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Goldman Sachs JBWere Commodities TeamMelbourne Malcolm Southwood [email protected] London Paul Gray [email protected]
Commodity Price OutlookHow long can the high prices be sustained?
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Commodity Price Trends: the start of a new era, or top of the (super) cycle?
0
100
200
300
400
500
600
J an-70
Jan-72
Jan-74
Jan-76
Jan-78
J an-80
J an-82
J an-84
J an-86
Jan-88
J an-90
Jan-92
J an-94
Jan-96
J an-98
Jan-00
J an-02
J an-04
Jan-06
GSCI - Spot I ndex, Daily, from J anuary 1970Source: Bloomberg
A Five Year Bull Run in
Commodities!
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Positive Structural Themes – Still Very Much Intact!Chinese demand growth:• The world’s biggest raw
materials consumer (China) is also the world’s fastest growing.
• We believe that this situation could continue for many years.
• In the longer term, this will be supplemented by Brazil, India, Russia ( the Goldman Sachs “BRIC” idea).
• Bumps in the road will occur, but in the longer term, it’s the trend rate of growth that matters.
Supply constraints:• Reduced exploration and
development spending over the past decade.
• Too few greenfield projects available, and reduced discovery rates.
• Long lead-times from discovery to commercial production.
• Infrastructure bottlenecks (oil; bulk commodities).
• Skills shortages, and long lead-times for equipment orders.
Currency:• Weak US dollar environment.
Global demand growth:• We envisage moderate (trend)
growth in OECD raw materials offtake.
We believe this environment will sustain strong commodities prices and improved growth opportunities. Resources company valuations should continue to rise.We recommend an overweight resources position.
I nvestment Flows:• Dominance of “long-only”
investment style (Index Funds).• Hedge funds and CTAs.
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The World and the BRICs dream
The Largest Economies in 2005 (US$ bn)
0
2000
4000
6000
8000
10000
12000
14000
US
Japa
n
Germ
any
Fran
ce UK
Chin
a
Italy
Cana
da
Russ
ia
Braz
il
Source: Goldman SachsThe Largest Economies in 2050 (US$ bn)
0
10000
20000
30000
40000
50000
60000
70000
80000
Chin
a
US
Indi
a
Braz
il
Russ
ia
Japa
n
Germ
any
UK
Fran
ce
Italy
Source: Goldman Sachs
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The World and the BRICS dream
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Russia
India
Italy France/UK
France/UK*
Cars indicate when BRICs US$GDP exceeds US$GDP in the G6
Germany
Japan USA
China
Brazil
Germany Japan USA
Germany
Italy Germany
Source: Goldman
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China: the dominant force in global commodity marketsChina's Share of Global Consumption (% )
0
10
20
30
40
50
60
Iron Ore* Coal Steel Al Cu Ni Oil*seaborne trade
1st
1st
1st1st
1st1st
2nd
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How long can it last? “saturation point” is typically $15,000 – $20,000 real GDP/capita (PPP adjusted) –
China is still < $7,000!Per capita consumption of steel and copper
Source: IMF World Economic Outlook
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The China (and India) growth story has many years to run
Oil Copper Aluminiumbarrels per person pounds per person kg per person
USA 25.2 16.0 23.3Japan 15.0 22.0 16.5Korea 16.1 38.0 25.0China 2.0 6.2 6.4India 0.9 0.9 0.8Source: Company data, GSJBW Research estimates.
Commodity Consumption per Capita (2006)
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Challenges to supply growth (1)
Quality and availability of projects: location; size; depth; grade etc.
Infrastructure: availability; cost; lead-time.
Personnel: Labour availability; skills shortages.
Capital equipment: extended lead-times.
Capital costs: have risen dramatically.
Financing and decision-making: What is an appropriate long-term price?
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Challenges to Supply Growth (2)
Green-field projects take at least 7 years to bring on line!
0 1 2 3 4 5 6 7 8Years
Source: Company data, GSJBW Research
Discovery
Drilling
Evaluation
Feasibility Study
Approval
Funding
Construction
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Challenges to Supply Growth (3):
Normal Mid-2007Grinding mills 20 44Draglines 18 36Locomotives 12 26Generators 12 24Wagons 12 24Reclaimers 18 24Haul Trucks < 6 24Crushers 16 24Source: Company Data
Extended lead-times for equipmenta constraint to supply-side growth
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Iron Ore
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Iron Ore: Seaborne trade - it’s all about China!
