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Base metals: outlook for supply and demand
 

Base metals: outlook for supply and demand

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Mining On Top: Stockholm 2013

Mining On Top: Stockholm 2013
26-27 Nov 2013

Base metals: outlook for supply and demand – Jim Lennon, Macquarie Capital; Commodities Research, Chairman

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    Base metals: outlook for supply and demand Base metals: outlook for supply and demand Presentation Transcript

    • Base metals outlook Demand thrust into supply headwinds November 2013 Macquarie Commodities Research Jim Lennon Macquarie Capital (Europe) Limited Ropemaker Place 28 Ropemaker St London, UK EC2Y 9HD In preparing this research, we did not take into account the investment objectives, financial situation and particular needs of the reader. Before making an investment decision on the basis of this research, the reader needs to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of their particular investment needs, objectives and financial circumstances. Please see disclaimer. Page 1
    • Our commodity price forecasts…in pictures! Page 2
    • Impact of China on global markets…. Page 3
    • Commodity prices – iron ore still the stand-out performer Index of monthly average commodity prices (Jan 2000 = 100) 1200 1000 600 400 200 Alumina Steel Stainless Steel Iron ore fob Thermal coal Coking coal Base metals Precious metals Page 4 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 0 2000 Index 800 WTI oil
    • Base metal prices – not all the same Index of monthly average commodity prices (Jan 2000 = 100) 800  Lead, copper and tin outperform nickel, aluminium and zinc 700  All metals except aluminium rose strongly in the boom period for Chinese demand growth and supply shortages up to mid2008 600 Index 500  Supply-side performance made the big difference in the recovery after 2008 financial crisis. 400 300  Chinese over-supply in zinc, nickel and aluminium combined with weak nonChinese demand led to weakness. 200 100 Aluminium Copper Nickel Zinc Lead 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 0 Tin  Nickel has suffered since the advent of Chinese nickel pig iron; aluminium from soaring domestic production Source: LME, Macquarie Research, November 2013 Page 5
    • Base metal relative price performance in line with surplus/deficits recorded Accumulated market balance as a percent of global consumption % of average consumption 25% 21% 21% 22% 20% 15% 10% 5% 4% 2% 0% -5% -10% -8% -11% -15% Al Ni -13% Zn 2003-07 Source: Macquarie Research, November 2013 Page 6 Cu 2008-2012 -7% -5% Pb -3% -3% Sn
    • Year-by-year performance of base metal surplus/deficit 7% 6% 40% 5% 4% 30% 3% 20% 2% 1% 10% 0% 0% -1% -2% -10% -3% Aluminium Copper Nickel Zinc Source: Macquarie Research, November 2013 Page 7 Lead Tin 2013F 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 -4% 2000 -20% Average Average for all metals Cumulative surplus(+)/deficit(-) 50% Global market surplses/deficits for base metals (expressed as % of demand
    • Nickel and aluminium have the largest inventory overhang of any base metals… Estimated total stocks for base metals at end-August 2013 (weeks of annual consumption) 30 30 25.3 25.4 25 25 Non-China in raw materials China other China SRB (e) 20 20 China- SHFE wks Reported Producer 14.7 15 15 9.4 10 8.7 10 5 0 0 Zn Cu Sn Source: LME, SHFE, Comex, IAI, ICSG, ILZSG, INSG, CRU, Macquarie Research, November 2013 Pb Page 8 LME In China raw materials 5 Ni Non-LME Ex-China Comex 6.0 Al Japanese ports
    • Better growth in prospect in 2014  Global GDP growth since 2010 has been on a downward trend and become more lopsided with China accounting for an ever larger share.  2Q 2013 could have been the start of a new dynamic, as developed economies’ growth accelerates and that of many emerging markets declines. For now it remains a second derivative argument – in absolute terms growth is still higher in the emerging economies – but the trend seems clear. China so far is an exception, with growth accelerating in recent months.  As growth strengthens in developed economies the normalisation of US monetary policy will have a far-reaching impact. How countries, and their capital, financial and commodity markets cope will be one of the key themes of 2014.  Although global growth will be better balanced, for base metals, China’s huge share of demand means it plays a larger role than its economic size would suggest. Chinese growth could still surprise on the upside, and even if it slows, the absolute growth rate will remain high. And faster growth in the rest of the world should mean global growth is more robust and market confidence higher. Page 9
    • Backdrop of last 3 years is slowing world GDP growth  Before the crisis world GDP growth was rising by 4-5% a year (in PPP terms) but after 2010 recovery has slowed sequentially to just over 2% a year.  Slowdown most pronounced in developed economies, with very little growth in Europe/Japan. China has held up well but other emerging markets have also weakened. World GDP growth, quarterly, year-on-year, % 6% Other developed US China Other emerging World 2011 2013 4% 2% 0% (2%) (4%) 2006 2007 2008 2009 2010 Source: Bloomberg, Macquarie Research, November 2013 Page 10 2012 Recovery ?
