For the mining sector, which remains highly exposed to the economic cycle and global investment rates, the post COVID-19 environment is going to be a challenge for years. We expect both demand destruction from the initial COVID-19 lockdown and an overcapacity of metals supply.
Any attempt to assess the short-term earnings implications in a fast-changing environment with single-estimate forecasts is, of course, nearly impossible. However, assuming that we find ways to mitigate the spread of COVID-19 with social distancing, immunity increases and potential vaccines, it seems reasonable to assume that the impact on supply disruptions will fade by 2021. Demand destruction will likely linger though.
At this early state, several longer-term influences are emerging that should be considered, and this is what we focus on in our Imagine 2025 report.
Key Takeaways
The post COVID-19 environment is going to be a challenge for the mining sector.
The short-term is fraught with challenges and we would remain cautious. If global GDP fell -5% in 2020E, we could see copper demand fall -15% and steel -18% which would trigger inventory growth to unprecedented levels. Even with a rebound in 2021, we expect profitability to remain constrained, especially as the world likely battles a global output gap, with the potential inventory build facing most metals leaving an impact on pricing for the next decade.
The demand shock in 2020 appears to be much greater than what is currently priced in.
Price pressure over the next 6-12 months will be far worse than consensus expectations, or what is discounted into current valuations. We could see significant EPS downgrades, with dividends for the majors falling by 90-100% for 2020.
It’s not all lost. Balance sheets remain strong and we foresee growing value opportunities on a 2-5 year horizon.
This cycle has the potential to be deeper than any before as the depressed environment will provide a once in a lifetime opportunity for portfolio rebalancing in an accretive manner. Unprecedented central bank interventions could potentially unhinge inflation expectations and the real asset nature of mining deposits provides a unique hedge. We strongly favour conservatively positioned miners with high structural margins and strong balance sheets.
After an initial “COVID-19 shock” – a near- evaporation of ex-China metals demand mismatched with unchanged levels of metals production, we expect the second impact to be falling medium-term consumer and industrial demand following damage to global consumer and corporate balance sheets.
Until economic stability is found, damage to the consumer and industrial balance sheet is likely to cause investment as a share of global GDP to fall. However, we anticipate that new fiscal spending from a global “New Deal 2.0” could help increase demand from the lows, especially in the United States. We expect government spending to become a key part of a more interventionist 2025 economy.