Transcript Scotia Bank - Outlook for Gold Metals, 2012 2013

Outlook for Base Metals & Gold, 2012-13
-- Copper Prices Will Remain Lucrative
Patricia M. Mohr
Vice-President, Economics
& Commodity Market Specialist, Scotiabank
Canadian Institute of Mining, Metallurgy & Petroleum
3rd Annual International Mining Finance
& Capital Markets Conference
Renaissance Beijing Capital Hotel
Beijing, China
November 7, 2012
Scotiabank’s Commodity Price Index –
Declines 13.8% From Near-Term High in April 2011
Scotiabank Commodity Price Index1
240
220
240
Index: Jan 2007=100
New record high
in July 2008
200
180
220
April
2011
Decline From April 2011
Near-Term Peak -13.8%,
160
140
140
September +3.8%m/m
120
100
Arab Oil
Embargo
All
20
100
Items1
-46% in
2008: July
to Dec.
60
40
180
160
120
80
200
Commodity prices posted an
unusually rapid recovery after the
2008 recession, a testimony to the
growing dominance of demand from
China and the ‘emerging markets’.
China’s massive RMB 4 trillion
infrastructure spending program in
November 2008 & record credit
expansion led the recovery in early
2009.
October 2001
Bottom
0
80
60
40
20
0
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
1. A trade-weighted U.S. dollar-based index of principal Canadian
commodity exports, including Metals & Minerals, Oil & Gas, Forest
Products and Agricultural commodities. – Shaded areas represent
U.S. recession periods. Data to September 2012.
Scotiabank’s Commodity Price Index
rose to a near-term peak in April 2011
– just prior to financial market
concern over excessive Eurozone
sovereign debt and the negative
impact on global economic growth.
The subsequent correction in
commodity prices from April 2011 to
July 2012 at 19% was less than half
the slide during the 2008 recession.
Prices have rallied back in August
(+3.1%) and September (+3.8%).
2
After a Sharp Correction, Commodity Prices Rally Back
The rally in Scotiabank’s Commodity Price Index in August reflected a number
of supply developments – 1) strong global oil prices linked to ‘geopolitical
supply risks’ in the Middle East and North Sea maintenance, 2) the beginning
of a rally in lumber & panel board prices alongside a nascent recovery in U.S.
housing -- in the face of tight Canadian & U.S. building material supplies -and 3) historically high grain & oil seed prices due to drought in the U.S.
Midwest and parts of Russia.
In September, this improvement was followed by easier monetary policy from
central banks and government policy measures -- to shore up the Eurozone
financial system, to lift sub-par U.S. growth and to curb the slowdown in
China & India -- bolstering business & investor ‘confidence’ and boosting
demand for ‘riskier assets’ such as commodities and equities.
More specifically:
The positive surprise at the June 28-29 EU Summit—the European
Commission proposal for a single banking supervisor, after which Eurozone
banks will have direct access to the European Stability Mechanism (ESM)
rather than having to borrow through sovereigns, raising their debt-to-GDP
ratios; This triggered the beginning of a rally in commodity prices;
3
Weaker U.S. Dollar, After QE3, Lifts Commodity Prices
The proposed ECB bond purchase program (‘Outright Monetary Transactions’
in the secondary market, Sept 6), under which the ECB will buy the short-term
debt of countries seeking help (under strict conditionality);
A third round of ‘quantitative easing’ from the Fed (purchasing additional
agency mortgage-backed securities -- US$40 bn per month); FOMC minutes
state that an exceptionally accommodative monetary policy will remain
appropriate for a considerable time after the economic recovery strengthens;
A RMB1 trillion (US$160 bn) infrastructure investment program unveiled by
China’s National Development and Reform Commission to boost growth. A
broadly weaker U.S. dollar, following announcement of QE3, was also quite
supportive of higher dollar-denominated commodity prices in September.
In 2013, commodity prices will receive a lift from slightly stronger – though
still slow – world economic growth (especially in the second half of the year)
and re-stocking of raw materials after liquidation or deferred orders in 2012;
Longer-term, recent announcements of new mine delays will underpin prices.
4
65
Global Purchasing Manager Indices
Lost Momentum Over The Summer,
But Now Rebounding in China
Values over 50 indicate expansion
60
65
60
China
55
U.S.
50
55
Global Purchasing Manager Indices
(PMIs) lost considerable momentum over
the summer, contributing to declining
business ‘confidence’ worldwide, with
buyers deferring orders and liquidating
inventories.
50
Euro zone
45
45
Germany
China PMI in Oct: 50.2,
up from 49.8 in
September, suggesting
a pick-up again in
manufacturing activity.
40
35
40
35
30
However, the PMI for manufacturing in
China has moved back over the 50 mark
in October – indicating an end to
inventory reduction and moderately
stronger growth in 2012:Q4.
The PMI in the United States has also
picked up, though conditions remain
exceptionally weak in the Eurozone.