    • Developed market recovery – fragile but unmistakable  In 2Q 2013 the four main developed economies saw GDP growth for first time since 1Q 2011 with the pace of expansion accelerating in the US and UK and the Eurozone returning to growth. 3Q has seen further acceleration in US, UK, and continued growth, although slower, in Eurozone & Japan.  Manufacturing (and service) PMIs show growing optimism across all key regions. Developed economies GDP growth, % QoQ US Eurozone UK Japan 2.0 1.5 Index 1.0 Developed economies manufacturing PMI, > 50 = expansion 65 US UK 60 Japan Eurozone 55 0.5 50 0.0 45 -0.5 -1.0 2010 2011 2012 40 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 2013 Source: Bloomberg, Macquarie Research, November 2013 Source: Bloomberg, Macquarie Research, November 2013 Page 11
    • Recovery can be seen from recent data exChina 70 65 40% 65 30% 60 60 55 50 45 40 35 20% 55 10% 50 0% 45 -10% -30% 35 30 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 40 -40% 30 -20% World Ex-China Base metals app. demand World Ex-China steel app. demand US/Europe/Japan PMI US/Europe/Japan PMI Page 12 US/Europe/Japan PMI (3mths fwd) 50% % change yoy - 3MMA 70 US/Europe/Japan PMI (3mths fwd) 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% Changes in non-Chinese steel demand and G3 PMIs 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 % change yoy - 3MMA Changes in non-Chinese base metals' demand and G3 PMIS
    • Emerging markets – China resilient, others…?  China’s economy has held up, despite a 2Q slowdown, with growth picking up in recent months. Source: Bloomberg, Macquarie Research, November 2013  Some other emerging markets are under strain, with GDP growth falling & financial market stresses rising. Equity indices have underperformed the developed economies. GDP growth, China & other emerging markets, % YoY 14% 12% Equity Markets, start 2013 = 100 130 125 10% 120 8% 115 6% Japan 110 4% Emerging markets 105 China 2% US 100 Other emerging 95 0% 90 (2%) (4%) 2007 Eurozone 85 2008 2009 2010 2011 2012 2013 Page 13 80 Jan-13 Apr-13 Jul-13 Oct-13
    • China – rebounding strongly but debt concerns grow  China’s economic growth weakened in 1H 2013 but commodity demand remained strong thanks to sectoral composition of growth and sheer size of economy.  Growth has accelerated (both in IP and Macquarie’s LKQ index) and short-term outlook positive but structural problems, including high debt levels, suggest cautious outlook for 2014. Local government investment increasingly to pay off debts, % LKQ index & industrial production, % YoY 25 100 20 80 15 60 10 40 5 20 0 0 1999 2001 2003 2005 2007 2009 Source: CEIC, Macquarie Research, November 2013 2011 2013 2009 2010 2011 2012 Source: NBS, Macquarie Research, November 2013 Page 14 2013
    • Other emerging markets feel the strain  Emerging markets face challenges both internal and external. Key economies have seen growth slow dramatically in recent years as structural problems mount.  The prospect of Fed tapering has seen capital outflows, falling currencies and the need for a policy response. Key emerging market FX v US dollar, start 2012=100 115 Key emerging markets, GDP growth, % YoY 15 110 105 10 100 5 95 0 90 85 (5) 80 (10) (15) 2007 75 Brazil 2008 Mexico 2009 2010 India 2011 Russia 2012 2013 70 Jan-12 India Turkey China Jul-12 Indonesia Brazil Jan-13 Jul-13 Source: Bloomberg, Macquarie Research, November 2013 Source: Bloomberg, Macquarie Research, November 2013 Page 15
    • 2012 demand structure…all about China 2012 share of global copper demand 2012 share of global aluminium demand 13% 18% 25% 26% 11% 10% 5% 5% 42% Europe USA 45% Japan China Other Europe 2012 share of global nickel demand 18% USA Japan China Other 2012 share of global zinc demand 19% 20% 25% 9% 9% 4% 8% 45% 43% Europe USA Japan China Europe Other Source: CNIA, ILZSG, INSG, IAI, ICSG, Macquarie Research, November 2013 Page 16 USA Japan China Other
    • Strength of Chinese demand this year is surprising… Year-on-year changes in demand, JanuaryOctober 2013 vs. 2012 % change YoY 20% 17.2% 14.6% 15% 12.0% 11.4% 9.0% 10% 5% 0.9% 0.5% 2.2% 0% -2.5% -5% Aluminium Copper China Zinc Ex-China Source: ICSG, INSG, ILZSG, IAI, Macquarie Research, November 2013 Page 17 Nickel World total -2.3% Steel
    • China still leads the way in demand, but rest of world starts to recover also… World base metals demand Chinese base metals demand World Ex-China base metals demand 25% 50% 25% 45% 20% 20% 40% 15% 15% 35% 5% 0% -5% -10% % chge YoY (3MMA) 10% % chge YoY (3MMA) % chge YoY (3MMA) 10% 30% 25% 20% 15% -15% 0% -5% 5% -25% 0% 10% -20% 5% -10% -30% 2007 -15% -5% 2008 2009 2010 2011 2012 2013 2007 2008 2009 2010 2011 Source: ICSG, INSG, ILZSG, IAI, Macquarie Research, November 2013 Page 18 2012 2013 -20% 2007 2008 2009 2010 2011 2012 2013
