Transcript No Slide Title

The Outlook for
Commodity Prices
and the Global Mining
Industry
Seminar on Surviving the Global
Financial Crisis in the Mining
Sector
Patricia M. Mohr
Vice-President, Economics
& Commodity Market Specialist
The Scotiabank Group, Toronto
Mine Africa
Radisson Admiral Harbourfront
Toronto, Ontario
February 28, 2009
Commodity Price Upswing
This Decade On a Par With 1970’s Expansion
300
280
Scotiabank Commodity Price Index1
300
Index: 1997=100
260
280
240
220
200
160
140
(January 2009, % change yr/yr)
220
All Items
140
160
240
*
180
December 2002
December 2003
December 2004
December 2005
December 2006
December 2007
260
New record high in July
2008 at 226% above
cyclical low
Scotiabank Commodity
Price Index, % change yr/yr
200
180
17.9%
17.3%
19.0%
24.4%
5.4%
10.4%
120
120
100
100
80
80
Oil & Gas
60
60
Metals & Minerals
-8.5
40
Forest Products
-6.0
40
Arab Oil
Embargo
October 2001
Bottom
20
20
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
A trade-weighted U.S. dollar-based index of principal Canadian exports.
Shaded areas represent U.S. recession periods.
Scotiabank Commodity Price Index edged up in January.
All Items
Agriculture
-19.6
-38.9
-20.9
Commodity Prices Retreat From Record High in July 2008
The ‘Bull-Run’ in commodities continued in 2008:H1 due to ongoing
strength in China’s GDP growth, under-investment in oil & gas and
metals during the 1990s and delays in expanding capacity this
decade.
Interest by investment funds in commodities as a ‘hedge against a
declining U.S. dollar’ and a major rejuvenation in international grain &
oilseed prices – linked to biofuel development and tight global
supplies – also pushed up commodity prices. Fertilizer prices
(especially potash) rose to record levels.
However, after reaching a cyclical peak in July 2008, Scotiabank’s
Commodity Price Index plunged by a sharp 39% through December
alongside a faltering global economy – ushered in by a U.S. and
European banking crisis, deleveraging by financial institutions and
much tighter global credit conditions. Most G7 economies are now
contracting.
Hedge Funds Exit Oil & Metal Positions
While inter-bank lending has improved – following government guarantees on
inter-bank lending in Europe, government capital injections into financial
institutions to shore up their balance sheets and massive central bank
liquidity injections – tighter credit will contribute to sharply reducing global
growth from 5% in 2006 and 2007 to about -0.5% in 2009. This will occur, even
with relative strength in ‘emerging markets’ such as China, where GDP growth
should still advance by 5.8% in 2009 – though well below the estimated 9.0%
of 2008 and 13.0% of 2007.
The sudden and unusually sharp decline in commodity prices since the July
peak reflects the exit of many hedge funds from long commodity ‘futures’
positions and ‘commodity index-linked investments’—forced by fund
redemptions and tighter credit – as well as a shift to record short positions by
funds and trading companies.
On a more positive note, the Scotiabank Commodity Price Index rose by 1.3%
in January 2009, as buying by China’s State Reserve Bureau contributed to
stronger base metal and grain prices and oil prices steadied.
30
China -- Vital to Global
Commodity Markets
30
yr/yr % change
20
China – Industrial
Production*
*3 mth moving avg.
December 2008
10
0
0
G7 Industrial Production
98 99 00 01 02 03 04 05 06 07 08 09
Demand Growth in China
(2007, % change)
Crude Oil
4.6
5.7% yr/yr
20
10
-10
China Industrial Production:
Nickel
24.0
Copper
16.0
Aluminium
38.8
Slab Zinc
11.5
Iron Ore
10.3
G7 Industrial Production
U.S.
Japan
Germany
-7.8% (Nov)
-10.0% (Jan)
-22.6% (Dec)
-12.0% (Dec)
China shifts policy in mid-September 2008 from
preventing ‘overheating’ to supporting fast and
-10 steady growth; monetary policy has been
eased decisively, while a massive fiscal
stimulus package (infrastructure spending
totaling 4.16 tr RMB from 2008:Q4 through 2010
– equivalent to 6% of nominal GDP in each of
2009 and 2010) was announced on Nov. 9, 2008.
