminent. 

In fact, global growth forecasts are being revised lower. China’s latest debt-fuelled rally already appears to be stumbling under the weight of chronic overcapacity and dismal margins.

In the end, markets are self-correcting. Prices will stay low long enough to force producers to make the supply adjustments necessary.  

There is still structural overcapacity in the mining industry and producers need to complete the job they have started to lay the foundations for recovery. If they do not feel they can embrace the task with enthusiasm then at least they can seek to make a virtue of necessity.  

Sadly, the people who direct the world’s economic and monetary policies seem determined to make this an inordinately slow and painful process. 

For the moment, the mining industry is trapped in limbo between growth which is neither strong enough to stimulate recovery nor weak enough to force on it the necessary purge of capacity.

David Humphreys is a columnist for Mining Journal. See more at www.mining-journal.com

*David Humphreys is a consultant and academic who was previously chief economist at Norilsk Nickel, Russia’s largest mining company, from 2004 to 2008. He was previously with Rio Tinto for 18 years, the last eight of these as the company’s chief economist. Prior to joining Rio Tinto, Humphreys worked for nine years in the UK government service, for six of these as an adviser on minerals policy.