Download China - The Engine of a Commodities Super Cycle

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EQUITY
RESEARCH:
SectorM apping
GLOBAL
A Global View
Commodities
Alan Heap
(612) 8225 4853 Sydney
[email protected]
Global
31 March, 2005
China - The Engine of a
Commodities Super Cycle
Commodity Update
! We believe a super cycle is underway, driven by materials
intensive economic growth in China.
! A super cycle is a prolonged (decades) trend rise in real
commodity
prices,
driven
by
the
industrialization of a major economy.
urbanization
and
! There have been two super cycles in the last 150 years: late
1800s-early 1900s, driving economic growth in the USA; 19451975, prompted by post-war reconstruction in Europe and by
Japan’s later, massive economic expansion.
! High and rising intensity of metals use is the most useful
indicator of a super cycle. In China, intensity of use is now
three times that of the USA, with demand driven by
urbanization, industrialization and fixed capital formation.
Importantly, the domestic market drives China’s metals
demand, not exports.
! In past super cycles, supply has increased to meet higher
demand growth.
! In the present super cycle, increased supply will come at
relatively higher costs. Lead times are also increasing,
contributing to extended periods of market tightness.
! Under these circumstances, higher long-term commodity
prices should be used.
! Paper presented at the Mineral Economics & Management
Society Annual Conference, Washington, April 2005.
Smith Barney is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covered in its
research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this
report. Investors should consider this report as only a single factor in making their investment decision.
Investment Summary
China - The Engine of a Commodities Super Cycle - 31 March, 2005
There have been two super cycles in the past 150 years. We believe a
third super cycle is underway, driven by China.
Super cycles are…
A super cycle is a prolonged (decade or more) trend rise in real commodity prices,
driven by urbanization and industrialization of a major economy.
There have been two super cycles in the past 150 years: from the late 1800s,
driven by the USA; and from 1945 to 1975 as a result of post-war reconstruction
in Europe, and subsequently by the Japanese economic renaissance.
Super cycles are demand driven
Highly materials intensive economic activity is the cause of super cycles –
intensity of metals use in the expanding economy is high, and global growth is
moving to a higher trend.
China – the engine of the present super cycle
China accounts for an increasing share of global economic activity (12% of IP, up
from 6% in 1995).
It accounts for around 20% of demand for copper and other commodities, and a
much larger proportion of demand growth. Intensity of use is 3 times greater than
that of the USA.
The drivers are urbanization, industrialization and fixed capital formation. Greatest
metals demand exists in China’s domestic market – not its export market.
Supply responses – increased production at higher costs
In past super cycles, expansions in commodity production were not sufficient to
offset stronger demand growth.
In the present super cycle, capital and exploration expenditure are increasing but is
not expected to result in oversupply.
2
!
costs are increasing, and
!
production lead times are extending.
China - The Engine of a Commodities Super Cycle - 31 March, 2005
The higher cost of new supply required to meet demand implies that higher longterm prices are appropriate for project evaluation and discounted cash flow
analysis.
Figure 1. Appropriate Long-term (Equilibrium) Commodity Prices - 2005$
Commodity
Copper
Aluminium
Nickel
Zinc
Lead
Oil
Iron Ore (Lump)
Coking coal
Thermal coal
Unit
Value
US¢/lb
US¢/lb
US$/t
US¢/lb
US¢/lb
US$/bbl
US¢/Fe unit
US$/t
US$/t
95
70
3.50
50
27
28
45
62
33
Source: Smith Barney estimates.
In this report we draw mainly on the copper market
The copper market has a number of attractions for this type of long-run historical
analysis. It is a mature market. Consumption is relatively evenly distributed across
geographical regions and a diversity of end uses, and it is correlated with general
macroeconomic trends. Market data is relatively easy to obtain.
Preliminary analysis of other commodities shows similar trends and drivers,
although some (such as aluminium and nickel) have shorter market histories.