30
09
10
11
12
Source: Markit, Scotia Economics.
Data to October 2012.
5
China Industrial Production:
China -- Vital to Global
Commodity Markets
30
20
Jan-Feb 2009
30
yr/yr % change
China – Industrial
Production*
*3 mth moving avg.
20
10
10
0
0
G7 Industrial Production
-10
-20
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
China’s Share of Global Consumption in
2012e Compared with United States
(in brackets)
40.9%
(9.0%)
Nickel*
Zinc
43.5%
(8.1%)
Aluminium
2010
14.4%
China tightens monetary policy.
2011
13.7%
Q1 2012
Q2 2012
July 2012
August 2012
September 2012
11.9%
9.5%
9.2%
8.9%
9.2%
-10
-20
Copper
Mar 2009
July 2009
Dec 2009
3.8% yr/yr
(a bottom)
8.3%
10.8%
18.5%
39.9%
(8.0%)
44.9%
(10.8%)
Four Base Metals: China 43.6%, USA 9.9%.
*Japan 9.9%; excluding inventory accumulation in China
G7 Industrial Production
U.S.
Japan
Germany
+1.8% (Jul)
2.8% (Sep)
-6.8% (Sep)
-1.4% (Aug)
Source: Scotiabank Commodity Price Index.
6
14
GDP (% per annum)
Global Growth Will Edge Up in 2013,
But Stay In the Slow Lane
yr/yr % change
12
A ‘seismic’ shift in global growth has
occurred from the G7 to ‘emerging
markets’ (especially in Asia).
10
8
6
2008
2009
2010
2011e
2012f
2013f
WORLD*
2.8
-0.6
5.2
4.0
3.1
3.3
MEXICO
1.2
-6.2
5.5
4.2
3.9
3.6
CANADA
0.5
-2.5
3.2
2.4
2.1
1.8
0.0
-2.6
3.0
1.8
2.1
1.9
2010
UNITED
2011e
2012f
STATES
4
CHINA
9.6
9.2
10.4
9.3
7.7
8.0
2
INDIA
5.2
7.7
9.0
10.0
5.5
6.0
BRAZIL
5.1
-0.2
7.5
2.7
1.7
3.8
JAPAN
-1.1
-5.5
4.5
-0.7
2.2
1.0
EURO
ZONE
0.5
-4.1
1.8
1.5
-0.6
0.1
0
-2
World
China
United
States
Japan
Euro Zone
In 2014, world growth should strengthen further
to 3.8% – moderately supportive of stronger
commodity prices. U.S. GDP 2.5%, China 8.3%.
*Scotiabank estimates. Average 1988-1997: 3.4% p.a. prior to the
“economic take-off” in China and India.
7
CHINA -- Shifts To Pro-Growth Monetary & Fiscal Policy To Shore Up Its
Economy, Though Easing Remains Cautious Due To Ongoing Concern Over
Inflation & Still High Municipal Debt
10
yr/yr % change
25
%
Required Reserve Ratios for
Big Banks (RHS)
8
20
6
15
Consumer Price Index
(LHS)
4
2
10
One-Year Lending
Rate (RHS)
5
0
0
-2
-5
07
08
09
10
11
12
CPI +1.9% yr/yr in September 2012. The People’s Bank of China reduced the required bank reserve ratio for
large banks by 50 basis points to 21.0% on Dec 5/11, by 50 basis points on Feb 24/12 to 20.50%, and by 50 basis
points on May 18/12 to 20.00%. One-Year Lending Rates have recently been reduced in two steps by 53 bps to
6.00%, with more for ‘preferred’ commercial bank customers. Local Government Debt is still about 23% of GDP,
only down slightly from a peak of 27% in 2010; ratio was 18% in 2008.
8
China’s Economic Growth Has Been Led By Investment Spending
Second-largest economy in the world, with a nominal GDP in 2012 estimated at
US$8.270 trillion compared with U.S. GDP at US$15.673 tr.
The share of investment spending in China’s GDP at 48.7% is much higher than in the
United States (12.3%), given China’s ongoing ‘industrialization, urbanization and
technological upgrading’ – a feature which has tremendously boosted global demand
for base metals, iron ore and steel over the past decade.
Consumer spending on goods & services garners a much lower share of GDP in China
at 34% compared with 70% in the United States.
STRUCTURE OF CHINA’S ECONOMY, EXPENDITURE AS PER CENT OF GDP
(2011 nominal GDP, % of Total)
CHINA
UNITED STATES
Consumer Spending
34.6%+
71.2%
Fixed Capital Formation*
48.7%
12.3%**
Net exports of goods & services
2.7%
-3.8%
* Business machinery & equipment, Non-residential construction, part of Residential construction,
Government investment and inventory change.
** Excludes Government investment.
+ Includes some property investment; the overall comparison will be similar in 2012.