    • Non-China recovery evident in all the metals… Non-Chinese base metals demand changes Change in base metals apparent demand 50% 60% 40% % change yoy - 3MMA 50% % change yoy (3MMA) 30% 20% 10% 0% 40% 30% 20% 10% 0% -10% -10% -20% -20% -30% Zinc Copper Aluminium China Source: ICSG, INSG, ILZSG, IAI, Macquarie Research, November 2013 Page 19 World Ex-China 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2001 Nickel 2002 -30% -40% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
    • The historical context – Chinese demand growth was staggering and largely unexpected World steel demand growth by decade 563 m tonnes crude steel 600 600 500 500 400 400 300 200 100 300 257 157 32 12 23 46 200 128 51 49 66 100 China Rest of world Source: worldsteel, Macquarie Research, November 2013 Page 20 2000-10 1990-00 1980-90 1970-80 1960-70 1950-60 1940-50 1930-40 1920-30 1910-20 1900-10 -
    • Impact of China - enormous Average growth in consumption, 200030% 2010 50% 24.1% 25% 10% 1.3% 1.0% 25% 20% 10% 0% -5% 38% 30% 15% 5% 12% 7% 5% 5% -0.8% -1.0% Copper Aluminium Zinc China -1.6% Nickel -1.7% Lead 39% 35% 16.0% 13.9% 15% 43% 43% 41% 41% 40% 18.9% 17.7% 15.0% 45% % of total 20% % CAGR China's share of global consumption 16% 15% 13% 8% 4% 3%5% 6% 4% 2% 10% 7% 4% 9% 6% 0% Copper Steel Aluminium 1980 Rest of world Source: worldsteel, INSG, ICSG, IAI, ILZSG, Macquarie Research, November 2013 Page 21 Zinc 1990 Nickel 2000 Lead 2010 Steel
    • What happened to demand after 2008 global financial crisis? Terrible outside China! Change in demand from 2007 to 2012 Change in demand from 2007 to 2012 120% 5% 1% 0% 82% 80% 2012/2007 % 2012/2007 % -5% -10% -11% -15% -20% 97% 100% -14% -14% -17% -18% -15% -16% 74% 60% 53% 52% 40% -20% -18% -20% -20% -25% 20% -23% -26% -30% -28% Europe Copper 0% N.America Aluminium Crude Steel China Japan Nickel Copper Zinc Source: LME, Macquarie Research, November 2013 Page 22 Aluminium Crude Steel Nickel Zinc
    • Sources of Chinese GDP growth – investment boost “saved” China in 2009 Chinese GDP Growth contributions 16 14 12.8 11.3 % change YoY (real) 12 10 8 6 16 14.3 7.6 0.1 1.8 8.4 1.0 1.9 8.3 4.1 9.1 0.7 4.4 10.0 0.1 10.1 0.7 2.1 5.5 0.9 6.0 5.5 6.3 10.4 0.4 9.6 2.6 14 9.1 2.6 4.3 12 9.3 10 7.8 5.5 4.5 7.5 0.1 8 3.9 8.1 3.6 6 4.4 4 2 4 5.7 5.5 0 4.2 4.0 3.6 3.9 4.4 5.1 5.6 4.2 4.6 4.5 0.0 5.3 -0.4 4.1 3.8 0 -0.2 -3.5 -2 2 -2 Consumption Gross capital formation Source: NBS, Macquarie Research, November 2013 Page 23 Net exports Total 2013F 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 -4 1999 -4
    • The changing structure of Chinese growth – less steel and metals intensive Source: Dragonomics, Macquarie Research, November 2013 Page 24
    • Unbalanced growth? Too much investment?  China has invested a lot more than many developing countries that got caught in a “middle-income” trap (failed to boost productivity when incomes reached $1015kt, but not much for economies which escaped it (e.g., Japan, Korea, Taiwan) Share of total Chinese GDP 55 % of total 50 45  China has invested more due to low interest rates, capital abundance, and a low capital stock when growth took off. 40 35  Consumption is underestimated in GDP by 4-10% Gross capital formation 2012 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 1978 30  Bottom line: not such a worry. Private consumption Source: NBS, Macquarie Research, November 2013 Page 25
    • Chinese monetary policy now quite “loose” – partly loans to service debts Loan and money supply growth minus nominal GDP Quartery: % change YoY 30 25 20 15 10 5 0 -5 Mar-00 Sep-00 Mar-01 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 -10 Loans Source: NBS, Macquarie Research, November 2013 Page 26 M2
    • Debt levels too high and a crisis on the horizon?  Remember banks owned by government; government budget deficit is only 1.9% of GDP. Loans are all in RMB (not much foreign bank debt as happened in Asian crisis).  Worst case scenario: many loans could be written off by government without creating collapse  At over 50% of GDP, Chinese savings rate is high so can finance debt internally.  This doesn’t mean the government doesn’t want to deleverage and cut investment in inefficient areas (local govt spending, adding to over-capacity in industry, etc) – this is crucial for long term stability.  However, there is no sign of imminent stress or a “Lehman” moment! June spike in interbank lending rate to 25% was a “warning” by government about restraining loose lending. Page 27
    • Too much supply in many metals  As demand growth slowed after the global financial crisis, supply growth started to accelerate (copper growth was delayed but has now caught up)  China has dominated refined supply growth in recent years based on construction at low capex of conversion capacity, partly based on imported raw materials. Changes in refined metals production, 2008-2012 2500 2000 1974 China '000t 1500 Ex-China 900 1000 312 500 312 55 150 0 -500 -216 Al -55 Cu Ni Source: CNIA, ICSG, IAI, INSG, ILZSG, Macquarie Research, November 2013 Page 28 Zn