This spending has already been expanded.
Measures to bolster 10 key industries
(including nonferrous metals) have been
unveiled ahead of the National People’s
Congress on March 5, 2009.
14
12
GDP (% per annum)
‘Emerging Markets’ Should
Provide Some Offset To G7 Contraction
2006
2007
2008e
2009F
2010F
WORLD*
5.1
5.0
3.3
-0.5
2.5
CANADA
3.1
2.7
0.7
-1.6
1.6
UNITED
STATES
2.8
2.0
1.1
-2.6
1.7
CHINA
11.6
13.0
9.0
5.8
8.5
INDIA
9.6
9.0
6.8
5.3
6.5
SOUTH
KOREA
5.0
5.0
2.5
-3.5
1.0
yr/yr %
change
2007
2008F
10
2009F
8
6
Widening credit squeeze
cuts growth prospects.
4
2
0
-2
-4
-6
World
China
United
States
Japan
Euro Zone
A ‘seismic’ shift in global growth has occurred from the G7 to
‘emerging markets’ this decade.
*Global GDP estimate based on “purchasing power parity,”
as used by the IMF. + Negative growth in current dollars.
Average 1988-1997: 3.4% p.a. prior to the “economic takeoff” in China and India.
2.75
U.S. Housing Starts
millions of units, quarterly, annualized
2.50
2.25
2.75
2.50
1978 – Strong ‘Baby-Boom’ Demand
U.S. Housing Start Outlook
(million units)
2006
1.81
2007
1.34
2.25
2.00
2.00
1.75
1.75
2008F
0.90
1.50
1.50
2009F
0.55
1.25
1.25
2010F
0.80
1.00
1.00
0.75
0.75
Total
Single-Family Units
0.50
0.50
0.25
0.25
76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
U.S. housing starts at 466,000 units in January 2009
are the lowest in data back to 1959.
Shaded areas represent U.S. recession periods.
Tighter U.S. lending standards, an
end to private-label mortgage
securitization, high existing home
inventories (exacerbated by nearrecord foreclosures) and severe
employment losses point to
prolonged U.S. slowdown.
The Fed Takes Action to Stem Fallout from Sub-prime
Mortgage Meltdown
Federal Funds –
Effective Rates
20
20
per cent
15
15
“Real” Federal Funds Rate
(Adjusted for Inflation)*
15
per cent
15
January 2009 = -1.41%
Average = 2.31%
10
10
Average
10
10
5
5
5
5
0
0
0
0
-5
-5
60
65
70
75
80
85
90
95
00
05
10
Federal Funds Target Rate is 0.25% in February 2009.
Fed Funds expected to remain virtually flat through 2010:H1.
60
65
70
75
80
85
90
95
00
05
10
* Inflation-adjusted with the U.S. Personal Consumption Deflator
(PCE) and the core PCE. Shaded areas represent U.S. recession
periods.
Credit Conditions Tighten Globally In September & October 2008
USD Libor Shows Significant
Improvement
in Late October
%
8
+
Inter-bank lending thaws
following government
guarantees on inter-bank lending
and capital injections into banks
and other financial institutions in
6 the U.K. and Western Europe in
October. However, general credit
conditions remain tight worldwide for corporate and consumer
4 loans in early 2009.
8
‘Credit Squeeze’
6
3-month
4
2
2
Overnight
+Inter-bank
lending
thaws
0
0
02
03
04
05
Data to February 25, 2009.
06
07
08
09
10
150
140
Oil Prices Tumble from Record High
*
US$ per barrel
130
110
90
80
120
110
100
OPEC announces output cuts of
4.2 mb/d in Sept/08 – Jan/09 to
shore up prices.
90
80
70
70
60
Iranian
Revolution
50
40
30
20
140
After a Weak 2009, Oil Prices
Will Likely Rebound MediumTerm
130
New Record High:
July 11, 2008: US$147.90
120
100
150
Iraq
War
Gulf
War
60
40
30
20
10
10
0
0
96
00
US$19.69/bbl
US$66.22
US$72.32
US$99.62
US$45–50
US$65
US$75+
50
Arab Oil
Embargo
60 64 68 72 76 80 84 88 92
Source: Scotiabank Commodity Price Index.
