Transcript Iron Ore: Chinese Imports.

Commodity Price Outlook
How long can the high prices be sustained?
Goldman Sachs JBWere Commodities Team
Melbourne
London
ME320_3120_METALS
Malcolm Southwood
Paul Gray
[email protected]
[email protected]
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Commodity Price Trends: the start of a new era, or top of
the (super) cycle?
GSCI - Spot Index, Daily, from January 1970
Source: Bloomberg
600
500
400
A Five Year
Bull Run in
Commodities!
300
200
100
0
Jan70
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Jan72
Jan74
Jan76
Jan78
Jan80
Jan82
Jan84
Jan86
Jan88
Jan90
Jan92
Jan94
Jan96
Jan98
Jan00
Jan02
Jan04
Jan06
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Positive Structural Themes – Still Very Much Intact!
Chinese demand growth:
Supply constraints:
Currency:
•
The world’s biggest raw
materials consumer (China) is
also the world’s fastest growing.
•
Reduced exploration and
development spending over the
past decade.
•
•
We believe that this situation
could continue for many years.
•
Too few greenfield projects
available, and reduced
discovery rates.
Investment Flows:
•
Dominance of “long-only”
investment style (Index Funds).
•
Long lead-times from discovery
to commercial production.
•
Hedge funds and CTAs.
•
Infrastructure bottlenecks (oil;
bulk commodities).
•
Skills shortages, and long leadtimes for equipment orders.
•
•
In the longer term, this will be
supplemented by Brazil, India,
Russia ( the Goldman Sachs
“BRIC” idea).
Bumps in the road will occur, but
in the longer term, it’s the trend
rate of growth that matters.
Weak US dollar environment.
Global demand growth:
•
We envisage moderate (trend)
growth in OECD raw materials
offtake.
We believe this environment will sustain strong
commodities prices and improved growth opportunities.
Resources company valuations should continue to rise.
We recommend an overweight resources position.
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The World and the BRICs dream
The Largest Economies in 2005 (US$ bn)
The Largest Economies in 2050 (US$ bn)
Source: Goldman Sachs
14000
Source: Goldman Sachs
80000
70000
12000
60000
10000
50000
8000
40000
6000
30000
4000
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Italy
France
UK
Germany
Japan
Russia
Brazil
India
US
Brazil
Russia
Canada
Italy
China
UK
France
0
Germany
0
Japan
10000
US
2000
China
20000
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The World and the BRICS dream
Cars indicate when BRICs US$GDP exceeds US$GDP in the G6
Brazil
Italy
France/UK*
Germany
Russia
Italy
France/UK
Germany
India
Germany
Japan
USA
China
2005
Germany
Japan
2010
2015
USA
2020
2025
2030
2035
2040
2045
2050
Source: Goldman
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China: the dominant force in global commodity markets
China's Share of Global Consumption (%)
60
50
1st
1st
40
1st
1st
30
1st
1st
20
2nd
10
0
Iron Ore*
*seaborne trade
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Coal
Steel
Al
Cu
Ni
Oil
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How long can it last?
“saturation point” is typically $15,000 – $20,000 real GDP/capita (PPP adjusted) –
China is still < $7,000!
Per capita consumption of steel and copper
Source: IMF World Economic Outlook
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The China (and India) growth story has many years to run
Commodity Consumption per Capita (2006)
USA
Japan
Korea
China
India
Oil
Copper
Aluminium
barrels per person pounds per person kg per person
25.2
16.0
23.3
15.0
22.0
16.5
16.1
38.0
25.0
2.0
6.2
6.4
0.9
0.9
0.8
Source: Company data, GSJBW Research estimates.
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Challenges to supply growth (1)
Quality and availability of projects: location; size; depth; grade etc.
Infrastructure: availability; cost; lead-time.
Personnel: Labour availability; skills shortages.
Capital equipment: extended lead-times.
Capital costs: have risen dramatically.
