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Commodities Quarterly Preview
Please refer to the disclaimer at the end of this document *This document is not investment research, as it has not been prepared in accordance with the requirements designed to promote the independence of research. It therefore consti-
tutes a ―marketing communication‖ as defined by the UK FCA Handbook, and must not be considered a Research Report under US or any other regulatory regime. U.S. Disclosure: Standard Bank Group Limited does and seeks to do
business with companies covered in its reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in
making their investment decision.
October 2013
All of the commodities covered in this report are likely to stay in surplus markets this
year, or heading there soon. The exception is PGM. We maintain our view that
stockpiles for many commodities are high (even for PGM) and, with surpluses fore-
cast, above-ground stockpiles are set to grow even faster. Stockpiles are probably the
most visible in the metals space.
We have updated our bottom-up model for Chinese growth, and focus on two realis-
tic scenarios, in our view: (1) Our base-case scenario: the Chinese economy rebal-
ances towards consumption. (2) Alternative scenario: the Chinese economy remains
investment-driven. The two scenarios have markedly different outcomes for certain
commodities. We assign a 30% probability to a lower growth path driven by invest-
ment spending rather than consumption spending over at least the next two years.
Amongst the base metals, we believe tin and lead have the most upside over the next
12 to 24 months. We believe there are still inherently supportive factors that make it
unadvisable to get too bearish on copper over the next 12 months despite increased
supply coming to the global copper market. Aluminium in our view has little upside.
Annual surpluses in the aluminium market have been observed since 2007, and this
will remain the picture over our forecast period.
Tactically, we believe gold is likely to struggle in the next quarter and rallies should be
sold into. We expect gold to average $1,330 in Q4:13. On a strategic basis, we still
believe gold will trade higher over the next five years. Our view on PGM remains
largely unchanged — we believe from a tactical perspective, upside remains capped
for platinum, palladium and rhodium. We forecast relatively flat prices for all three
metals for Q4:13.
We believe supply for crude is ample, and, while demand has stabilised, it is unlikely
to push crude prices on a sustainable basis higher. We expect Brent crude to aver-
age a $107/bbl this quarter and $106/bbl next quarter. We expect WTI to average
$103/bbl this quarter, falling to $100/bbl in Q1:14. The risk lies to the downside for our
forecasts.
For iron ore the late Q3 cape-freight rally highlighted the additional supplies begin-
ning to flow from long-awaited, large-scale expansions. Next year, BHPB, FMG and
RioT will continue ramping up, with their next stage of expansions weighted to the
back end of Cal-14. We still expect prices to trend lower next year, but volatility will
remain. Thermal coal restocking and Chinese winter supply disruptions should hold
met coal pricing stable across Q4. Looking ahead, pricing power looks dominated by
supply growth (especially in China), more than offsetting demand growth, despite the
strength of China’s steel industry.
Research Analysts
Walter de Wet, CFA* [email protected] +27-11-3787236
Leon Westgate* [email protected] +44-20-31456822
Demand improves, but so does supply
Table of contents
Commodity cycle 2
Commodity forecasts 3
Growth forecasts 5
Will China rebalance or not? 8
Precious metals 15
Base metals 24
Energy 37
Bulk commodities 42
Melinda Moore* [email protected] +44-20-31456887
2
Commodities
Quarterly Preview — October 2013
Commodity cycle
With supply outpacing demand, markets are cruising
All of the commodities covered in this report are likely to be in surplus markets in 2013 or will
go there soon. Should the data out of China continue to point to fading growth momentum,
surpluses may be larger than anticipated. The exception is PGM where supply constraints, not
strong demand, is the main reason for deficits.
Stock levels remain high, further capping upside
We maintain our view that stockpiles for many commodities are high and, with surpluses fore-
cast across the board (except for PGM), above-ground stockpiles are set to grow even faster.
Stockpiles are probably most visible in the metals space. In terms of days’ consumption, most
metals exhibits relatively high levels of inventory by recent standards — the exception is cop-
per, where inventory levels have risen.
From CAPEX expansion to CAPEX cuts
Surpluses will lead to further CAPEX cuts, which in effect will cut future production. In some
cases, existing production will also need to be cut, which, over time, will lead to inventory
draw-downs and rising prices.
Developed markets are recovering — but China remains key
While the US and EU economies are recovering, we still believe that China remains the key
driver of commodity demand. However, whether China grows above 8% or not, has become
irrelevant. The more important question, in our view, in determining how demand for commodi-
ties pans out, is whether China manages to rebalance its economy (or not) in a lower growth
environment.
Our base case, and alternative scenario
Our base case remains that China steadily rebalances its economy towards consumption over
the next few years. However, we see a growing risk that in the medium term, the Chinese
economy may fail to rebalance, with investment-led growth remaining prevalent.
Source: Standard Bank Research
The commodity cycle
3
Commodities
Quarterly Preview — October 2013
Commodity forecasts Key forecasts
2012 2013F 2014F 2015F 2016F Long-term
Q3:13F Q4:13F Q1:14F Q2:14F Q3:14F 2017F
PRECIOUS METALS
Gold ($/oz) 1,669 1,429 1,440 1,525 1,620 1,600 1,333 1,330 1,400 1,410 1,450 1,720
(y/y %) -14.4 0.8 5.9 6.2
(% chg from previous) -1.9 - - - 14.3 -
3.4 -3.6 - -
Platinum ($/oz) 1,553 1,504 1,650 1,850 1,975 1,900 1,456 1,450 1,600 1,600 1,700 1,975
(y/y %) -3.1 9.7 12.1 6.8
(% chg from previous) 0.1 - - - - - -
Palladium ($/oz) 644 727 825 925 983 900 723 725 800 800 825 980
(y/y %) 12.9 13.4 12.1 6.3
(% chg from previous) 1.7 - - - - 3.6 - -
Rhodium ($/oz) 1,274 1,081 1,350 1,650 1,775 1,775 1,000 1,000 1,200 1,200 1,300 1,775
(y/y %) -15.1 24.8 22.2 7.6
(% chg from previous) -2.3 - - - - -4.8 - -
Silver ($/oz) 31.17 24.04 21.75 23.00 23.50 20.00 21.50 21.00 21.5 21.5 22 24.00
(y/y %) -22.9 -9.5 5.7 2.2
(% chg from previous) 5.0 4.9 4.9
BASE METALS
Aluminium ($/mt) 2,022 1,861 1,850 1,950 2,300 2,450 1,825 1,770 1,900 1,850 1,850 2,300
(y/y %) -7.9 -0.6 5.4 17.9
(% chg from previous) -9.2 -20.1 -22.0 -8.0 - -21.3 -16.7 -15.9
Copper ($/mt) 7,958 7,419 7,200 6,900 7,400 6,000 7,095 7,450 7,600 7,200 7,000 8,000
(y/y %) -6.8 -3.0 -4.2 7.2
(% chg from previous) -3.0 -11.7 -13.8 -5.1 - -9.7 -9.0 -8.9
Lead ($/mt) 2,062 2,139 2,525 2,650 2,850 2,000 2,110 2,100 2,450 2,400 2,500 2,850
(y/y %) 3.7 18.0 5.0 7.5
(% chg from previous) -5.5 - - 5.6 - -12.5 - -
Nickel ($/mt) 17,530 15,032 14,200 14,800 16,300 16,000 14,020 13,700 14,050 14,200 14,200 16,300
(y/y %) -14.2 -5.5 4.2 10.1
(% chg from previous) -3.7 -16.2 -9.2 0.3 - -10.2 -12.2 -17.4
Tin ($/mt) 21,087 22,656 28,000 32,000 31,600 24,000 21,250 24,300 27,350 28,000 28,000 28,000
(y/y %) 7.4 23.6 14.3 -1.3
(% chg from previous) -7.6 - 12.3 10.9 - -12.3 - 7.7
Zinc ($/mt) 1,948 1,901 1,870 2,000 2,500 1,850 1,890 1,840 1,920 1,820 1,810 2,500
(y/y %) -2.4 -1.6 7.0 25.0
(% chg from previous) -5.8 -11.6 -14.9 2.0 - -18.2 -12.7 -9.0
Sources: Standard Bank Research; SBG Securities
4
Commodities
Quarterly Preview — October 2013
Sources: Standard Bank Research; SBG Securities
Commodity forecasts Key forecasts
2012 2013F 2014F 2015F 2017F Long-term
Q3:13F Q4:13F Q1:14F Q2:14F Q3:14F 2016F
ENERGY
WTI ($/bbl) 94 99 103 105 100 95 105 103 100 102 100 105
(y/y %) 5.3 3.9 1.9 -
(% chg from previous) 3.7 - - -
5.1 - - -
Brent ($/bbl) 112 108 109 110 105 95 109 106 107 109 106 110
(y/y %) -3.5 1.1 0.9 -
(% chg from previous) 0.9 - - - - - - -
API2 ($/mt) 94 82 81 86 86 86 77 82 82 82 78 87
(y/y %) -12.6 -1.1 6.2 1.2
(% chg from previous) -1.5 -5.3 -2.3 - -
4.7 -7.9 -1.2 -3.3
API4 ($/mt) 93 80 79 81 83 84 73 78 79 78 77 83
(y/y %) -14.8 -0.6 2.5 2.5
(% chg from previous) -3.3 -5.7 -6.9 - -
7.1 -9.2 -4.9 -6.7
Newcastle ($/mt) 94 86 88 90 88 79 87 93 85 92
(y/y %) -8.1 1.9 2.3 2.2
(% chg from previous) - - - - - - - - -
BULKS
Iron ore - Indian fines spot to China ($/mt) 128 131 122 112 90 80 132 121 132 122 118 100
(y/y %) 2.5 -7.0 -8.2 -10.7
(% chg from previous) 6.5 14.0 14.3 -
12.0 11.9 9.9 11.1
Australia hard coking coal spot fob ($/t)
192 153 156 158 160 155 140 155 160 152 150 160
(y/y %) -20.3 2.0 1.3 1.3
(% chg from previous) - -0.6 -1.3 - - -3.0 - -1.2
5
Commodities
Quarterly Preview — October 2013
Growth forecasts
Key macroeconomic forecasts
2009 2010 2011 2012 2013F 2014F 2015F 2016F
Real GDP (y/y)
Global -0.6 5.1 3.8 3.3 3.6 4.1 4.4 4.5
USA -3.0 2.4 1.8 2.2 2.0 3.0 3.4 3.5
Eurozone -4.4 2.0 1.5 -0.6 -1.0 0.5 0.7 0.7
United Kingdom -3.9 1.8 0.9 0.2 1.0 1.2 1.4 1.4
Russian Federation -7.9 4.3 4.3 4.0 4.1 4.2 4.2 4.2
Canada -2.8 3.2 2.6 1.8 2.0 2.7 2.8 2.8
Brazil -0.3 7.6 2.8 0.9 2.4 2.6 2.6 2.5
China 8.5 10.4 9.3 7.8 7.5 7.4 7.4 7.4
India 5.1 11.4 7.8 4.0 4.9 5.3 5.6 5.7
Japan -5.5 4.7 -0.6 2.1 2.2 2.5 2.7 2.5
Australia 1.4 2.6 2.4 3.6 2.5 2.5 2.6 2.5
Sources: Standard Bank Research; IMF
Surplus/deficits in days consumption
Inventory in days consumption
Source: Standard Bank Research
Source: Standard Bank Research
2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F
Aluminium 8 19 6 3 1 9 7 8 2
Copper 4 4 -5 -4 -5 4 5 4 2
Lead 5 -9 -3 4 1 0 0 -4 -8
Zinc 6 12 8 11 8 5 6 4 1.5
Nickel 26 25 -5 2 20 14 14 12 5
Platinum -13 43 -2 26 -23 -27 -28 -21 -13
Palladium 35 39 -25 70 -51 -60 -66 -68 -76
Iron ore 0 16 -11 -4 -4 -5 4 8 15
2008 2009 2010 2011 2012F 2013F 2014F 2015F 2016F
Aluminium 48 67 73 76 77 86 93 101 103
Copper 22 26 21 17 12 16 21 25 27
Lead 18 9 6 10 11 11 11 7 -1
Zinc 27 39 47 58 66 71 77 81 82.5
Nickel 66 91 86 88 108 122 136 148 153
Platinum 987 1,179 1,057 1,166 1,046 1019 991 970 957
Palladium 844 883 858 928 877 837 771 703 627
Oil 89 92 92 90 92 91 90 90 91
Iron ore 28 44 33 29 25 20 24 32 47
6
Commodities
Quarterly Preview — October 2013
Standard Bank forecasts vs. Bloomberg consensus*
Source for all graphs : Standard Bank Research; Bloomberg
*Consensus figures as of 3 October 2013
Gold Silver
1,000
1,150
1,300
1,450
1,600
Q4:14 Q1:14 2014
$/oz
SB BBG median BBG high/low
1,350
1,500
1,650
1,800
1,950
Q4:14 Q1:14 2014
$/oz
SB BBG median BBG high/low
Platinum Palladium
650
725
800
875
950
Q4:14 Q1:14 2014
$/oz
SB BBG median BBG high/low
17
20
22
25
27
Q4:14 Q1:14 2014
$/oz
SB BBG median BBG high/low
Precious metals
Base metals
Aluminium Copper
1,500
1,700
1,900
2,100
2,300
Q4:14 Q1:14 2014
$/mt
SB BBG median BBG high/low
5,500
6,250
7,000
7,750
8,500
Q4:14 Q1:14 2014
$/mt
SB BBG median BBG high/low
7
Commodities
Quarterly Preview — October 2013
Standard Bank forecasts vs. Bloomberg consensus
Source for all graphs : Standard Bank Research; Bloomberg
Lead Nickel
Base metals (continued)
Bulks and energy
Brent crude API2
1,700
1,950
2,200
2,450
2,700
Q4:14 Q1:14 2014
$/mt
SB BBG median BBG high/low
1,500
1,750
2,000
2,250
2,500
Q4:14 Q1:14 2014
$/mt
SB BBG median BBG high/low
75
87.5
100
112.5
125
Q4:14 Q1:14 2014
$/bbl
SB BBG median BBG high/low
60
72.5
85
97.5
110
Q4:14 Q1:14 2014
$/mt
SB BBG median BBG high/low
Iron ore Met coal
80
97.5
115
132.5
150
Q4:14 Q1:14 2014
$/mt
SB BBG median BBG high/low
120
135
150
165
180
Q4:14 Q1:14 2014
$/mt
SB BBG median BBG high/low
8
Commodities
Quarterly Preview — October 2013
Will China rebalance or not?
