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Living In Interesting TimesCommodity Outlook : Resource & Energy SymposiumBroken Hill, May 2012Prepared by: Lachlan Shaw –...
DisclaimerPlease view our website at www.research.commbank.com.au. The Commonwealth Bank of Australia ABN 48 123 123 124 A...
Living In Interesting Times : RES Broken Hill, May 2012Is the best behind us?Will the Euro-zone survive to the next Olympi...
Outlook: Differing prospects by commodity Commodity prices to mostly remain historically high over next 1-2 years. Costs ...
Macro: World growth about trend       Central case is Euro-zone survives => EU recession, ongoing recovery in US, robust ...
EU: Grexit and financial spill overs to real activity        Dysfunctional financial markets in the GFC bred distrust and...
EU: Debt doldrums => austerity, default or inflate?         The developed economies of Europe and the United States now a...
China: Who’s who in the zoo?        China dominates global consumption of early and mid cycle commodities – particularly ...
China: Growth is investment heavy…                          One risk to China’s outlook is elevated investment share of G...
China: …but the economy is also saving heavy!                               But China has more savings than investment (a...
China: Rebalancing will slow growth… China’s growth will rebalance away from investment and exports and towards domestic ...
China: …but still large incremental demand Lower annual GDP growth will still translate through to large year on year dem...
China: Growth to recover as cycle/policy eases       China’s liquidity cycle is easing as inflation has cooled       Fis...
Supply issue: Cost inflation                        Figure 12: Change in unit costs & EBITDA margin by commodity for CBA E...
Sector issues: Where is the cost support? Using recent cost curves, we find that:  — Most spot commodity prices are now b...
Commodity insights16
Iron ore & coking coal: Long demand drivers                                Iron ore and coking coal demand is driven by g...
Iron ore: Prices to recover relatively quickly…        We forecast iron ore spot prices (delivered China port) to recover...
Coking coal: Prices easing but remaining high       Positive medium term demand prospects for premium coking coal        ...
Aluminium: Cost support ebbing        A large portion of global capacity is estimated to be losing money        The outl...
Alumina/Bauxite: China arbitrage lifts imports       A better seaborne to domestic price arbitrage has lifted imports (do...
Copper: Don’t lose sight of the big picture Copper prices have come back in recent weeks due to high Chinese stocks and d...
Copper: China inventories up, imports to ease          Inventories: Low on LME, high in China (official plus bonded wareh...
Nickel: Demand / supply drivers Nickel demand is driven by stainless steel production, and stainless steel consumption is...
Nickel: Laterite (& NPI) the key swing factor          Laterite nickel will be a more important new source of supply over...
Zinc: Supply challenge looms…        Demand outlook positive, GDP growth the main driver, China ~40%-45% of demand.      ...
Lead: In transition        Demand outlook is positive, driven in large part by transport eg: battery production ~70% of l...
Gold: The currency of choice?       The higher gold price reflects both a structurally and cyclically weaker US dollar   ...
Gold: Yield correlation gives way to FX       The gold price has recorded a strong negative correlation with the US real ...
Gold: Central bank net buying           Central banks have for decades been net sellers of gold out of reserves          ...
Silver: Demand & supply trends           Since the 1990’s, fabrication demand has constituted the largest component of ov...
Silver: Pricing has eased…gold preferred…        The gold to silver price ratio provides an indication of how these two p...
Oil: Geopolitics and (still) muted US demand      UK Brent crude has traded at a premium to US WTI for over a year now, r...
Oil: US oil market to remain well supplied         Record high numbers of drilling rigs have been deployed into US liquid...
RECAP: Living In Interesting TimesIs the best behind us? Less “super”, more “cycle” => tier 1 assets and operatorsWill the...