WTI on February 27, 2009: US$44.64.
1990-99
2006
2007
2008
2009F
2010F
2011
04
08
A global capital spending slowdown
on oil field development in 2009, due
to tighter credit and the slide in oil
prices, sets the stage for a strong
rebound in oil prices in 2011-13.
U.S. demand for gasoline shows
signs of stabilizing (rising 1.7% yr/yr
in latest 4 weeks); U.S. oil imports
are also declining now, partly due to
OPEC cutbacks.
U.S. Economy Contracts
6
Waning U.S. Industrial Activity
yr/yr % change
U.S. Employment Growth
13
million units, quarterly
yr/yr % change
2.0
2.0
12
4
Industrial
Production
2
11
1.0
1.0
U.S. Payrolls
10
0.0
0
Latest Data:
Declines in
Payrolls
9
U.S. Motor
Vehicle
Assemblies
-2
0.0
8
-4
-1.0
7
-2.0
-6
6
-8
5
06
07
08
09
10
-1.0
Jan. 2009
-598,000
Decline in
Past Year
-3,422,000
-2.0
-3.0
-3.0
06
07
08
09
10
U.S. motor vehicle assemblies (including General Motors, Mitsubishi, Nissan…) totalled 8.7 million units in
2008, and are expected to drop to 7.3 million in 2009, before edging up to 7.6 million in 2010. Assemblies
averaged about 12 million from 1993-2007.
Scotiabank Metal and Mineral Price
Index Retreats from Record
390
390
Index: 1997=100
U.S. Equity Markets
Remain Jittery
1800
350
350
310
310
1600
Metal and Mineral Price Index in July
2008 reached a new record high –
123.8% above the June 1988 peak.
270
230
270
190
150
150
110
110
70
70
30
30
76
80
84
88
92
96
00
04
1600
S&P 500
1400
1400
1200
1200
1000
1000
800
800
230
190
72
1800
Index: 1941-43=10
08
Shaded areas represent U.S. recession periods.
Latest data: January 2009.
12
An Indicator of Financial Market
Distress & Economic Sentiment
Feb 23/09
600
600
00
01
02
03
04
05
06
07
08
09
Commodity prices recently trade down with weak
equity markets.
10
09
4.50
4.00
Copper Prices Still at Profitable Level
US$ per pound
Record High: US$4.08
on July 3, 2008
*
3.50
+
2.50
1.50
4.00
3.50
3.00
2.00
4.50
3.00
2.50
Low During
Credit Squeeze
(Aug. 17, 2007)
2.00
1.50
1.00
1.00
0.50
0.50
0.00
0.00
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
LME cash settlement prices. * Latest data: February 27, 2009.
Re-weighting
of
Dow
Jones-AIG
Commodity
Price Index and S&P GSCI
boosts base metals (at
least temporarily) in early
January.
Buying by China’s State
Reserve
Bureau
also
boosts copper prices in
January/February 2009.
Price Outlook
2007
US$3.23
2008
US$3.15
2009F
US$1.40
(possibly as high as US$1.50)
2010F
US$1.40
Copper Prices Will Likely
Outperform Other Base Metals
LME copper prices at US$1.54 per pound on February 27, 2009 are at profitable
levels -- yielding an 11% margin over average world break-even costs including
depreciation, interest expense & royalties. Prices have edged up in early 2009, after
falling as low as US$1.26 on December 24 (well below the 90th percentile of direct
cash costs) – triggering substantial production cuts and mine expansion deferrals.
Roughly 670,000 tonnes of production has recently been curtailed.
Significant buying of copper by China’s State Reserve Bureau (recently as much as
300,000 tonnes via intermediaries from Latin American and European copper
suppliers) contributed to the rebound in prices in January & February. Should
recent rumours be true -- that China wishes to build its overall copper reserve to 1
million tonnes -- the additional buying would go a long way towards offsetting the
projected 2009 copper surplus.
