As mineral and metal prices, production and consumption improve this year amid a broader and deeper economic recovery from the pandemic, the outlook for miners and metal players is positive, says research agency Fitch Solutions.
It notes that this year will see a mix of traditional trends playing out and the acceleration of some relatively new drivers for the industry, such as growing recognition of the need for tech integration and sustainability policies.
"The sustainability trend will continue to gain significant momentum in 2021, with stricter government regulations on the horizon and environmental, social and governance (ESG) investment becoming mainstream," says Fitch commodities analysis head Aurelia Britsch.
The decarbonisation of the mining and metals sector will, therefore, become increasingly top of mind, while the shifts in the thermal coal sector will likely hasten.
Fitch also expects mining capital expenditure to recover this year, driven by the largest players, but financial restraint will remain the norm and midtier and junior miners will struggle to expand investment.
Technology adoption to boost efficiency and sustainability − investment in renewables in particular − will be key pillars of investment for miners.
In the background, political risks related to the mining sector will remain prevalent, and Fitch expects a rise in resource nationalism amid the race to access critical and strategic minerals for the green and digital economy, including lithium, cobalt, copper, nickel and rare earths, and as domestic political risk rises in the post-Covid-19 world.
Growing inequalities and larger fiscal deficits following the pandemic mean that risks of government intervention will be high this year.
In terms of commodity prices, Britsch is confident that metal prices will average higher this year than in 2020, on a year-on-year average basis, owing to Covid-19 recovery in many parts of the world.
The agency expects gold to average $1 850/oz, copper to average $6 300/t and nickel to average $15 000/t, while iron-ore may lag behind at $90/t, down from its average price of $100/t.
Copper is currently trading at its highest level since 2013, despite being the commodity most impacted on by Covid-19 disruptions in 2020.
Britsch points out that the gold price is losing steam after two years of exceptionally strong performance, but says it nonetheless remains high.
Moreover, Fitch expects an uptick in government intervention and resource nationalism amid the race to access critical and strategic minerals for the green and digital economy, and as domestic political risk rises in the post-Covid-19 world.
"Growing inequalities and larger fiscal deficits following the pandemic mean that risk of higher mining taxes or government interference in regulations and the competitive landscape will be high in 2021.
"Meanwhile, the focus on improving supply chain resilience for strategic or critical raw materials, such as lithium, cobalt, copper and rare earths, will support mining project progression and investment in those sectors," Britsch says.
Spending by the mining industry is expected to increase as firms delayed spending for the most part last year.
The acceleration of renewables and natural gas adoption will undermine thermal coal demand, placing pressure on thermal coal operators to consolidate, reduce output and perhaps exit the industry.
In terms of operations, Fitch believes access to a vaccine will help reduce disruptions to operations, compared with mining and metals suffering significant disruptions in 2020, particularly in the copper market.
Britsch notes that global gross domestic product growth is likely to rebound to 5.5% this year, while a continued weakening of the dollar will act as a tailwind for commodity prices.
Major economies have pledged to reach carbon neutrality within the next 30 years, underpinned by Covid-19 stimulus packages for a green recovery from the pandemic.
In the mining sector, this may take the form of rising use of renewables, the use of clean fuel such as green hydrogen and metal recycling.
In November last year, the Partnership for Carbon Accounting Financials rolled out the Global Greenhouse Gas Accounting and Reporting Standards for the financial industry, bringing emissions associated with banks and investors' lending and investment activities to the forefront of public attention.
Miners will therefore face pressure to meet increasing environmental standards to secure project financing. Prominent mining firms that have taken actionable steps toward increasing sustainability include BHP, Vale, Anglo American, Hatch and Fortescue.
Fitch states that smaller miners with brownfield projects will face the most difficulty in securing the financing needed to meet decarbonisation goals.
GREATER GOVERNMENT INVOLVEMENT
Britsch explains further that government intervention in the mining sector is likely to rise this year.
Growing inequalities and larger fiscal deficits following the pandemic mean that risk will increase for higher mining taxes or government interference in regulations and the competitive landscape.
In particular, the access to and development of strategic and critical raw materials supply will remain a hot topic in the mining and metal industry, as major economies will increasingly prioritise strengthening supply chain resilience for these commodities, amid intensifying geopolitical risks and the acceleration of the transition to a green and digital economy.
Demand for some strategic raw materials such as copper for renewables, nickel for batteries, as well as lithium, cobalt and rare earths, is rising fast amid the boom in new technologies, at a time when supply of some of these key materials is relatively concentrated and facing a myriad of key political and sustainability risks.
Some of these commodities are considered 'critical' by some governments, most notably lithium, cobalt and rare earths, but Fitch also highlights copper and nickel as strategic materials of the future, with a lesser supply challenge than rarer metals.
Elevated geopolitical risks in the post-Covid-19 world and ongoing de-globalisation trends are likely to keep the relationship between the West-end market and China, as a key supplier of a number of these critical metals, strained, at a time when investment in renewables and battery manufacturing will pick up.
As a result, key new mining projects are expected to be fast-tracked and become priorities for governments and companies.
Investment and research into new sustainable extraction techniques are also likely to rise.
Suppliers and importers of these strategic minerals are adjusting their strategies.
Importing countries, such as the European Union (EU) and the US, are increasingly implementing explicit policies to secure critical metals sourcing and diversify away from China, including through the development of their own extraction projects when possible, the development of strategic partnerships to secure the more sustainable supply of these materials, and the recycling of materials and manufactured products.
Fitch notes that 2020 saw some clear progress in that direction, with outgoing US President Donald Trump’s September 2020 executive order acknowledging the present domestic supply chain threat resulting from US dependence on China for critical materials such as rare earth elements.
The topic is now also a priority for the EU, as shown by the launch in the region in September last year of the European Raw Materials Alliance, which follows the 2018 launch of the European Battery Alliance and the extension in 2020 of its List of Critical Raw Materials.