On 18 September 2020, BHP released FY2020 results and outlook for 2021.

Economic outlook

With the exception of China, the world’s major economies will contract during the 2020 calendar year as a result of the COVID-19 pandemic. While the outlook for 2021 remains uncertain, within the scenarios that we consider, our base case has the world economy rebounding solidly during the year. There will, however, be considerable variation at the country level. Even with this rebound, our base case is for the world economy to be six per cent smaller than it would otherwise have been in the 2021 calendar year. We expect that China and the OECD will return to their pre COVID-19 trend growth rates from around 2023. Developing economies outside East Asia may take longer.

Inflation trends and exchange rates have been volatile. Many of our uncontrollable cost exposures such as diesel, power, explosives and steel products have declined in the last six months. The impact of COVID-19 on national and regional labour markets has also been profound. Looking ahead, we expect that costs for these inputs will remain lower than anticipated pre-COVID for some years, even though inflation period-on-period may be quite variable.

In Chile, the need to continue to combat COVID-19, the background social unrest and the associated commitment to develop a new Constitution together imply ongoing heightened uncertainty when it comes to decision making in both the public and private spheres.

There remains a significant degree of uncertainty in terms of how the COVID-19 pandemic will progress, and its longer term effects. For the time being, we expect that this uncertainty will constrain risk appetite of households and businesses. This will in turn have a dampening effect on the global economy.

We remain positive in our outlook for long-term global economic growth and commodity demand. Population growth and rising living standards are expected to drive demand for energy, metals and fertilisers for decades to come.

Commodities outlook

Notwithstanding our view that the primary demand shock associated with COVID-19 is behind us, we believe that for the year ahead there remains a range of risks to prices for our various commodities. The potential for re–emergence of COVID–19 outbreaks in key markets or supply jurisdictions is the main source of uncertainty in our year-ahead outlook.

Global crude steel production will decline in the 2020 calendar year, with solid growth in China offset by a steep fall in the rest of the world. Steel production is expected to decline by six per cent for crude steel and between three per cent and four per cent for pig iron. Our preliminary assessment for the 2021 calendar year is for a percentage increase of similar magnitude to the 2020 contraction, with pig iron lagging somewhat as rising scrap availability and lower scrap cost restore the competitiveness of production from the electric arc furnace fleet. We anticipate that global steel production will expand slightly faster than population growth in coming decades, with a plateau and then slow decline in China offset by growth in the developing world, led by India. Growth in pig iron production will trail behind the growth in steel, principally reflecting higher long term proportion of steel sourced from scrap.

Iron ore prices have been elevated since the Brumadinho tailings dam tragedy in Brazil first disrupted the market in early 2019 but can be expected to ease as Brazilian supply recovers. In the second half of the 2020s, China’s demand for iron ore is expected to be lower than today as crude steel production plateaus and the scrap-to-steel ratio rises. At the same time, the likelihood of new supply of iron ore from West Africa has increased. This implies that it will be even more important to create competitive advantage and to grow value through driving exceptional operational performance. In the long-term, prices are expected to be determined by high cost production, on a value-in-use adjusted basis, from Australia or Brazil. Quality differentiation will remain a factor in determining iron ore prices.

Metallurgical coal prices have weakened markedly. A steep, COVID-19 induced decline in ex-China demand, which normally comprises around four-fifths of the seaborne trade, has been the major factor in driving the lower prices. Metallurgical coal faces a difficult and uncertain period as major importing regions manage their re–openings over the first half of the financial year. COVID-19 permitting, a sustained improvement in prices is possible in the second half of the 2021 financial year. We believe that a wholesale shift away from blast furnace steel making, which depends on metallurgical coal, is still decades in the future. This is due to the existing capital stock of blast furnace steel making capacity (70 per cent of global capacity today, average fleet age of around 10 - 12 years in China and around 18 years in India), and the high cost of large scale switching to alternative iron and steel making technologies, which in many cases are still in the early stage of their technological development. Over time, premium quality coking coals are expected to be particularly advantaged given the drive by steel makers to improve blast furnace productivity, partly to reduce emissions intensity. Demand for seaborne Hard Coking Coals (HCC) is expected to grow alongside the growth of the steel industry in HCC importing countries such as India, and increasing market share in China for large, integrated mills situated in the major demand centres on the coast. There is a developing mismatch between the expected evolution of customer demand and the cost-competitive growth options available to the supply side of the industry, which are skewed towards lower quality coals. As a result, we view the medium to long-term fundamentals for higher quality metallurgical coals as attractive.

