Base metals face long slump, Wood Mackenzie analyst Julian Kettle
Wood Mackenzie’s Julian Kettle says China’s early resurgence may not save the mining and metals sector from a tough few years.
One of the mining sector’s top analysts says the sector could be in for a long haul as developed economies recover from the coronavirus, saying China’s early resurgence may not save the sector from a tough few years ahead.
Wood Mackenzie metals and mining vice chairman Julian Kettle told The Australian there was a 60 per cent chance his worst fears for the sector may come to pass, saying his “slump scenario” for the industry suggests conditions for base metals miners could soon be worse than they were in the early 1990s.
In a post to WoodMac’s blog on Thursday, Mr Kettle said the outlook for iron ore and metallurgical coal was good, but expectations of a quick recovery for the rest of the metals and mining sector could be at risk.
“My slump scenario combines a recession of the severity of 2009, without the sharp recovery, and the low growth rates of the early 1980s or 1990s. What does this grim economic outlook mean for the world of mining and metals? It certainly has the potential for massive demand destruction, an extended period of oversupply and prices that chase costs downwards,” he said.
Mr Kettle told The Australian he believed his slump scenario was likely being factored in by global equity markets.
“The concern I've got is that China is off to the races, producing all of these goods, but who is going to buy them when we’re in lockdown?” he said.
“Am I going to go out and buy an electric car for $30,000 when I can buy a petrol car for $16,000? Nope, I'm going to buy a petrol car — or I'm going to keep my old car because I'm worried about my job.
“I think for the next couple of years we’re going to be in a situation where consumers are going to be extremely reluctant to spend.”
And expectations China’s internal demand may bolster the sector may also be wrong, he said.
“In 2008 China’s debt-to-GDP was 150 per cent. Before coronavirus, debt was 300 per cent of GDP because corporate debt had ballooned. So if anybody was thinking China is going to come to the rescue and have a massive stimulus program, I don’t think they have the capacity or the willingness again,” he said.
Mr Kettle said thermal coal was likely to take a short-term hit through diminished energy use across the globe, but may benefit in the medium term as governments pushed back plans to decarbonise economies in favour of cheaper power options from existing coal-fired generators.
“Put simply, with debt levels ballooning and growth subdued, the cheapest power fuel — coal — will be the go-to option during this period,” he said.
But he said base metals miners may face tough years ahead as slower industrial and consumer growth hits demand.
“Base case growth rates for base metals can be described as ‘slower for ever’ with all markets experiencing low single-digit growth. Not surprisingly, the slump scenario shifts base metals growth to alarmingly anaemic rises from 2020 to 2025,” he said.
And even the case for iron ore could be challenged within a few years, Mr Kettle said.
“We are already forecasting China peak steel consumption in 2022. The upshot of these developments is that global finished steel demand falls by some 200mt in 2020 and only recovers to 1630kt by 2025, never again reaching its 2019 level,” he said.