Bulk Commodity Prices Diverged – Australian mining giant BHP said that exchange traded commodity prices have recovered slightly from their March & April 2020 lows. Bulk commodity prices have diverged, with iron ore higher than in April 2020 while metallurgical coal prices are lower. Across the suite of commodities, a combination of economic supply-side curtailments and COVID-19 induced supply-side disruptions have served as a partial offset to the lower demand.

Steel Excluding China – BHP maintains view that steel production excluding China could contract by a double-digit percentage in the 2020 calendar year. BP estimates that capacity utilisation excluding China fell to between 50 and 60 per cent across the June quarter. Steel makers from other regions, including Europe, the Americas, India and Japan have cut production. This reflects logistical difficulties created by COVID-19, eg inter-state labour availability in India, as well as collapsing demand in downstream industries, such as automotive eg Europe and Japan.

Steel China – In China, blast furnace utilisation rates have increased from around 80 per cent earlier in February 2020 to above 90 per cent in June 2020. Daily rebar transactions were above normal seasonal levels for much of the June 2020 quarter, helping support a crude steel run-rate of 1,117 Mtpa in June 2020, +4.5 per cent year-on-year. Year-to-date annualised production is seen at 1.004 million tonnes. Finished inventories have fallen as downstream activity has improved. BHP believes that if China can avoid a second wave of COVID-19 steel and pig iron production can both rise in the 2020 calendar year versus the prior year.

Iron Ore – The Platts 62% Fe Iron Ore Fines price index has been resilient so far. This reflects solid Chinese pig iron production of +4.1 per cent year-on-year in June and the impact of constrained Brazilian exports. Meanwhile, preliminary shipping data suggest Australian exports hit a record of 1,072 Mtpa in June 2020. Weakness ex-China is less consequential for price formation in iron ore than in other commodities.

Metallurgical Coal – The Platts Premium Low-Volatile Metallurgical Coal price index has been under downward pressure through the June 2020 quarter. Negative demand impacts from COVID-19 lockdowns in the major importing regions of Europe, India and developed Asia have been the major influence on the market. Chinese demand, on the other hand has been firm. However, China s coal import policy remains a key uncertainty. As demand disruption excluding China accelerated early in the June quarter, prices traded below the lows seen in the second half of the 2019 calendar year. They have since stabilised at these levels. The geographic diversification of metallurgical coal demand is a long term advantage but an impediment under today’s unique circumstances. Developments in both supply and demand imply that lower quality products may face headwinds for an extended period. Premium coking coals exhibit attractive medium-term fundamentals.

Thermal Coal – The energy coal market is in a difficult state. The GCNewc 6000kcal price recently fell below the levels reached during the 2015/16 downturn. Wood Mackenzie has estimated that at late June 2020 spot prices around two-thirds of seaborne supply was likely to be earning negative margins. Short term increases in producer currencies and diesel prices have amplified cost challenges. An uplift in power demand across developed Asia as re-starts progress could help to stabilise the market. China’s policy in respect of energy coal imports remains a key uncertainty.

Copper – Copper prices fell sharply in March 2020 amidst depressed macro investor sentiment. They have since rebounded, first on improving sentiment towards pro-growth assets, and more recently on news of supply challenges in South America due to COVID-19. In terms of demand fundamentals, our view is that the decline in excluding China copper demand will be less severe than for steel. Conversely, in China, copper demand could be marginally weaker than steel in the 2020 calendar year, based partly on copper’s greater exposure to indirect exports from China (approximately 20 per cent versus approximately 10 per cent for steel). Copper also benefits less than steel from transport and non-power utilities infrastructure, which are benefitting from strong policy support. On the supply side, Peru and Chile have experienced difficulty in containing COVID-19, with flow-on impacts to copper operations and the broader supply chain. This has led to a material tightening of the copper concentrate balance, with treatment and refining charges moving lower in response. Scrap availability has also been constrained.

Crude Oil – After crashing in March 2020, crude oil prices exhibited considerable volatility in April 2020. However, conditions improved in May and June 2020, as the early impact of global supply cuts, China’s demand recovery and activity restarts in the US and Europe took some pressure off global storage. Large and small producers alike have announced sharp cuts in capital spending in response to the price decline. In North America, rigs targeting oil have declined by more than 70 per cent, to a level last seen before the shale boom. We believe that the most significant risks to the physical market have passed. However, a return to pre-COVID-19 demand levels is not expected to occur before the end of the 2021 calendar year.