    • Base metal raw material constraints have been removed in China by high imports of raw materials Nickel ore/conc. imports 8000000 7000000 7000000 6000000 6000000 4000000 1200000 1000000 800000 5000000 tonnes 5000000 tonnes tonnes Copper concentrate imports Bauxite imports 8000000 4000000 3000000 3000000 2000000 2000000 1000000 1000000 0 0 600000 Indonesian government policy change in 2014 to impact bauxite/nickel? Source: Chinese Customs Statistics, Macquarie Research, November 2013 Page 29 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 0 2000 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 200000 2000 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 400000
    • China to the end of the decade?  Growth rates to continue to slow due to: 1. Demographics making labour tight, urbanisation less: Potential growth rates for the economy lower 2. Restructuring of the economy to reduce debt levels, increase efficiency, reduce over-capacity, encourage more consumption driven growth  However, growth will continue: China is still a “developing” economy  Government measures designed to make growth sustainable (albeit at a lower rate than in past) Page 30
    • Our assumptions to 2020 Trend growth in Chinese consumption Trend growth in Ex-Chinese consumption 5.0% 30% 3.8% 4.0% 1.8% 2.0% 1.0% 1.0% 1.3% 1.3% 1.3% 1.0% % CAGR % CAGR 3.0% 24.1% 25% 2.9% 20% 16.0% 15.0% 13.9% 15% 9.6% 10% 0.0% 6.2% -1.0% -2.0% -1.6% Copper Aluminium Zinc 2000-10 6.1% 7.3% 7.3% 3.5% 5% -0.8% -1.0% 18.9% 17.7% Nickel -1.7% Lead 0% Steel Copper Source: ICSG, ILZSG, INSG, NBS, Macquarie Research, November 2013 Page 31 Zinc Nickel 2000-10 2010-20F Aluminium 2010-20F Lead Steel
    • What this means in quantities – still large Actual and "needed" supply growth for copper Actual and "needed" upply growth for aluminium 35.0 9 6 5 4.0 4.1 4 Mine and scrap 3 mt refined lead mt refined copper 30.0 7 2 1.5 25.0 20.0 10.0 6.1 3.1 0.0 0 1980-90 1990-2000 2000-10 1980-90 2010-20F Actual and "needed" supply growth for zinc 5.0 2000-10 2010-20F 800 711 700 '000t refined nickel 3.7 3.5 3.0 2.2 2.5 1990-2000 Actual and "needed" supply growth for nickel 4.4 4.5 4.0 mt refined zinc 16.7 15.0 5.0 1 2.0 1.5 1.0 0.5 31.5 7.8 8 0.6 600 500 344 400 300 183 168 1980-90 200 1990-2000 100 0 0.0 1980-90 1990-2000 2000-10 2010-20F Source: Macquarie Research, November 2013 Page 32 2000-10 2010-20F
    • Capex cuts continue – the first of three years of underinvestment? Macquarie forecasts for YoY changes in global mining capex Changes in copper mine output forecast, Oct 13 vs May 2012 30% 2018f 25% 20% -1568 2017f -577 15% 2016f 10% 280 5% -346 2015f 0% -5% 2014f 165 -10% 2013f -15% 326 -20% -2000 -25% 2010 2011 2012 2013f 2014f 2015f 2016f 2017f 2018f -1500 -1000 -500 kt Source: wood Mackenzie, Macquarie Research, November 2013 Page 33 0 500
    • We should be in a phase of taking supply offline (ex-copper), but the process is slow LME Aluminium prices and cash costs 50000 40000 1500 9 0 t h p ercent ile LME copper prices and cash costs Jan-11 Jan-10 Jan-09 Jan-08 Jan-07 Jan-06 Jan-05 Jan-04 Source: LME, Wood Mackenzie, Macquarie Research, November 2013 Page 34 Jan-13 Jan-11 Jan-10 Jan-09 LM E cash Jan-08 Jan-07 Jan-05 Jan-04 Jan-03 9 0 t h p ercent ile Jan-12 500 0 Jan-02 Jan-13 Jan-12 Jan-11 Jan-10 Jan-09 Jan-08 Jan-07 Jan-06 Jan-05 Jan-04 0 1500 1000 Jan-01 2000 2500 2000 Jan-00 4000 3500 3000 Jan-06 $/tonne zinc 6000 Jan-03 Jan-03 4500 4000 8000 Jan-02 LME zinc prices and cash costs 5000 LM E cash 10000 Jan-01 Jan-02 Jan-00 Jan-13 Jan-12 Jan-11 Jan-10 Jan-09 Jan-08 Jan-07 Jan-06 Jan-05 Jan-04 Jan-03 Jan-02 Jan-01 Jan-00 LM E cash 0 12000 Jan-00 10000 LM E cash 1000 9 0 t h p ercent ile y 20000 Jan-01 9 0 t h p ercent ile 30000 Jan-13 2000 Jan-12 2500 $/tonne nickel $/tonne aluminium 3000 $/tonne zinc LME nickel prices and cash costs 60000 3500
    • In summary: Surpluses to 2015 then markets to tighten: Zn, Pb, Cu and Sn to outperform? Global market surplses/deficits for base metals (expressed as % of demand 50% 7% Accumulated market balance as a percent of global consumption 6% 25% 40% 4% 3% 20% 2% 1% 10% 0% 0% -1% -2% -10% 20% % of average consumption 30% -3% 15% 10% 5% 7% Nickel Tin 0% -1% -2% -5% -3% -5% 2018F 2017F 2016F 2015F 2014F 2012 Copper Lead 2013F 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 Aluminium 3% 2% 2% 2% -4% 2000 -20% 22% 21% 21% Average for all metals Cumulative surplus(+)/deficit(-) 5% -10% Al Average Ni Zn Cu Zinc 2008-2012 Source: Macquarie Research, November 2013 Page 35 2013-2017 Pb Sn
    • Base metals detail Page 36
