Download OUTLOOK FOR METALS AND MINERALS Full Year

OUTLOOK FOR METALS AND MINERALS
Full Year Results 2013
13 February 2014
Rio Tinto Economics & Markets
Highlights
Prices for most commodities finished 2013 below levels at the start of the year, but volatility
was much reduced compared to previous years. The likelihood of further macroeconomic
crises has been diminishing over the year, confidence is starting to return in the OECD and
there is a sense that developed economies are finally on the path of a more stable and
robust recovery. However, the tightening of global monetary conditions have seen concerns
in emerging markets materialised through currency falls and declining foreign exchange
reserves. Meanwhile, the Chinese economy is embarking on a gradual reform process,
resulting in slower growth albeit from a higher base. China’s government managed to
stabilise the economy to reach its 2013 target after concerns that growth was losing
momentum during the first half of the year.

Iron ore prices were less volatile in 2013 than each of the previous six years. During
2013 prices averaged $135/dmt CFR China, $5/dmt higher than the previous year as
Chinese steel production growth matched GDP growth.

The copper price fell in the first half of 2013 from $3.70/lb to $3.20/lb as mine supply
growth accelerated but then stabilised through the rest of the year.

Aluminium prices remained below the marginal cost of production during 2013 and
averaged $1850/t. At this level, around 25 per cent of ex-China production was cash
negative. Low LME prices have been partly offset by high regional premiums.

Thermal coal prices continued the declining trend of the past two years, as the
market remained well-supplied, recording a year-on-year fall of 10 per cent and
finishing the year on $86/t.

A strong recovery in Australian exports kept metallurgical coal under pressure with
average prices just below $150/t, a decrease of nearly 30 per cent on the 2012 price.
As we enter 2014, the consensus for global growth at 3.7 per cent has an increasingly
optimistic tone, although underlying structural fragilities remain. Imbalances within the
Eurozone are not resolved and although the financing of sovereign debt is less of a shortterm concern, overall debt levels are still high. Developed financial markets have responded
well so far to the tapering of Quantitative Easing in the US and the US Federal Reserve is
signaling a very gradual normalisation process, but the unwinding of unconventional
monetary policies remains a potential source of renewed markets volatility.
The recovery in developed markets should be supportive of global commodity demand in
2014, although short-term cycles in China, and in particular credit flows into the commodity
intensive Chinese property sector, remain key factors to watch. For some commodities
healthy demand trends will be required to balance the addition of new capacity as the
recovery in supply growth observed last year is expected to continue into 2014. Although the
industry has actively been reducing capital expenditures during 2013, this is the lagged
response to previous years of high investment rates.
Looking further out, we maintain a favourable perspective for long-term commodity demand
while the complexity of future mining projects continues to increase. As noted earlier,
China’s growth is slower but from a much stronger base and prosperity in other developing
economies remain on an upward path. We still estimate that China’s crude steel
consumption will peak at around 1 billion tonnes towards 2030.
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Daily commodity spot prices
Index (1 Jan 2009 = 100)
400
350
Copper
Aluminium
Gold
Thermal Coal
Oil (Brent)
Spot iron ore (62% Fe, FOB)
300
322c/lb
250
$109/bbl
200
$111/t
150
$1290/oz
$1664/t
100
$77/t
50
Prices as at 11th Feb 2014
0
Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan
09 09 09 09 10 10 10 10 11 11 11 11 12 12 12 12 13 13 13 13 14
Source: Bloomberg, Platts
Macroeconomic overview
Macroeconomic themes
The global economy remained muted in 2013, managing just to match the previous year’s
moderate growth performance of 3 per cent. Growth remained uneven across regions but in
general there is a sense that the macroeconomic environment became increasingly stable
through the year, with growing optimism, particularly in the United States, that the recovery
is underway.

Despite concerns during the first half of the year, China’s economic growth in 2013
managed to remain on par with 2012 growth thanks to the effects of a substantial
liquidity injection on the property market. Reform remains firmly on the agenda,
carrying some short term risks, but there is good reason to believe that the Chinese
government will maintain an achievable growth target around 7.5 per cent for 2014.

