Six months ago, at the time of our full year results for the 2019 financial year, an air of prudent caution permeated commodity markets. On balance, events since that time have justified that caution.
The result has been a mixed price performance by our key commodities.1
Demand for oil, metallurgical coal and copper was weaker than expected in the 2019 calendar year, while demand for iron ore was higher than expectations. These outcomes reflected the impact of stunted growth in international trade, a recession in the global auto sector, a broad based slowdown in manufacturing in the developed world and a challenging year for non–China emerging markets, including India. The negative factors were partially balanced by robust growth in Chinese steel production and resilient growth in the United States for the majority of the calendar year.
For the 12 months ahead, we assess that directional risks to prices across our diversified portfolio are mixed, with the duration and intensity of the novel Coronavirus outbreak (hereafter Covid–19) a major source of uncertainty. This is arguably shrouding the impact of a patchy supply situation across many major commodity markets".
On balance, we expect to see lower iron ore prices on average in calendar year 2020 than in the year just concluded, with considerable two–way volatility in prospect. On the other hand, we expect conditions in metallurgical coal to improve somewhat versus those experienced in the second half of calendar 2019. Product differentials in both commodities are expected to remain favourable for higher quality producers, albeit narrower than the extremes of recent history, as steel industry profitability normalises.
Oil and copper prices are highly susceptible to swings in global policy and economic uncertainty. We consider the underlying commodity–specific fundamentals of both the oil and copper markets to be sound. We estimate that their forward looking short–term fair value ranges are similar to those we estimated both six and 12 months ago. Now that the US–China “Phase One” trade deal has been signed, a major drag on sentiment for much of calendar year 2019 has been neutralised. While this remains the case, we have no particular bias within those ranges.
The caveat is that while we hope that the Covid–19 outbreak is speedily contained within the March quarter, no one can be adamant about the precise timing. While the world is forced to live with this unknown, there is likely to be a sentiment discount in the prices of these commodities.
Looking beyond the immediate picture to the medium–term, we see the need for additional supply, both new and replacement, to be induced across most of the sectors in which we operate.
In many cases, this could lead to higher–cost supply entering the cost curve.
This projected steepening of cost curves can reasonably be expected to reward disciplined owner–operators with high quality assets.
On the demand side, we continue to see emerging Asia as an opportunity rich region. China, India, ASEAN and the global impact of China’s Belt and Road initiative are all expected to provide additional demand for our products.
As the true economic costs of trade protection are progressively recognised by global consumers, we anticipate a popular mandate for a more open international trading environment will eventually emerge.
Looking even further ahead, the basic elements of our positive long–term view remain in place.
Population growth and rising living standards are likely to drive demand for energy, metals, and fertilisers for decades to come.
New demand centres will emerge where the twin levers of industrialisation and urbanisation are still developing today. The electrification of transport and the decarbonisation of stationary power will progress. Comprehensive stewardship of the biosphere and ethical end–to–end supply chains will become even more important for earning and retaining community and investor trust.
The ability to both provide and demonstrate social value to our host communities and in our customer jurisdictions will be a core enabler of our strategy and a source of competitive advantage.
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 uncertain world we will face tomorrow.
The underwhelming performance of the global economy in calendar year 2019 stresses the point that while an increase in trade protection is not, on its own, a recessionary level shock for the global economy, it is an exceedingly unhelpful starting point for the pursuit of broad based growth across regions, expenditure drivers and industries.
Global economic growth
World economic growth was close to 3 per cent in real terms in calendar year 2019. That is down from an average of around 3¾ per cent in the prior two years. Each of the big four economies – the US, China, India, and Europe – recorded either flat or slower growth versus calendar year 2018. The US dollar has been relatively steady over the last twelve months. On a real, trade–weighted basis, it is around 1 per cent higher year–on–year (hereafter YoY).
Global trade growth has slowed from around 5½ per cent in calendar year 2017 to around 3¾ per cent in 2018 and, held back by policy headwinds, it is on track for a very disappointing outcome of around 1 per cent in calendar 2019.
The ratio of the growth in world trade to the growth in world GDP is an important indicator of the health of the global economic system at a point in time. Outside of recession years, the outcome for 2019 is the lowest in the four decades for which we have consistent data.
The underwhelming performance of the global economy in calendar year 2019 stresses the point that while an increase in trade protection is not, on its own, a recessionary level shock for the global economy, it is an exceedingly unhelpful starting point for the pursuit of broad based growth across regions, expenditure drivers and industries.
As a complementary observation, we strongly encourage policymakers to prioritise structural reforms at home as the surest route to sustainable productivity growth, and ultimately, prosperity.
These arguments highlight the importance of continued and vocal advocacy for free trade, open markets and high quality national and multilateral institutional design by corporations, governments and civil society.
Our base case is that world GDP growth will register around the mid–point of a 3 per cent to 3½ per cent range in calendar year 2020, roughly ¼ per cent higher than the projected outcome for 2019. The IMF and the OECD expect world growth of 3.3 per cent and 2.9 per cent in 2020 respectively.
Our view reflects the assumption that the Covid–19 outbreak is contained within the March quarter, some positive impact from the cessation in US–China trade hostilities, the support for growth coming from easier policy settings in the major economies, and some modest improvement in non–China emerging markets. The third and fourth arguments are linked. In particular, the change in the US monetary policy stance has brought some welcome relief to emerging markets, particularly for those with large hard currency external financing requirements and a reliance on portfolio inflows to service their deficits.
There is obviously clear downside risk to the outlook for China and its key trading partners if the Covid–19 outbreak is not contained within the time frame we have assumed in our base case.
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