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Metal Prices, Currencies & Global Growth –
Outlook 2013-15
Opportunities for the Territories
Patricia M. Mohr
Vice-President, Economics
& Commodity Market Specialist, Scotiabank
Prospects North 2013
Northern Canada’s Premier Business Conference
Northwest Territories Chamber of Commerce,
Northern Aboriginal Business Association & Le Conseil de
Développement Économique des Territoires du Nord-Ouest
Explorer Hotel
Yellowknife, Northwest Territories
September 10, 2013
Scotiabank’s Commodity Price Index – Rebounds Modestly in 2013YTD,
but remains 14.4% below The Near-Term Peak in April 2011
Scotiabank Commodity Price Index1
240
240
Index: Jan 2007=100
220
220
New record high
in July 2008
200
April
2011
180
Decline From April 2011
Near-Term Peak -14.4%,
160
140
100
80
140
120
-46% in
2008: July
to Dec.
60
40
October 2001
Bottom
20
80
60
40
20
0
0
72
76
80
84
88
92
96
00
The subsequent decline in commodity
prices from April 2011 to December
2012 at - 19.9% was less than half the
slide during the 2008 recession.
100
All Items1
Arab Oil
Embargo
180
160
July 2013 +4.1% m/m
+6.3% yr/yr
120
200
Scotiabank’s Commodity Price Index
rose to a near-term peak in April 2011
– just prior to financial market
concern over excessive Eurozone
sovereign debt and the negative
impact on global economic growth.
04
08
12
1. A trade-weighted U.S. dollar-based Index of principal Canadian
commodity exports, including Oil & Gas (39.9% weight), Metals &
Minerals (30.1% weight), Forest Products (14.66% weight) and
Agricultural commodities (15.35% weight).– Shaded areas represent
U.S. recession periods. Data to July 2013.
Despite considerable volatility, the All
Items Index has edged up 1.2% YTD
over the previous 7 months of 2012
and has climbed 6.3% yr/yr. While it is
too early to say that commodity prices
have bottomed, the correction since
April 2011 – linked to austerity-led
recession in the southern Eurozone, a
sub-par U.S. economic recovery and
new mine supply commissioned in a
lacklustre global economy – could be
largely over later this year.
2
Commodity Prices Started 2013 on Positive Note, But Markets
Stayed Skittish
After losing significant ground in late 2012, Scotiabank’s Commodity Price Index
started 2013 on a stronger note, rising 4.2% m/m in January. ‘Riskier’ assets such as
commodities and equities were buoyed by the 2012:Q4 pick-up in China’s economy –
with GDP accelerating to 7.9% from 7.4% in Q3, accompanied by raw material restocking -- a partial resolution of the U.S. ‘fiscal cliff’ (extension of the Bush-era tax
cuts – excepting the payroll tax reduction – and stepped-up taxes on high-income
earners) and expectations of some pick-up in the U.S. economy by 2013:H2.
However, the Scotiabank Commodity Price Index inched down again by 0.7% m/m in
February alongside another bout of ‘risk aversion’ linked to financial developments in
Cyprus. China’s State Council – concerned over escalating residential property prices
also announced a five-point plan to contain prices, including a 20% capital gains tax on
housing sales, unnerving financial markets. Residential construction has an important
impact on China’s demand for steel rebar and metals.
The Scotiabank Commodity Price Index picked up again in March 2013 (+1.6% m/m), as
a further surge in lumber and OSB prices (a panelboard used in U.S. residential
construction) and slightly firmer natural gas prices more than offset weaker base
metals, precious metals & iron ore prices. While North American lumber & OSB prices
have corrected seasonally in recent months, we expect forest products construction
materials to rally back and climb irregularly higher through 2015. Lumber & OSB are
likely to be one of the most lucrative of the commodity market sectors.
3
Metal Prices Ease in 2013, As New Supplies Come On Stream
In April, commodity prices lost ground again amid a sharp mid-month correction in
gold prices – triggered by concern that Cyprus might sell 10t as part of its bailout
package, raising the question of whether other distressed euro-zone countries such as
Italy might sell gold (it does not appear to have occurred).
The Scotiabank Commodity Price Index then rallied back in May (up 1.9% yr/yr), as the
discount on ‘Western Canadian Select heavy oil’ off WTI narrowed markedly. This partly
reflects the increasing use of rail to reach more lucrative markets on the USGC and in
Eastern Canada, taking pressure off Canada’s fully-utilized export pipeline system.
However, global commodity markets, as well as bonds & equities, came under renewed
pressure on June 20-21, after comments from the Fed Chairman that, in view of an
expected stronger U.S. economy going forward, the Fed may begin withdrawing some
of its US$85 bn ‘bond purchase program’ by late 2013, possibly ending ‘quantitative
easing’ by mid-2014. A backing-up in longer-dated U.S. interest rates triggered a
stronger U.S. dollar, creating ‘headwinds’ for many dollar-denominated commodity
prices.
A recent ‘shortage of liquidity’ in China’s banking system, and prospects for a less
accommodative monetary policy in China to discourage ‘shadow banking’, also
unnerved commodity markets. The overnight inter-bank rate spiked as high as 30% in
mid-June, though rates fell back to normal levels with an ending to the liquidity crunch.
