Opportunities for copper – Tom Price, Global Commodities Analyst, UBS
 

Opportunities for copper – Tom Price, Global Commodities Analyst, UBS

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Opportunities for copper – a late stage metal in the industrialisation cycle. Presentation by Tom Price, Global Commodities Analyst, UBS at Mines and Money Australia, 2013 Oct 29 – Nov 1, 2013, ...

Opportunities for copper – a late stage metal in the industrialisation cycle. Presentation by Tom Price, Global Commodities Analyst, UBS at Mines and Money Australia, 2013 Oct 29 – Nov 1, 2013, Melbourne Convention and Exhibition Centre

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Opportunities for copper – Tom Price, Global Commodities Analyst, UBS Opportunities for copper – Tom Price, Global Commodities Analyst, UBS Presentation Transcript

  • UBS Investment Research Mines and Money Australia, 2013 Opportunities for copper Tom Price Global Commodity Analyst Email: tom.price@ubs.com Tel: +612 9324 2189 October 2013 This document has been prepared by UBS Securities Australia Ltd UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON SLIDE 20 www.ubs.com/investmentresearch
  • Copper’s most popular themes • outlook for supply, demand, price ? • what are its key fundamental drivers? • does copper offer investors any long-term upside? • do big project delays = supply-side crunch? 1
  • View of the World (using PMI data) 65 60 55 50 Germany 45 Eurozone 40 Italy 35 France Japan US China 30 Mar-13 Apr-12 May-11 Jun-10 Jul-09 Aug-08 Sep-07 Oct-06 Nov-05 Dec-04 Jan-04 25 Source: Bloomberg 2
  • 150 1750 120 6 4 2 0 130 70 50 30 11-Oct-10 26-Sep-11 10-Sep-12 26-Aug-13 11-Oct-10 26-Sep-11 10-Sep-12 26-Aug-13 Source: Bloomberg, UBS Research 26-Jun-17 11-Jul-16 27-Jul-15 11-Aug-14 26-Oct-09 26-Jun-17 11-Jul-16 27-Jul-15 11-Aug-14 Ni daily historical UBS's quarterly forecast forw ard curv e consensus 26-Jun-17 145 11-Jul-16 2000 27-Jul-15 Zn daily historical UBS's quarterly forecast forw ard curv e consensus 8 26-Oct-09 110 11-Aug-14 10 10-Nov-08 12 10-Nov-08 US¢/lb 130 26-Aug-13 14 10-Sep-12 50 200 26-Sep-11 300 11-Oct-10 100 US$/lb 400 26-Oct-09 95 US¢/lb 26-Jun-17 11-Jul-16 27-Jul-15 Cu daily historical UBS's quarterly forecast forw ard curv e consensus 10-Nov-08 26-Jun-17 11-Jul-16 27-Jul-15 20 11-Aug-14 45 26-Aug-13 70 10-Sep-12 11-Aug-14 500 26-Sep-11 500 26-Aug-13 10-Sep-12 26-Sep-11 11-Oct-10 26-Oct-09 10-Nov-08 US¢/lb 600 11-Oct-10 Au daily historical UBS's quarterly forecast consensus 26-Oct-09 1250 US¢/lb 1500 10-Nov-08 26-Jun-17 11-Jul-16 750 27-Jul-15 1000 11-Aug-14 26-Aug-13 10-Sep-12 26-Sep-11 11-Oct-10 26-Oct-09 10-Nov-08 US$/oz PRICE: spot’s history vs. UBS’ forecast Al daily historical UBS's quarterly forecast forw ard curv e consensus 90 70 110 90 Pb daily historical UBS's quarterly forecast forw ard curv e consensus 3
