- The World Bank has forecast a striking slowdown in global GDP growth, sparking pessimism over industrial metals prices
- Supply issues have protected iron ore and copper prices recently, but the outlook is mixed
After handing out record dividends earlier this year, the major miners could be forgiven for winding back the hefty shareholder payout policies given the weakening macroeconomic environment. The World Bank said last week that global gross domestic product (GDP) growth for 2022 would be 2.9 per cent, a significant drop from the 5.7 per cent seen last year. The institution also warned of recession and global stagflation as developing countries raise interest rates. All this points to lower metals prices.
But that’s not what is happening, thanks to supply issues offsetting potentially lower demand for iron ore and copper, which are both linked strongly to China’s growth plans. Iron ore is back to around $140 (£115) a tonne after falling below $100 a tonne for the first time in 18 months at the end of 2021. BHP (BHP) and Rio Tinto’s (RIO) earnings are driven by iron ore, making up around two-thirds of cash profits.
Chief executives of the major miners have repeatedly raised macroeconomic concerns similar to those of the World Bank, but have also said supply issues could constrain production.
“Now we are forecasting a bit of slippage of growth out of this year into next year in China,” BHP chief executive Mike Henry said last month. “We also expect that the current supply chain disruptions that we're seeing around the world could take up to two to three years to resolve.” On the other hand, shipping companies have said recently iron ore cargoes are expected to increase into the September quarter.
Navios Maritime (US:NM) – a leading seaborne cargo company – expects 10 per cent growth in seaborne iron ore trade in the second half “as China plans further infrastructure investments to maintain the 2022 targeted GDP growth of 5.5 per cent”, according to vice-chair Ted Petrone.
Other sector experts have backed the supply challenges story. Last week, Bernstein analyst Bob Brackett said Rio Tinto and Brazilian miner Vale (BR:VALE3), the world’s top iron ore miner, were likely to reduce guidance for the year. Anglo American (AAL) has already done so, while BHP only has a few weeks until its financial year is over so should be able to make its target.
“The weakness we are seeing in iron ore production and the limited excess capacity of iron ore mines lead us to believe we will see miners take down guidance in Q2/Q3 this year,” Brackett said, adding that lower volumes would support higher prices, so this would not have a significant top-line impact.
Colin Hamilton, commodities analyst at BMO Capital Markets, sees more supply coming, but believes this is more a typical seasonal shift than a dangerous ramp up of output.
"Looking into the coming months, however, and we do see more supply entering the market from the seasonal Vale ramp up post the wet season plus the usual push for volumes into the end of the Australian fiscal year, which will outweigh any losses from the new Indian export tax lowering export volumes," he said, although he added that a weaker Chinese construction sector would drive a fall in steelmaking, hitting spot iron ore prices.
Copper contributes less to BHP, Rio Tinto and Anglo American's cash profits than iron ore, but is still a major contributor, and it has seen its own production challenges this year.
BHP reduced guidance slightly in April for the 12 months to 30 June, dropping its high end estimate from 1.76mn tonnes to 1.62mn tonnes. More recently, Chilean state-owned miner Codelco shut down a processing plant due to reported sulphur dioxide releases hurting a local community, while in Peru, Chinese major MMG has just reached a deal to reopen a 400,000-tonne-a-year copper mine, Las Bambas, which has been shut since April due to a protest by locals.
There is the potential for 2021-2022 to be the peak of major miners' earnings for this bull cycle – despite talk of a supercycle – but the majors have learnt plenty of lessons from the downturn and are happy to keep supply constrained for key metals in order to prolong these high earnings.
Our picks among the diversified miners are Anglo American and BHP, while Glencore (GLEN) is showing very strong earnings off its coal and base metal holdings.
