BHP Group Limited

08/22/2023 | News release | Distributed by Public on 08/21/2023 16:51

BHPs economic and commodity outlook


For India, the weak -19% YoY Ytd outcome for calendar 2023 is partly a function of supply availability: since May-2022, only two months have seen any supply at all from an FSU source entering India, and traditional partner Belarus has not shipped anything to India in that period. A substantial cut in the MOP subsidy for the 2023 Kharif planting season was an additional drag. South-east Asian imports have also declined heavily (-38% YoY Ytd). In contrast to India though, FSU flows to this region have been increasing, with Canada losing share over the last six months. Belarusian shipments have been registered as non-zero in five individual months since July-2022: indicating that South-east Asia was a third, minor outlet for Belarusian product, after China and Brazil.

Moving to the exporters now, and it is clear that Belarus has mitigated its main logistics constraints more rapidly than expected. After its production more than halved in calendar 2022 (from 13.1 Mt to 6.3 Mt, 4.9 Mt of which was exported), it is back in the 7-8 Mt export range in the first half of calendar 2023. Russia did not fall anywhere near as far as Belarus did, as it never lost access to its infrastructure, but nor is it ramping up back to pre-Ukraine conflict levels: indeed, production in calendar 2023 is expected to be lower than last year. Some of that will be due to the fact Russia is sacrificing some port and rail capacity to accommodate its Belarusian ally (at the sovereign, not company level). Canada's run-rate in calendar 2023 to date is down -5%, with voluntary mine curtailments from late in calendar year 2022 setting things up for a decline YoY.

The careful pre-Ukraine calculus that helped motivate our Jansen stage 1 decision was partly based on a ~5 Mt FSU project pipeline in the 2020s. There are obvious risks pertaining to both the timing and ultimate delivery of those projects given the new state of affairs. We also note that Nutrien reported an "indefinite pause" on its mid-2020s expansion plans at its Q2 earnings call. Pushing the other way there is more Laotian product moving into China than was previously expected.

We consider that a material delay or non-arrival of a portion of these FSU growth tonnes is likely to create either an earlier balance point for the market, or a potential reshuffling of the theoretical inducement queue, with non-FSU latent capacity released, non-FSU projects coming forward and FSU projects moving backward. Or as is most likely, we observe some combination of these options whereby some of the space vacated by the FSU is captured elsewhere, but perhaps not to the point where it prevents the balance point being achieved sooner than previously expected. Nutrien's "indefinite pause" helps to ascribe updated likelihoods to the various combinations.

It is important to note that none of these options would change the real long-term price we have in mind - but it could alter the time by which it emerges as a durable trend. There are many, many possible permutations here, and against this backdrop it is strategically prudent for us to accelerate studies of our own capital-efficient organic options beyond Jansen Stage 1, as we have stated in other fora.

That latter point includes both the need to improve yields on existing land under cultivation, in the face of depleted native soil fertility, but to also begin factoring in the long run land-use implications of large-scale first-generation biofuel production, lower availability of crop residues as an alternate supply of potassium to chemical fertilizer37 under large-scale 2G biofuel production (e.g. "sustainable" aviation fuel), giga-industrial scale renewables and nature-based solutions to climate change. To be clear though, we consider that the impact of deep decarbonisation on potash demand is best characterised as attractive upside on top of an already compelling demand case: not a case in itself.

Something else that attracts us to conventional potash mining and processing is its generally favourable upstream environmental footprint among the major fertiliser nutrients, and beyond the mine gate potash does not generate some of the negative environmental impacts associated with excessive application of nitrogen and, to a lesser extent, phosphorus. The major issues here are leaching into and polluting waterways and the release of GHGs in the application process. Excess nitrogen and phosphorus flows to the biosphere and oceans have been identified as critical "planetary boundary" parameters.38

Twelve months ago, our core message on the inflation front was that we were sensing emerging differentiation between manufacturing and logistics, on the one hand, and labour and energy on the other. The first two categories were moving into the "past the worst" camp. Labour and energy, especially power, remained pressing issues where it was unclear if conditions might yet deteriorate further. Europe's energy crisis and Australia's east coast power crisis were cases in point.

Six months ago, it was becoming clear that our instincts on manufacturing and logistics had served us well. If you slow the industrial sector of the developed world down to the point where it is balanced on the precipice of a recession, you can take a lot of pressure off physical supply chains and the price of durables goods and logistics services.

