Thou Shalt Not COVID Thy Neighbour’s Economy

COMMODITY CAPERS: The world economy has endured COVID-19 like a pimply-faced teenager encounters puberty.

Both enjoyed an 11-year growth spurt that suddenly stopped, giving time for reflection on where they are now, and what clothing they are likely to wear until they have to contend with a middle-age spread.

When COVID-19 hit the headlines economists and predictors of fiscal fortunes recognised there was bound to be some reversal of prosperity, however after 11 years of growth, nobody was as prepared for what was to come as they thought.

True, we had been through the Global Financial Crisis (GFC) of 2008/9, but that was a man-made crisis, from the office-bound finger tips of greedy financial types, all of whom had a reasonable idea of what they may be getting us into, and had sound Plan Bs in place to ensure they would bounce back – again – as they had the time before and the time before that.

The ‘Global’ moniker attached to the GFC was also misleading as it was truly a first world affliction, while COVID-19 has truly hit on a global scale, having no discrimination of social standing nor Gross Domestic Product.

Australia weathered the stormy GFC seas thanks mainly to mainland China and its infrastructure drive, a policy that is still contributing to sustained high prices for the bellwether commodities of iron ore and gold.

COVID-19 may be influencing current iron ore pricing, but up until it struck, Australian producers were enjoying a buoyant run pre-pandemic that was fuelled by the misfortunes of global competitors, mainly Vale in Brazil and the collapse of the Brumadinho tailings dam, which made it difficult to re-rail operations.

It has been reported that Vale is back in the game, hitting export numbers of 5 million tonnes per week, however to keep the Brazilian government happy pressure is mounting to increase those figures to six million tonnes per week.

The Department of Industry, Science, Energy and Resources, Commonwealth of Australia Resources and Energy (DISER) had forecast Australian iron ore export earnings to top $100 billion in 2019-20, and in its recent March Quarterly Report suggested this, “appears to have been achieved”.

The iron ore price recently hit US$120 per tonne driven by demand, mainly from China, and tightness in the medium grade fines segment.

Gold has also been making the most of global pandemic-related panic, which was recently pointed out by good friend of The Resources Roadhouse, industry analyst Gavin Wendt.

Wendt opined that although mainstream media sought to correlate gold’s rise with the Covid-19 pandemic, just like iron ore, it too had its origins of ascent well before the outbreak reached the airwaves.

He dated the start of the latest gold run way back in 2015, when the gold price was sitting around US$1,050 per ounce.

Cries of industry joy were again heard in 2018 when gold hit around US$1200 per ounce.

Looking at gold’s recent peak of around US$2,050 per ounce, Wendt calculated gold to have almost doubled in price over the past five years, and is up by two-thirds over the past two years alone.

“Gold’s ascent began five years ago, with interest rates low and question marks beginning to be asked about the world economy,” Wendt explained.

“Interest rates were kept low during and subsequent to the GFC, as a means of accelerating and maintaining economic growth, but have never been allowed to return to ‘normalised’ levels.

“There are inherent dangers in keeping interest rates too low for too long, as they create asset bubbles and lead to artificially high equity markets, as investors chase returns.”

Gold has long been a safe haven, physical gold that is, which in times of strife, in the form of gold bars, or bullion, as it is known to its friends has been the way people have protected their wealth.

They buy it, store it, and every now and then take it out and look at it, then put it away again, if not in the shape of bars, perhaps as jewellery, either way the physical stuff traditionally been more favourable than paper, be that money or shares.

Until recently, that is, when the most renown of all investors, Canadian wunderkind Warren Buffet forked out US$564 million for a stake in Barrick Gold Corporation.

It’s not known for certain whether he was aware that Barrick had sold its stake in the Kalgoorlie Superpit, but Buffet was not setting a trend, but merely following one that had been kicked off by Australian fund manager, David Paradice, who was followed down the golden adit by London-based compatriot, Michael Hintze.

Have they all read the gold tarot cards correctly? Only time will tell, but safe to say such big investments from such big players can only encourage others to follow suite.

Nickel prices were already on the swing in 2019, way before COVID-19 had emerged from a Chinese wet market.

In the second half of 2019, the metal was shifting between US$10,400 and US$18,600 a tonne, averaging US$13,900 a tonne, thanks mainly to uncertainty from Indonesia’s planned nickel ore export ban.

Prices fell in early 2020 hitting a market low of US$11,055 per tonne, until July when a major boost in the shape of Tesla boss, Elon Musk appeared, who openly pleaded with nickel miners around the world to pull their collective fingers out.

“Any mining companies out there, please mine more nickel,” Musk pleaded.

“Tesla will give you a giant contract for a long period of time, if you mine nickel efficiently and in an environmentally sensitive way.”

The market reaction was similar to the rally Musk set off in 2017 for tin when he expounded on the virtues of that particular commodity in the production of modern gadgetry.

This time he spoke nickel and the spot nickel price reacted accordingly, rebounding to US$13,460 per tonne on the London Metals Exchange.

“Given its exposure to China’s stainless steel and electric vehicle (EV) production, there is wide consensus that nickel is one of the best placed base metals to rebound as the world, and particularly China, starts to recover economically from the COVID-19 pandemic,” DISER said.

