Bridge in Melbourne

BHP's economic and commodity outlook

FY23 half year

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, 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.

Table of contents



China’s economy was buffeted by multiple headwinds in calendar 2022, with strict adherence to the zero–COVID policy amidst a rolling series of infection waves foremost among them. An additional drag on activity was the profound malaise that afflicted the property sector. Business confidence was also hindered by trade and geopolitical tensions. These forces combined to obscure what was a solid year for infrastructure, manufacturing investment, auto production and, somewhat surprisingly, exports. From a GDP perspective, China’s growth slowed to just 3.0% in calendar 2022, 0.4 percentage points lower than the world growth rate. The IMF database, which begins in 1980, registers … zero previous instances of China lagging the weighed–average growth rate of the world economy. 

Such weak economic growth relative to China’s potential rate saw producer price deflation setting in, with consumer prices also very subdued. China’s outlier status regarding price pressures, in a world enveloped by inflationary risk, is a forward–looking advantage for Chinese policymakers. 

The authorities have been able to throw considerable effort into stimulating the economy without worrying about managing a parallel cost–of–living crisis. With the U–turn on zero–COVID now executed, the benefits of that pipeline stimulus will become easier to see.  

Going back in time six months, we argued that China’s housing market was the biggest wild card for the outlook over the next year–and–a–half. Our diagnosis at the time was that “what ails Chinese housing is not a demand problem – it is a supply–side problem. More specifically, the resolution of the current issue lies within the nexus of developer balance sheets, macro–prudential controls on the same, and risk–averse financiers”. 

The month of November proved to be the watershed for housing policy. The precise turning point was the joint PBOC and CBIRC “16–measures” policy package of November 23rd. While this was far from the first official announcement aimed at shoring up confidence in the sector, previous attempts had fallen short of what the market truly required: a combined show of force and resolve. Simply put, something BIG was required to break the downdraft of pessimism that had frozen developer funding channels. The top 100 developers obtained over 4 trillion yuan in much–needed credit lines by the end of calendar 2022. A further 1.5 trillion yuan has been raised in early calendar 2023, with a further 20 developers benefiting. Demand–side easing measures (lower mortgage rates and down–payment ratios) have also been announced, alongside a “balance sheet improvement plan for quality developers”. 

The immediate impact of this reinjection of liquidity will be to accelerate the completion of projects that were stalled, consistent with the concept of ensuring “housing delivery” – the phrase that entered the policy lexicon at the time of the widespread mortgage boycott protests of the September quarter. A rebound in new project starts, and their lead indicators – land transactions and off–the–plan sales – will take somewhat longer.

This is how the major housing data stood at the end of calendar 2022. The volume of housing starts – the key indicator for contemporaneous steel use in real estate – declined by –39.4% versus calendar 2021 levels, a third consecutive annual contraction. Sales volumes declined –24.3% (weighed down by pre–sales at –28%: while existing home sales rose +1%). The equivalent comparisons for housing completions – the key indicator for contemporaneous copper use in real estate – was –15.0%. Floor space under–construction was tracking at –7.2%; land area sold was –53.4% and developer financing was –25.9%. 

It is important to remember that the monthly “commodity” housing data documented above is only one component of total construction. The “non–commodity” segment is in fact larger in terms of total floor space8, but unfortunately the data is not available in a suitably timely way around turning points of the cycle. Our estimates indicate that non–commodity construction starts grew at a rate of +8.4% in calendar 2022. Notably, in line with robust manufacturing fixed investment (see below), factory floor space completions and warehouse completions were both solid. These less visible but collectively important vectors of materials demand provided a partial offset to the steep decline in the commodity housing segment. 

Some final observations on housing. The scaled inventory of unsold dwellings remains close to historical lows as we move into this next cycle phase. The sustained period of weak starts has reduced the pipeline of work, and the needed focus on completions has been delayed. That helps explain why housing prices have not fallen more heavily despite the challenges the industry has endured. In fact, secondary market sales have been growing steadily. That implies that a loss of buyer confidence in developers was a non–trivial element in real estate turnover dynamics in calendar 2022: interest in real estate as an asset class was relatively undiminished. Reversing prospective home buyers’ distrust of developers could have high multiplier effects, especially in the context of (a) the pool of excess savings that has accumulated over the pandemic, and (b) the massive decline in the household credit impulse observed over the last year or so, as the volume of property transactions suffered.  

Moving on to non–housing end–use sectors now, and fixed investment in infrastructure was a bright spot in calendar 2022, as expected, with +11.5% growth realised for the full year, and +12.3% YoY in Q4 itself. 

A long–awaited uplift in outlays on water conservancy and related areas underpinned the overall pick–up. This segment, which accounts for roughly two–fifths of total infrastructure spending, expanded 10.3% in calendar 2022. That was a major turnaround from a narrow contraction of –1.2% in calendar 2021. Power infrastructure also accelerated notably, reaching almost +20% YoY, after a mild +1.1% outcome in calendar 2021. This was led by renewables capacity additions, as discussed in more depth in the copper chapter. Transport lagged the other two segments, with the major categories of road (+3.7%) and rail (+1.8%) showing signs of fatigue after a multi–year run of strength. Even so, a +32% jump in residual transport categories (e.g. sea and river ports, airports) saw the overall category up a healthy +9.1% over the full year. 

Investment in manufacturing capacity was also strong. The uptrend was broad–based across sub–sectors, with light industry (around a quarter of the total), machinery and equipment (about a fifth), and automotive manufacturing (5% share) all enjoying double digit growth. The outlier on the downside was ferrous smelting, reflecting tight regulatory guidelines for the steel sector. 

For auto production, it was an odd year. Total units were up +3.4%, but that mediocre figure hides stunning imbalances across the major segments. Passenger vehicles were superficially strong at +11.2% YoY, fuelled by the time–limited tax rebate that assisted sales from the middle of the year. However, the full benefit of the rebate was hindered by the COVID–19 waves and subsequent lockdowns that swept across multiple major cities in the second half of the year. Contrary to the passenger segment, commercial vehicles were very weak, collapsing –32% YoY. This had a major impact on the material input requirements from the sector overall. New Energy Vehicles (NEVs) had another spectacular year, leapfrogging the most bullish of expectations. NEV production fell a few ticks short of triple digit percentage growth – coming off 168% growth in 2021. Auto exports were very strong too, as discussed below.

Elsewhere in the domestic end–use story, for most of calendar 2022 the theme for the diverse machinery category was one of coming back to earth after the very strong run–up of prior years. Across the major components, transport, construction, and agricultural machinery all weakened in the first half, with power machinery the only major sector exhibiting clear resilience. This mix of course favoured copper over steel. Late in the year, tentative signs of improvement were noted in construction machinery, consistent with the nascent turnaround in construction as developers accessed newly extended credit lines. The overall segment was down a modest –2% YoY, up from –4% in June–22. Consumer durables have been a little firmer than machinery in the domestic market, but they have seen export sales tailing off. For the full calendar year, production of electronics was down –2%, while white goods declined –4%. 

Exports increased by around +30% in calendar 2021, and against expectations they managed to expand a solid +7% in calendar 2022 despite that high base and ongoing tariff protection in the US. The resilience was front–loaded to the first half though (+14.2% YTD YoY as of June) with the inevitable slowdown underway in earnest by the beginning of the December quarter. Chinese manufacturers have been arguably the leading beneficiaries of the global boom in goods consumption, gaining around 2 percentage points of global market share (from around 13% to around 15%) between 2020 and 2022.

The transition from lockdown consumption dominated by goods and gadgets in 2020 and 2021 to an “experiential” 2022 [highlighted by so–called “revenge travel”], and the end of the work–from–home technology hardware boom, are easy to deduce from the Chinese trade data. China’s own “revenge travel” catharsis is yet to come, with its neighbours to the north and south preparing for a spectacular influx this year and next.

Balancing the above slowdown in traditional export sectors, secular strength in workhorse decarbonisation technologies continues to be evident. In 2022, China’s exports of NEVs rose +120%, which is one–quarter of the impressive 54% growth in total Chinese auto unit exports, which reached 3.11 million. That puts China in the #2 position globally, between traditional automotive powerhouses Germany and Japan. On the power generation side, exports of solar panels increased +27% and wind turbines rose +115%. Note that Bloomberg NEF, a think–tank, estimates that China’s investment in “energy transition technology” rose +70% in 2022, contributing roughly half of total spending globally. And with European spending slowing down, no acceleration in the US, and the UK and Japan going backwards, 90% of the growth in the global figure came back to China as well.

Moving to the longer–term, our view remains that China’s economic growth rate should moderate as the working age population falls (noting new estimates from the UN and China’s Statistician indicate that the total population has already peaked) and the capital stock matures. China’s broad production structure is expected to continue to rebalance from industry to services and its expenditure drivers are likely to shift from investment and exports towards consumption, with late–stage urbanisation a complementary element in this shift.

Nevertheless, even as percentage rates of growth slow down, and the structure of the economy evolves, China is expected to remain the largest incremental volume contributor to global industrial value–added and fixed investment activity through the 2020s and likely well beyond. China’s strategic decision to invest heavily and consistently in low carbon technology production, complemented by high rates of adoption internally, imply it will remain an opportunity rich market for future facing commodities for many decades to come. 


Steel and pig iron

Global steel production fell to 1.879 Bt in calendar 2022, –4% from the record 1.957 billion tonnes produced in calendar 2021.9 China’s production declined –2.1% YoY, with the full year finishing at 1.013 Bt, which compares to 1.035 Bt in 2021 and the 2020 figure of 1.065 Bt. Ex–China production declined –6.1% YoY to 866 Mt, with India (+5.5%, 125 Mt) the positive outlier. North America (–5.5%), Europe (–10.4%), Japan (–7.4%), South Korea (–6.5%) and the FSU/CIS (–20.1%, with Ukraine –71%) all experiencing difficult years. The year did not start well from a production point of view, with YoY contraction the norm across multiple regions in the first half. In the OECD specifically, the rate of decline accelerated in the second half. 