3
Investment Summary
Implications for long-term prices
China - The Engine of a Commodities Super Cycle - 31 March, 2005
Super Cycles are
Extended periods (decades) of trend rise in real prices…
For the last 30 years commodity prices have been in trend decline in real terms.
But when viewed against a longer time period it is evident that this has not always
been the case. In particular, commodity prices rose on a trend basis for two
extended periods during the last 150 years: from the late 1800s through to the
early 1900s; and from 1945 to 1975.
This pattern can be most clearly seen for copper (Figure 2), but most commodities
show similar trends (Figure 3).
Figure 2. Copper Super Cycles
600
nominal price
2004 real price
500
400
US¢/lb
300
200
100
Source: USGS; Platts; US Department of Labor.
4
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
1945
1940
1935
1930
1925
1920
1915
1910
1905
1900
1895
1890
0
1885
Super cycles occurred
in the late 1800s–early
1900s (driven by
urbanization and
industrialization in the
USA), and in the late
1940s–early 1970s
(driven by post war
reconstruction in Europe
and Japan, and
subsequently the
Japanese economic
renaissance).
China - The Engine of a Commodities Super Cycle - 31 March, 2005
Figure 3. Other commodities show similar trends...
Aluminium
Nickel
20
400
nominal price
2004 real price
350
nominal price
2004 real price
18
16
300
14
Aluminium & nickel are
new age metals.
12
US$/lb
US¢/lb
250
200
10
8
150
6
100
4
50
2
Zinc
nominal price
2004 real price
1995
1985
nominal price
2004 real price
1000
200
800
1995
1985
1975
1965
1955
1945
1935
1925
1915
1995
1985
1975
1965
1955
1945
0
1935
0
1925
200
1915
50
1905
400
1895
100
1905
600
1895
150
1885
US$/t
250
1885
US¢/lb
1975
Steel
1200
300
Zinc & steel show
similar trends to copper.
1965
1955
1945
1935
1925
1915
1905
1885
1920
1925
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
1895
0
0
Source: USGS; Platts; US Department of Labor.
It should be noted that in a super cycle, prices rise on a trend basis. There are still
business cycles within a super cycle.
….driven by materials intensive economic growth as major
economies urbanize and industrialize.
The key driver of these super cycles is materials intensive economic growth in
major economies as they urbanize and industrialize.
This is reflected by high and rising intensity of use (IOU - the amount of copper
consumed per unit of economic activity).
5
China - The Engine of a Commodities Super Cycle - 31 March, 2005
Figure 4. Copper - intensity of use
2.00
USA
1.75
Germany
Japan
China
1.50
Intensity of use peaked
in the early 1900’s in the
USA, in the 1950’s in
Europe and in the early
70’s in Japan.
Index
1.25
1.00
0.75
0.50
0.25
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
1945
1940
1935
1930
1925
1920
1915
1910
1905
1900
0.00
Source: USGS; US Dept of Labor; GGDC; Smith Barney estimates.
Figure 4 shows intensity of use based on GDP as the economic denominator.
In China, IOU is only just beginning to rise strongly.
In the USA, intensity rose strongly during the early 1900s, then plateaued and
declined from around 1940 as its economy evolved. The highly materials intensive
growth phase came to an end, as the economy became increasingly services-based.
In Europe, reconstruction post the 1939-45 war boosted intensity of copper use.
In Japan, intensity rose during the early years of its economic renaissance, but
declined from 1980.
Declining intensity & slowing demand bring cycles to an end
Declining intensity of use brings super cycles to an end as the driving economy
evolves from materials intensive infrastructure and manufacturing towards more
service based.
We also believe declining demand brings typical business cycles to an end, rather
than expanding supply (Figure 5).
6
China - The Engine of a Commodities Super Cycle - 31 March, 2005
Figure 5. Cycles in the Copper Market
10.0%
250
8.0%
200
6.0%
4.0%
150
US¢/lb
Cycles are brought to an
end by declining
demand. In some cycles
(e.g. the mid 1990’s)
supply continued to
increase, contributing to
a prolonged downturn.