4
‘Bull-Run’ in Commodity Prices Expected To Return in Second
Half of the Decade
Base metal and gold prices increased again in August 2013 and world economic growth
should strengthen moderately in 2014. However, prices for several key base metals
such as copper may lose further ground in 2014, as new mine development gradually
comes on stream, based on capital spending commitments made some time ago.
On a more positive note, zinc should outperform mid-decade due to significant mine
depletion. Nickel prices could also rebound in 2014, as Indonesia’s ban on
unprocessed ore comes into effect, ending the recent stockpiling of nickel-containing
ore in China (for Nickel Pig Iron) -- a development which has unnerved the nickel
market. International potash shipments rebounded strongly in early 2013, though the
exit of Uralkali from the BPC marketing arrangement points to softer prices in the
second half of 2013.
The global mining industry has entered a period of more cautious and disciplined
capital spending to boost returns for shareholders. Financing for junior mining
companies will remain tight in the coming year. Some new mine projects have been
deferred – this development combined with ongoing demand growth in China and
‘emerging Asia’ will set the stage for a return of the ‘Bull Run’ in base metal prices in
the second half of the decade.
M&A activity in mining may heat up, as companies divest non-core holdings to focus on
better cost and financial performance for shareholders.
5
China’s Purchasing Manager Index
Drives Sentiment On Prospects For Commodity Markets
65
65
Values over 50 indicate expansion
60
55
60
U.S.
China
50
55
50
Euro zone
45
45
Germany
40
China’s Official PMI in August: 51.0,
after 50.3 in July
40
35
35
30
30
09
10
11
12
Source: Markit, Scotiabank Economics.
Data to August 2013.
13
Global Purchasing Manager Indices
(PMIs) lost considerable momentum in
the summer of 2012, reflecting declining
business ‘confidence’ worldwide, with
buyers deferring orders and liquidating
inventories.
The PMI for manufacturing in China
moved back over the 50 mark in October
– indicating an end to inventory
reduction and moderately stronger
growth in 2012:Q4. China’s GDP growth
picked up to 7.9% yr/yr in 2012:Q4 from
7.4% in Q3, yielding a ‘soft-landing’ of
7.8% for 2012 as a whole.
China’s economy lost momentum again
in 2013:Q1, with GDP decelerating to
7.7% yr/yr and 7.5% yr/yr in 2013:Q2.
After another bout of concern over a
further slowdown, China’s economic
indicators turned up in July (including
the Official PMI, industrial production,
export & import data and the HSBC Flash
PMI for August) – lifting base metal
prices in August.
6
China Industrial Production:
China -- Vital to Global
Commodity Markets
30
Jan-Feb 2009
30
yr/yr % change
China – Industrial
20
Production*
*3 mth moving avg.
20
Mar 2009
July 2009
Dec 2009
3.8% yr/yr
(a bottom)
8.3%
10.8%
18.5%
10
10
0
0
2010
14.4%
China tightens monetary policy.
-10
2011
13.7%
Q1 2012
Q2 2012
Q3 2012
Q4 2012
11.9%
9.5%
9.1%
10.0%
Q1 2013
Q2 2013
July
9.6%
9.1%
9.7%
G7 Industrial
Production
-10
-20
-20
98
00
02
04
06
08
10
12
14
China’s Share of Global Consumption in
2013 Compared with the United States
(in brackets)
Copper
43.1%
(9.1%)
Nickel*
Zinc
45.2%
(8.4%)
Aluminium
46.6%
(7.8%)
47.0%
(10.8%)
Four Base Metals: China 45.8%, USA 9.9%.
*Japan 9.7%; excluding inventory accumulation in China
Source: Scotiabank Commodity Price Index.
G7 Industrial Production)
U.S.
Japan
Germany
+1.4% (July)
-2.3% (July)
+0.2% (July)
7
14
GDP (% per annum)
Global Growth Should Strengthen in 2014,
After Staying in the Slow Lane in 2013
yr/yr % change
12
A ‘seismic’ shift in global growth has
occurred from the G7 to ‘emerging
markets’ (especially in Asia).
10
8
2008
2009
2010
2012
2013f
2014f
WORLD*
2.8
-0.6
5.2
3.2
2.8
3.4
PERU
10.1
1.1
8.8
6.3
5.7
5.7
CHILE
3.3
-1.0
5.8
5.6
4.6
4.4
CANADA
0.5
-2.5
3.2
1.7
1.7
2.3
0.0
-2.6
3.0
2.8
1.6
2.6
CHINA
9.6
9.2
10.4
7.8
7.3
7.3
INDIA
5.2
7.7
9.0
5.1
5.0
5.8
JAPAN
-1.1
-5.5
4.5
2.0
1.7
1.7
EURO
ZONE
0.5
-4.1
1.8
-0.5
-0.5
0.6
2010
2011
2012
6
UNITED
4
STATES
2
0
-2
World
China
United
States
Japan
Euro Zone
In 2014, world growth should strengthen to 3.4% –
moderately supportive of stronger commodity
prices. U.S. GDP 2.6%, China 7.3%.
