Editorial: Sinking in a sea of red

The economic fallout from COVID-19 is mounting sharply. Last week, unemployment claims in the United States hit a record 6.6 million, up from 3.3 million the previous week, and the U.S. Labor Department released its worst jobs report in 11 years. In the month of March, 701,000 people lost their jobs, sending the country’s unemployment rate to 4.4%, up from 3.5% in February, which the Wall Street Journal says is “the largest one-month increase in the rate since January 1975.”

“It was a month unlike anything American business has experienced,” the newspaper reported on March 31, noting that the 500 biggest public companies in the U.S. “were worth US$3 trillion less at the end of the month than they were at the beginning.”

A US$2 trillion relief plan signed into law on March 27 – the largest in U.S. history – will help the country battle back from the brink. The package includes direct payments and expanded unemployment benefits as well as loans and grants to businesses. But will it be enough? Probably not.

A preliminary forecast from the Congressional Budget Office warns that the U.S. unemployment rate in the second quarter will surpass 10% (the last time it breached that level was in late 1982, when it hit 10.8%, according to the WSJ) and GDP will drop by more than 7%. “If that happened, the decline in the annualized growth rate reported by the Bureau of Economic Analysis would be about four times larger and would exceed 28%,” the CBO stated on its website, cautioning that “those declines could be much larger, however.” (The non-partisan CBO produces independent analyses of budgetary and economic issues to support the Congressional budget process.)

Oxford Economics – a leader in global forecasting and quantitative analysis in the United Kingdom – says the pandemic “will inflict a deep recession on the world economy, and many major national economies, during the first half of 2020.” For the full year, the group expects “global growth to drop to zero, the second weakest in 50 years aside from 2009.” In the first quarter, it forecasts the global economy will “shrink at a faster pace than in the financial crisis, with a 2% fall in world GDP on the quarter, and a further 0.4% Q2 decline.”

In our industry, declining global demand for base and industrial metals, in particular, and unprecedented disruptions have hit many companies hard. In Mexico, the government mandated that mining operations shut down until April 30, but signs of pain are everywhere, including in Peru and Chile, where copper producers are slowing production and processing, or halting it altogether.

Bloomberg reports that copper miners “are poised for their worst quarter since 2008,” and in a March 30 article pointed to the BI Global Copper Competitive Peers Index, which has fallen 36% this quarter. Indeed, shares of Teck Resources, Hudbay Minerals, Freeport-McMoRan, have all dropped more than 50% in the first three months of the year.

The world’s biggest commodity trader, Glencore, has postponed a decision on whether to proceed with a cash dividend of 20¢ per share totalling US$2.6 billion this year due to the pandemic. Its shares in the first quarter were down 50.8%. Other major international miners have also suffered share price declines including Vale (-39.4%); Southern Copper (-36.0%); BHP (-31.0%) and Rio Tinto (-23.2%).

Last week, Haywood Securities released research illustrating the share price performance of companies under its coverage universe in a series of charts. For the base metal companies it covers, the largest declines in the first quarter of 2020 were: Trevali (-64.6%); Copper Mountain Mining (-55.7%); Teck Resources (-54.7%); Nevada Copper (-52.9%); Atalaya Mining (-51.6%); First Quantum Minerals (-51.4%); Hudbay Minerals (-50.2%); Taseko Mines (-46.3%); Fireweed Zinc (-45.7%); Capstone Mining (-43.6%); Imperial Metals (-43.0%); Sherritt International (-42.1%); Adventus Mining (-41.2%); Xanadu Mines (-33.3%); Lundin Mining (-31.7%); and Osisko Metals (-19.1%).

This week, Fitch Ratings forecast that global GDP will contract by 1.9% this year, which will “translate into a fall in global copper demand of 6% year-on-year,” and noted that while production disruptions in countries like Peru, Chile, Mexico and Canada “will remove significant volumes” from the market, it still anticipates “meaningful copper oversupply.” As a result, it has reduced its copper price assumptions to US$5,300 per tonne in 2020 and US$5,800 per tonne in 2021.

But in these dark times, we must find hope where we can. Oxford Economics forecasts that while “the near-term outlook is extremely challenging,” it believes that “consistent with historical experience – the eventual resurgence will be strong, with annual growth next year rising as high as 5% in early 2021 and averaging 4.4% for the year.” Fingers crossed.