2.0%
100
0.0%
-2.0%
50
-4.0%
% chg Supply
% chg Consumption
2007e
2006e
2005e
2003
2004e
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
0
1981
-6.0%
Price (US¢/lb)
Source: Smith Barney estimates.
China’s Contribution to Global Growth
China’s contribution to global growth depends on how you measure it.
China accounts for:
!
4% of global GDP on an exchange rate basis.
!
13% on a purchasing power parity basis, up from 9% in 1995.
!
12% of world industrial production, up from 6% in 1995.
Figure 6. Regional Shares of Global Industrial Production
10,000
9,000
China
8,000
7,000
US$bn (1987)
Other Asia
6,000
Rest
5,000
4,000
Europe
3,000
2,000
North America
1,000
2004
2000
1996
1992
1988
1984
0
1980
China accounts for 12%
of world IP, up from 6%
in 1995.
Source: World Bank; Smith Barney.
7
China - The Engine of a Commodities Super Cycle - 31 March, 2005
th
Interestingly, China accounted for 20-30% of global GDP until the mid 19
century, when it was eclipsed by the USA. Perhaps China is on the way to
regaining its past dominance, and perhaps this is the true expression of the super
cycle (Figure 7).
Figure 7. GDP of Key Nations: 0-2004 A.D.
100%
ROW
90%
80%
Japan
70%
China accounted for 2030% of global GDP until
the mid 19th century,
when it was eclipsed by
the USA.
60%
Germany
50%
USA
40%
30%
India
20%
10%
China
2004
1998
1973
1950
1913
1870
1820
1700
1600
1500
1000
0
0%
Time scale
Source: Maddison (OECD publication); Groningen Growth & Dlpmnt Cent., University of Groningen; Smith Barney estimates.
Super Cycles – Impact on Commodities Demand & the
Role of China.
Figure 4 shows that intensity of use in China has begun to lift sharply.
The contention then is that:
Further materials intensive economic activity (as measured by rising intensity of
use) in China will drive another super cycle.
Price super cycles are associated with higher levels of trend demand growth.
Supply responses are discussed below.
8
China - The Engine of a Commodities Super Cycle - 31 March, 2005
Figure 8. Global Copper Consumption Trend Growth
15%
5 year moving average
10%
Price super cycles are
associated with higher
levels of trend demand
growth.
5%
trend 2.5%/yr
trend 4.8%/yr
0%
-5%
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
1967
1964
1961
1958
1955
1952
1949
1946
1943
1940
1937
1934
-10%
Source: Metallgesellschaft (1929-1980); WBMS (1980-present).
While China’s demand for copper (and commodities in general) has been growing
for some years, it virtually exploded in 2000.
Figure 9. Global Copper Demand
20,000
Rest
18,000
16,000
Korea, Taiwan &
Other Asia
14,000
kt
12,000
Europe & Other
OECD
10,000
China
8,000
6,000
Japan
4,000
2,000
USA
0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
In 1999 China accounted
for 10% of world
consumption. In 2004 it
reached 20%.
Source: WBMS; Smith Barney estimates.
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China - The Engine of a Commodities Super Cycle - 31 March, 2005
China now accounts for around 20% of global demand for a broad range of
commodities, and an even larger proportion of growth in demand.
Figure 10. China’s Contribution to Commodities Demand
Comm odity
China now accounts for
around 20% of global
demand for a broad
range of commodities,
and an even larger
proportion of growth in
demand.
