Global Mineral Commodity Prices: Perspectives and Trendsportaldamineracao.com.br/wp-content/uploads/2018/05/cmb...2000 2004 2008 2012 2016 2020 2024 Change in Chinese consumption,

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Global Mineral Commodity Prices: Perspectives and Trends When Will the Market Hit Deficit: Risks, Opportunities, China‟s Changing Consumption Pattern, and Price Forecasts

September 19, 2017 John Mothersole Director, IHS Markit Pricing and Purchasing Service +1 202 481 9227 [email protected]

17th Brazilian Mining Congress and EXPOSIBRAM 2017

mailto:[email protected]

© 2017 IHS Markit. All Rights Reserved.

Agenda

• Base metal markets

> Top line global GDP growth and metal demand

> A look a production growth

> Price forecasts

•Headwinds to a sustained price recovery

> Tightening financial markets

> The changing character of Chinese growth

•Data Supplement

> Forecasts of industrial production and fixed investment

> Snapshots of aluminum, copper, nickel and zinc markets

2


Signs of life in base metals

• Market has moved into deficit

> A synchronized global expansion signals healthy demand growth

> Plus years of underinvestment are tightening conditions from the supply-side

• But we see prices supported rather than a sustained rally

• Headwinds that will check a strong continuing rally

> Slower growth in China

> Normalization of financial markets

> Don‟t discount the influence of lower oil prices in 2018

• Prices advance modestly over near-term. Real (inflation adjusted) prices remain fairly flat over the long-term

3

0,5

0,6

0,7

0,8

0,9

1,0

1,1

1,5

2,0

2,5

3,0

3,5

4,0

4,5

5,0

2012 2014 2016 2018 2020

IHS Markit Materials Price Index (all Commodities),2002w1=1.0, left

LME Base Metals Price Index, 2012:1=1.0, right


When will the market hit deficit? It already has

4

(2.000)

(1.000)

0

1.000

2.000

3.000

4.000

2001 2005 2009 2013 2017

LME Six Less Aluminum

Global base metal market balances, thousands of metric tons

Sources: WBMS, ICSG, ILZSG


Metals demand looks good Global new orders diffusion indexes (>50= expanding, 50< contracting)

5

46

48

50

52

54

56

2012 2013 2014 2015 2016 2017

New orders index, steel consuming industries, 3 month moving average

Source: IHS Markit © 2017 IHS

46

48

50

52

54

56

2012 2013 2014 2015 2016 2017

Aluminum Copper

New orders index, aluminum and copper consuming industries, 3 month moving average



Global growth is healthy and is now synchronized

GDP (percent change) 2016 2017 2018 2019 2020 2021-2027

World 2.5 3.1 3.2 3.1 3.1 3.1

Argentina -2.2 2.3 2.9 3.3 3.1 2.6

Brazil -3.6 0.4 2.1 3.2 3.8 3.2

China 6.7 6.8 6.5 6.2 6.0 5.7

Eurozone 1.7 2.1 1.9 1.7 1.6 1.5

India 7.1 7.1 7.5 7.6 7.6 6.6

Japan 1.0 1.4 1.0 0.7 0.2 1.0

Mexico 2.0 2.1 2.2 2.5 2.5 2.8

Russia -0.4 1.6 2.0 2.1 2.1 1.9

United States 1.5 2.1 2.7 2.4 2.1 1.9

6


Years of weak investment have slowed base metals production growth

7

-4

-2

0

2

4

6

8

-20

-10

0

10

20

30

40

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016

Global Gross Fixed Capital Formation, Metals and Metal Mining, percent change, left

Change in Global Base Metal Production, millions of metric tons, right


LME Price forecasts (US$ per metric ton)

8

Aluminum Copper Nickel Lead Tin Zinc

2017Q2

1,910

5,663

9,248

2,164

19,967

2,598

2017Q3

2,005

6,385

10,323

2,315

20,412

2,938

2017Q4

2,118

6,459

11,350

2,260

20,523

2,823

2018Q1

2,111

6,337

11,998

2,239

20,721

2,733

2018Q2

2,026

6,151

11,841

2,204

20,530

2,622

2018Q3

2,047

6,078

12,156

2,177

20,699

2,555

2018Q4

2,108

6,130

12,677

2,184

20,750

2,566


-1

0

1

2

3

4

5

6

2007 2009 2011 2013 2015 2017 2019

United States Eurozone Japan United Kingdom

Financial markets are “normalizing” in the developed economies

9

Policy interest rates, percent, end of quarter

Source: IHS Markit © 2017 IHS Markit

9


The “financialization” of base metals: has it peaked? If so, is the change cyclical or structural?

