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Commodities Through 2013: Buying Opportunities, or Buyer Beware?
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Commodities Through 2013 : Buying Opportunities, or Buyer Beware?

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As the reigning global economic uncertainty continues, companies are busy setting their budgets and planning for 2013. It is critical to know what you’ll pay for key commodities, raw materials and …

As the reigning global economic uncertainty continues, companies are busy setting their budgets and planning for 2013. It is critical to know what you’ll pay for key commodities, raw materials and other cost inputs and how the reining global demand and supply balances will impact prices. The IHS Pricing and Purchasing service supports our clients by providing key buying insights and market advice for more effective planning and procurement decisions. In these volatile times, ensure you know the whole picture to eliminate risks and identify opportunities. Ensure your company has the power of perspective that IHS brings to our clients each and every day.

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  • 1. Commodities Through 2013Buying Opportunities, or Buyer Beware?John AntonDirector, IHS Steel Servicejohn.anton@ihs.com(202) 481-9231
  • 2. IHS Focal Points Advancing Decisions that Advance the World™ Country and Industry Forecasting & Risk Analysis (Executives & Strategic Planners) Accurate, award-winning forecasts and analysis of the economic, business and investment climate in over 200 countries and 170 industries to support strategic planning, decision making, and risk assessment Commodities, Pricing & Cost (Procurement & Cost Estimators) Cost and price analysis to more effectively time buys, estimate project costs, manage supplier relationships, assess supplier quotes and negotiate long-term contracts Transitioning from what we do to how we solve customer business challengesCopyright © 2012 IHS Inc. All Rights Reserved. www.ihs.com/PricingPurchasing
  • 3. Value Prop: Quantifying price changes A simple but powerful way to look at prices: Machinery Consumer and Facility Costs Goods Equipment The Stages of Processing Model Components for Durable Manufacturing Components for Construction Model highlights flows from the bottom up Ferrous Metals Nonferrous Metals (scrap to hot rolled bars) Wages Raw Materials Macroeconomic Energy Models Models Figure 1 The General Interaction of Prices and Wages Through the Stages of Processing Explains price movements by examining: production costs - labor, materials, equipment, energy, -- along with market activity, seasonal patterns Advantages: Model resembles production process; provides framework to analyze sources of price change Copyright © 2012 IHS Inc. All Rights Reserved. 3 www.ihs.com/PricingPurchasing
  • 4. Buying Opportunity? Or Sit on Your Wallet?• Steel • Buy now, or sit on your wallet until July or August 2013• Organic Chemicals • Mixed. Ethylene is flat, but for Propylene buy now• Copper • Live hand to mouth; waiting is to your benefit• Aluminum • Buy on the dips, wait for 2013H2Copyright © 2012 IHS Inc. All Rights Reserved. 4 www.ihs.com/PricingPurchasing
  • 5. Recovery Struggling To Gain Traction (Real GDP, annualized real rate of growth, Q/Q, percent) 5 4 3 2 1 0 2010 2011 2012 2013 2014Copyright © 2012 IHS Inc. All Rights Reserved. 5 www.ihs.com/PricingPurchasing
  • 6. Credit Conditions Gradually Loosening,Except For Home Mortgage Credit(Percent of banks reporting tightening credit conditions) Comm. & Ind. Credit Commercial Mortgage Credit100 10075 Large 80 & Med.50 Firms 60 4025 20 0 Small Firms 0-25 -20 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012 Consumer Loans Home Mortgage Credit 80 80 60 60 Credit 40 Cards 40 20 Prime Loans 0 20-20 Autos 0-40 -20 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012Source: Diffusion Indexes from Fed Senior Loan Officer SurveyCopyright © 2012 IHS Inc. All Rights Reserved. 6 www.ihs.com/PricingPurchasing
  • 7. Housing Starts (Millions of Units) Permanent Mobile Homes 2.1 0.25 1.8 0.20 1.5 1.2 0.15 0.9 0.6 0.10 0.3 0.05 0.0 0.00 Fixed MultiCopyright © 2012 IHS Inc. All Rights Reserved. 7 www.ihs.com/PricingPurchasing
