Raw materials: Unlikely return of the 2003-2013 … 2016... · 6/13/2016 · Raw materials: Unlikely return of the 2003-2013 supercycle Understanding the macroeconomic context and

Raw materials: Unlikely return of

the 2003-2013 supercycleUnderstanding the macroeconomic context and impact on raw materials

9th June 2016

1

Context and scope

Summary of WMF 2015

▪ Increasing pressure on the materials industry to meet the expected

booming global demand

– Need to cope with middle class growth, urbanization,

connection to the internet and general push for green behaviors

– Need to produce more quantities at lower cost and with less

damage to the environment

– Need to anticipate future balance of supply and demand

▪ Need to design a new path to seize the resulting business

opportunity

– Improved processes to extract and transform resources

– Increased efficiency of circular economy

– Alternative materials to substitute or complement existing

offering

▪ New management approaches necessary to succeed

– Integrated approach combining materials composition and

sourcing, part design and manufacturing processes

– Partnership among different actors, competitors and customers

to leverage new skills

– Innovation on governance of public / private schemes at an

international level

2

Contents

Understanding the

macroeconomic context

Assessing the criticality of

selected raw materials

3

Overview of future macroeconomic context

A supercycle like the one

seen in the 2003-2013

period is not expected to

return in the foreseeable

future, the Chinese

development profile was

unique, and it coincided

with significant

deterioration of geological

conditions

Physical availability of

supply is not likely to be

an issue, but practical

availability may be

impeded by cost,

exploration, accessibility,

environmental or

geopolitical limitations

Price corrections are

expected to occur, at least

for select materials, due to

temporary or perceived

imbalances in supply

and demand

1 2 3

4

China’s past growth was exceptionally fast – especially when put in a

historical context

Source: Angus Maddison; World Bank; McKinsey analysis; McKinsey Global Institute

1 Historical time required to replicate Chinese per capita GDP (in PPP terms, International Dollars) growth between 2002

($ 4 100) and 2011 ($ 8 700)

2 India is yet to surpass the Chinese 2011 level, expected to surpass the $ 8 700 per capita level in 2030, midpoint = 2022

121

47

42

73

101

1,3892

1,318

Country

66

44

13

15

1880 1900 1920 1940 1960 1980 2000 2020

Japan

202

United States

United Kingdom

10

India

Germany

10

South Korea

China

Year

Population in

the middle of

growth periodMillion

Time to replicate China’s per capita GDP1

growth between 2002 and 2011GDP per capita PPP Int. $,Years

End of period

share of global

GDPUSD Real, %

5%

33%e

11%

7%

1%

11%

5%2

1 NO RETURN OF THE SUPERCYCLE

5

An unprecedented fall in grade was seen across the mining spectrum,

and coupled with China’s boom, this led to sharp productivity declines

Global mine productivity (Calculated)1

Total Factor Productivity (MPI)

Grade Erosion

Source: McKinsey Basic Materials Institute (BMI Mining Model); MPI study 2015

100

80

0

082004 10 1206

+0.6% p.a.

2014

-4.0% p.a.

-8.3% p.a.

-2,6% p.a.

20140806 12102004

90

100

140

110

130

120

80

0

082004 201406

-6.5% p.a.

10 12

Typical productivity growth in

manufacturing sector of 2-3% p.a.1 2002 value assumed to be 100

6

Exploration spending has reduced in the last few years, potentially

reducing discoveries in the future

Source: McKinsey Basic Materials Institute, Minex, Press

Exploration estimates for global mining

USD Bn

12.9

17.0

5.12.33.01.9

0

5

10

15

20

25

30

+2% p.a.

2010

+33% p.a.

2000 201519951991 2005

-24% p.a.

▪ Across all major regions, world-class discoveries cost over 1 billion USD

▪ Global discoveries over the most recent 15 year period covered only two thirds of reserve

replacement needs, this shortfall is expected to increase


7

Boom time investments have led to current overcapacities in

many materials, like steel or aluminium, particularly in China

Source: Word Steel Association, World Aluminium, BMI Steel Vision, BMI Aluminium Vision

ILLUSTRATIVE

Expected capacity utilisation vs. expected demand to 2020 for select commodities


Exp

ecte

d s

urp

lus c

ap

acity

by 2

020

Lo

w

Expected demand growth By 2020

Hig

h

HighLow

• Seaborne iron ore

• Steel

• Bauxite

• Aluminium

• Copper

• Zinc

• Nickel

• Lithium

• Titanium

• Borates

http://upload.wikimedia.org/wikipedia/commons/f/f0/NatCopper.jpg

http://upload.wikimedia.org/wikipedia/commons/5/5d/Aluminium-4.jpg

8

The collapse of steel prices was driven by increasing

oversupply that will dampen future price growth

Source: Steel Business Briefing, McKinsey Integrated Steel Demand Model

Million Metric Tonnes, USD/tonne

589 644 663 738 714 683

723 772 779 829794

0

500

1,000

1,500

2,000

0

200

400

600

800

1,5431,532-2.7%

2015

+3.4% p.a.