Seaborne Trade in I ron Ore(million tonnes)
0
100
200
300
400
500
600
700
800
900
1000
1990 1992 1994 1996 1998 2000 2002 2004 2006(f)
2008(f)
2010(f)
China
RoW
Source: TEX Report, GSJBW research estimates.
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Iron Ore: Chinese Imports.
Chinese Imports of I ron Oremillion tonnes
-
5
10
15
20
25
30
35
40
J an-99 J an-00 J an-01 J an-02 J an-03 J an-04 J an-05 J an-06 J an-07
1999: 55mt 2000: 70mt 2001: 93mt 2002: 112mt 2003: 148mt
Source: TEX Report, Reuters, GSJBW Research estimates.
2004: 208mt
2007: GSJBW F'cast: 380mt
2005: 275mt 2006: 326mt
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Iron Ore: where are the Chinese imports coming from?
Chinese Imports of I ron Ore: by Source% share by volume (tonnes)
49%44% 47%
41% 38% 39% 38% 41% 39% 38%
17%21%
21%27%
27% 26%22% 20% 23% 24%
13% 16%16% 18% 20% 22%
24% 25% 23% 23%
11%13%
11% 10% 9% 6%5% 4% 4% 3%
9% 6% 5% 4% 5% 7%11% 11% 11% 11%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1998 1999 2000 2001 2002 2003 2004 2005 2006 J an-J ul07
Other
S.Africa
India
Brazil
Australia
Source: TEX Report, China Customs
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Iron Ore: Beware the Chinese supply response!Domestic mine production rises to fill gap created by shortage of imports but
Av. Fe grade is declining.Chinese Consumption of I ron Ore (million tonnes)
0
10
20
30
40
50
60
70
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
0%
10%
20%
30%
40%
50%
60%
70%
Domestic Ore*
Imported Ore
Import Ratio (RHS)
Source: China Customs/Government Data, GSJ BW Research estimates
*converted to "Western equivalent".
Import Ratio
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Iron ore: Capesize freight rates – remain high and volatile.
Capesize Freight Rates for I ron OreUS$/tonne
0
10
20
30
40
50
60
70
80
J an-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
J ul-06
Jan-07
Jul-07
Tubarao (Brazil)to Baoshan
Dampier (WA) toBaoshan
Source: Clarksons
Freight Differential =
$40/t(Sep 2007)
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Iron ore: Spot prices at record levelsI ron Ore: Chinese Spot Price (63.5% Fe)
5060708090
100110120130140150
Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07
Source: GSJ BW Research Estimates, CRU International
US$/ t, CI F China
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Iron Ore Price Cycle
I ron Ore: Contract Price (% Ch. y/ y)
-15
-5
5
15
25
35
45
55
65
75
1981 1986 1991 1996 2001 2006 2011(f)Source: GSJ BW Research Estimates, CRU International
GSJ BW F'casts from 2008
I ron Ore Contract Price (USc/ dmtu)
0
20
40
60
80
100
120
140
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008(f)2010(f)
Lump PremiumHamersley High Grade FinesGSJ BW long term price for fines (52c/dmtu)
GSJ BW F'casts from 2008
Source: GSJ BW Research Estimates, Company Data
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Alumina & Aluminium
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Aluminium: Short-term Caution; Medium Term Optimism
0
50
100
150
200
250
J an-50
J an-53
J an-56
J an-59
J an-62
J an-65
J an-68
J an-71
J an-74
J an-77
J an-80
J an-83
J an-86
J an-89
J an-92
J an-95
J an-98
J an-01
J an-04
J an-07
Nominal Price Series -1 Standard Deviation+1 Standard Deviation Mean-2 Standard Deviation +2 Standard DeviationReal price series
Aluminium: Monthly Average Prices from 1950, (Real and Nominal)
USc/ lb
Source: Global Financial Data.com; IRESS, GSJBW Research
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Aluminium: China’s Aluminium Industry Policy
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
2003 2004 2005 2006 2007f 2008f 2009f 2010f 2011f60.0%
65.0%
70.0%
75.0%
80.0%
85.0%
90.0%
95.0%
100.0%
China's Aluminium Production (LHS)China's Smelter Utilisation (RHS)
Source: CRU International; China Metals; GSJBW Research estimates
China: Aluminium Production Forecast and Smelter Utilisation Rates
'000 tonnes Percent
GSJ BW Investment Research
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Aluminium: Bauxite imports - mainly from Indonesia
China's Imports of Alumina and Bauxite, Monthly
0
20004000
60008000
10000
1200014000
1600018000
20000
J an-04 J an-05 J an-06 J an-075000
5500
6000
6500
7000
7500Bauxite Imports; 12mth moving total ('000t; LHS) Alumina Imports; 12mth moving total ('000t; RHS)
Source: China Customs; Reuters
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Chinese smelters dominate the top end of the cost curve
0
500
1000
1500
2000
2500
0 5 10 15 20 25 30 35Cumulative Production (000 t)Source: CRU International
GSJ BW Investment ResearchAluminium: Industry Cost Curve, 2006 (US$/ t; Business Operating Cost)
US$/tonne
Alcan SmeltersRio Tinto Smelters
0
500
1000
1500
2000
2500
0 5 10 15 20 25 30 35Cumulative Production (000 t)Source: CRU International
GSJ BW Investment ResearchAluminium: Industry Cost Curve, 2006 (US$/ t; Business Operating Cost)
US$/ tonne
Chinese Smelters
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Aluminium: longer term, we see China as a net importer
135327
705
133
-206 -369-708 -651 -546
-1013
-312
281
1251
2183
-1500
-1000
-500
0
500
1000
1500
2000
2500
3000
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007f 2008f 2009f 2010f 2011f
Primary Aluminum: China's Net Trade, through 2011
'000 tonnes
Source: CRU I nternational; China Metals; GSJ BW Research estimatesNote: We expect low value-add semis to constitute a high proportion of 2007 exports.