Economic growth across the globe is on a better footing than in 2009. More importantly, cycli-
cally, Chinese growth has stabilised. However, we continue to believe that, structurally, the
Chinese economy is likely to grow at a slower pace.
However, to us the more important question for many commodities is not whether the Chinese
economy will grow at a slower pace, but rather whether the Chinese economy can become a
consumption-led economy within a lower-growth scenario.
Since 2001, GFCF average annual contribution to economic growth has been more than
5 percentage points (pps). To put China’s annual investment into perspective: China’s GFCF
overtook the GFCF of the United States in 2009 despite China’s economy being three times
smaller.
The growth in GFCF has come at the expense of household consumption expenditure (HHCE)
— more commonly known as ―private consumption‖. HHCE as a percentage of GDP has been
in a steady decline, with the low point of 34% coinciding with the GFCF-directed stimulus of
2009 (see Figure 1). In 2011, the ratio of HHCE reached 38% in 2011. GFCF as a percentage
of GDP has edged lower, coming in at 44% for 2011 (see Figure 2).
There is a well known intension in China to shift this economy towards one driven by HHCE
rather than GFCF. We analyse what such a change might imply for China’s consumption of
commodities.
Last year, we presented four scenarios for Chinese growth and what it may imply for demand
for certain commodities from China (see our report titled Economic rebalancing in China could
put commodity demand at risk dated 13 August 2012).
We presented two scenarios of high-GDP-growth in which China either rebalances its econ-
omy (to a HHCE/GDP ratio of 50% and a GFCF/GDP ratio of 30%), or doesn’t rebalance.
We also represented two other scenarios, but with a low-GDP-growth trajectory. Under each of
the scenarios, we performed a bottom-up analysis for China’s demand for copper, aluminium
and steel demand.
We have updated our bottom-up model for Chinese growth, but focus now only on two realis-
tic scenarios, in our view:
Our base-case scenario: the Chinese economy rebalances towards consumption.
Alternative scenario: the Chinese economy remains investment-driven.
Sources: CFL; Standard Bank Research
Figure 2: Expenditure breakdown of GDP 2011
Sources: World Bank; Standard Bank Research
Figure 1: HHCE and GFCF as a percentage of GDP
20
33
45
58
70
1970 1975 1980 1985 1990 1995 2000 2005 2010
Household consumption expenditure (HHCE)
Gross fixed capital formation (GFCF)
% of GDP
38%
44%
13%
5%
Household consumption Gross fixed capital formation
Government consumption Net exports
9
Commodities
Quarterly Preview — October 2013
In both cases, we consider only a lower growth scenario as we believe the risk to Chinese
growth slowing to 5% by 2017 is far greater than the ―risk‖ of the Chinese economy growing at
8.5% in 2017.
Rebalancing dynamics: the type of growth does matter
Ultimately, growth is the most important driver of commodity demand, and it doesn’t seem to
matter whether it is consumption-driven or investment-led growth. We find that higher growth
(irrespective of the type of growth) implies higher demand for commodities under most scenar-
ios. However, when one is dealing with slower growth rates, the type of growth does matter.
When an economy rebalances, there are many dynamics to consider, in terms of commodity
demand:
Firstly, there is the trade-off between the higher growth in HHCE vs. growth in GFCF.
If China’s economy were to rebalance, HHCE must grow faster than GFCF in any GDP-
growth scenario. That trade-off would affect demand for commodities differently. It goes
without saying that the lower GDP growth is, the slower both HHCE and GFCF can
grow.
Secondly, when the growth rate in GFCF changes, it is highly likely that the growth rate
in residential and commercial construction will change too. Construction is an important
component in GFCF and also a large driver of commodity demand. In rebalancing an
economy, analysing the potential path of construction growth is crucial to determine
commodity demand growth.
Thirdly, when HHCE grows faster, spending patterns of households change too.
For example, households would spend more on transportation as a percent of their
income and less on food. Changing consumption patterns within a rebalancing econ-
omy will affect commodity demand differently.
With these dynamics in mind, we perform a bottom-up analysis of Chinese demand for
copper, aluminium, nickel, lead, platinum, palladium and oil demand:
Firstly, we set a GDP growth path for China. In our case, we expect China’s growth to
slow towards 5% by 2017, and then remain at this level until 2023 (see Figure 3 over-
leaf).
Secondly, we simulate a transition path for China’s GDP to rebalance from GFCF/GDP
ratio of 44% to a 30% over 10 years. In this transition, as GFCF’s share in the economy
reduces, so does the share of HHCE rise towards 50% by the end of 10 years (see
Figures 4 and Figure 5).
Thirdly, we analyse China’s construction sector to make a judgement on how this im-
portant sector may change. We estimate the countries stock of urban housing as well
as the expected urbanisation rate of families and through this obtains expected growth
rates for the expansion of residential and commercial construction.
Lastly, as HHCE rises, we adjust for expected changes in spending patterns by house-
holds, under a scenario where HHCE expands its share of GDP vs. one where HHCE’s
share of GDP remains unchanged.
We keep GCE’s share of GDP unchanged (around 13%). As far as imports and exports are
concerned, we simulate export growth for China over the period based on GDP growth rates of
China’s major trading partners (US, Eurozone and Asia) as well as the rest of the world.
We use the marginal propensities to import of the countries/regions to determine how much
China’s exports will grow over the period. We determined import’s growth path a direct func-
tion of our assumed GDP growth path (high/low) for China and China’s estimated marginal
10
Commodities
Quarterly Preview — October 2013
propensity to import.
Given estimates on how much of each commodity is used in different consumer products
(vehicles, fridges etc.), construction and other fixed asset investment, we project China’s de-
mand for these commodities under the event where the country does rebalance towards our
target HHCE/GDP and GFCF/GDP ratios, given our GDP growth rate. We feed this into our
supply/demand balances for commodities to determine how the market balances changes.
We see a rising risk of no or little rebalancing over the medium term
Despite our base-case scenario, we assign a 30% probability to a lower growth path driven by
investment spending rather than consumption spending over at least the next two years. This
is evident in data prints which show that fixed asset investment has not slowed substantially,
while e.g. retail sales growth remains relatively flat.
We believe that one has to be cognisant of the fact that any economic growth path under tran-
sition is not going to be linear, and there is a growing risk that for a period of time, China’s
lower growth will be dominated by investment-led spending.
Domestic consumption expenditure is too small to utilise excess capacity in the Chi-
nese economy — especially with foreign demand lower than the pre-2008 levels. Given
that household consumption expenditure constitutes only 38% of GDP, even if the gov-
ernment stimulates domestic demand, domestic demand cannot take up the slack left
Base case
Target HHCE as % of GPD = 50%
Alternative scenario
Target HHCE as % of GPD = 38%
HHCE Government GFCF GDP HHCE Government GFCF GDP
2012 7.80% 7.80%
2013E 10.09% 10.00% 4.00% 7.50% 5.05% 8.00% 9.00% 7.50%
2014E 7.86% 8.00% 4.00% 7.00% 4.85% 7.00% 7.00% 7.00%
2015E 9.03% 7.00% 3.00% 6.00% 7.29% 7.00% 5.00% 6.00%
2016E 6.26% 7.00% 3.00% 6.00% 4.26% 7.00% 5.00% 6.00%
2017E 8.16% 4.00% 2.00% 5.00% 5.05% 5.00% 5.00% 5.00%
2018E 8.76% 4.00% 1.00% 5.00% 6.24% 5.00% 4.00% 5.00%
2019E 8.51% 4.00% 1.00% 5.00% 6.22% 5.00% 4.00% 5.00%
2020E 8.29% 4.00% 1.00% 5.00% 6.20% 5.00% 4.00% 5.00%
2021E 8.09% 4.00% 1.00% 5.00% 6.18% 5.00% 4.00% 5.00%
2022E 7.91% 4.00% 1.00% 5.00% 6.16% 5.00% 4.00% 5.00%
0%
25%
50%
75%
100%
'10
'11
'12
'13
'14
'15
'16
'17
'18
'19
'20
'21
'22
Figure 4: Base case scenario — composition of GDP
0%
25%
50%
75%
100%
'10
'11
'12
'13
'14
'15
'16
'17
'18
'19
'20
'21
'22
Figure 5: Alternative scenario — composition of GDP
Figure 3: GDP growth and rebalancing scenarios
Source: Standard Bank Research Source: Standard Bank Research
Source: Standard Bank Research
11
Commodities
Quarterly Preview — October 2013
by slower growth in both fixed capital formation and exports, or any one of them indi-
vidually.
Furthermore, many SOEs, local governments and individuals are highly leveraged, and
consumption, driven by credit extension, may by constrained for now. As a result, ei-
ther growth may be even lower than anticipated, or central government will have to
deliver more investment led growth in the interim to prop up growth.
It is undeniable that a surge in unproductive, stimulus-related and debt-financed invest-
ment is going to result in a surge in non-performing loans and defaults. The majority of
the debt siphoned off to local government balance sheets — who were tasked with
propagating the stimulus programme — came from (1) bank lending (usually three-year
money paying for projects which will only generate cash flow in 5-10 years) and (2) land
sales to developers (meaning that the housing correction could lead to defaults). Logi-
cally, defaults will rise, swallowing up the banking sector, placing pressure on the state
to bail out the financial sector — which would undermine the shift towards consumption,
and choke growth.
While we acknowledge investment growth is not sustainable longer term, we believe it is prob-
able in the medium term.
Simulating rebalancing of Chinese economy: a balance sheet perspective
Under our base-case scenario for China, from a balance sheet perspective, we favour
platinum, palladium, lead and oil.
Our base-case scenario, and represented in our supply/demand balances, are a Chinese
economy shifting towards consumption. Under this scenario, from a deficit/surplus perspective
out to 2016, we favour platinum, palladium, lead and crude oil (see Figure 6 to Figure 9 ).
These commodities are either in deficits already, or go into deficits by 2016. Crude oil is not in
a deficit, but because supply is managed to a large degree by OPEC, the market remains very
much balanced throughout the time period under consideration. Apart from the fact that all
these commodities have a disproportionate exposure to consumption, the other factor they
have in common is that they also have large exposure to transport. When disposable income
of individuals rises, one of the areas where spending rises fast, is transport.
Under our base-case scenario, we do not favour aluminium, nickel and copper.
All three these base metals see rising surpluses. Aluminium, which actually ahs large expo-
sure to consumption driven growth (we estimate 53% of aluminium demand in China is related
to consumption driven sectors), is a market that is likely to produce to large surpluses to get
positive on price action.
Source: Standard Bank Research Source: Standard Bank Research
Figure 6: Platinum deficit/surplus under scenarios Figure 7: Palladium deficit/surplus under scenarios
(2,800)
(2,400)
(2,000)
(1,600)
(1,200)
(800)
(400)
0
2012 2013E 2014E 2015E 2016E
ozs ('000)
Base case Alternative
(800)
(600)
(400)
(200)
0
200
400
2012 2013E 2014E 2015E 2016E
ozs ('000)
Base case Alternative
12
Commodities
Quarterly Preview — October 2013
Under our alternative scenario, where the Chinese economy fails to rebalance, from a
balance sheet perspective, we favour copper, nickel and palladium.
Our alternative scenario favours commodities with exposure to infrastructure. Although palla-
dium has large exposure to transport (which is likely to grow at a slower pace if the economy
doesn’t rebalance towards consumption), the deficits projected for palladium is large enough
to offset slower demand growth under our alternative scenario.
Copper and nickel, both of which have large exposure to infrastructure and construction
spending, fare better. We don’t see copper moving into a deficit market, but the surpluses re-
duces substantially. Nickel, eventually moves back into a deficit market by 2016.
Under our alternative scenario, we don’t favour aluminium, lead, platinum and crude oil.
Platinum, because of its large exposure to not only transport, but also jewellery demand in
China, platinum deficits may actually decline by 2016. Jewellery demand constitutes 30% of
total platinum demand. In turn, China’s constitutes 70% of total jewellery demand.
Lead, because of its exposure to transport, sees less demand growth with the market moving
into surplus.
While we have a sizable surplus growing for crude oil under our alternative scenario, in reality
we doubt the surplus would be as big as we project. The simple reason is that oil supply can
be easily controlled by especially OPEC. However, should OPEC need to decrease output by
an additional 5mpbd, it may result in the cartel output becoming unstable as OPEC members
start producing more than their quota to maximize revenue. This is negative for prices.
Figure 8: Lead deficit/surplus under scenarios
Source: Standard Bank Research
Figure 9: Oil deficit/surplus under scenarios
Source: Standard Bank Research
(2)
0
2
4
6
2012 2013E 2014E 2015E 2016E
bbls (millions)
Base case Alternative
(400)
(100)
200
500
800
2012 2013E 2014E 2015E 2016E
mt ('000)
Base case Alternative
Figure 10: Copper deficit/surplus under scenarios
Source: Standard Bank Research
Figure 11: Nickel deficit/surplus under scenarios
Source: Standard Bank Research
0
100
200
300
400
2012 2013E 2014E 2015E 2016E
mt ('000)
Base case Alternative
(100)
(50)
0
50
100
150
2012 2013E 2014E 2015E 2016E
mt ('000)
Base case Alternative
13
Commodities
Quarterly Preview — October 2013
Figure 12: Aluminium deficit/surplus under scenarios
Source: Standard Bank Research
0
1,000
2,000
3,000
4,000
2012 2013E 2014E 2015E 2016E
mt ('000)
Base case Alternative
Simulating the rebalancing of the economy: an inventory perspective
We believe that looking at the balance sheet of commodities is a partial picture and can be
misleading. Inventory, and above-ground stock needs to be taken into account when making a
strategic and tactical decisions.