U.S. Federal Gov’t Deficit: FY2012 US$1.087 tr;
2013F US$680 bn– helping to keep bond yields
low.
*Scotiabank estimates. Average 1988-1997: 3.4% p.a. prior to the
“economic take-off” in China and India.
8
ONCE IN A DECADE CHANGE IN LEADERSHIP IN CHINA –
As Important To The Global Growth Outlook
As The U.S. Presidential Election
November 8-15, 2012 – date of the 18th National Congress of the Communist
Party of China, where a new leadership was established for only the fifth time
since Mao Zedong – followed by the National People’s Congress (parliament)
in March 2013. A large number of officials have changed.
New Fifth Generation Leadership:
President (Head of State and Secretary-General of the Communist Party of
China):
Mr. Xi Jinping; previously Mr. Hu Jintao
Prime Minister (Head of Government):
Mr. Li Keqiang, previously Mr. Wen Jiabao.
9
China – Policy Continuity Expected Under New Leadership
China is expected to continue pursuing the economic initiatives in the 12th Five-Year
Plan, unveiled in March 2011, though the new leadership will seek more market-related
solutions (less central planning & government involvement -- including in the banking
sector) -- be more ‘populist’ and emphasize government over party interests. Mr.
Jinping will pursue the national “dream”.
The 12th Five Year Plan (2011-15) seeks more ‘balanced’ economic growth – with less
emphasis on export expansion & investment and greater focus on domestic consumer
spending, development of the ‘service’ industries including the financial sector and
‘New Economy’ growth; other key objectives -- productivity gains through ‘economic
restructuring’ – e.g. closure of smaller, less efficient plant & rationalization into larger,
lower-cost entities (the steel & iron ore industries); reducing industrial energy intensity;
a focus on developing the Western & Central parts of China, away from the heavily
industrialized Eastern & Coastal areas, as initiated by President Hu Jintao; raising
household incomes & living standards and building an environment-friendly society.
In practice, progress on ‘rebalancing’ China’s economy towards domestically-led
growth (e.g. via consumer spending) was not significant in 2012. Retail sales slowed to
14.3% in 2012 from 17.1% in 2011.
What is evident is that China is no longer pursuing ‘economic growth at any cost’. A
subtle shift is underway, with China comfortable with a slower, more ‘marketdetermined’ advance (official target was 7.5% for 2012 and is at least 7% in 2013).
10
Dual Policy Agenda in 2013:H2 – De-Risk Financial Sector,
While Maintaining Growth Of At Least 7%
However, noticeably weaker economic indicators in China in August 2012 triggered a
RMB1 trillion (US$160 bn) infrastructure spending program – approved by the National
Development and Reform Commission (NDRC) -- about ¼ of the massive RMB4 trillion
announced in November 2008 in the face of the ‘Great Recession”. After reducing
inventories of raw materials and consumer goods last Summer and early Fall, China’s
economy picked up moderately in late 2012, bolstered by stronger infrastructure
spending as well as consumer incentives to buy power or fuel-efficient household
appliances and small cars.
In view of a recently lacklustre economy, China again announced a ‘mini-stimulus
package’ in July 2013, scrapping taxes on small business, reducing administrative
costs for exporting companies and creating new financing vehicles for private-sector
railway investment (bonds). Beijing will renew its push on affordable housing and
urban renovation.
In 2013:H2, Chinese policy makers have a dual agenda: meaningful deleveraging/derisking in China’s ‘shadow banking’ sector, while still ensuring at least 7% GDP growth.
Liquidity in the banking sector will remain relatively tight, but fiscal stimulus (increased
investment in affordable housing, urban infrastructure and railways) will support the
economy. China’s raw material demand in the Fall construction season should be
reasonably robust.
11
Medium-Term, The ‘Emerging’ Markets Will Remain
Supportive for Commodity Prices
Huge Potential for Oil & Metal-Intensive Motor Vehicle Sales in China
China’s population: 1.354 billion
Vehicle Penetration – 2011
(Vehicles per 1,000 people)
China
United States
Western Europe
Japan
India
70
793
588
580
20
Aluminium usage in automobiles in China
has recently been an average of 127.5kg
per vehicle compared with 145kg in the
USA. As such, there is good potential to
increase aluminium usage in China.
China’s potential GDP growth is slowing -- in 2012: 8.5%, 2015-20: 7.0%p.a., 2025-30: 5% p.a.
with less under-utilized labour & much slower capital formation (less build-out of the
manufacturing sector).
12
The Fed Is Determined to Strengthen U.S. Employment Recovery –
Accommodative Monetary Policy Until Unemployment Falls to Normal
Federal Funds –
Effective Rates
20
20
15
“Real” Federal Funds Rate
(Adjusted for Inflation)*
per cent
per cent
15
15
15
July 2013 = -1.04%
Average = 2.01%
10
10
Average
10
10
5
5
0
0
60
65
70
75
80
85
90
95
00
05
10
15
Federal Funds Target Rate is 0-25 bps in Sept 2013. Very low
funds rate will be warranted until U.S. unemployment rate falls
below 6.5% (currently at 7.3%). Scotia Economics does not
expect a tapering of Fed asset purchases of US$85 bn per
month until late 2013, though a gradual end to purchases of
longer-dated MBS and Treasury bonds is likely by mid-2014.