CBA commodity price deck – calendar year36
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Transcript of "Lachlan Shaw- Resources & Energy Symposium 2012"

  1. 1. Living In Interesting TimesCommodity Outlook : Resource & Energy SymposiumBroken Hill, May 2012Prepared by: Lachlan Shaw – Senior Analyst, CommoditiesDate: 23 May 2012
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  3. 3. Living In Interesting Times : RES Broken Hill, May 2012Is the best behind us?Will the Euro-zone survive to the next Olympiad in Rio De Janeiro in 2016?What does China’s GDP moderation mean for resources?Has China’s steel intensity peaked?What challenges face Australian resource developers?Commodity viewsQuestions 3
  4. 4. Outlook: Differing prospects by commodity Commodity prices to mostly remain historically high over next 1-2 years. Costs still rising, which will pressure margins lower. The Super Cycle is becoming more “cycle” than “super” World GDP slows to about trend this year and next. Euro-zone remains in tact in our central case. — US avoids recession (EU already close to / in recession) — 1/3rd chance of Greece (and other periphery) departure – all bets are off… — Strong growth continues in emerging markets, policy easing due to lower inflation Consistent with ongoing commodity demand growth Supply continues to be challenged – escalating capital costs, labour shortages/strikes, increasing project complexity, deteriorating geology, financing, regulatory/environmental burden, etc Prefer low-cost long-life assets with astute managers that optimise cash margins — Positive bias towards: Copper, iron ore, premium coking coal, oil, LNG — Negative bias towards: Aluminium, thermal coal, uranium 4
  5. 5. Macro: World growth about trend  Central case is Euro-zone survives => EU recession, ongoing recovery in US, robust growth in emerging markets — 1/3rd chance of Greece (and other periphery) leaving the Euro – all bets are off…  Around trend world growth is consistent with ongoing commodity demand growth  The medium term outlook is positive – a larger share of world growth driven by emerging, commodity intensive economies Figure 1: Annual world GDP growth, and contributions by major country/region (developed and developing) Japan Korea China India Russia Brazil US EU27 Other World6%5%4%3%2%1%0%-1%-2%-3% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: IMF, UN, Penn World Tables, The Conference Board, CBA 5
  6. 6. EU: Grexit and financial spill overs to real activity  Dysfunctional financial markets in the GFC bred distrust and stopped banks lending to each other, firms and households, causing trade and activity to stop — This is the risk of a Greece exit (Grexit) and/or Euro-zone break up – A Grexit would severely impact European (and global) banking systems. – Policy (eg: Central Bank QE and liquidity operations) is helping but would need to step up  Developing Asia would be less impacted due to fewer financial linkages but would not escape Figure 2: Selected global interbank spreads and world trade, industrial production volumes4.0% US (3m bill / OIS spread) Europe (3m bill / OIS spread) World trade volumes (indexed: 18-May-07 = 100, rhs) World IP volumes (indexed: 18-May-07 = 100, rhs) 1203.5% 1153.0% 1102.5% 1052.0% 1001.5% 951.0%0.5% 900.0% 85 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Source: Netherlands Bureau of Economic Policy Analysis, Bloomberg, CBA 6
  7. 7. EU: Debt doldrums => austerity, default or inflate?  The developed economies of Europe and the United States now a huge debt load with limited scope for repayment  Through history, excess indebtedness at the country level has usually been resolved by i) gradual debt repayment, ii) default, or iii) inflation  Option i) is hardest (politically – see Europe currently!) and the most drawn out. Option ii) can be very disruptive to real activity, and option iii) may also undermine stable prices and real economic performance – but if managed closely, might present best option over the longer term. Figure 3: Historical perspective - % countries in default and % countries with inflation greater than 20% pa50% % of countries in external default45% % of countries with inflation >20%40%35%30%25%20%15%10%5%0% 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Source: Reinheart & Rogoff, “This Time Its Different” 7