Under our base-case scenario for China, from an inventory perspective, we still favour
lead, platinum and palladium. All three metals show significant drawdown in inventory. We
Figure 13: Platinum inventory
Source: Standard Bank Research
900
950
1,000
1,050
1,100
1,150
1,200
2008
2009
2010
2011
2012
2013F
2014F
2015F
2016F
Days
Base case Alternative
Figure 14: Palladium inventory
Source: Standard Bank Research
400
600
800
1,000
1,200
2008
2009
2010
2011
2012
2013F
2014F
2015F
2016F
Days
Base case Alternative
Figure 15: Lead inventory
Source: Standard Bank Research
0
15
30
45
60
2008
2009
2010
2011
2012
2013F
2014F
2015F
2016F
Days
Base case Alternative
note that our estimates point to very high inventory levels for platinum and palladium which will
cap upside for the time being. However, we also believe that a sizable portion of the inventory
is closely held and unlikely to come back to the market anytime soon (see the PGM section
page 19 for details).
Under our alternative scenario, we would favour copper as the inventory in terms of days’ con-
sumption remains at low levels which should support the price. However, relative to other com-
modities, we also believe crude oil should hold up well, simply because we would expect sup-
ply to be better managed.
Lastly, we note that our surplus markets take into account only announced production cuts. Of
course, surplus market get to large, and inventory build to fast, existing production may be cut
(in addition to CAPEX). That may result in more balance markets sooner. Nevertheless, we do
believe this analysis provides an indication of which commodities are most likely to see ongo-
ing CAPEX cuts, and are at risk of potential production cuts under both scenarios.
14
Commodities
Quarterly Preview — October 2013
Figure 17: Copper inventory
Source: Standard Bank Research
Figure 18: Nickel inventory
Source: Standard Bank Research
Figure 19: Aluminium inventory
Source: Standard Bank Research
Figure 16: Oil inventory
Source: Standard Bank Research
88
89.5
91
92.5
94
2008
2009
2010
2011
2012
2013F
2014F
2015F
2016F
Days
Base case Alternative
0
7
14
21
28
2008
2009
2010
2011
2012
2013F
2014F
2015F
2016F
Days
Base case Alternative
20
40
60
80
100
120
2008
2009
2010
2011
2012
2013F
2014F
2015F
2016F
Days
Base case Alternative
0
25
50
75
100
2008
2009
2010
2011
2012
2013F
2014F
2015F
2016F
Days
Base case Alternative
15
Commodities
Quarterly Preview — October 2013
Gold — rising real rates are key
On a strategic basis, we still believe gold will trade higher over the next five years. From a
monetary perspective, we believe gold is undervalued and should trade higher. However, this
is unlikely to happen within the next 12 months as US bond yields move higher (see Figures
20 and 21). As a result, from a tactical perspective, we believe the metal is likely to struggle in
the next quarter and rallies should be sold into. We expect gold to average $1,330 in Q4:13.
Gold demand YTD has been exceptionally strong. Our Standard Bank Gold Physical Flow
index provides an indication of how strong 2013 demand has been relative to 2012 and 2011
(see Figure 22). YTD we believe China’s imports of gold is in excess of 1000mt already, and
while it may taper of towards year-end, we do believe Chinese demand could absorb most of
the upcoming ETF liquidation.
In recent weeks, physical demand has tailed of substantially — albeit, as mentioned, from high
levels. Tactically, one has to question the sustainability of a move in the gold price much
higher without strong physical demand, especially with our view that US 10-year bond yield will
move towards 4% over the next 12 months which will likely to keep ETF investors at bay.
In the past, we have seen an improvement in demand starting in September. However, this
year is different for a few reasons. Firstly, the Indian rupee is weak and gold in rupee is close
to all time highs (see Figure 23). Not only may the high gold price in rupee dampen buying, but
it may attract scrap selling. YTD we have not seen much selling in general because of the low
gold price but recent currency moves may change this. Secondly, we have seen strong buying
at lower prices during May to July, and combined India import duties, the seasonal pick-up in
demand may be much lower than previous year.
For now, we still doubt the sustainability of longs entering the market even if the Fed’s tapering
starts only in December (or perhaps even February). The main reason would be that we ex-
pect US bond yields to be at similar levels in 12 months’ time irrespective of whether tapering
starts in December or February. As a result, from a purely Fed-action perspective, we expect
the market to look through the exact timing of tapering to the actual outcome which, as pointed
out, we believe will be unchanged.
Longer term, we expect ETF liquidation to stop, which combined with cost pressures on mines,
should see gold turning steadily higher. This will be assisted by stronger fabrication demand.
Figure 21: US real interest rate
Source: Standard Bank Research
Figure 20: Gold vs. global liquidity
Sources: Standard Bank Research; Bloomberg
0
100
200
300
400
500
Jan
-04
Oct-0
4
Jul-0
5
Ap
r-06
Jan
-07
Oct-0
7
Jul-0
8
Ap
r-09
Jan
-10
Oct-1
0
Jul-1
1
Ap
r-12
Jan
-13
Index
Global liquidity Gold price
-4.0
-2.0
0.0
2.0
4.0
Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jul-13
QE US generic inflation-indexed bond yield
%
16
Commodities
Quarterly Preview — October 2013
Figure 23: Gold in Indian rupee
Source: Bloomberg
Figure 22: Relative strength of physical demand in 2013
Source: Standard Bank Research
Sources: GFMS; World Gold Council; Standard Bank Research; SBG Securities
Key forecasts (tonnes)
2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F
Mine supply 2,416 2,611 2,740 2,838 2861 2,861 2,804 2,748 2,693
Old scrap supply 1,316 1,735 1,719 1,649 1592 1,300 1,408 1,492 1,586
Primary supply 3,732 4,346 4,459 4,487 4453 4,161 4,212 4,240 4,279
Jewellery 2,193 1,814 2,017 1,975 1893 2,296 2,365 2,436 2,509
Industrial 439 410 466 453 407 416 428 441 455
Total fabrication 2,632 2,223 2,483 2,428 2300 2,712 2,793 2,877 2,963
Bar hoarding/coins/medals 856 791 1184 1513 1247 1,421 1,464 1,508 1,553
Exchange traded funds 321 617 368 162 279 (680) 100 150 200
Primary demand 3,809 3,631 4,035 4,103 3826 3,453 4,357 4,535 4,716
Primary surplus (deficit) (77) 715 424 384 627 708 (145) (295) (438)
Total official sector supply 296 34 (76) (440) (528) (350) (309) (309) (309)
Net hedging (de-hedging) (352) (234) (108) 11 (40) (40) 10 10 10
Net surplus (deficit) residue (133) 514 240 (45) 59 318 (444) (594) (737)
Gold price ($/oz) 872 974 1,227 1,573 1,669 1,456 1,440 1,525 1,620
Supply/demand balance for gold
0
30,000
60,000
90,000
120,000
Jan
-04
Aug
-04
Mar-0
5
Oct-0
5
May-0
6
Dec-0
6
Jul-0
7
Feb-0
8
Sep
-08
Ap
r-09
No
v-0
9
Jun
-10
Jan
-11
Aug
-11
Mar-1
2
Oct-1
2
May-1
3
INR/oz
0
75
150
225
300
113
25
37
49
61
73
85
97
109
121
133
145
157
169
181
193
205
217
229
241
253
Index
Trading days
2011 2012 2013
17
Commodities
Quarterly Preview — October 2013
Silver — we remain bearish
We still believe that silver is likely to trade below $20/oz for short bouts this year.
Our fundamental view on the metal remains unchanged. We maintain that silver’s underlying
demand/supply fundamentals remain weak and that inventory is abundant. In fact, we estimate
that above-ground inventory in China (the growing source of demand for the metal since 2009)
remains as high as 18 months of fabrication demand, up from 16 months at the start of 2012
and only 4 months in 2009 (see Figure 24).
Looking at the volumes of silver that China has imported since 2010, it is clear why inventory
is high in China (see Figure 25). In 2009, China was still a net exporter of silver. Due to
changes in export tax rebates and demand growth, China turned net importer of the metal in
2010. In that year, the country imported an average of 298mt per month. In addition, China
added another 288mt per month of silver from mine supply and scrap, leaving the total
monthly supply of metal at 586mt in 2010. In contrast, China’s average monthly fabrication
demand in 2010 was only 330mt per month, implying a monthly surplus of 256mt per month in
the local Chinese market during that year. This, by implication, had to be taken up by invest-
ment demand or stockpiled by fabricators. And even though China’s imports have slowed from
298mt per month in 2010 to 166mt per month in 2012, the decline in imports was still not
enough to stop the rise in metal within China.
The situation within China implies that one of two scenarios should play out before silver could
rise substantially higher on a sustainable basis (1) internal demand (fabrication and investment
demand) must grow faster to decrease the stockpiles; or (2) China must become a net ex-
porter of silver again.
On the former, although China’s manufacturing activity has picked up, we do not believe it is
strong enough to make a material difference yet (see Figure 26). As far as the latter is con-
cerned: even if China becomes a net exporter of silver, it would only imply that the metal has
shifted location and not been consumed — the result of which would be price-neutral at best.
Therefore, we believe that the former is the only scenario that could see silver stockpiles de-
crease and build a substantial bullish case for the metal. While our estimate of inventory in
China has increased at a slower pace in the past year, it is still rising. This, we believe, will cap
upside. As a result, we see silver struggling throughout most of this year. Furthermore, silver
has a beta of 1.4 with gold, implying that, if gold moved lower, silver would struggle even
more.
Source: Standard Bank Research
Figure 25: China net imports of silver Figure 24: China silver inventory (months of fabrication demand)
Source: China Customs
-1,000
0
1,000
2,000
3,000
4,000
2006 2007 2008 2009 2010 2011 2012
mt
0
5
10
15
20
2009 2010 2011 2012 2013E
months
18
Commodities
Quarterly Preview — October 2013
Sources: Silver Institute; Standard Bank Research
Key forecasts (tonnes)
2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F
SUPPLY 27,510 28,493 30,483 31,674 32,228 33,141 34,004 34,751 35,538
Mine production 21,263 22,272 23,370 23,689 24,281 25,131 26,011 26,791 27,595
Scrap recovery 6,248 6,221 7,113 7,985 7,947 8,010 7,993 7,960 7,943
DEMAND 27,225 24,325 27,684 27,265 27,447 28,193 29,164 30,223 31,376
Industrial 15,323 12,601 15,552 15,132 15,739 16,382 17,154 18,021 18,950
Photography 3,150 2,465 2,241 2,056 1,871 1,702 1,575 1,472 1,384
Jewellery, silverware & coins 8,751 9,259 9,891 10,078 9,838 10,109 10,436 10,730 11,042
SURPLUS/DEFICIT 286 4,168 2,799 4,409 4,781 4,948 4,840 4,528 4,162
PRICES ($/oz) 15.0 14.7 20.2 35.3 31.2 23.5 21.8 23.0 23.5
Supply/demand balance for silver
Sources: Bloomberg; Standard Bank Research
Figure 27: Industrial fabrication demand Figure 26: Global PMI
Sources: GFMS; Standard Bank Research
25%
13%
12%
20%
30%
US Japan India China Rest of the world
40
46
53
59
65
Jun-10 Jan-11 Aug-11 Mar-12 Oct-12 May-13
US Eurozone China Japan
Index
19
Commodities
Quarterly Preview — October 2013
Platinum Group Metals — no near-term upside
Our view on PGM remains largely unchanged — we believe from a tactical perspective, upside
remains capped for platinum, palladium and rhodium. We forecast relatively flat prices for all
three metals in Q4:13. That said, from a strategic perspective we believe all three metals
should trade higher, especially into 2015. We expect platinum to average $1,450 this quarter.
We pin our estimate for palladium at $725, and rhodium at $1,000 during Q4:13. Our fore-
casts for the year as a whole remain largely unchanged.
Largely unchanged balance sheets
We have adjusted our supply/demand balances only marginally from the previous quarter.
For platinum, we have adjusted South African mine supply lower over the forecast period.
Our demand forecast is unchanged. However, we have marked-to-market the rise in ETF hold-
ings seen over the past few months. Because of mainly supply side adjustments, our deficit
forecasts have grown for all three metals. We now expect platinum to register a 578Kozs defi-
cit in 2013, compared to our previous estimate of 451Kozs. For 2014, we expect a deficit of
620Kozs next year, compared to our previous estimate of 559Kozs for 2014. For palladium,
we expect a deficit of 1,256Kozs (unchanged from our previous deficit forecast for 2013).
However, we have increased our deficit forecast marginally for 2014, from 1,803Kozs to
2,003Kozs (see Figures 28 and 29).
Market still well supplied
Despite our bullish deficit projections for 2013 and beyond, we have a muted price outlook for
PGM, premised on a well-supplied spot platinum market, as evidenced by the almost un-
changed platinum price despite ETF holdings rising by 700Kozs since May (see Figure 30).
Platinum and palladium lease rates also remain almost at zero (see Figure 31). We believe
that above-ground inventory for both metals is high, which should cap price upside. In short,
the price behaviour of platinum and palladium seems to indicate large amounts of above-
ground inventory, which we believe calls for a focus on the inventory of these two metals. Our
analysis of above-ground platinum and palladium inventory indicates that above-ground inven-
tory is indeed high. In fact, these metals’ price behaviour is consistent with a market that re-
quires a PGM basket price which cuts into the cost curve in order to limit mine production. Our
estimates of above-ground inventory of platinum is 1,046 days of consumption, and 879 days
for palladium — probably higher than market consensus (see Special Report: PGM—much
more than we thought dated 26 June 2013).