Operational labour markets justified the concerns we expressed, with worker availability tight and wage pressure coming through. But importantly, we gauged that risks with respect to energy costs had become balanced, rather than skewed to the upside, thus leaving labour markets as the single most pressing forward looking inflationary concern for calendar 2023.

And we repeated the standard disclaimer on realised costs versus prompt prices: "The lag effect of inflationary pressures is expected to remain a challenge in the 2024 financial year."

Benchmark indices for ammonium nitrate (AN) - a proxy for explosives costs we estimate as a weighted average of inputs - declined -21% in the second half of the 2023 financial year in Western Australia, -28% in Chile, and -6% in eastern Australia. Volatility in feedstock costs (ammonia and its feedstock, natural gas) produced sizeable falls as the extreme spikes seen in the early months of the Russia-Ukraine conflict unwound.

Earth-moving tyre raw material costs (weighted) declined by -0.9% in the second half of financial 2023 versus the prior half. Natural rubber has the highest weight in our index, and it stabilised over the last six months having declined by -25% in the prior half. There were modest declines in petroleum derived inputs, and modest uplifts half-on-half in steel.

Sulphuric acid prices for Chilean end-users, sourced from Argus, fell sharply in the first half of financial 2023, and they fell again in the second half. North Asian FOB prices have collapsed on weaker demand from the phosphate and industrial sectors. Lower sulphur feedstock costs and lower freights rates have also contributed to the decline. CFR Chile pricing ranged from $98/t to $139/t over the second half of the 2023 financial year, averaging $113/t, a -32% move half-on-half. The end-of-period price was also the low.

Power prices were crisis-prone across multiple regions for much of calendar 2022, as developed nations faced up to their sternest energy security test in generations. With the northern hemisphere winter of 2022-23 now navigated, an (uneasy) calm has descended. We see the forward-looking risks for power prices in our main operational jurisdictions as balanced.

Chilean spot power prices in the Northern grid (SING) rose +6% in the second half of financial 2023 to an average of US$104/MWh. In Chile, the principal regulatory response to the breakdown of the energy trilemma was to mobilise and extend coal power utilisation. Prices increased by a modest +14% over the full financial year 2023. Note that Chile has a power capacity market that remunerates emergency peaking capacity whether it is mobilised or not.

Australian NEM spot power prices were engulfed by crisis in the June quarter of 2022. In the second half of financial year 2022, prices increased 219% on average across the NEM. They then fell just -12% from that elevated level in the first half of financial 2023, but they came down a further -38% in the second. The Federal Government intervened directly in the market in December-2022 by way of capping feedstock prices (gas @ $A12/GJ, coal @ $A125/t). Gas prices had already begun to recede before the ban was imposed. Power prices have also been assisted by improved renewable generation. We see periodic bouts of high volatility as an inherent characteristic of the NEM - with a major spike in power prices in South Australia a week prior to this report being published being a case in point. We consider that the difficulties of calibrating the exit of coal capacity with increasing penetration of intermittent renewables backed by an (as yet) immature storage infrastructure and an under-invested transmission network seem more likely to amplify than dampen that feature for the remainder of this decade.

Diesel prices have unwound a reasonable portion of the extraordinary gains registered in the wake of the start of the Ukraine conflict, with both lower crude oil prices and an easing of refinery spreads contributing to that outcome. Average Singapore diesel (into Minerals Australia) declined -24% half-on-half to $101/bbl, while average US Gulf Coast seaborne (into Minerals Americas) declined -25% half-on-half to $103/bbl. Even so, prices were slightly higher on average across financial year 2023 than in the prior financial year ($116/bbl versus $112/bbl). Refinery spreads are no longer at record highs (USGC peaked at $80/bbl in the first half of financial 2023, averaging $49/bbl. Singapore's peak was $57/bbl, and an average of $37/bbl) but they are, elevated relative to history. Singapore closed financial year 2023 at $18/bbl versus the 2017-2019 average of $13/bbl. As for crude markets, it was a less volatile half-year after the drama of calendar 2022, with macro sentiment and supply discipline by OPEC being major influences on price direction. Financial instability in the US and Europe in March-2023 drove Brent prices markedly lower, precipitating a surprise out-of-session supply cut by OPEC on April 2. The resulting price gains were short-lived, but additional "voluntary" cuts in July seem to have had a more durable impact, given they have coincided with stronger seasonal demand.

