For a good few years now, the big miners have had it all their own way. Because – although you wouldn’t know it from reading the analyses of conventional economists -there’s actually been lots of inflation in the system for years. It went largely unnoticed, though, because it was right at the beginning of the supply chain, in the form of commodity prices. For years, nearly all the metals have been trading very strongly in dollar terms. And why? – because the massive money-printing programmes of the Federal Reserve have made dollars far less valuable, and a straight trade for metal is the easiest way to measure that. As soon as you start moving up the value chain, or along the supply chain, though, all sorts of opportunities to absorb the inflationary impacts of money printing present themselves. Or have done, up till now. Because now, the Fed’s worst nightmares are coming true, and the big miners are about to be caught up in the ensuring maelstrom. Following a decade of stimulus after the global financial crisis, a further stimulus was then required to meet the exigencies of covid. The result of this has been a global economy on steroids as activity has re-started after lockdowns. And then the policy-makers decided to lock Russia, one of the world’s largest commodity producers out of the system. Suddenly, inflation is everywhere, not just at one distant end of far away and fully globalized supply chains, and there really is no escaping the reality that continuing to print more dollars just about crater everything. So, quantitative easing is over, tightening is coming in, the dollar is at multi-year highs against the basket of currencies that comprises the DXY, and even gold is feeling the pressure, albeit that we are in one of the most uncertain and dangerous geopolitical situations since 9/11. The problem for miners, of course, is that if the dollar is becoming more valuable, the dynamic of the cheap dollar that has served them so well over the past decade or so is now going into sharp reverse. But it’s worse than that. Not only are commodity prices under pressure because the dollar is once again becoming more valuable, but input costs at all levels are sharply elevated. In short, production costs are going up at the same time as revenues are likely to drop. Broker RBC reckons the big five copper miners, for example, are going to do well even just “running to stand still.” The broker estimates the net overall cost to the big five miners of these structural changes to be between 20% and 35% of their current market capitalisations. “The impact of inflation pulsing through the sector creates a sizeable challenge for the whole space,” says RBC. The broker notes that Glencore is now the only miner it rates as “outperform”, and even sounds a note of caution about that. The key variable, is of course energy. If the Ukraine war gets resolved and the world’s energy supplies can be returned to normal relatively quickly, then instead of snowballing, inflation might be managed fairly well. Miners have significant exposure to the oil price in terms of input costs – using diesel to run plant, fuel trucks and the like – and very little in the way of production. Glencore does, of course, make a major business trading all commodities, including oil, and BHP until recently was a committed producer. But BHP’s oil business is on the way out, as a concession to the ESG brigade as much as anything else, just at a time when having significant oil production in-house looked like being a real benefit. The proof of this: shares in Shell have just about doubled over the past year, whereas shares in BHP are up just slightly. And although looking ahead a couple of decades, the outlook for the copper producers looks markedly brighter than the outlook for the oil producers, in the more immediate term, oil is almost certain to hold sway. All of which assumes that Presidents Biden and Putin can keep their heads and avoid a nuclear war. And even that’s not as obvious as it used to be.