China's strong demand for commodities has shifted the global industry’s perspective away from developing market consumption to a focus on Chinese consumption, BlackRock MD Evy Hambro said during a discussion as part of this year’s virtual Platinum Group Metals (PGMs) Industry Day, on March 24.
This shift in perspective led to a change in the entire commodity landscape, he commented, noting that it affected corporate strategy, which was “always cyclical”, and also impacted on the net price cycles.
However, trends around sustainability would drive markets for the next decade, he said, explaining that this was a “huge thing” for both the financial and resources sectors, as resources companies, for example, had an opportunity to reconsider the role they played within society “because you cannot supply the world’s needs for the carbon transition without commodity supply”.
Producing these commodities in a sustainable way, with as little impact as possible on the world, and doing it in a way that was responsible, was going to impact on the perspectives of companies, which Hambro believed was a transition the world was already experiencing, though slightly earlier than initially expected.
“If that transition is done well, then the resources companies have the ability to be at the heart of being a beneficiary of this transition, with rising commodity demand trends and likely decent margins for a long period of time.”
Therefore, Hambro believed that, should capital discipline remain, and resources be produced responsibly, there was a chance of the sector getting a “re-rating”.
Commenting on environmental, social and governance (ESG) trends specifically, Hambro believed the shift of capital was going to drive differentials of cost in the corporate landscape and, therefore, different ways of measuring companies based on their asset mix will arise.
This was already evidenced through the industry’s “rush” to get out of thermal coal assets, he pointed out, noting that the inability of some companies to dispose of assets like these would negatively impact on them.
The ESG shift is driving positive change in the way that companies behave but is also presenting a challenge in the sense that some companies may not know what to do with noncomplying ESG assets as the new owner may not be as responsible.
PLATINUM GROUP METALS MINERS
Taking all of this into account, Hambro noted that the South African platinum industry had in recent years been “challenged” with regard to a demand outlook, as many commodities experienced challenges in terms of demand and supply.
Whether this was as a result of the original shift towards diesel, from gasoline, or whether it was owing to the threat of what the future holds with regard to electric vehicles and fuel cells, Hambro said this resulted in changes to pricing, which “caused significant pain in the industry”.
The industry reacted, in many cases, by removing capacity, reducing cash flows or disallowing reinvestment into new capacity, and this, in turn, changed the landscape for supply.
Hambro said the industry was now “in a much stronger position” with robust balance sheets, which “cannot be ignored”.
“The mining industry today has learned from the pain of having a levered balance sheet when demand slows down, and the damage that causes to your equity base is permanent.”
The PGMs industry, he added, was “well financed” and, therefore, “deserved” a different level of discount rate, because the risk was now “significantly lower” owing to a lack of gearing.