BANGKOK -- For the commodities market, the good times have come and gone, but the bad times are only just beginning.
Each commodities supercycle, defined as a decadelong bull market, has always been followed by a downturn that lasted just as long, or longer. With demand weak and oversupply rampant, it is unlikely that this time will be any different. For many countries and companies, this means the only options are adapt or die.
Conditions in the commodities market over the past two years have created a perfect storm for Mongolia, bringing to its knees what was once the poster child for emerging market success.
"It is no secret that the Mongolian economy is affected by decreasing foreign direct investments, coupled with China's slowdown and impacted by [falling] global commodity prices," Mongolian Prime Minister Saikhanbileg Chimed said in Hong Kong in April.
The Asian Development Bank forecast in March that the country's gross domestic product will grow a meager 0.1% in 2016, a further slowdown from the 2.3% recorded in 2015. It is a painful comedown for a country that posted 17% growth as recently as 2011. The reversal of fortunes comes as Mongolia's main exports -- copper, coal and crude oil -- have all become mired in the global commodities slump.
Until the late 20th century, the majority of Mongolia's people lived nomadic lives on the vast, arid steppes for which the country is known. Then, in the early 2000s, Mongolia began embracing the commodities boom, perhaps too rashly. Roughly half of its GDP now comes from exports, of which more than 80% are mined commodities.
Mongolia's rush to tap its natural resources attracted a wave of foreign direct investment that boosted the overall economy, largely through capital spending in mining and related sectors and property development in cities. FDI reached about 40% of GDP in the boom years, according to Naidansuren Zoljargal, governor of the Bank of Mongolia, the country's central bank.
But once the bubble burst, FDI dwindled to just 2% of GDP in 2015. "The cash dried up," Naidansuren said.
Commodities accounted for more than 80% of total exports in 63 of 135 developing countries in 2012-13, according to the United Nations Conference on Trade and Development. Brazil and South Africa, members of the so-called BRICS emerging markets, were investor darlings until just a few years ago. Now their economies are in turmoil, dragged down by their ailing mining sectors. Even richer countries, such as Canada and Australia, are suffering hangovers from the mining boom.
Since the start of the 20th century, there have been three commodities supercycles, or periods of generally rising prices, the last of which is estimated to have peaked between 2011 and early 2014. Both of the previous uptrends were followed by downturns that lasted more than a decade.
This pattern, along with supply gluts and the uncertain global economic outlook, means analysts and investors are finding it hard to be optimistic, despite recent price rebounds in oil and other commodities.
If the slump becomes the "new normal" for commodities, then governments of mining countries will be under even greater pressure to diversify their economies.
The prolonged gloom is already forcing individual businesses to adapt. While some companies are just scraping by, however, others are finding opportunities in the harsher conditions.
The liquefied natural gas industry is a good example of this divide. The benchmark North Asia spot delivery price of LNG has dived more than 70% from a year ago, shaking the industry to its core.
It is customary for gas field developers to secure long-term contracts that set prices for as long as 25 years. In the good times, buyers such as retail gas providers, traders and businesses that use gas saw such long contract terms as hedges against price volatility.
The collapse of the fossil fuel market changed the picture drastically, and buyers are demanding renegotiations of their contract terms. Last December, for instance, Indian gas provider Petronet LNG succeeded in halving the price of its 25-year purchase contract with Qatar's RasGas, replacing the fixed-price structure with a floating rate linked to the latest crude oil prices. Citibank analysts said major Chinese and Japanese buyers will soon try to renegotiate their LNG contracts, too.
Major Japanese trading houses such as Mitsubishi Corp. and Mitsui & Co., which invested in gas production development projects, have already announced massive impairment losses on the asset value of those projects. An industry source said there will be more announcements of impairment losses, from both developers and traders.
Meanwhile, other industry giants are pouncing on the opportunity to expand. In February, Royal Dutch Shell completed a $53 billion acquisition of U.K. LNG trader BG Group. Apparently, BG had wanted to be a part of a bigger balance sheet that could absorb the risks involved in its trading positions and development assets.
The steel industry is seeing a similar shake-up, with major producers like ArcelorMittal and Tata Steel posting net losses amid a flood of cheap Chinese exports. Tata has announced it is selling its U.K. and French mills, with the U.K. government coming under pressure to bail out the British mills.
