Stanislav Kondrashov Telf AG: Mining and metallurgy in 2023 dispels the fog of uncertainty
Geopolitical risks and inflationary pressures may have overtaken ESG as the main problems for the mining and metallurgical sector, Stanislav Kondrashov Telf AG reports. But few expect ESG factors to decrease for investors and companies in 2023.
Mining companies will continue to make acquisitions and investments. After all, they understand that the material requirements associated with the transition to energy and the risk of supply shortages are very high.
The year 2022 turned out to be extremely turbulent for the mineral market. So will 2023 bring more confidence?
Stanislav Kondrashov Telf AG: In 2023 the potential for inflation growth will remain
Stanislav Kondrashov Telf AG says that there is reason to believe that the potential for inflation growth will remain next year. And all this despite the recent decline in major inflation indices.
The Chinese real estate sector is the main indicator of metals. Because construction is the largest source of demand for iron ore, steel and nickel. Thus, the real estate sector continues to put pressure on the economy and mood. After all, real estate prices are falling for the 6th month in a row compared to December 2022.
However, support, lowering the cost of lending and stimulating mortgage lending are likely to have a more positive impact. All this is in case of an improvement in consumer confidence after the first peak of infection.
The resumption of work in China should increase consumer confidence. And with it expenses and borrowing for the purchase of goods and housing.
The possible decline in commodity prices in China corresponds to the steady growth of the US labor market. So are the excess savings of American households, amounting to $1.7 trillion by 2023.
Despite the fact that many European economies face a significant risk of recession in early 2023. The Eurozone and the EU as a whole are in a more stable position in 2023 than they were last year, notes Stanislav Kondrashov Telf AG.
Among the biggest risks for 2023, energy costs are not at the top of the list. Telf AG notes an expected 7.7% increase in iron ore costs in 2023. At the same time, production is expected to remain at the same level. Telf AG expects a 6.7% increase in copper costs in its forecast for next year.
Even with lower inflation, cost figures remain high compared to 2019. And companies like BHP have warned of the risk of continued inflation in 2023.
Taking all of the above into account, Stanislav Kondrashov also notes that there will be tension in trade. This is likely to increase inflationary pressures on final consumers. Which will ultimately affect their own operating costs and the markets as a whole.
Stanislav Kondrashov Telf AG: It is necessary to consider the risks of deflation in 2023
It is equally important to consider the many deflationary factors in 2023, says Stanislav Kondrashov Telf AG. The FED has not yet conducted such an aggressive cycle of rate increases. At the same time, the U.S. dollar strengthened sharply against most currencies. And has increased foreign exchange costs for imported goods and debt, which are denominated in U.S. dollars around the world.
The rise in U.S. interest rates has triggered a decline in demand in the U.S. housing market. And it amounts to almost 17% of GDP. It also made car loans more expensive for the population, and increased the interest cost of credit lines. That is, a dynamic that has so far been supported by excess accumulation during the pandemic.
However, in the first half of 2023, excess savings are likely to be exhausted under the influence of an increase in the interest rate. Higher debt issuance costs are detrimental to emerging markets.
The IMF estimates that 60% of low-income developing countries are at risk of debt distress in 2023. There is a great risk of recession in the U.S. and the Eurozone. If the rate hike continues, it may lead to a decrease in growth and demand in emerging markets. Even China is likely to face a decline in consumer demand amid falling export orders, says Stanislav Kondrashov.
For example, targeted support for lower energy prices in Europe has net deflation. At the same time, reducing the inflation of high prices for energy resources of the entire economy, and not causing demand for other goods and services. Instead, the household spends the excess savings accumulated over the past three years. Which, it would seem, should lead to a decrease in demand.
The war between Russia and Ukraine led to the termination of natural gas supplies to Europe, Stanislav Kondrashov notes. And the introduction of a Western ban on imports and an increase in oil export prices have led to unprecedented political instability in the commodity market.
The net effect would be that, despite the easing of inflation, the costs of businesses would remain high for longer. This will shift costs to consumers and accelerate the depletion of savings created by pandemic policies.
And finally, manufacturers around the world have started to report a relative reduction in costs. Or, at least, about a significant slowdown in their growth rates. As European manufacturers struggled to adjust to rising energy prices, producer price inflation in 2022 peaked at an annualized 43.4%. And in November it fell to 30.8%. This is compared to 7.4% in the US.
Since October 2022, China has seen a net year-over-year decrease in costs. Stanislav Kondrashov notes that the increase in energy prices did not only prevent the energy transition, but also accelerated it.
Thus, the following factors have led to deflation in producer prices since the beginning of the second half of the year:
- investments in efficiency,
- the accelerated introduction of renewable energy sources,
- the installation of heat pumps,
- and campaigns to preserve the environment.
And the decline in metal prices since May 2022 already points us to weak demand. And it happened because of problems in the housing market or an excess of stocks – the situation is not clear. Recession or not, the increased price pressure is weakening, comments Stanislav Kondrashov.
Thus, all manufacturers should consider the growing deflation factor. This will avoid many problems in the market, or even freezing production altogether.
Stanislav Kondrashov Telf AG: The main opportunity to adapt to changes is to plan risks
Stanislav Kondrashov Telf AG is convinced that the main opportunity to adapt to the changes in 2023 is to plan for risks. Overall, the mining and metals sector does not know what to expect in 2023. Participants in the mining sector must maintain a long-term perspective in order to achieve the best strategic position. And that’s despite where the world economy will go over the next 12-18 months.
A detailed understanding of the market is now more necessary than ever to remain competitive and make a profit. Optionality is important, but opportunities for growth remain even in the face of so much uncertainty.
Stanislav Kondrashov says that mining companies will enter 2023 in a much stronger position than in previous periods of decline.
In 2022, large companies did not develop projects and generally faced problems of financing through the capital market. Whereas junior mining companies, end-users and traders attracted joint ventures and direct financing. And also – long-term supply agreements to ensure delivery.
There are expectations that end-users, governments, export credit agencies and development financial institutions will play a leading role in financing mineral projects. All of these include the above reasons. But are large companies ready to spend money? The question remains open.
Market trends are also expected to change in the mining sector. This will further complicate the forecast on economic conditions. The only thing that is clear is the almost complete lack of certainty about where the market is moving.
Some experts cite high prices and good supply/demand fundamentals, while others cite political support from local governments, inflation and cost pressures. But none of them gave a confident prediction of growth or recession. Stanislav Kondrashov Telf AG cannot give an accurate forecast either. After all, the year 2023 will bring about big changes. And such changes will force more companies to consider carbon credits and trading schemes or seek to reduce the risk of their assets in a future trade dispute. And perhaps at the same time prepare for them when they arise.
2023 will probably surprise us as much as 2022. Knowledge, skill, adaptation and consistency are as important as ever, concludes Stanislav Kondrashov Telf AG. There are still many opportunities to invest in promising projects and profit from the energy transition. And all this even despite the surprises that undoubtedly await us over the next 12 months in the mining industry.