5
5
0
0
-5
-5
60 65 70 75 80 85 90 95 00 05 10 15
* Inflation-adjusted with the U.S. Personal Consumption
Deflator (PCE) and the core PCE. Shaded areas represent
U.S. recession periods. Fed intends to keep inflation
expectations 1-2 years ahead anchored at 2.5%.
13
Strong Auto Assemblies Buoy U.S. Industrial Activity In 2013,
But Employment Gains Have Been Sub-Par
U.S. Employment Growth
U.S. Industrial Activity Revives
10
yr/yr % change
15
million units, quarterly
8
yr/yr % change
2.0
2.0
14
U.S. Industrial
Production
6
13
4
12
2
11
0
10
-2
9
U.S.
Consumers
Replace
Aging Fleet,
A Trend
Likely to
Continue
-4
-6
-8
-10
-12
0.0
-1.0
7
6
-3.0
5
4
-16
2
08
0.0
09
10
11
12
13
U.S.
employment
recovery has
been 5-times
less than
normal.
U.S.
Payrolls
-2.0
U.S. Motor
Vehicle
Assemblies
3
07
1.0
8
-14
06
1.0
14
-1.0
-2.0
Latest Data:
Advance in
Payrolls
Aug/13
-3.0
+169,000
-4.0
-4.0
Gain in +2,206,000
Past Year
-5.0
-5.0
06
07
08
09
10
11
12
13
14
North American motor vehicle assemblies strengthened to 15.8 million units in 2012 (+17%) and are forecast to climb
to 16.5 million in 2013 (+4.4%) and 17 million in 2014 (highest since the 17.6 million peak of 2000). Output in Mexico
reached a record 3.1 million in 2012, lifted by Mexico’s free trade agreements with Japan, the EU and the USA. In
Canada, assemblies were 2.46 million in 2012, but have levelled off in 2013.
14
Currency Trends
Canadian Dollar Loses Ground
U.S. Dollar Trends
17
March 1973=100
US cents
160
160
euro: peak US$1.60
July 15, 2008
110
100
140
140
euro
90
120
120
US cents
Canadian dollar has slipped
below par to U.S. currency
alongside a somewhat
stronger U.S. dollar and a
weaker trade performance;
Canada’s triple-A credit
rating remains
supportive
16
15
14
Canadian Dollar
80
100
US cents
100
13
70
80
U.S. Dollar
Trade-Weighted
60
98
00
02
04
06
08
10
12
14
80
60
60
50
Chinese Yuan
12
11
98
00
02
04
06
08
10
12
14
Data to September 6, 2013: euro US$1.3162; Cdn$ = US$0.9619; US$ = 6.1195 Rmb. Expected stronger US dollar
against the euro, Sterling and the Japanese yen in 2013-14. A stronger U.S. dollar (e.g. against the Indian rupee)
creates ‘headwinds’ for dollar-denominated commodity prices.
15
Price Outlook (US$)
Gold Prices Likely Bottomed Just
Below US$1,200
2,000
2,000
US$ per ounce
1,800
+
1,800
New Record:
Sept 9, 2011 spot US$1,921.15
1,600
1,400
1,200
Jan. 21, 1980
peak US$850
1,000
1,600
March 17, 2008
US$1,032.70,
following collapse
of Bear Stearns
1,400
*
1,200
1,000
800
800
Gold Prices
London PM Fix
600
600
400
400
Potential Cyprus sale of 10t of gold,
triggers sharp selloff in mid-April.
200
200
0
0
75
80
85
90
95
00
05
10
15
London PM Fix on September 6, 2013: US$1,387.
Gold again corrected sharply in late June, when the Fed announced
that it might begin tapering its ‘bond purchase program’ (US$85 bn
per month) and likely end the program in mid-2014, falling as low as
US$1,180. While gold has rallied back with strong ‘physical’ demand
in China & Hong Kong and ‘geopolitical tensions’ in the Middle East,
gold could correct once more when the Fed finally reduces liquidity.
2007
2008
2010
2012
2013F
2014F
697
872
1,225
1,672
1,425
1,325
(1,275-1,350)
Gold prices had been on a ‘Bull Run’ since 2001 –
with high government debt and deficits triggering a
loss of investor confidence in paper currencies (the
two reserve currencies – the U.S. dollar and euro).
Gold prices drifted lower through most of 2012, with
traders awaiting QE3. However, announcement of
a third round of ‘quantitative easing’ by the Fed
(QE3), combined with the ECB’s proposed bond
purchase program, propelled gold back to a high of
US$1,791.75 on October 4, 2012 in London.
Gold languished again in early 2013 due to 1) a
shift of investor interest from gold to equities in
anticipation of a moderate pick-up in the U.S.
economy in 2013:H2; 2) the unlikelihood that the
Fed would need to apply even more ‘quantitative
easing’ to kick-start the U.S. economy; 3) a tax by
India on gold imports (raised to a record 10% in
August); and 4) the failure of Basel III to include
gold in the LCR for banks. The sharp mid-April gold
price correction was triggered by a possible Cyprus
sale as part of its bailout package, raising the
possibility that other distressed Eurozone countries
might follow suit (neither development occurred).
