Ernst & Young takes metals analysts to task

Ernst & Young, the business services group, has published a report in which it questions “the accuracy of outcomes for the recent metal price forecasts”.

The paper, entitled EYeSight on Consolidation: Backpedalling on the cycle, examines three key themes:
1. Looking further back than the usual five to 10 year timeframe, how cyclical is the sector, and, in real terms, how high are current metal prices?
2. Given the huge number of variables to consider, what chance do metals analysts really have of accurately forecasting metals prices even 12 months forward?
3. What could this mean for the sector going forward as the consolidation seems to continue apace?

The authors take that view that “current metal prices are actually a return to sustainable price levels following an extended period of artificially depressed prices, rather than the conventional wisdom that the industry is near the top of a cycle.”

The paper asserts that: “It is only when the mining companies are really convinced that future revenue from operations justifies the commitment of significant capital outlay that they will accept the risk, resulting in further capacity.”

Referring to the high levels of acquisitions currently taking place in the mining sector, Ernst & Young analysts put forward the view that the market “is undervaluing mining assets by not fully appreciating how long demand will outstrip supply”.

Adding: “the pace of consolidation in the mining industry shows no signs of slowing. The continuing, robust levels of metal and minerals prices are fuelling the drive for growth through acquisition.”