GSJ BW Investment Research
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GSJBW Aluminium Price Outlook to 2011
Aluminium: Stocks and Prices, through 2011
3242
53 4460 62 625654 46 46
41
4749 49
112
102
116 118
95
73
62 62
70 6661
65
78
86
98
50
60
70
80
90
100
110
120
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007f 2008f 2009f 2010f 2011f10
30
50
70
90
110
130
150
Forecast range (LHS)
Stock Ratio (RHS)
Nominal Price (LHS)
USc/ lb Stocks (days)
Source: CRU International; GSJBW Research estimates
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Copper
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Copper: historical price series
- 100.00
0.00
100.00
200.00
300.00
400.00
500.00
600.00
700.00
J an-50
J an-53
J an-56
J an-59
J an-62
J an-65
J an-68
J an-71
J an-74
J an-77
J an-80
J an-83
J an-86
J an-89
J an-92
J an-95
J an-98
J an-01
J an-04
J an-07
Nominal Price Series - 1 Standard Deviation+1 Standard Deviation Mean- 2 Standard Deviation +2 Standard DeviationReal Series
Copper: Monthly Average Prices from 1950, (Real and Nominal)
USc/ lb
Source: Global Financial Data.com; I RESS, GSJ BW Research
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Copper: the need for new supply
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
1990 1992 1994 1996 1998 2000 2002 2004 20061.1
1.15
1.2
1.25
1.3
1.35
1.4
1.45
1.5
Years of Consumption in Identified Global Reserves (LHS)
Average Head Grade (% Cu; RHS)
Source: USBM; US Geological Survey; CRU International; Xstrata (CESCO Presentation)
Global Reserves of Copper, and Average Mined Head GradesGlobal Reserves (years of consumption) Average Mined Head Grade (% Cu)
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Copper: Assessing the impact of a slowdown in the US housing market
0.0
50.0
100.0
150.0
200.0
250.0
Jan-03 Jan-04 Jan-05 Jan-06 Jan-07
Single Unit Dwellings ('000) Multi-Unit Dwellings ('000)
Source: US Census Bureau
US Housing Starts, Monthly
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Copper: Costs and Margins
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
1990 1992 1994 1996 1998 2000 2002 2004 2006
Median Cash Cost (USc/lb)9th Decile (USc/lb)Average LME Cash Price (USc/lb)
Source: GSJ BW Research Estimates, CRU International; www.minecost.comNote: Normal costing.
Copper: Cost and Price Evolution
0.0
50.0
100.0
150.0
200.0
250.0
300.0
1990 1992 1994 1996 1998 2000 2002 2004 20060.0
20.0
40.0
60.0
80.0
100.0
120.0
Median Cash Margin (USc/ lb; LHS) Median % margin (RHS)
Source: GSJ BW Research Estimates, CRU International; www.minecost.comNote: Normal costing.
Copper: Median Cash Margin
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We Expect Six Years with the Average Copper Price above US$3.00/lb!