  • Top-picks, next 12 months, descending order palladium: sustainable US economic activity & dwindling Russian inventories remain key price drivers. platinum: improving US economic activity & underperforming, high-cost Sth African capacity, are major medium-term fundamental props. uranium: Japan's nuclear power generating capacity likely to be re-fired to cut industry costs; broader global recovery offers support. zinc: China’s import dependency; recovering activity in mature economies; uncertain mine supply growth – are key price supports. alumina: China’s arbitrage of Al2O3/bxt trade eases + on-going risk of a ban on Indonesian bauxite exports, create upside price risk. lead: improving global economic activity is good for the auto-sector (batteries); weak mine supply growth is another price support here. zircon: after re-balancing of the trade through production cuts + inventory draw-downs, price outlook still appears subdued. metallurgical coal: new & evolving constraints on supply growth in Mongolia and Mozambique create upside price risk. thermal coal: stable commodity market on a 12-month view, but carries longer-term downside price risks (unconventional gas supply). aluminium: inflexible global production capacity + on-going lift in global interest rates, undermines medium-term price outlook. nickel: project overhang caps medium-term outlook; only a sustained political constraint on Indonesian exports creates upside price risk. gold: stable economic activity in the US means that medium-term outlook depends on European financial crisis & inflation fears. silver: any longer-term price lift depends heavily on inflation/fear, and perhaps on residual speculator interest. titanium feedstock: forecast on-going stability in global pigment trade offers upside to a recently sentiment-weakened price. copper: expanded investment in Chilean/African mine supply + moderation in China’s demand growth all ease trade tightness. iron ore: expanding/diversifying seaborne supply promises growing surpluses, weighing on the longer-term price outlook. Source: UBS Global I/O® - Miners’ Price Review - Policy constrained, 15-Oct-13 4
  • What do the market signals say? …pretty balanced global trade 260 China’s (SHFE) copper inventories (kt) 5.0 210 350 3.0 110 400 4.0 160 Copper's cancelled warrants vs. price (kt; US$/lb) 2.0 300 250 200 cancelled w arrants 150 price (US$/lb) - LHS Jun-13 Dec-12 Jun-12 Dec-11 Jun-11 Dec-10 Jul-10 Jan-10 Jul-09 Apr-13 Jun-12 Aug-11 Nov-10 Jan-10 Mar-09 May-08 120 90 60 30 May-13 0 Jul-11 17-Oct-13 19-Sep-13 22-Aug-13 25-Jul-13 27-Jun-13 30-May-13 2-May-13 3.0 150 Sep-09 -0.2 -0.2 -0.3 180 Nov-07 3.5 spot treatment charge (US$/t) contract treatment charge (US$/t) Jan-06 4.0 Copper’s TC/RCs spot vs. contract (US$/t) Mar-04 0.1 0.0 -0.1 -0.1 4.5 210 May-02 0.2 0.1 spot TC/RC (US$/t) diff. (RHS) more imports, less exports SHFE diff. SHFE 3mth Cu prem/-disc to LME LME 4-Apr-13 LME & SHFE Cu prices (US$/lb) SHFE 3mth Cu Prem/-Disc to LME (last 3 months) 5.0 Jul-07 Jan-05 Oct-13 Jun-13 Feb-13 Oct-12 Jun-12 Feb-12 Oct-11 0 Jun-11 2.0 Feb-11 200 Oct-10 2.5 Jul-00 400 3.0 Sep-98 600 3.5 Sep-06 4.0 Nov-05 800 Nov-96 4.5 US merchant Euro pean free mkt A -grade cif Shanghai A -grade 10 9 8 7 6 5 4 3 2 1 0 1,000 Jan-95 Europe Americas Asia Price (US$/lb) - LHS 0 Copper’s merchant premia (US¢/lb) Copper global stocks vs. LME price (kt, US$/lb) 5.0 50 Jan-09 Oct-13 Jun-13 Feb-13 Oct-12 Jun-12 Feb-12 Oct-11 Jun-11 0.0 Feb-11 10 100 1.0 Oct-10 60 Sources: Bloomberg, LME, SHFE, Comex 5