China's share of global
consumption
2002
2003
Cement
Ethylene
Alum ina
Alum inium
Copper
Nickel
Zinc
Iron ore
Steel
Gold
Platinum
Pulp
Container board
Crude oil
GDP
34%
6%
16%
16%
18%
8%
19%
26%
23%
6%
23%
18%
11%
7%
4%
Population
21%
China's contribution to y-o-y
consum ption growth
2002
2003
8%
3%
56%
23%
60%
39%
112%
13%
53%
39%
77%
3%
75%
27%
30%
57%
7%
5%
59%
53%
78%
48%
86%
70%
84%
-5%
-560%
18%
11%
40%
-16%
21%
11%
11%
6%
19%
19%
20%
10%
21%
29%
27%
7%
18%
Source: Smith Barney estimates.
Some of the dynamics can be seen in Figure 11. (In this data industrial production
is the denominator of intensity of use, rather than GDP shown earlier).
Figure 11. China's Copper Demand
50%
6.0
5.0
30%
4.0
20%
10%
3.0
0%
2.0
-10%
IP
Consumption
-20%
0.0
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
-30%
Source: WBMS; Smith Barney estimates.
10
1.0
IOU
IOU
Intensity in China has
increased sharply since
1999…
Consumption & IP (% ch yoy)
40%
China - The Engine of a Commodities Super Cycle - 31 March, 2005
And can be compared with the USA in Figure 12.
Figure 12. USA's Copper Demand
30%
1.8
1.6
1.4
10%
1.2
1.0
0%
0.8
-10%
0.6
IP
-20%
IOU
…and it is now 3 times
that of the USA, where
intensity is declining.
Consumption & IP (% ch yoy)
20%
Consumption
0.4
IOU
0.2
0.0
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
-30%
Source: WBMS; Smith Barney estimates.
Drivers of demand –fixed capital formation
Fixed capital formation is an important driver of metals demand in China. Fixed
capital formation has increased to around 40% of GDP. Although there is concern
that this may prove unsustainable, we expect fixed capital formation to stabilize at
around 50% of GDP, but for the growth rate to slow more rapidly than the broader
economy.
Figure 13. China - Changing Share of Gross Capital Formation in GDP, 1952-2003 (%)
50
%
45
40
35
30
25
20
15
2004
2000
1996
1992
1988
1984
1980
1976
1972
1968
1964
1960
1956
10
1952
Fixed capital formation
is increasing as a
percentage of GDP. It is
expected to stabilize at
around 50%
Source: National Statistics Bureau of China; CEIC Data Company; Smith Barney estimates.
11
China - The Engine of a Commodities Super Cycle - 31 March, 2005
Figure 14. China's GDP & Gross Capital Formation, 1991-2006
30
GDP by Industry %
Fixed capital formation
has been growing at
around 20%/yr, but is
expected to slow more
rapidly than the broader
economy.
25
Gross Capital Formation %
%
20
15
10
5
2006e
2005e
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
0
Source: National Statistics Bureau of China; CEIC Data Company; Smith Barney estimates.
Drivers of demand – urbanization
Urban migration is an important driver of fixed capital formation and super cycles.
In China, 10 million people per year are moving from the countryside to the cities,
according to World Bank estimates, and this may increase four fold as restrictions
on the movement of labour are relaxed as required by the WTO.
Urban migration was also a driver of past super cycles, but fixed capital formation
probably did not reach the proportion of GDP seen in China.
Drivers of demand-domestic consumption
At least 50%, and perhaps 75%, of China’s copper demand is for domestic
consumption.
Figure 15. China's Copper Consumption, by use
OEM & General
48%
Infrastructure
24%
At least half of China’s
copper demand is for
domestic consumption.
Construction
28%
Source: Bloomsbury Mineral Economics.
12
China - The Engine of a Commodities Super Cycle - 31 March, 2005
Therefore, China’s copper demand is not export driven, nor is a result of a
relocation of manufacturing capacity from other countries.
This is also an important characteristic of past super cycles. For example, the super
cycle of the 1960s and early 70s faded as Japanese internal development matured,
even though exports continued to grow. It is also notable that the boom of the
Asian tigers in the early 1990s, which was an essentially export driven
phenomenon, did not translate into a super cycle.