16
Silver Prices
50
Price Outlook (US$)
ratio
US$ per ounce
100
40
80
30
60
Gold-to-Silver
Price Ratio (RHS)
20
2008
2009
2010
2011
2012
2013F
2014F
14.99
14.69
20.19
35.11
31.15
24
22-24
40
ScotiaMocatta: permanent Chair of
London Silver Fix.
10
20
London Silver Fix (LHS)
0
0
75
80
85
90
95
00
05
10
15
Gold reserves held by Eurozone countries (tonnes): Italy
2,452;Portugal 382; Spain 282; Greece 111;Ireland 6;
Europe 11,260; US gold reserves: 8,133 (No.1 largest);
China 1,054 (6th).
Until recently, silver prices have been
under pressure from declining gold
prices, weak industrial demand in
2011-12 and an unwinding in investor
positions.
London Silver Fix: Sept 6, 2013
US$23.05.
17
PALLADIUM – A ‘Pick’ For Investors
1200
1200
US$ per ounce,
London PM Fix
1000
1000
Palladium prices -- a
‘play’ on the growth of
auto catalytic
converters in China and
depletion of Russian
government stockpile;
strong U.S. auto sales
are also supportive.
800
600
400
800
600
400
Palladium
Prices:
2012 643
2013F 715
2014F 750
2015F 850
200
0
00
02
04
06
08
10
12
200
0
14
Data to September 6, 2013: US$699 per ounce.
The global auto industry began 2013 on a robust note. Car
production in China in 2013:Jan-July +10.8% yr/yr; including
SUVs & light passenger trucks +14.5% in 2013 YTD.
18
Copper Prices Ease Alongside
‘Brownfield’ Mine Expansion
5.00
US$ per pound
4.50
4.00
5.00
New Record High: US$4.60
on February 14, 2011
*
4.00
Global supply & demand conditions
for copper were in ‘deficit’ in 2011,
but have shifted into a modest
‘surplus’ in 2012-13
3.50
3.00
2.50
3.50
+
3.00
2.00
1.50
1.50
++
1.00
1.00
0.50
0.50
LME Copper Prices
0.00
0.00
72
76
80
84
88
92
96
Extraordinary recovery in copper prices in early
2009 reflected buying by China’s State Reserve
Bureau, massive credit expansion and a rapid
rebound in China’s industrial activity.
2.50
Low During
Credit Squeeze
(Dec. 24, 2008)
2.00
4.50
Price Outlook
2009
US$2.34
2010
US$3.42
2011
US$4.00
2012
US$3.61
2013F
US$3.30
2014F
US$3.05-3.10
00
04
08
12
LME cash settlement prices. + Latest data: Sept. 6, 2013: US$3.25,
still yielding a lucrative 34% profit margin over average world
breakeven costs including depreciation, interest & indirect costs.
++ Dec. 24, 2008: US$1.26.
COPPER DEMAND IN CHINA REMAINS STRONG
The strength of copper prices in the past five
years has reflected only limited global mine
development -- up 1.7% per annum from 2008-2012
-- in the face of strong demand growth from China
and the rest of the ‘emerging’ world.
China’s refined copper consumption:
2009
+25%
2010
2011
+10.8% +8.5%
2012 2013F 2014F
+5.0% +8.0% +6.2%
Despite slower GDP growth, strong underlying
demand and tight scrap supplies boosted refined
copper imports into China 14.7% yr/yr in July
(concentrate imports were record in July, +37%
YTD). Expansion of the electricity grid and firm
construction activity are lifting demand for copper
cable, building wire and household goods.
19
LME Copper Prices Likely To Ease In 2014
LME copper prices are currently US$3.25 per pound – yielding a 34% profit margin over
average world break-even costs including depreciation, interest, indirect & cash costs.
World demand for refined copper edged down slightly in 2012 (-0.3%), as higher
consumption in China (up 5%), the Middle East (up 7.4%) and the United States (up 1%)
was more than offset by a 6.8% plunge in Europe, a 1.8% drop in Japan and
surprisingly weak demand in South Korea, Malaysia and Taiwan. At the same time,
while mine expansion failed to meet expectations, given technical problems and lower
ore grades at a number of major mines – especially in Chile (Collahuasi, Los Bronces),
Zambia and Indonesia (Grasberg) – overall mine output still managed to increase by
3.7%. The net result, refined copper slipped into a modest ‘surplus’ in 2012.
Global demand will pick up by about 4.4% in 2013 and 5% in 2014. However, world
mine production is finally starting to ramp up (+4.5% in 2013 and +6.5% in 2014),
pushing down copper prices. ‘Brownfield’ expansion at existing mines in Chile, Peru,
Zambia and the DR Congo will rev up, head grades have improved this year at
Escondida, Antofagasta and Los Bronces and some major ‘greenfield’ projects will
come on stream (Oyu Tolgoi in Mongolia, Antapaccay, Toromocho & Las Bambas in
Peru (in 2015), Mount Milligan in Canada, Caserones & Mina Ministro Hales in Chile).