  • supply Source: UBS Research 6
  • At first, 2013’s mine supply growth story looked troubled, but… 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Name Escondida Other Chinese Mines PT Freeport Indonesia El Teniente Radomiro Los Pelambres Antamina Norilsk Chuquicamata Mill Collahuasi Los Bronces Escondida SxEw Andina Morenci SxEw Rudna Tenke-Fungurume SxEw Cerro Verde Mill Sarcheshmeh Candelaria Olympic Dam Esperanza Cuajone Spence SxEw Kansanshi El Abra SxEw Dexing Tintaya (inc Antapaccay) Balkhash Buenavista (Cananea) Mount Isa Cu Katanga Mutanda SxEw Erdenet Gaby SxEw Highland Valley Copper Zaldívar SxEw Chuquicamata SxEw Alumbrera Toquepala Ok Tedi Other TOTAL Percent of Global Production Country Chile China Indonesia Chile Chile Chile Peru Russia Chile Chile Chile Chile Chile USA Poland Congo DR Peru Iran Chile Australia Chile Peru Chile Zambia Chile China Peru Kazakhstan Mexico Australia Congo DR Congo DR Mongolia Chile Canada Chile Chile Argentina Peru Papua New Guinea Stage Producing Producing Producing Producing Producing Producing Producing Producing Producing Producing Producing Producing Producing Producing Producing Producing Producing Producing Producing Producing Project Producing Producing Producing Producing Producing Producing Producing Producing Producing Producing Producing Producing Producing Producing Producing Producing Producing Producing Producing % 4.9% 3.2% 2.4% 2.2% 2.2% 2.2% 2.1% 2.0% 1.9% 1.8% 1.7% 1.6% 1.3% 1.3% 1.3% 1.2% 1.2% 1.1% 1.1% 1.0% 1.0% 1.0% 0.9% 0.9% 0.9% 0.9% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% Kt 881 580 429 400 400 395 384 362 344 333 307 293 240 240 235 212 211 203 192 180 179 175 170 165 160 160 152 151 150 149 144 137 135 130 130 130 130 124 121 120 45.9% 8,261 17,993 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Change in production rate vs 2012 Name Country Stage Escondida Chile Producing Balkhash Kazakhstan Producing Tintaya (inc Antapaccay) Peru Producing Collahuasi Chile Producing Tenke-Fungurume SxEw Congo DR Producing Candelaria Chile Producing Mutanda SxEw Congo DR Producing Katanga Congo DR Producing Ernest Henry Australia Producing DeGrussa Australia Project Frontier (ex Lufua) Congo DR Producing Lumwana Zambia Producing Ministro Mina Hales (MMH) Chile Project Salobo Brazil Project Zyryanovsk Kazakhstan Producing Jabal Sayid Saudi Arabia Project Other Chinese Mines China Producing Kansanshi Zambia Producing Cuajone Peru Producing Caserones (ex Regalito) Chile Project Buenavista SxEw Exp (3) Mexico Project Gibraltar Canada Producing Buenavista (Cananea) Mexico Producing Sarcheshmeh Iran Producing Highland Valley Copper Canada Producing Boseto Botswana Project Palabora South Africa