In pig iron, the global figure for calendar 2022 of 1.301 Bt was down by –3.7% on calendar 2021’s 1.351 Bt, with a –0.8% outcome in China (864 Mt) allied to an ex–China contraction of –8.9%.

Twelve months ago, we wrote that “Our starting point for thinking about calendar 2022 is that a continuation of China’s policy stance of “zero growth” [for steel] ought to be the baseline, with scenarios built around that. A fourth year above 1 billion tonnes accordingly seems likely, as the nation’s “plateau phase” extends.” That proved to be a useful guide to the full year outcome, while our ex–ante assessment that the “ultimate route to those ends will be a circuitous – and volatile – one” was a reasonable approximation of the tumultuous year that was in store. Statistically speaking, as expected there was also considerable volatility in YoY rates, reflecting the stop–start nature of production in the prior year as a well as the somewhat erratic end–use conditions that prevailed under the dual stressors of zero–COVID and weakness in the property sector. 

Our preliminary take on calendar 2023 and 2024 is that the current four–year streak of outcomes in the 1.0 to 1.1 Bt plateau range is likely to extend to five and then six. However, contrary to calendar 2022 when we moved to the lower end of the range, the next two years are likely to move us back closer to the middle of the range. For that to eventuate, the systemically vital housing sector needs to progressively leave its annus horribilis behind it.

It also relies on the Chinese authorities adopting a more flexible disposition towards incremental annual growth than has been the case in recent years. Early indications at both a macro and micro level hint that this might be the case for a modest uplift in production – although there are no signs that a more lenient approach to capacity expansion would be countenanced (and nor do we expect any change in this regard).

China’s blast furnace (BF) utilisation rate averaged a robust 85% in the second half of calendar 2022, troughing at 79.3% in late July and peaking at 89.1% in mid–September. Average utilisation was similar to the first half of the calendar year, but period–to–period variability was lower in the second half, despite two rounds of production cuts. The first round was a voluntary phase due to loss–making, which coincided with the low point of BF utilisation in July. The second occurred late in the year, on standard winter air–quality concerns at the local level. In contrast to the second half of calendar 2021, there were no centrally mandated cuts aiming at a specific annual production goal.

Continuing the trend from the first half of calendar 2022, EAF production and profitability struggled. This was driven by two key factors (1) poor scrap feedstock availability, with collection rates collapsing during the lockdowns, and (2) weak demand for commodity construction steels amidst the downturn in housing activity. Apparent demand for long steel declined by –12% YoY in calendar 2022. EAF utilisation tracked well below the 2019–2021 range from April–2022 onwards.

Realised margins for Chinese steelmakers were poor for most of calendar 2022, with loss–making widespread. We estimate that spot margins averaged around –$20/t, not far from the 2015 figure of –$24/t just prior to the introduction of supply–side reform (SSR). The major difference between those two years is that utilisation rates for integrated BF–BOF10 operations were quite high in 2022, which historically has tended to correlate with good margins. That relationship has broken down through the pandemic era, with stop–start downstream end–use conditions contributing to much higher levels of finished steel inventories within the year, and higher associated working capital requirements for steel mills. Very high coke prices were also a consistent weight on margins, as metallurgical coal prices soared in the wake of the start of the Ukraine conflict. It will likely take some time for previously reliable correlations to become predictable again, but it is notable that finished steel inventory trends in calendar 2023 to date look closer to pre–pandemic norms than the extreme amplitude seen across 2020–2021.

Taking a step back, we note that margins averaged +$54/t from 2017–2021. Those who have followed our views for some time may recall that we argued that around two–thirds of the initial SSR boost to margins would be durable, and one–third would be transitory. The realised margins for 2017–2021 have validated that estimate.

The end–use demand picture in calendar 2022 was a combination of pronounced weakness in housing, strength in infrastructure, and soft outcomes across the wider manufacturing landscape. Key sectoral trends are discussed in detail in the Chinese economy chapter. From a steel point of view, the most important forward–looking considerations are (1) the pace, scale, and composition of the housing construction recovery, (2) the steel intensity of the same, (3) the response of machinery demand to the anticipated mix of activity in associated sectors, and (4) the tussle between slowing external demand for steel–containing goods and the needs of the domestic economy. Note that the infrastructure upswing feels well entrenched and is a solid foundation on which to build the remainder of the forecast.

On (1) and (2), we see the composition of housing activity in the first half of calendar 2023 being relatively less steel–intensive, as developers prioritise the re–start and completion of idled projects. This should begin to balance out more in the second half, as new starts begin to progressively replenish the pipeline of work, with a positive spillover into calendar 2024 anticipated. On (3), a modest upswing in construction machinery is anticipated, with any real strength likely to be back–loaded, in line with the expected composition of housing activity. Ongoing strength in power equipment is expected. On (4), weak external demand is expected to pull consumer durables down to the low single digits, with firming domestic sales preventing an outright contraction.

We estimate that net exports of steel–contained finished goods account for slightly more than 10% of Chinese apparent steel demand. That is a lower degree of external exposure than, say, Japan or Germany, where the number is about one–fifth. An additional 4% or so of Chinese production is exported directly. The direct trade surplus in steel has fluctuated widely since the pandemic began, both seasonally and year–to–year. In calendar 2022, net exports were +54 Mt, up from +41 Mt outcome in the prior year. Contrary to prior phases of the pandemic, the surplus was relatively steady across both halves. Even so, there was volatility within the year as Chinese exports helped fill a vacuum created by disruptions in the FSU, with sizeable monthly surpluses in excess of +80 Mtpa recorded in the June quarter.

Turning to the long–term, we firmly believe that, by mid–century, China will almost double its accumulated stock of steel in use, which is currently over 8 tonnes per capita, on its way to an urbanisation rate of around 80% and living standards around two–thirds of those in the United States.

China’s current stock is well below the current US level of around 12 tonnes per capita. Germany, South Korea, and Japan, which all share important points of commonality with China in terms of development strategy, industry structure, economic geography, and demography, have even higher stocks than the US.

The exact trajectory of annual production run–rates that will achieve this near doubling of the stock is uncertain. Our base case remains that Chinese steel production is in a plateau phase, with the literal peak likely to be the cyclical high achieved in this period (with 1.065 Bt in 2020 being the “clubhouse leader” in golfing terms). The plateau can be usefully thought of as a range from 1.0 to 1.1 Btpa, with cyclical and policy driven year–to–year fluctuations contained within those boundaries.

We estimate that the growing stock described above will create a flow of potential end–of–life scrap sufficient to enable a doubling of China’s current scrap–to–steel ratio of around 22% by mid–century. The official target of a scrap–to–steel ratio of 30% by 2025 is thus directionally sound, notwithstanding the fact it is more aggressive than our internal estimates by a few percentage points. Uncertainty regarding the future availability of imported scrap makes China’s official targets a little more challenging.

As we argued in our blog on regional pathways for steel decarbonisation, increasing scrap availability is a powerful lever at the Chinese steel industry’s disposal as it seeks to contribute to the national objective of carbon neutrality by 2060. Beyond the considerable passive abatement opportunities available to it, of which scrap availability is the largest, the decarbonisation choices of Chinese steel mills will be determined by the age of their integrated steel making facilities, the policy framework they are presented with, developments in the external environment impacting upon Chinese competitiveness, and the rate at which transitional and alternative steel making technologies develop.

We have noted considerable interest in the novel (for the iron–steel complex) electric–smelter furnace (ESF) from our global customers, including those in China. This interest is being turned into action as steel producers in Europe, Japan, South Korea, and Australia have now included this technology in their 2030 plans and/or longer–term decarbonisation pathways. We expect these initial projects will catalyse industry growth.

Some of the advantages of the ESF versus the more established EAF, which is designed for scrap, are its greater flexibility in accommodating medium and lower grade ores through the DRI route, and its ability to be physically incorporated into an existing integrated facility to feed a basic oxygen furnace (BOF).

Steel production outside China (hereafter ROW) initially stuttered early in calendar 2022, before falling flat in the second half. Utilisation closed the year at a weak 62% after a series of cuts across Europe and Northeast Asia. The normal pre–pandemic range was 70–75%. As mentioned above, India was a lone bright spot among the major producing regions, with +5.5% growth over calendar 2021. In the tier below, the Middle East managed respectable growth, while South America, South–east Asia and Africa were all weaker.

India’s crude steel sector has recovered strongly from the pandemic, with output in 2022 up by around +24% from the 2020 low point. It is expected to lead global growth again in calendar 2023 (in percentage terms), assisted by a concerted push on transport infrastructure in a pre–election year. In terms of new tonnes, it will contribute roughly half of the growth produced by China, on an approximate 3–to–1 ratio of percentage growth rates.

Production cuts across the OECD in the second half of calendar 2022 have established a trough for calendar 2023 first half run–rates, with a staggered re–opening anticipated across the year. Downstream demand permitting, we expect North–east Asia and North America to recover roughly half of their calendar 2022 loss across 2023, while Europe is expected to fall short of even that low threshold. By the end of calendar 2024, we expect North America to be running back above calendar 2021 levels, while Europe and North–east Asia, with their greater external exposure and underwhelming domestic growth prospects are anticipated to fall short of reclaiming that benchmark.

The aforementioned cuts reflected significant margin squeeze amidst falling steel prices and firm raw materials costs. In the immediate aftermath of the conflict commencing, according to Platts, benchmark prices in India (ex–tax), Europe, and the US had surpassed US$1000/t, US$1,500/t, and US$1,600/t respectively. It was almost one–way traffic downward between those highs and the end of the calendar year. As of end–December 2022, prices had declined to $667/t, $724/t and $772/t respectively. That reflects a modest bounce from late November/December, as production cuts enabled prices to find a bottom. We have noted that some idled BFs in Europe have already come back on–line, or had their return date announced, with some guarded optimism emerging amidst the European earnings season. The tragic earthquake in Turkey will also have an impact on Pan–European steel balances, with western and northern European mills potentially stepping into any gap created by Turkish production going offline.

