Metals and mining: who gets hit hardest by an economic slump?

There can be little doubt that a severe global recession lies ahead, but the pathway to recovery is less clear. Many assume a U-shaped route, with a quick return to ‘normality’ – indeed our base case forecast is that GDP will contract 4% in 2020 before rebounding to 4.9% next year. But what if we see a sharper downturn, with economic activity taking five years to return to 2019 levels?

My slump scenario – outlined in detail in a recent article – has eye-watering implications for demand, costs and prices for mined commodities. Industry revenues would fall dramatically, with a cumulative loss of US$900 billion to 2025.

I discussed the impact of this scenario with Mike Sinden, Director, Metals and Mining Research, in a recent webinar.

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Who are the best performers in a slump scenario?

In the metals world, zinc and copper look well-placed to recover the quickest. For zinc, it’s a consequence of a lack of mine supply and an undersupplied refined market. Copper sees short term volatility, but retains its longer-term energy transition opportunities – as a vital component in, for example, electric vehicles and wind turbines. We would also see an extended period of price strength for gold. That’s great for gold miners, and for copper miners with significant gold by-product.

On the bulks side, high-quality iron ore and metallurgical coal for the seaborne market fare best from a demand perspective. That’s down to China’s expected continued appetite for both commodities, and India’s for the latter.

Who are the underperformers in a slump scenario?

There are winners and losers in any economic scenario. In this one, a few likely underperformers stand out from the world of metals and mining. The key risk factors include:

• Dollar-domiciled assets

The global economic slump scenario is a strong dollar environment. Those with dollar pegs, or dollar-based costs, won’t see any benefit from weak local currencies.

• Government-ownership

Coronavirus has put governments around the world under intense financial pressure. Government-owned or sponsored companies could struggle to maintain operational levels and become more likely to have to turn to debt markets for funding.

• Exposure to finished steel and thermal coal

Seaborne thermal coal is the worst performer in a slump scenario, suffering from low economic activity and power demand, closely followed by finished steel. Any company with significant exposure, that isn’t well-funded, will be under duress – particularly given the structural overcapacity in steel.

• Exposure to aluminium

Aluminium is a perennial underachiever, due to structural overcapacity and an inelastic response to low prices. And in a slump scenario, the demand loss is huge – five million tonnes a year over the next five years. Not all aluminium exposure is equal though. It’s better to be upstream than downstream, where China dominates.

• Marginal producers of iron ore

China will continue to demand high-quality iron ore from the seaborne market, increasing the dominance of the "big four" producers – Vale, Rio Tinto, BHP and Fortescue Metals. Marginal producers with lower quality grades could find themselves out in the cold.

• Small companies with big capex profiles

Small or mid-cap companies will struggle to fund significant capital expenditure programmes in this scenario. They’ll be faced with either cancelling their programmes or turning to the markets for funding. We could also see a pick-up in M&A activity in this space. Well-capitalised players may spot an opportunity to buy growth, rather than target more uncertain and expensive expansions.

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Our webinar – Metals and mining slump: How bad could it get and what gets hit hardest? – features charts and analysis from our commodity outlooks, including demand, cost and price projections.

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