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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