Protectionism remains a feature of the ROW industry landscape, with both export and import disincentives in play across the steel value chain, with import barriers persisting despite elevated inflationary concerns.

There is also an emerging theme at the nexus of decarbonisation and protectionism: scrap nationalism. Six months ago we discussed speculation that the EU was contemplating a scrap export ban as a part of a wider approach to the domestic management of “waste”. This is no longer just a rumour.

The environmental committee of the EU parliament has voted to toughen the rules on the export of waste as defined under EU law – which includes scrap metal. Legislation is still pending. Scrap exports to non–OECD countries will be restricted, unless the destination country can demonstrate it has environmental protections in place that are aligned to EU standards.

It is important to remember that while the genesis of this debate in Europe goes back a long way, the move to accelerate action was the stark realisation in developed countries that they had essentially outsourced waste management to China. When China banned waste imports in 2017/18, the West had no plan B. This sparked a flurry of activity – some guilt about sending “dirty” waste products abroad, concerns about carbon emissions leakage, some opportunity identification in the circular economy realm, and a lobbying effort by self–interested parties – notably metal processors and recycling firms. The new waste rules are the outcome of this complex interplay.

Who likes the proposed rules? Metal processors (EU steel mills and non–ferrous operators), who will see their raw material costs lowered by the loosening of the region’s supply–demand balance in scrap markets.

Who dislikes them? (1) Recyclers and traders, who will see their margins reduced by the inability to easily arbitrage across borders. (2) Major steel scrap importers may struggle to meet the environmental criteria, which would undercut their security of supply.

Who perhaps doesn’t have a strong opinion but should? Everyone. We all have a stake in high–quality public policy decision making around the world. Note that the extent of international cooperation and coordination is an important behavioural consideration in any sophisticated 1.5–degree scenario – and the difference between a benevolent global government making these decisions, and a fragmented extreme, can be a delay of several decades in reaching net zero.11

Mandated domestic use of recyclable or recycled material creates an artificial source of friction in the global decarbonisation journey. It would be perverse if Europe, with the financial capability within the system (if not within the balance sheets of the steel industry narrowly defined) to directly pursue zero or near–zero GHG emissions end–state solutions, decided to prioritise its own access to passive abatement levers like scrap feedstock, while leaving lower income regions to adopt what they can afford: which is unlikely to be end–state technology.

Protectionism does not change how much potential scrap is available globally. At the margin though, curbing cross–border trade could impact upon how much metal is collected and recovered in natural surplus regions that impose export controls, as limiting the commercial optionality of traders and recyclers will reduce the incentive to collect. Stranding some portion of potential scrap that could be utilised in the developing world is not good decarbonisation policy. 

As we are fond of saying – both because it is true and also because it serves as a timely reminder and reality check for Eurocentric views – the decarbonisation battle cannot be won in Europe alone, but it can certainly be lost in the developing world. That is particularly true of steel.

That is why we are focussing our Scope 3 research and development partnerships in steelmaking on Asia, where our five MOU partners in the region to date represent around 13½% of reported global steel production, almost 6 percentage points more than EU production combined. Unsurprisingly, their share of global pig iron production is even higher. Looking at our partners via the nations they represent rather than as standalone entities, close to 70% of crude steel production is covered and around 80% of pig iron.

Notwithstanding the above arguments that Asia should be the main point of focus, we are not standing aloof from developments in Europe. Despite its relatively small current and projected production footprint, with its ageing blast furnaces, its ambitious policy regime, vast collective financial resources and heightened societal expectations for its industrial sectors, Europe is likely to be where the first real–world visions of a decarbonised end–state for steel begin to take shape. That is partly why we have added the world’s second largest steelmaker, Arcelor Mittal, with its pan–European operational footprint, as a sixth Scope 3 partner. With the addition of Arcelor Mittal, the proportion of reported global steel production attributable to our Scope 3 research and development partners is expected to increase to around 17%.

Our approach to ranging uncertainty regarding the future pathway for steel decarbonisation remains to blend bottom–up, regional analysis leveraging our deep corporate knowledge of this sector with two other pillars of our proprietary foresight method, which are scenario analysis and framework design. The results have been discussed here and here, as part of our Pathways to Decarbonisation blog series. Where our views in relation to steel differ from others, it is often due to our differentiated regional approach, which is supplemented by the insights we glean as a key cog in both the Asian and European steel value chains.

On the topic of decarbonisation more broadly, our latest research indicates a modest net uplift in our base case for long term steel demand from the combined impacts of:

  • Rising investment in the infrastructure of decarbonisation [+]
  • Lower demand from the fossil energy value chain (e.g., upstream petroleum) [–]
  • Higher capital stock turnover as the lifetimes of equipment and structures are reduced by the harsher physical conditions they are expected to endure based on a range of projected climate change futures in coming decades. [+]
  • Lower growth rates in GDP versus baseline due to the physical impacts of climate change and the imposition of carbon policies [–] 

We detailed this research during the WAIO site visit in October 2022.


Iron ore

In the first half of financial year 2023 iron ore prices (62%, CFR, Argus) traded their narrowest range since the second half of financial 2020. The 62% index ranged between $79/dmt and $120/dmt, averaging around $101/dmt. Half–on–half average prices were –28% lower than the second half of financial 2022. The average lump premium was US$0.13/dmtu in the first half of financial year 2023, exactly half of the average achieved in financial 2022. 

Six months ago, we recounted the surprising decline in Chinese port stocks that occurred over the first half of calendar 2022. The series of developments that led to this unexpected outcome, were: (1) elevated BF utilisation in China despite weak profitability, as scrap shortages and energy issues hindered the EAF fleet (2) lower than expected aggregate seaborne supply from low–cost majors (3) lower than expected aggregate seaborne supply from junior and swing suppliers, including India [export tariffs] and Ukraine [military conflict]. 

These conditions did not feel sustainable, and they were not. Voluntary cuts in BF production emerged very early in the second half of calendar 2022, as loss–making deepened on weak downstream demand and elevated coke prices. That set off a multi–month phase of downward price pressure. Deepening pessimism on housing, the zero–COVID situation and the global economy, plus uncertainty as to how the authorities would pursue the zero–growth mandate for steel in the latter months of the year, all played their part in driving prices down to the lower end of the real–time cost support range, which we estimated was $80–100/t.

Sentiment began to turn from November, as policy U–turns on property developers and zero–COVID saw market participants upgrading their views on the performance of the steel value chain in calendar 2023. In what seems like the blink of an eye, the iron ore price was almost 60% higher in early February 2023 versus its $79/t low, fittingly recorded on Halloween. 

Moving to differentials, the average lump premium (LP) of $0.13/dmtu in the first half of financial 2023 was the lowest since the first half of financial 2021 – which some readers may recall was a phase of “profitless recovery” from the original shock of COVID–19. Fewer mandated restrictions on sintering, rising lump supply, weak overall steel mill profitability and elevated coke prices all impacted on LP dynamics. In the fines space, differentials to the 62% index for the 65% and 58% indexes narrowed across the first half of financial year 2023 (i.e. lower premiums for higher grades, smaller discounts for lower grades), in line with the deterioration in steel margins and the consequent move by mills to procure lower cost raw materials on average. Beyond these fundamental drivers, lower–grade products received additional support when India introduced export tariffs, thereby removing some supply from this suddenly desirable quality bucket. 

The feedback loop between Chinese steel margins and lower–grade differentials is one of the major watch points for benchmark 62% pricing in calendar 2023. 

How so? The swing suppliers who balance the market tend to be lower grade producers. While their traditional cost base changes slowly, their incentive price to continue shipping is not fixed – it fluctuates daily based on two things over which they have little or no control (1) the size of the discount that market participants currently ascribe to their products, and (2) freight netbacks from CFR to FOB, which can be considerable for, say, a Brazilian junior selling into North Asia. At times, freight and differentials can move in the same direction, at speed, and real–time cost support – the level at which the swing producers cease to earn an operating margin – can change very quickly. That is why we tend to identify a range for real–time cost support, rather than providing a single number. 

There was a live illustration of this recursive dynamic operating to the downside just a few months ago, with lower freight and smaller discounts dragging the incentive price of swing producers down to the bottom of the recent range of $80–100/t, with prices ultimately bottoming at $79/t. Earlier in the pandemic, the reverse was true, with elevated steel run–rates in China, buoyant steel margins, elevated freight and large discounts for lower–grade producers combining to lift real–time cost support to the $120–130/t range. In this regard, it is important to note that discounts cover a very wide range, with the potential to blow out to around –40% or more when operating conditions are propitious for steel makers, and freight rates are even more volatile than underlying commodity prices. 

With spot iron ore trading above $120/t CFR in the early part of calendar 2023 with China steel margins still negative, Capesize freight rates near record lows and lower–grade discounts still narrow, the above discussion is far from academic. 

In the medium to longer–term, as described in our steel decarbonisation blogs (episode 2 and episode 3 in our Pathways to Decarbonisation series) higher quality iron ore fines and direct charge materials such as lump are important abatement sources for the BF steel making route during the optimisation phase of our three–stage Steel Decarbonisation Framework. In China of course, the BF–BOF route represents roughly 90% of steel–making capacity, with the average integrated facility being just 11–13 years old. BHP’s South Flank project, which achieved first production in May 2021, will raise the average iron ore grade of our overall portfolio by around 1 percentage point, in addition to increasing the share of lump in our total output from around one–quarter to around one–third. 

Our analysis indicates that the long run price will likely be determined by the all-in cost base of the least competitive seaborne exporters (higher narrow cost, lower value–in–use) in either Australia or Brazil. That assessment is robust to the prospective entry of new supply from West Africa, and China prioritising the accelerated development of its domestic resources. This implies that it will be even more important to create competitive advantage and to grow value through driving exceptional operational performance.