  8. 8. China: Who’s who in the zoo?  China dominates global consumption of early and mid cycle commodities – particularly iron ore, steel, coking coal  Developed economies account for larger consumption shares of mid to late cycle commodities such as zinc, nickel, copper, oil, natural gas and LNG  While the US and Europe are relevant for global demand of early and mid-cycle commodities, China is the most important Figure 4: Share of global commodity consumption by major country bloc (2010) China Japan Eurozone US India Other100%90%80%70%60%50%40%30%20%10% 0% Iron ore Steel Aluminium Copper Nickel Zinc Coking coal * Thermal coal* Oil Natural Gas LNG Source: BP SRWE 2010, AME, BREE, WSA, WBMS, Bloomberg, CBA. * Shares of traded coal, NOT total world consumption 8
  9. 9. China: Growth is investment heavy…  One risk to China’s outlook is elevated investment share of GDP and unbalanced GDP composition  The ramifications of any potential over-investment are, seen through a Western capitalist lens, significant: — Excess capacity (good for users, bad for owners of these assets) — Very low returns to capital and poor resource allocation  We would not entirely disagree… Figure 5: Global perspective – gross fixed capital formation and GDP per capita for selected countries (1970-2010) 45% China Japan South Korea India United States Germany 40% 35%GFCF as % of GDP 30% 25% 20% 15% 10% 5% 0% 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 GDP per capita, 1990 international dollars Source: United Nations National Accounts database, Penn World Tables, IMF, CBA 9
  10. 10. China: …but the economy is also saving heavy!  But China has more savings than investment (as a share of GDP)  Implication? To rebalance China’s economy away from high investment share of GDP and towards higher consumption share of GDP, saving share of GDP needs to fall — Convince households to save less, eg: higher wages, better social security, better healthcare and education; lower savings => increased return to capital => lower investment  This requires extensive economic / political reforms in China, which will occur gradually, meaning that consumption share of GDP will lift slowly. Investment share will remain significant; it needs to; and so will commodity demand Figure 6: Global perspective – national savings and GDP per capita for selected countries (1980-2010) 60% China Japan South Korea India United States Germany 50%National saving, % of GDP 40% 30% 20% 10% 0% 0 5000 10000 15000 20000 25000 30000 35000 40000 45000 50000 GDP per capita, 1990 international dollars Source: United Nations National Accounts database, Penn World Tables, IMF, CBA 10
  11. 11. China: Rebalancing will slow growth… China’s growth will rebalance away from investment and exports and towards domestic consumption and services. This is likely to see GDP growth slow over time – consistent with other countries’ – as incomes keep rising Investment is re-balancing from developed coastal provinces to less developed, poorer inland provinces. — Recent insights: Henan / Zhongzhou ; Sichuan / Chengdu / Chongqing — This theme will persist for the next decade at least, keeping commodity demand high and growing Figure 8: GDP growth vs GDP per capita 20% India Japan South Korea Taiwan US China 15% GDP growth % y/y 10% 5% 0% -5% -10% 0 5000 10000 15000 20000 25000 30000 35000 40000 45000 50000 GDP per capita, 2005 international dollar Source: IMF, CBA 11
  12. 12. China: …but still large incremental demand Lower annual GDP growth will still translate through to large year on year demand growth, due to the sheer size of China’s economy — Baseline: Incremental annual GDP 40% higher in 2015 than in 2010 — Bear scenario (2% lower GDP growth): incremental annual GDP lower => lower commodity demand / prices Figure 9: China incremental GDP – base and bear case $ 30 trn China GDP (base case) $ 2.0 trn Millions China GDP (2% less growth than base case, from 2013) Incremental GDP (lhs) $ 1.8 trn $ 25 trn Incremental GDP (2% less growth than base case, lhs) $ 1.6 trn $ 1.4 trn $ 20 trn $ 1.2 trn $ 15 trn $ 1.0 trn $ 0.8 trn $ 10 trn $ 0.6 trn $ 0.4 trn $ 5 trn $ 0.2 trn $ 0 trn $ 0.0 trn 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Source: IMF, CBA 12