Supply Responses in Super Cycles
Copper mine supply from 1900 is shown in Figure 16.
Figure 16. Copper mine production since 1900
14,000
Supply increases in
super cycles.
Australasia
12,000
Latin America
10,000
N.America
6,000
Asia
kt
8,000
4,000
Africa
2,000
Europe
1990
1995
2000
1985
1975
1980
1970
1955
1960
1965
1945
1950
1940
1930
1935
1920
1925
1910
1915
1900
1905
0
Source: Metallstatistik; WBMS; Smith Barney estimates.
This is combined with demand to show supply-demand balances in Figure 17.
Figure 17. Copper Supply-Demand Balance & Price
1200
400
1000
350
800
Super cycles are not
associated with
persisting supply
deficits.
600
300
US¢/lb
200
0
200
-200
150
Surplus/Defict (kt)
400
250
-400
-600
100
-800
50
-1000
Surplus/Deficit
2003
2000
1997
1994
1991
1988
1985
1982
1979
1976
1973
1970
1967
1964
1961
1958
1955
1952
1949
1946
1943
1940
1937
1934
1931
-1200
1928
0
Price
Source: Metallstatistik; WBMS; Smith Barney estimates.
13
China - The Engine of a Commodities Super Cycle - 31 March, 2005
From an analysis of this data, we conclude that super cycles are not associated
with persisting supply shortfalls. Supply typically expands in response to growing
demand, but production costs also increase. This supports our view that super
cycles are demand driven. We believe this is the outlook for the present super
cycle, as discussed below.
Changes in the sources of copper supply since 1900 is illustrated in Figure 18.
Figure 18. Copper mine production - regional contributions
100%
Australasia
80%
The geographical centre
of production shifts over
time as the resources of
each province are
depleted.
Latin America
60%
N.America
Asia
40%
Africa
20%
Europe
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
1945
1940
1935
1930
1925
1920
1915
1910
1905
1900
0%
Source: Metallstatistik; WBMS; Smith Barney estimates.
The chart highlights how the geographical centre of copper production shifts over
time as the economically accessible resources of major mining provinces are
depleted. North American production dominated global supply in the first half of
th
the 20 century, eventually giving way to Africa – a major producer in the 1950s
and 60s. Latin American has been the pre-eminent copper-producing region since
the early 1990s
There is no known mineral province comparable to that of Latin America that can
be developed over the next 5-10 years to deliver new supply at relatively low cost.
Influence of Technology
The rapid advancement of technology is sometimes cited as a dampening influence
on an emerging super cycle. However, on-going technical innovations have been a
long-standing feature of the global mining industry – they are not a recent
phenomenon.
14
China - The Engine of a Commodities Super Cycle - 31 March, 2005
Figure 19. Copper industry developments - a history
Technical advances
have been a longstanding feature of the
global mining industry.
1862
1898
1906
1930
1963
1968
1972
1974
1984
1990
1990
1995
1997
1998
Bingham Canyon discovered
Bulk mining introduced at Kennecott using steam-powered shovels
Bingham Canyon start-up
Introduction of open pit mining
Bougainville discovery
SxEw introduced in USA
Ertsberg start-up
Bougainville start-up
Ok Tedi start-up
Escondida; Olympic Dam start-ups
Chilean production expands substantially
La Candelaria start-up
El Abra start-up
Collahuasi start-up
Source: Smith Barney.
While it is difficult to identify new technologies under development, they are
likely to have the same impact on the copper market (increasing supply, lowering
costs) as did solvent extraction and electro-winning in the 1990s.
The Capital Cycle
Capital spending typically lags the commodity price cycle (Figure 20).
Figure 20. Metals & Mining Capex
50
250
40
200
Capex (US$bn)
35
30
150
25
20
100
15
10
50
Metals & Mining Capex (Real 2004)
5
Base Metals Real Price Index
45
The capital cycle lags
the commodity price
cycle.
