BHP's Economic & Commodity Outlook
Strategic Research Institute
Published on :
23 Feb, 2022, 5:30 am
BHP Vice President Market Analysis & Economics Dr Huw McKay said “Six months ago1, at the time of our full year results for the 2021 financial year, we reported markedly improved operating conditions for the majority of the portfolio. Those commodities that had performed strongly in calendar 2020 had built on that momentum. Those that had lagged somewhat in calendar 2020 were showing clear signs of entering a recovery phase. As a result, most of our major commodities were trading at prices that were close to, or above, our estimates of long term equilibrium. As we release half year results for the 2022 financial year today, developments over the last six months make it more difficult to generalise about the portfolio in a narrative sense. The half year was characterised by (yet more) extraordinary volatility, but instead of a shared, albeit staggered recovery pattern, highly idiosyncratic trends have emerged within the energy and non–ferrous commodity clusters, as well as within the steel making raw materials complex. Nevertheless, and the aforementioned volatility notwithstanding, the statement that “most of our major commodities are trading at prices that are close to, or above, our estimates of long term equilibrium”, is still, remarkably, absolutely valid.”
Dr McKay said “For the 12 months ahead, we assess that weighted directional risks to prices across our diversified portfolio are tilted modestly downwards, a view that relies in part on the elevated price deck we face in many commodities at the outset of this calendar year, and a general belief that the most severe supply disruptions will ease, progressively, as the year unfolds – weather, COVID–19 and policy permitting. That said, very short term downside is arguably limited, with operating cost curves having moved higher and steepened in the midst of the global inflation shock. This has raised real–time price support above pre–pandemic levels in many of the commodities in which we operate. We expect the demand–supply balance to remain relatively tight in both copper and nickel. Iron ore moved into surplus in the second half of calendar 2021, and, on balance, is likely to remain in that state across calendar 2022. We see no clear directional bias for oil prices from current elevated levels, while LNG prices are more likely to move lower than to sustain (or set new) all–time highs. Metallurgical coal prices have also achieved all–time records on multi–regional, multi–causal supply disruptions. The degree to which these ease, and by when, is the key swing factor for the coming year. Potash seems poised at the crest of its stunning bull wave, driven by strikingly positive downstream fundamentals at a time of both constrained and uncertain supply.”
Dr McKay added “There is obviously still some residual uncertainty as to how vaccine deployment and the policy and behavioural response to the newer, highly transmissible strain of COVID–19 will interact over the coming quarters. There is also a higher level of macro complexity to deal with than in the recent past, as the world’s two major systemic growth engines – the US and China – adopt diametrically opposite counter–cyclical policy stances. So while the “uncertainty discount” in the risk appetite of households and businesses we have noted in previous communications is definitely fading, it is doing so in uneven fashion across the world, and new vectors of uncertainty have arisen, such as the situation in Ukraine.”