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MF commodity seminar FINAL
- 1. Outlook for commodity markets NealBrewster Rio Tinto Economics Department MF Global Seminar 15 October 2009
- 2. 15 October 2009MF Global Conference 2 This presentation has been prepared by Rio Tinto plc and Rio Tinto Limited (“Rio Tinto”) and consisting of the slides for a presentation concerning Rio Tinto. By reviewing/attending this presentation you agree to be bound by the following conditions. Forward-Looking Statements This presentation includes forward-looking statements. All statements other than statements of historical facts included in this presentation, including, without limitation, those regarding Rio Tinto’s financial position, business strategy, plans and objectives of management for future operations (including development plans and objectives relating to Rio Tinto’s products, production forecasts and reserve and resource positions), are forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Rio Tinto, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding Rio Tinto’s present and future business strategies and the environment in which Rio Tinto will operate in the future. Among the important factors that could cause Rio Tinto’s actual results, performance or achievements to differ materially from those in the forward-looking statements include, among others, levels of actual production during any period, levels of demand and market prices, the ability to produce and transport products profitably, the impact of foreign currency exchange rates on market prices and operating costs, operational problems, political uncertainty and economic conditions in relevant areas of the world, the actions of competitors, activities by governmental authorities such as changes in taxation or regulation and such other risk factors identified in Rio Tinto's most recent Annual Report on Form 20-F filed with the United States Securities and Exchange Commission (the "SEC") or Form 6-Ks furnished to the SEC. Forward-looking statements should, therefore, be construed in light of such risk factors and undue reliance should not be placed on forward-looking statements. These forward-looking statements speak only as of the date of this presentation. Nothing in this presentation should be interpreted to mean that future earnings per share of Rio Tinto plc or Rio Tinto Limited will necessarily match or exceed its historical published earnings per share. Cautionary Statement
- 3. 15 October 2009MF Global Conference 3 -10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10% 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Global financial crisis has been the biggest shock to the world economy since the Second World War The Great Depression WW2 Note: Data prior to 1950 excludes Africa, Asia and Former Soviet Union Source: IMF, Rio Tinto 4.8% 2.5% 3.3% Clash of ideologies Post War OECD Growth Emergence of Developing Countries Maturing OECD Growth in global GDP (percent a year on purchasing power parity basis) Financial crisis Oil price shocks
- 4. 15 October 2009MF Global Conference 4 0 10 20 30 40 50 60 1990 2000 2008 Copper Aluminium Traded iron ore -20 -15 -10 -5 0 5 10 15 75 80 85 90 95 00 05 In a “metals weighted” world the downturn is comparable to the early 1980’s and “dot-com” downturns Growth in industrial production (percent a year) OECD Global, weighted by share of metals consumption(1) Source: IMF, WBMS, CRU, Brook Hunt, Rio Tinto China’s share of world consumption (percent)
- 5. 15 October 2009MF Global Conference 5 We are now seeing a cyclical upturn in the developed world but underlying recovery may not be strong 20 25 30 35 40 45 50 55 60 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 US Japan Eurozone Source: ISM Factory (US), Nomura JM (Japan), Markit (Eurozone) Purchasing manager indicators suggest recovery … • Release of ‘pent up’ demand, government stimulus and end to destocking is driving current ‘normalisation’ in demand • Excess capacity is still holding back investment and producers are not restocking • Structural fiscal deficits will eventually need rebalancing • Western consumers unlikely to go back to previous levels of borrowing .. but a number of ‘headwinds’
- 6. 15 October 2009MF Global Conference 6 0 2 4 6 8 10 12 14 16 18 20 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 20 25 30 35 40 45 50 55 60 65 percent yoy, index Rapid pick up in Chinese economic activity Chinese industrial production and Purchasing Managers Index Industrial production* (LHS) PMI** (RHS) This may not matter for commodities if the strong Chinese recovery continues; but a longer term shift in the balance of its growth is required Source: Reuters Ecowin, Consensus Economics * 3 month moving average ** NBS series. Forward 1 month Chinese GDP growth 0 2 4 6 8 10 12 14 2005 2006 2007 2008 2009f 2010f percent yoy
