Silicon Valley is a Derivative of the Mining Industry
The stock market under-values the role of mining, writes Bernstein analyst Paul Gait, and society misunderstands how wealth is created
We have all heard of Moore's Law: the number of transistors on a silicon chip doubles every two years. But who has heard of Moore's Law in Mining? Since 1920, labour productivity in the global mining industry has doubled every 14 years. It may not be quite as exciting as the explosion of the trillion dollar tech industry, but is far more important.
Mining is the sine qua non of economic growth; the world simply cannot grow without it. Over the last 115 years of available data, the link between global copper production, steel demand and GDP has never broken down, following an almost identical growth rate of 3.1 to 3.3 per cent, only deviating from the trend-line during financial crises and World Wars.
That is hardly surprising. Commodities are the physical instantiation of capital. Mining creates the world's wealth by supplying its raw materials, embedding them in the global economy.
Yet large mining companies that produce this wealth are lowly-valued, whilst companies in tech and entertainment, which simply transfer wealth from one pocket to another, are much-vaunted. Rio Tinto trades on six times earnings and is worth $113bn, whilst Facebook trades on fifteen times and is worth $513bn. Snap Inc., the company behind Snapchat (a messaging service for teenagers) trades on 26 times sales.
This obsession with Moore's Law and the widespread ignorance of Moore's Law in
Mining means that we, as a society, are misallocating our resources, ploughing capital into non-productive segments of the economy. Every billion dollars that flows into Facebook and Snap, for the sake of creating entertainment platforms, is a billion that could have gone into building houses and bridges, creating real assets for the future. We are eroding unnoticed the capital base of our economies. It is little wonder that millennials will be the first generation to earn less than their parents.
There are no physical limits to growth; there is more than enough capital in the world to deliver whatever future we like. The only limit is of our own making, arising out of our choices regarding the activities we prioritise and reward. It is the mis-valuation of the world's natural resources that is the barrier to growth.
Investors forget that the modern tech industry is nothing more than a derivative of the raw materials industry, a set of increasingly sophisticated ways of transforming, arranging and combining the same silver and copper inputs that we have been combining in different ways for hundreds of years. Without the billion dollar industry, the trillion dollar industry is worth nothing.
Paul Gait is a senior research analyst at Bernstein Investment Research. He was previously head of corporate finance for Anglo American and has advised the UK Treasury on tax policy
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