819

+7.9% p.a.

14

1,502

1311

1,416

2010 12

1,3121,442

HRC N. EU dom. ex works Ruhr

Chinese Steel Demand

RoW Steel Demand

Average RoW capacity util.Percent

71 80 74 657083

STEEL EXAMPLE

Average CHN capacity util.Percent

85 80 80 767973


Global steel demand in 2015 experienced its first drop since 2009

9Source: IMF, MGI, McKinsey Basic Materials Institute

Global commodity markets suffered a bearish year in 2015. The main

causes were the stronger dollar, falling oil prices and growing

oversupply

Year on year change, percentage

1 Includes copper, aluminium, iron ore, tin, nickel, zinc, lead, and uranium price indices

IMF Metals Price Index1

Volumes

Oil price (WTI)

US$/Euro


-23-10-4

-17

14

48

-19-8

17

56

2235

12

-3-10

-16

03

-8

5

-5-5

7910

1020

5

-3

110503 07 10 12060402 1309082001 201514

-48

-5

4

-1

2029

-38

38

9173633

191

-15

-1

1555

9

-2

1

54565

22

Comparison of price drivers

10Source: McKinsey Mining Model

Steady state Supercycle up The new normal?

At current price and demand levels, multiple commodities

are seeing shrinking margins. Slow future growth is expected

MINING EXAMPLE1 NO RETURN OF THE SUPERCYCLE

0

2.000

1.500

1.000

500

2.500

00 08 1698 0492 10 14 18

13% p.a.

06

-1% p.a.2% p.a.

5% p.a.

15% p.a.

96 1294 02 20201990

Weakening $ Strong $

Revenue

EBITDA

Billion USD, Nominal

Revenues and EBITDA of the global mining industry

11

World population, Bn1

A growing middle class will continue to sustain demand for

commodities in the future

Source: Homi Kharas; Angus Maddison; McKinsey Global Institute Cityscope 3.0

1 Historical values for 1820 through 1990 estimated by Homi Kharas; 2010 - 2025 estimates by McKinsey Global Institute

2 Defined as people with daily disposable income above $10 at PPP. Population below consuming class defined as

individuals with disposable income below $10 at PPP..

8.0

5.1

2.2

1990

6.1

2020

3.3

2015

4.3

7.3

2010

3.1

3.8

3.6

7.6

3.7

6.9

2000

3.9

5.3

1.2

4.0

3.7

0.9

1970

2.8

2025

1.6

1900

0.3

2.2

2.5

0.11.5

2.9

1950

Consuming class2

Below consuming class

Share of

population in

consuming

class, %

7 12 24 23 36 45 49 57 64


The middle/consuming class is set to grow considerably toward 2030

12

Beyond demographics, future resource requirements will be strongly

influenced by a number of global key trends

Source: McKinsey and Company


Circular economy Automation & miniaturization

Green economy Sharing economy

13

The shape of the adoption curve of different products varies across

types and countries, leading to very different market growth patterns

Source: Euromonitor; McKinsey Global Institute analysis

Penetration, %

0

20

40

60

80

100

120

140

160

180

200

220

858075656055 70504515 20 405 250 30 3510

Per capita GDP$ thousand, PPP

Washing machines Smartphones Tablets

End product, and subsequently material demand will be dependent on penetration into countries with different

cultural values and geographies. “Technology” materials will outgrow “basic” materials

Take-off points

Saturation

points?


Household penetration by country, 2015

14

2000 to 2015 minesite cost increase1

Source: Industry research, Press search

$/t ore milled

4

113

9

2

8

4

2

0

2015E

1

1

11

+24(~251%)

35

2000

1

1 Weighted average across 369 minesites and 46 countries

Mine production continues to increase, while

years of production left shows volatility

COPPER EXAMPLE

2

Consu-

mables

Services

Labour

Power

Diesel

Other

There is no supply squeeze, but a squeeze on accessible

low cost supply

AVAILABILITY OF SUPPLY

14

38

34

18

12

19

17

16

15

13

10

11

44

42

40

36

0

30

28

0

32

20141994

Years of annual production

in reserves

Annual mine production

Ye

ars

of

an

nu

al p

rod

uc

tio

n in

re

se

rve

s

An

nu

al

min

e p

rod

ucti

on

, M

t

15

Large scale mining disasters worldwide are bringing environment

concerns to the forefront of government and local agendas

Source: McKinsey

0

10

20

30

40

50

60

70

80

0 95.030.0 90.025.015.010.05.0 45.0 75.0 80.0 100.085.040.035.020.0

Union relationships

Mine security

Maximum loss probable % of mine volumes

Environmental permits

2 AVAILABILITY OF SUPPLY

SINGLE MINE EXAMPLE

Second priorityFirst priorityProbability of happening in the next 5 years, %

Supply Disruptions

Community relationships

Legal affairs

Mining License renewalIndustrial security

16Source: McKinsey Value Pools

150

237

350385

505478

670

522

263

2008 2016

YTD1

15

-22% p.a.