Metallurgical coal

Metallurgical coal prices12 have been volatile over the last six months, but relative to the dramatic circumstances that emerged as the Ukraine conflict got underway, the most recent half felt almost tranquil. In the first half of financial 2023, the PLV index ranged from a low of $188/t FOB Australia to a high of around $321/t, averaging $264/t. Remarkably, that represents a steep decline from the prior half, when the all–time daily record high of $671/t was established, and the average for the entire half exceeded the previous daily price record achieved during the Queensland floods of 2011. That is tantamount to running a full marathon where the constituent 400 metre legs are all faster than world record pace. 

Non–premium Mid–Vol (MV64) has ranged from $167/t to $302/t; PCI has ranged from $181/t to $314/t; and SSCC has ranged from $139/t to $274/t.

Three–quarters of our tonnes reference the PLV FOB index, approximately, with that percentage being higher than twelve months ago due to the divestment of our stake in BMC during the second half of financial year 2022.

The differential between the PLV and MV64 indexes averaged 9% in the first half of financial 2023, the same outcome as the prior half. That is 6 percentage points below the five–year average.

The metallurgical coal market has experienced both feast and famine in the pandemic era, with periods of loss–making for some producers in calendar 2020 and the first half of 2021 having given way to fly–up and then scarcity pricing for much of the time since. Beyond the abrupt volte–faces on the demand side associated with lockdown and re–opening economics around the globe, the industry has also dealt with the presumptive clearing market [China] not accepting products from the major exporter [Australia], a supply side shock in lower–end coals in the wake of the Ukraine conflict, consecutive La Nina phases that hampered production on Australia’s east coast, and a generalised energy system shock that pulled already scarce metallurgical coals into power generation. 

It is not just benchmark pricing that has swung wildly: spreads have also experienced unheard of volatility. The spread between China CFR equivalent and PLV FOB pricing averaged +$4/t in the four financial years prior to the pandemic (FY17–20). In financial 2022, the differential ranged from +$218/t to –$245/t and from +$140/t to –$21/t in the first half of financial 2023. Oh, and despite trading at elevated absolute levels, PLV FOB pricing somehow managed to spend much of the post–Ukraine period trading below FOB energy coal (Newcastle 6000kcal), and at times PLV was trading at a discount to lower–quality met coals. These developments were beyond extraordinary. In the coal trade, fact was certainly stranger than fiction in calendar 2022. 

We have analysed the impact of trade distortions in detail previously. That discussion can be reviewed here. With the China–Australia trade apparently edging towards a resumption, the obvious question now is how will trade flows adjust if this distortion is a thing of the past?

Will participants swiftly revert to the kind of trade flows that pertained prior to the ban, when Australian exports of met coal to China averaged 37–40 Mtpa? As of today, a swift normalisation to pre–ban norms is much less likely than a tentative reset in calendar 2023. While in the medium–term trade flows are likely to converge on the intersection of logistical efficiency and optimised customer blending preferences, it is unclear exactly what the path to the medium–term will look like.

Some relevant considerations for assessing how the bilateral trade and broader industry may evolve include:

  1. Already strong producer/end–user relationships in the Australian FOB market became even stronger as trade flows rebalanced swiftly when access to the Chinese market was lost. Long–term contract volumes committed to the FOB market will be honoured, and the long–term contract share of total FOB trade has increased. Equally, with the return of some bilateral trade between Australia and China, that bodes well for liquidity in the spot market and for robust price formation driven by physical fundamentals. 
  2. Mongolian and Russian sellers who have no other major competitive outlet than to sell to China (Mongolia due to geographic reality, Russia due to sanctions/self–sanctioning by alternative buyers) have significantly increased their exports into China. 57 Mt of China’s 74 Mt total imports in calendar 2022 (77%) came from these two sources, vs 33 Mt of 81 Mt in calendar 2020 (41%). Those volumes are likely to be sticky (and attractively priced for profit–challenged Chinese steel mills) and could grow as the end of zero–COVID eases logistical constraints at Mongolia truck border crossings. 
  3. Also in China, domestic capacity additions have reduced import requirements, with the discipline of the SSR period having been set aside somewhat under the record prices seen in calendar 2022. (More details below).
  4. While loss–making prevails, it reduces the incentive for the median Chinese steel mill to compete aggressively to divert high quality Australian supply from the FOB market. Chinese BF–BOF steel margins are still negative early in calendar 2023, so the productivity and emissions benefits of premium coals are not as sought after by steel mills at this exact juncture as they would/will be under regular operating conditions (although there will be exceptions to this general observation among the largest, most sophisticated coastal mills). As we argue below, we expect the time will come when traditional value–in–use dynamics reassert under more normal margin conditions, but it does not feel like this is imminent. 
  5. India has moved into the #1 seaborne import position and its appetite is growing rapidly, versus steadier demand in the other major import regions. That is a relevant consideration for where the seaborne trade might clear in the medium–term. 

The key hypothetical argument in favour of a swifter re–rebalancing would be a major wedge between Chinese and ROW pig iron production growth developing, as we saw in 2020. That though seems unlikely while the Indian economy (the largest seaborne importer of met coal, at ~70 Mt) is looking firm, but the potential for Europe (~45 Mt) and North–east Asia (~96 Mt) to be weaker than expected is certainly still there.

Moving on to the supply side fundamentals, overall seaborne supply was just 290 mt in calendar 2022, –1.7% YoY and –22 Mt from calendar 2019 levels. Adding changes in Mongolian landborne exports to the mix, total supply is –30Mt versus 2019, a –9% decline. Note that global pig iron production has fallen by –1.1% on the same basis. That comparison clearly illustrates that one major driver of tight metallurgical coal markets has been the difficult operating conditions the industry has experienced in the pandemic era. 

Looking at the performance of the major regions, both in 2022 itself and versus 2019, it becomes clear that operational challenges have been multi–regional and enduring. Australian shipments experienced another difficult year in calendar 2022, with supply to the seaborne trade down –4.2% to 160 Mt. That is the third consecutive year of YoY decline for Australia (matching the string of three consecutive La Nina weather patterns) with 2022 exports down –20 Mt from the calendar 2019 level. North American exporters saw flat YoY tonnages in 2022, but like Australia, volumes for Canada (–8 Mt vs 2019) and the US (–7 Mt vs 2019) are still well short of the pre–pandemic baseline. Mongolia has been logistics constrained through the COVID–19 era, but it was able to boost shipments +12 Mt in calendar 2022 from the 2021 nadir, although the 2022 flow remains –24% below 2019 levels. Russian exports have increased marginally since 2019 (+5 Mt), with their reliance on China as a destination market (from one–fifth of exports in 2019 to three–quarters in 2022) the major story.

In China, run–of–mine hard coking coal capacity has been allowed to lift from the 2019 trough, the level of which was dictated by supply–side reform mandates. Notably, it appears that the recent increases have raised capacity above 2015 levels. The capacity increases (and some local regulatory forbearance that has increased effective capacity) have enabled hard coking coal production in 2022 to edge up +1% YoY despite operational challenges under zero–COVID. Production in 2022 was around +4% higher than 2019 levels (+18 Mt). The PLV proportion of that though has been relatively flat between 25 Mt and 28 Mt in the 2019–2022 period. 

Longer term, we argue that a policy focus on safety, environmental considerations, and financial sustainability in Chinese coal mining, in addition to the intent to embark upon a decarbonisation path for steel making, should highlight the competitive value of using high quality Australian coals in China’s world class fleet of coastal integrated mills. As we argued here, China’s steel industry is still in the optimisation phase of its decarbonisation journey, in which higher quality raw materials make a clear difference to the energy and emissions intensity of the BF–BOF route, which accounts for around 90% of Chinese and around 70% of global crude steel production. 

In coming years, most committed and prospective new metallurgical coal supply is expected to be mid quality or lower, while industry intelligence implies that some mature assets are drifting down the quality spectrum as they age. Additionally, the regulatory environment has become less conducive to long–life capital investment in the world’s premier PLV basin – Queensland. The relative supply equation underscores that a durable scarcity premium for true PLV coals is a reasonable starting point for considering medium terms trends in the industry. 

The advantages of the highest quality coking coals with respect to GHG emissions are an additional factor supporting this overarching industry theme: an advantage that will be increasingly apparent if carbon pricing becomes more pervasive. 

The flip side of the burgeoning advantages of PLV, as derived from the fundamentals discussed above, is that the non–PLV pool of the industry could face headwinds for an extended period in the disrupted post COVID–19 world. This could, however, be obscured for a time while FSU supply uncertainty lingers. 

On the topic of technological disruption, our analysis suggests that blast furnace iron making, which depends on coke made from metallurgical coal, is unlikely to be displaced at scale by emergent technologies this half century. The argument hinges partly on the sheer size of the existing stock of long–lived BF–BOF capacity (70% of global capacity today, average fleet age13 of just 11–13 years in China – the major producer – and around 18 years in India – the key growth vector). It also highlights the lack of cost competitiveness and technological readiness (or both) that is expected to inhibit a wide adoption of potentially promising alternative iron and steel making routes, or high–cost abatement levers such as hydrogen iron making and carbon capture and storage, for a couple of decades at least in the developing world. Notwithstanding the sweet spot in profitability in calendar 2021 under record pricing in many regions, steelmaking is typically a low margin industry where every cent on the cost line counts. 

We certainly acknowledge that (a) PCI could be partially displaced in the BF at some point by a lower carbon fuel, and (b) the well–established electric arc furnace (EAF) technology, charged with scrap and without any need for metallurgical coal, will be a stern competitor for the BF at scale to the extent that local scrap availability allows. In a decarbonising world, EAFs with reliable scrap supply running on renewable power should be very competitive. We assess that the emerging technologies that are expected to feature in a low carbon end–state for the industry, such as green hydrogen enabled DRI–EAF and DRI–ESF, are some decades away from being deployed at scale. Accordingly, we expect that the industry will need to be a purchaser of carbon offsets (as required to meet regulatory or voluntary commitments) for a considerable period of time even as it positions itself to pursue long run carbon neutrality.

