The dichotomy of developed and emerging markets has always been a simple and imperfect one – the world of the haves and the soon-to-haves, the emerged and the emerging. When the term ’emerging market’ was coined in 1981 by former World Bank division chief Antoine van Agtmael, it was conceived as a positive turn of phrase to encourage reluctant investors to join an equity fund focussed on investing in developing countries.
"Racking my brain, at last I came up with a term that sounded more positive and invigorating: emerging markets," van Agtmael told The Economist in 2008. "’Third world’ suggested stagnation; ’emerging markets’ suggested progress, uplift and dynamism."
‘Emerging markets’: the catch-all phrase
The international traction the term has maintained despite its origin as a re-branding exercise is a testament to van Agtmael’s sound judgement more than 30 years ago. Nevertheless, it’s impossible that the sheer scope and infinite nuance of dozens of economies could be accurately summarised by a catch-all phrase, and there are inevitably many instances in which the term feels inadequate.
For a start, the word ’emerging’ suggests the countries in question are part of a continuum in which the only way is up – a fallacy that will have stung Greece as it was recently downgraded to an emerging market by S&P Dow Jones Indices in light of continued post-financial crisis struggles. There are many adjectives that could be used to describe Greece’s economy, but it’s unlikely ’emerging’ would be among them.
There is also a vague fuzziness at the edges of the expression as it is broadly used. ‘Emerging market’ status might be measurable in its strict financial definition – liquidity in debt and equity markets and the existence of a regulated market exchange are all solid indicators – but outside of that there are many shades of grey. Even within the tighter financial criteria there is room for manoeuvre; Greece is now listed as an emerging market by the S&P Dow Jones, MSCI and Russell indices, but remains a developed market according to the FTSE index.
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Emerging market status can feel particularly awkward when viewing particular industrial sectors in isolation. Take mining, where the performance differential between emerging market miners and their counterparts in the developed markets is stark and looks set to widen.
Emerging market dominance in the mining sector
Amid a broader landscape of declining capital expenditure, tumbling market values and diminished profitability that has created one of the harshest mining operating environments in the last decade, emerging market mining companies are becoming increasingly predominant in the industry, both in terms of performance and influence.
According to PwC’s annual ‘Mine’ report, published in June 2014 with the appropriate subtitle ‘Realigning Expectations’, collective net profits from emerging market companies were $24bn in 2013. Although this may represent a drop when compared to 2012’s net profits of $39bn, emerging market profitability still presents a marked contrast to the $4bn net loss made by developed market companies in 2013, with impairments proving particularly impactful on the latter’s performance.
Emerging market companies have also been making strong headway in terms of market presence. According to PwC’s report, "2013 has for the first time seen a majority of the Top 40 [largest mining companies] come from emerging markets, and given their current performance and greater recent appetite to spend on capital, this trend looks set to continue."
The report expects to see more emerging market companies crack the Top 40 in coming years. As developed market players focus on simplification, reducing their exposure to risk and re-evaluating their approaches for the future, their equivalents in emerging markets appear to be doubling down on pursuing opportunities for further growth. Many have the financial support to do so, and significantly, are oriented around servicing the industrial and infrastructure growth of their own countries, rather than feeding international demand.
"Many of these companies have backing from governments and are largely focused on meeting domestic supply needs," reads the Mine 2014 report. "2013 is the first year a company from the Middle East [Saudi Arabian Mining] has been included in the Top 40. New sources of finance, such as sovereign wealth funds perhaps seeing an opportunity to get in at the bottom, are showing increased interest in getting a foothold in the industry."
Familiar emerging market risks still present
Larger returns fed by faster economic growth are a hallmark of the emerging market’s lure. But the increasing market presence of emerging market companies coupled with emerging economies driving demand for many commodities – China is the standout here; for example, the country’s burgeoning middle class drove a 10% rise in jewellery sales in the Chinese market for the first quarter of 2014, offering a glimmer of hope in the face of a rapidly declining gold price – blurs the line between binary terms like ‘developed’ and ’emerging’ markets, at least within the mining industry.
Of course, familiar emerging market risks still affect mining companies operating at the top end of the emerging spectrum – China, Brazil, South Africa – down to the small but rapidly growing mining markets springing up in Africa, Latin America and the Far East.
Peru, for example, is set soon to become the world’s second-largest copper producer, overtaking the United States, due in large part to massive investments in copper production from fellow ’emerging’ economy China, with Chinese projects in Peru now worth more than US and Canadian investments in the country combined, including July’s $7bn acquisition of Las Bambas copper operation from Glencore by a subsidiary of China Minmetals.
Nevertheless, the growth of the copper industry is offset somewhat by Peru’s massive issues with informal and illegal gold mining – a recurring problem in resource-rich emerging markets – which involves around 40,000 unlicensed miners in almost every province of the country and accounts for one-fifth of Peruvian gold exports, valued at billions of dollars in lost revenue for the country and legitimate industry.
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According to the PwC report, resource nationalism, another well-known complication for operators in emerging markets, will continue to pose an equal or even greater risk in the future as governments seek to capitalise on new projects by demanding a larger share of the profits, sometimes after investment decisions have already been made. As the report notes, "frustrations are building within the ranks of CEOs around the challenges of operating in some emerging markets, where governments have changed laws and regulations with inadequate consultation, disrupting the regulatory certainty needed to support long-term investment decisions."
So there are still the same challenges involved in operating in emerging markets – political, social and environmental factors that have the power to make or break projects. But in terms of financial performance and market presence, major changes are afoot, with the larger emerging economies taking an increasingly central role in both supply and demand for major mining commodities. The line between ’emerging’ and ‘developed’ now seems blurrier than ever, and before too long we might have to either reconsider our terminology or take a good, long look at the global mining industry and ask – has the emerging market finally emerged?