Despite the Covid-19-related economic dislocation that is under way, consultancy Roskill says prices in several metals markets have gone up year-to-date, and that mining equities have outperformed those of many other sectors.
Despite this, the mining sector is far from immune to the Covid-19 disruption, with a Roskill White Paper, published on June 11, stating that the world economy has been experiencing its “quickest and largest contraction in modern times”.
According to the International Labour Organisation, more than 300-million people globally have lost their job this year alone and declines in gross domestic product (GDP) during the first half of this year are likely to be “well over 10%” in some major economies.
Further, despite the global battle with the virus being far from over, it is being better contained in regions like Europe, North America and large parts of Asia, and economic restrictions have already been significantly rolled back in China, with restrictions being progressively eased elsewhere.
This has left Roskill questioning how metals demand is being affected by the Covid-19-related downturn, what the speed and size of a post-lockdown recovery will look like and what a post-Covid-19 world may look like when compared to the one before the pandemic.
In its White Paper, the consultancy compares the Covid-19 effects to that of the world economy during the 2008/9 global financial crisis (GFC), which is considered to have been “particularly traumatic” for the global mining industry.
While the global mining sector, as a whole, has “performed more robustly” this time around, Roskill thinks metals markets will be challenged over the coming two quarters as a number of potential new forces come into play, or are accelerated, as a result of the current crisis, which the mining sector will need to navigate in the years ahead.
The GFC is often seen as a single event, but Roskill says it is important to recognise that there were major differences in how it was experienced by developed economies, such as that output in some of the main developed economies (including the US) declined between 2% and 5% and didn’t return to its pre-crisis trend after the GFC, although the rate of growth did eventually recover. This is characterised as a U-shaped downturn.
Gross domestic product (GDP) in a small group of developed economies (like Canada and Australia) stagnated or fell slightly, but then returned relatively quickly to its previous trendline. This is characterised as a V-shaped recession.
In a final group of economies (like Greece and some other countries), not only did the economy come out of the GFC period with a lower level of output (falls of between 5% and 10%, or more), but the trend in GDP afterwards was permanently lower, giving it an L-shaped GDP profile.
Which of these different patterns prevailed depended on success and efficacy of policy responses to the recession in each country and the extent to which economies had underlying structural issues going into the GFC, and which the crisis exposed, Roskill notes.
As such, the consultancy’s White Paper says there is no clear evidence of there being the same degree of fundamental economic imbalances in the major developed economies ahead of the Covid-19 pandemic as there were going into the GFC.
Underlying conditions therefore seem generally more supportive of a V-shaped recovery in the world economy than they were in 2009. However, less positive outcomes for the strength of today’s recovery are possible should the current crisis morph into causing macroeconomic breaks or behavioural changes.
Examples of these could include a permanent fall in risk appetites and lower investment levels, temporary layoffs becoming permanent cuts to employment or a loss of productive capacity in the economy. Signals that these developments are taking place would include steepening interest rate risk curves, permanent falls in capital spending, structural unemployment (as opposed to temporary layoffs) and bankruptcies of previously viable businesses.
While these are key risks at this time, Roskill says there is no conclusive evidence that these are yet happening on a significant scale.
Current consensus views for the US economy are of a recovery somewhere between a U- or V-shaped recovery, with two-thirds of the initial loss of GDP caused by Covid-19 being made up by end-2021.
Although the initial shock to GDP would be significantly greater than that recorded during the GFC, a much bigger proportion of this loss of output is expected to be recovered.
Should downside factors become stronger and result in further downside risks to short-to-medium-term growth outcomes, Roskill says this will not necessarily be bad for longer-term growth.
While a release of resources and the triggering of innovation in parts of the economy may improve longer run productivity, the consultancy notes that putting pressure in the other direction, the fallout of the current crisis is leading to a worsening in global relations.
In turn, this may accelerate a trend towards deglobalisation and lead to a shortening in supply chains, more constrained flows of capital and reduced technological transfers. Such factors are likely to lower growth in global productivity and reduce economic convergence.
Further, a difference between the Covid-19 crisis and the GFC worth noting in terms of its impact on the mining sector is that given the physical nature of the lockdowns and social distancing requirements, the former has had unusually severe impacts on the retail, hospitality and services sectors, which are not especially metals intensive consuming industries.
