The global mining sector has been plagued by a raft of disruptions in 2022. Can we expect the same in 2023?
Geopolitical and economic uncertainty has been compounded by sustained supply-chain disruptions, labour shortages and extreme weather events, to name a few.
Russia’s invasion of Ukraine on February 24 saw countries and jurisdictions across the world impose sanctions on the transcontinental nation, crippling its trade and production as a result.
This sent already-tight commodity markets into a spin, with energy commodities particularly affected given Russia is a leading exporter of oil, gas and coal.
As European nations scrambled to access alternative energy supplies amid sweltering summer conditions, coal prices surged and have since maintained their gusto, benefiting the Australian coal sector.
This saw the likes of Whitehaven Coal, New Hope Corporation and Yancoal enjoy record coal prices and soaring profits. However, windfalls were quelled by extreme rainfall, with production affected at many New South Wales and Queensland coal mines during 2022.
So can we expect the same mining sector volatility in 2023?
Fitch Solutions has outlined five key themes to expect from next year.
“We forecast almost all mineral and metal prices to average slightly lower in 2023, on a year-on-year average basis,” Fitch said in a recent report.
“The Russia–Ukraine war and mainland China’s COVID policies will continue to stoke volatility to metal prices in 2023. Additionally, the global economic slowdown will continue to place a cap on metals prices as inflationary pressures deter demand.”
Fitch said that lead and gold are the only two commodities in which it holds a neutral to positive outlook for 2023, with tin and lithium expected to underperform more than other metals and minerals.
Fitch recently revised up its 2023 gold price forecast from $US1800 per ounce (oz) to $US1850/oz.
“While gold prices continue to be dictated by competing economic forces as a myriad of risks surround the global economy, we believe the bearing of these issues are now toward the upside,” Fitch said in a recent gold outlook report.
“On the one hand, gold remains above its pre-COVID levels and has gained ground in November as bond yields weakened, the US dollar peaked, the global economy remains on a slowing track with major economies slipping into recession, the war in Ukraine continues to evolve, and risks to the mainland Chinese economy persist.
“On the other hand, gold price strength will face pressures from mainland China’s slight easing of COVID restrictions and improving investor sentiment towards its economy, the likely peaking of inflation in Q3 (of the 2022–23 financial year) as well as the continued easing of restrictions worldwide as vaccination rates continue to rise.
“While we expect significant price volatility going forward, we expect gold prices to remain elevated in the coming years compared to pre-COVID levels.”
A simple relationship to remember:
Rising dollar = falling commodity prices
Falling dollar = rising commodity prices pic.twitter.com/OPwFReO5KH
— Game of Trades (@GameofTrades_) November 30, 2022
Critical minerals to remain a key focus
“Critical minerals required for the energy transition will remain a priority for many countries sourcing for supplies,” Fitch said.
“In 2023, we expect higher investments into mines and permits for critical minerals. Governments will also work to increase domestic production and critical mineral security, to mitigate the pressures of resource nationalism and higher taxes from exporting countries.
“Rising geopolitical tensions will ensure mineral security remains in focus in 2023.”
Fitch expects the big winners in 2023 to be countries with large resources of green minerals, such as Chile and Peru (lithium and copper) and Australia (key producer of many strategic minerals). Refiners are also set to benefit from increased critical mineral investments and export levels.
Fitch expects the losers to be countries dependent on imports to obtain mineral supply, as they could face higher costs and supply gluts.
Mining profitability squeezed by high production costs
“The continued impact of the COVID-19 pandemic, global economic slowdown and the Russia–Ukraine war will keep mining production costs high going into 2023,” Fitch said.
“Inflationary pressures and supply-chain disruptions have led to a rise in raw material, energy and labour costs, causing a dent in miners’ revenue.”
Fitch expects mining capital expenditure (capex) into new project developments to be hit hard in 2023, with companies expected to allocate funds into brownfields operations, while lowering their risk appetite given the volatility of commodity prices and global demand.
“However, we do see upside to capex on green commodities, with critical mineral project development a key focus for companies,” Fitch said.
“Additionally, many firms will continue to allocate funding to developing renewable energy infrastructure, minimising the environmental footprint of mining activities.”
A slower coal exit
“Ongoing energy crunches across the European Union exacerbated by the Russia–Ukraine war will push governments to extend lifespans of coal mining projects and power plants,” Fitch said.
“Mainland China’s recent congress has renewed commitment for coal to remain a steady and reliable energy source.”
Fitch expects mining companies with large coal portfolios and production capabilities to be the big winners in 2023, with the associated countries to benefit from higher exports.
Companies that divested away from coal are expected to be the losers, while countries dependent on coal imports could be hit by higher costs.
The need for Queensland metallurgical coal is expected to increase despite global trends, state government analysis shows.
— Bowen Coking Coal (@Bowencokingcoal) November 29, 2022
Mining companies to improve the ‘S’ aspect of ESG
“In 2022, high inflation has fuelled labour strikes across the globe as workers demand pay increases to meet rising costs of living,” Fitch said. “We expect this trend to continue into 2023 as inflation remains persistently high.
“Additionally, protests from Indigenous communities and environmental activists will continue to impact companies’ production output going into 2023.”
Fitch said that in order for mining companies to address social concerns associated with their activities, they will need to focus on addressing local community and employee concerns before they reach a level where they are hurting profitability.
“In 2023, miners will work on improving the ‘S’ aspect of ESG to prevent disruptions at operational sites,” Fitch said.
Countries with highly regulated labour markets and strict environmental legislation are expected to be the big winners from this theme in 2023, with these nations able to dampen the impact of labour strikes as well as environmental and Indigenous industrial action on mining companies.
On the flip side, countries with less strict environmental regulations, and nations with more vocal community opposition to mine activity (eg Latin America) are expected to be the losers. The same goes for countries with tight labour markets.
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