There is ‘risk’ of copper prices easing slightly below the US$3 mark by mid-decade.
Later in the decade, copper prices should rebound again to US$3.50, given high capital
costs for new mine development (high ‘incentive costs’) and solid demand.
20
China Dominates World Copper Consumption
% of total
"Emerging"
Markets = 65.8%
"Industrialized"
Markets = 28.8%
China
43.1%
USA
9.1%
Other Asia +
Middle East +
Latin America
+ Other
22.7%
Western
Europe
15.1%
Russia Japan
+ CIS
4.6%
5.4%
2013 estimates of world consumption.
China's consumption = 1.5 times USA +
Japan + Western Europe.
Source: Scotiabank Commodity Price Index.
21
Zinc – The Next Big Base Metal Play
2.50
2.50
US$ per pound
LME Zinc Prices
2.00
Zinc prices could
climb as high as
US$1.50 in 2016-17
2.00
Zinc demand will
be boosted middecade by a
recovery in G7
construction
activity
1.50
1.00
1.50
1.00
0.50
0.50
Credit Crisis
Late 2008
0.00
0.00
00
02
04
06
08
10
12
14
LME official cash settlement price Sept 6, 2013: US$0.85;
Zinc prices have held up better than aluminium, nickel & copper in
2013, with strong global auto sales, a U.S. housing recovery and
declining world exchange stocks (esp. Shanghai Futures Exch).
Zinc Price Outlook
2009
US$0.75
2010
US$0.98
2012
US$0.88
2013F
US$0.88
2014F
US$1.05
Global supply & demand conditions for refined
zinc shifted into a surprising ‘deficit’ in 2012, as
Chinese producers shut down smelters in view of
low treatment charges on domestic and imported
‘concentrates’, poor profitability and tight credit
from Chinese banks. China’s smelters reduced
output by an unprecedented 5.7% to 4.8 mt in
2012, shifting the global zinc ‘concentrate’ market
into a moderate ‘surplus’.
While China’s smelter output has rebounded
moderately in 2013, smelter capacity utilization
will remain low at 70% compared with a ROW
average of 91%. The metal market balance is
expected to remain in ‘deficit’ over the next five
years, with stocks dwindling to 58 days of
consumption by 2017, down from 101 days in
2012, lifting refined metal prices.
While smelter TC charges will rise in 2013-15,
higher metal prices will be an offset for
concentrate producers. Nevertheless, miners are
now scaling back projects, with limited finance
for juniors. While mine output could advance by
4.4% p.a. 2012-17, the gain will be limited by
unusually high depletion (e.g. Perseverance,
Lisheen, Century). The concentrate surplus
should recede in 2015, moving to balance by2016.
22
Nunavut/Labrador Trough
New World-Class Iron Ore Region
23
Spot Iron Ore Prices Delivered To China,
Important for Nunavut & Labrador Trough
200
Steel Mill Restocking In China Boosts
Prices Near-Term
200
US dollars per tonne
150
150
100
100
Iron Ore Concentrates, 62%
Fe, basis Qingdao & Tianjin,
China*
50
50
Representative of spot prices from
Labrador/Northern Quebec to China.
0
0
09
10
11
12
August 2013: US$136.70 per tonne.
13
Spot iron ore prices, 62% Fe, delivered to
northern China have rebounded from a low
of US$115 per tonne to US$136.70 in
August and are US$138.70 in early
September.
China’s iron ore imports surged to a record
high of 73.14 mt in July (+26.4% yr/yr), with
steel mills restocking and taking advantage
of softer prices in May & June, linked to
weak financial-market sentiment on the
Chinese economy.
The ‘mini-stimulus package’, outlined by
China’s State Council in late July, should
boost private-sector railway investment and
steel demand over the balance of 2013.
China’s Fall construction season should
also be fairly strong.
14
China’s steel production has increased by
7.5% YTD through July and now accounts
for 49% of the world total.
ROW steel output has edged down by 2.3%
in 2013 YTD.
24
300
Iron Ore Benchmark Prices
More Competitive Market Conditions Ahead
US cents per dmtu
FOB loading port
Fiscal Years
250
300
250
Annual Averages
JFY 2009
2010
2011
2012
2013F
2014F
2016F
200
150
100
97
210
265
197
205
180
145
200
forecast
150
100
‘Great
Recession’
Pilbara Blend/Newman Fines,
Australia to Japan, China &
North Asia
50
0
03
04 05
06 07 08
09 10 11
12 13
50
The quarterly contract price for Pilbara
Blend/Mt. Newman fines (FOB loading port
in Western Australia) – the key international
benchmark – is about 192.90 US cents per
dmtu in FY2013:Q2. Prices remain quite
profitable for Rio Tinto and BHP Billiton in
the Pilbara region, yielding a 60% margin
over cash costs at the port. (Sales
arrangements are shifting to a spot basis).
However, the pace of China’s steel
production growth will likely slow in 201416, cutting the growth rate in world iron ore
demand to 3.7% per annum. Equally
important, large new and very low-cost
supplies will be developed in Western
Australia, with world supplies increasing by
8.4% per annum.