    • Nickel and aluminium have similar issues Aluminium Nickel  Surplus of 319kt from 2008 to 2012, equal to 21% of 2012 world use. Large surpluses continue in 2013; without large supply cuts, further large surplus predicted for 2014.  China accounts for all of the demand growth and 85% of supply growth since 2008  Large surpluses due to massive growth in Chinese nickel pig iron production – major delays in Greenfield capacity additions outside China have reduced potential over-supply.  Surplus of 8.5mt from 2008 to 2012, equal to 21% of use. Smaller surpluses in 2013 and 2014 but cuts needed.  Demand and supply growth dominated by China: 90% of demand growth and more than 100% of supply growth  No end in sight to the surpluses as financial players/traders soak up excess material from producers, pay high physical premiums and “lock” the material away  Indonesian bauxite a big part of aluminium raw material supply.  Indonesia a big part of Chinese raw material supply. Page 37
    • Nickel stocks keep rising while (reported) aluminium stocks are falling Reported stocks for nickel and aluminium 650 8300 8100 600 7900 550 500 7500 450 7300 7100 400 6900 350 6700 6500 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 300 Nickel Aluminium Source: LME, INSG, IAI, Comex. SHFE, Macquarie Research, November 2013 Page 38 '000t Al '000t Ni 7700
    • Most of the Chinese raw materials stocks are Indonesian material… Chinese are preparing for 2014 restrictions Estimated Chinese bauxite stocks Estimated Chinese nickel ore stocks 35 35 25 mtt gross weight 30 25 mt gross weight 30 20 15 20 15 10 10 5 5 0 2009 0 2010 2011 2012 2009 2013 Ports and refineries 2010 2011 Ports Source: CM, SMM, CRU, Macquarie Research, November 2013 Page 39 Producer 2012 2013
    • What could happen in Indonesia in 2014?  2009 Mining Act requires a full ban on exports of unprocessed mineral products (including bauxite and nickel ore) from January 12, 2014  Recent feedback from Indonesia suggests that companies who are planning to build nickel and alumina plants (to come on stream in 2015 and onwards) are already negotiating 2014 export quotas!  Politically acceptable compromise may well be a rise in export tax from 20% to 50% with reductions for exporters with plants under construction.  Even a 30-40% reduction in exports from 2013 inflated levels may not change Chinese production levels for nickel pig iron/alumina that much in 2014 due to heavy destocking. Page 40
    • Nickel supply/demand summary – surplus to 2015? `000t Total SS production % Change Ni-containing SS prod. % Change Nickel Consumption % Change 2011 33666 5.7% 25080 9.3% 1597 7.3% 2012 35525 5.5% 26944 7.4% 1662 4.1% 2013f 38910 9.5% 29268 8.6% 1791 7.7% 2014f 41889 7.7% 31641 8.1% 1907 6.5% 2015f 45157 7.8% 34250 8.2% 2050 7.5% 2016f 47444 5.1% 35938 4.9% 2118 3.3% 2017f 49139 3.6% 37023 3.0% 2149 1.5% 2018f 50401 2.6% 38037 2.7% 2176 1.3% Nickel Supply % Change (of which NPI) 1630 12.3% (282) 1781 9.2% (362) 1922 7.9% (482) 1941 1.0% (474) 2019 4.0% (475) 2085 3.3% (460) 2140 2.7% (450) 2173 1.5% (450) 119 131 34 -31 -33 227 7.0 795 17527 358 10.2 688 15166 World Market Balance LME/Producer stocks Weeks' world demand LME Cash Price (cents/lb) nominal LME Cash Price ($/tonne) - nominal 34 186 5.9 1036 22831 Source: INSG, Macquarie Research, November 2013 Page 41 392 10.5 703 15500 360 9.0 794 17500 327 7.9 907 20000 -8 319 7.6 998 22000 -3 316 7.4 1089 24000
    • Aluminium outlook – getting closer to balance but massive stock overhang  Worst fundamentals of any base metal over the past decade due to large growth in Chinese supply  Weak prices but high premiums have kept producers in business and supply on-stream  Strong demand growth should help to rebalance markets eventually  Warehousing “games” – ongoing demand for material not needed by consumers: will this end soon?  What can happen to turn things? Role of Indonesia in bauxite exports to China Chinese costs rising? (New low-cost Western capacity but closures in the East?) Strong ex-Chinese demand growth Production cuts due to falling premiums as new LME rules take effect? Page 42
    • Problem for world market – China has largely been self-sufficient….in fact a growing net exporter of metal and semis Chinese net Imports of aluminium, scrap alloy and semis Chinese Aluminium Production and Consumption Since 1970 ('000t) 4000 22500 20000 3000 17500 2000 '000t Al '000t Al 15000 12500 10000 7500 1000 0 -1000 5000 -2000 2500 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 Production Consumption -3000 1970 1975 1980 1985 1990 1995 2000 2005 2010 Al and Alloy Production Source: WBMS, Chinese Customs, Macquarie Research, November 2013 Page 43 Semis Scrap Total Al units
    • Supply growth is all about China Ex-China aluminium production and capacity Chinese aluminium production and capacity 26 33 24 22 mt annualised production mt annualised production 31 29 27 25 20 18 16 14 12 10 8 23 6 4 21 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Capacity 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Capacity Production Source: IAI, CRU, Macquarie Research, November 2013 Page 44 Production
