How can adversity accelerate mining’s transformation?
Mining and metals companies must act fast to mitigate disruption, and consider how responses will accelerate recovery and build resilience.
This is part of a series of articles relating to the impact of COVID-19 on the mining and metals value chain.
While the outbreak of COVID-19 continues to impact countries and sectors, the mining and metals industry is navigating the effects of the pandemic relatively well. A strong safety culture and deep project management experience have ensured a continued laser focus on the workforce and a mission to keep people safe and connected. Miners are maintaining operations as close to capacity as possible, monitoring the elements of the value chain that could cause disruption, assessing gaps in supply chains and managing liquidity to ensure that no issues arise in the midterm. Companies are also putting investment decisions on hold, reducing capex and nonessential maintenance, and deferring dividend payouts.
Of course, while this is a global crisis, staggered infection rates and different approaches to lockdowns mean that the disruption created by COVID-19 differs across the world. In mainland China, activity is returning to a semblance of normality, while other countries are extending lockdowns. In some countries, mining has been shut down, but in others has been declared an essential service, providing that social distancing and hygiene rules are complied with. Global supply of several commodities is therefore disrupted, and all markets are likely to feel some level of impact from lower global downstream demand.
Exactly how this impact differs across markets and commodities is difficult to pinpoint, but we have considered two scenarios: the first based on the pandemic persisting for 6 to 12 months and the second where the outbreak continues for more than a year. Each scenario considers factors that include how the global economic recovery may unfold and the pandemic’s effect on the demand and price of a broad range of commodities. We’ve included a focus on Asia, given the region’s impact on minerals and metals demand and China’s stimulus into infrastructure investment.
The outcomes of the scenarios are broad and uncertain, which is unsurprising considering that the impact of COVID-19 depends on complex factors, including the current reported infection rate, population density, strength of the health system, education levels and institutional capabilities.
In the first scenario, based on the pandemic persisting for 6 to 12 months, the impacts across commodity markets are likely to be mixed:
- Commodities reliant on a higher proportion of Chinese demand, for example, iron ore, coking coal and copper, will be more resilient.
- Copper markets, however, did experience an immediate impact as inventories surged on lower Chinese demand. Now, supply cuts in a number of countries, combined with a return to industrial activity in China, are likely to see a drawdown on inventories and improving prices.
- Base metals will feel the biggest impact due to a heavy reliance on downstream demand, though supply cuts may support prices.
- Thermal coal was struggling to access capital prior to COVID-19 as demand moved to greener energy sources. Declining power demand has put this market under further stress.
- Gold will remain in demand as a safe haven.
The second scenario, where the outbreak continues for more than a year, sees a much longer recovery varying across regions and creating more supply chain disruption. Here, we would expect to see more material reductions in demand and supply shortages, significant workforce disruption and the risk of reinfection. It’s likely that a large number of operations in the mining industry would close or be limited for a number of months and recovering from such an extended period of disruption would be challenging. We may also see the pandemic create a legacy of global protectionism that would create further barriers to international trade.
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