- 7. 15 October 2009MF Global Conference 7 Production Volume Index Inland Chinese provinces have been the focus of Chinese infrastructure spending Acceleration in investment growth in China Increase in fixed asset investment Jan-Aug 2009 Per cent yoy (bars denote relative growth) Source: Chinese National Bureau of Statistics Urban fixed asset investment 15 20 25 30 35 40 45 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 percent yoy, 3 month moving average
- 8. 15 October 2009MF Global Conference 8 Surge in Chinese imports during 2009 have been the driving force behind commodity markets offsetting fall in demand in other regions 0 10 20 30 40 50 60 70 Jan-05Jan-06Jan-07Jan-08Jan-09Jan-10 Source: Chinese trade statistics Iron ore Aluminum 0 100 200 300 400 500 Jan-05Jan-06Jan-07Jan-08Jan-09Jan-10 Copper Chinese net unwrought copper imports thousand tonnes a month Chinese iron ore imports million tonnes a month -300 -200 -100 0 100 200 300 400 Jan-05Jan-06Jan-07Jan-08Jan-09Jan-10 Chinese net unwrought aluminium imports thousand tonnes a month
- 9. 15 October 2009MF Global Conference 9 0 50 100 150 200 250 300 Jul- 06 Oct- 06 Jan- 07 Apr- 07 Jul- 07 Oct- 07 Jan- 08 Apr- 08 Jul- 08 Oct- 08 Jan- 09 Apr- 09 Jul- 09 Oct- 09 Jan- 10 Spot iron ore (62% Fe, fob) Aluminium Copper Gold Thermal coal (NEWC) 9 Daily spot price index (2 October 2009 = 100) Minus60-70% Plus40-120% After a record decline in 2008H2 commodity prices have staged a strong recovery Source: Metal Bulletin, Reuters Ecowin US dollar has declined 11%
- 10. 15 October 2009MF Global Conference 10 0.5 0.8 1.0 1.3 1.5 1.8 2.0 -12 -8 -4 0 4 8 12 16 20 24 Lag from economic trough (quarters) Current metals price cycle has been much more severe than in previous periods but prices have risen more quickly off lows Aluminium price as ratio of 5 year trailing average(2) (1) Average of cycles centred around 1978, 1982, 1992 and 2001 (2) Real terms Source: LME, Rio Tinto Copper price as ratio of 5 year trailing average(2) 0.5 1.0 1.5 2.0 2.5 3.0 -12 -8 -4 0 4 8 12 16 20 24 Lag from economic trough (quarters) Average of previous cycles(1) Current cycle Average of previous cycles(1) Current cycle
- 11. 15 October 2009MF Global Conference 11 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 Jan-90 Jan-95 Jan-00 Jan-05 Aluminium: Prices in Q1 reflected excessive risk but large stock overhangs have developed 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 90 92 94 96 98 00 02 04 06 08 10 World aluminium production and price-cost relationship Source: IAI, CRU, LME Western aluminium stocks Aluminium prices and costs million tonnes $ per tonne in real 2009 terms Median industry costs Spot aluminium price Exchange Producers
- 12. 15 October 2009MF Global Conference 12 Consumption is now starting to recover but remains well below previous levels outside China 1.00 1.20 1.40 1.60 1.80 2.00 2.20 2.40 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 World aluminium shipments Source Rio Tinto estimates Non-China monthly, million tonnes China monthly, million tonnes 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Year-to-date -29% Year-to-date +9%
- 13. 15 October 2009MF Global Conference 13 Large smelter capacity overhangs remain both inside and outside China 17 18 19 20 21 22 23 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 World aluminium production and capacity Source: IAI, WBMS, Rio Tinto estimates Western world monthly, annualised million tonnes Capacity Production China monthly, annualised million tonnes 5 7 9 11 13 15 17 19 21 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Capacity Production
- 14. 15 October 2009MF Global Conference 14 Copper: Constrained supply and record Chinese imports pushed market back into deficit in H1 but destocking may be a short run negative Low copper stocks and constrained supply growth Source: WBMS, LME, NYMEX, WBMS, Chinese trade statistics Western copper stocks Western world copper mine production monthly, annualised million tonnesthousand tonnes 8 9 10 11 12 13 14 15 Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 Jan 02 Jan 04 Jan 06 Jan 08 Exchange Producers and consumers 1.1 percent per annum growth in mine production between 2005-9
