As Covid-19 infection rates fall in a number of countries, governments are loosening social-distancing rules and instigating measures to encourage normal economic activity. Commodity prices rebounded sharply during the global financial crisis of 2008-09. Can we expect the same this time following the pandemic crisis? Perhaps.
What thwarts a similar bounce back is that China’s economy is far more advanced so we are unlikely to see the same levels of government-led infrastructure build or stockpiling that helped commodity demand and prices back then. Other governments also lack the ability to launch significant commodity-intensive infrastructure initiatives.
In addition, there is simply not the same intergovernmental will to work together and solve this economic crisis, as there was during the financial crisis.
This creates significant uncertainty on the timing and strength of a global recovery, with the real danger that government finger-pointing and uncoordinated policymaking could slow any commodity rebound.
More encouragingly, social distancing is having the greatest impact on the commodity-light service sector. What will consumers do with their disposable income instead? Will they save or spend on commodity-intensive goods, cars and home improvements?
Furthermore, economies today are not experiencing a credit crush as they did back in 2008. There will be plenty of investment dollars looking for a home this year and if miners can prove that margins are more important than volumes, the mining and metals sector could outperform. After all, would you at present invest in commercial property, retail, aviation or the automotive sector?
Initial recovery signals from China are also positive, pointing to a rebound in domestic commodity demand. Purchasing managers’ indices, industrial production data, construction activity and auto sales all show signs of some recovery. And colleagues in China say what they are seeing on the ground fits with the data.
Around them the streets are filling up again and there is strong support for the government’s actions throughout the crisis. The consumer service sector remains subdued, though. There is little talk of metal stockpiling or new infrastructure projects, although details will become clearer after the meeting of China’s National People’s Congress later this month.
In reality, it will be another three to six months before we see how consumer spending develops and hence how business confidence is affected. However, this should not stop miners taking positive action now.
Miners are well-positioned to manage demand uncertainty. The price baskets for base metal, steel and fertiliser prices from CRU, the business intelligence group, have only fallen between 6 and 12 per cent since the beginning of March.
Equity prices remain robust. For example, the S&P/ASX 300 Metals and Mining index has declined by less than 5 per cent over the same period. Of course, there are notable exceptions to this positive outlook, for example in seaborne thermal and metallurgical coal, which have been hit hard by industrial lockdowns in Europe and India.
Mining debt also remains manageable with good liquidity levels. There are options to reduce leverage ratios if needed while management teams have recent experience in delivering cost reductions. The resilience of the sector has been shown in recent days with Fitch Ratings leaving credit ratings for Anglo American, BHP and Rio Tinto unchanged.
Over the next 18 months, miners need to demonstrate a strong resolve to balance their markets and manage cash reserves prudently to maintain positive sentiment towards the sector. Supply discipline has been discussed at length in recent years. If miners hold the line, commodity, share and related debt prices could all outperform in the weeks and months ahead.
Paul Robinson is a director of CRU Group, a consultancy
The Commodities Note is an online commentary on the industry from the Financial Times