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BHP sees looming coronavirus risk over mixed commodities market outlook

The coronavirus outbreak and other risks loom over commodity markets in the near-term, BHP Group wrote in its 2020 outlook on markets and the economy.

An air of caution in commodity markets six months ago, when BHP released its prior commodity outlook, has been justified, the company said in its Feb. 18 outlook. BHP's key commodities in those six months had mixed results, and BHP expects directional risks to prices to vary across its products due to a "major source of uncertainty" around the timing of containing the new coronavirus.

"Coronavirus, of course, presents some near-term uncertainty," BHP CEO and Executive Director Mike Henry said on a Feb. 18 earnings call. "Our view is that if the epidemic is contained by the end of the quarter, then we expect the overall impact to be muted with some catch-up on lost demand for most of our commodities by the financial year-end. Of course, the impact on people has been tragic."

BHP already expects China's economic growth to slow modestly in the coming years even as it remains the largest incremental contributor to global industrial value-added and fixed investment activity through the 2020s as its growth rates mature. If the impacts of the virus linger beyond the first quarter, BHP said it will decrease its annual forecast for Chinese growth.

"The range of responses by the Chinese authorities to contain COVID–19, in tandem with the understandably risk-averse response of the population, will undoubtedly cause a sharp decline in economic activity in the March quarter," wrote Huw McKay, vice president of market analysis and economics at BHP, in the company's Feb. 18 commodities outlook. "However, if the psychological and logistical impacts can be effectively contained within that window, construction and manufacturing activity (i.e., our steel and copper end-use sectors) should recover briskly to higher than normal run–rates in the June quarter."

COVID-19 is caused by a member of the coronavirus family that is a close cousin to the SARS and MERS viruses that have caused outbreaks in the past

The underlying commodity-specific fundamentals of the oil and copper markets are sound, McKay wrote, but prices are also highly susceptible to swings in global policy and economic uncertainty. The recent signing of a "phase one" trade deal between the U.S. and China, however, neutralized a significant drag on sentiment for the commodity, the outlook said.

Meanwhile, BHP is expecting lower iron prices, although the company anticipates metallurgical coal prices improving compared to the second half of 2019.

"Looking beyond the immediate picture to 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," McKay wrote. "This projected steepening of cost curves can reasonably be expected to reward disciplined owner-operators with high-quality assets."

BHP expects that emerging economies in Asia will continue to present opportunities for sellers into the commodities markets. The company also suspects that the rising economic costs of protectionist trade policies across the globe will increase the public's appetite for a more open international trade environment. Each of the big four economies — the U.S., China, India and Europe — recorded either flat or slower growth in 2019 compared to 2018.

"The underwhelming performance of the global economy in calendar year 2019 stresses the point that while an increase in trade protection is not, on its own, a recessionary level shock for the global economy, it is an exceedingly unhelpful starting point for the pursuit of broad-based growth across regions, expenditure drivers and industries," McKay wrote.

BHP maintains a positive long-term view and expects population growth and rising living standards to continue to increase demand for energy, metals and fertilizers for the next several decades. Electrification of transportation and the decarbonization of stationary power will also present opportunities. At the same time, investors are increasingly looking for products created by a responsible and ethical supply chain.

"We remain alert to opportunities to expand our suite of options in attractive commodities that will perform well in the world we face today, and will remain resilient to, or prosper in, the uncertain world we will face tomorrow," McKay wrote.