- 15. 15 October 2009MF Global Conference 15 (20) (10) 0 10 20 30 40 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Iron ore spot price and domestic Chinese mine production Chinese steel production is responding to recovery in construction activity and infrastructure spending and driving spot iron ore prices Iron ore: Current spot prices are supported by call on high cost marginal producers required to meet Chinese demand Source: World Steel Association, Chinese trade statistics, Reuters Ecowin Floor space under construction Apparent steel consumption Residential construction and apparent steel consumption in China percent yoy (3 month moving average) (15) (10) (5) 0 5 10 15 20 25 30 Jan 08 May 08 Sep 08 Jan 09 May 09 Sep 09 0 20 40 60 80 100 120 140 160 180 200 Domestic iron ore production (LHS) Spot iron ore price (RHS) $ per tonne (63.5% Fe, cfr China) percent yoy (3 month moving average)
- 16. 15 October 2009MF Global Conference 16 0 2 4 6 8 10 12 14 16 18 20 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Consumption/production (million tonnes) 0 100 200 300 400 500 600 700 800 900 Price (c/lb in real 2009$) Long run price levels are the outcome of a continuous tussle between demand and supply Refined copper consumption and real copper price Consumption Price Production Source: LME, Brook Hunt, Rio Tinto
- 17. 15 October 2009MF Global Conference 17 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000 60,000 0 2 4 6 8 10 12 GDP per capita (in 2006 US$ at PPP) Copper consumption (kg/capita) Population distribution (millions by income group) Future metals consumption trends will be driven by growth in population and wealth in developing nations, particularly China and India 2008 Population Distribution 2025 Population Distribution Copper Consumption China 2025 India 2008 Global population distribution and per capita copper consumption India 2025 China 2008 China 2008 copper consumption China est. 2025 copper consumption India 2025 copper consumption India 2008 copper consumption Source: Brook Hunt, Ecowin, World Bank, Rio Tinto estimates
- 18. 15 October 2009MF Global Conference 18 0 20 40 60 80 100 0 10,000 20,000 30,000 40,000 50,000 GDP per capita (US$ at PPP rates in 2006 terms) Urbanisationrate(percent) National averages Chinese provinces Industrialisation and urbanisation within China have some way to run Source: Global Insight, CIA Factbook Urbanisation rates across Asia, the United States and European Union in 2008 Urbanisation rates, income and population Note: Size of bubble reflects total population United States Japan India EU15 China
- 19. 15 October 2009MF Global Conference 19 Metals consumption could double in next 15-20 years and implies sustained pressure on capital and people … 10 20 30 40 50 60 70 80 78 82 86 90 94 98 02 06 Capital spending by non-ferrous mining sector ($billion in 2009 terms) 0 10 20 30 40 50 60 70 80 2009-15 Base metals Steel raw materials Aluminium Precious metals Traded energy Fertiliser Other Note: Base metals consists of cobalt, copper, lead, manganese, molybdenum, nickel, tin and zinc Steel making consists of seaborne coking coal and seaborne iron ore Aluminium consists of alumina refining and aluminium smelting Precious metals consists of gold, silver, PGMs and diamonds Energy consists of seaborne thermal coal and uranium Based on current unit capital costs and Rio Tinto demand projections and assuming sustaining capital at 4% of revenue. Sources: MICA (CRU), Rio Tinto estimates Estimates for 2009 industry capex $26-55bn Future sustaining and new capital spending requirement ($billion in 2009 terms)
- 20. 15 October 2009MF Global Conference 20 … and resources. The location and grade of Copper ore will create challenges for the industry. 26% 40% 2009 2025 Notes: 1 Existing mines and funded projects 2 Rio Tinto classification Source: Brook Hunt Q2 2009 Increasing depth . . . Underground copper production1 (% of global production) … and higher risk Current production and project capacity in high risk2 regions 1.17% 1.03% 2009 2025 …decreasing grade… Copper Industry average grade1 (% Cu) 12% 20% Current New Projects % Global production % New project capacity
- 21. 15 October 2009MF Global Conference 21 21 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 2006 2015 2020 2025 2030 Long run upwards pressure on Chinese costs will support long run aluminium prices • Chinese smelters will face increasing competition for access to power • Renminbi appreciation is expected to resume once export market conditions stabilise • Carbon pricing will lead to upwards industry cost and price pressure and benefit low carbon sources of production Source: IEA World Energy Outlook (2008) Chinese electricity generation requirements TWh … including energy. Positive long run aluminium outlook underpinned by rising demand and energy constraints
