Our short term outlook has been clouded by COVID-19, but economic trends are signalling positive long-term demand for our products.
An increase in climate action will accelerate the electrification of transport and the decarbonisation of power, increasing demand for future facing commodities.
Chinese annual steel production is expected to surpass the 1 billion tonnes barrier for the very first time.
China’s focus on environmental considerations should increase the competitiveness of high quality Australian coals and iron ores.
OPEC price war
The impacts of COVID-19 and the OPEC price war had an immediate and brutal impact on oil prices.
Population growth and an increase in living standards will increase demand for metals, energy and fertilisers for decades to come.
Commodity market trends
Population growth and improvements in living standards will increase demand for future facing commodities like copper and nickel for decades to come. And as China applies more stringent environmental controls across its steelmaking sector, Australian coals and iron ore will become more competitive.
Iron ore prices have been strong over the last half-year, with China’s fast recovery from the COVID-19 offsetting the weakness in the rest of the world.
There are two major forces that could generate iron ore price volatility in the coming year:
- uncertainty created by the containment and re-emergence of COVID-19 outbreaks; and
- seaborne supply uncertainty.
In the medium to long-term, the ongoing supply side reform and capacity swap in China, along with the migration of steel capacity to the coastal regions, the trend towards larger furnaces and more stringent environmental policies are all expected to underpin the demand for high quality seaborne iron ore.
Supply disruptions and exposure to China’s recovery have allowed the copper price to recover swiftly from the lows seen during the initial phase of COVID-19.
Looking ahead, we see copper as a very attractive growth commodity as it presents a compelling narrative on both the demand and supply side.
Demand is leveraged to the electrification and decarbonisation mega-trends. More copper is required in each electric vehicle and for each megawatt-hour of energy produced from wind and solar, compared to the equivalent fossil fuel-based technology. Supply is challenged by grade decline, water scarcity, and above ground risk, as well as low levels of exploration success over the last decade.
Metallurgical coal is a key ingredient in the steelmaking process and is unlikely to be displaced by emergent technologies this half century, with higher quality products attracting a durable premium.
The commodity faces a difficult period in the very short term as major importing regions manage their reopening after lockdown, but China's longer-term move towards emissions reduction and blast furnace productivity enhancement should increasingly aid the competitiveness of high quality Australian coals.
Crude oil prices collapsed under the COVID-19 outbreak and the OPEC+ price war. The impact was immediate and brutal, with West Texas Intermediate (WTI) trading below zero for the first time in history on April 20.
Our base case is that demand will rise modestly above pre-COVID levels in the coming years, and oil will be attractive, even under our plausible low case, for a considerable time to come, underpinned by a steepening cost curve and natural field decline.
Nickel prices have rebounded in line with other base metals after the initial shock of COVID-19.
Today, the stainless steel sector currently accounts for around two-thirds of primary nickel demand but we think the rapid and prolonged drive towards the electrification of transport means batteries could one day become equally important consumers of nickel, in a much larger global market.
There are three key questions for the nickel market in the longer run:
- How fast will electric vehicles penetrate the auto fleet?
- What mix of battery chemistries will power those vehicles?
- What will be the marginal cost of converting the abundant global endowment of laterite ores to a high grade nickel product suitable for use in battery manufacturing?
Steel and pig iron
Global crude steel production was already extremely unbalanced from a geographic perspective prior to COVID–19, with China expanding around 8.25 per cent and the rest of the world contracting around 1.5 per cent in 2019.
This gap has widened in 2020, with a projected 2 per cent growth in China set to offset a steep double digit percentage decline in the rest of the world.
Global steel production will fall about 6 per cent in the 2020 calendar year, but the increase in Chinese output is likely to see their annual production surpass the 1 billion tonnes barrier for the very first time.