Financing and decision-making: What is an appropriate long-term price?
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Challenges to Supply Growth (2)
Green-field projects take at least 7 years to bring on line!
Discovery
Drilling
Evaluation
Feasibility Study
Approval
Funding
Construction
0
1
2
3
4
Years
5
6
7
8
Source: Company data, GSJBW Research
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Challenges to Supply Growth (3):
Extended lead-times for equipment
a constraint to supply-side growth
Grinding mills
Draglines
Locomotives
Generators
Wagons
Reclaimers
Haul Trucks
Crushers
Normal
20
18
12
12
12
18
<6
16
Mid-2007
44
36
26
24
24
24
24
24
Source: Company Data
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Iron Ore
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Iron Ore: Seaborne trade - it’s all about China!
Source: TEX Report, GSJBW research estimates.
Seaborne Trade in Iron Ore
(million tonnes)
1000
900
800
700
600
500
China
400
RoW
300
200
100
0
1990
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1992
1994
1996
1998
2000
2002
2004
2006
(f)
2008
(f)
2010
(f)
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Iron Ore: Chinese Imports.
Chinese Imports of Iron Ore
million tonnes
40
Source: TEX Report, Reuters, GSJBW Research estimates.
35
30
25
20
15
10
2007: GSJBW
F'cast: 380mt
5
1999: 55mt
2000: 70mt
2001: 93mt
2002: 112mt
2003: 148mt
2004: 208mt 2005: 275mt 2006: 326mt
Jan-99
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Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
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Iron Ore: where are the Chinese imports coming from?
Chinese Imports of Iron Ore: by Source
% share by volume (tonnes)
100%
9%
90%
11%
6%
13%
5%
11%
Source: TEX Report, China Customs
Other
4%
5%
7%
10%
9%
6%
11%
11%
11%
11%
5%
4%
4%
3%
S.Africa
80%
70%
60%
13%
16%
16%
18%
20%
22%
24%
25%
23%
23%
India
17%
21%
21%
27%
50%
27%
26%
22%
20%
23%
24%
Brazil
40%
30%
49%
20%
44%
47%
41%
38%
39%
38%
2001
2002
2003
2004
41%
39%
38%
2005
2006
Jan-Jul
07
Australia
10%
0%
1998
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1999
2000
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Iron Ore: Beware the Chinese supply response!
Domestic mine production rises to fill gap created by shortage of imports but
Av. Fe grade is declining.
Source: China Customs/Government Data, GSJBW Research estimates
Chinese Consumption of Iron Ore
(million tonnes)
Import
Ratio
70
70%
60
60%
50
50%
Domestic Ore*
40
40%
Imported Ore
30
30%
Import Ratio (RHS)
20
20%
10
10%
0
Jan02
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*converted to
"Western equivalent".
0%
Jul02
Jan03
Jul03
Jan04
Jul04
Jan05
Jul05
Jan06
Jul06
Jan07
Jul07
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Iron ore: Capesize freight rates – remain high and volatile.
