Energy and Mining

An economic slowdown in BRIC countries, cooling commodity prices and recession in the Eurozone all pose a risk to mining and energy companies operating in the UK and abroad. Junior firms in the sectors could be seen as risky investments this year, placing them at risk of formal defaults as sources of funding dry up. However, despite short-term risks, the medium-to-long term prospects for the mining and energy sectors remain robust, with strong demand growth in the developing world supporting prices.

The mining and energy sector in the UK and overseas faces significant challenges this year, related to concerns about the strength of the global economy. IMF forecasts show developed world economic growth failing to pick up this year as the Eurozone remains in recession.  The latest data also point towards worse-than-expected economic performance in BRIC countries, meaning that the IMF’s forecasts for emerging market economies may be overly optimistic.  World trade volumes have slowed significantly in recent months, with trade growth standing far below the typical levels seen over the years 2000-2007, providing further evidence of weak global growth at present.

The weakness of the global economy implies subdued demand for commodities and for energy, and markets across the globe have adjusted to the latest economic data. Hard commodity prices have for the most part cooled in recent weeks amid renewed demand concerns. This is reflected in IMF commodity price indices for metals and energy. Comparing March 2013 with February 2013, there was a 7.1% decline in metal prices and a 4.1% decline in energy prices – significant drops over such a short time frame.  Brent crude oil was trading at over $110 per barrel at the start of 2013, but by mid-April the price was close to $100 per barrel. 

The short-term outlook for commodity prices, as reflected in futures prices, points to declines across most main commodity groups. Overall, the IMF expects commodity prices, as measured by its Commodity Price Index, to decline by 2% in 2013 (year over year). This reflects improving supply prospects for all main commodity sectors as well as relatively weak demand for some commodities given the subdued economic backdrop.

Cooling prices are likely to pose some challenges to firms – particularly smaller firms – in the natural resources sector in the short-term.  However, the medium-to-longer term prospects for the sector remain tilted on the upside, with rising prices expected for most hard commodities.

Going forward, upside risks to commodity prices appear more prevalent than downside risks. On the supply side, a return of problems that affected metal and energy markets in the past decade (accidents, project delays, shortages of equipment and skilled labour) could again lead to supply shortfalls and higher prices. Additional concerns include geopolitical tensions in the oil-producing regions of the Middle East and Africa, which could trigger an oil price surge.

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