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While 2020 will be a year the world would rather forget, for the commodities sector it was a remarkable 12 months thanks to a price run that looks set to continue into 2021 and beyond.
In fact, oil aside, there’s hardly a commodity that had a particularly bad year.
From January to December 2020, iron ore prices surged from $92 a ton to $160 — a gain of more than 70%.
Platinum group metals continued their winning streak. Rhodium moved from $6,000 an ounce to $16,630 by year-end and reached new record highs this month. Palladium ran from $1,925 an ounce at the start of 2020 to pass $2,800 by February, and ended the year at $2,430, while the laggard, platinum, ended the year at a two-year high of $1,065.
Gold hit record highs of more than $2,000 an ounce while copper fetched levels last seen in 2013. And even coal — which faces a multitude of challenges as fossil fuels fall out of favour — ended the year above $80 a ton, up from $67 in January.
With prices like these, miners had a bumper year, irrespective of pandemic-related disruptions and production losses. SA producers, in particular, had the additional benefit of a weak rand, helping the resources index rally 16% from January 2 to December 31.
Now, even as the world faces a prolonged Covid onslaught, some analysts are betting on another stellar year for commodities.
Peter Major, director of mining at Mergence Corporate Solutions, says limited production remains a key supporter of prices, especially for platinum group metals.
"Producers can’t increase production that much at will, and then, do they have the will? They kind of like prices where there are," he says. Fiscal stimulus has likely played a part in asset price and commodity inflation, and shows no signs of slowing in 2021. "You can’t have reversion to the mean when there’s $12-trillion that wasn’t there before. I think that’s what gold is showing us," Major says.
But beyond that, and more importantly, demand from China is very real.
"[The commodity price run] is a China story and it’s despite the virus, not because of it," Major says. "We have a hard time contemplating that country because it’s growing like the [US] never grew. China is four times the size [in terms of population] of America, and growing at double the rate. China takes more than half of virtually every commodity traded now."
Because of this, Major thinks a global recovery, should it be forthcoming, will escalate demand for metals. "If they cure the virus, I don’t see commodity prices going down. If they cure the virus, the rest of the world can also start firing on all cylinders."
Fitch Solutions, in its outlook for the sector for 2021, also says commodity prices will be supported by a broader and deeper global economic recovery as Covid-19 vaccines become available.
According to a survey conducted by S&P Global Platts, 62% of China market participants expect iron ore prices to stay above $120 a ton in the first quarter of the year while 26% expect they would stay in the $110-$120 range. Iron ore is a key ingredient in steel production, and more than half of respondents saw infrastructure construction as the major driver of steel consumption, while 32% of respondents expect that manufacturing will play a bigger role for demand. "Manufacturing has recovered strongly in recent months and global supply chains have been restored, helping China’s exports to resume," S&P Global Platts notes. It says that this year China looks on track to export about 54Mt of steel, compared with 75Mt in 2019.
Still, Major cautions investors to remember one simple truth: "The best cure for high prices is high prices."
On the domestic front, mines have enjoyed good relations with labour, communities and the government of late, with mineral resources & energy minister Gwede Mantashe said to be more in tune with the industry than others who came before him.
Established miners in SA haven’t had it this good in 35 years, Major says. "Our industry is in really good shape," he says. "All the balance sheets are stuffed with cash and I don’t know if anybody’s got any debt after December."
The biggest worry for the industry now is distressed monopoly power utility Eskom, which is aggressively pursuing electricity tariff increases.
While some issues related to the latest mining charter have been ironed out, the industry is set to tackle the local content requirements this year, especially as these have been given particular emphasis in the presidency’s economic reconstruction and recovery plan.
The charter requires 70% of procurement spend to be on SA-manufactured goods with a 60% local content, something the industry has said is not achievable.
For Paul Miller, director at AmaranthCX, the biggest concern now is whether there will be much mining at all in the years ahead, given that exploration investment in SA has all but dried up.
"We’ve gone from attracting 35% of all Africa’s exploration spend to less than 8% since the Mineral & Petroleum Resources Development Act (MPRDA) and the first mining charter were introduced. That equates to less than 1% of global exploration spend in what used to be the greatest mining country in the world," says Miller. "To Mantashe’s credit, the penny has dropped that we haven’t had proper greenfields exploration in SA for 30 years because we haven’t been able to attract exploration investment. [The government] has realised it’s a problem."
An exploration strategy has been promised in the first quarter of the year and is now being hashed out behind closed doors by the department, the Council for Geosciences and the Minerals Council SA.
Miller worries about the lack of transparency in the development of the plan — "that the rest of us are going to have to like it or lump it when they release it", he says.
"The minerals council has historically been an incredibly poor advocate for the future of the industry. It has represented its members’ interests, which is to try to protect their sunk capital in existing mines," he says.
"The MPRDA and the mining charter were negotiated on that basis — by people who have existing sunk capital, not people who are looking to invest new capital in exploration. As a consequence, 20 years in we discover there’s been no new exploration — and our mines now have about 15 years left, after which they will mostly be done."
Miller says the new exploration strategy will be dead in its tracks if it does not include as a main element a transparent online mining cadastre (a set of records showing the extent, value and ownership of land).
But even if a transparent online cadastre is included, he says, a far deeper "root and branch" reform of the regulatory environment is required if SA is to compete to attract investment.
But that’s not something that will be happening this year, if ever.
"The legislation and the charter process are no longer fit for purpose, but there is no appreciation of that at all," he says.
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