Information on our six Scope 3 MOUs with China’s China Baowu and HBIS, Japan’s JFE Steel, South Korea’s POSCO, India’s Tata Steel and European multinational ArcelorMittal are available elsewhere on our website.



Copper prices ranged from $7,000/t to $8,537/t ($3.18/lb to $3.87/lb) over the first half of the 2023 financial year, averaging $7,871/t ($3.57/lb).14 The average was around –19% lower than in the prior half and –17% versus the equivalent half of financial year 2022.

Zooming in on the price path in the first half of financial 2023, the period opened with copper caught up in a major downdraft dating back to the middle of the June quarter. As markets grappled with the joint implications of China’s strict adherence to zero–COVID, ongoing weakness in Chinese housing, soaring inflation outside China, a burgeoning energy crisis in Europe and the US Fed leading the global rate hiking stampede, there were two obvious decisions to take: (1) buy the US dollar and (2) seek refuge away from growth–sensitive assets like exchange traded industrial commodities. 

The trough for the May–July copper price move was $7000/t ($3.18/lb), which printed on the ides of July. That was –35% below the record high of $10,730/t ($4.87/lb) set in early March–2022, prior the world being gripped by recession fears. From mid–July, a narrow range trade centred on $7,700/t formed through to October, with a few tests towards $7300/t and an occasional unconvincing pop above $8000/t. The range held firm until November, when copper broke out to the upside. The shift came as the US dollar started edging off its highs as a series of positive inflation surprises came through, and as China executed its dual U–turns on zero–COVID and property developers. A new range of $8000/t to $8500 was established through to year–end, with the high for the period reached in mid–December, at $8537/t ($3.87/t). Prices took another step higher in the new calendar year, with copper roaring past the $9000/t and $4/lb psychological thresholds amidst the general updraft that lifted all growth–sensitive assets.

Both industry specific fundamental factors and swings in broader macro sentiment will remain influential factors in price formation. Indeed, the contest between the 3–Rs of reality / re–opening / relief outlined in the preamble to this blog is arguably most applicable to copper. 

Turning to Chinese demand first of all, the end–use picture was patchy. Construction, machinery, air–conditioners and refrigerators all saw demand fall from calendar 2021 levels, while electronics was essentially flat. This was offset by pronounced strength in power infrastructure and transport, both of which benefitted directly from China’s +70% uplift in energy transition investment (accordingly to the Bloomberg NEF definition) across calendar 2022. This mixed performance still allowed copper to out–perform steel by a wide margin for a second consecutive year, (+1.5% semis, +0.5% end–use, versus around –2% for steel. In calendar 2021, copper semis expanded 5.1% while steel declined –2.8%). 

Construction demand has been weak, as detailed at length in the China economy chapter. More specifically for copper, housing completions vastly under–performed relative to expectations at the outset of calendar 2022. The consensus view on housing at that time – which we agreed with – was that completions would be quite strong over the year but starts were likely to decline. A –15% decline in completions was not on any credible radar, but that is what occurred as projects ground to a halt for want of working capital. 

The positive stories for Chinese copper use in calendar 2022 were power infrastructure and transport. The imprint of decarbonisation in these sectors is clear, with wind and solar accounting for 63% of installed power capacity in the year (solar +60% YoY), while NEV sales grew 96%. 

Within the power infrastructure segment, grid spending (typically four–fifths of the segment) increased +2% YoY and power generation (one–fifth) increased +23% YoY. Wind under–performed solar this year as subsidies for the former expired, although exports still grew strongly. Expectations for calendar 2023 though are high based on a strong pipeline of projects (which are split roughly 80:20 between onshore and offshore – the latter being hugely copper intensive). In the more prosaic area of traditional grid outlays, State Grid has set their nominal budget for calendar 2023 at 520 billion yuan, +4% YoY. 

In the ROW, demand contracted mildly in the second half of calendar 2022, following modest growth in the first. Overall, ROW crept 0.3% higher YoY, with contracting demand in the major OECD regions offset by a steep rebound in India. Four of the five regions into which we categorise the ex–China copper world have now reclaimed pre–pandemic demand levels – with North–east Asia being the exception. For calendar 2023, we anticipate further declines in North America and Europe, a flat outcome for North–east Asia and high single digit growth from India, which rolls up to a slight decline for ROW overall. 

On the supply side of the industry, copper concentrate supply has gone from “extremely tight” 6 quarters ago to “regularly tight” at the outset of calendar 2022 to “are we balanced or in surplus?” in the second half. The TCRC benchmark for 2023 settled at $88/dmt & US 8¢/lb in November 2022, well up on the $65/dmt & US 6¢/lb, agreed in December 2021 for 2022. We note that spot TCRCs have traded below the 88/8 benchmark in calendar 2023 to date, but they remain comfortably above the prior year’s settlement. Even so, smelter profitability has eased, with acid by–product revenues coming off sharply from their peak in the June quarter of 2022.

As of Jan–2023 (i.e. with the benefit of some but not all December quarter operational reviews), Wood Mackenzie had so far identified disruptions equivalent to around 5% of initial production expectations in calendar 2022. At the same point a year ago, disruptions were running at 5.1%. Note that 5% is the long run average for this metric: and that is our default assumption at the outset of any year. However, calendar 2023 is not going to be a normal year in terms of interpreting disruption factors. That is because several major copper producers lowered their published production expectations for calendar 2023 during 2022 – and on our estimates these downward revisions are worth ~3.1 percentage points of pre–disruption primary production (~3.4% post disruption) versus what was guided for 2023 at the outset of 2022. Therefore, to hit 5% in calendar 2023 versus year–opening guidance would be the operational equivalent of ~8–8½% if guidance had not been pre-emptively lowered. 

Turning to the outlook, a long–awaited cluster of projects (including in Peru, Chile, central Africa, and Mongolia) have either recently come on–line or are expected to do so within the 2023–2024 window. While there have been a range of problems encountered delivering and ramping–up projects through the pandemic, when the dust settles, we expect mine supply will have lifted by around +12% from calendar 2021 levels by the end of calendar 2024, roughly doubling the +7% increase in refined demand expected over the same period. Rising primary supply is also expected to coincide with an increase in the availability of copper scrap. The scrap uptrend is supported by the increasing size of the end–of–life pool in China, elevated prices, and fewer physical constraints from social distancing. Global secondary supply (3.5 Mt in a 24.8 Mt refined industry in calendar 2022) is expected to be +9% higher in calendar 2024 than in 2021.15 

The industry must digest the entry of this supply over the next two years, at a time when demand in the developed world is expected to be at a low ebb: which puts a major onus on China. Instinctively, at a high level this feels like the supply–demand balance is more likely to be in surplus than not under these conditions.

Bottom–up, we reach the same conclusion. 

Once this phase of the decade is transited, a durable inducement pricing regime is expected to emerge in the final third of the 2020s. Holistically speaking, a modest build–up of inventories in this decade’s middle third would provide a healthy buffer in advance of the pronounced deficits we envisage in the copper industry’s medium–term future. A “take–off” of demand from copper–intensive easier–to–abate sectors (renewable power generation, the electrification of light duty transport, and the infrastructure that supports them both) is expected to be a key feature of global industry dynamics as the final third of the 2020s arrives: if not earlier. As discussed above, rapid growth in renewable power generation and EVs (electric vehicles) in China are already making a material contribution to growth, at the margin. As the world’s other industrial giants seek to make inroads into China’s significant capacity lead across multiple decarbonisation hardware segments, copper is well positioned to thrive on that competition. 

Looking even further out, long–term demand from traditional end–uses is expected to be solid, while broad exposure to the electrification mega–trend offers attractive upside. Grade decline, resource depletion, water constraints, the increased depth and complexity of known development options and a scarcity of high–quality future development opportunities are likely to result in the higher prices needed to attract sufficient investment to ultimately balance the market. 

On this latter point, it is notable that while there has been some activity in the project space, the industry–wide response has been timid when you consider both the elevated prices we have observed and copper’s future facing halo effect. That underscores the idea that the collective option set of the industry is constrained. It may also reflect policy and political uncertainty, with both Chile and Peru (together about two–fifths of world mine supply prior to the pandemic and one–third of reserves16) presenting a fluid regulatory and civil society picture to would–be explorers, project developers and asset owners. Indeed, the joint share of global mine supply contributed by the Andean powers has fallen –5 percentage points to ~35% since the pandemic began. 

In terms of hard numbers, our internal estimates show that in a plausible upside case for demand, the cumulative industry wide capex bill out to 2030 (which will be here before we know it) could reach one–quarter of a trillion dollars. 

Yet according to data assembled by S&P Global Market Intelligence, capex for copper production at miners is expected to decline in real terms between calendar 2022 and calendar 2024, (noting that inflation leads to some uplift in nominal terms), which would put real capex at just 54% of the super–cycle peak. Digging a little deeper, if we distinguish between sustaining and development capital, spending was apportioned 70:30 in calendar 2022 (sustaining being the larger figure). The average share going back to 1991 is a more balanced 59:41. In calendar 2024? 77:23. The projection for 2026? 91:9. That final figure should not be taken as fixed, as the industry can do something about the development pipeline in that year if swift action were to be taken, but time is running extremely short if a capex air–pocket is to be avoided at precisely the moment when the industry ought to be ramping up its development efforts. 

It is quite apparent that there remains a very substantial disconnect between what needs to be done at the macro level to support both rising traditional demand and the exponential lift in metal needs implied by the energy transition, and what is occurring at a micro level.