- 22. 15 October 2009MF Global Conference 22 Current market conditions and outlook • Spot metals prices are 40-120% above Q1 cyclical lows but remain well under previous peaks • Stimulus spending, loans growth and stocking activities in China provided initial basis for recovery • Could see some ‘pay-back’ for this in coming months but may be offset by normalisation in developed world consumption levels • Strong longer run fundamentals remain intact
Editor's Notes
- #4 IMF forecasts (% yoy) 2009 2010 World -1.1 +3.3 Developed world -3.5 +1.25
- #5 For metals reflect the fact that activity – particularly metals intensive activity is more heavily weighted towards emerging world which has been less exposed to the economic downturn China’s share of metals consumption: 1990: <5% 2000: 10-15% 2008: 30-50% Find that chain-linked index of industrial production weighed by shares of base metal consumption is a better proxy for modelling metals prices. This measure has fallen by 5% yoy – comparable to early 1980s and 2001 recessions. Compared to 15% fall in production in industrial output in OECD economies.
- #6 Latest leading indicators for developed economies returned to expansionary territory although most recent data suggest that pace of recovery may be slowing and US leading indicator has relapsed somewhat. Metals demand picked up over summer but mostly stimulus related and producers remain cautious over restocking. Given the size of the downturn should see a significant bounce-back as destocking ends and pent up demand for consumer goods is released. Latest IP % yoy US -10.7% Ezone -16.2% Japan -22.7% Rising 1-2 %-pt mom However a number of reasons to be concern over the sustainability of this growth: The problem with a “dead cat bounce” is that the cat is still dead. Excess capacity hold back investment: US capacity utilisation remains at 67% compared to 75-80% before crisis and not seeing much of a recovery in investment goods. Govt fiscal consolidation. IMF forecast major economies to have structural deficits in the order of 5% of GDP. Sweden recovered from such a deficit in the 1990s by cutting back expenditure but lower nominal interest rates, lower currency and export growth. Weak lending. Not only as banks more cautious over lending but also shift towards greater saving by consumers. Oxford Economics estimates that the “total financial wealth has fallen some $28 trillion, or 14 per cent, from its peak
- #7 Whilst poor demand in developed world have seen rapid acceleration in Chinese economy since Q1 On some measures of economic activity economy growing by 16% yoy annualised rate over the summer months IP up 11.3% yoy in August PMI index currently at 54.3 - previously consistent with IP growth of around 15% and continuing to climb Consensus GDP growth forecasts continue to be pushed up: 2009 8.3% 2010 9.4% There are concerns over the sustainability (investment led nature) of this growth Longer term China needs to move towards more domestic consumption-led development but a pick up in export demand should begin to take over as positive growth driver in the short run.
- #8 Driver behind this acceleration has been fiscal and monetary policy stimulus by the Chinese government In 2008 undertook quick reduction in interest rates and reserve requirements. Government control over banks allows them to direct bank lending and new bank loans have surged: 2008 = RMB4.91tr 2009 M1-8 = RMB 8.15 tr (+66% over whole of 2008) Direct central and local government spending, especially on infrastructure projects. China accounts for three-quarters of global stimulus spending on infrastructure. Focus of this been felt most strongly in inland regions and by some particularly metals intensive sectors FAI (M1-8, % yoy) Total 33.7%, East 27.2%, Centre +37.0, West 39.2 Transportation +61.2%, o/w rail 103.5%
- #9 After declining in late 2008 / 2009Q1 the impact of this activity has bee growth in apparent demand for metals of 25-50% Debate as to what degree this reflects stockbuilding but strong rise in net imports has been driving prices during 2009 Jan-Aug Fe Cu Al 2008 307 1,220 -1,260 2009 405 2,660 +720 % yoy +32% +117%
- #10 This has been the main driver behind recovery in prices. Between peak and Q1/2 trough prices fell 60-70% Since then 40-120% rise Another additional factor has been the US dollar – rising whilst prices were falling and declining 11% since then. Al $1950 Cu 6270 / 285c Coal $72 Au $1052 Fe $76 (fob) / $87 (cfr) for 62% Fe) Oil $73
- #11 Notable that current cycle has been much more severe than in the past but that prices have risen more quickly off lows. In previous cycles prices tended to remain at floors for 4-8 quarters until stock overhangs run off. See some tendency for prices to respond ahead of stock movements than in the past, perhaps reflecting the influence of stock financing and fund activity.