    • Adding aluminium premiums to exchange prices significantly shifts results of breakeven analysis Aluminium prices and cash production costs 3,000 US$/tonne 2,500 2,000 C1 cash cost LME price + premiums 1,500 YTD LME average price 1,000 500 0 0 10 20 30 40 50 Cumulative production, m tonnes Source: LME, Wood Mackenzie, Macquarie Research, November 2013. Note: LME cash settlement price average 1 Jan – 19 November 2013 Page 45
    • Macquarie global aluminium S&D '000 tonnes Al World consumption % change YoY of which: China of which: Ex-China 2011 45552 10.4% 19976 25575 World production % change YoY of which: China of which: Ex-China 46174 48091 51099 54861 58032 61261 64206 66767 8.7% 4.2% 6.3% 7.4% 5.8% 5.6% 4.8% 4.0% 20000 22500 24500 26500 28500 30923 32837 34087 26174 25591 26599 28360 29532 30338 31369 32680 Global balance All stocks (est) Weeks' demand LME price 2012 47906 5.2% 21942 25965 622 185 11703 11981 13.4 13.0 2395 2018 2013F 50800 6.0% 24136 26664 300 2014F 53943 6.2% 26308 27635 917 2015F 57331 6.3% 28676 28655 701 2016F 60694 5.9% 30970 29724 566 2017F 63967 5.4% 33138 30829 239 2018F 66953 4.7% 35126 31827 -186 12281 13198 13899 14465 14704 14519 12.6 12.7 12.6 12.4 12.0 11.3 1854 1863 1950 2200 2300 2500 Source: WoodMackenzie, CRU, IAI, Macquarie Research, November 2013 Page 46
    • Indonesia’s share of Chinese aluminium production around 22% in 2013 Chinese raw material stocks rise sharply in 2013 Source of bauxite and alumina for Chinese aluminium production needs (real consumption) 9% 10% 17% 25% 80% 70% 62% 57% 60% 55% 55% 50% 54% 53% 40% 9% 30% 10% 15% 26% 23% 11% 2011 2012 2013F 7% 15% 15% 2009 20% 7 15 6 13 5 11 4 9 3 7 2 5 1 3 22% 8% 2008 20% 10% Al content of bauxite and alumina stocks 90% 3% 19% 17 0 0% Indonesia 2010 Other imports Chinese domestic 1 2009 2010 Bauxite Imported alumina Source: GTIS, CM, WoodMackenzie, Macquarie Research, November 2013 Page 47 2011 Alumina 2012 weeks' Al production 2013 stocks in wks of Al production 8 100%
    • Copper: Transitioning away from raw material constraint Chinese copper imports - YoY change Do mestic mined co pper 1 9% Refined co pper imports 29% 2500 Refined Imported co ncentrate 28% Scrap 1 8% ,000t Cu contained 2000 Blister Scrap 1500 Conc 1000 500 0 -500 Source: NBS, China Customs, Macquarie Research, November 2013 Page 48 2014f 2013f 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 -1000 2002 Imported B lister 6%
    • Supply growth always has the propensity to disappoint…but there’s a lot of it! Change in copper output, 2015f vs. 2012 Batu Hijau Ok Tedi Sierra Gorda Salobo Caserones (SXEW) MMH Collahuasi Sentinal Buenavista (Cananea) Toromocho Oyu Tolgoi PT Freeport Indonesia Antapaccay Escondida Greenfield Brownfield 0 50 100 150 200 250 300 ,000t Source: Wood Mackenzie, Company data, Macquarie Research, November 2013 Page 49 350 400 450 500
    • Copper mine output growth accelerates World copper mine production by quarter Unmistakeable rise in Chilean copper mine output 19.0 6.2 18.5 18.5 6.0 6.0 18.3 18.0 5.8 18.0 5.8 17.5 5.6 5.6 5.6 5.4 5.4 5.2 5.3 5.1 m tonnes annualised mt Cu annualised 5.8 17.4 17.5 17.0 16.8 16.5 16.5 16.0 15.5 15.5 5.0 15.0 4.8 14.5 4.6 14.0 Q112 Q212 Q312 Q412 Q113 Q112 Q213 Q313E Q413F Source: Wood Mackenzie, ICSG, Macquarie Research, November 2013 Page 50 Q212 Q312 Q412 Q113 Q213 Q313E Q413F
    • We expect high-single-digit mine output growth – and above trend demand Consistent growth expected Copper mine supply growth Copper demand growth 2500 1200 China 1500 800 1000 ,000 tonnes 600 ,000 tonnes World ex-China 2000 1000 400 200 500 0 -500 0 -1000 -200 Less need to substitute/thrift -1500 -400 -2000 Page 51 2018f 2017f 2016f 2015f 2014f 2013f 2012 2011 2010 2009 2008 2007 2006 2005 2004 2002 Source: Wood Mackenzie, ICSG, Macquarie Research, November 2013 2003 -2500 2018f 2017f 2016f 2015f 2014f 2012 2013f 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 -600
    • Turning copper on its head – the cathode market has been tighter! Premiums are high, helped by Johor queue YoY change in China's Cu scrap imports, 3MMA 40% 30% 20% 10% 0% -10% -20% Source: CRU, China Customs, LME, Macquarie Research, November 2013 Page 52 Jul-13 Apr-13 Jan-13 Oct-12 Jul-12 Apr-12 Jan-12 Oct-11 Jul-11 Apr-11 Jan-11 Oct-10 Jul-10 Apr-10 Jan-10 -30%
    • Financing contributed to tightening market – we’d expect imports to fall 250 200 150 100 50 0 -50 -100 -150 -200 -250 -300 500 450 imports encouraged 400 '000t 350 300 250 200 150 100 Source: China Customs, LME, Macquarie Research, November 2013 Page 53 Jul-13 Apr-13 Jan-13 Oct-12 Jul-12 Apr-12 Jan-12 Oct-11 Jul-11 Apr-11 0 Jan-11 Sep 13 Aug 13 Jul 13 Jun 13 May 13 Apr 13 Mar 13 Feb 13 50 Jan 13 $/tonne Chinese cathode imports Physical cash arbitrage - Chinese copper imports (inc. premium) SHIBOR spike –
    • Stocks are set to build – the question is where? Forecast 1800 1600 1400 1200 1000 800 600 400 200 0 LME Comex SHFE Bonded Source: LME, CRU, SHFE, Macquarie Research, November 2013 Page 54 Apr-14 Jan-14 Oct-13 Jul-13 Apr-13 Jan-13 Oct-12 Jul-12 Apr-12 Jan-12 Oct-11 Jul-11 Apr-11 Jan-11 Oct-10 Jul-10 Apr-10 Jan-10 Oct-09 Jul-09 Apr-09 We expect the build in LME inventories from ex-China smelters delivery, however this could come in bonded or even off-market Jan-09 kt Exchange and bonded stocks
