When the COVID-19 pandemic finally passes, the new economy that emerges will have commodity winners and losers.
Coal, for one, may prove to be a short-term ‘comeback kid’, though its long-term decline is set in stone. But, in a global economy where inflation remains subdued and the biggest uncertainties around the pandemic have eased, gold may come back to earth.
Meanwhile, growing concerns about environmental, social and governance (ESG) issues should support demand for battery metals and palladium. And demand for iron ore is seen rising again in the key Asian markets of China and India.
This article was first published in the Mining Yearbook 2020 which is available here: https://www.miningmx.com/the-mining-yearbook-2020/
Let’s start with coal. Obituaries for the fossil fuel are looking premature. This is despite the hype of how lockdown has re-greened the world economy – a function of less industrial activity and lower CO2 emissions.
In fact, the economic meltdown triggered by the pandemic appears to be giving coal a new lease based on an old argument: namely, that developing economies cannot afford to do without a relatively abundant and cheap source of energy that powered the Industrial Revolution.
Indian Prime Minister Narendra Modi made this point in June when he launched an auction for 41 coal mining blocks for the private sector in June.
“People of these districts are aspiring for development but have lagged behind,” he said. And China has signalled it will allow more provinces to start building new coal plants in 2023 while speeding the pace of construction of coal-fired power stations currently being built.
Still, in the post-COVID economy, ESG concerns will continue to hamper coal, as more banks bow to shareholder and other pressures to cut financing to the sector. In April, two major Japanese banks, Mizuho Financial Group and Sumitomo Mitsui Financial Group Inc, announced plans to pull the plug on new coal projects while remaining committed to those in the pipeline, including a major one in Vietnam. And Anglo American plans to sell its South African coal assets as it seeks to boost its ESG record. Such sales will be under intense scrutiny in South Africa, with its vibrant and vocal conservation movement.
The economic outlook for India, the other major consumer of iron ore, will be similar to that of China. While short-term demand has been affected by the slowdown, there is a general expectation that consumption will recover as India lifts its lockdown
Iron ore is also closely linked to industrialisation. Historian Toby Green, in his recent sweeping history of West Africa, “A Fistful of Shells” has uncovered the arresting fact that demand for iron ore bars in 17th century West Africa, used as a currency, enabled early industrialisation in Europe. In the 21st century, China is still industrialising along with other Asian economies.
“Iron ore has been holding above $80 a ton throughout the outbreak. Some of the major iron ore miners achieved record production levels in Q1 2020 as China began emerging from the crisis. Also, China is expected to increase public spending on infrastructure projects to boost its weakening economy,” PwC recently noted in a report on the global mining sector.
“The economic outlook for India, the other major consumer of iron ore, will be similar to that of China. While short-term demand has been affected by the slowdown, there is a general expectation that consumption will recover as India lifts its lockdown.” And in the longer run, African industrialisation will depend on iron ore centuries after its historical demand for the commodity helped lay the foundation for Europe’s modern economy.
Gold, on the other hand, may lose some of its newfound lustre in the post-COVID world.
In late June, at the time of writing, the precious metal’s price was close to eight-year highs around $1,780 an ounce.
But it has had absolutely everything going for it. The pandemic has greatly increased economic and market uncertainties, hugely boosting gold’s appeal as a “safe haven”. Global stimulus packages, including cutting interest rates to the bone, have further lifted it. Yet, while investors are pouring in, jewellery, industrial and central bank demand has cratered. Consultancy Metals Focus in late June forecast that gold will average $1,700 an ounce this year.
“Jewellery demand has collapsed as a result of shutdowns, higher prices and poor consumer sentiment. The harm to industrial demand has been less dramatic, but this was mainly thanks to defensive inventory build by users. Physical investment has been mixed; western markets have enjoyed a recovery whereas, in much of Asia, financial distress and higher prices have put pressure on demand,” it said in a report.
The post-COVID economy could further cap gains if relative levels of certainty return to global markets and stimulus initiatives tail off. Of course, geopolitical tensions may remain on the boil. Meanwhile, jewellery demand could remain restrained if consumers are still reeling from lost income. A relatively fast end to the global recession or depression will be required to reignite demand on this front.
The performance of PGMs will also depend on the pace of the recovery.
“Palladium will likely be at $2,200 to $2,500 by June 2021, rhodium will be above $10,000/oz and platinum, despite being in a surplus, may be pulled up by gold to around $1,000/oz. This all assumes the world returns to some form of normality and that the lockdown doesn’t cause a prolonged global recession,” said Cor Booysen, equity portfolio manager at Fairtree Asset Management.
ESG concerns have been among the factors driving palladium’s pre-COVID-19 rally to historic highs late last year of over $2,700/oz as it is the metal of choice for petrol as opposed to diesel engines, which are falling out of favour in key markets such as Europe in response to tighter emissions regulations. That trend should give it legs, and platinum should get a lift by a new tri-metal catalyst launched by BASF – work sponsored by Sibanye-Stillwater and Impala Platinum – that enables partial substitution of platinum in light-duty gasoline vehicles.
And what of the battery metals seen driving the electrical vehicle revolution?
“There’s a lot of research being bandied about for demand by 2050,” Lara Smith, director of Core Consultants, a mining consultancy, said. “Capital is impatient and fund managers aren’t seeking to give up their liquidity for returns in 2050.”
Palladium will likely be at $2,200 to $2,500 by June 2021, rhodium will be above $10,000/oz and platinum, despite being in a surplus, may be pulled up by gold to around $1,000/oz. This all assumes the world returns to some form of normality and that the lockdown doesn’t cause a prolonged global recession
Smith noted that lithium, for example, was in surplus before the pandemic and that has only grown since, leading to a postponement of expansion plans in the sector, which was all the rage just a couple of years ago.
“This year, about $670m worth of value has been obliterated and the lithium market is facing an oversupply with falling demand,” she said.
“It is important to observe whether China reintroduces stimulus measures to promote particularly EVs, as that will give an idea as to how quickly demand will recover,” she said. Smith does not see a recovery any time soon, and believes the global financial crisis will pale in comparison to the scale of the economic havoc wreaked by the COVID-19 pandemic.
That is ultimately what will shape the course of commodity supply and demand over the next couple of years, as well as the importance of ESGs. The timing and pace of any recovery is uncertain, but the growth of ESGs on investor radar screens is not going to be nipped in the bud anytime soon.