The lag between investment and production is fatal

Five years ago investors and executives were making decisions about developing mines that are just beginning production today.

They couldn't have possibly foreseen the way prices of commodities would collapse.

Now that the massive startup costs have been spent, there is no turning back. The billions spent developing resources are gone and the only thing to do is pull it from the earth and try to recuperate as much as possible.

Operating costs are relatively low in mines once holes are dug. The all-in cost for building a copper mine might be $3-4 lb but the operating cost is $1-2. So even at the current price of $2.05 it makes sense to keep operating.

Four reasons to keep producing

Even if prices go slightly below operating cost it still makes sense, 1) Prices could rebound 2) To restart production later requires re-hiring an entire workforce 3) Miners gotta mine. If you're the CEO of a mining company, you don't get paid for shutting the company down 4) If you hold out long enough, your competitors will shut down and prices will rebound.

Today the Globe & Mail examines the wreckage of the commodity super-cycle.

They outline the difficulty of deciding to shut down production:

"Real-life miners face an ugly choice: They know things would be better if everyone would ease back on production, which would thereby boost prices. But they also realize that any single miner who cuts back on output will just open up space for competitors to grab market share."

We see it in oil production but it's the same in virtually every commodity at the moment.

They also raise an interesting point on currencies. The rally in the US dollar has given non-US producers some breathing room while making US mines less competitive.

Where it's headed

Miners will continue to extract and flood the market below where operating costs match profits and until producers are starved out and have to shut down. The economics are different in every commodity but years of supply is still in the pipeline.

Now, no money is being invested in future supply so once mines are depleted and projects are halted there is a shortage starting in 3-5 years.

...and the cycle rolls on.