  13. 13. China: Growth to recover as cycle/policy eases  China’s liquidity cycle is easing as inflation has cooled  Fiscal policy is now shifting to a more accommodative / pro-growth stance (ref: Premier Wen Jiabao’s comments)  We expect continued policy easing to support growth stabilisation / recovery through 2H12 and into 2013: — This will support commodity demand (eg: new construction starts, crude steel output) and pricing Figure 10: China real money supply and copper price Figure 11: China excess liquidity vs S&P/ASX200 resources35% Excess liquidity (M2 % chg y/y less Nominal GDP % chg y/y) Real money supply (% chg, y/y) Copper price (% chg, y/y, 8mth lag, rhs) 200% 25% S&P/ASX 200 Resources (% chg, y/y, lagged 6 mths, rhs) 100%30% 150% 20% 80%25% 100% 15% 60%20% 10% 40% 50%15% 5% 20% 0%10% 0% 0%5% -50% -5% -20%0% -100% -10% -40% Apr-98 Apr-00 Apr-02 Apr-04 Apr-06 Apr-08 Apr-10 Apr-12 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Source: China NBS, Bloomberg, CBA Source: China NBS, PBoC, Bloomberg, CBA 13
  14. 14. Supply issue: Cost inflation Figure 12: Change in unit costs & EBITDA margin by commodity for CBA Equities research universe Source: CBA EquitiesFigure 13: Average EBITDA margins, by commodity type, for CBA Equities research universeSource: CBA Eqiuities 14
  15. 15. Sector issues: Where is the cost support? Using recent cost curves, we find that: — Most spot commodity prices are now below marginal costs — Copper, gold, iron ore and premium coking coal spot prices remain well above the 95 th percentile – These commodities also have steep cost curves, meaning a large fall in price is needed to ration a given amount of supply The climate over the next 1-2 years will likely favour low cost, long life, high grade assets; rather than leveraged assets Figure 14: Spot price and cost curve figures Marginal cost P95 P90 P85 P80 Aluminium -39% -17% -15% -14% -13% Alumina -28% -24% -15% -12% -10% Copper -59% 68% 88% 94% 96% Nickel -36% -13% -4% 5% 9% Gold -3% 41% 67% 82% 99% Iron ore (fob) -6% 57% 77% 82% 89% Coking coal 31% 62% 72% 75% 78% Thermal coal -40% 0% 7% 13% 19% Note: Cost curves include by-product credits Source: AME, CBA 15
  16. 16. Commodity insights16
  17. 17. Iron ore & coking coal: Long demand drivers  Iron ore and coking coal demand is driven by growth in steel output (pig iron)  Over the long term, economies tend to consume more steel as incomes rise, development progresses and countries deepen infrastructure capital stock  We see global crude steel production surpassing 2 billion tonnes by 2017, from about 1.5 billion tonnes this year — China’s production will peak around 960 million tonnes in 2023, India’s steel production will peak decades later — Decline of developed economy steel output will be more than offset by growth in emerging markets Figure 15: Long term steel growth prospects – driven by emerging market development (history and CBA forecast) 1,800 US Japan South Korea China India 1,600 1,400Steel output (kg/capita) 1,200 1,000 800 600 400 200 0 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 GDP per capita, USD, 1990 real terms, PPP basis Source: WSA, IMF, AME, ABARES, UN, The Conference Board, CBA 17
  18. 18. Iron ore: Prices to recover relatively quickly…  We forecast iron ore spot prices (delivered China port) to recover quite quickly and rally through 2012-13 towards USD 150/t, before easing into mid-decade — Prices in the range USD 120-130/t are at substantive Chinese domestic cost support — Current spot price volatility (eg: cargo delays/defaults) vs record high crude steel output Figure 16: Iron ore forward curve Figure 17: Iron ore prices, forward curve and CBA forecast USD 200/tUSD160/t 21-May 07-May 23-Apr 09-Apr USD 180/tUSD150/t USD 160/t USD 140/tUSD140/t USD 120/tUSD130/t USD 100/t USD 80/tUSD120/t USD 60/t Iron ore price (MB 63.5% Fe, CFR China) USD 40/t Iron ore price (TSI 62% Fe CFR China)USD110/t Forward curve (TSI 62% Fe CFR China) as at 21-May-12 USD 20/t CBA forecastUSD100/t USD 0/t Spot 2 mth 4 mth 6 mth 8 mth 10 mth 12 mth 14 mth 16 mth 18 mth 20 mth 22 mth 24 mth May-07 May-08 May-09 May-10 May-11 May-12 May-13 May-14 May-15 May-16 May-17 Source: NYMEX, Bloomberg, CBA Source: Metal Bulletin, Platts, SSY, NYMEX, Bloomberg, CBA 18