10

10

20

30

40

50

60

1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

SHFE introduces Cu contract in 1997, Al contract in Dec 03

LME, SHFE, CME Metals Trading Volume/Physical Consumption

?


China‟s debt level does not resemble other middle income countries – and has grown alarmingly

11

25

100

175

250

325

U.S. Eurozone China

2005

2010

2016

Total credit to non-financial sector, % of GDP

Source: Bank of International Settlements

25

100

175

250

325

Argentina Brazil Mexico

2005

2010

2016

Total credit to non-financial sector, % of GDP



Credit expansion in China is unsustainable and is a yellow flag even for near-term growth

12

-60

-30

0

30

60

90

120

-20

-10

0

10

20

30

40

-40 -35 -30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30 35 40

Argentina 94Q4-12Q2 China 05Q1-16Q4

Greece 98Q3-16Q4 Ireland 00Q1-16Q4, right

Credit to GDP gaps, percent


Quarters before and after gap “peak”


The intriguing correlation between Chinese money supply growth and base metal prices

13

-60

-40

-20

0

20

40

60

80

100

0

10

20

30

40

2008 2010 2012 2014 2016 2018 2020

Money Supply (M1), China, left LME Price Index, right

Year over year change

Source: IHS Markit


Imbalances in the Chinese economy also suggest that base metal consumption growth has hit an inflection point

14

0

20

40

60

80

100

120

1982 1986 1990 1994 1998 2002 2006 2010 2014 2018 2022

China Japan

Per capita consumption of base metals, in pounds

Sources: WBMS, ICSG, ILZSG, IHS Markit


Which has implications for global long-term base metal demand growth

15

-4

-2

0

2

4

6

8

10

2000 2004 2008 2012 2016 2020 2024

Change in Chinese consumption, millions of metric tons

Change in global consumption, millions of metric tons

Increases in consumption will peak early next decade and are not likely not match growth seen over the last 16 years


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Supplemental Data and Forecasts

Forecasts of global industrial production and fixed investment

Snapshot views of individual metals

Policy environment -- Fraser Institute data

17


Industrial production

Industrial Production

(percent change) 2016 2017 2018 2019 2020

2021-2027

World 1.3 2.9 3.1 3.1 2.7 2.7

Argentina -4.5 2.8 2.0 1.8 2.0 2.0

Brazil -6.8 1.4 1.9 2.5 2.9 2.9

China 6.1 6.4 5.7 5.5 5.4 5.3

Eurozone 1.5 2.3 2.3 1.8 1.6 1.4

India 5.8 2.3 5.8 6.8 7.1 7.3

Japan -0.2 4.2 2.0 2.2 -1.0 0.9

Mexico -0.1 0.8 1.9 1.9 2.0 2.1

Russia 1.3 2.9 2.2 2.3 2.2 2.0

United States -1.2 1.8 2.8 2.8 1.9 1.5

18


Real fixed investment

Real Fixed Investment (percent change)

2016 2017 2018 2019 2020 2021-2027

World 1.7 3.2 3.8 4.2 3.7 3.3

Argentina -5.0 10.7 3.6 4.8 3.3 3.4

Brazil -10.3 -3.3 3.6 4.6 4.6 3.4

China 3.6 4.8 5.3 5.7 5.0 4.3

Eurozone 4.1 2.2 2.5 2.3 2.2 1.9

India 2.4 1.0 7.6 9.8 10.2 7.3

Japan 1.0 2.9 1.6 3.0 0.0 0.5

Mexico 0.1 -0.9 1.6 3.6 2.7 3.0

Russia -2.5 1.2 2.9 3.9 3.4 2.6

United States 0.6 3.3 3.5 3.3 2.6 2.1

19


Aluminum: How disciplined are Chinese producers? Demand

> Global primary consumption will growth by more than

3.0% in 2017 and by 2.5% in 2018. Assuming

discipline among producers, this growth should be

enough to tighten the market over the next four

quarters.

Supply

> Capacity is ample with inventory still high. Chinese

production (the root cause of the industry‟s problems)

is being cut. How much „illegal‟ capacity comes off-line

– which isn‟t offset by new starts, will determine how

high prices move. Prices above $2,100/metric do

incentivize production.

Prices

> LME prices have pushed above $2,000/metric ton on

news that Chinese production is being cut. Prices will

remain near or above $2,100 per metric depending on

how much Chinese production remains off-line and

how much non-Chinese capacity comes back into

production.