Improving economic growth prospects in the US and Europe and rising expectations
of Quantitative Easing (QE) unwinding throughout the year have resulted in a sharp
reversal in global capital flows, with funds flowing out of emerging markets and
precious metals.

While growth in key developed economies was below expectations in the first half
of 2013, growth accelerated in the second half with indications that the momentum
will be carried through into 2014. The risk of an emerging market crisis related to QE
unwinding has been increasing.

Currencies have been influenced by the reversal in capital flows, with the Australian
currency depreciating by around 14 per cent against the US dollar over the course of
the year. Effects of the US recovery and QE tapering on the US dollar are expected
to remain an important dynamic of currency markets in coming months.
GDP growth
China’s economic growth was short of initial expectations in the first half of 2013 as the
government focused energy on reform, reigning in government spending, hot money inflows
and introducing new property tightening measures. A credit scare in June, along with
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concerns that the annual GDP growth target of 7.5 per cent might not be achieved, resulted
in a mid-year relaxation in policy, with the government announcing a new social housing
program and loosening credit. Despite policy loosening in mid-2013 the political agenda
shifted firmly back to reform after the third Party Plenum in November.
China’s new leadership set the agenda for a gradual reform process at the third Party
Plenum meetings in November 2013. After several years of expansion dominated by
investment, the country’s economic growth model is beginning to rebalance towards
consumption. While planned reforms should gradually deliver a more sustainable model, the
pace of growth is expected to continue to slow gradually.
Despite a significant contraction in fiscal spending, US growth looks to have achieved initial
expectations in 2013 with a strong rebound in construction activity. Growth prospects for
2014 look very encouraging given the sharp fall in the unemployment rate towards the end of
the year, even if this was partly due to a reduction in participation rates.
Japan’s growth considerably exceeded expectations in 2013 thanks to investor optimism in
the domestic QE policy and improved trade competitiveness – assisted by a sharp
depreciation in the exchange rate. The effects of monetary easing should continue to work
their way through the Japanese economy in 2014.
Prospects have also improved in the Eurozone with the economy recovering from recession
and sovereign yields in peripheral regions continuing to fall throughout the year. Despite the
market optimism, banking fragilities and labour competitiveness issues remain a concern.
Consensus expectations are of stronger growth in emerging markets such as India and
Brazil in 2014 (5.4 per cent and 3.0 per cent respectively), while consumer price inflation in
many emerging markets is expected to ease. However, the risk of an emerging market crisis
remains as concerns have increased recently with Federal Reserve tapering, a reduction in
emerging market confidence, equity and currency declines and the resulting pressure on
foreign exchange reserves.
Currencies
The US dollar and euro have strengthened against both emerging market and commoditybased economies as improving growth prospects and expectations of QE unwinding in the
US resulted in capital flows returning to the US and Europe.
The Australian dollar weakened as a result of lower than expected economic growth in China
and interest rates cuts by the Reserve Bank of Australia. Whilst volatility remains high, it
does look like there has been a fundamental downward shift in the Australian dollar’s
perceived market value – this could ease the margin pressure on Australian producers. The
Canadian dollar has not depreciated to the same degree as it is not as reliant on Chinese
growth or experienced a decline in policy rate expectations.
Commodity markets
Costs
A key feature of the mining industry in 2013 has been a renewed focus on managing margin
compression through operating cost reductions. Heightened risk aversion and capital
constraints are also resulting in capital expenditure rationalisation. For existing operations
there is a greater attention on costs and driving productivity improvements.
The curtailment in capital expenditure across the industry is being felt by Heavy Mobile
Equipment (HME) manufacturers with equipment shipments at the lowest level since 2009.
Sales forecasts continue to decline with little signs of a short-term recovery. Manufacturers
are responding by reducing employment levels, a continued focus on maintenance and
maximising the installed machine base. Meanwhile lead times have been relatively stable
throughout 2013, for example 4-6 months for haul trucks.