    • Smelters – some reasons to feel cheerful for once! (c/lb) 40 Share of copper price received by smelters - spot basis Copper TC/RC - Spot to China 900 800 30 700 25 600 $/tonne 35 20 15 500 400 300 Source: Wood Mackenzie, LME, Macquarie Research, November 2013 Page 55 Jul-13 Jul 13 Jan-13 Jan 13 Jul-12 Jul 12 Jan-12 Jan 12 Jul-11 Jul 11 Jan-11 Jan 11 Jul-10 Jul 10 Jan-10 Jan 10 Jul-09 0 Jan-09 0 Jul-08 100 Jan-08 5 Jul-07 200 Jan-07 10
    • What returns copper to deficit – the peak of SX-EW helps Incentive price for 10% IRR - SxEw projects YoY changes in SxEw output 400 14000 300 12000 200 10000 kt $/tonne 100 0 -100 8000 6000 4000 -200 2000 Rest of World -300 Source: Wood Mackenzie, Macquarie Research, November 2013 Page 56 La Granja Kalakundi Andina El Pilar White Range KOV Kolwezi Kipoi Boleo 2018f 2017f 2016f 2015f 2014f 2013f 2012 2011 2010 2009 2008 2007 0 Antucoya DRC Tia Maria Chile
    • Copper projects are both increasingly dilutive to the existing asset base and highly capitalintensive Weighted average copper project by year of delivery 1.8 2000-2011 2002 1.6 Average head grade 2012-2018f 2007 1.4 2005 1.2 2001 1 0.8 2000 2006 2008 0.6 2012 2011 2013f 2009 2016f 2010 0.4 2017f 2004 2018f 2014f 0.2 2015f 0 0 5000 10000 15000 20000 25000 Life of mine capital intensity Source: Wood Mackenzie, CRU, Macquarie Research, November 2013 Page 57 30000 35000 40000
    • Macquarie’s copper supply-demand balance Global Refined Copper Balance '000 tonnes World Production % Change Y-o-Y 2009 18,298 0.1% 2010 18,930 3.5% 2011 19,624 3.7% 2012 20,105 2.5% 2013f 20,868 3.8% 2014f 21,985 5.4% 2015f 22,972 4.5% 2016f 23,753 3.4% 2017f 24,521 3.2% 2018f 24,457 -0.3% World Consumption % Change Y-o-Y 17,426 -3.1% 19,188 10.1% 19,957 4.0% 19,886 -0.4% 20,698 4.1% 21,633 4.5% 22,625 4.6% 23,589 4.3% 24,500 3.9% 25,210 2.9% 873 -258 -333 220 170 352 346 163 21 -753 World Reported Stocks Stocks (Weeks) 1,358 4.1 1,183 3.2 1,174 3.1 1,078 2.8 1,248 3.1 1,600 3.8 1,946 4.5 2,109 4.6 2,131 4.5 1,377 2.8 LME Cash Price ($/t) LME Cash Price (c/lb) 5,164 234 7,539 342 8,811 400 7,950 360 7,351 333 6,550 297 6,525 296 7,525 341 7,875 357 7,875 357 Balance Concentrates Market ('000t Cu) '000t Cu Mine Production: Concentrates SX-EW Total % Change Y-o-Y Concs Balance 2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f 2018f 12527 3281 15809 1.8% 12658 3340 15998 1.2% 12593 3414 16006 0.1% 13036 3660 16696 4.3% 14218 3756 17974 7.7% 14715 4034 18748 4.3% 15368 4210 19577 4.4% 16177 4135 20312 3.8% 16545 4365 20910 2.9% 16319 4270 20589 -1.5% -277 -32 -341 12 284 0 0 0 0 0 Source: Wood Mackenzie, ICSG, Macquarie Research, November 2013 Page 58
    • Zinc – The mine supply problem – too much in 2013… 7 6 m tonnes, annualised 13 12 11 Mine output Refined output 10 5 4 Monthly 12MMA 3 2 1 Page 59 J 2013 J 2012 J 2011 J 2010 J 2009 J 2008 J 2007 J 2013 M 2013 S 2012 M 2012 J 2012 S 2011 J 2011 M 2011 S 2010 J 2010 M 2010 S 2009 M 2009 J 2009 Source: ILZSG, Macquarie Research, November 2013 J 2006 0 9 J 2004 m tonnes, 3MMA annualised 14 J 2005 15 Chinese zinc mine output Global zinc mine, refined metal output
    • …and too little in the latter part of the decade Ex-China zinc mine output Zinc mine major projects and depletions 7% 6% Questions regarding sustainability of Chinese output 5% Shalkiya Restart 500 3% ,000 tonnes YoY % ch, 3MMA 4% Ozernoe 1000 2% 1% 0% -1% Dugald River McArthur River 0 Century -500 Brunswick Perseverence -1000 -2% Lisheen -3% -1500 J 2013 A 2013 J 2013 O 2012 J 2012 A 2012 J 2012 O 2011 J 2011 A 2011 J 2011 -4% 2013f 2014f 2015f 2016f 2017f Source: Wood Mackenzie, ILZSG, Macquarie Research, November 2013 Page 60 Skorpion
    • Just like others, the Chinese market has been tightening… China's zinc mine and metal output Reported commercial zinc stocks China's zinc concentrate imports 2,500 450 6 Producers 400 Merchants 2,000 '000 tonnes 4 3 Mine output 2 '000 tonnes, month end 350 300 250 200 150 Refined output 100 1 Consumers SHFE LME 1,500 1,000 500 50 Source: worldsteel, INSG, ICSG, IAI, ILZSG, Macquarie Research, November 2013 Page 61 2013 2012 2011 2010 2009 2008 2007 2006 2005 0 2004 Jul-13 Jan-13 Jul-12 Jan-12 Jul-11 Jan-11 Jul-10 M 2013 J 2013 S 2012 J 2012 M 2012 S 2011 J 2011 M 2011 S 2010 J 2010 M 2010 S 2009 J 2009 Jan-10 0 0 M 2009 m tonnes, 3MMA annualised 5
    • …however higher treatment charges are encouraging smelters back China's refined zinc output Zinc TCs - spot vs contract 25% 250 20% 15% YoY % change US$/dmt 200 150 100 10% 5% 0% -5% Contract 50 -10% Spot -15% Page 62 J 2013 A 2013 J 2013 O 2012 J 2012 A 2012 J 2012 O 2011 J 2011 J 2011 Source: CRU, ILZSG, Macquarie Research, November 2013 A 2011 -20% J 2013 A 2013 J 2013 O 2012 J 2012 A 2012 J 2012 O 2011 J 2011 A 2011 J 2011 0