We estimate the US has built substantial inventory in platinum and palladium since at least the
Source: Standard Bank Research
Figure 29: Palladium deficit forecasts Figure 28: Platinum deficit forecasts
Source: China Customs
20
Commodities
Quarterly Preview — October 2013
early 1990, while Japan and Switzerland have destocked. The UK has some inventory —
largely due to the shift of metal form Zurich to London (see Figures 32 and 33). We also find
evidence that other countries, such as China and South Korea, potentially have relatively large
stockpiles of platinum.
That said, we do believe that a fairly large portion of inventory, especially for platinum, may
indeed be tightly held, which if inventory is drawdown enough, should push prices higher. That
said, we do believe prices will take longer to rise than the market anticipated.
Platinum — autocat demand up marginally
The demand outlook for platinum remains relatively robust. For 2013, we expect (excluding in-
vestment demand) growth in net demand for platinum of 3% y/y. We still expect the EU to deliver
another poor auto volume year in 2013 (-1% y/y), but looking to recover somewhat into 2014.
We expect jewellery demand to remain robust into this year (5% y/y).
Palladium — strong growth in autocat demand
As far as palladium is concerned, the key driver behind our palladium view remains palladium’s
underlying use in gasoline autocats. Based on our global auto forecasts, this gasoline-biased
exposure has unquestionably provided palladium with valuable demand insulation from Euro-
zone auto-demand weakness, maintaining palladium’s exposure to key emerging-market growth,
relative stability in China, and a US recovery. We expect 2013 global auto assembly to increase
to 82.9m units, led by an expected 15% y/y in China (to 18.9m units) and the US adding 5% y/y
(to 10.6m units). Importantly, gasoline vehicles are expected to maintain a market share of 78%
in 2013. We therefore expect palladium net autocat demand to increase to 5.3moz in 2013, 8%
y/y. Total net demand for palladium is forecast at 7.7moz in 2013, representing yet another re-
cord level of demand.
China demand for platinum more price sensitive — capping upside for now
China is the dominant player in the platinum jewellery market, accounting for 70% of the world
platinum jewellery demand. Jewellery demand constitutes around 30% of total platinum de-
mand. The latest import data from China indicates that China’s platinum imports declined
17.5% m/m in August to 237Kozs, following a 6.6% m/m in July when China imported
289Kozs. The m/m decline in platinum imports by China follows an average platinum price of
$1,500 in August, up from an average platinum price of $1,405 in July.
We maintain that Chinese platinum imports have become increasingly sensitive to changes in
the platinum price since 2012 (see Commodities Daily dated 21 August 2013). A comparison
between platinum imports on a monthly basis vs. the platinum price also indicates price sensi-
tivity.
Source: Various ETFs; Standard Bank Research; Bloomberg
Figure 31: Palladium lease rates Figure 30: Platinum ETF holdings vs. price
Source: Standard Bank
21
Commodities
Quarterly Preview — October 2013
Source: Standard Bank Research
Figure 35: China platinum imports vs. price Figure 34: Pt and Pd by ownership
Source: China Customs
The fact that imports seem more sensitive to prices since 2012 implies that China has undergone a
cycle of stockpiling (over and above platinum consumed in jewellery, autocatalysts and other indus-
trial demand) and that perhaps China is more content to buy platinum at low prices rather than at any
price (see Figure 35). This would be consistent with our estimates that China has accumulated
2.3mozs of platinum inventory since 2008.
While China’s palladium imports are slowing
We also note that palladium imports into China are down despite the fact that auto production contin-
ues to move up (although at a slower pace than before — see Figure 36 and Figure 37). China can
get its metal from only three sources — imports, recycling, and inventory. Given that imports are
lower, the data would suggest that China either has enough palladium inventory for the time being, or
recycling in the country is higher than thought. Either way, import data suggests that China is con-
suming less metal than previous years relative to the number of autos produced. The China customs
data would also be broadly consistent with the Swiss customs data which indicates China’s YTD pal-
ladium volumes from Switzerland are largely unchanged compared to levels seen in 2012.
Rhodium outlook still muted by oversupply
Despite maintaining our view of relatively attractive rhodium market fundamentals and predicting sus-
tained rhodium market deficits from 2014 onwards, we are still not convinced that this will translate
into sustainable upside for the rhodium price. This lack of conviction is largely based on the inherent
Figure 33: Palladium above-ground inventory by location Figure 32: Platinum above-ground inventory by location
Source: Standard Bank Research Source: Standard Bank Research
1,300
1,450
1,600
1,750
1,900
150
190
230
270
310
Jan
-12
Mar-1
2
May-1
2
Jul-1
2
Sep
-12
No
v-1
2
Jan
-13
Mar-1
3
May-1
3
Jul-1
3
USDKozs
China Pt imports Platinum spot
22
Commodities
Quarterly Preview — October 2013
Figure 36: China vehicle production
volatility in rhodium’s price over the last 10 years, with the absence of a notable rhodium price correction since the GFC further
compounding the issue. In addition, we believe that the rhodium market remains very well supplied, and that metal will be sold
into rallies, preventing a sustainable rhodium price lift in the near term. The underlying rhodium market fundamentals continue
to closely mirror those of platinum, with the rhodium market expected to continue operating within a tightly balanced range.
Figure 37: China palladium imports
Sources: SBG Securities; Johnson Matthey
Supply/demand balance for platinum
Source: China AIA Sources: China Customs
Key forecasts (thousands of oz)
2009 2010 2011 2012 2013F 2014F 2015F 2016F 2008
South Africa 4,635 4,635 4,855 4,095 4,023 3,789 4,028 4,643 4,515
Russia 785 825 835 800 790 790 790 790 805
North America 260 200 350 295 292 289 285 282 325
Zimbabwe 226 280 340 340 423 463 468 468 180
Other 119 110 100 110 110 110 110 110 116
Total producer supply 6,025 6,050 6,480 5,640 5,638 5,441 5,682 6,294 5,940
Recycled supply 830 1,085 1,225 1,130 1,212 1,289 1,384 1,461 1,130
Total supply 6,855 7,135 7,705 6,770 6,849 6,729 7,066 7,755 7,070
Gross autocatalyst 2,185 3,075 3,105 3,240 3,377 3,655 3,966 4,224 3,655
Autocatalyst recovery (830) (1,085) (1,225) (1,130) (1,212) (1,289) (1,384) (1,461) (1,130)
Net autocatalyst 1,355 1,990 1,880 2,110 2,165 2,366 2,582 2,763 2,525
Jewellery (net) 2,245 1,685 1,670 1,890 1,993 2,083 2,178 2,277 1,365
Chemical 290 440 470 450 459 468 478 487 400
Electrical 180 220 220 155 155 155 155 155 230
Fuel cells 0 0 0 0 0 0 0 0 0
Glass 10 385 555 180 180 180 180 180 315
Investment 660 655 460 455 473 0 0 0 555
Petroleum 210 170 210 200 204 208 212 216 240
Medical and biomedical 250 230 230 235 243 250 259 268 245
Other 190 300 355 340 345 349 354 359 290
Total demand 5,390 6,075 6,050 6,015 6,086 6,061 6,398 6,706 6,165
Surplus (deficit) 635 (25) 430 (375) (448) (620) (716) (412) (225)
Price ($/oz) 1,208 1,612 1,722 1,553 1,504 1,650 1,850 1,975 1,611
23
Commodities
Quarterly Preview — October 2013
Sources for tables: SBG Securities; Johnson Matthey
Key forecasts (thousands of oz)
2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F
South Africa 574 663 632 641 576 566 533 567 653
Russia 85 70 70 72 90 89 89 89 89
North America 18 15 10 20 23 23 22 22 22
Zimbabwe 15 19 19 29 30 37 41 41 41
Other 3 3 3 3 3 3 3 3 3
Total producer supply 695 770 734 765 722 718 688 722 808
Recycled supply 227 187 241 277 259 287 324 359 377
Total supply 922 957 975 1,042 981 1005 1012 1081 1185
Gross autocatalyst 768 619 727 715 782 846 934 1026 1100
Autocatalyst recovery (227) (187) (241) (277) (259) (287) (324) (359) (377)
Net autocatalyst 541 432 486 438 523 559 610 667 724
Chemical 68 54 67 72 81 83 84 86 88
Electrical 3 3 4 6 6 6 6 6 6
Glass 38 19 68 77 31 31 31 31 31
Other 25 21 21 38 66 26 29 33 37
Total demand 675 529 646 631 707 705 761 823 885
Surplus (deficit) 20 241 88 134 15 13 (73) (101) (77)
Price ($/oz) 6,529 1,597 2,452 2,018 1,274 1,081 1,350 1,650 1,775
Supply/demand balance for rhodium
Key forecasts (thousands of oz)
2009 2010 2011 2012 2013F 2014F 2015F 2016F 2008
South Africa 2,370 2,640 2,560 2,330 2,140 2,048 2,254 2,645 2,430
Russia 3,635 3,720 3,480 2,880 2,700 2,600 2,600 2,600 3,660
North America 755 590 900 905 913 930 957 964 910
Zimbabwe 180 220 265 265 327 358 362 362 140
Other 160 185 155 165 167 168 170 172 170
Total producer supply 7,100 7,355 7,360 6,545 6,247 6,105 6,343 6,742 7,310
Recycled supply 965 1,310 1,655 1,660 1,779 1,901 2,080 2,149 1,140
Total supply 8,065 8,665 9,015 8,205 8,180 8,207 8,773 9,053 8,450
Gross autocatalyst 4,050 5,580 6,155 6,615 7,115 7,826 8,609 9,256 4,465
Autocatalyst recovery (965) (1,310) (1,695) (1,660) (1,779) (1,901) (2,080) (2,149) (1,140)
Net autocatalyst 3,085 4,270 4,460 4,955 5,336 5,924 6,528 7,106 3,325
Chemical 325 370 440 530 242 230 219 208 350
Dental 635 595 540 530 541 551 562 574 625
Electronics (net) 975 970 895 770 778 785 793 801 1,025
Jewellery (net) 705 495 295 255 520 510 500 490 855
Investment (net) 625 1,095 -565 470 -19 0 0 0 420
Other 70 90 110 105 106 107 108 109 75
Total demand 6,420 7,885 6,175 7,615 7,503 8,108 8,711 9,288 6,675
Surplus (deficit) 680 (530) 1,185 (1,070) (1,256) (2,003) (2,367) (2,546) 635
Price ($/oz) 266 529 733 644 727 825 925 983 351
Supply/demand balance for palladium
24
Commodities
Quarterly Preview — October 2013
Aluminium — too few production cuts
Demand robust, but still the slowest since 2009
Despite an apparent slowdown in aluminium demand over Q3:13, we still expect aluminium
demand to increase by a healthy 4.6% in 2013. However, this will be the slowest year of
growth since 2009 and will fall beneath the 5.5% CAGR of the last 12 years. Positive growth is
being largely supported by China, the US, India, and, to a lesser degree, Germany.
At times of recession, aluminium benefits from the fact that sales into the packaging sector, in
the form of cansheet and foil, account for almost half of global demand. In mature economies,
packaging is a fairly stable, recession-proof sector, providing an extremely strong base for
aluminium demand (see Figure 38). Meanwhile in emerging economies, the growing middle
classes tend to aspire to live a more Western lifestyle which includes a greater per capita con-
sumption of packaged goods.
In addition to these more traditional uses, aluminium continues to make good progress in its
use in the transportation sector. It is here where big gains are being made. Light-weighting and
fuel economy is losing none of its appeal, with oil prices back over the $100/bbl mark yet
again.
The real drag on aluminium demand in recent years has been the lacklustre performance in
the construction sector. Current spending on aluminium products for construction use remains
very patchy, and will continue to constrain aluminium demand growth potential over our fore-
cast period.
Supply outlook — cuts not enough
Major aluminium producers Alcoa and Rusal have announced a significant amount of capacity
curtailments, though over the year to August global ex-China aluminium production showed a
decrease of only 0.4%. Increases in the GCC, North America and Africa — the only IAI report-
ing regions to show growth — almost entirely offset reduced output in other regions.
In China, central and south-western provinces continue to shutter high cost smelters, but these
are being more than offset by increases in the northwest of the country. State-owned compa-
nies and small-scale individual operations are seeing the brunt of the closures.
Some smelters in Europe remain at serious threat of closure at sub-$1,800/tonne prices and
falling premia. This threat is not about to be lifted. Over the next couple of years premium lev-
els will play a central role in determining whether high cost European smelters can remain in
operation. We doubt they will and have factored in further production declines in Europe over
Figure 38: Global demand for aluminium by sector
Source: MBR Sources: LME; Standard Bank Research
Figure 39: LME warehouse stock
20%
32%
7%
9%
21%
5%
6%Building & construction
Transportation
Electrical & electronic
Machinery
Packaging
Consumer durables
Other
0
1,325
2,650
3,975
5,300
Jul-03 Jan-06 Jul-08 Dec-10 Jun-13
Other Detriot Baltimore
mt ('000)
25
Commodities
Quarterly Preview — October 2013
Figure 40: Brent crude vs. aluminium
Sources: Standard Bank Research; Bloomberg Source: MB; Bloomberg
Figure 41: Europe aluminium premium
our forecast period.
Capacity additions in the GCC will continue, as most smelters in this region can still operate at
a profit even at current LME prices thanks to low cost gas supply contracts. Expansion plans in
Russia have been put on hold as Rusal becomes increasingly proactive in reducing aluminium
output. The ramp-up rate of already-completed smelter expansions in India is questionable as
Vedanta’s plants in particular struggle to source sufficient alumina to operate. For now, we
continue to factor in these expansions, but they are perhaps some of the most at risk in our
forecasts.