Producing Muliashi SxEw Zambia Project Duobaoshan China Project Chino USA Producing Morenci SxEw USA Producing Bisha Eritrea Project Esperanza Chile Project Boleo SxEw Mexico Project Chambishi (NFC) Zambia Producing Kevitsa Finland Project Cerro Verde SxEw Peru Producing Vale - Sudbury Canada Producing Oyu Tolgoi Mongolia Project Pinto Valley SxEw USA Producing Other TOTAL % 22.0% 8.8% 8.0% 5.4% 5.3% 4.3% 3.8% 3.7% 3.7% 3.5% 3.4% 2.9% 2.9% 2.6% 2.6% 2.2% 2.2% 2.2% 1.8% 1.8% 1.8% 1.8% 1.8% 1.7% 1.7% 1.5% 1.5% 1.5% 1.5% 1.3% 1.2% 1.2% 1.1% 1.1% 1.1% 0.9% 0.9% 0.9% 0.7% 0.7% Kt 300 120 109 74 72 58 52 51 50 48 46 40 40 36 36 30 30 30 25 25 25 25 24 23 23 21 21 20 20 18 17 16 16 15 14 13 12 12 10 10 -19.0% -259 1,365 Source: Wood Mackenzie, UBS Research 7
  • …mine supply (& total supply) look ok for now Copper industry capex (US$bn) and copper price (US$/lb) Kazakhstan, 3% Congo DR, 5% 25 Indonesia, 3% 20 Russia, 4% 15 Australia, 6% Zambia, 4% 10 2025e 2024e 2023e 2022e 2021e 2020e 2019e 2018e 2017e 2016e 2015e 2014e 2013e 2012 2011 2010 2009 2008 2014E 2013E 2012A Chile, 33% 0 2011A 0 China, 8% 2010A USA, 7% 5 5 2006A Peru, 7% 2009A 10 copper price5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 juniors 30 Canada, 3% 15 majors 2008A 20 35 2016E other, 18% 2007A 25 2015E Global copper mine supply (Mt, Cu-in-conc; % share of 2013’s total) Source: UBS Research and company filings Global copper supply (Mt) Copper mine supply growth 30 16 25 20 8% 7% 6% 5% 4% 3% 2% 1% 0% yoy growth [RHS] Mine Supply Mtpa [LHS] 14 15 scrap (smelter & refinery) 10 12 SxEw 5 concentrates 2016E 2015E 2014E 2013E 2012A 2011A 2010A 2009A 2008A 2007A 10 2006A 2025e 2024e 2023e 2022e 2021e 2020e 2019e 2018e 2017e 2016e 2015e 2014e 2013e 2012 2011 2010 2009 2008 0 Source: UBS Research and company filings Source: UBS Research 8
  • Longer-term risk? new copper sources => new growth risks Source: Wood Mackenzie 9
  • demand Source: Rio Tinto 10
  • Demand growth = China + India (+ upside from old players) 2000 Copper (ktpa) US China India Europe Japan RoW World 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 CAGR 2016 2000-13 2013-16 3,049 2,777 2,465 2,210 2,282 2,245 2,120 2,174 2,087 1,778 1,754 1,787 1,827 1,864 1,883 1,920 1,959 1,701 2,319 2,462 2,946 3,336 3,722 3,925 4,672 5,168 6,690 6,981 7,426 7,887 8,455 8,962 9,455 9,928 275 308 301 294 313 368 400 513 533 580 560 601 627 639 668 698 726 3,908 4,110 3,815 3,617 3,520 3,464 3,839 3,623 3,437 2,923 3,077 3,106 3,128 3,127 3,166 3,215 3,265 1,322 1,225 1,213 1,194 1,213 1,247 1,316 1,293 1,241 962 1,082 1,091 1,116 1,127 1,139 1,161 1,185 4,599 4,899 5,085 5,023 5,299 5,561 5,706 5,762 5,862 5,402 5,511 5,781 5,967 6,107 6,220 6,328 6,414 14,854 15,638 15,341 15,285 15,963 16,606 17,306 18,037 18,329 18,334 18,964 19,793 20,552 21,319 22,038 22,778 23,475 -3.71% 13.13% 6.71% -1.70% -1.22% 2.21% 2.82% 1.67% 5.50% 4.33% 1.45% 1.67% 1.65% 3.26% % share of total 2000 2013 21% 11% 2% 26% 9% 31% 9% 40% 3% 15% 5% 29% Per Capita Intensity of Use 2009 18 Copper’s global demand growth, by country/region (ktpa) 25,000 RoW 15,000 Sw eden 16 India 20,000 kg 14 Europe S.Korea Germany 12 10 Japan 10,000 US 5,000 China Source: UBS Research 2016 2014 2012 2010 2008 2006 2004 2002 2000 0 Sd.Arabia Italy 8 China 6 Poland Malay sia Japan US Turkey Thailand Russia Peru Mex ico Indonesia Brazil Argentina India 4 2 - 10,000 20,000 France UK 30,000 40,000 50,000 GDP (PPP constant 2005 international $) 11