  19. 19. Coking coal: Prices easing but remaining high  Positive medium term demand prospects for premium coking coal — China blast furnace modernization, India  Spot coking coal prices drifted lower through 2011 due to recovering Queensland supply and moderating demand  Protracted industrial action at BMA’s mines in the Bowen Basin are now supporting better pricing, probably temporarily?  We see prices supported above USD 200/t for the next few years before trailing lower from mid-decade as supply growth exceeds demand growth. Our real long run price is USD 167/t, effective in 2020 Figure 18: Coking coal spot prices Figure 19: CBA coking coal forecasts – FOB AustraliaUSD 400/t Premium coking coal (fob Qld) US$350/t Premium coking coal (cfr China) Nominal Real (2010) Premium coking coal (cfr India) Real average CBA real long run US$300/tUSD 350/t Premium coking coal, contract (fob Qld) US$250/tUSD 300/t US$200/t US$150/tUSD 250/t US$100/tUSD 200/t US$50/tUSD 150/t US$0/t Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: Platts, CBA Source: CBA 19
  20. 20. Aluminium: Cost support ebbing  A large portion of global capacity is estimated to be losing money  The outlook is muted: — We identified 13Mt of new cheap capacity in China’s Xinjiang province that will undermine global cost support further — Markets will be in excess supply for the rest of the decade – the inventory finance trade will roll on  Only stronger demand growth, or supply discipline (in contrast with most of the last 2 decades) will tighten the market in the medium term Figure 20: Aluminium cost curve and important price points Figure 21: Global cost curve with new cheap Chinese capacity Cost curve (2012) P95 : USc 99/lb (2012) USc 140/lb Demand (CBA) Original New P90 : USc 98/lb (2012) P85 : USc 97/lb (2012) P80 : USc 95/lb (2012) Spot : USc 92/lb as of 18-Apr-12USc 120/lbUSc 115/lbUSc 110/lbUSc 105/lbUSc 100/lb USc 100/lb USc 95/lb USc 90/lb USc 85/lb USc 80/lb USc 75/lb USc 70/lb USc 60/lb 0 Mt 6 Mt 12 Mt 18 Mt 24 Mt 30 Mt 36 Mt 42 Mt 0 kt 8,000 kt 16,000 kt 24,000 kt 32,000 kt 40,000 kt 48,000 kt 56,000 kt 64,000 kt Source: AME, CBA Source: AME, CBA 20
  21. 21. Alumina/Bauxite: China arbitrage lifts imports  A better seaborne to domestic price arbitrage has lifted imports (domestic output cuts help as well)  China’s demand for imported bauxite remains, thanks to high silica (high cost) domestic bauxite — Indonesian export bans – to the extent they work – may see bauxite & alumina imports & prices rise in coming months Figure 22: China domestic & seaborne alumina price & imports Figure 23: China’s bauxite imports and import dependence ratio Net imports India Indonesia Malaysia Australia Import dependence (rhs) Alumina price (spot, China, rhs) 6.0 Mt 90%700 ktpm Alumina price (spot, fob Australia, rhs) USD500/t 80% 5.0 Mt600 ktpm USD450/t 70%500 ktpm 4.0 Mt 60% USD400/t400 ktpm 50% 3.0 Mt USD350/t 40%300 ktpm USD300/t 2.0 Mt 30%200 ktpm 20% USD250/t 1.0 Mt100 ktpm 10% 0 ktpm USD200/t 0.0 Mt 0% Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Source: Metal Bulletin, China Customs, Bloomberg, CBA Source: China Customs, China NBS, Antaike, IAI, Bloomberg, CBA 21
  22. 22. Copper: Don’t lose sight of the big picture Copper prices have come back in recent weeks due to high Chinese stocks and demand worries; and the resurgence of concerns surrounding the stability of the Eurozone But demand and supply remains fundamentally tight. We expect a copper deficit this year. — Chinese demand will pick up as the liquidity cycle eases and policy becomes more accommodative — Supply remains fragile and sensitive to shocks – seismic (eg: Chile, Peru), grade, cost, etc. Having said that, new supply in coming years will see prices ease We remain confident in the longer term copper demand outlook given its status as a mid-cycle commodity Copper demand growth - China and rest of world 16.0 Mt 14.0 Mt 12.0 Mt 10.0 Mt 8.0 Mt China 6.0 Mt World_ex_China 4.0 Mt 2.0 Mt 0.0 Mt 2000 2003 2006 2009 2012 2015 22
  23. 23. Copper: China inventories up, imports to ease  Inventories: Low on LME, high in China (official plus bonded warehouse) — Due to the import finance trade – perhaps 550kt-600kt copper in unbonded warehouses on LCs up to 360 days — Banks (usually Chinese) who extended the trade finance ultimately carry default risk  This will unwind as liquidity cycle eases and SFE-LME arbitrage remains unfavourable for imports  Expect China’s copper imports to trend lower in coming months Figure 24: Rising SFE but falling LME copper inventories Figure 25: SFE to LME price arbitrage and China copper import800 kt Americas (LME) Europe (LME) Asia (LME) USc500/lb USc50/lb Copper 3 month arbitrage Imports (rhs) 950 kt Shanghai (SFE) Copper price USc40/lb 900 kt700 kt USc450/lb USc30/lb 850 kt600 kt USc400/lb USc20/lb 800 kt500 kt USc350/lb USc10/lb 750 kt400 kt USc300/lb USc0/lb 700 kt -USc10/lb300 kt USc250/lb 650 kt -USc20/lb200 kt USc200/lb 600 kt -USc30/lb100 kt USc150/lb -USc40/lb 550 kt 0 kt USc100/lb -USc50/lb 500 kt May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Source: SFE, LME, Bloomberg, CBA Source: CBA 23