China will continue to dominate future aluminium production growth, but will remain close to
being a self-sufficient market. This is a key assumption of our aluminium outlook. Despite
strong growth in domestic production, there are still only negligible amounts of primary alumin-
ium coming out of the country. The risk is from increased exports of semi-fabricated products
rather than exports of primary metal.
Balance and price outlook
Annual surpluses in the aluminium market have been observed since 2007, and this will re-
main the picture over our forecast period; by 2016 a full decade of annual surpluses would
have been observed amounting to a large above-ground inventory level.
Recent cuts have tightened up the outlook for 2013-14, but not by enough to make much of an
impact on prices given the huge availability of metal directly from stock. As a result, aluminium
prices will, on average, likely remain below the $2,000/tonne mark out to 2015 which will keep
the pressure on smelters to reduce output further, assuming there is no rebound in premia
levels (see Figure 41).
By 2016, we believe that the market will finally start to tighten as demand remains strong but
production additions slow. If this tightening materialises, we believe that only then will we see
aluminium prices convincingly rebounding over $2,000/tonne.
Further upside potential for prices over the forecast period is fairly limited. What could trigger a
rally is more likely to come from a stronger-than-expected resurgence in demand. It is likely
that any price rally would be heavily sold into, while with so much idled capacity on standby,
the threat remains that restarts could quickly quash any longer-run price improvement.
The greatest threat to the aluminium price recovery that we model is the ongoing possibility of
financed stocks becoming unprofitable, or unworkable in the face of LME warehousing rule
changes, and being suddenly made available to the market. Such a flood, although highly
unlikely in our opinion, would see physical premia fall sharply and may also then weigh on
outright prices.
0
57.5
115
172.5
230
Jul-03 Jan-06 Jul-08 Dec-10 Jun-13
$/mt
R² = 0.3902
0
40
80
120
160
1,000 1,625 2,250 2,875 3,500
Aluminium ($/mt)
Brent ($/bbl)
26
Commodities
Quarterly Preview — October 2013
Supply/demand balance for aluminium
Sources: Standard Bank Research; IAI; WBMS; LME
Key forecasts (thousands of tonnes)
2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F
Production
Africa 1,715 1,681 1,744 1,795 1,683 1,700 1,726 1,728 1,789
North America 5,783 4,850 4,690 4,989 4,843 4,882 4,603 4,864 4,865
Latin America 2,660 2,508 2,306 2,183 2,038 1,914 1,870 1,961 1,970
Asia (ex. China) 3,700 4,321 4,854 5,759 6,637 7,576 9,043 10,725 11,135
Western Europe 4,840 3,964 4,089 4,139 3,622 3,510 3,586 3,417 3,345
Australasia 2,296 2,211 2,252 2,253 2,204 2,025 2,119 2,119 2,104
China 13,076 13,550 16,432 18,405 21,200 22,749 24,769 26,301 27,821
CIS and Eastern Europe 5,269 4,745 4,798 4,977 4,736 4,450 4,489 4,569 4,839
Total 39,339 37,830 41,166 44,500 46,964 48,806 52,205 55,684 57,868
Year-on year % change 3.5 -3.8 8.8 8.1 5.5 3.9 7.0 6.7 3.9
Consumption
North America 6,913 5,043 5,437 5,654 5,888 6,023 6,216 6,371 6,531
Asia (ex. China) 7,140 6,675 7,740 8,057 8,444 8,653 9,099 9,564 10,028
Western Europe 7,256 5,900 6,525 6,844 6,283 6,220 6,338 6,571 6,670
China 12,934 14,100 16,414 18,959 20,684 22,359 24,626 27,049 28,969
Others 4,288 4,163 4,390 4,610 4,705 4,856 5,001 5,139 5,301
Total 38,531 35,882 40,507 44,124 46,004 48,112 51,280 54,694 57,499
Year-on year % change 2.6% (6.9%) 12.9% 8.9% 4.3% 4.6% 6.6% 6.7% 5.1%
Implied surplus (deficit) 807 1,949 659 376 577 694 925 990 369
LME cash prices ($/tonne) 2,576 1,671 2,173 2,398 2,022 1,861 1,850 1,950 2,300
27
Commodities
Quarterly Preview — October 2013
Figure 43: Cumulative copper imports (refined & waste/scrap)
Source: China Customs
Figure 42: Copper LME Grade CIF premiums in Shanghai
Sources: Standard Bank Research; Metals Bulletin
Copper — surpluses on the horizon
Increased supply is coming and the global copper market appears to have entered an ex-
tended period of structural surplus for the first time in a decade. However, there are still inher-
ently supportive factors that make it unadvisable to get too bearish or assume that copper is
going to go the way of aluminium or nickel.
As mine supply grows, annual TC/RCs are also set to rise in 2014 from the benchmark level of
$70/7c this year towards current spot terms in the range of $90-100/9-10c.
Outright prices will be burdened by improved supply and reduced liquidity, but are likely to find
support from rising marginal costs, improved economic conditions overall and the likelihood
that availability of LME stocks will continue to be restricted to some degree.
We believe that the key variable in the outlook for copper prices going forward (as well as for
physical premia and TC/RCs) will be how quickly the concentrate surplus is processed into
refined metal. Our belief is that the major Chinese smelting groups (among others) will demon-
strate restraint and slow the conversion of the concentrate surplus into cathode. If that does
prove to be the case then we think the annual refined market surpluses can be contained to
200-300k tpy during 2014-2015, and even start to narrow by 2016.
We forecasts a copper price of $7,200/mt in 2014, $6,900/tonne in 2015 and $7,400/tonne in
2016.
Bonded warehouse inventory down, demand strong
Copper prices may have one last hurrah in Q4, possibly spilling over into early 2014, before a
run of annual surpluses see prices grind lower. As has been the case in recent years, there is
much focus on unreported cathode inventories held in Chinese bonded warehouses. Some
reports put stock levels as high at 1m tonnes early this year, having risen steeply during the
second half of 2012. They have fallen steadily this year, however, and are believed to have
been in the 350-450k-tonne range in recent months, as consumers have drawn down ton-
nages fairly regularly, while bonded inventories have also been topped up periodically, helped
by the intermittent opening in the SHFE-LME arbitrage window.
In China, official data shows that copper semis output grew by 21.6% over the seven months
to July, topping the 8m-tonne mark and breaking monthly records in the process. However,
this strength is not reflected in y/y data for copper consuming sectors, which has been gener-
ally solid, but certainly not spectacular. Admittedly, strong year-on-year growth has been seen
0
50
100
150
200
Jun-10 Jan-11 Sep-11 Apr-12 Nov-12 Jun-13
$/mt
0
2,000
4,000
6,000
8,000
10,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2010 2011 2012 2013
mt ('000)
28
Commodities
Quarterly Preview — October 2013
Sources: Standard Bank Research; MBR; CEIN Sources: LME; SFE; Standard Bank Research
Figure 44: Copper LME inventories Figure 45: Copper intensity of China exports by destination
66%
7%
1%
3%
17%
6%
European Union US India
Japan Asia (excl. Japan) RoW
0
210
420
630
840
Jul-03 Jul-05 Jul-07 Jun-09 Jun-11 Jun-13
LME New Orleans LME Other SFE
mt ('000)
in the production of vehicles (15.1%), household fridges and freezers (12.4% and 10.9%, re-
spectively) and power cable output (8.8%) and aircon unit production (8%) have been decent.
However, production of telecommunication cable (-7.5%), AC motors (1.2%), transformers
(4.9%) has been poor, and power generation capacity has grown by only 5.2%. Copper also
continues to face competition from aluminium in various applications, with aluminium alloy
even making inroads into LV and MV power cabling.
Lastly, we estimate that most of the exported goods manufactured in China which contains
copper goes to Europe. While copper contained in exports constitute only a small part of
Chinese demand (we estimate that construction and construction related activity accounts for
56% of China copper demand), an improved performance from Europe should benefit copper
demand form China at the margin (see Figure 45).
Mine supply more, disruptions fewer
Prior to 2012, annual growth in global copper mine supply had been less than 1% in four of the
six preceding years, and averaged just 0.4%/year in 2010-2011. However, a new era began in
2012 as unplanned disruptions slowed, albeit perhaps only temporarily, and as investment in
new capacity began to bear fruit. We see global growth at or above 4%/year over the 2012-
2016 period, peaking at 6.1% in 2014. One of the main reasons that copper prices have come
under such sustained pressure it the realisation that there is no holding back the rising tide of
concentrate supply.
Apart from the past year or so, the copper mining industry has shown itself to be fragile and
prone to disruptions. The accompanying table lists the disruptions seen this year, and though
there is scope for more before the year-end, disruptions have been relatively minor in 2013
compared with the +1m tpy losses seen during years.
CAPEX cuts on the rise
Further forward, capex reductions, lower prices, rising costs and greater industry consolidation
are likely to combine to see the next generation of projects curtailed somewhat too. Our table
of copper projects delayed or suspended has grown since this time last year. The total af-
fected capacity has risen to 3.1m tpy from last year’s assessment of 1.7m tpy, as the Que-
brada Blanca and Los Pelambres expansions have been delayed by Teck and Antofagasta,
respectively, and Oyu Tolgoi’s underground expansion has been put in doubt. Northern Dy-
nasty’s Pebble project in Alaska has also been added to our list with Anglo American’s with-
drawal from the JV placing an even bigger question marks over this ambitious project’s future.
29
Commodities
Quarterly Preview — October 2013
Supply/demand balance for copper
Sources: Standard Bank Research; ICSG; WBMS: LME
Key forecasts (thousands of tonnes)
2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F
Mine production
Total 15,531 15,898 16,020 16,023 16,740 17,544 18,614 19,414 20,191
Year-on year % change 0.3 2.4 0.8 0.0 4.5 4.8 6.1 4.3 4.0
Refined production
Africa 689 952 1,103 1,178 1,242 1,341 1,435 1,521 1,643
North America 2,013 1,753 1,664 1,706 1,649 1,677 1,727 1,798 1,834
Latin America 3,771 3,948 3,877 3,700 3,413 3,348 3,318 3,338 3,371
Asia (ex. China) -3,795 3,976 4,009 3,902 3,991 3,999 4,159 4,242 4,369
China 3,795 4,051 4,540 5,163 5,824 6,523 7,175 7,749 8,214
Australasia 502 446 424 477 461 463 471 475 475
Europe 3,620 3,442 3,616 3,714 3,736 3,658 3,617 3,650 3,690
Total 10,595 18,568 19,233 19,840 20,316 21,009 21,903 22,774 23,597
Year-on year % change 1.5 0.3 3.9 3.3 2.9 3.4 4.3 4.0 3.6
Refined consumption
North America 137 2,063 2,176 2,219 2,233 2,313 2,346 2,393 2,417
Latin America 41 521 656 599 623 620 642 674 714
Asia (ex. China) -5,202 4,540 4,739 4,455 4,425 4,507 4,696 4,837 5,006
China 5,202 7,086 7,385 7,881 8,840 9,370 9,886 10,528 11,160
Europe 4,917 3,568 3,970 3,976 3,599 3,639 3,690 3,756 3,831
Other 412 349 344 365 361 372 383 391 398
Total 5,507 18,127 19,270 19,495 20,081 20,821 21,642 22,578 23,527
Year-on year % change -0.8 0.1 6.5 3.2 3.1 3.7 3.9 4.3 4.2
Implied surplus (deficit) 176 222 (239) (228) (266) 188 261 196 71
LME cash prices ($/tonne) 6,959 5,178 7,543 8,813 7,958 7,419 7,200 6,900 7,400
30
Commodities
Quarterly Preview — October 2013
Lead — not as heavy as other metals
The lead market has only experienced one year of significant oversupply in the last 12 years
and has been in deficit for the past four consecutive quarters (see Figure 48).
Lead demand is robust though not particularly spectacular. Strong auto markets in the US and
China have been key drivers of above-trend demand growth for lead this year. We have an
optimistic outlook for these markets going forward, which should offset a slow recovery in the
European auto market and concerns over growth in emerging economies ex-China. In non-
auto markets, the outlook for industrial batteries is also solid in both developed and emerging
markets, and although China’s e-bike market is maturing and facing greater completion from
other battery technologies, there is the potential for strong growth in e-bikes to be seen in
other populous Asian markets (see Figure 46).
That said, against a supply side feeling constraints on primary production growth and suffering
regional scrap tightness, there is little scope in our view for the global refined lead market to
slip into surplus like its peers. On the contrary, we are looking for small deficit this year (29k
tonnes) and a larger deficit in 2016 (75k tonnes), with a finely balanced market seen in the two
intervening years.
We note that Chinese supply has the habit of surprising on the upside and, if clampdowns (not
only primary production, but ongoing actions against the battery recycling industry too) prove
to be less effective than anticipated, then Chinese refined lead output could well come in
above our current expectations. We view this as the main risk to our base-case forecasts.
This outlook will keep the global stocks-consumption ratio trending lower, from around three
weeks currently to 2.4 weeks by the end of 2016. Compared with aluminium at 11 weeks and
zinc at 10 weeks, lead really is in a different league, and this will see prices for the heavy
metal maintain a healthy premium over these two peers, which have often been traded along-
side lead as relative value pairs for much of the year.
Our annual price forecasts for lead are $2,525/tonne in 2014, $2,650/tonne in 2015 and
$2,850/tonne in 2016 — significantly higher than current levels. This is because much higher
prices are required to incentivise investment in necessary greenfield and brownfield capacity
additions outside China. Without these, the lead market risks slipping into deeper deficits dur-
ing the second half of this decade.