Further to the macro–micro disjuncture, we have frequently highlighted the grade decline (around –2 Mtpa by 2030) and resource depletion headwinds the sector is facing this decade. Left unchecked, resource depletion could potentially remove an additional –1½ to –2¼ Mt of production per annum by 2030.17 However, recent conditions are conducive to lifetime extensions at mature high–cost mines that would be considering closure at mid–cycle (historical) prices, which points to something closer to the lower end of that range being the likely outcome. All else equal, these trends naturally tilt the industry wide capex outlay towards more sustaining capital. We need an abundance of both sustaining capital to mitigate the geological reality of existing operations, and development capital to nurture the next generation of copper assets – and by abundance, we mean something in the vicinity of a quarter of a trillion dollars or so this decade, as referred above. 

In closing for this chapter, we reiterate our view that the price setting marginal tonne a decade hence will come from either a lower grade brownfield expansion in a lower risk jurisdiction, or a higher grade greenfield in a higher risk jurisdiction. Neither source of metal is likely to come cheaply. 



LME nickel prices ranged from $19,100/t to $30,425/t over the first half of financial year 2023, averaging $23,652/t. The average is –15% lower than the prior half. The shadow cast by developments that emerged in the prior half was long. The two principal factors here were the ongoing impact on LME market functioning in the wake of the epic short squeeze of March–2022, and the inflection point for demand expectations and investor sentiment that occurred in the June quarter. Due to the latter factor, sentiment was at a low ebb as financial year 2023 opened, but the first half closed with an air of something not unlike euphoria pervading. In between, an uneasy range trade developed, with LME traders looking warily over their shoulders, with the wafer–thin inventory position and low levels of liquidity being fertile ground for potential pricing discontinuities.  

We estimate that the refined nickel balance was in a large deficit in calendar 2021, with a steep associated rundown in visible stocks. This flipped to an aggregate surplus approaching +300 kt in 2022. However, this did not manifest in LME pricing to any great extent, as the Class–I sub–balance remained tight, keeping exchange stocks at very low levels. 

It was the significantly larger Class–II supply, and the rapidly growing intermediates space, where the surplus burgeoned. The excess of nickel units outside of Class–I showed up clearly in the Asian theatre, where payables versus LME equivalents plunged. There were three major dynamics at play here. The first was that demand for stainless steel (69% of nickel first–use in calendar 2021) slowed abruptly. Second, there was double–digit growth in Class–II production (with Indonesian nickel–pig–iron [NPI] ramping up an additional 31% YoY). The third was stunning growth in intermediates from Indonesia: NPI–to–matte production (~75% nickel contained) increased from 2 kt in calendar 2021 to 124 kt in 2022, while mixed–hydroxide precipitate (MHP: 30–45% nickel contained) rose from 16 kt in 2021 to 113 kt in 2022. This caught potential users of this material on the Chinese Mainland on the hop – there was not enough capacity in place to absorb this discontinuous growth.

The surge in intermediates supply is the direct result of upstream innovation to meet the needs of the rapidly expanding battery value chain. It is also highlighting that reform of the LME’s metal delivery rules is long overdue. The LME short squeeze episode highlighted vulnerabilities that had been building for years. In 2010, 57% of nickel production was eligible for LME delivery. That figure is now below 30% and on current supply projections, it will only fall further. Uncertainty over the long–term status of Russian Class–I metal should self–sanctioning increase (a segment in which Russia is the single largest producer), adds to the urgency to modernise the norms of the exchange. 

For now, the reality is that the global price discovery mechanism for this critical building block of the energy transition is not functioning well. The basic tension is that the exchange where the benchmark price is set has become more removed from what is happening in the physical clearing market – China. An example of this is the collapse of metal dissolution economics in China in a world where Class–I supply is tight but intermediate feedstocks for nickel sulphate (NiSO4) are over–supplied. 

Turning to the outlook for calendar 2023, we anticipate another surplus in the aggregate, but it is expected to narrow from the calendar 2022 level. Solid demand from stainless steel and another steep increase in EV battery requirements are anticipated. Together with the first single–digit increment in Class–II supply this decade (2020/21/22 were +10%/10%/12% respectively), that adds up to a surplus in the vicinity of 200 kt. The key uncertainties in the short–term are: the global growth outlook; the EV sales outlook; and the possibility of innovations in the Sino–Indonesian industrial eco–system that finds a way to economically convert excess non–Class–I over–supply into refined metal.  

Turning to the longer term, we believe that nickel will be a substantial beneficiary of the global electrification mega–trend and that nickel sulphides will be particularly attractive. This is due to their relatively lower cost of production of battery–suitable class–1 nickel than for laterites, as well as the favourable position of integrated sulphide operations on the GHG emissions intensity curve. 

There are five key questions for the nickel market in the longer run.18 The first is how fast will electric vehicles (EVs) penetrate the auto fleet? The second is what mix of battery chemistries will power those vehicles? The third is what will be the “steady state” marginal cost of converting the abundant global endowment of laterite ores to nickel products suitable for use in battery manufacturing? The fourth question is related to the third: how will the cost curve evolve in the face of ever–increasing consumer and regulatory demands for transparency with respect to the sustainability of upstream activity? The fifth is how will the trade flow of nickel units be influenced by policy and geopolitics?

Our views on the first two questions are both well–known and uncontroversial: EVs are taking off, and ternary nickel–rich chemistries are expected to be the leading technology that powers them. Leading of course does not mean that this technology will monopolise all applications, and we have previous reported that we revised the long–run share of nickel–rich batteries lower in our most recent range analysis. LFP (Lithium–iron–phosphate) has made considerable inroads in recent times, particularly in China, where affordability concerns are paramount among EV buyers and range anxiety is somewhat less pronounced than in the West. Our view is that LFP will continue to play an important role at the low end of the cost and performance spectrum, especially in the developing world. Other chemistries (for example those that thrift on cobalt and/or accommodate more manganese) are also likely to find their niche as EV penetration broadens across all vehicle categories. 

There has been a lot of information flow on the third and fourth questions, with the frenetic pace of capacity additions in Indonesia offering multiple data points. We have observed that capital–intensity estimates from Sino–invested projects in Indonesia are consistently lower than those with Western sponsors, such as those of Eramet–BASF and Nickel Industries. On the cost side, an increasing recognition among nickel customers and the wider investor community of the broad environmental impact of Indonesian operations (for example land–use change, biodiversity, and tailings management)19, in addition to the highly carbon intensive nature of the local (frequently captive) electricity supply, should – rightly – add to the cost base of supply from this region in due course. We range the quantum of this cost uplift in our long run scenario analysis. Western media reports of violent worker protests in the wake of serious safety incidents at an Indonesian operation are likely to increase levels of ESG scrutiny.

On the fifth point, calendar 2022 will likely be memorialised as the year that the US passed the Inflation Reduction Act (IRA). The over–arching design of the IRA neatly encapsulates the intersecting themes of the decarbonisation imperative, the desire for energy security, supply chain resilience, economic nationalism, and great power rivalry. The practical import of the legislation for nickel and other battery raw materials is that there are significant inducements for automotive OEMs to dramatically reconstitute the geographic make–up of their critical mineral supply chains. 

The principal carrot is that EV manufacturers will qualify for significant per vehicle subsidies if they meet the IRA’s heavily prescribed local content (by value) requirements – which for critical minerals start at 40% and then escalates +10 percentage points per year. What separates the IRA’s design from standard local content requirements is that it explicitly incorporates the concept of “friend–shoring” – whereby existing FTA partners qualify as providers of local content. Think Australian or Canadian nickel, or Australian and Chilean lithium. While the practical interpretation with respect to critical minerals value chains is not precisely clear at this stage, and whether there will be pragmatic concessions that (for instance) draw Indonesian origin nickel into the eligible mix will be important, we expect the direct, indirect and unintended consequences of the IRA will resonate for a considerable time to come.   



The tragic events in Ukraine have left an indelible imprint on the global commodity markets. The immediate impact on potash was larger than most – and the reverberations of the history–shaping events we are living through will certainly continue for years, and plausibly, perhaps decades. 

The good news for global food security is that the worse–case scenarios whereby a physical shortage of fertilisers materially held back crop production did not occur. Fertiliser prices have since receded to levels where farmer affordability is looking more reasonable again. Worldwide Google searches for “food crisis” peaked in May–2022 at a level 30% below the search traffic seen amidst the global food crisis of 2007/08 (something we touched on here). As of February–2023, search traffic has halved since the May–2022 peak. 

Looking at price developments by region, the timing and speed of descent from the peak has varied greatly. According to assessments in CRU’s Fertilizer Week, the price of gMOP20 into Brazil opened the second half of calendar year 2022 at $1,025/t CFR and closed the year at $515/t. gMOP into the United States (at NOLA), which initially led the global rally before ceding that place to Brazil, opened the second half of calendar year 2022 at $813/t FOB Barge, and closed the year at $527/t. Spot prices for sMOP in South–East Asia opened the second half of calendar year 2022 at $938/t CFR, but by calendar year end were sitting at $540/t. Annual contract prices with China and India were set at $590/t CFR in February–2022, and they held through the period. Expectations for calendar 2023 are between $460/t and $480/t. 

Realised prices for producers tend to reflect developments in prompt benchmark pricing with a lag that is partly dependent on the perpetual dance between prompt and fixed price contract markets. During the fly–up phase, a producer with higher gMOP exposure in the Americas enjoyed vastly superior pricing to a producer geared more towards sMOP under annual contract into Asia. As the scarcity prices rolled over and began to submit to gravity, they converged quite swiftly on the contract prices. In early calendar 2023, each of the prompt markets was trading below the $590/t contract price threshold. 

We estimate that approximate realised prices for Canadian producers (FOB Vancouver equivalent) as of mid–January 2023, were just short of $490/t. The peak was around $780/t, achieved in the months immediately following the invasion.