According to the White Paper, what is “very striking” is the relative speed of collapse in Purchasing Managers Indices (PMIs) and industrial production recorded this year. The largest monthly decline in US industrial production during the GFC was a fall of 4%; one-third of the reduction reported in just April this year.
One consequence of this is that inventories have not had time to go through their usual destocking pattern, Roskill says, noting that whatever metal inventories existed at the start of the Covid-19 crisis will largely remain in place.
However, should producers not believe demand will recover to pre-Covid-19 levels, destocking might hold back demand for metals for longer than in more usual economic cycles when restocking tends to magnify the recovery phase.
In effect, this means that even if industrial production picks up, the effect on metals demand may be more muted than in previous economic recovery phases.
Additionally, Roskill’s White Paper notes that the other key difference in the world economy today compared with the period of the GFC that is important for metal markets, is that China is now a more developed economy which accounts for a much larger share of the world economy than it did a decade or so ago; 19% of global GDP on a purchasing power parity basis compared to 11% in 2007.
Metals markets are now even more skewed towards China, and the country accounts for over half of total world consumption for most metals, up from around one-third in 2007.
But while China represents a much larger share of the world economy than it did before, its underlying rate of economic growth is significantly slower than it was a decade ago.
Yearly GDP growth in China in the three years prior to the GFC averaged 12.8% compared with 6.6% between 2017 and 2019.
The rate of growth in Chinese industrial production has also slowed even more between these two periods; from an average of 16.6% a year in the three years prior to 2008 to 6.1% a year.
The economic effects of the GFC in China were largely confined to two to three quarters and even during that period of time the economy continued to expand at a significantly positive rate. In fact, Roskill says that when spread over 12 months, the effects of the GFC in China are difficult to isolate compared with regular volatility in GDP.
The effects of Covid-19 on the Chinese economy, meanwhile, are likely to be much more notable given the extent of the contraction in GDP already reported in the first quarter this year – a 9.8% quarter-on-quarter decline.
PMI data for China has rebounded back even faster than in 2008 and 2009 though and industrial production and electricity output were already back into positive territory year-on-year in April.
While this is not necessarily the “end game” for the effects of Covid-19 on China, considering that some restrictions on the economy remain, Roskill says that a second wave of infections still represents a significant risk.
Increasing international hostility could yet have unknown economic consequences, and more fundamentally, a recovery in retail sales has yet to occur and, with weaker export demand likely, growth in China may be constrained by insufficient final demand.
Further, China’s abandonment of a GDP growth target is “perhaps an acknowledgement of some of these challenges the country faces”, Roskill comments, adding that nevertheless, the consensus view is for Chinese growth to be back up to 6% year-on-year by the fourth quarter and that it will record growth of around 2% over 2020 as a whole.
As with the recovery in China after the GFC, Roskill says that the Covid-19 pick-up in activity will need to be internally generated. In 2009 and 2010 an important driver for the pick-up after the GFC was a major government stimulus package, and unlike its position before the GFC though, the Chinese government was running a “sizeable fiscal deficit” ahead of the Covid-19 pandemic and stimulus measures taken by the government have, so far, have been limited.
Actions enacted have been largely limited to capital injections of about 1.7-trillion yuan (about $240-billion) by the People’s Bank of China, a reduction of the one-year lending facility rate of 0.10% and some loan financing to key industries.
However, Roskill says the efficacy of these will also be less than during the GFC as the economy is larger and there are less attractive projects in which to invest.
On the positive side, the Chinese economy is more mature than before – the economy is 2.2 times its size in 2007 – and while it has a slower rate of underlying growth, this growth still has a fair degree of momentum behind it given the per capita GDP in China is still only one-third that of the US. However, high levels of domestic savings allow for considerable scope for domestic consumption-led growth.
Overall, the initial hit from Covid-19 has been “larger, more sudden and more global” than the GFC, according to Roskill, who adds that “there are some good grounds for thinking that the recovery will be equally sharper and with less persistent negative effects on metals demand”.
Although the economic recovery depends on controlling the spread of the virus and some “hysteresis” effects are likely as there is less evidence of prior underlying economic imbalances that will prevent a V-shaped recovery, according to the consultancy.
Additionally, the consultancy notes that economic policy responses have been less globally coordinated but they have benefitted from previous lessons learnt and have been much faster than those taken during the GFC.