  24. 24. Nickel: Demand / supply drivers Nickel demand is driven by stainless steel production, and stainless steel consumption is increasingly being driven out of Asia, and especially China Nickel in pig iron production in China has grown dramatically in recent years, relying in large part on nickel in concentrate supplies from Indonesia and Philippines — Indonesian export bans threaten this trade, although local nickel in concentrate suppliers are pragmatic about investing in refineries. Expect less nickel concentrate flow into China and more semi-refined nickel over the medium termFigure 26: Nickel demand by first use Figure 27: World stainless steel demand Other Americas EUAfrica 7% 35,000 Kt Asia w/o China China Electroplating 7% Central & Eastern Europe World Foundry castings 30,000 Kt 3% 25,000 Kt Non ferrous alloys 12% 20,000 Kt 15,000 Kt 10,000 Kt Low alloy steels Stainless steel 5% 66% 5,000 Kt 0 Kt 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 pSource: ISSF, AME, CBA Source: ISSF, CBA 24
  25. 25. Nickel: Laterite (& NPI) the key swing factor  Laterite nickel will be a more important new source of supply over the medium term, but faces significant challenges — The complexity of processes such as high pressure acid leach (HPAL) can give rise to large upfront costs — No two laterite deposits are the same and the chemistry involved in processing ores can be very sensitive to natural variations in ore feedstock, thereby causing problems with the processing plant  We adopt a sanguine approach to new laterite supply, treating each project on its merits. — Figs 28 & 29 show the sensitivity of overall nickel supply to scenarios around the major laterite projects. Figure 28: HPAL impact on nickel supply Figure 29: HPAL impact on total nickel supply 2012 2013 2014 2015 2016 12% 100% of nameplate capacity 50% of nameplate capacity 30% of nameplate capacityTotal refined supply 1671 1794 1894 1960 1997Base case HPAL production 16 40 60 70 78 10%% of refined supply 1% 2% 3% 4% 4% 8%Increase in refined supply100% of nameplate capacity 55 121 186 221 221 6%50% of nameplate capacity 28 60 93 110 11030% of nameplate capacity 17 36 56 66 66 4%% Increase in refined supply 2%100% of nameplate capacity 3% 7% 10% 11% 11%50% of nameplate capacity 2% 3% 5% 6% 6% 0%30% of nameplate capacity 1% 2% 3% 3% 3% 2012 2013 2014 2015 2016 Source: AME, ABARES, Bloomberg, company reports, CBA Source: AME, ABARES, Bloomberg, company reports, CBA 25
  26. 26. Zinc: Supply challenge looms…  Demand outlook positive, GDP growth the main driver, China ~40%-45% of demand. — Transportation (especially automotive via galvanised steel) and construction are the main demand drivers  Supply outlook challenged in the medium term due to some large well known closures (eg: Century) — Positive price drivers: Average ore grades are expected to fall 0.5% over the rest of the decade. Meanwhile, current new projects will only replace 10%-15% of lost output this decade, leading to a concentrate shortage in the medium term — Negative price drivers: Higher rates of zinc recycling in medium term, and China’s artisanal producers Figure 30: Zinc supply & demand outlook Figure 31: CBA zinc price forecasts (nominal)18,000 kt Supply Demand USc135/lb17,500 kt17,000 kt16,500 kt USc125/lb16,000 kt15,500 kt USc115/lb15,000 kt14,500 kt USc105/lb14,000 kt13,500 kt13,000 kt USc95/lb 2012 2013 2014 2015 2016 2017 2018 2019 2020 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: AME, ABARES, Bloomberg, company reports, CBA Source: AME, Bloomberg, CBA 26
  27. 27. Lead: In transition  Demand outlook is positive, driven in large part by transport eg: battery production ~70% of lead demand, and transport ~80% of battery demand — Positive demand driver: still low vehicle and e-bike penetration in developing economies — Demand risk: Lighter weight vehicles globally mean less lead needed per vehicle  Supply outlook is more balanced than Zinc. Grade decline and older, inefficient and more polluting smelter closures in China will pressure costs higher. But lead is not scarce and can be regarded as a pollutant in some polymetallic concentrates. Figure 32: Lead supply & demand outlook Figure 33: CBA lead price forecasts (nominal)15,000 kt USc116/lb Supply Demand14,000 kt USc112/lb13,000 kt USc108/lb12,000 kt USc104/lb USc100/lb11,000 kt USc96/lb10,000 kt 2012 2013 2014 2015 2016 2017 2018 2019 2020 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: AME, ABARES, Bloomberg, company reports, CBA Source: AME, Bloomberg, CBA 27
