BHP holds a favourable outlook for its products in the long-term, beyond the market’s mixed short-term sentiment.
While demand for iron ore exceeded expectations during 2019, BHP anticipated stronger demand for metallurgical coal and copper.
The company’s Queensland Coal production during the December 2019 half year stayed at the same level as the prior corresponding period at 36 million tonnes.
BHP vice president, market analysis & economics Huw McKay cited the impact of stunted growth in international trade, a recession in the auto sector and slowdown in manufacturing in the developed world as drivers of lower commodity demand.
The mining giant, however, expects conditions in met coal to improve this year.
“In the medium–term, enhanced value–in–use realisation for low volatile matter, low impurity, high ‘coke strength after reaction’ products and Chinese supply–side discipline are both expected to pertain,” McKay said.
“So while prices will always fluctuate widely within and across years based on both cyclical and idiosyncratic influences, (as they have done in recent history), it seems reasonable to suggest that met coal prices can sustain above long run marginal cost, if given an average pig iron demand backdrop to work with, for some time to come.”
The caveat is that while BHP hopes that the Covid–19 (coronavirus) outbreak is speedily contained within the March quarter, no one can be adamant about the precise timing, according to McKay.
He said the coronavirus outbreak would cause a sharp decline in economic activity in the March quarter.
This could recover briskly to higher than normal run-rates in the June quarter if the psychological and logistical impacts can be effectively contained within that window.
“While the world is forced to live with this unknown, there is likely to be a sentiment discount in the prices of these commodities,” McKay said.
BHP is set to revise its annual forecast lower should construction and manufacturing is unable to return to regular operation in April.
This doesn’t change BHP’s view on China as an opportunity rich region, thanks to additional demand that the country’s Belt and Road initiative is expected to deliver.
In the copper world, McKay warned that grade decline could remove two million tonnes a year of mine supply by 2030.
“Our view is 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,” he said.
“Neither source of metal is likely to come cheaply.”