Source: ILZSG
Figure 46: Global demand for lead by sector
80%
6%
5%
3%1% 2%
3% Batteries
Rolled & extruded products
Pigments & other compounds
Shot/ammunition
Cable sheathing
Alloys
Other
Sources: MBR; Standard Bank Research
Figure 47: China share of Lead demand and supply
10%
22%
34%
46%
58%
2006 2008 2010 2012 2014
Production Consumption
31
Commodities
Quarterly Preview — October 2013
Supply/demand balance for lead
Mine production 2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F
Total 3,818 3,810 4,291 4,683 5,238 5,296 5,656 5,870 6,010
Year-on year % change 5.3 0.4 12.9 7.3 11.5 1.1 6.8 3.8 2.4
Refined production
Africa 116 98 116 120 99 102 114 119 120
North America 1,791 1,701 1,785 1,777 1,827 1,884 1,799 1,831 1,853
Latin America 330 274 252 282 275 329 395 407 415
Asia (ex. China) 1,372 1,306 1,396 1,549 1,653 1,623 1,656 1,672 1,689
China 3,452 3,773 4,158 4,604 4,646 4,878 5,269 5,585 5,920
Australasia 270 259 229 246 203 199 207 215 219
Europe 1,815 1,636 1,721 1,756 1,754 1,807 1,830 1,821 1,812
Total 9,146 9,047 9,657 10,334 10,457 10,822 11,268 11,650 12,028
Year-on year % change 10.0 -1.0 7.1 6.7 0.9 3.5 4.1 3.4 3.2
Refined consumption
North America 1,695 1,490 1,642 1,581 1,667 1,817 1,781 1,772 1,754
Latin America 296 360 365 384 379 376 389 405 429
Asia (ex. China) 1,732 1,689 1,721 1,878 2,032 2,095 2,118 2,182 2,247
China 3,456 3,925 4,171 4,588 4,628 4,813 5,246 5,561 5,950
Europe 1,813 1,500 1,639 1,626 1,600 1,634 1,609 1,601 1,596
Others 130 116 111 125 118 120 125 129 133
Total 9,122 9,080 9,649 10,182 10,424 10,855 11,268 11,649 12,111
Year-on year % change 5.2 -0.3 7.1 6.3 0.8 4.1 3.8 3.4 4.0
Implied surplus (deficit) 24 (41) (41) (2) 7 (33) 0 1 (82)
LME cash prices ($/tonne) 2,088 1,726 2,147 2,397 2,062 2,139 2,525 2,650 2,850
LME cash prices ($/tonne) 2,586 2,088 1,726 2,147 2,397 2,062 2,264 2,525 2,650
Sources: Standard Bank Research; ILZSG; WBMS; LME
Figure 48: Implied surplus/deficit
Source: ILZSG; Standard Bank Research
-120.0
-80.0
-40.0
0.0
40.0
2008
2009
2010
2011
2012
2013F
2014F
2015F
2016F
mt ('000)
Figure 49: Lead stocks as weeks’ consumption
Source: Standard Bank Research
0.0
0.9
1.7
2.6
3.4
2009 2010 2011 2012 2013F 2014F 2015F 2016F
weeks
32
Commodities
Quarterly Preview — October 2013
Figure 50: Growth in refined nickel consumption
Sources: INSG; Standard Bank Research Source: INSG
Figure 51: Global demand for nickel by sector
Nickel — selling into rallies
We see nickel demand driven by continued strong growth in Chinese stainless steel output
and gradually improving conditions in the world ex-China. Growth in Chinese NPI output is
expected to slow from its recent break-neck pace, as credit is tighter and ore and electricity
costs rise.
NPI remains swing supply
Antaike estimates that NPI production will reach 450k tonnes in 2013, which is on the high
side in our view, but certainly not beyond the realms of possibility, given the outperformance
so far. In our own model, we are factoring in annual output of closer to 425k tonnes, which is
closer to a 20% increase from 2012. Rising costs for Chinese NPI producers should help to
underpin nickel prices, even if the market remains in surplus. We do, however, see break-even
shifting from around $12,000/tonne at its lowest this year back towards $20,000/tonne in 4-5
years from now.
We expect non-Chinese nickel supply to edge higher as major HPAL and ferronickel projects
gradually overcome problems and improve operating performances, but this will be a slow
process.
The growth in use of 200-series stainless steel, which contains far less nickel than 300-series.
This switch scaled back demand growth for nickel units when prices were high and volatile.
But with lower prices more recently, the pendulum is swinging back to 300-series, which
makes for a more nickel-intensive stainless steel industry as we move forward.
Overall, therefore, the pace of global nickel supply growth is expected to moderate in the com-
ing years, though we do not expect a return to deficit until later in the decade. At the same
time, a blanket ban on Indonesian ore exports next year will not happen in our view, as it
would be counter-productive for the government. We do not expect to see prices mounting a
sustained price rally, even with a potential supply shock.
Q2 production reports from the world’s nickel majors were mostly disappointing as there was
very little in the way of the production cutbacks this oversupplied market so desperately needs.
That said, most companies did report lower production y/y. For the first six months, year-on-
year declines in output were seen by Norilsk (-4.2%), BHP Billiton (-2%), Anglo American
(-35.8%), Anglo Platinum (-33.7%), Sherritt (-11.4%), Eramet (-8%) and Talvivaara (-31.4%).
With increases only achieved at Vale (4.9%), First Quantum (31.1%) and Glencore Xstrata
(1.5%), the net effect on the market balance of these companies is a reduction in supply dur-
ing H1 2013 of 12,085 tonnes compared to H1 2012.
64%
18%
8%
5%5%
Stainless steel
Super alloy & nonferrous alloys
Plating
Batteries
Chemicals
-7
0
7
14
21
2006
2007
2008
2009
2010
2011
2012
2013F
2014F
2015F
2016F
% (y/y)
33
Commodities
Quarterly Preview — October 2013
Source: LME Source: International Stainless Steel
Figure 53: World stainless steel production Figure 52: LME nickel inventory
While Norilsk’s performance was partly due to the previously announced closure of Johnston
Lake, Eramet was the only company to imply an intentional market-related cutback, and stated
that it would continue to adjust production in line with market conditions. Further intentional
cutbacks are sorely needed, but a lack of producer response to lower prices is something we
have seen in other base metal markets too, so we should not be surprised by the lack of it in
nickel, yet.
Nickel remains a surplus market
But given the large surpluses in coming years, any price strength has, and will continue to be,
sold into for the foreseeable future. So we don’t hold out much hope of prices making any sus-
tainable headway above $15,000/tonne in the short to medium term. However, we believe that
the downside is relatively protected too, and we do not expect prices to extend their slump.
One reason for this is that the scale of short positions, acting as hedges against the record
high LME stock level (see Figure 52), looks to have reduced the capacity of speculators to
short the market aggressively, and may even become the trigger for short-covering rallies if
the rolling forward of speculative short positions serves to tighten up the nearby forward curve.
3,000
4,500
6,000
7,500
9,000
10,500
Jun-09 Mar-10 Dec-10 Sep-11 Jun-12 Mar-13
mt ('000)
0
50
100
150
200
250
Jul-03 Jul-05 Jul-07 Jun-09 Jun-11 Jun-13
mt ('000)
34
Commodities
Quarterly Preview — October 2013
Supply/demand balance for nickel
Sources: Standard Bank Research; INSG; WBMS; LME
Key forecasts (thousands of tonnes)
2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F
Mine production
Total 1,550 1,356 1,580 1,959 2,178 2,261 2,421 2,528 2,634
Year-on year % change -3.3 -13.2 17.1 22.6 5.0 3.8 7.1 4.4 4.2
Refined production
Africa 42 36 36 36 41 60 73 88 97
North America 168 117 105 142 140 138 140 141 142
Latin America 137 122 124 130 155 140 152 166 181
Asia (ex. China) 178 179 206 194 210 227 239 254 261
China 200 254 332 435 519 633 659 665 699
Australasia 142 168 141 150 174 187 221 251 282
Europe 510 444 502 525 512 497 507 512 512
Total 1,377 1,320 1,446 1,612 1,751 1,882 1,990 2,077 2,173
Year-on year % change -2.8 -4.1 9.5 11.5 8.4 7.4 5.8 4.4 4.6
Refined consumption
North America 137 98 130 141 145 148 156 161 163
Latin America 24 24 23 24 22 22 25 28 32
Asia (ex. China) 328 318 354 347 332 339 354 364 376
China 360 443 575 704 770 901 1,000 1,080 1,177
Europe 408 318 356 365 363 345 347 359 368
Others 29 33 27 27 27 26 27 28 30
Total 1,286 1,234 1,465 1,607 1,659 1,780 1,908 2,020 2,146
Year-on year % change -2.7 -4.0 18.6 9.7 3.4 7.3 7.2 5.8 6.2
Implied surplus (deficit) 90 85 (19) 7 89 102 82 57 27
LME cash prices ($/tonne) 21,058 14,712 21,811 22,843 17,530 15,032 14,200 14,800 16,300
35
Commodities
Quarterly Preview — October 2013
Zinc — smaller surpluses
The prospects for further robust demand growth for zinc from North American and Chinese auto
markets are strong; construction (and related sectors, such as appliances) is setting out on a mod-
est recovery path in the US; Europe is showing stability and will back this up with timid growth in
the coming years; and, in China, policymakers seem willing to give the economy a shot in the arm
when needed. As a result, we are comfortable forecasting global refined zinc consumption growth
in excess of 4% a year during our forecast period after a bumper 5.2% pace this year. Although
above-trend, this strong pace of demand growth in 2013 comes on the back of two very weak
years (+0.9% in 2011 and -2.7% in 2012) and is in line with ytd ILZSG estimates.
Supply consolidation grows
Our main interest in zinc going forward is on the supply side. Unlike many other base metals the
focus in zinc is now shifting to supply shortcomings and the outlook is becoming increasingly frag-
ile. This reflects a turnaround from our view up to last year when the pipeline of new mine projects
was overflowing. Then we were looking for larger surpluses and had greater confidence in that
view. Now the forecast surpluses are smaller and could disappear altogether sooner rather than
later.
Industry consolidation
What has changed since last year? The level of industry consolidation is greater, which should
breed more producer discipline. The demand for capital preservation among mining majors has
resulted in far more restraint on capital expenditure, while funding options for juniors has deterio-
rated further, which is slowing the pace of investment in new projects overall. Prices of zinc itself
and, importantly, its by-products, are lower-than-expected. And there have been technical difficul-
ties at certain new projects, which is uncharacteristic for zinc.
With the supply outlook ex-China looking more vulnerable, the focus shifts to China. Providing gov-
ernment efforts to increase regulation and control over the small mines sector are successful, we
believed domestic mine supply growth will be capped, resulting in a tightening global concentrate
market from around 2015-2017, which should start to spill over into the refined market.
Shrinking surpluses
Our current supply-demand model for zinc sees global annual surpluses shrinking in the coming
years, from 278k tonnes this year, to 118-148k tonnes in 2014-2015, and 43k tonnes in 2016.
Figure 54: Zinc LME 3-month price
Source: Bloomberg Source: LME
Figure 55: Zinc market balance
0
100
200
300
400
2007
2008
2009
2010
2011
2012
2013F
2014F
2015F
mt ('000)
1,700
1,950
2,200
2,450
2,700
Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13
$/mt
36
Commodities
Quarterly Preview — October 2013
Supply/demand balance for zinc
Sources: Standard Bank Research; ILZSG; WBMS; LME
Key forecasts (thousands of tonnes)
2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F
Mine production
Total 11,882 11,620 12,527 12,661 13,534 13,954 14,540 14,961 15,290
Year-on year % change 6.1 -2.3 7.6 3.7 5.1 3.1 4.2 2.9 2.2
Refined production
Africa 260 265 273 246 167 165 165 169 170
North America 1,356 1,224 1,261 1,232 1,233 1,230 1,226 1,232 1,239
Latin America 482 427 554 642 603 621 638 651 664
Asia (ex. China) 2,543 2,526 2,712 2,816 2,851 2,888 2,917 3,004 3,059
China 4,042 4,286 5,209 5,212 4,829 5,408 5,841 6,308 6,813
Australasia 499 519 499 515 501 505 507 509 511
Europe 2,476 2,050 2,382 2,425 2,412 2,458 2,477 2,465 2,453
Total 11,658 11,297 12,890 13,088 12,596 13,276 13,773 14,339 14,909
Year-on year % change 2.1 -3.8 13.7 2.5 -4.0 5.4 3.7 4.1 4.0
Refined consumption
North America 1,295 1,144 1,184 1,221 1,224 1,267 1,297 1,323 1,347
Latin America 432 340 427 436 386 371 393 424 450
Asia (ex. China) 2,578 2,381 2,669 2,594 2,656 2,736 2,790 2,874 2,932
China 4,145 4,659 5,403 5,468 5,291 5,873 6,343 6,755 7,262
Europe 2,626 1,939 2,488 2,513 2,363 2,382 2,425 2,461 2,486
Others 430 375 335 388 360 371 379 386 394
Total 11,506 10,858 12,544 12,722 12,352 12,999 13,627 14,224 14,870
Year-on year % change 2.0 -5.6 15.5 1.4 -2.9 5.2 4.8 4.4 4.5
Implied surplus (deficit) 152 356 210 350 196 277 146 115 39
LME cash prices ($/tonne) 1,880 1,662 2,159 2,193 1,948 1,901 1,870 2,000 2,500
Figure 56: LME zinc inventory
Source: LME Source: Standard Bank Research
Figure 57: Growth in refined zinc production
-5
0
5
10
15
2006
2007
2008
2009
2010
2011
2012
2013F
2014F
2015F
% (y/y)
0
325
650
975
1,300
Jul-03 Jul-05 Jul-07 Jun-09 Jun-11 Jun-13
Other Detroit New Orleans
mt ('000)
37
Commodities
Quarterly Preview — October 2013
Sources: Bloomberg; Standard Bank Research
Figure 58: Oil consumption vs. OECD leading indicator: high correla-
Crude oil — supply ample
We continue to believe that Brent crude oil will remain well supported on approach of $100/bbl.