  28. 28. Gold: The currency of choice?  The higher gold price reflects both a structurally and cyclically weaker US dollar  The cyclical weakness of the US dollar looks to be reverting somewhat, with better macro trends in the US and safe haven demand due to the Euro-zone sovereign debt crisis  The structural drivers for a weaker USD remain broadly in place — The caveat to this is that the US dollar remains an asset safe haven of last resort – extreme volatility and risk aversion does result in US dollar support, but we view these events as relatively transitory Figure 34: Gold price history and forecasts Figure 35: US General Government Gross DebtUSD2,000/oz USD 24 Trillion General government gross debt % chg, y/y 24% Nominal (USD/oz)USD1,800/oz USD 20 Trillion 20% Real (USD/oz, Indexed: 30-Mar-12 = 100)USD1,600/oz CBA forecast (nominal, USD/oz) USD 16 Trillion 16%USD1,400/oz Real average (1980-2010 = USD 706/oz) USD 12 Trillion 12%USD1,200/ozUSD1,000/oz USD 8 Trillion 8% USD800/oz USD 4 Trillion 4% USD600/oz USD 0 Trillion 0% USD400/oz -USD 4 Trillion -4% USD200/oz USD0/oz -USD 8 Trillion -8% Mar-86 Mar-89 Mar-92 Mar-95 Mar-98 Mar-01 Mar-04 Mar-07 Mar-10 Mar-13 Mar-16 1981 1985 1989 1993 1997 2001 2005 2009 2013 2017 Source: Bloomberg, CBA Source: IMF WEO April 2012, CBA 28
  29. 29. Gold: Yield correlation gives way to FX  The gold price has recorded a strong negative correlation with the US real long bond yield in recent years  But it also trades – at various points in time – with a strongly negative correlation to the US dollar  The recent firming of the US dollar, due to a i) better outlook for the US economy, and ii) increased safe haven demand thanks to the ongoing European sovereign debt crisis; has dominated the gold price in recent months, even as real long yields have continued to drift lower — A departure from the Euro-zone by Greece (and other periphery states) would see gold supported out of safe haven flows Figure 36: Gold price and US real long yields - correlation Figure 37: Gold price and US dollar indexUSD2,000/oz Gold price -1.0% USD2,000/oz 65 Gold price US dollar index (inverted, rhs)USD1,800/oz US 10 yr real yields (inverted, rhs) USD1,800/oz -0.5% 70USD1,600/oz USD1,600/oz 0.0%USD1,400/oz USD1,400/oz 75USD1,200/oz 0.5% USD1,200/ozUSD1,000/oz 1.0% USD1,000/oz 80 USD800/oz USD800/oz 1.5% 85 USD600/oz USD600/oz 2.0% USD400/oz USD400/oz 90 USD200/oz 2.5% USD200/oz USD0/oz 3.0% USD0/oz 95 May-06 May-07 May-08 May-09 May-10 May-11 May-12 May-05 May-06 May-07 May-08 May-09 May-10 May-11 May-12 Source: Bloomberg, CBA Source: Bloomberg, CBA 29
  30. 30. Gold: Central bank net buying  Central banks have for decades been net sellers of gold out of reserves  But more recently, this has shifted towards being net buyers, thanks to efforts to diversify reserve holdings away from US treasuries and US dollars  The impact has been to switch an annual supply source of 400-500 tonnes to a demand source of 400-500 tonnes per annum. This is significant in a global market of only ~4000 tonnes per annum Figure 38: Central bank net gold sales - annual Figure 39: Central bank net gold sales - quarterly800 t 200 t Purchases Sales Net Sales Purchases Sales Net Sales600 t 150 t 100 t400 t 50 t200 t 0t 0t -50 t-200 t -100 t-400 t -150 t-600 t -200 t Dec-90 Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Source: GFMS, Bloomberg, CBA Source: GFMS, Bloomberg, CBA 30
  31. 31. Silver: Demand & supply trends  Since the 1990’s, fabrication demand has constituted the largest component of overall demand. Of fabrication demand, industrial demand is the largest segment (55% in 2010 vs 38% in 1990); jewellery demand has averaged ~25% while implied net investment demand has picked up in lock step with gold investment demand in recent years  Silver supply is dominated by mine supply, which has ranged between 59% to 78% of total supply. Old scrap has consistently contributed ~20% to total supply, while disinvestment ceased in the 1990s — Mine supply is highly dependent on copper, lead and zinc mine economics, given the occurrence of polymetallic deposits entailing significant by-product credits Figure 40: World silver demand by major component Figure 41: World silver supply by major component1200 kt Total Fabrication Net Government Purchases 1200 kt Mine Production Net Government Sales Old Scrap Producer Hedging Disinvestment Other Producer Hedging Implied Net Invesment Total1000 kt Other Total 1000 kt 800 kt 800 kt 600 kt 600 kt 400 kt 400 kt 200 kt 200 kt 0 kt 0 kt 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Source: Silver Institute, Bloomberg, CBA Source: Silver Institute, Bloomberg, CBA 31