The net result, market conditions will shift
into ‘balance’ by 2014-15, with a risk of
‘surplus’ in 2016.
0
14 15
•dmtu = dry metric tonne unit.
•Producers will be challenged to compete with Western
Australian iron ore with cash costs of only US$40-60 per
tonne and ocean shipping costs of US$7.60 to Beilun, China.
Higher-cost Chinese mines will close, making room for
capacity expansion in Australia & Brazil and to some extent in
West Africa & Canada.
In view of expected lower prices in the next
several years and given the sharp
correction in China’s iron ore imports in
mid-2012, Canadian companies have been
examining project development more
critically, with some mines deferred and
operations reconfigured to cut costs.
25
Price Outlook
‘Geopolitical Supply Risks’ Keep
International Oil Prices High in 2013
150
140
150
*
US$ per barrel
140
Scotiabank Commodity Price Index
130
130
Record High:
July 11, 2008: US$147.90
Despite slow growth in petroleum
demand (+1.1%), international oil
prices should remain high in 2014 –
underpinned by ‘geopolitical
supply risks’ in the Middle East
& West Africa.
Iranian
Iraq
Revolution Gulf War
War
120
110
100
90
80
70
60
50
40
120
+
100
90
80
70
60
50
40
Arab Oil
Embargo
30
20
110
30
20
10
+ September 6, 2013: US$109.65
0
10
0
60
64
68
72
76
80
84
88
92
96
00
04
08
12
Over the medium-term, building additional export pipeline
capacity to the B.C. and Atlantic Coasts for the onward shipment
of Western Canada’s blended bitumen and light crude oil to the
‘growth’ markets of China, northern Asia and India remains vital.
Signs point to further delays in U.S. Presidential approval of the
Keystone XL pipeline.
2008
2009
2012
2013F
2014F
WTI Oil
US$99.62
US$62
US$94
US$99
US$102
Brent Oil
US$97.95
US$62
US$112
US$108
US$108
Brent oil prices jumped to a 4-month high in July
2013 of US$107 and rose further in early Sept to
US$116. After unusually heavy spring maintenance,
global refinery demand surged to a record in June
and will stay elevated over the balance of 2013. New
refinery capacity in ‘non-OECD’ countries is being
commissioned to keep pace with relatively strong
‘emerging market’ demand.
While U.S. & Canadian production continues to climb
(especially in the North Dakota Bakken), OPEC
supply outages (civil unrest in Libya & pipeline
attacks in Iraq) have grabbed the headlines. WTI oil
prices at US$110 in Sept 2013 remain close to Brent,
after completely closing the gap on July 19, with
debottlenecking of the Cushing, Oklahoma oil hub
and pipeline expansion from the Permian & Eagle
Ford Basins in northern Texas to Houston.
The return of WTI oil prices closer to international
levels, and temporarily lower discounts on WCS
heavy and light crude oil in Edmonton, have boosted
earnings for Western Canada’s ‘oil patch’ in 2013:Q3.
26
20
High LNG Prices in Japan & Asia
Favour Canadian & U.S. LNG Exports
US$ per mmbtu
15
* Avg. LNG import price into Japan;
Japan turned to imported LNG & oil
when nuclear reactors were shut
in 2011-12.
Nymex Natural Gas Prices
(US$ per mmbtu)
20
LNG Prices
in Japan*
15
10
10
5
5
NYMEX Natural
Gas Prices
0
98
00
02
04
06
08
10
12
14
*LNG prices delivered to Japan: peak at US$18.07 in July 2012,
late June 2013: US$15.11. Source: LNG Japan Corporation.
Steam coal lost competitiveness in 2012, but could rally back if
natural gas is consistently at or above US$4.00.
LNG exports should be the trigger for a large ‘structural’
increase in natural gas demand & stronger prices later in the
decade. New transportation initiatives are being developed:
LNG use in trucking and possibly in railway locomotives.
0
2008
2009
2011
2012
2013F
2014F
8.90
4.15
4.03
2.83
3.75
4.00
Natural gas is the fuel of choice for North
American manufacturers, recently rejuvenating
the U.S. petrochemical and fertilizer industries.
Development of 20 new U.S. natural gas ‘shale’
basins – made economic by new multi-stage
fracture drilling technology – has lowered the
industry cost curve.
NYMEX prices fell to a decade low of US$1.91
per mmbtu on April 19, 2012. This price level
was unsustainably low; the vast bulk of North
American natural gas cannot be produced
profitably at prices below US$2. Most ‘dry’
natural gas shale producers require at least
US$3 to generate a reasonable rate of return.
Prices rallied to around the US$4 mark last
spring alongside unseasonably cold U.S.
weather, pushing gas-in-storage down below
the 5-year average (now US$3.52). Gastargeted drilling rigs have dropped, with energy
companies shifting focus to oil, though the tiein of already drilled gas wells has limited the
impact.
27
Scotiabank’s Global Presence In Resource Industries
Equity Sales & Research
Scotiabank is a leading provider of Equity Research on Base Metal, Precious Metal, Oil & Gas,
Forest Products and Fertilizer companies.