However, we equally believe that demand over the next 12 months is unlikely to push crude oil
on a sustainable basis above $110/bbl. We expect Brent crude to average a $107/bbl this
quarter and $106/bbl next quarter. We expect WTI to average $103/bbl this quarter, falling to
$100/bbl in Q1:14. The risk lies to the downside for our forecasts.
Growth turns up
Oil demand has a high correlation with the OECD leading indicator which more recently has
shown signs of improvement (see Figure 58 and Figure 59). We do believe that this uptick in
economic recovery, driven by some extent by the US but also the EU (from a very low base),
will support demand growth. Downside risk lies in the US, where the partial shutdown of the
Federal government could dent GDP growth this quarter. As a result, WTI may be more vul-
nerable to a slide in prices than Brent.
The resilience of the US consumer in the face of the country’s various fiscal hurdles bodes
well, although we would warn against extrapolating the recent and abrupt pick-up in some eco-
nomic indicators — such extrapolation to our mind has perhaps led to over-enthusiasm in the
WTI market. We expect Chinese demand to hold steady, and since this quarter’s correction,
we feel that prices more or less also reflect such a view. However, we must note that a further
slowing of China’s economy is a non-negligible risk to our current pre-diction. Renewed sover-
eign debt problems in the Eurozone economy also pose another down-side risk, although our
baseline sees a modest improvement in the region’s economic activity.
Supply and production capacity ample
On the supply front, OPEC has expressed its comfort with current prices (choosing to maintain
its production ceiling at 30mbd), leaving the oligopoly as a relatively neutral factor for now (see
Figure 60). Ample OPEC spare capacity (currently at 5.4mbpd), as well as a relatively good
compliance level by OPEC members (producing 1.04mbpd more than the quota), should sup-
port prices on the downside, but free OPEC up to increase supply should it be needed (Figure
62). Furthermore, Saudi Arabia has at least another 2.5mbpd of spare capacity, and given
their willingness to increase supply in the past when needed, it may calm market fears about
the possible tightness in the market in the event of further political uncertainty in the Middle
East (see Figure 61).
Overall we believe the demand and supply picture from the US paints a less positive picture,
Figure 59: OECD leading indicator turning up in recent months
Sources: OPEC; Bloomberg; Standard Bank Research
-6
-4
-2
0
2
4
6
8
01-D
ec-0
7
01-A
pr-
08
01-A
ug
-08
01-D
ec-0
8
01-A
pr-
09
01-A
ug
-09
01-D
ec-0
9
01-A
pr-
10
01-A
ug
-10
01-D
ec-1
0
01-A
pr-
11
01-A
ug
-11
01-D
ec-1
1
01-A
pr-
12
01-A
ug
-12
01-D
ec-1
2
01-A
pr-
13
% y/y
-6
-2
2
6
10
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
% (y/y)
Oil demand (y/y) OECD leading indicator (y/y)
38
Commodities
Quarterly Preview — October 2013
Source: Bloomberg
and this is where we see the largest risk to lower oil prices emanate from. In the US oil produc-
tion continues to rise and imports continue to decline (see Figure 63). This in itself should see
some demand pressures ease in the global oil market. While crude inventories at Cushing has
come off all time highs and should continue to decline towards more normal levels seen in the
past five years (see Figure 66), total commercial oil inventories in the US remains near a five-
year high (see Figure 67).
On the demand side, we believe that demand for crude oil in the US may be soft in coming
months, partly because of fiscal policy, but also because we are not witnessing any substantial
uptick in US highway miles driven. We use US highway miles as a proxy for discretionary driv-
ing and transport needs for the underlying real economy (see Figure 65). Since 2008 there has
been very little growth.
As always, China remains a key driver of growth in oil demand. It is important that the econ-
omy has stabilised, but we also see a growing risk that the Chinese economy may under per-
form in terms of oil demand growth, largely because of growth that remains investment driven
as opposed to consumption drive. Given that the largest part of crude consumption goes to-
wards transport, slower growth in consumption would also implies slower growth in transport
needs.
Figure 60: OPEC production and spare capacity Figure 61: Saudi Arabia production and spare capacity
20
25
30
35
40
Jan
-00
Se
p-0
0
May-0
1
Jan
-02
Se
p-0
2
May-0
3
Jan
-04
Se
p-0
4
May-0
5
Jan
-06
Se
p-0
6
May-0
7
Jan
-08
Se
p-0
8
May-0
9
Jan
-10
Se
p-1
0
May-1
1
Jan
-12
Se
p-1
2
May-1
3
mbpd
OPEC production OPEC capacity
Figure 62: OPEC compliance Figure 63: US oil imports and oil production
2
4.5
7
9.5
12
Jan
-00
Se
p-0
0
Ma
y-0
1
Jan
-02
Se
p-0
2
Ma
y-0
3
Jan
-04
Se
p-0
4
May-0
5
Jan
-06
Se
p-0
6
Ma
y-0
7
Jan
-08
Se
p-0
8
Ma
y-0
9
Jan
-10
Se
p-1
0
Ma
y-1
1
Jan
-12
Se
p-1
2
Ma
y-1
3
mbpd
US crude production US oil imports
Sources: Bloomberg; OPEC; Standard Bank Research Sources: Bloomberg; OPEC; Standard Bank Research
Source: US DOE
0.00
0.70
1.40
2.10
2.80
Jan
-12
Mar-1
2
May-1
2
Jul-1
2
Sep
-12
No
v-1
2
Jan
-13
Mar-1
3
May-1
3
Jul-1
3
Sep
-13
mbpd
6
8
10
12
14
mbpd
Saudi Arabia production Saudi Arabia capacity
39
Commodities
Quarterly Preview — October 2013
Sources: DOE; Standard Bank Research
On the political front, it does appear as if at least for the next quarter, the political premium
priced into crude oil may be less as the UN start implementing its resolution on Syria, and the
US and Iran relations improves.
Figure 64: US refinery capacity utilisation
Figure 67: US total crude oil inventory Figure 66: Cushing crude oil inventory
Figure 65: US highway miles driven (12month MA)
Sources: US Dept. of Transportation; FHA;; Standard Bank Research
250,000
287,500
325,000
362,500
400,000
Jan Mar May Jul Sep Nov
5-yr range 2010 2011
2012 5-yr average 2013
k bbl
Sources: DOE; Standard Bank Research
61%
10%
13%
16%
Transport Industry Non-energy use Other sectors
Sources: Standard Bank Research; EIA
Sources: Standard Bank Research; IEA
Oil supply/demand balance
Key forecasts (millions of barrels per day)
2009 2010 2011 2012 2013F 2014F 2015F 2016F 2017F
DEMAND 85.4 88.3 88.9 89.9 90.8 92.3 93.4 94.4 95.47
OECD 46.3 46.9 46.5 46.0 45.5 45.4 45.3 45.1 45.20
Non-OECD 39.1 41.4 42.4 43.9 45.3 46.9 48.1 49.4 50.00
SUPPLY 85.4 87.5 88.6 91.0 92.1 93.3 94.5 95.6 95.00
Non-OPEC 51.4 52.7 52.8 53.4 54.3 55.2 56.2 56.9 57.00
OPEC oil and OPEC NGL 34.0 34.8 35.8 37.6 37.8 38.1 38.4 38.7 38.00
PRICES ($/bbl)
WTI 62 80 95 94 99 103 105 105 100
BRENT 63 80 111 112 108 109 110 110 105
11,000
22,000
33,000
44,000
55,000
Jan Mar May Jul Sep Nov
5-yr range 2010 2011
2012 5-yr average 2013
k bbl
0
75
150
225
300
Dec-7
0
Jul-7
5
Feb-8
0
Sep
-84
Ap
r-89
No
v-9
3
Jun
-98
Jan
-03
Aug
-07
Mar-1
2
miles (bn)
40
Commodities
Quarterly Preview — October 2013
Sources: Bloomberg; McCloskey; ICE
Figure 69: Atlantic thermal coal and Brent crude oil Figure 68: Pacific thermal coal prices
Sources: Bloomberg; McCloskey
Thermal coal — uphill struggle
Q3 Thermal Dynamics proved the most interesting for a while. Drummond’s 54-day strike, impacting c.4mt; the threat of a
Fenoco (45mtpa) rail strike; German elections potentially levering the Greens Party into a stronger position, impacting Euro-
pean emission prices; nascent signs of a synchronised global economic recovery; the threat of a 3-day Coal of India strike
(4mt); the Indian rupee devaluation to a 68.8:1 peak; a hotter-than-usual Chinese summer; and a freight dislocation rally led by
capes causing CFR & FOB spreads to widen, all served to push and pull at the Quarter’s prices. API2 & API4 fell just c.$3/t.
Newcastle bore the brunt of a larger c.$9/t fall, no longer supported by regional Asian (ex-China) contract demand, given the
overarching Pacific oversupplies.
For the Atlantic
For Q4:13 API 2, seasonal winter residential demand patterns can be expected to rise, compared to the Q3 summer holiday
season, together with some bottoming in European industrial demand. However, the ongoing rise of EU wind/solar/renewable
power alternatives and power plant closures, coupled with rising regional nuclear/gas and imported gas competition, plus
fewer supply disruptions from Colombia’s coal sector (+5mt q/q) will make any significant rally in thermal prices difficult, unless
the current Baltic cape freight rally doubles again from c.$30,000/day. Merkel’s choice of post-election coalition partner could
be the quarter’s wild card if her choice impacts Emissions pricing policy.
The 2-3 year price outlook remains relatively glum, given the European move away from a high ―C‖ energy mix towards renew-
ables; structurally weakening industrial demand and rising Colombian supplies (+10-15mt), with Russia remaining in the wings,
ahead of the US, and with RBCT supplies a memory.
For the Pacific
For the Pacific, Q4 will be largely be dictated by the strength of underlying Asian winter restocking momentum, particularly the
timing of China’s winter onset and the level of northern dislocation to its own production rates. Although we don’t expect a con-
tinuation of Chinese power demand growth at 13% y/y, as in August, we do expect growth in the 7-8% y/y range. India’s rupee
movements appear to have calmed, although the economy is far from strong, with India’s government struggling to pump-
prime due to high debts and inflation. Freight rates need to plateau too, before the Indians feel comfortable to re-stock, with the
Coal of India strike postponed until Dec’13. Newcastle Q4 quarterly contract benchmark negotiations between Glencore and
Tohoku Electric are expecting to settle in the range of $82-85/t FOB, vs. $92/t in Q2 and $89.95/t in Q3.
The Pacific’s longer-term outlook remains caught between several large elephants, including Indonesian & Chinese supply
momentum and Chinese/Indian import arbitrage dynamics. China is beginning to message a move away from LT coal con-
sumption (2017’s total energy mix aiming to fall from 70% to 65%), which will also impact LT growth projections. India is far
from an affordable position to follow suit this decade; however, yet may only support 5-10mtpa of imported demand growth
until the end of this decade.
0
50
100
150
200
250
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
$ /mt or $/bbl
API 2 (ARA) Brent Crude (front month)
0
1
2
3
4
5
6
7
8
9
0
50
100
150
200
250
May-0
4
Aug
-05
No
v-0
6
Feb-0
8
May-0
9
Aug
-10
No
v-1
1
Feb-1
3
RMB/USD $/mt
Newcastle 6700 kcal GAD FOB - prompt
Richards Bay 6000 kcal NAR FOB - prompt
RMB-USD exchange
41
Commodities
Quarterly Preview — October 2013
Sources: Standard Bank Research; McCloskey; BP
Supply/demand balance for thermal coal
Key forecasts (millions of metric tonnes)
2006 2007 2008 2009 2010 2011 2012 2013F 2014F
IMPORTS 588 607 612 649 693 732 777 814 842
Europe 160 162 160 150 135 155 160 160 160
China 30 40 35 80 110 105 106 110 105
India 28 35 35 60 75 90 100 110 120
Japan 120 120 120 125 130 115 125 130 120
Other 250 250 262 234 243 267 286 304 337
EXPORTS 605 608 612 650 690 730 770 815 845
Australia 110 112 125 140 140 160 175 190 200
Indonesia 185 195 200 230 270 270 280 290 300
China 55 45 35 20 18 17 16 15 15
Columbia 60 65 70 65 65 70 80 85 88
South Africa 67 66 62 62 62 70 75 80 86
Other 128 125 120 133 135 143 144 155 156
PRICES ($/mt)
API2 63 114 148 70 92 121 94 83 86
API4 50 80 122 64 91 118 93 82 84
Sources: Bloomberg; Port of Newcastle
Figure 71: Newcastle thermal coal exports Figure 70: Chinese thermal coal imports
Sources: Bloomberg; China Customs
-9
0
9
18
27
36
45
Dec-0
4
Jun
-05
Dec-0
5
Jun
-06
Dec-0
6
Jun
-07
Dec-0
7
Jun
-08
Dec-0
8
Jun
-09
Dec-0
9
Jun
-10
Dec-1
0
Jun
-11
Dec-1
1
Jun
-12
Dec-1
2
Jun
-13
mt (millions)
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
Oct-
06
Feb-0
7
Jun
-07
Oct-
07
Feb-0
8
Jun
-08
Oct-
08
Feb-0
9
Jun
-09
Oct-
09
Feb-1
0
Jun
-10
Oct-
10
Feb-1
1
Jun
-11
Oct-
11
Feb-1
2
Jun
-12
Oct-
12
Feb-1
3
Jun
-13
mt (millions)
42
Commodities
Quarterly Preview — October 2013
Figure 72: Iron ore 62% Fe prices
Sources: Bloomberg; TSI Sources: Bloomberg; Antaike
Figure 73: Chinese iron ore and steel inventories
Iron ore — still steady for now
Q3 Fe 62% iron ore (IO) prices rose to average c. $130/t, having reached $148/t in Q1 and
$126/t in Q2. Prices traded well above our expectations and our $125/t cost curve estimate for
nearly the entirety of the quarter. Chinese steel restocking demand strength was the dominant
cause of Q3’s price upswings, with August-September pig iron output rising well above-trend,
at 11.5% y/y. This left Q3 IO demand in line with Q2, normally the dominant quarter. Incoming
Chinese authorities turned policy 180-degrees at the end of June, shifting from messaging
negative property sector policies, to pump-priming the sector via social housing starts & devel-
oper funding, after witnessing July’s poor PMI results. While seaborne IO supplies began ris-
ing c.3mt/mth during the quarter, with improvements from Vale and ramp-ups from BHPB,
FMG and RioT, these were not enough to balance the surprisingly strong Q3:13 market, in full
re-stock mode.
