The boom-and-bust cycle is so entrenched in the mining sector that executives have been wary of committing to new investment, despite five years of surging commodity prices.

Indications that this is finally changing came yesterday as BHP Billiton, the world’s largest mining company, announced that its exploration budget would exceed $1 billion for the first time.

BHP will spend $1.2 billion (£602 million) this year seeking new mineral resources, three times more than it spent five years ago. Surging demand from China has fuelled the mining boom that has enabled companies such as BHP, Rio Tinto, Xstrata and Anglo American to report one set of record earnings after another.

Yesterday it was BHP’s turn, as it announced posttax profits up 28 per cent to $13.4 billion. The boom is the result of a disparity between supply and demand in the mining sector. China’s industrial economy is growing rapidly and drawing in raw materials, but supply has yet to catch up as the miners are still getting over the last “bust”.

At the end of the 1990s, the Asian growth bubble had burst and the global economy was being driven by technology stocks. Demand for raw materials was low and mining companies were forced to mothball production and slash exploration budgets. When China’s economy exploded at the start of this decade, the miners were unprepared. It takes years for a mine to start production and this delay between demand and supply has driven the rise in commodity prices.

The price of copper contracts on the London Metal Exchange rose nearly 500 per cent between 2002 and last year, when the metal peaked at $8,800 per tonne. Prices have fallen recently as speculators have sold out, but copper is still up more than 350 per cent in only five years.

Mining companies have been here before. Habitually, they get left behind when the global economy begins a boom cycle and invest heavily in new capacity to catch up with demand. This extra supply usually comes onstream as growth slows. The boom becomes a bust and they are left running expensive mines just as prices collapse.

Thus it was inevitable that when the China boom began, the industry was cautious. Rather than develop entirely new capacity, the miners expanded their existing facilities. BHP’s capital expenditure for growing its existing facilities has risen from $1.9 billion in 2002 to an estimated $7 billion in 2008. The miners have also sought rapid increases in capacity through acquisitions, resulting in a number of mega-deals in the past two years.

Rio Tinto is so eager to boost its aluminium production that it is paying $38 billion for Alcan – a 30 per cent premium. The aluminium price has risen about 55 per cent in two years. What the miners have avoided is investing in a lottery situation in the form of new capacity. However, this is changing.

The mining industry is finally convinced that it has entered a “supercycle”, where demand from China will create a step-change in the price of raw materials.

Marius Kloppers, the chief executive-designate of BHP, said: “Two billion people are in the process of joining the industrial world and that is driving global demand.”

There will continue to be booms and busts in the sector as growth fluctuates, but this will occur over a long-term boom created by the addition of China as an industrial power. Even if China’s growth slows, the miners now expect India’s industrialisation to take up any slack.

Mr Kloppers said: “We have seen our sales to India increase very dramatically up to 4 per cent from almost nothing. This is where China was six or seven years ago and we expect rapid growth.”

Mining executives have been talking of the supercycle for years, but mostly out of hope. Now attitudes appear to have changed and Anglo, Rio and BHP are all ramping up their exploration budgets and development projects.

Consolidation and expansion of existing assets will continue as the miners, and their shareholders, look for jam today – but the industry is finally confident enough about the long-term gains from China and India to pump billions of dollars into speculative exploration.

BHP said yesterday that it had 19 projects under development that will cost $13.7 billion. A further 14 are undergoing feasibility studies and potentially they could cost $6.6 billion to bring onstream. For the first time, the company also revealed that it had a further $50 billion of exploration projects in the pipeline.

The mining industry is ready to gamble that the boom times will last forever. If history is any judge, cynical investors should start selling now.

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