Base Metals Real Price Index (2004=100)
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
0
1978
0
Source: Smith Barney estimates.
The base load of stay-in-business capital spending is around US$15bn per year,
although there are indications that this is increasing. Peaks above this base
represent spending on new projects.
The excess capital expenditure of the late 1990s, combined with a slowdown in
demand following the Asian crisis, contributed to the subsequent prolonged
recession in commodity markets that extended from the mid 1990s until 2004.
This pattern reflects that illustrated in Figure 5.
A capital cycle is underway at present. But, increasing production costs mean that
higher capital expenditure is likely to translate into a relatively small expansion in
production. Furthermore, increasing lead times due to environmental permitting
15
China - The Engine of a Commodities Super Cycle - 31 March, 2005
and more stringent capital budgeting will delay the expansion of current
operations.
Exploration expenditure is also increasing. Again though, long lead times threaten
to delay the conversion of these projects into new supply sources (Figure 21).
At this stage, we see no sign of oversupply emerging.
Figure 21. Worldwide Non-ferrous Exploration Budgets
6
5
US$bn
4
3
2
1
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
0
Source: Metals Economics Group.
Production costs and margins
Data on production costs and margins in past super cycles has proved elusive.
However, we surmise that cost increased as production rose to meet demand.
Over the last 25 years or so, production costs have been declining on a trend basis,
as have prices (Figure 22).
Figure 22. Copper Costs, Prices & Margins
240
220
Real cash cost (2004 US¢/lb)
Cost & Price (US¢/lb)
200
Real LME Cu price (2004 US¢/lb)
180
160
140
120
100
80
equilibrium price
60
40
equilibrium cost
20
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
0
Long-term
Source: Brook Hunt; CRU; Smith Barney estimates.
16
China - The Engine of a Commodities Super Cycle - 31 March, 2005
Over the last year, costs have increased sharply – although largely from cyclical
factors including fuel prices, consumables and labour.
However, we also believe production costs are likely to continue rising on a
structural basis. The additional supply required to meet higher trend demand
growth will be higher cost.
Margins are expected to remain constant, and prices will be driven higher.
Implications for long-term prices
We believe this environment means that it will be appropriate to adopt higher
long-term (equilibrium) prices for project evaluation and discounted cash flow
valuations.
Higher trend demand growth will be met by higher cost production. Industry
average margins will remain constant. As a consequence, prices will trend higher.
Our approach to deriving long-term prices differs from traditional mineral
economics dogma.
Dogma dictates that the equilibrium price is the capital cost of new production,
plus a return on the investment. The flaws we see with this are that 1) it ignores
the influence of existing production capacity, in which costs are largely
depreciated and 2) mining operations rarely return their cost of capital.
Our approach to determining long-term prices is shown schematically in Figure
23.
Figure 23. Cash Costs vs. Prices – a shift in the curves
Cost & Price
1.2
Long term price will rise
with increasing costs.
1
0.8
New forecast LT price
0.6
New forecast cost curve
Previously forecast LT price
0.4
Previously forecast cost
0.2
0
0
0.2
0.4
0.6
0.8
1
Cumulative
Production
1.2
Source: Smith Barney.
Given higher demand growth, the long-term price is a function of costs and
margins. If the average cost increases, and margins remain constant, the long-term
price will increase.
17
China - The Engine of a Commodities Super Cycle - 31 March, 2005
Implications for trough prices
A further consequence of the super cycle is that as the current business cycle
slows, prices will likely decline to a relative trough level set higher than those
reported for recent industry downturns (1993, 2001).
Figure 24. Cash Costs vs. Prices - parameters
Real cash costs
Real prices
Trend real price
Cost & Price
In the next downturn,
trough prices will be
higher than those of
previous cycles.