Source: Clarksons
Capesize Freight Rates for Iron Ore
US$/tonne
80
70
Tubarao (Brazil)
to Baoshan
60
50
Freight
Differential =
$40/t
(Sep 2007)
40
30
20
Dampier (WA) to
Baoshan
10
0
Jan02
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Jul02
Jan03
Jul03
Jan04
Jul04
Jan05
Jul05
Jan06
Jul06
Jan07
Jul07
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Iron ore: Spot prices at record levels
Iron Ore: Chinese Spot Price
150
(63.5% Fe)
US$/t, CIF China
140
130
120
110
100
90
80
70
60
50
Jan-06 Apr-06
Jul-06
Oct-06 Jan-07 Apr-07
Jul-07
Source: GSJBW Research Estimates, CRU International
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Iron Ore Price Cycle
Iron Ore Contract Price (USc/dmtu)
Iron Ore: Contract Price (% Ch. y/y)
140
75
Lump Premium
65
Hamersley High Grade Fines
120
GSJBW long term price for fines (52c/dmtu)
55
100
GSJBW F'casts
from 2008
45
35
80
25
60
15
40
5
GSJBW F'casts
from 2008
20
-5
-15
0
1990
1992
1994
1996
1998
2000
2002
2004
Source: GSJBW Research Estimates, Company Data
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2006 2008(f)2010(f)
1981
1986
1991
1996
2001
2006
2011(f)
Source: GSJBW Research Estimates, CRU International
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Alumina & Aluminium
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Aluminium: Short-term Caution; Medium Term Optimism
Aluminium: Monthly Average Prices from 1950, (Real and Nominal)
250
USc/lb
Nominal Price Series
+1 Standard Deviation
-2 Standard Deviation
Real price series
200
-1 Standard Deviation
Mean
+2 Standard Deviation
150
100
50
0
Jan50
Jan53
Jan56
Jan59
Jan62
Jan65
Jan68
Jan71
Jan74
Jan77
Jan80
Jan83
Jan86
Jan89
Jan92
Jan95
Jan98
Jan01
Jan04
Jan07
Source: Global Financial Data.com; IRESS, GSJBW Research
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Aluminium: China’s Aluminium Industry Policy
GSJBW Investment Research
China: Aluminium Production Forecast and Smelter Utilisation Rates
18000
'000 tonnes
Percent
16000
100.0%
95.0%
14000
90.0%
12000
85.0%
10000
80.0%
8000
75.0%
6000
China's Aluminium Production (LHS)
4000
China's Smelter Utilisation (RHS)
70.0%
2000
65.0%
0
60.0%
2003
2004
2005
2006
2007f
2008f
2009f
2010f
2011f
Source: CRU International; China Metals; GSJBW Research estimates
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Aluminium: Bauxite imports - mainly from Indonesia
China's Imports of Alumina and Bauxite, Monthly
Bauxite Imports; 12mth moving total ('000t; LHS)
20000
Alumina Imports; 12mth moving total ('000t; RHS)
7500
18000
16000
7000
14000
12000
6500
10000
8000
6000
6000
4000
5500
2000
0
Jan-04
5000
Jan-05
Jan-06
Jan-07
Source: China Customs; Reuters
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Aluminium: Industry Cost Curve, 2006 (US$/t; Business Operating Cost)
GSJBW Investment Research
US$/tonne
2500
Alcan Smelters
Rio Tinto Smelters
2000
1500
Chinese smelters dominate the top
end of the cost curve
1000
500
0
0
5
Source: CRU International
10
15
20
25
30
35
Cumulative Production (000 t)
Aluminium: Industry Cost Curve, 2006 (US$/t; Business Operating Cost)
GSJBW Investment Research
US$/tonne
2500
Chinese Smelters
2000
1500
1000
500
0
0
Source: CRU International
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5
10
15
20
25
30
35
Cumulative Production (000 t)
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Aluminium: longer term, we see China as a net importer
Primary Aluminum: China's Net Trade, through 2011
3000
GSJBW Investment Research
'000 tonnes
2500
2183
2000
1500
1251
1000
500
705
135
327
281
133
0
-206
-500
-369
-708
-1000
-651
-312
-546
-1013
-1500
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007f 2008f 2009f 2010f 2011f
Source: C RU International; C hina Metals; GSJBW Research estimates
Note: We expect low value-add semis to constitute a high proportion of 2007 exports.