Nevertheless, prices could move lower again later in 2009, given prospects for a
contraction in world copper consumption of about -4.6% in 2009, after last year’s
marked deceleration in demand to only +0.3%. Global consumption should pick up
again modestly in 2010 (+1.0%).
China’s Copper Consumption Likely to Rise by
5% in 2009 and in 2010
China’s copper consumption will decelerate from last year’s 8% growth (16% in
2007) to only 5%, given lower exports to the G7 and substantial inventory
liquidation in parts of its manufacturing sector (e.g. air conditioners) linked to a
domestic housing correction and industry rationalization. However, this inventory
correction should come to an end by mid-year and China’s massive infrastructure
spending program (particularly on power transmission in urban areas – as well as
aluminium-intensive cross country transmission) will provide some support for
copper.
Japan’s auto sector is dominated by export demand and, with declining car sales in
the United States and Europe, Japan’s auto makers have been forced to cut output
(-41% in January). Copper consumption is also quite weak in Western Europe
(-9.8% expected in 2009).
LME copper inventories have surged by 67% since early January (from 324,000
tonnes to 542,300 tonnes in late February), but remain low on the Shanghai Futures
Exchange at only 28,332 tonnes. While global copper inventories may continue to
rise through early 2010, the increase is likely to be less than for nickel and
aluminium (in terms of days of global consumption). Copper prices should hold up
better than many other base metals.
26
Nickel Prices Retreat
26
US$ per pound
24
24
22
22
20
May 16, 2007
New Record US$24.59
18
16
18
LME Nickel Prices
14
12
20
16
14
Previous Record
US$10.84 in March 1988
12
Stainless steel production
slowdown in Asia and Europe
pushes down prices in 2008.
Mine & refinery closures (at
Ravensthorpe in Australia and
Loma de Niquel in Venezuela)
and delays in ramping up new
projects (possibly at Goro and
Onça-Puma) together with
stronger consumption point
to a modest rebound in prices
by 2010.
10
10
8
8
6
6
4
4
2
2
2007
16.88
0
0
2008
9.57
2009F
4.20
2010F
4.80
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
Latest data: February 2009.
LME Nickel Prices
(US$ per pound)
U.S. Stainless Steel Prices
6500
6500
US$ per tonne
U.S. Midwest, spot prices
6000
6000
5500
5500
5000
5000
Stainless Steel
Prices - CR304*
4500
4500
4000
4000
3500
3500
3000
3000
2500
2500
2000
2000
1500
1500
1000
1000
98
00
02
04
06
08
Including alloy surcharges. Data to February 2009.
10
Expected
global
capital
spending slowdown in 2009
will pressure stainless steel
prices.
However, capital
spending should reaccelerate
early in the next decade.
U.S. nickel surcharges on
stainless steel prices have
dropped from US$1.48 per
pound in January 2008 to
US$0.54 in January 2009.
2.50
Zinc Prices Ease
2.50
US$ per pound
2.00
LME Zinc Prices
(US$ per pound)
2.00
Zinc producers announce
pro-active output cuts to
shore up market conditions
1.50
1.50
1.00
1.00
0.50
0.50
0.00
0.00
80
84
88
92
96
00
04
08
LME official cash settlement prices. Data to February 2009.
12
2007
1.47
2008
0.85
2009F
0.50
2010F
0.60
Zinc prices should start to
recover in 2010, though
prices may remain at a low
ebb (below average world
break-even costs including
depreciation).
Collapse in Global Auto Production & Weak
Residential Construction Takes Toll on Zinc
The global supply/demand balance for zinc moved into a surplus in 2008, with
traders continuing to short the market through most of the year – initially in
anticipation of substantial new mine capability scheduled to come on stream and
later with growing realization that much of the G7 had entered recession.
Zinc prices fell to a low of US$0.47 per pound on December 12 – close to average
world cash costs – amid a collapse in demand in the global auto and construction
sectors. Prices peaked for the business cycle around US$2.09 in December 2006.