Trough margin
10%
Average margin
39%
Prev. equil price
05 US¢85
New equil price
05 US¢95
Prev. trough price
05 US¢65
New trough price
05 US¢72
Years
Source: Smith Barney estimates.
Iron ore – a different market
65
60
55
50
45
40
35
30
25
20
15
10
5
0
70%
equilibrium margin
60%
50%
equilibrium price
40%
30%
equilibrium cost
20%
10%
Cash cost (2004 US¢/Fe Unit)
Price (2004 US¢/Fe Unit)
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
0%
1994
Cost & Price (US¢/Fe unit)
Figure 25. Iron ore Costs, Prices & Margins
Long-term
Margin %
Source: Brook Hunt; CRU; Smith Barney estimates.
The history of iron ore costs and margins is starkly different from that of copper.
Its industry has seen sustained margin expansion. Persisting tight markets mean
that margins will probably be sustained.
18
China - The Engine of a Commodities Super Cycle - 31 March, 2005
Figure 26. Appropriate Long-term (Equilibrium) Commodity Prices - 2005$
Commodity
Copper
Aluminium
Nickel
Zinc
Lead
Oil
Iron Ore (Lump)
Coking coal
Thermal coal
Unit
Value
US¢/lb
US¢/lb
US$/t
US¢/lb
US¢/lb
US$/bbl
US¢/Fe unit
US$/t
US$/t
95
70
3.50
50
27
28
45
62
33
Source: Smith Barney estimates.
19
China - The Engine of a Commodities Super Cycle - 31 March, 2005
Appendix 1: References
Bloomsbury Mineral Economics (BME), 2005
[Online] Available at: http://www.bloomsburyminerals.com/
CEIC Data Company, 2005
[Online] Available at: http://www.ceicdata.com/
Groningen Growth and Development Centre (GGDC), 2005
[Online] Available at: http://www.ggdc.net/index-dseries.html
MADDISON, A. 2001, The World Economy - A Millennial Perspective, OECD
Development Centre, Paris
Metallstatistik (historical commodity production data, 1900-1990), subscription
to combined WBMS & CRU research
Metals Economics Group, 2005
[Online] Available at: http://www.metalseconomics.com/meglogin.html
National Bureau of Statistics of China, 2005
[Online] Available at: http://www.stats.gov.cn/english/
U.S. Department of Labor, 2005
[Online] Available at: http://www.bls.gov/
U.S. Geological Survey (USGS) 2005
[Online] Metal Prices in the United States through 1998, Available at:
http://minerals.usgs.gov/minerals/pubs/metal_prices/
World Bank, 2005
[Online] Available at: http://www.worldbank.org/data/
World Bureau of Metal Statistics (WBMS), (compiled, 1980-present), World
Metal Statistics Monthly Reports, WBMS, London
20
China - The Engine of a Commodities Super Cycle - 31 March, 2005
Appendix 2: Historical Price Data Details
Copper
1850-96, New York price for Lake copper (99.9%-pure copper), in Loughlin, G.F., Prefatory note on the report on gold, silver, copper,
lead, and zinc, Mineral Resources of the United States 1922, Part I, U.S. Geological Survey, 1925, p. 127a.
1897-98, New York price for Lake copper (99.9%-pure copper), in Engineering and Mining Journal.
1899-1908, Electrolytic (99.9%-pure copper) refinery price in New York, in Engineering and Mining Journal.
1909-22, Electrolytic (99.9%-pure copper) domestic f.o.b. refinery, in American Metal Market.
1923-72, Electrolytic (99.9%-pure copper) domestic delivered to Connecticut price, in American Metal Market.
1973-77, U.S. producer electrolytic (99.9%-pure copper) wirebar, in Metals Week.
1978-2004, U.S. producer cathode (99.99%-pure copper), in Metals Week (1978-92) and Platt’s Metals Week (1993-2004).
Aluminium
1850-94, in U.S. Geological Survey Minerals Yearbooks and predecessor volumes.