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GSJBW Aluminium Price Outlook to 2011
Aluminium: Stocks and Prices, through 2011
120
USc/lb
116
Stocks (days)
150
118
112
110
130
Forecast range (LHS)
Stock Ratio (RHS)
100
95
102
110
Nominal Price (LHS)
86
90
80
98
90
78
73
70
70
62
66
62
61
70
65
50
47
60
53
54
56
44
60
62
62
46
49
49
42
46
30
32
41
50
10
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007f
2008f
2009f
2010f
2011f
Source: CRU International; GSJBW Research estimates
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Copper
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Copper: historical price series
Copper: Monthly Average Prices from 1950, (Real and Nominal)
700.00
USc/lb
Nominal Price Series
+1 Standard Deviation
-2 Standard Deviation
Real Series
600.00
-1 Standard Deviation
Mean
+2 Standard Deviation
500.00
400.00
300.00
200.00
100.00
0.00
Jan50
Jan53
Jan56
Jan59
Jan62
Jan65
Jan68
Jan71
Jan74
Jan77
Jan80
Jan83
Jan86
Jan89
Jan92
Jan95
Jan98
Jan01
Jan04
Jan07
-100.00
Source: Global Financial Data.com; IRESS, GSJBW Research
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Copper: the need for new supply
Global Reserves of Copper, and Average Mined Head Grades
Global Reserves (years of consumption)
40.0
Average Mined Head Grade (% Cu)
1.5
35.0
1.45
30.0
1.4
25.0
1.35
20.0
1.3
15.0
1.25
10.0
1.2
Years of Consumption in Identified Global Reserves (LHS)
5.0
1.15
Average Head Grade (% Cu; RHS)
0.0
1.1
1990
1992
1994
1996
1998
2000
2002
2004
2006
Source: USBM; US Geological Survey; CRU International; Xstrata (CESCO Presentation)
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Copper: Assessing the impact of a slowdown in the US
housing market
US Housing Starts, Monthly
Single Unit Dwellings ('000)
Multi-Unit Dwellings ('000)
250.0
200.0
150.0
100.0
50.0
0.0
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Source: US Census Bureau
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Copper: Costs and Margins
Copper: Cost and Price Evolution
Copper: Median Cash Margin
Median Cash Cost (USc/lb)
9th Decile (USc/lb)
350.0
Median Cash Margin (USc/lb; LHS)
Average LME Cash Price (USc/lb)
300.0
250.0
200.0
Median % margin (RHS)
300.0
120.0
250.0
100.0
200.0
80.0
150.0
60.0
100.0
40.0
50.0
20.0
150.0
100.0
50.0
0.0
0.0
0.0
1990
1992
1994
1996
1998
2000
2002
2004
Source: GSJBW Research Estimates, CRU International; www.minecost.com
Note: Normal costing.
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2006
1990 1992 1994 1996 1998 2000 2002 2004 2006
Source: GSJBW Research Estimates, CRU International; www.minecost.com
Note: Normal costing.
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We Expect Six Years with the Average Copper Price
above US$3.00/lb!
Copper: Inventories, GSJBW Price Forecast, and the LME Forward Curve
Stock:Consumption Ratio (RHS)
420.0
GSJBW price forecast (LHS)
LME Forward Curve (as of mid-Sep, 2007)
USc/lb
Weeks of Consumption
380.0
332
340.0
305
348
355
333
340
27.0
24.0
330
300.0
30.0
21.0
304
260.0
255
220.0
167
180.0
140.0
130
103
75
100.0
60.0
18.0
279
4.7
71
6.1
6.4
1998
1999
82
71
7.8
8.1
2001
2002
4.3
20.0
1997
72
2000
15.0
12.0
Note that we do not envisage a major re-build in the
stocks-to-consumption ratio during this period.
