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RESOURCE SECTOR OVERVIEW/BHP
BHP’s full-year profit result is a pretty good indication of where the big end of the resource sector is at the moment – strong profits, cashflows and dividends – despite commodity price volatility and demand uncertainty. Having said that, BHP has significantly outperformed its rival RIO.
BHP has demonstrated that it can generate record profitability during probably the most difficult period ever for a mining company – faced with the combined challenges of an uncertain macroeconomic backdrop, volatile commodity prices, China’s continued Zero COVID policy, the ongoing Russia/Ukraine war, and high inflation. BHP had every excuse to miss earnings expectations this season, but it didn’t.
Interestingly, BHP still retains strong confidence in China’s ability to boost growth, given it is the world’s biggest commodity buyer.
And given the supply-side challenges impacting the mining industry now and into the future, BHP like all of the bigger miners is looking to secure supply of key commodities – and corporate action will form part of its strategy. It’s already shown its hand with the OZ Minerals takeover.
Gold markets are grappling with several major factors at present, but prices are holding up pretty well around the $1800 mark.
Firstly, the minutes of the Federal Reserve’s July meeting, which signaled ongoing interest-rate hikes but at a slower pace down the track. Given the Fed minutes signal hikes could be deferred or smaller, we could see inflation that’s higher for longer, which is good news for gold.
A second factor the gold market is grappling with is political risk – some geopolitical risks have reared up again – Ukraine and Taiwan – which is helping support bullion prices.
Finally, the US dollar seems to have stabilised, after recently hitting 20-year highs, allowing gold to regain some momentum above $1800 per ounce.
ENERGY VOLATILITY/CRUDE OIL
Natural gas is continuing to outperform the price of crude oil, due to Russian supply issues into Europe. The consequence of high prices is that nations are looking for alternatives – i.e. coal and oil. We’ve already seen thermal coal prices hit records around $400 a ton and coking coal producers increasingly selling their coal to the power industry.
With respect to crude oil, the International Energy Agency has boosted its forecast for global oil demand growth by 380,000 barrels daily to 2.1 million barrels a day on the expectation that industry and power generators will switch their fuel to oil.
ENERGY SUPPLY SHORTAGES/ALUMINIUM
It’s not just rising prices but energy shortages that are impacting the production sector. In particular, the aluminium sector in Europe is under pressure once again. Norsk Hydro is planning to shutter an aluminum smelter in Slovakia at the end of next month.
Aluminum is one of the most energy-intensive metals to produce, and the closure of the Slovalco facility adds to growing signs of stress in Europe’s industrial economy as power prices surge to record highs. The region had already lost about half of its zinc and aluminum smelting capacity during the past year, mainly as producers dialed back output. Hydro and others are now moving to shut down plants entirely.
Traders are also monitoring power issues in China, where Sichuan province – a significant aluminum hub – is rationing electricity amid soaring temperatures. China boosted exports in recent months to help plug the gap overseas, and a reversal in that trend could underpin prices even as risks to demand grow.