  32. 32. Silver: Pricing has eased…gold preferred…  The gold to silver price ratio provides an indication of how these two precious metals trade relative to each other — Currently, the gold to silver price ratio is below its 35 year long run average, indicating either a low gold price, high silver price or combination of the two (relative to historical norms). This seems a little odd to us, as we would characterise gold fundamentals as tighter than silver. As such, we expect this ratio to continue normalising to long run levels over time  We see silver pricing being determined in large part by gold pricing in the short to medium term. Silver tends to be traded more aggressively as a ‘safe haven’ asset than gold – a pattern that we argue may not be sustainable, given its relative abundance and consumer preference for gold as a store of wealth. We see silver prices easing in coming years. Figure 42: Gold to silver price ratio Figure 43: Silver price forecasts (real and nominal)120x Gold-Silver price ratio USD 45/oz Average (35 year) Nominal Real (Indexed: Dec-11)100x USD 40/oz USD 35/oz 80x USD 30/oz USD 25/oz 60x USD 20/oz 40x USD 15/oz USD 10/oz 20x USD 5/oz 0x USD 0/oz May-76 May-80 May-84 May-88 May-92 May-96 May-00 May-04 May-08 May-12 Mar-90 Mar-95 Mar-00 Mar-05 Mar-10 Mar-15 Mar-20 Source: Bloomberg, CBA Source: Bloomberg, CBA 32
  33. 33. Oil: Geopolitics and (still) muted US demand  UK Brent crude has traded at a premium to US WTI for over a year now, reflecting: — Middle East and North Africa geopolitical tensions, and — Infrastructure bottlenecks in the US onshore energy market restricting shale oil from reaching the Gulf Coast (the Seaway pipeline reversal starts to address this)  Weaker demand in the US and EU continues to offset by strong demand in emerging markets Figure 44: UK Brent and US WTI crude oil prices Figure 45: US crude oil stocks – days of consumptionUSD160/bbl 27 days UK Brent US WTIUSD140/bbl 25 daysUSD120/bbl 23 daysUSD100/bbl USD80/bbl 21 days USD60/bbl 19 days USD40/bbl 17 days USD20/bbl Average 06-11 2010 2011 2012 USD0/bbl 15 days May-92 May-96 May-00 May-04 May-08 May-12 Week 1 Week 11 Week 21 Week 31 Week 41 Week 51 Source: Bloomberg, CBA Source: US DoE, Bloomberg, CBA 33
  34. 34. Oil: US oil market to remain well supplied  Record high numbers of drilling rigs have been deployed into US liquids rich shale plays reflecting the recent record high US oil to gas price ratio. This will drive US onshore liquids output growth into the medium term  Still, US onshore gas supply will grow too, thanks to large numbers of wells drilled in recent years, and significant gas by- products from liquids rich wells under development now. US gas prices are likely to remain under pressure Figure 46: US oil to gas price and rig count ratios Figure 47: US crude oil, gas; and thermal coal prices2.5 x 12.0 x 28 mmbtu WTI Oil Newcastle coal Richards Bay coal Henry Hub gas Oil to gas rig ratio (LHS) Oil to gas price ratio (RHS) 10.0 x 24 mmbtu2.0 x 20 mmbtu 8.0 x1.5 x 16 mmbtu 6.0 x1.0 x 12 mmbtu 4.0 x 8 mmbtu0.5 x 2.0 x 4 mmbtu0.0 x 0.0 x 0 mmbtu May-04 May-05 May-06 May-07 May-08 May-09 May-10 May-11 May-12 Apr-00 Apr-02 Apr-04 Apr-06 Apr-08 Apr-10 Apr-12 Source: Baker Hughes, Bloomberg, CBA Source: globalCOAL, Bloomberg, CBA 34
  35. 35. RECAP: Living In Interesting TimesIs the best behind us? Less “super”, more “cycle” => tier 1 assets and operatorsWill the Euro-zone survive to the next Olympiad in Rio De Janeiro in 2016? ???!What does China’s GDP moderation mean for resources? Growth continues…Has China’s steel intensity peaked? NO. Nor for most (all?) metals and energyWhat challenges face Australian resource developers? Cost, cost and costCommodity viewsQuestionsTHANK YOU AND SEE YOU IN 2013 ! 35
  36. 36. CBA commodity price deck – calendar year36
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