  • zircon 2012 uranium 2009 crude oil met-coal (seaborne) 2006 LNG thermal coal (seaborne) Ti-pigment nickel thermal coal (global) copper steel zinc alumina aluminium met-coal (global) iron ore (global) lead iron ore (seaborne) China's %-share of commodities' demand (sorted on 2015 data) 80% 2015 70% …70% of China’s total copper supply is imported 60% 50% 40% 30% 20% 10% 0% Source: UBS Research 12
  • China's semis output vs. total contained Cu-supply 2,000 1,000 1,000 500 0 0 -1,000 -500 appt consumption total copper copper semis production total inventories monthly balance -2,000 monthly balance & inventories (kt/mth) 1,500 -1,000 Jan-13 Jan-12 Jan-11 Jan-10 Jan-09 Jan-08 Jan-07 -1,500 Jan-06 -3,000 Jan-05 consumption & production (kt/mth) 3,000 Source: China Customs; UBS Research; assumes China held 500kt of total inventories at the start of 2009 13
  • Copper’s most popular themes: THE ANSWERS • outlook for supply, demand, price ? adequate conc./refined supply growth + China-led demand growth = stable price outlook • what are its key fundamental drivers? 1. mine supply growth uncertainty; 2. China’s import-dependency; 3. return of the US & Eurozone • does copper offer investors any long-term upside? yes: invest in good projects with smart development teams + seek producers with low-cost assets • do big project delays = supply-side crunch? absolutely! this is the undying theme of key commodity markets => copper; nickel; zinc; coals 14
  • appendix Source: UBS Research 15
  • long-term history of commodity prices 700 500 Cu nominal 500 300 US¢/lb Cu 2013 600 spot 200 100 400 US$/lb 2008 2000 1992 1984 1976 1968 1960 15 10 5 2006 20% 15% 350 10% 300 0% 200 150 2006 1995 1984 1973 1962 1951 1940 1929 1918 1907 50 2006 1995 1984 1973 1962 1951 1940 1929 1918 1907 1885 2011 2002 1993 1984 1975 1966 1957 1948 1939 1930 1921 1912 0 1903 2006 1995 1984 1973 1962 1951 1940 1929 1918 0 100 50 -15% 1907 100 -10% 0 150 250 -5% 500 Pb 2013 Pb nominal spot 200 Zn 2013 Zn nominal spot US¢/lb 5% 1000 US¢/lb 1500 400 1894 Au nominal US CPI 1885 Au 2013 spot 2000 1896 0 1885 1995 1984 1973 1962 1951 1940 1929 1918 1907 1896 1885 0 1896 1952 Ni 2013 Ni nominal spot 20 100 1885 1944 25 200 US$/oz 1936 1920 300 1928 0 1896 US¢/lb Al 2013 Al nominal spot 400 Source: Bloomberg, Platts, USGS, UBS Research 16