The rate of increase in the US producer price index (PPI) for mining machinery and equipment manufacturing moderated further in the second half of financial year 2023. The index is now running at +12.8% on a 12-month smoothed basis, +10.6% YoY for the month of July 2023, with the latter down around -3 percentage points over the last six months. While these figures remain high, and we are somewhat sceptical about the index' relative stickiness given the time series dynamics of adjacent sectors and comparable indicators, at least they are an improvement from the rate of increase we were facing at times in financial year 2023, with outcomes that were the highest since 1976. The construction machinery PPI was at +11.1% on a 12mma basis and was running at +10.2% YoY in July-2023. The YoY rate peaked in August 2022 at +13.8%.

Important notice:

This article contains forward-looking statements, including regarding trends in the economic outlook, commodity prices and currency exchange rates; supply and demand for commodities; plans, strategies, and objectives of management; assumed long-term scenarios; potential global responses to climate change; and the potential effect of possible future events on the value of the BHP portfolio. Forward-looking statements may be identified by the use of terminology, including, but not limited to , "intend", "aim", "project", "see", "anticipate", "estimate", "plan", "objective", "believe", "expect", "commit", "may", "should", "need", "must", "will', "would", "continue", "forecast", "guidance", "trend" or similar words, and are based on the information available as at the date of this article and/or the date of BHP's scenario analysis processes. There are inherent limitations with scenario analysis, and it is difficult to predict which, if any, of the scenarios might eventuate. Scenarios do not constitute definitive outcomes for us. Scenario analysis relies on assumptions that may or may not be, or prove to be, correct and may or may not eventuate, and scenarios may be impacted by additional factors to the assumptions disclosed. Additionally, forward-looking statements are not guarantees or predictions of future performance, and involve known and unknown risks, uncertainties, and other factors, many of which are beyond our control, and which may cause actual results to differ materially from those expressed in the statements contained in this article. BHP cautions against reliance on any forward-looking statements, including in light of the current economic climate and the significant volatility, uncertainty and disruption arising in connection with the Ukraine conflict and COVID-19. Except as required by applicable regulations or by law, BHP does not undertake to publicly update or review any forward-looking statements, whether as a result of new information or future events. Past performance cannot be relied on as a guide to future performance.

No offer of securities
Nothing in this article should be construed as either an offer or a solicitation of an offer to buy or sell any securities, or a solicitation of any vote or approval, in any jurisdiction, or be treated or relied upon as a recommendation or advice by BHP. No offer of securities shall be made in the United States absent registration under the U.S. Securities Act of 1933, as amended, or pursuant to an exemption from, or in a transaction not subject to, such registration requirements.

Reliance on third party information
The views expressed in this article contain information that has been derived from publicly available sources that have not been independently verified. No representation or warranty is made as to the accuracy, completeness or reliability of the information. This article should not be relied upon as a recommendation or forecast by BHP.

BHP and its subsidiaries
In this article, the terms 'BHP', the 'Company', the 'Group', 'BHP Group', 'our business', 'organisation', 'we', 'us' and 'our' refer to BHP Group Limited and, except where the context otherwise requires, our subsidiaries. Refer to the 'Subsidiaries' note to the Financial Statements in the BHP Annual Report for a list of our significant subsidiaries. Those terms do not include non-operated assets.

Footnotes

1 Data and events referenced in this report are current as of August 14, 2023. All references to financial years are June-end, as per BHP reporting standards. For example, "financial year 2023" is the period ending 30 June 2023. All references to dollars or "$" are US dollars unless otherwise stated. The data is compiled from a wide range of publicly available and subscription sources, including national statistical agencies, Bloomberg, Wood Mackenzie, CRU, IEA, ILO, IMF, Argus, CREIS, Fertecon, FastMarkets, SMM, Parker Bay, MySteel, Platts, LME, COMEX, SHFE, ICE, DCE, SGX, and S&P Global, among others.

2 The UN released new long-term population projections on World Population Day (July 11, 2022). At a global level, these are essentially unchanged from the prior vintage out to 2050. There are, however, important regional differences and there are considerable changes in the second half of the century. We will review these changes and their implications in a future blog.