141311 121009

0.50

<0.50

0.86

Oil & Gas

0.49

Chemicals

Mining

0.46Pulp

Flat steel

1 9 May 2016

2 AVAILABILITY OF SUPPLY

Bloomberg Mining IndexIndex, 2002 = 100

Relationship between current

commodity prices and market cap R², 2000-2013

Capital will continue to remain constrained, given the lower risk

appetites of investors and lenders and weaker balance sheets

17

Expected evolution of price regimes

Source: McKinsey & Company

Margins are expected to slightly improve for

most commodities by 2020

Copper

Phosphate rock

Alumina

Nickel

Seaborne iron ore

Gold

Seaborne thermal coal

Potash

Aluminum

Seaborne coking coal

Zinc

2020

2015

2015

2020

2020

2020 2015

20202015

2015

2020

20202015

20202015

20202015

2020

20202015

2015

2015

2015 Based on average price

Based on Value Pool Model2020

Price regime

3 PRICING

Brownfield Greenfield Fly-upCash cost

http://upload.wikimedia.org/wikipedia/commons/f/f0/NatCopper.jpg

http://upload.wikimedia.org/wikipedia/commons/3/3f/DSCN5766-guano-glantz_crop_b.jpg

http://upload.wikimedia.org/wikipedia/commons/5/5d/Aluminium-4.jpg

18

Contents

Understanding the

macroeconomic context

Assessing the criticality

of selected raw materials

19

We have defined a framework to assess criticality of commodities

18

23

24

25

25

27

28

79

1

104

Thermal coal

112

Copper (refined) 120

Gold

Iron ore

231

149

<1Indium

Vanadium

Potash

<1Lithium

Manganese

Coking coal

Aluminum

Ferrochrome

Zinc (refined)

Phosphate rock

Lignite

Nickel (refined)

Precious metals OtherBulk Minor metalsType of commodities

Value of raw materials produced Dimensions of criticality

Supply

▪ No geological scarcity, but

exploration underinvestment

▪ Many minor metals are by-

products (of Al, Cu, Ni, Pb)

▪ Accessibility issues

▪ 15-20 years from discovery to

production (trend: growing?)

▪ China’s role

▪ Trade restrictions

▪ Statistical issues

Pricing outcomes

▪ Fly-ups and sharp decreases

due to cyclical imbalances

and market anticipations

▪ Difficult to meet capital

requirements

Demand

▪ Effects of technology

developments (renewable

energies, electromobility…)

especially on minor metals,

rising technological volatility

▪ Reduction of material intensity

(nanotechs, 3D-printing…)

▪ Substitution effects

▪ EOL recycling

▪ Statistical issues

Community and government

▪ Institutional capacity

▪ Environmental issues

▪ Social/community acceptance

▪ Energy & water requirements

▪ Transparency/CSR

▪ Safety criteria

USD bn, 2015

CRITICALITY FRAMEWORK

20

We have classified the materials into four archetypes based on the

type of commodity and end-use

Stable supply

“Bulk

commodities”

Risky supply

“Minor

commodities”


Infrastructure Consumer

▪ Iron ore & steel for construction

▪ Aluminium for construction and

aerospace

▪ Copper for electric cabling

▪ Potash and phosphate for

agriculture

▪ Steel and aluminium related to

automotive / aerospace

▪ Solar power related elements,

e.g. Germanium, Indium,

Selenium, REE (permanent

magnets), Silver, Tellurium

▪ Energy storage elements, e.g.,

Lithium, Cobalt, Vanadium

▪ ICT driven materials, e.g., Gallium,

Indium, PGMs, Tantalum, REEs

(permanent magnets, phosphors,

fiber optics…)

▪ Aircraft (antimony, beryllium,

lithium, refractory metals,

scandium, titanium)

▪ … and more!

21

Criticality of all bulk commodities are expected to

stay at medium, with some pricing implications

in short term

Easing criticality

Medium impact

Contributing to criticality


Commodity Criticality

Iron Ore

Copper

Aluminium

Description

▪ Non-critical with limited opex or capex requirements

project pipeline is sufficient for fulfilling steel demand in the

near future; some impact from environmental and local

agendas expected

▪ Some criticality expected with price fly-ups in the

medium term (5-10 years. Potential move to aluminium

over copper for LV transmission and wiring. Urbanisation,

renewables and electromobility will drive demand growth.