Energy coal prices are particularly challenged, with prices recently falling below the levels reached during the 2015/16 downturn. Around two-thirds of seaborne supply is estimated to be earning negative margins at such price levels. An uplift in power demand across developed Asia as re-starts progress might help to stabilise the market. China’s policy in respect of energy coal imports remains a key uncertainty. Longer-term, we expect total primary energy derived from coal (power and non-power) to expand at a compound rate slower than that of global population growth. Coal power is expected to progressively lose competitiveness to unsubsidised renewables on a new build basis in the developed world and in China. However, coal power is expected to retain competitiveness in India (where the coal fleet is only around 10 years old on average) and other populous, low income emerging markets, for a much longer time. Large, low cost mines supplying energy coal to seaborne markets will continue to be able to generate decent margins.

Copper prices fell sharply in the early stages of the COVID-19 pandemic but have since rebounded, first on improving sentiment towards pro-growth assets, and more recently on news of COVID-19 related supply-side challenges. In the medium term we believe that the effect of the pandemic will be to delay the timing of the anticipated structural deficit for copper by one or two years to the mid to late 2020s. Longer term, end-use demand is expected to be solid, while broad exposure to the electrification mega-trend offers attractive upside. Our view is that the price setting marginal tonne a decade from now will come from either a lower grade brownfield expansion in a lower risk jurisdiction, or a higher grade greenfield project in a higher risk jurisdiction. Prices will rise on the back of grade decline, resource depletion, increased input costs, water constraints and a scarcity of high quality future development opportunities after a poor decade for industry-wide exploration.

Nickel prices have been driven by the swings in macro-economic sentiment that have also influenced other base metals. 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 given the relatively lower cost of production of battery-suitable class-1 nickel than for laterites, which will set the long-run nickel price. This view is supported by our assessment of the likely rate of growth in electric vehicles and of the likely battery chemistry that will underpin this.

Crude oil prices experienced unprecedented volatility in the second half of the 2020 financial year. We believe that the most significant risks to the physical market have now passed. Prices may well build upon their recent recovery, if mobility continues to improve globally. The pace of gains though could be modest given potential headwinds from supply returning, whether that is re-started primary production or releases from storage. However, if we look beyond this, our bottom-up analysis of demand, allied to systematic field decline rates, points to a structural demand-supply gap through at least the mid-2030s. Considerable investment in conventional oil is going to be required to fill that gap. The medium to long term supply deficit has been amplified by the global retreat from capital spending across the industry in response to the COVID-19 pandemic. Specifically on demand, road transport is subject to clear disruption risk, while non-transport demand looks resilient, especially in the developing world. Behavioural changes post COVID-19 are another factor we consider. The net impact of these trends is likely to be a steady erosion of total demand beyond the plateau we expect in the medium-term. Deepwater assets are the most likely major supply segment to balance the market in the longer term. The price expectation required to trigger investment in deepwater projects will be significantly higher than the prices we face today. We believe oil will be an attractive commodity, even under a plausible low case, for a considerable time to come.

The Japan-Korea Marker price for LNG performed poorly in the second half of the 2020 financial year. Demand is expected to be firmer in the new financial year, but storage levels are very high. Longer term, the commodity offers a combination of systematic base decline and an attractive demand trajectory. However, gas resource is abundant and liquefaction infrastructure comes with large upfront costs and extended pay backs. North American exports are expected to provide the marginal supply across multiple longer term scenarios for the LNG industry, with new supply likely to be required to balance the market in the middle of this decade, or slightly later. Within global gas, LNG is expected to gain share. Against this backdrop, LNG assets advantaged by their proximity to existing infrastructure or customers, or both, will be attractive.

Potash stands to benefit from the intersection of a number of global megatrends: rising population, changing diets and the need for the sustainable intensification of agriculture. We anticipate trend demand growth of 1.5 to 2.0 Mt per year (between two and three per cent per annum) through the 2020s. This would progressively absorb the excess capacity currently present in the industry, with the window for new supply expected to be open by the late 2020s or early 2030s.

Source: BHP