- #12 Global demand fell 25% year-on-year or circa 10 million tonnes on an annualised basis in Q1 Fixed cost of shutting capacity led to sluggish supply response and prices fell towards the bottom quartile of the cost curve Visible western stocks above 5 million tonnes. Whilst this is higher in absolute terms than in the e1990s it is lower in weeks’s consumption (13 vs 17)
- #13 Now seeing an improvement in shipments and slowing pace of visible stock accumulation. Ytd western shipments down 29% ytd but in July were down around 20% yoy and expect the trend to significantly improve on a yoy basis Chinese demand expected to rise in double digit rate although yoy comparison less than in other metals markets as consumption levels were especially high in 208H1.
- #14 Unfortunately, as well as large stocks a significant excess capacity overhangs the market. Based on August production levels there was 6.3mtpa of idled capacity in China and 3.7mtpa of spare capacity elsewhere. Further capacity will be added, notably in India next year. Lower costs and the improvement in prices have allowed some Chinese smelters to restart production. Whilst it is comforting that production costs will provide downside protection they will also limit upside risk.
- #15 That is not the case in copper where western stocks remain low at a little over 800kt or under 5 weeks of western consumption The tightness reflect s the jump in Chinese copper imports seen earlier. Partly due to lower scrap imports but apparent consumption of copper in Chinese is up almost 50% yoy. This includes stockbuilding and true demand growth is likely to be close to 20% yoy. This implies around 800kt of stockbuilding, of which 150-250kt by SRB. Could seem some reversal of this and seen recent decline in imports but supply growth is highly constrained. Between 2005-9 only 1% pa growth in mine production in the Western world – stagnant Chilean production and falling output in the US. (During this period 7-10% of annual production lost due to mine disruptions) Although large number of new projects this is likely to be an ongoing issue for the industry.
- #16 China now accounts for well over half of the seaborne iron ore trade and the rise in it’s iron ore imports has offset a collapse in rest of world demand and led to a gradual recovery in iron ore imports. Current production rates over 600mtpa but Chinese CSP expect to reach 525mt (+25mt this year) despite net exports falling from 44mt in 2008 to rough balance this year. There is a debate to which steel production volumes reflect actual demand but highly leverage to construction/investment and see close correlation with floorspace under construction. Our bottom-up analysis suggests that relatively little stockbuilding has taken place and there is little evidence of steel stockbuilding. Previously highlighted the role of marginal Chinese costs as driving the spot iron ore price and see strong correlation between call on domestic production and prices. Current spot price for 62% ore is $85/tonne. fob spot prices are 30% above benchmark levels agreed with Japanese mills earlier this year. Some new capacity in 2010 but western steel production now ramping up – was still down 23% yoy in August and seeing continued news of restarts. Unlikely to see the same growth in Chinese steel demand in 2010 as stimulus not additional but suggests on-going tight market.
- #17 Spike 1, American civil war Spike 2, end of Franco Prussian war, start of second industrial revolution Intervening spike related to a number of factors including occasional recessions, then ww1
- #18 But as the trend accelerates, a huge wall of the world’s population will move along the horizontal axis as their average wealth increases and with that the commodity intensity of this wall of people, their consumption of raw materials, rises significantly giving rise to sharp upward moves in long run commodity prices over the next fifteen years, and beyond. .
- #20 Demand expected to double over next 15-20 years. Bottom up calculation of investment (new capex and sustaining) required based on current capital costs suggests need to invest $60 billion a year – not directly comparable as some sustaining capital included as opex and slightly broader coverage but more than in any year apart from 2008. Additional people and supplier capabilities.