3 Data comparisons are between 2019 and 2030 and reflect our central case forecasts, which incorporate aspects of the potential physical impacts of climate change for regions around the world and responses to them for these global indicators, the projected "green" investment boom, estimates of global inflation and the likely impact of expected climate policies. GDP is in nominal US dollars, on a base of $87 trillion in 2019, with changes being the absolute difference between the 2019 actual and the 2030 projection. Capital spending is estimated based on the expected share of gross capital formation (GCF) applied to this measure of GDP. In PPP terms, the 2019 GDP base is around $135 trillion.

4 Paris-aligned" means a societal pathway aligned to the aims of the Paris Agreement. The central objective of the Paris Agreement is its long-term temperature goal to hold global average temperature increase to well below 2°C above pre-industrial levels and pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels.

5 We note, of course, that there is an almost infinite array of technical, behavioural and policy assumptions that can achieve this end in combination, and our 1.5-degree scenario is just one of the many. Each unique pathway produces a unique call on commodity demand and presents a unique incentive matrix vis-a-vis supply. This highlights the need to avoid treating any single pathway as the sole source of "truth". That is too heavy a burden for any one scenario to carry. As the common knowledge base of publicly available Paris-aligned scenarios continues to grow, we will continue to learn from this invaluable collective resource to improve the work that helps to inform our strategic deliberations. The statement in the text is explicitly based on the commodity demand and price impacts of our 1.5-degree scenario, a technical pathway modelled in consultation with Vivid Economics which requires steep global annual emissions reduction, sustained for decades, to stay within a 1.5°C carbon budget. Demand figures derived from the pathway, together with its assumptions and limitations, are described in our Climate Change Report 2022, available at bhp.com/climate.

6 Available from https://www.iea.org/topics/net-zero-emissions

7 Six of the sixteen measures focus on the financing real estate development. They are (1) Stabilise real estate development loan growth. (2) Support reasonable demand for individual housing loans. (3) Stabilise credit support of construction companies. (4) Support the extension of existing real estate development loans and trust products. (5) Stabilise bond financing. (6) Stabilise trust products financing. Two were related directly to the delivery of stalled projects, one citing development banks and the other for the general finance industry. Two related to the resolution of distressed developers, covering M&A and the role of asset management companies (AMCs). Two related to consumer protection for those struggling to service loans. Two related to relaxing the strict enforcement of banks' macroprudential ratios vis-à-vis the sector. The final two related to M&A within the sector and the promotion of REITs in the rental segment.

8 These are 2023 estimates by the IMF. See page 44 of the report available from: https://www.imf.org/en/Publications/CR/Issues/2023/02/02/Peoples-Republic-of-China-2022-Article-IV-Consultation-Press-Release-Staff-Report-and-529067

9 The relative size of the two segments moves considerably over the course of cycles. The non-commodity segment was 72% of starts and 79% of completions in calendar 2022. However, such was the scale of the starts ramp-up in the multi-year upswing that led up to the pandemic, that developers still account for 58% of the stock of floor space underway.

10 It is not an all-time low, partly because the commodity housing market did not exist until the late 1990s, and therefore the inventory figures were exceedingly small in absolute terms in the 2000s.

11 Household size is from the decadal Census. Sample surveys are conducted more frequently but the data is of substantially lower quality than the Census.

12 Estimates from the China Household Wealth Survey Report: The proportion of real estate remains high_China Economic Network National Economic Portal (ce.cn)

13 China has a target to increase the share of rural sewerage that is treated from 28% in 2020 to 40% in 2025. That is also an interesting datapoint for those wondering if China is saturated with infrastructure (no pun intended). Developed countries treat about three-quarters of their sewerage, on average.

14 These figures are exports produced in the country. Japanese auto sales produced by affiliates abroad dwarfs their direct export numbers. Of the approximate 24 million sales of Japanese auto makers in 2022, 70% were foreign affiliates, 17% were domestic and 13% were traditional exports. So, while China may be the largest exporter now, but it is still far from being the larger seller of cars in foreign markets.

15 Definitions can be found here: https://www.iea.org/reports/tracking-clean-energy-progress-2023

16 Interestingly, China's wind turbine exports are -6.5% YoY in the first half of calendar 2023 - another sign that this critical value chain is going through a difficult period globally. Other signposts include job losses among major western OEMs, asset write-downs, and a string of offshore wind project cancellations.

17 The Observatory of Economic Complexity (with MIT roots) and Harvard's Atlas of Economic Complexity are the two competing sources.