1895-98, 98%-pure aluminum, in American Bureau of Metal Statistics.
1899-1900, 99%-pure aluminum ingot, in American Bureau of Metal Statistics.
1901-04, 99.75%-pure aluminum ingots in 2,000-pound lots, in American Bureau of Metal Statistics.
1905, 99.75%-pure aluminum ingots in 2,000-pound lots, in American Metal Market/Metal Statistics, 1955.
1906-19, 99%-pure No. 1 aluminum ingots, in American Metal Market/Metal Statistics, 1955.
1920-21, 98%- to 99%-pure aluminum, in American Metal Market/Metal Statistics, 1955.
1922-28, 98%-pure aluminum metal, in American Metal Market/Metal Statistics, 1955.
1929-35, 99%-pure aluminum metal, in American Metal Market/Metal Statistics, 1955.
1936-54, 99%-plus pure aluminum virgin ingot, in American Metal Market/ Metal Statistics, 1955.
1955-56, 99%-pure aluminum virgin ingot, in Engineering & Mining Journal.
1957-71, 99.5%-pure unalloyed aluminum ingot, in Engineering & Mining Journal.
1972, 99.5%-pure unalloyed aluminum ingot, in Metals Week.
1973-82, U.S. market spot price, in Metals Week.
1983-92, 99.7%-pure aluminum ingot, U.S. market spot price, in Metals Week.
1993-98, 99.7%-pure aluminum ingot, U.S. market spot price, in Platt’s Metals Week.
1999-2004, LME
1875-1904, New York price for Prime Western zinc (98% pure), in Ingalls, W.R., Lead and Zinc in the United States, McGraw-Hill, NY,
1980, p. 342.
1905-70, St. Louis/East St. Louis producer price for Prime Western zinc, in American Metal Market/Metal Statistics.
1971-79, U.S. Dealers Prime Western delivered price, in Metals Week.
1980-93, U.S. Dealers High Grade zinc (99.9% pure) delivered price, in Metals Week.
1994-2004, U.S. Dealers Special High Grade zinc (99.99% pure) delivered price, in Platt’s Metals Week.
Zinc
Nickel
1850-1912, Price of refined metal, as supplied by Inco Ltd.
1913-21, Price of refined metal, Historical Statistics of the U.S., Colonial Times to 1970, U.S. Dept of Comm, Census Bureau
1922-45, Price quoted by Inco for electrolytic Ni cathode at NY, in 2-short-ton minimum lots, in US Bureau of Mines Yearbook.
1946-47, Contract price to US buyers of electrolytic Ni cathode in carlots, fob. Port Colborne, Ont, incl. 2.50¢/lb duty, in US Bureau of
Mines Yearbook; 1948-61, Contract price to US buyers of electrolytic nickel cathode in carlots, fob. Port Colborne, Ont, incl. 1.25¢/lb
duty, in U.S. Bureau of Mines Yearbook. [duty halved on January 1, 1948]
1962-79, Contract price to U.S. buyers of electrolytic nickel in carlots, f.o.b. Port Colborne, Ontario, in American Metal Market.
Weighted average for the year. U.S. import duty of 1.25¢/lb was suspended September 27, 1965.
1980-93, LME cash price for primary Ni (min. 99.80%, cut cathodes, pellets, briquets, 6t lots), Metals Week [through June 14, 1993].
1993-2004, LME cash price for primary primary Ni (min. 99.80%, cut cathodes, pellets, briquets, 6t lots), Platt’s Metals Week.
Steel
1897-February 1987, hot-rolled carbon steel bars merchant, Pittsburgh base, dollars per cwt., in American
March 1987-1998, hot-rolled carbon SBQ (special bar quality) 1000 series, in American Metal Market.
1998-2004, Metal Bulletin
Source: USGS.
21
China - The Engine of a Commodities Super Cycle - 31 March, 2005
Notes
22
China - The Engine of a Commodities Super Cycle - 31 March, 2005
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