Friday, 6 October 2023

By James Cooper Editor, Fat Tail Commodities

[6 min read]

Dear Reader,

In case you weren’t watching, the Department of Industry’s chief economist just released its forecasts for Australia’s resource and energy exports over 2024–25.

It’s a long report, so I’ll try to unwrap the key details.

First off, the report expects Australia’s revenue from commodity exports to fall substantially next year…around $67 billion.

That’s a hefty 14% drop on last year’s numbers. 

According to the report, weakening demand and higher commodity outputs are expected to soften prices into 2024–25.

The department was rather downbeat on the prospects of China’s economy, citing deep problems with the country’s property sector.

Virtually every commodity in its report faces weakening fundamentals which will drive prices lower next year.

However, economists at the department have a record of underplaying growth potential in the resource sector…

This time last year, they projected benchmark iron ore prices to average just US$90 per tonne.

As it turns out, iron ore has never traded below US$100 per tonne in 2023.

It currently hovers well above the projected average at around US$120 per tonne.

While the department’s quarterly update is handy for a cursory glance, I find data from within the industry far more useful.

As the world’s largest miner, BHP delivers more contracts, acquisitions, mining, exploration than any other entity in the resource space.

It’s also a major stakeholder at high level meetings between suppliers, policymakers, and buyers.

If you truly want to understand the future trajectory of commodity markets, you must be paying attention to the industry’s most important insider.

It’s why I regularly dig into Dr Huw McKay’s annual commodity update…perhaps a far more useful economic assessment of the current prospects of the commodity market.

McKay is a high-profile economist that sits in the upper echelons of BHP’s senior management.

He’s privy to BHP’s internal data and future strategies. In my mind, that trumps any backward-looking government data.

According to McKay, there’s every reason to be upbeat on the Chinese economy:

‘We confidently state that the basic elements of our positive long–term view [on China] remain in place. Population growth, urbanisation, the infrastructure of decarbonisation and rising living standards are expected to drive demand for steel, non–ferrous metals, and fertilisers for decades to come.’

That flies in the face of the department’s projections.

McKay is especially upbeat on the strengthening fundamentals for copper; a commodity BHP is aggressively pursuing through acquisitions and development projects (emphasis added):

‘Our confidence in medium term deficits [for copper] is underpinned by both the demand and supply side, but if forced to elevate one over the other, supply headwinds would be the #1 motive force. Simply put, the supply response to supportive demand and price signals in the 2020s to date has been underwhelming, despite copper’s future-facing halo effect. And time is running very, very short to turn that story around.

‘It is quite apparent that there is a very substantial disconnect between what needs to be done at the macro level to support both rising traditional demand and the exponential lift in metal needs implied by the energy transition, and what is occurring at a micro level.

‘We reiterate our view that the price setting marginal tonne a decade hence will come from either a lower grade brownfield expansion in a mature jurisdiction, or a higher grade greenfield in a higher risk and/or emerging jurisdiction. None of these sources of metal are likely to come cheaply, easily – or, unfortunately, promptly.’

Copper bears take note!

McKay’s comments align precisely with what I’ve been telling readers for months…copper deficits are coming.

Precisely at a time when enormous growth is expected from the energy transition.

As one of the world's largest producers of copper, BHP is perhaps the best equipped to make this judgement.

But this won’t be a problem in four or five years…according to McKay, ‘time is running very, very short to turn that story [of supply] around’.

Follow the billion-dollar money trail and it’s very clear what this mining giant is doing…

A $9.4 billion takeover of South Australia’s Oz Minerals last year.

Followed by a $4.5 billion expansion of the world’s largest copper mine in Chile, Escondida.

Not to mention the enormous deployment of capital injected into new copper developments...the Oak Dam project in South Australia as an example.

BHP has quietly deployed an army of rigs and support crew to drill out this emerging giant, located just a stone’s throw from one of the world’s largest open-pit copper and gold operations, Olympic Dam.

Watch the insiders and follow their lead…right now, the biggest bread crumbs lead to copper.

Until next time,

James Cooper,
Editor, Fat Tail Commodities