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Aluminium, alumina and bauxite
In Q4 2013, aluminium prices fell to their lowest level in over four years, averaging $1,815/t
due to a combination of factors including overcapacity in China and record high London
Metal Exchange (LME) inventory levels. However, low prices have been partly offset by
strong increases in premiums. Smelter curtailments and strong demand have moved the
market ex-China into a modest deficit with load-out bottlenecks at warehouses and a tight
scrap market.
Premiums have rallied again at the start of 2014 despite the proposed changes to LME
warehousing rules. These aim to cut the length of queues at LME warehouses and reduce
the incentive to purchase metal for storage, which is expected to increase metal availability.
For the meantime though, the strong contango yield continues to incentivise stock financing
with LME stocks rising 5 per cent to 5.5 Mt in 2013. Total inventories ex-China are
equivalent to more than 16 weeks of demand.
Aluminium is expected to exhibit strong consumption growth relative to other commodities
over the medium term. This is predominantly driven by growing intensity of use in the
transportation, construction and consumer durables sectors. Despite this positive demand
setting the aluminium market looks to remain well supplied, as economic incentives drive the
addition of further new smelting capacity in north-west China.
The Indonesian unprocessed ore export ban has come into full effect as of January 2014,
and, while there is still some uncertainty over amendments, exemptions and enforcement,
this represents a key upside risk for bauxite and alumina prices. Approximately 75 per cent
of China’s bauxite imports are currently shipped from Indonesia, with the balance mostly
from Australia. Chinese refineries have built up their inventory positions during 2013 in
anticipation of trade disruptions. Further positive price support for bauxite could come from
the pressure that China’s strong alumina production growth is putting on its constrained
domestic bauxite resources.
Copper
The LME copper price fell in the first half of 2013 from $3.70/lb to $3.20/lb and fluctuated
around this level through the rest of the year, before climbing to $3.35/lb by the year end.
Global copper mine supply grew by 6.5 per cent in 2013, led by Africa and Latin America
which each contributed an incremental 300kt. This compares to growth of 1 per cent per
annum during 2005-2011. Chile registered strong growth of about 6.4 per cent through to
November 2013. In addition to the ramp-up from new projects the high production levels
were supported by a lower level of mine disruptions (4 per cent) compared to recent years
(closer to 6-7 per cent).
While the strong growth in mine supply pushed the concentrate market into surplus, several
factors combined to maintain a tighter cathode market: global demand growth was healthier
than expected, scrap generation was relatively low and some bottlenecks appeared at the
smelting stage. As a result of this, copper LME stocks have been declining since July 2013.
Rising Treatment and Refining Charges (TCRCs) indicate that 2014 is likely to be another
year of concentrate surpluses as additional copper projects ramp-up and scrap generation
recovers to previous levels in the developed world. Further out we expect the market to
return to equilibrium as copper miners continue to face declining grades, stakeholder
pressures and project delays.
Iron ore
Spot iron ore prices were relatively stable in the second half of 2013. From a July start of
$116/dmt CFR China, the Platts index increased by $15/dmt throughout July before settling
into a tight $10/dmt trading range around $135/dmt for the remainder of the year. Stability in
the iron ore price was brought about by strong steel production in China counterbalancing
growing seaborne supply.
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Strong iron ore prices were brought about by an 8 per cent expansion in China’s crude steel
production in 2013 which was driven by sustained growth in property and infrastructure
spending. Providing further support to China’s iron ore demand was a steady rebuild in iron
ore inventories held at steel mills and ports in the second half of 2013.
China experienced a rapid increase in housing sales and prices throughout the year owing to
a substantial increase in credit in late 2012 and early 2013. This in turn supported a revival
in land sales, housing starts and floor space under construction across China which has
flowed into higher end use demand for steel.
Infrastructure spending was also a strong contributor to steel demand growth in 2013 with
fixed asset investment in infrastructure growing at over 20 per cent. Investment in railway
infrastructure was the main contributor to growth in the first half of the year with investment