18 This range should be treated with modest caution, given different weighting systems, different years of publication and the fact that a bullish or bearish disposition towards US growth may bias the relative level assessed for China. We feel though that the information is broadly indicative of the best thinking on this incredibly important topic.

19 Data on steel and pig iron in this chapter are from WorldSteel and official agencies, unless specified otherwise. Some growth rates have been rounded and historical figures have been revised since our previous version of this report.

20 This distinction is made to avoid confusion with seasonal restrictions on heavy industrial activity based principally on air-quality concerns, which have a much longer history, particularly in Beijing and surrounding areas.

21 The latest information on steelmaking processes have led to a revision of historical estimates of margin levels. All figures are presented on this updated basis. Margins reported in previous vintages of this outlook are thus not like-for-like.

22 A BF-BOF operation is an integrated process with "hot metal" (molten pig iron) produced in the BF then transferred to the blast oxygen furnace (BOF) for conversion into steel.

23 Note that the net exports increased to around 12% of production in 2015 and 2016, circa 100 Mtpa, on a much smaller production base than today. That spike in exports was a sign of stress.

24 The tragic Brumadinho tailings dam collapse occurred in the south-eastern Brazilian state of Minas Gerais in January 2019. With hindsight, it has been revealed as a key inflection point for the iron ore market.

25 The abbreviations used in the metallurgical coal section are as follows - PLV: Premium Low-Volatile, MV64: Mid-Volatile 64, PCI: Pulverised Coal Injection, SSCC: Semi-soft Coking Coal, as published by Platts. Unless specified otherwise, figures are rounded to the nearest dollar and are quoted in free-on-board (FOB) terms. The terms "coking" and "metallurgical" coal are used interchangeably throughout the text.

26 These approximations are based on a sample of mills, not a census. Note a BF is typically relined every 20 years or so.

27 LME Cash Settlement basis. Daily closes and intra-day lows and highs may differ slightly.

28 A decade ago, stocks in Chinese bonded warehouses reached 1 Mt. Today, there is less than 100 kt.

29 A MOF ruling in 2022 specified that Chinese scrap firms are required to pay 3% of their general revenue in VAT, a concessional rate from the general scheme of 13% of added value. Reportedly, many firms were not paying any VAT, and their business models are coming under strain as local authorities are no longer willing to look the other way with fiscal stress high.

30 While this is most evident in Asia, Class-II ferro-nickel producers have also faced considerable discounts outside Asia.

31 Historical data is compiled from a composite of sources (Wood Mackenzie, SMM and CRU), with some BHP estimates.

32 We focus on key uncertainties in the main text, but the future path of conventional non-battery demand is also worthy of note. Nickel first-use is dominated by the stainless steel sector. It comprised more than two-thirds of primary demand in the 2010s but has been losing ground to batteries at the rate of a few percentage points year in the 2020s. Non-stainless, non-battery demand has been more stable in its share around one-fifth. Nickel end-use is diverse, with broad sectoral exposure to construction, consumer durables and electronics, engineering, metal goods and transport, in addition to finished batteries.

33 An interesting study from the IFC provides estimates of the land-use GHG emissions impacts on copper and nickel mining. See https://commdev.org/publications/ifc-net-zero-roadmap/

34 Climate-Smart Mining: Minerals for Climate Action (worldbank.org)

35 Fertiliser-grade MOP is commonly sold in powder ("standard") or compacted "granular" forms, abbreviated as sMOP and gMOP respectively. gMOP typically sells at a premium. Major demand centres for sMOP include China and India, while gMOP is prevalent in the Americas. Pricing data sourced from Fertilizer Week and public filings.

36 All trade data in this section are from S&P Global.

37 The Kharif is one of India's two main cropping seasons, the other being Winter (Rabi). Kharif tends to coincide with the monsoon, with crops (staples being rice and corn) sewn alongside the early rains and harvested at monsoon end. Wheat and barley are staple Rabi crops.

38 The potassium uptake of crops comes from (a) native K in the soil, (b) crop residues, (c) manures, and (d) chemical fertiliser. These shares vary widely by region, but the global averages are 30% from the coil, 20% from manures, 20% from crop residues and 30% from fertilizer. We anticipate that the fertiliser share will rise over time as soil fertility depletes.

39 For more on the Global Boundaries framework, see W. Steffen et al., Science 347, 1259855 (2015).