BHP's economic and commodity outlook (FY20 full year)

Six months ago, at the time of our half year results for the 2020 financial year, we had little conception of the size of the shock that was about to shiver the foundations of the world economy.

The result has been an extremely challenging demand, supply and price environment for many of our key commodities.¹

Within that portfolio wide judgement, we expect iron ore prices to ease from the spot levels observed at the time of writing, with considerable two–way volatility in prospect. Metallurgical coal still has to navigate a difficult period as major importing regions manage their re–openings in the first half of financial year 2021. COVID–19 permitting, sustained improvement is possible in the second half of the financial year.

Oil and copper prices are both highly susceptible to swings in global policy and economic uncertainty. Aside from this common trait, the fundamentals of the two commodities under COVID–19 have been very distinct.

Oil has suffered through a calamitous demand collapse, with the downdraft in pricing that this created only forestalled by a combination of very large withdrawals of supply and the partial normalisation of terrestrial mobility conditions. Copper demand has been much more resilient, reflecting the nature of its end–uses and its greater exposure to China’s recovery. Coupled with profound COVID–19 related difficulties on the supply side of the industry, this has enabled copper prices to recover quickly from the trough they initially fell into amidst the financial panic of March.

The over–riding caveat for all of our commentary is that while we hope that the COVID–19 outbreak is speedily contained everywhere that the first wave is still extant, and that elsewhere all subsequent waves are managed without a major impact on societal well–being, it would be unwise to be adamant about these matters. While we are all forced to live with these unknowns, there will be an uncertainty discount in the risk appetite of households and businesses. The impact this will have on real world decision making will constrain the global economy from running on all cylinders.

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 most of the sectors in which we operate: notwithstanding the reality that COVID–19 has significantly lowered the starting point for demand across most of our exposures.

In many cases, this could require higher–cost supply to enter the cost curve.

In isolation, the demand shock associated with COVID–19, some aspects of which can be reasonably expected to endure beyond the immediate horizon, is likely to delay the rational timing of such entries by a number of years versus pre–COVID estimates. This timing must then be adjusted based on the expected duration and scale of the direct and indirect impacts of COVID–19 on the supply landscape in each industry.

The combined impact of these factors could well delay the onset of inducement pricing in some industries but at this very early stage we do not feel that inducement prices themselves are in need of substantial revision.