BHP Sees Robust Prices As Covid Vaccine Rolled Out -- Commodity Comment

BHP Group Ltd. (BHP) on Tuesday recorded a 16% lift in first-half underlying profit in large part because of higher iron ore and copper prices. Here are some remarks on world commodity markets from that report.

On commodity prices:

"The deployment of vaccines in key economies, albeit with some uncertainty as to timing and efficacy, removes a material amount of downside risk to the short term demand and price outlook for our portfolio commodities. With Chinese demand looking robust and the rest of the world on an improving trajectory, a precondition for maintaining robust price performance is in place. Where the price recovery is more nascent, there is potential for a further uplift."

On steel:

"Global crude steel production was unbalanced in the 2020 calendar year, with strong growth in China offset by a steep fall in ROW [rest of world]. We note the momentum in ROW has been picking up markedly, with average utilisation rates now close to pre-Covid levels, while margins are benefiting from higher prices. In the 2021 calendar year, we anticipate a continuation of strong end-use demand conditions in China and ongoing recovery in the rest of world. Over the long term, we anticipate that global steel production will expand at a similar rate to population growth in coming decades, with a plateau and then slow decline in China offset by growth in the developing world, led by India."

On iron ore:

"Iron ore prices have been elevated since the Brumadinho tailings dam tragedy in Brazil first disrupted the market in early 2019. Conditions were particularly tight in the second half of the 2020 calendar year. The combined impact of very strong Chinese pig iron production and Brazilian exports being unable to lift materially from depressed levels in the 2019 calendar year outweighed record shipments from Australia. Our analysis indicates that before prices can correct meaningfully from their current high levels, one or both of the Chinese demand/Brazilian supply factors will need to change materially."

On metallurgical coal:

"Metallurgical coal prices faced by Australian producers in the free-on-board market have been weak. A steep, Covid-19 induced decline in ROW demand, which normally comprises around four-fifths of the seaborne trade, was the major factor driving lower prices for much of the 2020 calendar year, with China serving as the effective clearing market. However, late in the 2020 calendar year, these positions reversed, with ROW demand beginning to improve, while uncertainty about China's import policy towards Australian coals spiked. Trade flows are adjusting to account for the available opportunities. The industry faces a difficult and uncertain period ahead. Long term, we believe that a wholesale shift away from blast furnace steel making, which depends on metallurgical coal, is still decades in the future."

On thermal coal:

"Energy coal prices recovered from their Covid-19 induced lows late in the 2020 calendar year, assisted by a pick-up in demand due to cold weather in North Asia and a bounce in Indian industrial activity. China's policy in respect of energy coal imports remains a key uncertainty."

On copper:

"Copper prices have been strong in recent times. With ROW demand recovering and China continuing to perform well, the short term outlook for demand is constructive. On the supply side, we note near term risks from the escalation of Covid- 19 cases in Chile, and the fact that a number of wage negotiations at Chilean mines are scheduled for the current calendar year, spread across both halves. Longer term, end-use demand is expected to be solid, while broad exposure to the electrification mega-trend offers attractive upside."

On nickel:

"Nickel prices have been driven by positive sentiment towards pro-growth assets, supply uncertainty and a strong rebound from the battery-electric vehicle complex in the second half of the 2020 calendar year. 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 are expected to set the long-run nickel price. This view is supported by our assessment of the likely rate of growth in EVs and of the likely battery chemistry that will underpin this. We have revised our already aggressive long run EV ranges to reflect even more supportive policy, such as accelerated bans for internal combustion engine vehicles in Europe, the policy platform of the Biden administration and net zero objectives in China, Japan and South Korea."

On oil:

"Crude oil prices have recovered to around US$60 per barrel range. Our base case is that prices should build upon their recent recovery, but the pace of gains is likely going to be modest initially given potential headwinds from currently curtailed supply returning. However, if we look beyond this phase, our bottom-up analysis of demand, allied to systematic field decline rates, points to a long run structural demand-supply gap. Considerable investment in conventional oil is going to be required to fill that gap."

Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com


  (END) Dow Jones Newswires
  02-15-21 1725ET
  Copyright (c) 2021 Dow Jones & Company, Inc.

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