    • The lack of LME stocks in Asia perhaps the biggest 2014 price risk Global refined zinc consumption World galv. steel sheet output 15% LME zinc stocks by region 10% 100% 9% 9% 9% 10% 5% 0% -5% 80% 7% 6% 6% 5% 5% 4% 4% 4% 4% 3% 2% % total, month end 7% YoY % change YoY % change 8% 60% M.East Europe USA 40% Asia 2% -10% 20% 1% 1% -15% Source: LME, CRU, ILZSG, Macquarie Research, November 2013 Page 63 J 2013 J 2013 J 2012 J 2012 J 2011 J 2011 J 2010 J 2010 J 2009 0% J 2009 2013 Q2 2013 Q1 2012 Q4 2012 Q3 2012 Q2 2012 Q1 2011 Q4 2011 Q3 2011 Q2 2011 Q1 J 2013 A 2013 J 2013 O 2012 J 2012 A 2012 J 2012 O 2011 J 2011 A 2011 J 2011 0%
    • Macquarie’s zinc supply-demand balance '000t zinc Mine production YoY change 2012 13,250 4.0% 2013F 14,250 7.5% 2014F 14,850 4.2% 2015F 15,250 2.7% 2016F 15,000 -1.6% 2017F 15,750 5.0% 2018F 16,400 4.0% Refined production YoY change 12,600 -3.2% 13,100 4.0% 13,650 4.2% 14,150 3.7% 14,550 2.8% 15,200 4.5% 15,800 3.9% Consumption YoY change 12,446 -0.8% 12,945 4.0% 13,542 4.6% 14,147 4.5% 14,756 4.3% 15,338 3.9% 15,900 3.7% 154 155 108 3 -206 -138 -150 1,946 88 1,933 88 1,988 90 2,150 98 2,375 108 2,350 107 2,200 100 Balance LME cash price LME Cash Price ($/t) LME Cash Price (c/lb) Source: Wood Mackenzie, ILZSG, Macquarie Research, November 2013 Page 64
    • Ex-China lead mine supply struggling… YoY change in China's Pb concentrate imports, 3MMA Ex-China lead mine output 60% 8% 50% 40% 6% YoY % ch, 3MMA 30% 4% 20% 10% 2% 0% -10% 0% -20% -2% -30% Source: China Customs, ILZSG, Macquarie Research, November 2013 Page 65 Jul-13 Apr-13 Jan-13 Oct-12 Jul-12 Apr-12 Jan-12 Oct-11 Jul-11 Apr-11 Jan-11 Oct-10 Jul-10 J 2013 M 2013 M 2013 J 2013 N 2012 S 2012 J 2012 M 2012 M 2012 J 2012 -4% Apr-10 Jan-10 -40%
    • …making future Chinese mine supply increasingly important – more so than for zinc Lead market balance under different scenarios Chinese mine output as a proportion of global 400 70% 60% 200 50% 0 ,000 tonnes 40% 30% 20% -200 -400 Lead 10% Zinc -600 Chinese Supply falls 5%pa Base Jul-13 Jan-13 Jul-12 Jan-12 Jul-11 Jan-11 Jul-10 Jan-10 Jul-09 Jan-09 Jul-08 Jan-08 0% -800 2013F Source: ILZSG, CRU, Macquarie Research, November 2013 Page 66 Chinese Supply grow s 5%pa 2014F 2015F 2016F 2017F 2018F
    • Macquarie’s lead supply-demand balance '000t lead Mine production % Change YoY 2012 4,900 8.9% 2013F 5,100 4.1% 2014F 5,200 2.0% 2015F 5,300 1.9% 2016F 5,300 0.0% 2017F 5,400 1.9% 2018F 5,550 3% Total production % Change 10,450 2.0% 10,850 3.8% 11,100 2.3% 11,300 1.8% 11,400 0.9% 11,700 2.6% 12,150 4% Consumption % Change YoY 10,400 3.5% 10,750 3.4% 11,100 3.3% 11,400 2.7% 11,600 1.8% 11,750 1.3% 12,100 3% Refined balance 50 100 0 -100 -200 -50 50 LME cash price $/tonne c/lb 2061 93.0 2126 96.0 2175 99.0 2400 109.0 2250 100.0 2200 100.0 2200 100.0 Source: CRU, ILZSG, Macquarie Research, November 2013 Page 67
    • Important disclosures: Recommendation definitions Volatility index definition* Macquarie - Australia/New Zealand This is calculated from the volatility of historic price movements. Outperform – return > 3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return > 3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Very high–highest risk – Stock should be expected to move up or down 60-100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40-60% in a year – investors should be aware this stock could be speculative. Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected <-10% Medium – stock should be expected to move up or down at least 30-40% in a year. Macquarie First South - South Africa Low–medium – stock should be expected to move up or down at least 25-30% in a year. Outperform – return > 10% in excess of benchmark return Neutral – return within 10% of benchmark return Underperform – return > 10% below benchmark return Low – stock should be expected to move up or down at least 15-25% in a year. Macquarie - Canada Outperform – return > 5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return > 5% below benchmark return * Applicable to Australian/NZ stocks only Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit /efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation – 12 months Macquarie - USA Note: Quant recommendations may differ from Fundamental Analyst recommendations Outperform – return > 5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return > 5% below benchmark return Recommendation proportions – For quarter ending 30 September 2013 Outperform Neutral Underperform AU/NZ 50.56% 38.95% 10.49% Asia 56.87% 25.18% 17.94% RSA 48.78% 42.68% 8.54% USA 41.00% 54.40% 4.60% CA 61.75% 34.43% 3.83% EUR 47.10% 30.89% 22.01% (for US coverage by MCUSA, 5.85% of stocks covered are investment banking clients) (for US coverage by MCUSA, 3.90% of stocks covered are investment banking clients) (for US coverage by MCUSA, 0.00% of stocks covered are investment banking clients) Page 68
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