Six months ago1, at the time of our half year results for the 2021 financial year, we presented a constructive outlook for our commodities and for the world economy as a whole. At this time, some of our commodities were still facing a challenging environment in absolute terms, while others had entered a clear recovery phase for both demand and price. As we release full year results today, operating conditions for the majority of the portfolio have improved markedly, as anticipated. Most of our major commodities are now trading at prices that are close to, or above, our estimates of long term equilibrium.
For the 12 months ahead, we assess that weighted directional risks to prices across our diversified portfolio are steady. While some uncertainties remain, our base case is constructive.
We expect the demand–supply balance to remain relatively tight in both iron ore and copper. The balance of risks for oil prices are tilted modestly upwards. Metallurgical coal prices have rebounded, for now, on multi–regional supply disruptions and strong downstream conditions in the steel sector. Nickel demand is robust but supply is expected to keep pace. Potash is in the midst of a bull run, driven by strikingly positive downstream fundamentals at a time of constrained supply.
There is obviously still some residual uncertainty as to how vaccine deployment and the policy and behavioural response to the newer, more infectious strains of COVID–19 will interact over the coming quarters. There is also some nervousness in financial markets about the timing and extent of the eventual exit from loose global monetary policy. 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. That said, while the world’s two major systemic growth engines – the US and China – are performing strongly, there is probable cause for optimism that the rising tide can progressively lift all boats.
Looking beyond the immediate picture to the medium–term, we continue to see the need for additional supply, both new and replacement, to be induced across most of the sectors in which we operate.
After a multi–year period of adjustment in which demand rebalances and supply recalibrates to the unique circumstances created by the COVID–19 shock, we anticipate that higher–cost supply will be required to enter the cost curve in our preferred growth commodities as the decade proceeds.
COVID–19 has altered many things, but it does not alter geology or define the frontier of operational efficiency in each commodity sector. Besides demand, these are the two most critical factors for identifying marginal sources of long run supply: and what it will cost to bring those resources to market.
The steepening of some industry cost curves that we monitor, albeit delayed from prior expectations, can reasonably be expected to reward disciplined owner–operators with higher quality assets featuring embedded optionality.
In the medium and long term, on the demand side, we continue to see emerging Asia as an opportunity rich region. As the true costs of a partial retreat from economic openness and a lack of climate action are progressively recognised, we anticipate a popular mandate for a more open international trading environment will eventually re–emerge, along with a concerted effort to confront climate change as a basic imperative.
We note that the younger generations that will define our future – both Millennials and Generation Z – are not only more concerned about climate change than their elders in both East and West, they are also more favourably disposed towards globalisation.2
On that uplifting note, we confidently state that the basic elements of our positive long–term view remain in place.
Population growth, the infrastructure of decarbonisation and rising living standards are all expected to drive demand for energy, metals and fertilisers for decades to come.
In the 2020s specifically, we expect global population to expand by 0.8 billion to 8.5 billion, urban population to also expand by 0.8 billion to 5.2 billion, nominal GDP to expand by $75 trillion to $163 trillion and capital spending to expand by $15 trillion to $37 trillion.3 Each of these basic fundamental indicators of resource demand are expected to increase by more in absolute terms than they did across the 2010s.
We firmly believe that our industry needs to grow in order to build a better, Paris–aligned world.
The IPCC stated on August 9 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 (available at bhp.com/climate), if the world takes urgent actions to limit global warming to 1.5 degrees, we expect it to be advantageous for our portfolio.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 source of “truth”. That is too heavy a burden for any one scenario to carry. As the common knowledge base of publically 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.
What is common across the vast majority of the 100 or so Paris-aligned pathways we have studied is that they cannot occur without an enormous uplift in the supply of critical minerals such as nickel and copper. And some of the scenarios we have studied, such as the International Energy Agency’s high profile 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 our portfolio.
Now: add each of the constructive foregoing themes to the fact that the industry as a whole has been disciplined in its allocation of capital over the last half decade. With this disciplined historical supply backdrop as a starting point, any sustained demand surprise seems likely to flow almost directly to tighter market balances.
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BHP share fall after hitting a multi year high following latest set of results.