in utility and transport infrastructure supporting growth in the second half of 2013. Growth in
fixed asset investment in infrastructure slowed gradually over the second half of 2013.
Accompanying strong demand growth from China has been equally robust seaborne supply
expansions from traditional suppliers, particularly in the second half of 2013. Australia
contributed to most of this supply growth with exports increasing by 17 per cent year on
year. Brazilian exports were largely flat year-on-year although a strong second half, with
exports increasing 25 per cent half-on-half, was a major contributor to the overall growth in
seaborne supply in the second half of 2013.
The outlook for 2014 points to continued growth in China steel demand while the main iron
ore seaborne producers continue to steadily ramp up supply. Short term changes in China’s
inventory cycles and supply variations are likely to result in continued iron ore price volatility.
Thermal coal
Prices globally continued the trend of the past two years with the Newcastle Index recording
a year-on-year fall of 10 per cent, finishing the year on $86/t. The price decline culminated
between June and October with prices spending time below $80/t for the first time since Q4
2009 before stabilising in second half of 2013.
As with 2012 the price declines were not so much a result of weak demand but robust
supply, principally out of Australia and Indonesia in the first half of 2013, with Indonesia
exports notably exceeding 400Mt for the first time. A strengthening US dollar and concerted
effort to compress costs allowed traditional supply hubs to remain largely cash positive,
albeit with thinner margins than previous years. The sluggish supply response in the face of
falling prices was in part due to take-or-pay infrastructure obligations factored into closure
decisions.
Looking to 2014, prices will depend on the extent to which swing supply from the US and
Indonesia soak up incremental demand. Recent commentary on a stricter Chinese coal
policy clearly has air pollution as the key driver. This will not necessarily impact on China’s
national total demand for coal: we continue to see total coal demand in China growing
through this decade.
Metallurgical coal
Premium hard coking coal prices remained under pressure in the second half of 2013 as the
market continued to be characterised by excess supply. After hitting a year low in June of
around $130/t, prices for prime hard coking coal showed some strength on the back of a
restocking activity in China. Nevertheless, prices have since fallen again with spot prices at
the end of December returning to levels not seen since 2009.
Excess supply continues to impact the coking coal market with nearly all major exporting
countries increasing supply in 2013. Australian producers led the supply growth with exports
increasing by 18 per cent year on year as production was supported by a renewed focus on
productivity across the supply chain, low rainfall and minimal disruptions. North American
and Russian supply was also robust with increasing exports from Canada and Russia more
than offsetting a moderate fall in US exports. In China, domestic production of washed
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coking coal is estimated to have grown at nearly 5 per cent in 2013 led by continued supply
expansion in Shanxi.
Looking forward, seaborne supply growth is expected to moderate in 2014 with slowing
growth from Australia and Canada expected to be met with further reductions in US supply.
Other commodities
The uranium market in 2013 continued its downward slide that begun following the
Fukushima nuclear disaster in March 2011 and saw the spot price fall below $35/lb in July
for the first time since 2005. From there it traded in a narrow band to finish the year at
$34.50/lb and record a year-on-year decline of 20%.
Uranium upside is limited in the near term due to strong utility inventories and a persisting
weak demand environment. Further out a price recovery will be prompted by falling supply
growth, the return of Japanese nuclear fleet to operation and increasing momentum in the
Chinese nuclear build.
The market for titanium dioxide and zircon has softened further over the course of the year
as the industry continues to deal with high levels of stocks. Pigment producers are believed
to have absorbed a large portion of pigment inventories in 2013 but a stock overhang
remains on the feedstock side despite some curtailments in production volumes last year.
The normalisation of pigment stocks should support a gradual drawdown in feedstock
inventories as underlying demand recovers.
Polished diamond prices were relatively stable throughout 2013 whilst slightly greater
variance was experienced in rough diamonds. In the medium to long run, strong demand
growth is expected, especially from India and China, as disposal incomes rise and increase
consumer luxury demand.
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