Australia may even lose one of its two remaining integrated steel mills. Arrium, the country's second-largest steel-maker, entered voluntary administration on April 7. Its Whyalla mill, in the state of South Australia, is one of two on the continent. Thousands of jobs there and at other Arrium sites are in danger, and saving the company has become a political issue in Canberra.
Nippon Steel & Sumitomo Metal, now the world's top steel producer by market capitalization, seems determined to take advantage of this upheaval. The lower steel prices are providing once-in-a-generation buying opportunities for the Japanese company as it looks to expand its already vast global reach.
On April 18, shareholders of Brazil's Usinas Siderurgicas de Minas Gerais formally approved Nippon Steel's proposal of a 1 billion real ($275 million) capital injection. The deal will make Nippon Steel, which already owns a 29.4% stake in the Brazilian company, its top shareholder by a wide margin.
In February, Usiminas, as the company is commonly known, had found itself short of funds needed to pay upcoming debt commitments, and major shareholder Ternium of Argentina was reluctant to provide new capital. Nippon Steel President Kosei Shindo declared to his fellow executives that he would "do everything possible to protect our supply bases in South America." This determination, backed up by Nippon Steel's 1 billion real offer, won the support of the majority of Usiminas shareholders despite Ternium's earlier objection.
Nippon Steel is making decisive moves elsewhere, too. It announced in early February it would inject a total of 350 million euros ($399 million) into troubled French steel tube maker Vallourec through convertible bonds. Such a deal would have cost billions of dollars in the boom years.
At almost the same time, Nippon Steel reached an agreement to acquire a majority stake in Nisshin Steel, Japan's top stainless steel-maker, for between 60 billion and 80 billion yen ($553 million and $737 million) by early 2017. After many years of wooing by Nippon Steel, Nisshin finally agreed to the merger only after struggling to survive the sharp rise in cheap stainless steel products being exported from China.
In such an environment, what separates the winners from losers is having a long-term management strategy that avoids excessive leverage, manages risks and boosts profitability.
In a recent interview with The Nikkei, Sam Walsh, the outgoing chief executive of mining giant Rio Tinto, emphasized his company's strengths in this regard, saying it has the strongest balance sheet and is the most profitable in the industry.
"That is important in terms of our ability to look at potential transactions in [the] marketplace. There are a number of assets that are being put on the market," he said.
It is likewise important for countries to have growth strategies that prioritize long-term productivity rather than short-term gains.
China has kept its dependence on commodities low. As a result, the country is maintaining relatively robust growth, even as it transitions from an investment-led economy to a consumption-led one.
Mongolian leaders seem at least aware of what they should aim for. "Mining is now about 80% of the economy," Prime Minister Saikhanbileg said, "but we want to decrease this number significantly."
He said his administration has implemented a "Rainbow Policy" aimed at promoting seven major sectors for greater economic diversity. He particularly emphasized the importance of agriculture, tourism and information technology, and called for investors' participation in those fields.
The country is also taking a lesson in efficient management practices from the private sector. Erdenes Mongol, a state-owned asset holding company, is now in the process of transforming itself into a corporate-style investment company.
Established in 2007, Erdenes Mongol has major stakes in key sectors, mainly in mining, including a 34% share in Oyu Tolgoi mine, the country's largest copper and gold mine. The prime minister said he wants the company to become "like Temasek," the state-owned but privately managed Singaporean investment conglomerate.
Byambasaikhan Bayanjargal, CEO of Erdenes Mongol, told the Nikkei Asian Review that the key motivation behind this transformation is simple. With the economic situation becoming critical, the company "must start making money" through better management of its assets.
Morgan Stanley Investment Management emerging markets portfolio manager Ruchir Sharma pointed out in his best-selling book "Breakout Nations" that resource-rich "lucky countries" tend to do poorly when it comes to boosting productivity and are often vulnerable to market cycles. In other words, they tend to be short on long-term strategies. Be it a country or a company, a savvy management strategy and decisive action are crucial to thriving in a turbulent global economy.
Nikkei deputy editor Kenji Kawase, Nikkei Asian Review Asia regional correspondent Michael Sainsbury, and Nikkei staff writers Natsuki Kaneko, Sayaka Hayashi and Kaori Takahashi contributed to this article.