BHP’s economic and commodity outlook (FY21 half year)

Six months ago, at the time of our full year results for the 2020 financial year, we felt that the balance of probabilities indicated that the worst of the physical demand shock from COVID–19 was behind us. While some of our commodities have continued to face a challenging environment in absolute terms since that time, others have entered a clear recovery phase for both demand and price. ¹

We expect the demand–supply balance to remain relatively tight in both iron ore and copper. The balance of risks for oil prices are tilted upwards, while metallurgical coal prices and differentials will be influenced as much by policy as by fundamentals. There is obviously still some residual uncertainty as to how vaccine deployment and the policy and behavioural response to the newer, more infectious strains of COVID–19 will interact over the coming quarters. It is also notable that the early trends in the regional distribution of vaccines in calendar 2021 is similar to the distribution of stimulus policies in calendar 2020: the gap between wealthy economies and the bulk of the developing world is stark. So while the “uncertainty discount” in the risk appetite of households and businesses we have noted in previous communications is definitely fading, it is doing so in uneven fashion across the world. Those societies that are best equipped to rapidly mobilise resources under the pressure of a crisis – whether that be fiscal spending, hospital beds, vaccine production or cold storage logistics for the same – are distinctly advantaged over those with lesser capacity to move swiftly at scale. 

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 and in some instances has also left a temporary overhang of supply in its wake.

After a period of adjustment in which demand rebalances and supply is recalibrated, we anticipate that higher–cost supply will be required to enter the cost curve in our preferred growth commodities.

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