4.72.8 3.0 3.4 2.5 2.4 2.4 2.5 2.26.4
4.37.8 8.1 6.76.1
103 7571 82 72 71 81
130167
305332
355348333 340
255279
304
330
20.0
60.0
100.0
140.0
180.0
220.0
260.0
300.0
340.0
380.0
420.0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007f 2008f 2009f 2010f 2011f0.0
3.0
6.0
9.0
12.0
15.0
18.0
21.0
24.0
27.0
30.0
Stock:Consumption Ratio (RHS) GSJBW price forecast (LHS) LME Forward Curve (as of mid-Sep, 2007)
Source: CRU International; LME; GSJBW Research estimates
Copper: I nventories, GSJ BW Price Forecast, and the LME Forward Curve
USc/ lb Weeks of Consumption
Note that we do not envisage a major re-build in the stocks-to-consumption ratio during this period.
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Nickel
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Historical Nickel Price Series
0.00
5.00
10.00
15.00
20.00
25.00
J an-50
J an-53
J an-56
J an-59
J an-62
J an-65
J an-68
J an-71
J an-74
J an-77
J an-80
J an-83
J an-86
J an-89
J an-92
J an-95
J an-98
J an-01
J an-04
J an-07
Nominal Price Series-1 Standard Deviation+1 Standard DeviationMean-2 Standard Deviation+2 Standard DeviationReal price series
Nickel: Monthly Average Prices from 1950; (Real and Nominal)US$/ lb
Source: Global Financial Data.com, I RESS, GSJ BW Research
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Nickel: China is Driving Short-term Supply Growth
China's Imports of Nickel Ore and Estimated Metal Content
0
400
800
1200
1600
2000
2400
Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-070.0
4.0
8.0
12.0
16.0
20.0
24.0
Imports ex Other ('000t; LHS)
Imports ex New Caledonia ('000t; LHS)
Imports ex Indonesia ('000t; LHS)
Imports ex Philippines ('000t; LHS)
Estimated Recoverable Nickel ('000t; RHS)
Est. Recoverable Ni ('000t)Ore Imports ('000t)
Source: GSJ BW Research Estimates, China Customs
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Nickel: Chinese ferronickel production outlook
0
10
20
30
40
50
60
70
80
90
100
2004 2005 2006 2007f 2008f 2009f 2010f 2011f0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
20.00
China's Ni Production in LowGrade Ferronickel ('000t; LHS)
Nickel Price (US$/ lb; RHS)
Chinese Ferronickel Production, and Nickel Price: GSJ BW Base Case Assumptions'000 tonnes US$/ lb
Source: China Customs; Antaike; GSJBW Research estimates
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Nickel: Costs and Margins
0.0
200.0
400.0
600.0
800.0
1000.0
1200.0
1990 1992 1994 1996 1998 2000 2002 2004 2006
Median Cash Cost (USc/lb)Average LME Cash Price (USc/lb)9th Decile (USc/lb)
Source: GSJ BW Research Estimates, CRU International; www.minecost.comNote: Pro- rata costing
Nickel: Cost and Price Evolution
0.0100.0200.0
300.0400.0500.0600.0
700.0800.0
1990 1992 1994 1996 1998 2000 2002 2004 20060.010.020.0
30.040.050.060.0
70.080.0
Median Cash Margin (USc/ lb) Median % margin (RHS)
Source: GSJ BW Research Estimates, CRU International; www.minecost.comNote: Pro-rata costing
Nickel: Median Cash Margin
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Nickel: we expect prices to continue falling
8.48.610.411.89.410.213.612.7 11.07.9 8.9
11.011.5 11.6
11.7
1700
500628
437307270
392314 273
210
669615
815
1100
1250
0
200
400
600
800
1000
1200
1400
1600
1800
2000
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007f 2008f 2009f 2010f 2011f0
4
8
12
16
20
24
28
32
36
40
Weeks Inventory (RHS) GSJBW Price Forecast (LHS) LME Forward Curve, basis mid-Sept 2007 (LHS)
USc/lb Weeks Inventory
Nickel: Inventories, GSJBW Price Forecast, and the Forward Curve, through 2011
Source: CRU International; GSJBW Research estimates
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Summary/Conclusions• A powerful combination of BRIC’s related demand growth and supply side constraints
means that commodity prices will remain high relative to historical levels.The secular decline in real commodity prices has ended.
• We prefer commodities for which we see a weak or delayed supply response.• We prefer commodities that China cannot provide for itself.• We prefer upstream (mining) to downstream (smelting/refining/fabricating).
• China can build smelters, but cannot create ore bodies!
• Resource company share prices have not displayed the same frothiness as the underlying commodities and many still offer good long-run investment potential.
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Muito obrigado e boa sorte!
Paul Gray