However, zinc prices rallied back in late December and averaged US$0.54 in
January. The market responded favourably to substantial mine and smelter
production cutbacks as well as the annual re-jigging of the Dow Jones-AIG
Commodity Index boosting the weighting of zinc and news that China’s State
Reserves Bureau would buy about 200,000 tonnes of refined zinc from Chinese
smelters for its ‘strategic’ stockpile (intended to bolster hard-pressed domestic
smelters as well as take advantage of bargain prices). Interestingly, Yunnan
province may also buy reserves to shore up its beleaguered zinc smelting
industry.
Zinc Smelters Take Unusual Steps
To Bolster Market Conditions
Twenty zinc smelters (including Zhuzhou in China -20%, Trail -20% to
mid-2009, Kidd Creek -30% to mid-2009) have now announced deep
production cuts – a very unusual step. Smelters often wait until mine
concentrate supplies dwindle before cutting output.
Weak demand for the sulphuric acid produced by some smelters and
insufficient storage capability for it could also cut smelter output in
coming months, as will a tightening supply of concentrates from mines.
While lower smelter output has bolstered market conditions, it would not
be surprising to see zinc prices retest previous lows in the first half of
2009. In fact, zinc has fallen back to US$0.49 in late February. Zinc prices
should start to rebound on a sustained basis by the second half of 2010.
Gold – A Hedge Against
Economic Uncertainty
1,200
1,200
US$ per ounce
*
1,000
New Record:
March 17, 2008
US$1,032.70
Jan. 21, 1980
peak US$850
800
1,000
600
800
Price Outlook
2007
US$697
2008
US$872
2009F
US$975
2010F US$900-950
600
Gold Prices
London PM Fix
400
400
200
200
0
0
75
80
85
90
95
00
05
10
London PM Fix on Feb 26, 2009: US$945.
Investor Interest in ETFs and retail interest in bars and coins remains strong.
Gold Should Shine as ‘Safe-Haven’ in 2009
Gold prices (London PM Fix) – traditionally considered a store of value
and a hedge against economic uncertainty – have held up better than
base metal prices.
However, a stronger trade-weighted U.S. dollar (especially against the
euro) from mid-July 2008 through November 20th – linked to some
improvement in the U.S. merchandise trade performance last summer,
but more importantly to a counter-intuitive flight to the ‘safe-haven’ of
U.S. Treasury securities during the height of the banking credit crisis last
Fall, prevented gold from climbing back to its previous March 2008
record high of US$1,032.70 and – in fact – pushed prices down.
Gold Should Shine as ‘Safe-Haven’ in 2009
A largely ‘deflationary’ economic environment, falling oil prices and the
forced exit of many hedge funds from commodity market positions also
contributed to a decline in gold prices to a low of US$712.50 on October
24.
Gold prices have subsequently rallied back, averaging US$859 in
January 2009 and surging as high as US$1,006 in intraday trading on the
spot market on February 20. Prices were pushed up by another global
selloff in equity markets, triggered by concern over the stability of the
U.S. banking industry.
While day-to-day prices remain volatile and retreated to US$942 (spot) on
February 27, the big picture outlook for gold remains bullish in 2009.
Asian and Middle East central banks and sovereign wealth funds could
be less supportive of U.S. debt markets in the next 12-24 months, in view
of large debt issuance to fund massive U.S. federal government
budgetary deficits (US$1.75 trillion in FY2009 and probably over US$1.2
trillion in FY2010). Gold should come into its own as a true ‘safe haven’
in 2009.
U.S. Dollar Trade Weighted vs. Euro
120
US cents
monthly averages
March 1973=100
monthly averages
170
120
160
110
Canadian Dollar
120
US cents
monthly averages
110
110
100
100
90
90
150
euro
100
140
130
90
120
80
110
Commodity
prices slip
80
80
100
70
U.S. Dollar Trade Weighted
80
00
02
04
*Data to February 26, 2009.
06
08
70
60
60
90
60
98
70
10
98
00
02
04
06
08
10
Canadian dollar reached parity with the U.S. dollar on
Sept. 20th, 2007. Canadian Dollar: US$0.802 as of
February 26, 2009.
