A black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterized by their extreme rarity, severe impact, and the widespread insistence they were obvious in hindsight.
Covid-19 is the biggest, blackest swan ever to hit global financial markets and the dislocation, uncertainty, volatility and confusion that it has brought with it has affected all markets and all geographies.
Papua New Guinea is no exception. 6 months into this crisis (if we ignore the 3 or 4 months from December 2019 through March 2020 when the event was for the most part confined to a single geography, there is no corner of the financial markets that do not have Covid-19 as its main point of analysis.
In PNG, we are in the midst of an unprecedented period of economic slowdown, brought about by the necessary and appropriate measures put in place to manage the public health emergency that this pandemic first and foremost is. In addition to putting restraints on social and economic mobility and interactions, the pandemic initially had a significant impact on the price of and functioning of markets for some of our main exports.
Petroleum markets clawing their way back to survivable levels………
We all recall the calamity that befell global oil markets in May of this year with prices dipping into heavily negative territory for a brief period.
PNG exports almost 9 million tonnes of LNG per annum and the price of most of these molecules is determined with a lagging reference to a cocktail of crude oil prices. Spot sales make up around 5-10% of sales and these are based on a simpler demand and supply equation at the time of the trade.
With oil back at US$45 per barrel (Brent Blend), the PNG LNG Project long term contracts should be back to yielding at least US$7-8/mmbtu which in a couple of months. With the lags in pricing under the long term contracts, it is in the current quarter that we are likely to see some of the biggest impacts on sales revenues. Using the OSH quarterly numbers for the June quarter as a proxy, LNG sales prices held up better than feared, however the bigger impact may be revealed in the current quarter when those diabolical oil prices from May will feed through the long-term contract deliveries.
Nevertheless, with oil prices now back to a survivable level, there is reason to hope that the worst is behind us on that score.
Minerals prices now quite conducive……
Our mines sell their copper, cobalt and nickel into international markets that initially reacted with great confusion and uncertainty but which have mostly recovered as China seems to have gotten the Covid-19 epidemic under control and is resuscitating its economy. Coupled with very significant increases in the price of gold, the pandemic actually has not significantly damaged the prospects for mining in the country. Copper is trading at or near US$3.00 per pound and gold is above US$1,900 per ounce. Considering we exported around 70 tonnes of gold last year, gold is now arguably more valuable as an export commodity to PNG than Petroleum – although we will wait for the annual accounts at the end of the year to see how the year finishes.
Operational challenges abound….
Keeping the mining and petroleum operations going in the face of an ever present danger of localized outbreaks of Covid-19 is proving perhaps the main challenge facing these businesses.
Ok Tedi Mining Limited has had to shut down for a period in order to manage outbreaks in the Western Province which threaten to significantly impact on the operations.
This is happening just as record gold prices and very agreeable copper prices potentially could see OTML have a bumper year. Being 100% PNG owned, OTML plays a major role in keeping the local foreign exchange markets with US$ liquidity and any shutdown is unwelcome. Hopefully the very capable team at Ok Tedi and Tabubil manage to get the situation under control and operations restarted as soon as possible.
Growing the export engine…
In addition to sandbagging current production capacity at our world class projects, we need to ensure that a steady stream of new projects are being brought to market to replace maturing fields and assets as well as to grow the proverbial pie.
Getting the mix of speed to development and construction as well as the right benefits sharing framework is an ever ongoing challenge. The current government has got its hands full seeking to deliver the Papua LNG Project, the Wafi-Golpu Project and also the P’nyang PNG LNG Project expansion. In addition, the Porgera Project is in the process of being reconfigured in light of the purported expiry of the SML covering that Project and the Pasca A Project is also going through its approval process.
All remains to play for and Papua New Guinea can still reach its stretch target of 20-500-5: 20 million tonnes of LNG, 500,000 tonnes of Copper and 5 million ounces of gold. That would make us a US$25 billion export machine and could radically transform the economy and the nation.
Employment and business activities are taking a beating…
Even though our minerals and petroleum export prices are holding up better than we may have feared, the drop in production from Progera (and now OTML) as well as the variability in petroleum revenues are having negative impacts on economic sentiment.
In addition, the local Covid-19 defensive measures coupled with the very significant reduction in trade and economic activity globally is having a devastating impact on economic activity in the tourism, transport, retail and property sectors (to mention but a few).
Employment levels are plummeting and developing a robust recovery plan is a national priority.
At the center of such a plan there will be targeted initiatives aimed at mitigating the immediate dislocation suffered by our people, however, the success of the plan in the long term will be determined by the extent to which it is able to deliver tangible and discernable investment in productive assets.
It is to this endeavour that our leading minds must apply themselves. Only through investment in assets, projects and productive capacity can we grow our way back to where we were before Covid-19 and beyond.
In the meantime…….
Stay Safe – Maintain Social Distance – Wash Your Hands – Wear a Mask