What we know about The Australian Resource Sector - COVID-19

The Coronavirus (COVID-19) is impacting the Australian economy in unprecedented ways and has caused many uncertainties within the resource sector.

The resource sector accounts for 57% of Australia’s export share, which means it must operate through the escalating COVID-19 pandemic and continue to deliver economic wealth, jobs, investment, and tax revenues to Australians despite the challenges posed against it. It is fortunate that the Australian sector strength lies within its diversity between commodities such as Iron Ore, Gold, Oil and Gas, and Coal which in previous downturns has allowed for its exports to overcome difficult economic conditions.

Here is what we know:

Iron Ore

Despite a tough February, Iron Ore exports were strong towards the backend of the past quarter. This showed that Iron Ore has the potential to benefit from COVID-19 as China, the world's biggest steel producer, begins its economic recovery.

Despite the announced news of the record fall in Chinese economic growth for the March quarter, the price of 62% Fe fines delivered to northern China rose 80 cents on Friday to USD$86.17/tonne, up from USD$85.60 the previous Thursday and major players Rio Tinto (ASX:RIO), Fortescue (ASX:FMG) and BHP (ASX:BHP) finished up the week at $91.51, $11.28, $31.28 respectively. The rise in price could be attributed to the positive crude steel first quarter production figures. According to China's National Bureau of Statistics, China produced 80.33Mt last quarter which was up 1.2% on the first quarter of 2019. Additionally, prices have and will likely further be assisted by COVID-19 restrictions with mine shutdowns and production delays creating a reduction in supply.

All markets have felt the influence of this pandemic, although the iron ore price has shown greater resilience than most other commodities being supported by the confidence in the economic recovery of the Chinese Market, however, the global outlook still remains uncertain.

Gold

Gold prices and stocks have been reaping the rewards as investors seek a haven. Recovering from prior weakness, Australian companies such as Newcrest Mining (ASX:NCM) last week posted a 22% rebound in the previous 30 days while Evolution Mining (ASX:EVN) posted a 47% gain. The US influence is at the forefront of this trend because despite the incoming stimulus economic projections are appearing worse by the day, unemployment rates rise, and the uncertainty grows. Morgan Stanley recently reported an expected 30.1% decrease in GDP by Q2 which poses the possibility of a 12.8% unemployment rate. 

Given the circumstances, the short-term professional selling should create a sideways trend but the long-term outlook for Gold looks strong, and if these projections continue this will complement Australia's growing production. Currently one Australian dollar purchasing 63 cents US, the "down under" gold price is sitting at ~AUD$2,702/oz.

Oil and Gas

It is tough times ahead for oil prices who are wearing the brunt of rising US oil production, slowing demand and the rising dollar value. ASX Company, Beach Energy Ltd (ASX:BPT) from last week is down 48% on the last 3 months, while Freedom Oil and Gas (ASX:FDM) has been forced into voluntary administration because of its inability to recapitalise in the current environment.

The IEA recently downgraded its global growth forecast by 365,000bpd to 825,000bpd and the crude oil price has already gone below US$20bbl for a 25 year low. This year alone, a decade of oil-demand growth will be erased as consumption plunges by about 9 million barrels a day and IEA have estimated that the largest hit will come in April when fuel use will fall by 29 million barrels a day, its lowest since 1995. Due to the substantial fall in demand the IEA noted in its last report "The demand loss is so big that there is no feasible agreement that could cut supply by enough to offset the volatility in the near term".

This diminishing global demand and oil price will also have a lagged effect on LNG contract prices making upcoming projects substantially more difficult. The dip is expected to be felt across LNG markets as it makes oil-based LNG cargoes 25-30% cheaper and impacts its total revenue.

Anything can happen with Oil and Gas but what is certain, is that for the time being, in a bear market, there is more volatility ahead.

Coal

Coal, fortunately, hasn't felt the brunt of COVID-19 as much as some of its fellow commodities and may even come out stronger than before. Oil’s falling price (which is used as a fuel in coal mining) and the weakened US dollar has meant greater revenues for local producers. This increased operating margin has strengthened the sector and provides Australian producers greater manoeuvrability to accept lower US prices if required.

As we move towards the post-pandemic phase, coal will become a cheap and affordable energy source to rebuild the economy. This could potentially slow the low carbon energy transition which would benefit the coal industry going forward.

It is evident that the Australian Resource Sector is resistant but not immune to COVID-19. For financial advice or further information in this sector, contact Barclay Pearce Capital.

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