  • price-cost-margin 70% 60% 50% 0 price; cost; margin (US¢/lb) 0% 2010 2012 2008 2004 2006 2002 1998 2000 1996 1992 1994 1990 1986 1988 30% 20% 4 2010 2012 2008 2004 2006 2002 1998 2000 0% 1996 10% 1992 1994 20% 1990 40 1980 1982 6 80% price (2013US¢/lb) margin (2013US¢/lb) cost (2013US¢/lb) margin (%) Lead 70% 60% 100 50% 80 40% 60 30% 40 20% 2010 2012 2008 2004 2006 2002 1998 2000 1996 1992 1994 1990 1986 1988 1984 2012 0% 2010 0 2008 0% 2006 0 2004 10% 2002 20 2000 2 10% 1996 1998 2010 2012 2008 2004 2006 2002 1998 2000 1996 1992 1994 1990 1986 1988 1984 30% 1994 0% 0 40% 8 1992 10% 10 1990 20% 100 40% 60 120 50% 1988 200 50% 80 140 12 1986 30% 60% 100 70% 14 1984 40% 300 70% 120 80% 60% 1982 50% 400 16 1980 60% margin (2013US¢/lb) cost (2013US¢/lb) margin (%) Nickel 140 80% 0 price; cost; margin (US¢/lb) 70% 18 price; cost; margin (US$/lb) 20 price (2013US¢/lb) margin (2013US¢/lb) cost (2013US¢/lb) margin (%) Zinc 20 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 80% 500 1980 1982 price; cost; margin (US$/t) 600 price (2013US$/t) margin (2013US$/t) cost (2013US$/t) margin (%) Alumina 0% 1980 1982 180 10% 0 20% 10% 20% 100 30% 50 160 50 700 40% 100 30% 150 70% 50% 150 40% 200 80% 60% 1984 250 margin (2013US¢/lb) cost (2013US¢/lb) margin (%) 200 1986 1988 300 Aluminium 1980 1982 350 250 price; cost; margin (US¢/lb) margin (2013US¢/lb) cost (2013US¢/lb) margin (%) 400 price; cost; margin (US¢/lb) 80% 1984 Copper 450 Source: CRU, Wood-Mackenzie-Brook Hunt, Metalytics, UBS Research 17
  • UBS price forecasts (as at 15-Oct-13) Source: UBS Research 18
  • UBS copper market balance: a summary (as at 15-Oct-13) Global Copper Market Global refined copper demand Growth in copper demand Growth in copper demand Mt Mt % 2010 19.0 0.6 3.4% 2011 19.8 0.8 4.4% 2012 20.6 0.8 3.8% 2013e 21.3 0.8 3.7% 2014e 22.0 0.7 3.4% 2015e 22.8 0.7 3.4% 2016e 23.5 0.7 3.1% 2017e 24.0 0.5 2.1% Mine production (ex SX-EW) growth in mine conc production Smelting capacity utilisation rate Smelter production Refined production SXEW production Total copper supply growth in supply Mt % Mt % Mt Mt Mt Mt % 12.9 1.6% 17.6 83% 14.5 15.6 3.3 19.0 3.3% 12.9 0.2% 18.3 84% 15.4 16.2 3.6 19.8 4.4% 13.0 0.8% 19.0 83% 15.8 17.0 3.6 20.6 3.9% 13.9 6.7% 19.7 85% 16.8 17.8 3.7 21.5 4.7% 14.4 3.4% 19.8 88% 17.3 18.5 3.8 22.3 3.4% 14.9 3.9% 20.5 87% 17.9 19.0 3.9 23.0 3.2% 15.5 3.7% 21.3 86% 18.4 19.5 4.0 23.5 2.1% 15.7 1% 22.5 83% 18.7 19.8 4.1 23.9 2.1% Market balance Days Total Inventory kt days -12 56 -11 53 0 51 204 56 222 62 191 66 -14 64 -18 62 LME price average LME price average LME price change y/y US¢/lb US$/t % 342.9 7,560 46.6% 399.7 8,812 16.6% 360.8 7,954 -9.7% 328.9 7,251 -8.8% 290.0 6,393 -11.8% 285.0 6,283 -1.7% 285.0 6,283 0.0% 280.6 6,186 -1.5% Source: UBS estimates 19
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  • Contact Information UBS Securities Australia Ltd Tom Price Executive Director – Commodities Research email tom.price@ubs.com Tel: +61 2 9324 2189 Fax: +61 2 9324 3672 UBS Securities Australia Ltd Daniel Morgan Director – Commodities Research email daniel.morgan@ubs.com Tel: +61 2 9324 3844 Fax: +61 2 9324 3672 UBS Limited Angus Staines Associate Director – Commodities Research email angus.staines@ubs.com Tel: +44 207 567 9798 22
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