Mining and beneficiation can cause lasting environmental

damage (e.g., acid mine drainage). Energy and water

availability can be issues in some places

▪ Demand growth remains robust, partly due to the shift

toward light-weight materials in transport. The major

challenge will be adjusting to declining prices through

efficiency measures, and controlling Chinese surplus

production.

22

Most minor commodities show limited criticality driven

by secure supply and single end-use requirements


Indium

(< 0.01 Mt)

Easing criticality

Medium impact


Commodity Criticality Description

▪ Main use: flat displays (LCD, OLED) - Substitutes possible. Slow

growth rate.

▪ Future: Copper-Indium-Gallium- Selenium thin film solar panels

(current market share: 2%)

▪ Non-critical. With limited smelter capex requirements production

could be increased if needed. Only +/- 30% of Indium recoverable from

zinc ores is currently recoverable.

▪ Large stockpile (> 4 years production) from the failed Fanya stockmarket

depresses the price

▪ Main producer: China (49% of total production)

▪ Main use: Li-ion batteries (44% of Li use). Very high growth rate (+/-

20%/year since 2013).

▪ Future: other batteries (metal-air, metal-sulfur …) may replace Li

(after 2025?)

▪ Non-critical in the ten next years with further investments; speculative

price fly-ups may occur in medium term if CAGR for Li batteries is 11-13%

for the 2014-25 period, as foreseen by Avicenne Consulting

▪ Large resources, much potential for new discoveries. 430 years of

2015 production in known reserves

▪ Geographically well distributed

Lithium

(0.03 Mt)

23





▪ Main use: Li-ion batteries (in the cathode: 3 of 6 commercially

available cathodes contain cobalt) - Substitutes to cobalt possible

with performance drop. Growth rate: 11-13%/year.

▪ Future: substitution of Li batteries after 2025?

▪ By product of Ni and Cu (64% depends on copper mining in DRC, 34%

on Ni mining). China leads (47%) the Co refining

▪ Large resources. Deep-sea polymetallic crusts are a huge potential

resource in addition to land-based resources

▪ Main use: as antimony trioxyde as fire retardant in plastics (electrical

cables) and composites (aircraft). (52% of Li use). Other important use:

lead-antimony alloy for car batteries. Slow growth rate

▪ Depletion of reserves (China) is a cause of concern

▪ Substitution of some composites by Li-Al alloy in aircraft and by lead-

calcium alloy in batteries may reduce future demand

▪ Main producer: China (77% of the 2015 global production, reserves of

its main deposit may be exhausted in 4 years.

Cobalt

(0.12 Mt)

Antimony

(0.15 Mt)

Easing criticality

Medium impact


24




Easing criticality

Medium impact


▪ Main use: stainless steel (45% of Ni use), non-ferrous alloys and

superalloys (43%).

▪ Almost flat demand and stockpiles at historically high levels depress

prices. Many producers lose money while continuing to produce.

▪ Future: slow growth. Demand for nickel metal hydride batteries used in

hybrid electrical vehicles set to decline in favour of Li-ion batteries with

less Ni in them.

▪ Large well distributed resources.

▪ High stainless steel recycling rate (60% recyclate in stainless steel

products)

▪ Main use: 91% of the global Mn production being used in steel

making,.its market is strongly coupled to the steel market issues.

▪ Demand for manganese oxide could grow rapidly if LiMn oxide

batteries become the favorite choice in electric cars, but small impact

on Mn demand (+0.1 – 0.2 Mt/ year by 2020)

▪ South Africa ( 32%), China (17%) and Australia (16%) are the main

producers.


Nickel

(2 Mt)

Manganese

(18 Mt)

25




Easing criticality

Medium impact


▪ Diversified uses mostly driven by steel applications: high-strength

low alloy steel (46%) non-ferrous alloys and superalloys (43%).

▪ Vanadium demand could rise sharply if Chinese regulation requiring

the use of 500 Mpa V-HSLA Grade 4 rebars for constructions is effectively

enforced.

▪ It could also be supported by the development of vanadium redox

flow batteries for energy storage

▪ Vanadium is produced as either a by-product of some iron ore

deposits (titaniferous magnetite mined for steel making (64% of the

vanadium produced: e. g. the Mapochs mine in South Africa) or

phosphate, coal, oil brines and black shales

▪ 2014 Production was dominated by China (54%), South Africa (26%)

and Russia (18%)


Vanadium

(0.8 Mt)

Documents

Raw materials: Unlikely return of the 2003-2013 … 2016... · 6/13/2016 · Raw materials: Unlikely return of the 2003-2013 supercycle Understanding the macroeconomic context and