  • 8. North America - Light Vehicle Production (Units in millions) (Share of NA Prod.) 18 24%Millions 17 22% 16 20% 15 14 18% 13 16% 12 ` 14% 11 12% 10 9 10% 8 8% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Volume - L Canada- R Mexico - R Copyright © 2012 IHS Inc. All Rights Reserved. 8 www.ihs.com/PricingPurchasing
  • 9. China Synopsis • Growing strongly but not as great as recent years • 2010 10.5% • 2011 9.2% • 2012 7.4% • 2013 7.6% • Risk of hard landing • Balanced against government stimulus • CANNOT CONSUME ALL STEEL BEING MADE • Boom/Bust like the USA did from 1995 thru 2003Copyright © 2012 IHS Inc. All Rights Reserved. 9 www.ihs.com/PricingPurchasing
  • 10. Greece Leaves the Euro• Eurozone Sovereign Debt Crisis • Eurozone recession deepening, euro expected to weaken• Greece Exit • In early 2013 Greece finds it impossible to meet obligations • By mid-2013 (Q3 forecast) Greece leaves the euro, returns to drachma • ECB must get serious within a week, must act within a month• If decisive action not taken, -4% to -6% European recession • -1% to -2% in USA, Japan • Hard landing in ChinaCopyright © 2012 IHS Inc. All Rights Reserved. 10 www.ihs.com/PricingPurchasing
  • 11. Steel Overview: Meet the New Cycle, Same as the Old Cycle• Output finally declining in China, several months too late• Falling output tightens supply by late 2012/early 2013• Tighter supply rallies prices late this year or early 2013• Unfortunately, China (and probably USA) will react by • Boosting prices too much (2013Q1) • Restarting every ounce of idle capacity (2013H1)• The increase in output causes prices to crash next summer• Followed by production cuts once again in late 2013 Copyright © 2012 IHS Inc. All Rights Reserved. www.ihs.com/PricingPurchasing
  • 12. Steel Fundamentals Lower Because of Iron Ore• Miners were profitable when ore was $80-$90 per metric tonne (mt)• Prices moved above $150/mt in 2008 and stayed there except for the recession• Based on extraction cost, prices should be in $80-$100 range • But we did not think it would happen• Ore companies all bought the myth that Chinese steel production would grow forever • Now they have excess capacity and excess production Copyright © 2012 IHS Inc. All Rights Reserved. 12 www.ihs.com/PricingPurchasing
  • 13. Hot Rolled Carbon Sheet (Dollars per metric tonne)1100 • Demand is good from autos, soft1000 from appliances • China gross over-production900 overwhelms restraint in USA800 • Persistent import bargains through 2013, assume700 convergence beyond600 1/1/2010 1/1/2012 1/1/2014 1/1/2016 USA Europe China Copyright © 2012 IHS Inc. All Rights Reserved. 13 www.ihs.com/PricingPurchasing
  • 14. Petrochemicals (cents per pound)90 • Low priced natural gas (ethane)80 makes ethylene family cheap70 • Recovering export demand keeps PE prices from plummeting60 • Propylene prices remain higher50 and more volatile than ethylene due to natural gas cracking40 • More “on purpose” propylene30 projects expected longer term 2010:1 2011:1 2012:1 2013:1 2014:1 Ethylene Propylene Copyright © 2012 IHS Inc. All Rights Reserved. 14 www.ihs.com/PricingPurchasing
  • 15. Aluminum2,750 • Prices already bounced • Below production costs • Economic stimulus impacted2,500 investor psychology • Choppy through the first half of2,250 2013 • Little overall trend for six months • Buy on the dips2,000 • Prices tumble when Greece leaves the euro1,750 • Longer trend is up, but limited 2010:1 2011:1 2012:1 2013:1 2014:1 Copyright © 2012 IHS Inc. All Rights Reserved. 15 www.ihs.com/PricingPurchasing
  • 16. Copper10,000 • Bounced when stimulus announced • Fundamentals point down 9,000 • New mines • Extreme profit margins 8,000 • Choppy through early 2013 • Large downward move as Greece exits 7,000 • Longer term points down as new mines cause profit erosion 6,000 2010:1 2011:1 2012:1 2013:1 2014:1 Copyright © 2012 IHS Inc. All Rights Reserved. 16 www.ihs.com/PricingPurchasing
  • 17. So, What Are the Risks? • Steel – Buy now • Large upside rise from Australian flooding • Nonferrous - Neutral • Speculators can always distort the market • Long pushes prices up • Short pushes prices down • Stainless Steel, Platinum, Palladium, Gold – Buy now • Platinum, palladium, gold, and ferrochrome depend on South Africa • South Africa is not dependable • Mine strikes • Very bad power gridCopyright © 2012 IHS Inc. All Rights Reserved. 17 www.ihs.com/PricingPurchasing
  • 18. Thank you! John Anton Director, IHS Steel Service john.anton@ihs.comCopyright © 2012 IHS Inc. All Rights Reserved. www.ihs.com/PricingPurchasing