Twelve months ago, in advance of our full year results for the 2017 financial year, an air of cautious optimism was beginning to permeate commodity markets. On balance, events since have justified that optimism.
While many policy and geopolitical challenges remain, some new and others of long standing, happily the global economy has been resilient to this backdrop to date, and has performed well.
The result has been a solid price performance by our key commodities.
While uncertainties remain, and it is expected that prices will be volatile, we continue to feel confident that we have left the cycle trough behind us. That said, we have revised our near-term world growth mid-case downwards.
The downgrade reflects the negative impact of rising trade protection, which we expect will be partially offset by more expansionary domestic policy settings.
The net impact on key end–use sectors is expected to be modestly negative relative to the previous forecast.
For the year ahead, we assess that the directional risks to prices across our diversified portfolio are mixed. We anticipate that benchmark prices for steel making raw materials are likely to remain above long run marginal cost, on average. Within that grouping, metallurgical coal may sustain such a price level deeper into the cycle than iron ore.
Quality differentials in both commodities are expected to remain wide, based on durable changes in the operating environment of the Chinese steel industry. The upside and downside risks for oil are balanced. Copper prices remain susceptible to swings in global policy uncertainty. The near–term commodity–specific fundamentals of both the oil and copper markets are sound.
Looking beyond the immediate picture, in the medium-term, we see the need for additional supply, both new and replacement, to be induced across most of the sectors in which we operate.
In many cases, this could lead to higher–cost supply entering the cost curve.
This projected steepening of cost curves can reasonably be expected to reward disciplined owner–operators with high quality assets.
On the demand side, we continue to see emerging Asia as an opportunity rich region. China, India, ASEAN and the global impact of China’s Belt and Road initiative are all expected to provide additional demand for our products.
As the true economic costs of trade protection are progressively recognised by global consumers, we anticipate that a popular mandate for a more open international trading environment will eventually emerge.
Looking even further ahead, the basic elements of our positive long–term view remain in place.
Population growth and rising living standards are likely to drive demand for energy, metals, and fertilisers for decades to come.
New demand centres will emerge where the twin levers of industrialisation and urbanisation are still developing today. Emerging themes, such as sustainable end-to-end supply chains, will become even more important for competitiveness.
Technology will advance, creating both opportunities and threats, and climate change policy, technology and market responses will evolve.
Against that backdrop, we are confident we have the right assets in the right commodities in the right jurisdictions, with attractive optionality, with demand diversified by end–use sector and geography.