Please refer to the Important Notice at the end of this article1
Six months ago, at the time of our full year results for the financial year 2022, we noted that while prices in general remained close to or above forward–looking estimates of equilibria, differentiation across commodity clusters had increased. That divergence persisted in the first half of financial year 2023, with the direct and indirect impacts of the Ukraine conflict continuing to drive extraordinary volatility in energy, food and fertiliser markets. Non–ferrous metals and the steel–making value chain were also impacted by former Soviet Union (FSU) supply uncertainty, but China’s dynamic zero–COVID policy and housing market weakness, and the financial market turbulence that emerged elsewhere under escalating inflation, multi–region central bank tightening and recessionary speculation were even more influential. As expected, bottlenecks in global logistics, non–energy industrial products and downstream manufacturing have eased noticeably over the last six months, in part due to genuine efficiency improvement, but this trend is also due to a marked reduction in new order flow allowing backlogs to be cleared. Operational labour markets remained tight, and it is the state of labour markets that is expected to be the most pressing forward looking inflationary concern for calendar year 2023. Risks with respect to energy costs are now balanced, rather than skewed to the upside.
Notwithstanding the fact that the world economy is always a complicated jigsaw, the near–term outlook for demand feels less complex now than it did in the immediate aftermath of the commencement of the Ukraine conflict. At that time there was considerable uncertainty regarding the future path of inflation, the speed and scale of US and global monetary tightening, and the rate at which consumer behaviour and labour market dynamics would respond to the above. In addition, there were two critical known unknowns in terms of how China’s policy stances towards public health issues and the real estate sector would evolve.
Today, we have greater clarity on each of the above questions. The global headline inflationary pulse has peaked and is beginning to recede. The US monetary policy tightening cycle is expected to conclude in coming quarters, a major deceleration in domestic demand in the developed world is already underway, and while the US labour market remains tight on aggregate measures, it has begun to bifurcate between emergent weakness at the top–end (Silicon Valley and Wall St) and ongoing strength in lower–skill, lower–wage sectors where the competition for available workers is still intense. In China, policy U–turns on zero–COVID and the property market in the aftermath of the 20th Party Congress have alleviated two major sources of downside risk in that systemically important economy. The balance of the above points to world GDP slowing to between 2½% and 2¾% in calendar 2023, from an estimated 3.4% in 2022. Comparing the two halves of calendar 2023, the growth pulse is expected to be relatively stronger in the second half.
The potential for surprises in both directions is omnipresent, and as ever we have systematically run and tested alternative cases: but the plausible range for the next twelve months certainly feels like it is narrower today than at the same time a year ago.
In contrast to the growth outlook, price formation dynamics are expected to be highly complex once again. We see volatility emerging within the year as an arm wrestle plays out between three major forces that can be summarised by the following “R”–words: reality [of slower growth in the developed world], relief [that the inflationary wave appears to have crested, and interest rates may not need to rise very much further]; and re–opening [the China dynamic].
In the month of January-2023, it was very clear that a combination of relief and re–opening was dominating sentiment in commodity markets – and in a range of pro–growth asset classes besides. Reality though can be relied upon to make periodic appearances, as it did in early February.
This ebb and flow will continue through the current half year.
Our basic framing against this multi–faceted backdrop for price formation is that on average across calendar 2023 prices are expected to be higher than they were in the second half of calendar 2022, when pessimism on Chinese growth prospects was at its height, the US Fed was at its most hawkish and the energy price shock was at its peak. But at the same time, we gauge that the constellation of prices observed in late January over–states how tight physical commodity markets are likely to be over the full year, especially in non–ferrous metals where roughly half of global demand emanates from outside China.
In our central view small surpluses in non–ferrous metals and broadly balanced markets in steel–making raw materials are in prospect for the full calendar year: not the imminent return to deficit conditions that financial markets seemed to be envisaging in January.
The caveat, as always, is that these expectations are predicated on average supply conditions per industry. Material deviations on supply performance, in either direction, could invalidate these positions.
Should there be phases within the year where prices do trade to the downside, these dips are more likely to be shallow than deep, noting that industry–wide cost inflation has raised real–time price support well above pre–pandemic levels in many of the commodities in which we operate, and value–chain inventories in general remain low across multiple industries. Low inventories at the outset of the year are also a relevant component of a hypothetical bullish case: should Chinese demand surprise positively, and the rest of the world can perform resiliently, or if supply lags materially behind expectations in any industry. If any combination of the above were to occur, continued support for and even further upward pressure on currently elevated prices is well within the range of possibilities.
Looking beyond the immediate picture to the medium term, we continue to see the need for additional supply, both new and replacement, to be induced across many of the sectors in which we operate.
After a multi–year period of adjustment in which demand rebalances and supply recalibrates to the unique circumstances created by COVID–19, the Ukraine conflict, and the global inflationary shock, we anticipate that geologically higher–cost production will be required to enter the supply stack in our preferred growth commodities as the decade proceeds.
The projected secular steepening of some industry cost curves that we monitor, which may be amplified as resource nationalism, supply chain diversification and localisation, carbon pricing and other forms of “greenflation” become more influential themes in both demand and supply centres, can reasonably be expected to reward disciplined and sustainable owner–operators with higher quality assets featuring embedded, capital–efficient optionality.
We confidently state that the basic elements of our positive long–term view remain in place.
Population growth, urbanisation, the infrastructure of decarbonisation and rising living standards are expected to drive demand for steel, non–ferrous metals, and fertilisers for decades to come.
From a pre–pandemic baseline, by the end of calendar 2030 we expect: global population2 to expand by 0.8 billion to 8.5 billion, urban population to also expand by 0.8 billion to 5.2 billion, nominal world GDP to expand by $83 trillion to $171 trillion and the capital spending component of that to expand by $16 trillion to $39 trillion.3 Each of these fundamental indicators of resource demand are expected to increase by more in absolute terms than they did across the 2010s.
By 2050, we project that: global population will be approaching 10 billion; urban population will be approaching 7 billion; the nominal world economy will have expanded to around $400 trillion, with one–fifth of that – i.e., around $80 trillion – being capex.
In line with our purpose, we firmly believe that our industry needs to grow in order to best support efforts to build a better, Paris–aligned world.4 The Intergovernmental Panel on Climate Change (IPCC) stated on August 9, 2021, that “Unless there are immediate and large–scale greenhouse gas emissions reductions, limiting warming to 1.5 degrees Celsius will be beyond reach”. As illustrated by the scenario analysis in our Climate Change Report 2020 (available at bhp.com/climate), if the world takes the actions required to limit global warming to 1.5 degrees, we expect it to be advantageous for our portfolio as a whole.5
And it is not just us.
What is common across the 100 or so Paris–aligned pathways we have studied is that they simply cannot occur without an enormous uplift in the supply of critical minerals such as nickel and copper.
Our research also indicates that crude steel demand is likely to be a net beneficiary of deep decarbonisation, albeit not to the same degree as nickel and copper. And some of the more extreme scenarios we have studied, such as the International Energy Agency’s technologically optimistic Net Zero Emissions scenario6, would be even more favourable for our future facing non–ferrous metals than what is implied by our own work to date: albeit with different assumptions and potential impacts elsewhere in the commodity landscape.
Against that backdrop, we are confident we have the right assets in the right commodities in the right jurisdictions, with attractive optionality, with demand diversified by end–use sector and geography, allied to the right social value proposition.
Even so, we remain alert to opportunities to expand our suite of options in attractive commodities that will perform well in the world we face today, and will remain resilient to, or prosper in, the world we expect to face tomorrow.
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