Turning to the major consumption regions, Brazil, the most reliable growth destination in recent years, recorded an import volume decline of –8% YoY in calendar 2022. Six months ago we flagged that the strength of Brazilian imports in the aftermath of the Ukraine conflict had a non–commercial feel to it, especially in the context of declining affordability. Our exact words were “It seems likely that some of the growth in Brazilian imports in the last two quarters was purely precautionary as a hedge against a sudden stop in the availability of FSU product.” When the sudden stop never came (for Russian product at least), the Brazilian value chain found itself awash with inventories, with storage at full capacity. Demand accordingly dried up, and in the thin liquidity prices began an inexorable descent. With CFR Brazil now roughly half of its peak level, soybean MOP affordability is back close to long–run average. That normalisation, and a rundown in stocks post the second (Safrinha) corn planting, portends a return to more normal buying behaviour across the year in calendar 2023. 

The US took the opposite approach to their Brazilian competitors. Rather than stocking up, they backed right off and never really returned in scale. Shipments were down by –26% YoY in calendar 2022. US corn MOP affordability is now better than average, and farmers who took the risk on a “potash holiday” last year for economic reasons should be back in the market at some point this year.  

Imports into China (+4% YoY calendar 2022) and India (–14% YoY Jan–Nov) were mixed. With domestic production weak, and imports not flowing under stale contract pricing, the Chinese government released some of its strategic reserve late in calendar 2021. Releases continued throughout 2022 despite an uplift in domestic production. Uniquely among the major importing regions, China saw the share of its imports from Belarus hold steady at typical levels in calendar 2022.

We do not have visibility of the terms under which Russian and Belarusian exports made their way to China in calendar 2022, but it would be a surprise if they were not preferential to the buyer, especially for otherwise stranded Belarusian product. 

For India, the weak –14% YoY outcome was partly a function of supply availability: there were no imports from the FSU recorded after May. India and Belarus had been coming closer together in the years leading up to the sanctions, which was illustrated by the signing of what were widely seen as below–market contracts (from the producer perspective). Belarus provided 31% of India’s imports in calendar 2021, versus just 5% for Russia. India was thus in a more difficult position than most when Belarus lost port access in Lithuania – and India is presumably as eager as anyone to see Belarus establish a sustainable port solution. South–east Asian imports have also declined by –14% YoY, with the full year now estimated to reach 6.5 Mt. 

Getting away from temporary adjustments in trade flows and logistical issues, how will the new geopolitics of the FSU impact upon the potash industry in the longer run? The most honest answer is that it is too early to tell. The secondary answer is that at a minimum it is reasonable to expect a delay of some years from the original timetable for new mines in the FSU. 

The careful pre–Ukraine calculus that helped motivate our Jansen stage 1 decision was partly based on a ~5 Mt FSU project pipeline in the 2020s. With obvious risks pertaining to both the timing and ultimate delivery of those projects now, our position is under dynamic review. 

A material delay or non–arrival of a portion of these tonnes creates either an earlier balance point for the market, or a potential reshuffling of the theoretical inducement queue, with non–FSU latent capacity released, non–FSU projects coming forward and FSU projects moving backward.21 Or some combination of these options whereby some of the space vacated by the FSU is captured elsewhere, but perhaps not to the point where it prevents the balance point being achieved sooner than previously expected.

It is important to note here that this would not change the real long–term price we have in mind – but it could alter the timing by which it emerges as a durable trend. There are many, many possible permutations here, and against this backdrop it is strategically prudent for us to accelerate studies of our own capital–efficient organic options beyond Jansen Stage 1, as we have stated in other fora. 

Beyond the balance point, with the market very likely to continue expanding in the following decades, our views on the most likely operating environment for the industry in the 2030s and beyond – an extension of what we have dubbed the “4th wave” of the potash industry – is a durable inducement pricing regime centred on solution mining in the Canadian basin. Accordingly, Canadian greenfield solution mines, which tend to have higher opex, require more sustaining capex and consume more energy and water than conventional mines, have been expected to set the industry’s long run trend price. We estimate that a price in the high $300/t to low $400/t range would be required to incentivise a material portion of Canada’s solution mining “supply bench” into production. That is somewhat higher than our estimate at the time of the Jansen stage 1 decision.

Higher carbon pricing should amplify the operating cost advantages of conventional mining vis–à–vis the solution mining method, steepening the operating and inducement cost curves. And depending on just how high the carbon price goes, there is a threshold above which the solution mining bench could lose out to a set of higher–cost conventional operations spread out around the world. In this scenario, rather than having a deep bench of archetype projects setting LRMC for the industry, the shoulder of the cost curve could eventually look more like copper’s, where greenfield projects jockey for position with ageing, and/or lower–grade and/or sub–scale assets between the 90th and 100th percentile. 

Longer–term, we see potash as a future facing commodity with attractive fundamentals. Demand for potash stands to benefit from the intersection of global mega–trends: rising population, changing diets and the need for the sustainable intensification of agriculture. 

That latter point includes both the need to improve yields on existing land under cultivation, in the face of depleted native soil fertility, but to also begin factoring in the long run land–use implications of large–scale biofuel production, giga–industrial scale renewables and nature–based solutions to climate change. To be clear though, the impact of deep decarbonisation on potash demand is best characterised as attractive upside on top of an already compelling demand case: not a case in itself. 

Something else that attracts us to conventional potash mining and processing is that it has the lowest upstream environmental footprint among the major fertiliser nutrients, and beyond the mine gate potash does not generate some of the negative environment impacts associated with excessive application of nitrogen and, to a lesser extent, phosphorus. The major issues here are leaching into and polluting waterways and the release of GHGs in the application process. Excess nitrogen and phosphorus flows to the biosphere and oceans have been identified as critical “planetary boundary” parameters.22


Inputs and inflation trends

Six months ago, our core message on the inflation front was that we were sensing emerging differentiation between manufacturing and logistics, on the one hand, and labour and energy on the other. The first two categories were moving into the “past the worst” camp. Labour and energy, especially power, remained pressing issues where it was unclear if conditions might yet deteriorate further. Europe’s energy crisis and Australia’s east coast power crisis were cases in point. 

Fast forward to today, and it is clear that our instincts on manufacturing and logistics served us well. Bottlenecks in global logistics, non–energy industrial products and downstream manufacturing have eased noticeably, in part due to genuine efficiency improvement, but also due to a marked reduction in new order flow allowing backlogs to be cleared. If you slow the industrial sector of the developed world down to the point where it is balanced on the precipice of a recession, you can take a lot of pressure off physical supply chains.

Operational labour markets justified the concerns we expressed, with worker availability very tight, and wage pressure coming through. 

As risks with respect to energy costs are now balanced, rather than skewed to the upside, it is the state of labour markets that is the most pressing forward looking inflationary concern for calendar 2023. 

The emerging nuance in this regard is that labour supply conditions are improved from where they were 12 or even 6 months ago – but from a unit labour cost perspective, the pressure remains high. 

The standard disclaimer on realised costs versus prompt prices applies: “The lag effect of inflationary pressures is expected to remain a challenge in the 2024 financial year.” 


Six months ago we stated that: “Many commodity–linked uncontrollable costs have moved noticeably higher, in some cases to record highs.” The good news is that six months later, we are comfortable stating that inflation rates for the majority of non–labour cost exposures seem to have passed their peaks. The bad news is that in absolute terms they remain considerably higher than mid–cycle norms: and that extended lags will delay the positive impact on our realised costs. 

Turning to the recent history of the maritime bulk freight market, the key C5 WA–China route averaged $9.0/t in the first half of financial year 2023 down –16% from the prior half. Lower port congestion has increased the effective supply of Capesize tonnage, and lowered demurrage. Bulker port congestion normalised in the second half of calendar 2022. Another year of lower–than–expected tonne–kilometre on the key C3 route (Brazil–China) weighed on the overall Capesize market.

In the medium term, we anticipate that rates may rise, with very modest growth in the fleet after a period of weak orders intersecting with an expected lift in bulk volumes. Regulatory shifts are also likely to influence industry evolution in coming years, with the IMO introducing two decarbonisation metrics in calendar 2023: the Energy Efficiency Existing Ship Index (EEXI) and the Carbon Intensity Indicator (CII).23  

Benchmark indices for ammonium nitrate (AN) – a proxy for explosives costs we estimate as a weighted average of inputs – declined –3% in the first half of the 2023 financial year in Western Australia and –4% in Chile, while edging up +1% in eastern Australia. These small changes come on top of very large increases in the prior half and across financial 2022 as a result of disruptions to supply and steeply escalating natural gas feedstock costs. We saw considerable variation by region in financial 2022, ranging from +23% YoY in eastern Australia to +89% YoY in Chile. Reduced gas feedstock prices over the unexpectedly warm European winter have taken some pressure off the ammonia industry at the time of writing.

Earth–moving tyre raw material costs (weighted) declined by –4.4% in the first half of financial 2023 versus the prior half. Natural rubber has the highest weight in our index, and it declined by –25%, taking prices back to pre–pandemic levels. Modest increases in steel and petroleum derived inputs explain the remainder. While this category has traditionally contracted with a fixed portion of non–raw material costs, we have noted an increasing frequency of vendor attempts to alter this fixed element via surcharges.

Sulphuric acid prices for Chilean end–users, sourced from Argus, fell sharply in the first half of financial 2023, as North Asian FOB prices collapsed on weak demand from the phosphate and industrial sectors. We presaged that development in these pages six months ago: “For most of the financial year 2022, the global sulphuric acid market has been characterised by tight supply availability, a broad–based demand uplift from fertilisers, metals, and industrial markets, higher sulphur feedstock costs and limited availability of vessels. However, in line with the global industrial slowdown, the non–freight factors have shown signs of unravelling recently, which could see FOB prices move lower in the first half of financial 2023.” CFR Chile pricing ranged from $127/t to $272/t over the first half of the 2023 financial year, averaging $167/t. That is down from $263/t in the prior half. Point–to–point over the half, Japan–Korea FOB prices declined –87% to around $18/t, while ocean freight rates have increased +6%. Annual CFR Chile contracts for calendar 2023 have reportedly settled around $143–148/t. 