Q4 demand momentum remains in China’s hands
We expect China’s Q4 demand growth to drop back from Q3’s 9.8% y/y average into a
7-8% y/y range. We anticipate ex-China will continue to gain little positive traction, after re-
cording YTD falls of -0.4% y/y, with previous success stories, Korea and Turkey, displaying
growth fatigue. China will conclude 2013 consuming over 1.4bln tonnes of ore; the seaborne-
ROW just 260mt.
Beyond Q4:13, Chinese demand volatility remains difficult to pre-plot, with annual growth rates
likely to swing in range from 5-8% y/y, equating to ore consumption growth of anywhere be-
tween 70-130mt next year alone (the law of very large numbers). At this stage, +80-90mt
seems the most plausible range, however, growth remains dependent on the extent Beijing
authorities continue to use social housing and infrastructure to prop up their annual GDP
growth targets and urbanisation goals.
Supply has many potential elephants to monitor
The late Q3 cape-freight rally highlighted the additional supplies beginning to flow from long-
awaited, large-scale expansions in the Pilbara particularly (FMG +20mt; BHPB +8mt; RioT
+20mt). For Q4, the momentum continues. While RioT’s late-Q3 +20mt first-phase Pilbara
expansion will gain traction, BHPB’s next expansion (+12mt) begins in Q4, as does FMG’s
(+20-40mt) Solomon project, with some uncertainty as to likely ramp-up rates, given the pro-
ject’s scale. Vale’s shipments continue to display erratic conditions; however overall Brazilian
shipments are expected to be stable-to-up in Q4. Goa’s Supreme Court mine ban hearings
offer the industry’s elephant risk, where as much as 4.5mt/mth tonnage could return across the
0
50
100
150
200
No
v-0
8
Ap
r-09
Sep
-09
Feb-1
0
Jul-1
0
Dec-1
0
May-1
1
Oct-1
1
Mar-1
2
Aug
-12
Jan
-13
Jun
-13
$/mt CFR
China Iron Ore Fines (62% Fe; CFR Tianjin)
China Iron Ore Fines (58% Fe; CFR Tianjin)
10
13
16
19
22
60
75
90
105
120
Jun
-10
Aug
-10
Oct-
10
Dec-1
0
Feb-1
1
Ap
r-11
Jun
-11
Aug
-11
Oct-
11
Dec-1
1
Feb-1
2
Ap
r-12
Jun
-12
Aug
-12
Oct-
12
Dec-1
2
Feb-1
3
Ap
r-13
Jun
-13
Aug
-13
Steel (mt)IO (mt)
China Iron Ore Inventory (LHS)
Chinese steel inventories (RHS)
43
Commodities
Quarterly Preview — October 2013
crucial Q4/Q1 period (when other regions are impacted by weather disruptions), if bans are
lifted. Meanwhile Chinese winter should expect to see at least 5mt/mth pulled from the market,
with 2012/13 not a useful comparative, given the prevailing cost pressures then.
Next year, BHPB, FMG and RioT will continue ramping up, with their next stage of expansions
weighted to the back end of Cal-14. Vale is meanwhile expected to bring +10mt from the
southern systems, with the timing of the next Carajas +40mt uncertain. MMX and Usinimas
may bring 7-12mt on-line if the Sudeste Superport is completed. Meanwhile Anglo’s Minas Rio
+26mt project will be keenly watched for its completion date, with ownership issues still out-
standing.
44
Commodities
Quarterly Preview — October 2013
Key forecasts (millions of tonnes)
2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F
Demand
China 457 646 622 704 742 815 891 1046 1081
Rest of the world 386 299 370 388 383 383 391 398 398
Total 843 945 992 1,092 1,125 1,198 1,282 1,445 1,480
Year-on year % change 12.0 5.0 10.0 3.0 6.5 7.0 12.7 2.4
Supply
Indian 105.7 119.2 107.6 79.5 43.0 9.1 10.5 28.0 28.0
Australian 327.3 375.3 430.9 465.8 495.3 593.7 672.3 737.9 778.8
Brazilian 276.5 267.8 311.3 299.7 316.5 312.9 363.7 434.7 465.7
Other South America 13.5 16.4 24.2 35.1 30.9 24.5 32.6 55.5 55.5
South Africa 31.5 44.1 47.0 49.4 54.2 55.0 55.0 55.4 55.4
Other Africa 12.0 12.0 13.0 17.1 23.7 33.9 49.2 60.5 71.0
North America 19.7 19.7 19.7 25.5 34.2 34.5 40.8 56.4 56.4
Northern European 31.0 43.4 41.8 71.9 59.9 56.5 59.4 65.8 65.8
Other (Asia/Middle East) 14.1 16.7 22.8 34.9 37.3 35.6 36.0 36.0 36.0
China landborne 4.2 7.3 10.4 4.8 5.7 6.0 6.0 6.0 6.0
China domestic concentrates 326.7 255.0 350.9 359.9 351.3 365.2 333.0 186.0 175.0
Total 1,162 1,177 1,380 1,444 1,452 1,527 1,658 1,722 1,794
Year-on year % change 1.3 17.2 4.6 0.6 5.2 8.6 3.8 4.1
ex China domestic concentrates 914.5 1018.3 1078.9 1094.8 1155.7 1319.4 1530.2 1612.6 831.4
Year-on year % change 10.0 11.3 6.0 1.5 5.6 14.2 16.0 5.4
-30.0 26.2 -12.9 -30.2 -42.0 37.8 85.4 133.1 ex China notional surplus (deficit) -11.7
Indian fines spot to China ($/mt) 152 86 151 171 128 131 122 112 100
Sources: World Steel Association; Company Announcements; Standard Bank Research
Supply/demand balance for iron ore
45
Commodities
Quarterly Preview — October 2013
Figure 78: China daily steel output rates — 2012/2013
Sources: Bloomberg; CISA Sources: Bloomberg; Energy Publishing
Figure 79: Hard coking coal vs. thermal coal (Qld FOB/t)
Metallurgical coal — supply dominates demand growth
Q3’s met coal spot price performance was rescued by China’s dramatic steel restock, which caused August pig iron
output to grow at a whopping 11.5% y/y. This had been enabled partly by the Chinese Central government’s clan-
destine property pump-priming, approving developers to re-finance and initiating above-trend social housing starts
during the quarter. The end-Q3 rally came, despite thermal coal price drops of c.$7/t, due to regional weather
(Indian Monsoon hydro growth and Chinese autumn destocking), together with the start-up of BHPB-BMA’s 4.5mtpa
Daunia mine in Qld. Met prices did not actually bottom until mid-August, in the low $130’s for premium HCC materi-
als. Spot for the quarter averaged c.$140/t, down from Q2’s $149/t and Q1’s $167/t. For 2013, spot prices look to be
heading to average c.$40/t lower than 2012, with the recent freight rally further eating into miner realisations.
For Q4, contract benchmark prices have been settled already between BHPB-BMA and Nippon, on behalf of Japa-
nese mills, at $152/t for Peak Downs and $148/t for Goonyella. These are up $7/t (c.5%) q/q, from $145/t for Peak
Downs and $141/t for Goonyella in Q3, reflecting the latter-stage Q3 pricing strength. PCI rates have settled at
$120.50/t.
Chinese demand offsetting ROW Stragglers
Seaborne Met Coal demand ex-China has remained relatively weak all year, growing at a paltry 0.3%. Of the strag-
glers, Europe has seen its pig iron output drop -2.4% y/y; Australia has dropped -5.3% y/y; South Korea has
dropped -6.3% y/y. Offsetting them, Turkey has grown 8.7% y/y; Taiwan has grown 15.3% y/y; India has lifted 3.7%
y/y, while Japan has managed to grow 2.3% y/y. However, with China included (up 6.6% y/y), the key seaborne met
coal consuming regions of the world have grown 4.7% (+43mt of pig iron annualised), equating to c.25-30 million
tonnes of additional met coal/PCI demand. A lack of demand growth is therefore NOT responsible for met coal’s
price falls this year.
Sustained supplies from the US and thermal crossover
Not only are all miners working to reduce costs to stay competitive rather than close; not only are US coking coal
exports continuing in the 55-60mtpa range (although -10mt since 2012); not only has the 4.5mtpa Daunia mine be-
gun production and port maintenance been completed at Haypoint; but of most relevance, China’s dominant ther-
mal /cross-over coking coal supplies continue to grow, overwhelmingly remaining Supply’s ―elephant in the room‖.
Price outlook
For Q4, we expect Chinese steel output growth, as the main driver for seaborne met coal demand, to drop back,
from above-trend 11+% y/y peak levels of Q3, towards 2013’s average GDP 7.5-8% growth range, while India’s
rupee devaluation; poor growth outlook & iron ore policy restrictions continue to hamper met coal imports. However
thermal coal restocking and Chinese winter supply disruptions should hold met pricing stable across Q4. Looking
ahead, pricing power looks dominated by supply growth (especially in China), more than offsetting demand growth,
despite the strength of China’s steel industry.
1.60
1.70
1.80
1.90
2.00
2.10
2.20
JuneAprilMarJanNovOctAugJuneMayMarjan
Mt/day
60
80
100
120
140
160
180
100
200
300
400
Feb-1
0
May-1
0
Aug
-10
No
v-1
0
Feb-1
1
May-1
1
Aug
-11
No
v-1
1
Feb-1
2
May-1
2
Aug
-12
No
v-1
2
Feb-1
3
May-1
3
Aug
-13
$/mt FOB
Premium Hard Coking Coal (Qld FOB) $/t Newcastle Thermal
46
Commodities
Quarterly Preview — October 2013
Sources: World Steel Association; Company Announcements; Standard Bank Research
Supply/demand balance for metallurgical coal
Key forecasts (millions of tonnes)
2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F
Supply
Australia 134.6 135.2 136.0 111.0 142.0 146.0 154.0 160.0 165.0
USA 38.7 34.5 52.0 62.0 70.0 60.0 50.0 40.0 30.0
South Africa 2.5 2.0 1.5 2.0 2.0 2.0 2.0 2.0 2.0
Indonesia 5.5 6.0 6.0 7.0 10.0 12.0 13.0 14.0 15.0
Canada 27.0 21.4 27.0 27.0 27.0 28.0 30.0 32.0 34.0
Poland 1.6 1.0 1.3 2.0 2.0 2.0 2.0 2.0 2.0
China 3.5 0.6 1.0 1.0 1.0 4.0 6.0 8.0 10.0
Colombia 2.1 2.0 2.0 2.0 4.0 6.0 6.0 6.0 6.0
Russia 13.6 13.2 18.0 19.0 21.0 23.0 25.0 26.0 27.0
Mozambique 0.5 2.0 6.0 10.0 15.0 20.0
Other 7.0 7.0 7.3 8.0 9.0 10.0 12.0 13.0 14.0
Total 236 223 252 242 290 299 310 318 325
Year-on year % change -5.7 15.8 -2.2 18.4 7.6 8.6 9.3 9.3
China domestic tonnage 325 345 365 402 410 430 451 474 492
Year-on year % change 6.0 6.0 9.9 2.1 4.9 5.0 5.0 3.9
Demand
Ex China seaborne demand 223 175 222 237 237 242 247 252 257
Year-on year % change -21.8 27.3 6.8 0.0 2.0 2.0 2.0 2.0
China total demand 328 378 412 445 463 486 510 536 557
Year-on year % change 15.3 8.8 8.2 4.0 5.0 5.0 5.0 4.0
China seaborne imports 3 31 38 32 36 45 55 65 75
ex China notional surplus (deficit) 17 (8) (28) 17 12 8 1 0 9
156 220 273 192 153 156 158 160 Australia hard coking coal spot fob ($/t) 319
Figure 80: China coking coal imports
Sources: Bloomberg; China Customs Sources: Bloomberg; Australian Customs
Figure 81: Australian coking coal exports
0.0
2.0
4.0
6.0
8.0
Ap
r-11
Jul-1
1
Oct-1
1
Jan
-12
Ap
r-12
Jul-1
2
Oct-1
2
Jan
-13
Ap
r-13
Jul-1
3
Mt
China Mongolia Met Coal imports China Met Coal imports
0.0
4.0
8.0
12.0
16.0
Mar-0
4
Jun
-05
Sep
-06
Dec-0
7
Mar-0
9
Jun
-10
Sep
-11
Dec-1
2
Mt
47
Commodities
Quarterly Preview — October 2013
Figure 82: China coking coal imports
Sources: Bloomberg; China Customs Sources: Bloomberg; Australian Customs
Figure 83: Australian coking coal exports
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Jan
-11
Mar-
11
May-1
1
Jul-
11
Sep
-11
No
v-1
1
Jan
-12
Mar-
12
May-1
2
Jul-
12
Sep
-12
No
v-1
2
Jan
-13
Mar-
13
Million to
nnes
China Mongolia Met Coal imports China Met Coal imports
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Jan
-04
Aug
-04
Mar-
05
Oct-
05
May-0
6
Dec-0
6
Jul-
07
Feb-0
8
Sep
-08
Ap
r-09
No
v-0
9
Jun
-10
Jan
-11
Aug
-11
Mar-
12
Oct-
12
Million to
nnes
Australian Coking Coal Exports
48
Commodities
Quarterly Preview — October 2013
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