Regardless of your analyst of choice, most predict a rise in the fortunes of nickel in coming years with some 1.1 million tonnes earmarked for use in the production of 30 million Electric Vehicles (EVs) by 2030.

That rise is anticipated to be shared by copper, of which around 4.1 million tonnes is expected to be used in making our roads cleaner and quieter.

A double-edged sword of COVID-19 and a general pessimistic world economic outlook conspired early in 2020 to bring copper prices down to their lowest levels since 2016 at US$4,620 per tonne, since then it has fought back to be knocking around the US$6,000 mark.

Australia’s recent fall in mined copper production, around 4.6 per cent, has not been directly due to any COVID-19 issues, but has been more in line with the closure of two Western Australian mines – the Nifty and Golden Grove mines.

Production from South Australia also fell with the closure of Hillgrove Resource’s Kanmantoo operation and the changing of ore bodies at Oz Minerals’ Prominent Hill mine.

Zinc prices have not had a fun time during the pandemic and have been predicted to remain so for the duration of 2020.

According to the boffins at DISER, zinc prices should enjoy a modest rise of around 3.1 per cent to US$2,055 a tonne over 2020 to 2022.

Australia’s zinc production is expected to gain traction increasing from an estimated 1.3 million tonnes (in metallic content terms) in 2019–20 to 1.6 million tonnes in 2021–22, however DISER forecasts Australia’s zinc export earnings to decline from $3.5 billion in 2019–20 to around $3.2 billion in both 2020–21 and 2021–22 based on an appreciating Australian dollar, despite increasing production and rising prices.

Lithium continues to be a conundrum wrapped up in onion clothing having suffered due to a COVID-19 induced slump in global automotive sales globally.

Whether it has been needed or just because they can, China upped its imports of lithium carbonate by a whopping 544 per cent year-on-year for April 2020 and up 284 per cent for the four months, January to April 2020, on a year-on-year basis as it cashed in on falling prices to place large lithium orders.

China also increased its imports of lithium hydroxide by 262 per cent, month-on-month for April as trade reopened after the COVID-19 outbreak.

Throw in an offtake agreement or two the country inked during COVID-19, and one would have to assume its appetite for lithium remains strong.

South Korea was not to be outdone and increased importation of lithium carbonate by 28 per cent month-on-month in April, again as trade resumed post the COVID-19 outbreak.

Although we in Australia are yet to see any substantial uptake in the electric vehicle market, at least not until prices come down to generate interest, sales elsewhere are healthy enough.

This resulted in DISER to predict, “global lithium demand to rise from 258,000 tonnes (lithium carbonate equivalent) in 2020 to around 414,000 tonnes by 2022 as car plants in Germany and China commence production and ramp up, after being slowed down by COVID-19”.

“Electric vehicles sales are forecast to drop by 18 per cent in 2020 due to the effects of COVID-19,” DISER said.

“Global electrical vehicle sales slumped by 44 per cent for the March quarter, but were offset by stronger European sales based on emissions restrictions due to come into force on 1 January 2021.”

If an unwinner were to be declared at this time it would be Australian LNG exporters with prices falling to record lows.

As countries have knuckled down to contain COVID-19 there has been a proportionate drop in gas and LNG demand across global power, industrial and transport sectors, which has increased the over-supply of LNG, thereby resulting in weakened prices.

How long we have to wait for these markets to rebound is anybody’s guess, however with vaccines rumoured to be closer to becoming an actual thing, countries will again be looking to kick-start their economies and spot and contract LNG prices will once again be on the rise.

According to DISER, Australia exported some $47 billion of LNG in 2019–20, a figure way down on the previous year, in fact 4.6 per cent lower than 2018–19.

Australia’s LNG export earnings are forecast to fall back sharply again in 2020-21 by 26 per cent to $35 billion.

“Oil prices are a key sensitivity for Australian LNG export earnings, and there is substantial uncertainty underpinning the outlook for oil prices,” DISER said.

COVID-19 and the inability of OPEC+ countries to play nicely have resulted in wild fluctuations of oil prices throughout 2020, although this instability has abated since May 2020 that still suggests a high degree of uncertainty in the short-term.

“This uncertainty presents significant risks to the outlook for the Australian commodity sector,” DISER explained.

“Although Australia is not a major oil producer or exporter, almost three quarters of Australian LNG exports are sold under oil-linked long-term contracts.”

It has to be of little surprise that China is mentioned throughout – and in most economic analysis – as the country is an important trade partner to most others.

However, a significant factor to be included in any global economic equation has to be the probability of a Donald Trump re-election.

When elected in 2016, Trump had his sights on a trade war with China, and the upshot is that for the majority of 2019, Australian trade with China was negatively affected by tensions with the US.

This wasn’t helped by our own Prime Minister rattling the Chinese COVID-19 cage by calling for an investigation into the pandemic spread.

Since then there has been a Sino challenge to the import of Australian barley, beef, and most recently wine.

Although these commodities don’t lend much to the omnipotent Chinese infrastructure build as those we dig out of the ground, they do reflect how the country’s elite wish to enjoy the western things in life.

Trump, if you will pardon the pun, is the Joker in the pack and his possible re-election could extend the ongoing trade tensions that were in place before we all caught the nastiest of colds.