Power prices were crisis–prone for much of calendar 2022. For a time, our main operating jurisdictions saw less dramatic price changes than, say, Europe, but the forces unleashed by the Ukraine conflict, unfavourable weather (including floods and early onset of winter in Australia and poor hydrology impacting hydro generation in Chile) and unplanned outages led to steep price appreciation in both Australia and Chile, at times. Early in calendar 2023, risks have subsided somewhat.

Chilean spot power prices in the Northern grid (SING) fell –5% in the first half of financial 2023 to an average of US$99/MWh. Somewhat more favourable renewable and hydro generation allowed prices to edge down.

Australian NEM spot power prices were engulfed by crisis in the June quarter of 2022, and that spilled over into the new financial year. In the second half of financial year 2022, prices increased 219% on average across the NEM. They then fell just –12% from that elevated level in the first half of financial 2023. The Federal Government has intervened in the market by way of capping feedstock prices (gas @ $A12/GJ, coal @ $A125/t). Gas prices had already begun to recede before the ban was imposed. Power prices have also been assisted by improved renewable generation. 

Diesel prices have unwound a small portion of the extraordinary gains registered in the wake of the invasion of Ukraine, with lower crude oil prices the principal driver. Refinery spreads are no longer at record highs, but they are very elevated relative to history. Average Singapore diesel (into Minerals Australia) declined –5% half–on–half to $132/bbl, while average US Gulf Coast seaborne (into Minerals Americas) declined –1% half–on–half to $142/bbl. Refining spreads maxed out in the half around $72/bbl and $57/bbl in the US and Singapore respectively (averaging $55/bbl and $37/bbl), versus average levels from calendar 2017–19 of $20 and $13 respectively. 

The rate of increase in the US producer price index (PPI) for mining machinery and equipment manufacturing moderated in the first half of financial year 2023 (+15.6% on a 12–month smoothed basis, +13.5% YoY for the month of December–2022, with the YoY rate peaking in May–2022 at 21.0%). These figures are the highest since 1976. The construction machinery PPI was at +10.4% on a 12mma basis, +9.0% YoY in Dec 22, with YoY rate peaking in Aug–22 at +13.8%.


Important notice

This article contains forward–looking statements, including regarding trends in the economic outlook, commodity prices and currency exchange rates; supply and demand for commodities; plans, strategies, and objectives of management; assumed long–term scenarios; potential global responses to climate change; and the potential effect of possible future events on the value of the BHP portfolio. Forward–looking statements may be identified by the use of terminology, including, but not limited to , “intend”, “aim”, “project”, “see”, “anticipate”, “estimate”, “plan”, “objective”, “believe”, “expect”, “commit”, “may”, “should”, “need”, “must”, “will’, “would”, “continue”, “forecast”, “guidance”, “trend” or similar words, and are based on the information available as at the date of this article and/or the date of BHP’s scenario analysis processes. There are inherent limitations with scenario analysis, and it is difficult to predict which, if any, of the scenarios might eventuate. Scenarios do not constitute definitive outcomes for us. Scenario analysis relies on assumptions that may or may not be, or prove to be, correct and may or may not eventuate, and scenarios may be impacted by additional factors to the assumptions disclosed. Additionally, forward–looking statements are not guarantees or predictions of future performance, and involve known and unknown risks, uncertainties, and other factors, many of which are beyond our control, and which may cause actual results to differ materially from those expressed in the statements contained in this article. BHP cautions against reliance on any forward–looking statements, including in light of the current economic climate and the significant volatility, uncertainty and disruption arising in connection with the Ukraine conflict and COVID–19. Except as required by applicable regulations or by law, BHP does not undertake to publicly update or review any forward–looking statements, whether as a result of new information or future events. Past performance cannot be relied on as a guide to future performance.



1 Data and events referenced in this report are current as of February 13, 2023. All references to financial years are June–end, as per BHP reporting standards. For example, “financial year 2022” is the period ending 30 June 2022. All references to dollars or “$” are US dollars unless otherwise stated. The data is compiled from a wide range of publicly available and subscription sources, including national statistical agencies, Bloomberg, Wood Mackenzie, CRU, IEA, ILO, IMF, Argus, CREIS, Fertecon, FastMarkets, SMM, Parker Bay, MySteel, Platts, LME, COMEX, SHFE, ICE, DCE, SGX, and S&P Global, among others.

2 The UN released new long–term population projections on World Population Day (July 11, 2022). At a global level, these are essentially unchanged from the prior vintage out to 2050. There are, however, important regional differences and there are considerable changes in the second half of the century. We will review these changes and their implications in a future blog.

3 Data comparisons are between 2019 and 2030 and reflect our central case forecasts, which incorporate aspects of the potential physical impacts of climate change for regions around the world and responses to them for these global indicators, the projected “green” investment boom, estimates of global inflation and the likely impact of expected climate policies. GDP is in nominal US dollars, on a base of $87 trillion in 2019, with changes being the absolute difference between the 2019 actual and the 2030 projection. Capital spending is estimated based on the expected share of gross capital formation (GCF) applied to this measure of GDP. In PPP terms, the 2019 GDP base is around $135 trillion.

4 Paris–aligned” means a societal pathway aligned to the aims of the Paris Agreement. The central objective of the Paris Agreement is its long–term temperature goal to hold global average temperature increase to well below 2°C above pre–industrial levels and pursue efforts to limit the temperature increase to 1.5°C above pre–industrial levels. 

5 We note, of course, that there is an almost infinite array of technical, behavioural and policy assumptions that can achieve this end in combination, and our 1.5–degree scenario is just one of the many. Each unique pathway produces a unique call on commodity demand and presents a unique incentive matrix vis–a–vis supply. This highlights the need to avoid treating any single pathway as the sole source of “truth”. That is too heavy a burden for any one scenario to carry. As the common knowledge base of publicly available Paris–aligned scenarios continues to grow, we will continue to learn from this invaluable collective resource to improve the work that helps to inform our strategic deliberations. The statement in the text is explicitly based on the commodity demand and price impacts of our 1.5–degree scenario, a technical pathway modelled in consultation with Vivid Economics which requires steep global annual emissions reduction, sustained for decades, to stay within a 1.5°C carbon budget. Demand figures derived from the pathway, together with its assumptions and limitations, are described in our Climate Change Report 2022, available at 

6 Available from–zero–emissions

7 Using a longer historical series from the World Bank shows that this last occurred in 1976, the year of Mao Zedong’s death. 

8 The relative size of the two segments moves considerably over the course of cycles. At present, with developers under so much pressure, the non–commodity segment was 72% of starts and 79% of completions in calendar 2022. However, such was the scale of the starts ramp–up in the multi–year upswing that led up to the pandemic, the developers account for 58% of the stock of floor space underway.

9 Data on steel and pig iron in this chapter are from WorldSteel and official agencies, unless specified otherwise. 

10 A BF–BOF operation is an integrated process with “hot metal” (molten pig iron) produced in the BF then transferred to the blast oxygen furnace (BOF) for conversion into steel.

11 For example, on page 189 of the IEA’s May 2021 report on its NZE study, its assessment of the costs of not cooperating are laid bare – a four–decade future delay in the transition to net zero. 

12 The abbreviations used in the metallurgical coal section are as follows – PLV: Premium Low–Volatile, MV64: Mid–Volatile 64, PCI: Pulverised Coal Injection, SSCC: Semi–soft Coking Coal, as published by Platts. Unless specified otherwise, figures are rounded to the nearest dollar and are quoted in free–on–board (FOB) terms. The terms “coking” and “metallurgical” coal are used interchangeably throughout the text.

13 These approximations are based on a sample of mills, not a census. Note a BF is typically relined every 20 years or so. 

14 LME Cash Settlement basis. Daily closes and intra–day lows and highs may differ slightly. Note that the lowest 3–month closing price in the period was $7170/t, on Bastille Day. 

15 Scrap use rebounded solidly in calendar 2021 to around 31% of semis production, a fraction above the pre–pandemic share. It fell back again in calendar 2022 due to the Chinese lockdowns, with a bounce expected in 2023 as China re–opens. We expect scrap use to grind upwards as a structural trend in the 2020s due to both supply and demand drivers. The EU’s new waste regulations, that we discussed at length in the steel chapter, are also an important watchpoint for the copper industry. 

16 Reserves from USGS,–copper.pdf

17 These estimates are all compared to a 2019 baseline to capture the decadal change. 

18 We focus on key uncertainties in the main text, but the future path of conventional non–battery demand is also worthy of note. Nickel first–use is dominated by the stainless steel sector. It comprises more than two–thirds of primary demand today. Nickel end–use is diverse, with broad sectoral exposure to construction, consumer durables and electronics, engineering, metal goods and transport, in addition to finished batteries. 

19 An interesting study from the IFC provides estimates of the land–use GHG emissions impacts on copper and nickel mining. See–net–zero–roadmap/

20 Fertiliser–grade MOP is commonly sold in powder (“standard”) or compacted “granular” forms, abbreviated as sMOP and gMOP respectively. gMOP typically sells at a premium. Major demand centres for sMOP include China and India, while gMOP is prevalent in the Americas. Pricing data sourced from Fertilizer Week and public filings.

21 A major Canadian producer, Nutrien, signalled in mid-February 2023 that it was pushing back the delivery of its growth plans by one year to 2026. Our long-term view is indifferent to small scale timing changes such as this, as we assume all latent capacity is absorbed as part of reaching a true balance point for the market. 

22 For more on the Global Boundaries framework, see W. Steffen et al., Science 347, 1259855 (2015). Sadly, the pioneer of this Framework, the ANU’s Will Steffen, passed away on January 29, 2023. Vale Professor. 

23 For some details on these new metrics and their application see–CII–FAQ.aspx