Oil price drop shields miners only partially from metals demand, prices slide

London — The oil price slump of recent weeks will benefit miners by reducing costs, but only partially offset the impact of falling metals prices and sales as coronavirus rattles the global economy, miners and analysts say.

For some miners the impact of lower oil and related energy prices will nonetheless be substantial. "For every 10% move in the oil price, we see about a $50-million swing in EBITDA," diversified global miner Anglo American said. "If the oil price comes down, that is a net positive benefit for our business, all other things being equal," a spokesman said.

As energy typically accounts for 25%-35% of miners' costs, an oil price currently 45% lower than at the start of the year should certainly lower fuel costs. The benefit will be comparatively greater for gold and platinum group metal producers, often with higher production costs than base metals operations because their mines may be deeper and because their product prices have until this week held up despite the crisis. Still, their gains are not sacrosanct, given current volatility. After weeks of rallying, a selling spree Thursday took safe-haven gold down from seven-year highs as investors sought liquidity in falling markets, while PGM palladium was knocked off its pedestal despite short supplies, shedding nearly 20% as weakness in the automotive sector dulls demand prospects for auto-catalyst metals.

Industrial metals prices have fallen 10-15% during the current market plunge. Copper, a barometer of global economic health, slid to four-year lows this week.

For Tharisa, a Cyprus-based PGMs and chrome miner with operations in South Africa's Bushveld complex, oil typically represents about 15%-17% of input costs, "making a halving of price welcome," according to Ilja Graulich, Tharisa head of investor relations and communications.

"To the extent that the price drop is sustained, all things being equal, we expect it [the oil price drop] to have a positive impact on our direct and indirect costs," said Merafe Resources' CFO Ditabe Chocho. Johannesburg-listed Merafe has a 20.5% stake in the Glencore-Merafe Chrome Venture in South Africa -- the world's largest ferrochrome producer -- with the rest held by Glencore.

South African Impala Platinum, one of the world's leading platinum producers, sees lower diesel prices will have some impact at its mechanized mines (Impala Canada, Zimplats, Mimosa and Two Rivers).

Impala Group corporate relations executive Johan Theron, also sees oil's fall will help stem inflationary pressures arising from currency devaluation in emerging nations. Recent currency devaluations in both South Africa and Russia will doubtless aid these nations' minerals and metals exports until such time as protectionist measures spring up elsewhere in counterattack.

Unlikely to offset market decline

Lower oil, with its knock-on effect on energy costs generally, should help miners and base metals producers withstand what is expected to be a trying few months. But, with global GDP growth rates looking set to slide, the advantages are unlikely to outweigh the overall market decline. "If there is substantial shrinkage due to coronavirus, it is unlikely that the lower energy prices will make up for that," Merafe's Chocho said.

Nor has the most recent oil price slump, sparked by Saudi Arabia's pricing initiative, yet had any noticeable impact on freight costs. "Freight rates have not as yet dropped significantly," Tharisa's Graulich said. They would have to drop by a large number to make up for the potential volume shrinkage."

Amid the coronavirus-spooked markets, legislation on carbon emissions is viewed by some PGMs and battery metals producers as an advantage. "The corona impact on the global economy will definitely harm industrial demand and price, but stricter emission standards globally, specifically in China, requiring higher loading will provide support," Impala's Theron said.

EVs revolution to decelerate

Still, an expected deceleration of the electric vehicles revolution and possibly even of decarbonization initiatives amid market turmoil may soon take more of the shine off battery metals and PGMs.

BMO Capital Markets analyst Colin Hamilton said lower oil prices will lead investors out of commodities generally, while Russian analyst Maxim Khudalov, senior director at Moscow-based analytical credit ratings agency ACRA, sees that even gold's investment appeal will become tarnished, as until the current panic subsides, investors are likely to choose only risk-free assets.

"Most of them, apart from gold, have nearly negative profitability given central banks' rate cuts," the ACRA analyst said in an interview. "But to keep investing in gold, whose price has grown sharply for two years, is not a good strategy either, given that demand for the metal is lacking drivers in the world where the middle class is not becoming better off and developing economies where gold is integral to celebrations have slowed down."