The Impact of Falling Commodity Prices on Latin-American Economies | GBAF

The Impact of Falling Commodity Prices on Latin-American Economies | GBAF

Editorial & Advertiser disclosure

Global Banking and Finance Review is an online platform offering news, analysis, and opinion on the latest trends, developments, and innovations in the banking and finance industry worldwide. The platform covers a diverse range of topics, including banking, insurance, investment, wealth management, fintech, and regulatory issues. The website publishes news, press releases, opinion and advertorials on various financial organizations, products and services which are commissioned from various Companies, Organizations, PR agencies, Bloggers etc. These commissioned articles are commercial in nature. This is not to be considered as financial advice and should be considered only for information purposes. It does not reflect the views or opinion of our website and is not to be considered an endorsement or a recommendation. We cannot guarantee the accuracy or applicability of any information provided with respect to your individual or personal circumstances. Please seek Professional advice from a qualified professional before making any financial decisions. We link to various third-party websites, affiliate sales networks, and to our advertising partners websites. When you view or click on certain links available on our articles, our partners may compensate us for displaying the content to you or make a purchase or fill a form. This will not incur any additional charges to you. To make things simpler for you to identity or distinguish advertised or sponsored articles or links, you may consider all articles or links hosted on our site as a commercial article placement. We will not be responsible for any loss you may suffer as a result of any omission or inaccuracy on the website.

Home > Top Stories > OVER AND OVER AGAIN: THE MINING SECTOR CYCLE

OVER AND OVER AGAIN: THE MINING SECTOR CYCLE

Published by Gbaf News

Posted on January 8, 2016

5 min read

Last updated: January 22, 2026

Mining sector analysis and commodity price trends - Global Banking & Finance Review — This image illustrates the cyclical nature of the mining sector, highlighting the impact of commodity price fluctuations on Latin American economies, as discussed in the article.

Matías Braun, MD of Strategy, Credicorp Capital

Matías Braun

Matías Braun

No matter how you measure it –as a share of GDP, exports, fiscal revenue, etc. – with their ups and downs, commodities have been a key component of what our Latin-American economies are. And, as a consequence, they are also a relevant determinant of the character of our institutions. Unfortunately, the great boom in commodity prices seems to be over. The values of natural resources have fallen around 50% compared with the levels they were just a couple of years ago.

In the case of base metals the reason is mainly a negative demand shock coming from lower-than-expected growth in China. Not only because it grows slower but also due to the changing pattern of this growth. The transition of this economy from one based on investment and the export sector into one fueled by domestic consumption does not benefit us since the non-tradable sector is much less demanding of metals than the tradable one. And the situation is not likely to improve anytime soon. Nevertheless prices should not fall more but rather stay constant in real terms in the coming years. This is because of the measures the Bank of China has been undertaking–and more importantly, the signals it is sending- to allow it’s over appreciated currency to converge to market levels. Such depreciation will help contain the large deceleration that the export sector is experiencing.

The drop in oil prices is the other side of the coin. The services sector of the economy is more intensive in oil and, therefore, the structural transformation should have benefited it. For a while, it seemed to be working fine and prices stayed relatively high when compared to other commodities. Unfortunately, the process was not going smoothly: the modest pick-up of the non-tradable part of the economy was not being able to counteract the fast pace of deceleration of the tradable one. Indeed, one can interpret the recent changes in the Chinese exchange rate policy as recognition that the conversion will not happen so rapidly and that to pause for a while is a sensible thing to do. However, the main driver of the low prices of oil is supply rather than demand. A new technology has arrived and has changed the dynamics of the traditional industry. Currently the costs of shale production are significantly higher than those of the old-fashioned producers. But their rapid decline triggered a strategic response and destroyed whatever was left of the market power that the OPEC enjoyed.

Investment in mining has collapsed. The capital expenditures of the mining companies are very sensitive to changes in prices. When these are high, investment explodes and when they are low it falls very much. This timing is not at all good. Contrary to other sectors, here investment pays way in the future. As a consequence, prices typically have already fallen when production starts increasing and the returns are much lower than expected. Of course, this dynamics contributes to further decrease the prices in the low part of the cycle.

How can this happen over and over again? Why don’t miners moderate investment in booms to increase it in bad times? One possibility is that they don’t realize what is going on. It is not difficult to convince ourselves that prices will remain high for a long time because that is what would make us happy (and wealthier). There are, however, other reasons. One is perfectly rational: capital expenditures not only depend on investment opportunities but also on the capacity to finance them. The sums needed are very large and, as we said, they have to be available for many years. Also, uncertainty is high, not only because it is never obvious what´s under the ground but, especially, because the viability and the ex-post returns are very sensitive to the political context in which these outlays are supposed to happen. All this results in that it is quite difficult to raise funds to undertake the investments. Then, the only way to finance them is using internal funds: rather than giving the astonishing amounts of cash produced during price booms back to shareholders, they are used to finance new mines and improvement of old ones. The timing may not be the best but it is the only way to do it.

Whatever the reasons, oversupply is already here and the fall in profits has been dramatic. Fortunately, they should not fall much further because when prices go down costs also do and, therefore, margins fall less than one would think. Energy costs have dropped quite a bit thanks to lower oil prices, and labor costs are contained as investment declines and firing starts. The exchange rate also contributes by lowering the burden of the costs in local currency.

One should be cautiously optimistic about the mining sector. The worst may already be over. In the same way that it is unreasonable to think that prices will be high forever, is also awkward to think that they will continue dropping at the pace we have been seeing recently. Now, understanding the forces that are behind the cycles in the sector, to promote large investments in the sector, one should focus on trying to develop capital markets able to finance investment during downturns and to generate a stable institutional environment to ensure funds will go back to financiers.