BHP expects its operating environment to remain volatile in the
near term, Kallanish notes. Industry
wide inflationary pressures continue to lift and steepen operating cost curves
and extend timelines for project delivery, it says.
Many commodity-linked uncontrollable costs, such as diesel,
increased to record highs in the financial year through June 2022 (FY22), and
energy costs remain vulnerable to global geopolitical developments, the miner
observes.
The lag effect of inflation, as well as labour market tightness
is expected to impact the group's cost base throughout FY23.
Meanwhile, it says exchange rates have adjusted rapidly against
the evolving macroeconomic backdrop, with the pronounced US dollar strength
providing a partial offset for local currency cost inflation in its major
operating jurisdictions.
"The net result of these many challenges is that the
marginal cost of production is now estimated to be markedly higher than it was
prior to the Covid-19 pandemic,” BHP observes. “This implies that price support
is also expected to be higher than in previous cycles and low-cost operators
stand to capture higher relative margins in certain commodities.”
Meanwhile, the global steel market opened the second half of
FY22 strongly, both in China and the rest of the world (ROW), but momentum
began to fade as the period came to a close.
While a steady improvement in end-use demand from China is
anticipated, it says the slower-than-expected rebound in construction post
Covid-19 lockdowns has dampened sentiment across the steel value chain.
In the ROW, it says strong profitability for steelmakers in the
March quarter had declined by the end of the June quarter, as end-use demand
softened amid high input costs.
ROW steel markets are expected to remain under pressure in FY23
as the macroeconomic climate softens.
For iron ore, the firm expects China's medium-term demand to be
lower than it is today as crude steel production plateaus, and the
scrap-to-steel ratio rises.
In the long term, it expects prices to be determined by
high-cost production, on a value-in-use adjusted basis, from Australia or
Brazil.
It meanwhile expects demand for seaborne hard coking coals to
expand alongside the growth of the steel industry in hard coking coal importing
countries such as India.
Long term, it believes higher-quality metallurgical coals will
still be used in blast furnace steelmaking for decades based on its bottom-up
analysis of likely regional steel decarbonisation pathways.
As for nickel, it believes the commodity will be a core
beneficiary of the longer-term electrification mega-trend and that nickel
sulphides will be particularly attractive.