81
9.0
6.0
3.0
6.7
2.8
3.0
3.4
2.5
2.4
2.4
2.5
2.2
2003
2004
2005
2006
2007f
2008f
2009f
2010f
2011f
0.0
Source: CRU International; LME; GSJBW Research estimates
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Nickel
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Historical Nickel Price Series
Nickel: Monthly Average Prices from 1950; (Real and Nominal)
25.00
US$/lb
Nominal Price Series
-1 Standard Deviation
+1 Standard Deviation
Mean
-2 Standard Deviation
+2 Standard Deviation
Real price series
20.00
15.00
10.00
5.00
0.00
Jan50
Jan53
Jan56
Jan59
Jan62
Jan65
Jan68
Jan71
Jan74
Jan77
Jan80
Jan83
Jan86
Jan89
Jan92
Jan95
Jan98
Jan01
Jan04
Jan07
Source: Global Financial Data.com, IRESS, GSJBW Research
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Nickel: China is Driving Short-term Supply Growth
China's Imports of Nickel Ore and Estimated Metal Content
2400
Ore Imports ('000t)
2000
Est. Recoverable Ni ('000t)
24.0
Imports ex Other ('000t; LHS)
20.0
Imports ex New Caledonia ('000t; LHS)
1600
1200
800
16.0
Imports ex Indonesia ('000t; LHS)
12.0
Imports ex Philippines ('000t; LHS)
Estimated Recoverable Nickel ('000t; RHS)
8.0
400
0
Jan-05
4.0
0.0
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Source: GSJBW Research Estimates, China Customs
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Nickel: Chinese ferronickel production outlook
Chinese Ferronickel Production, and Nickel Price: GSJBW Base Case Assumptions
100
'000 tonnes
90
80
US$/lb
China's Ni Production in Low
Grade Ferronickel ('000t; LHS)
20.00
18.00
16.00
Nickel Price (US$/lb; RHS)
70
14.00
60
12.00
50
10.00
40
8.00
30
6.00
20
4.00
10
2.00
0
0.00
2004
2005
2006
2007f
2008f
2009f
2010f
2011f
Source: China Customs; Antaike; GSJBW Research estimates
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Nickel: Costs and Margins
Nickel: Cost and Price Evolution
Nickel: Median Cash Margin
Median Cash Cost (USc/lb)
Average LME Cash Price (USc/lb)
1200.0
Median Cash Margin (USc/lb)
9th Decile (USc/lb)
1000.0
800.0
600.0
400.0
200.0
Median % margin (RHS)
800.0
80.0
700.0
70.0
600.0
60.0
500.0
50.0
400.0
40.0
300.0
30.0
200.0
20.0
100.0
10.0
0.0
0.0
0.0
1990
1992
1994
1996
1998
2000
2002
2004
Source: GSJBW Research Estimates, CRU International; www.minecost.com
Note: Pro-rata costing
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2006
1990 1992 1994 1996 1998 2000 2002 2004 2006
Source: GSJBW Research Estimates, CRU International; www.minecost.com
Note: Pro-rata costing
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Nickel: we expect prices to continue falling
Nickel: Inventories, GSJBW Price Forecast, and the Forward Curve, through 2011
Weeks Inventory (RHS)
GSJBW Price Forecast (LHS)
LME Forward Curve, basis mid-Sept 2007 (LHS)
USc/lb
Weeks Inventory
2000
40
1700
1800
36
1600
32
1400
28
1100
1200
24
1250
1000
669
800
200
273
314
270
210
12.7
13.6
307
11.0
10.2
9.4
11.8
10.4
8.6
0
1997
1998
500
437
392
1999
2000
2001
16
615
628
600
400
20
815
2002
2003
11.0
8.4
2004
7.9
11.5
8
11.6
11.7
8.9
12
4
0
2005
2006
2007f
2008f
2009f
2010f
2011f
Source: CRU International; GSJBW Research estimates
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Summary/Conclusions
• A powerful combination of BRIC’s related demand growth and supply side constraints
means that commodity prices will remain high relative to historical levels.
The secular decline in real commodity prices has ended.
• We prefer commodities for which we see a weak or delayed supply response.
• We prefer commodities that China cannot provide for itself.
• We prefer upstream (mining) to downstream (smelting/refining/fabricating).
• China can build smelters, but cannot create ore bodies!
• Resource company share prices have not displayed the same frothiness as the
underlying commodities and many still offer good long-run investment potential.
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Muito obrigado e boa sorte!
Paul Gray
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