140
130
Spot Uranium Prices Will Rally in Medium Term
US$ per pound
140
130
120
Feb 23, 2009
120
110
Spot
US$45.00
110
100
LT Contract
US$70.00
100
90
90
80
70
US$43.40
Peak
60
50
Russian HEU
Agreement
Three Mile Cancelled Options
Island
80
70
60
50
40
40
Arab Oil
Embargo Low US$7.10
30
30
in Dec. 2000
20
20
Nuclear
Disarmament
10
0
72
76
80
84
88
10
0
92
96
00
Source: Scotiabank Commodity Price Index.
04
08
Spot Uranium Prices Will Rally in Medium-Term
The forced liquidation of commodity market investments by funds and individual
investors also affected the uranium market last October, when spot prices declined
to a low of US$44 per pound (an oversold position). Prices rallied back to US$55 in
late November -- as Asian utilities, commodity brokers and producers took advantage
of bargain prices – though bids have dropped back to the US$45 level as of late
February. Spot prices are expected to strengthen medium-term (to around US$70
from 2011-14). Term-contract prices remain lucrative.
‘Uncovered U3O8 requirements’ by North American utilities will be low in 2009, given
the re-stocking and term contracting of recent years.
However, three developments point to firmer prices in the medium-term: 1) India will
return as an importer of uranium concentrates in 2009 after more than a 30-year
absence, given approval by the World Nuclear Suppliers Group, and has now signed
bilateral nuclear cooperation agreements with the United States, France and Russia
(from whom it may import concentrates and equipment). Canada requires a similar
agreement. India has been operating its nuclear reactors at 50% of capability, given
inadequate domestic uranium supplies, and has huge nuclear power expansion
plans. 2) Delays in commissioning the Cigar Lake project and in Olympic Dam
expansion will dramatically tighten world supplies around 2011-13; and 3) Higher
capital and operating costs will lift the medium-term floor on prices.
Western Canadian Coking
Coal Prices Poised to Drop From
Record Levels
Steam Coal Prices
350
200
US$ per tonne, spot
US$ per tonne
300
FOB Newcastle, Australia
175
Western Canada
to Japan
250
Steam Coal Prices
150
FOB port
Premium-Grade
Hard Coking Coal
Contract Price
200
125
150
100
China’s Electricity
Shortage Boosts
Steam Coal Prices
Last Summer
75
*
100
50
0
50
July
October January
April
July
October January
China imposes export tax of 10% on steam coal
and raises export tax on coking coal from 5% to
10% on August 20, 2008 to conserve supplies for
domestic power generation.
Contract price: Australia/Japan.
FY2008 US$125:FY2009 US$75 forecast.
03
04
05
06
07
08
09
10
Prices leapt to record US$300 in April 2008 from US$93.
*Forecast JFY 2009: US$125-150.
Source: Scotiabank Commodity Price Index.
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Recent Equity Leads
US$163,000,000
C$22,001,200
C$34,256,035
C$50,025,000
C$65,520,000
Common Shares
TSX IPO - Common Shares
Units
Common Shares
Common Shares
Co-Bookrunner
Sole Bookrunner
Sole Bookrunner
Sole Bookrunner
Sole Bookrunner
September 2008
February 2008
January 2008
November 2007
November 2007
Recent Advisory Transactions
Is merging with
Evaluating an unsolicited tender
offer and identifying potential
alternatives to enhance
shareholder value
has acquired
has consolidated its interest in
the Corani Silver Project by acquiring
the remaining 30% interest from
has acquired 100% of the Life of Mine Silver
Production from the Sabinas Mine of
to create a company with a combined
market capitalization of
for
for
for
C$550,000,000
US$1,200,000,000
US$75,000,000
US$350,000,000
Financial Advisor
Financial Advisor
Financial Advisor
Financial Advisor
Financial Advisor
Pending
Pending
October 2008
July 2008
May 2008
Strong Commitment to the Sector
This Report is prepared by Scotia Economics as a resource for the clients of
Scotiabank and Scotia Capital. While the information is from sources believed
reliable, neither the information nor the forecast shall be taken as a
representation for which The Bank of Nova Scotia or Scotia Capital Inc. or any
of their employees incur responsibility.