Corporate Banking – Global Mining
In 2012, Scotiabank was ranked as the No.1 lead arranger (by deal count) in the Canadian and
North American mining sectors; the most international of the Canadian banks, with offices in
Beijing, Shanghai, Chongqing and Hong Kong, operations across Asia Pacific including India,
Malaysia and Thailand and throughout Latin America (including Mexico, Chile, Peru, Brazil
and Colombia), London and New York.
Investment Banking and M&A Advisory Services
#1 Canadian Equity Issuer and a leading mining underwriter January 2011 to present.
Landmark Transactions:
-- Exclusive Financial Advisor to Red Back Mining’s C$8.0 billion merger with Kinross Gold –
Fourth largest M&A transaction ever completed in the gold sector.
-- Co-Bookrunner on Barrick’s US$4.0 billion equity offering – the largest equity offering in
Canadian history and the largest equity financing ever made in the international gold sector.
-- Sole Financial Advisor to China Investment Corporation in their landmark private placement
in Teck Resources (US$1.5 billion) -- largest investment in a mining company by a Chinese
investor in Canadian history.
Scotia Waterous -- a world leader in upstream Oil & Gas M&A and Divestiture mandates, with
offices in Hong Kong, Singapore, Calgary, Houston, Denver and London; Co-Bookrunner of
Gibson Energy Initial Public Offering (C$568 million ) – the largest Canadian IPO in 2011.
Advised BHP Billiton on acquisition of Petrohawk Energy and Chesapeake’s Fayetteville
assets.
28
Corporate Banking – Canadian Mining
US$400,000,000
US$200,000,000
US$2,500,000,000
US$1,000,000,000
US$2,000,000,000
Credit Facilities
Revolving Credit Facility
Credit Facilities
Term Loan Facility
Revolving Credit Facility
Lead Arranger, Sole Bookrunner &
Admin Agent
Lead Arranger, Sole Bookrunner &
Admin Agent
Joint Lead Arranger,
Joint Bookrunner & Admin Agent
Co-Lead Arranger,
Joint Bookrunner & Admin Agent
Co-Lead Arranger, Joint
Bookrunner & Syndication Agent
Closing October 2013
June 2013
June 2013
May 2013
March 2013
US$750,000,000
US$2,500,000,000
US$150,000,000
US$100,000,000
US$150,000,000
Revolving Credit Facility
Credit Facilities
Revolving Credit Facility
Revolving Credit Facility
Revolving Credit Facility
Joint Lead Arranger,
Joint Bookrunner & Admin Agent
Co-Lead Arranger,
Joint Bookrunner & Admin Agent
Joint Lead Arranger,
Joint Bookrunner & Admin Agent
Co-Lead Arranger,
Joint Bookrunner & Admin Agent
Joint Lead Arranger,
Joint Bookrunner & Admin Agent
February 2013
February 2013
February 2013
February 2013
January 2013
US$350,000,000
US$450,000,000
US$1,200,000,000
C$75,000,000
C$525,000,000
Revolving Credit Facility
Revolving Credit Facility
Revolving Credit Facility
Revolving Credit Facility
Revolving Credit Facility
Sole Lead Arranger,
Sole Bookrunner & Admin Agent
Co-Lead Arranger,
Joint Bookrunner & Admin Agent
Co-Lead Arranger,
Joint Bookrunner & Admin Agent
Sole Lead Arranger,
Sole Bookrunner & Admin Agent
Co-Lead Arranger, Joint
Bookrunner & Syndication Agent
December 2012
September 2012
August 2012
July 2012
June 2012
29
ScotiaMocatta – Precious & Base Metals Trading
ScotiaMocatta provides innovative hedging & base metal trading solutions
with offices in London, New York, Toronto & Mumbai.
ScotiaMocatta is a global leader in precious metals trading and finance
dating back to 1671; ranks #1 in physical trading worldwide.
Member of the Shanghai Gold Exchange, permanent Chair of the London
Silver Fixing and an original member of the London Gold Fixing.
Offices in Shanghai, Hong Kong, Singapore, London, Toronto, New York,
Bangalore, Coimbatore, Dubai, Mexico City, Mumbai and New Delhi.
Fully integrated and innovative solutions across a complete
range of metal services:
. Spot, forward and options trading
. Metal leases, consignments and loans
. Global physical delivery
. Forward rate agreements
. Metals certificate programs
.
.
.
.
.
Hedging programs
Custodial services
Approved COMEX depository
Location swaps
Structured notes
30
Scotiabank is Canada’s most international bank
Global Operations
Scotiabank has operations in 11 Asian countries,
the largest network of any Canadian bank.
Scotiabank has Canadian banking’s
largest network in mainland China.
31
Disclaimer
TM
Trademark of The Bank of Nova Scotia. Used under license, where applicable.
This report has been prepared by Scotia Economics as a resource for the clients of Scotiabank. Opinions,
estimates and projections contained herein are our own as of the date hereof and are subject to change
without notice. The information and opinions contained herein have been compiled or arrived at from
sources believed reliable but no representation or warranty, express or implied, is made as to their
accuracy or completeness. Neither Scotiabank nor its affiliates accepts any liability whatsoever for any loss
arising from any use of this report or its contents.
32