Australia’s BHP Group Ltd. (BHP, Financial), the world’s largest metals and mining company, remains acutely attuned to the dynamics poised to reshape its industry in the coming years. It published a detailed economic and commodity outlook alongside its 2023 full year results. The document is a thoughtful commentary by BHP Group's chief economist on commodities. This discussion summarizes its key points. I wrote about the company itself previously.
Future resource landscape
One of the most compelling drivers of change is the expected surge in demand for key commodities, including steel, non-ferrous metals and fertilizers. This surge is set to be propelled by a convergence of factors, including rapid population growth, ongoing urbanization trends, the imperative to develop sustainable infrastructure and the pursuit of higher living standards worldwide. As BHP delves into the intricacies of the future resource landscape, it becomes evident that these transformative shifts will be underpinned by a fundamental requirement: a substantial increase in the supply of critical minerals such as nickel and copper.
China's role in global resource consumption
Turning to China, the world's most populous nation and a linchpin in global resource consumption, a pivotal moment arrived in December 2022. China executed a U-turn on its stringent zero-Covid strategy, resulting in a stabilization of international relations. Coupled with robust policy support for the housing sector, expectations soared regarding the potential for China's economic resurgence, but it did not happen. The politburo's recent communiqué underscored the leadership's recognition of the need for fresh counter-cyclical policies and more effective implementation of existing measures.
Yet, the central question remains: how effectively will these policies translate into tangible outcomes? It is evident that, in some critical areas, policy measures failed to yield the desired results. A glaring symptom of this shortcoming is the persistent lack of trust in private developers, which continues to shape the behavior of both property buyers and lenders. For Chinese consumers, perhaps nothing exerts a more profound influence on sentiment than real estate prices. With over 90% of households owning their homes and approximately 70% of wealth vested in real estate, the ebb and flow of property values are keenly observed.
While grappling with challenges in traditional goods export sectors, China continues to exhibit remarkable resilience in the realm of decarbonization technologies. However, as we look further into the future, a nuanced perspective emerges. BHP's view is that China's economic growth trajectory will gradually moderate due to factors such as a declining working-age population and the maturation of its capital stock. According to the latest estimates from the United Nations and China's Statistician, the total population of China may have already peaked. Despite the anticipation of a sub-2% growth rate, BHP projects that China's incremental contribution to the global economy in 2050 will approximate its average during the 2010s. Projections span a range of 46% to 77% of U.S. living standards, with a mean of 58%. The company's planning range of 56% to 65% falls comfortably within these parameters, reinforcing its confidence in the “robust foundations” of its own long-term strategy.
Iron ore and steel
Delving deeper into specific commodities, starting with steel and pig iron, the overarching caveat here pertains to the ever-looming spectre of mandated production cuts, a recurring concern for BHP each year. At present, the extent, timing and severity of prospective cuts remain uncertain. Nonetheless, BHP Group holds firm in its conviction that, by mid-century, China will substantially augment its accumulated stock of steel in use, which is inching toward 9 tonnes per capita. This transformation is intrinsically linked to China's path toward an urbanization rate of roughly 80% and living standards approaching three-fifths of those in the United States.
In BHP's outlook for iron ore, it is compelled to reflect on the disparity between the consensus forecasts of 2018 and the unfolding reality. Back then, expectations were modest, predicting an increase in low-cost seaborne supply from major basins, the gradual squeezing out of higher-cost supply, a flattening of the cost curve and softer prices. However, the actual trajectory has been characterized by an opposite trend on all fronts.
In the world of metallurgical coal, the industry's fortunes have oscillated dramatically during the pandemic era. Periods of loss-making for some producers in calendar 2020 and the first half of 2021 have yielded to soaring prices and, subsequently, scarcity pricing in calendar 2022.
Copper and nickel
Shifting our attention to copper, a compelling narrative of deficits unfolds. The first half of calendar 2023 witnessed the installation of a staggering 101.4 gigawatts of wind and solar capacity, with solar now surpassing hydro as China's second-largest power source by capacity. To put this feat in perspective, 101 gigawatts roughly equals the total hydro capacity the U.S. amassed over the course of a century. In just six months, China has replicated that capacity with renewables.
These projected copper deficits stem from a confluence of factors. Historically, there has been underinvestment in new primary supply and geological challenges at existing operations intersect with the burgeoning demand fuelled by copper-intensive energy transition efforts. This conundrum is anticipated to be a defining feature of global industry dynamics, especially as we enter the latter part of the 2020s.
In the case of nickel, a long-term perspective paints an intriguing picture. BHP anticipates that nickel will be a substantial beneficiary of the global electrification mega-trend. Nickel sulphides are poised to reap significant rewards due to their relatively lower cost of producing battery-grade class-1 nickel compared to laterites. Additionally, integrated sulphide operations occupy a favourable position on the greenhouse gases emissions intensity curve, aligning with the imperatives of decarbonization.
Advocacy for inclusion of critical minerals
The Inflation Reduction Act encapsulates these multifaceted themes, ranging from the urgency of decarbonization and energy security to supply chain resilience, economic nationalism and great power rivalry. As BHP assesses Australia's critical minerals list, the company is advocating for the inclusion of copper, nickel and uranium. These minerals, integral to the energy transition, are also featured on the lists of many other producing and consuming regions, with Canada serving as a prominent example.
Potash
In the world of potash, a saying resonates: "the best cure for high prices is high prices." Temporary disruptions in trade flows and logistical challenges aside, the geopolitical dynamics of the former Soviet Union introduce a set of important challenges to the potash industry's future. While it remains early to make definitive assessments, a prudent expectation is a delay in the timeline for new mines in the FSU.
Looking ahead, potash emerges as a forward-looking commodity underpinned by compelling fundamentals. Its demand stands to benefit from the intersection of global mega-trends, including rising population figures, evolving dietary preferences and the imperative for sustainable agricultural intensification.
In the world of maritime bulk freight, regulatory shifts loom large on the industry's horizon. The International Maritime Organization's recent pledge to achieve net-zero emissions "close to 2050" and the intermediate targets leading to this milestone necessitate decisive action across the maritime industry. Shipping companies and their customers will need to navigate these evolving regulations to meet the ambitious goals set forth by the IMO.
Conclusion
As BHP navigates the complex terrain of global resource dynamics, it says it remains committed to shaping a sustainable and prosperous future for both the industry and the world at large. The confluence of population growth, urbanization, decarbonization imperatives and rising living standards presents a formidable challenge and opportunity. Through its forward-looking portfolio and strategy, an unwavering commitment to sustainability and a keen understanding of global dynamics, BHP stands - along with other large mining companies - set to play a pivotal role in meeting the resource demands of the future.