20

2017Q4 2018Q4

PRICES Higher Flat

SUPPLY Tighter on production cuts

Tighter

DEMAND Slightly stronger

Stronger

1.400

1.600

1.800

2.000

2.200

2015 2016 2017 2018 2019

LME Aluminum, $/metric ton



Copper: Feeding frenzy Demand

> Consumption growth is forecast to be near 3%

in both 2017 and 2018. We do not see an

acceleration in Chinese consumption growth. We

do have concerns about 2018 US consumption

growth. Investors are clearly adding momentum

now as is a softer US$

Supply

> Q1 disruptions have been resolved. Concerns

over fresh disruptions seem over blown. Mine

production growth will slow but not alarmingly.

We still see a relatively balanced market in

2018

Prices

> Prices have cleared $6,900/mt though the

market is looking overbought. Watch inventory

and Chinese imports – they will tell the tale. We

avoid buys at current prices and await a pull

back. We see prices closer to $6,200 rather

than $7,000/mt in 2018H2

2017Q4 2018Q4

PRICES Lower Rising slowly

SUPPLY Neutral Neutral

DEMAND Stronger Slightly stronger

• 21

4.600

5.000

5.400

5.800

6.200

6.600

2015 2016 2017 2018 2019

LME Copper, $/metric ton



Nickel: Prices need to move higher

Demand

> Chinese stainless production remains strong and

holds the key to the forecast. Is it sustainable

or will slowing stainless production growth

undercut improving fundamentals that promise

to lift prices?

Supply

> Inventory remains high but mine production

growth is (finally) beginning to slow with refined

production now falling. The change should

eventually work down inventory and support

higher prices. Philippine exports are a wild card.

Prices

> Market‟s shift into deficit and the threat to

Philippine exports has lifted prices above

$12,000/mt. On a cost basis we believe prices

need to move above $13,000.

22

8.000

9.000

10.000

11.000

12.000

13.000

14.000

15.000

2015 2016 2017 2018 2019

LME Nickel, $/metric ton


2017Q4 2018Q4

PRICES Higher Higher

SUPPLY Ample Tighter

DEMAND Slightly Stronger

Slightly stronger


Zinc: Deficit closing Demand

> Decelerating Chinese consumption growth remains a headwind to zinc prices. Chinese growth look weak thus far in 2017 and may remain flat for the year.

> Global consumption ex-China grew by 1.4% year on year (y/y) in June and may grow as much as 4.0% in 2017.Global consumption growth looks to remain under 1.0%.

> Global consumption growth looks better in 2018 with growth nearer 3.0%.

Supply

> Zinc concentrate supply remains tight in the immediate months ahead.

> In June, global primary mine production was up 2.5% year on year. Mines in Canada, Peru and China are ramping-up.

> Growing mine production stabilizes inventory in the next 12-months.

Prices

> Zinc's deficit shrinks to 160,000 metric tons in 2017 and moves closer to balance in 2018. Prices retreat to $2,600/mt average in 2018.

23

2017Q4 2018Q4

PRICES Slightly Lower Lower

SUPPLY Tight Less Tight

DEMAND Neutral Slightly Stronger

1.500

1.900

2.300

2.700

3.100

2015 2016 2017 2018 2019

LME Zinc, $/metric ton



Climate for the mining industry globally has improved since 2007 and suggests a better investment environment in the near future

24

0,94

0,96

0,98

1,00

1,02

1,04

1,06

2001 2003 2005 2007 2009 2011 2013 2015

Fraser Institute Global Policy Perception Index (Adjusted)

Source: Fraser Institute

Policy Perception Index is composed of survey responses to factors that affect investment decisions: administration of [industry] regulations, environmental and labor regulations, regulatory duplication, legal and tax regime, uncertainty concerning protected areas and dispute land claims, infrastructure, security, trade barriers, institutional stability, geological quality, and availability of skilled labor.


Fraser Institute Policy Perception Index for key South American countries

25

50

60

70

80

90

20

30

40

50

60

70

80

2001 2003 2005 2007 2009 2011 2013 2015

Brazil


30

40

50

60

70

80

20

30

40

50

60

70

80

2001 2003 2005 2007 2009 2011 2013 2015

Argentina

Source: Fraser Institue

Index methodology changes in 2015

74

78

82

86

90

94

50

60

70

80

90

2001 2003 2005 2007 2009 2011 2013 2015

Chile


54

58

62

66

70

74

78

20

30

40

50

60

70

80

2001 2003 2005 2007 2009 2011 2013 2015

Peru


Documents

Global Mineral Commodity Prices: Perspectives and Trendsportaldamineracao.com.br/wp-content/uploads/2018/05/cmb...2000 2004 2008 2012 2016 2020 2024 Change in Chinese consumption,