9
ONCE IN A DECADE CHANGE IN LEADERSHIP IN CHINA –
As Important To The Global Growth Outlook
As The U.S. Presidential Election
November 8, 2012 – date of the 18th National Congress of the Communist
Party of China, where a new leadership will be established for only the fifth
time since Mao Zedong -- followed by the National People’s Congress
(parliament) in March 2013. A large number of officials will be changed.
Expected Change in Fifth Generation Leadership:
President (Head of State and Secretary-General of the Communist Party of
China):
Mr. Xi Jinping (currently Vice State President); now Mr. Hu Jintao
Prime Minister (Head of Government):
Mr. Li Keqiang, now Mr. Wen Jiabao.
10
China – Policy Continuity Expected Under New Leadership
China is expected to continue pursuing the economic initiatives in the 12th Five-Year
Plan, unveiled in March 2011, though the new leadership may seek more market-related
solutions (less central planning) and be more ‘populist’.
The 12th Five Year Plan (2011-15) seeks more ‘balanced’ economic growth – with less
emphasis on export expansion and investment and greater focus on domestic
consumer spending and development of the ‘service’ industries; other key objectives -productivity gains through ‘economic restructuring’ – e.g. closure of smaller, less
efficient plant & rationalization into larger, lower-cost entities (the steel & coal
industries); reducing industrial energy intensity; a greater focus on developing the
Western & Central parts of China, away from the heavily industrialized Eastern &
Coastal areas; and raising household incomes & living standards and building an
environment-friendly society.
In practice, progress on ‘rebalancing’ China’s economy towards domestically-led
growth (especially via consumer spending) has not been significant in 2012. Retail
sales have slowed to 14.1% YTD from 17.1% in 2011.
What is evident is that China is no longer pursuing ‘economic growth at any cost’ and
has -- until recently -- been comfortable with a slower advance (the official target is
7.5% for 2012).
11
Infrastructure Spending Program Announced In Early
September To Spur Growth
However, noticeably weaker economic indicators in China in August have triggered a
RMB1 trillion (US$160 bn) infrastructure spending program – approved by the National
Development and Reform Commission (NDRC) – 60 infrastructure projects including 25
urban rail transit projects in 19 cities (subway systems), 13 road construction projects,
10 civil projects and 7 port & navigation channel projects. Will boost GDP by 2% (0.5%
p.a. over four years).
The stimulus package is about ¼ of the massive RMB4 trillion announced in November
2008 in the face of the ‘Great Recession”.
Local governments have also announced RMB10 trillion in ‘investment plans’ in recent
months, though financing is likely to be more readily available for the NDRC approved
projects. In addition, local governments have increased the pace of ‘land supply’ to
support residential construction.
After reducing inventories of raw materials and consumer goods in recent months,
China’s economy is expected to pick up moderately in late 2012 and in 2013, bolstered
by stronger infrastructure spending as well as consumer incentives to buy power or
fuel-efficient household appliances and small cars. Auto sales have already picked up
and there are ‘green shoots’ in new land sales.
12
China on Track to Hit Ambitious Public Housing Target
China’s ‘Social Housing’
1000
1000
million m2, Completions
Social and Other
800
800
Private Sector
600
600
400
400
200
200
0
0
04
05
06
07
08
09
10
11
12
13
14
15
Based on 2/3 completion of 36 million units from 2011-15 under
China’s 12th Five-Year Plan.
China’s massive ‘social housing’
program will be a key support for
China’s economy in 2012-13.
In 2012, targeted ‘social housing’
starts of 7 million units plus the
completion of units started last
year will offset some of the decline
in private-sector residential
construction in 2012. Lower
overall residential construction
likely to reduce GDP growth by 1%
in 2012.
Actual ‘social housing’ starts in
2011: 10.4 million;
Completions in 2011: 4.3 mn;
Targeted starts in 2012: 7 mn
Starts 2012Jan-Aug: 6.5 mn
Completions in 2012: 5 mn.
‘Social housing’ construction is under-reported in China’s housing
data.
13
Medium-Term, The ‘Emerging’ Markets Will Remain
Supportive for Commodity Prices
Huge Potential for Oil & Metal-Intensive Motor Vehicle Sales in China
China’s population: 1.354 billion
Vehicle Penetration – 2010
(Vehicles per 1,000 people)
China
United States
Western Europe
Japan
India
58
766
586
584
17
Aluminium usage in automobiles in China
has recently been an average of 127.5kg
per vehicle compared with 145kg in the
USA. As such, there is good potential to
increase aluminium usage in China.
China’s potential GDP growth is slowing: in 2012 8.5%, 2015-20 7.0%p.a.,
2025-30 5% p.a. with less under-utilized labour and slower capital formation.
14
The Fed Is Determined to Strengthen U.S. Employment
Recovery -- Signals Accommodative Policy Likely Until Mid-2015
Federal Funds –
Effective Rates
20
20
per cent
15
15
15
“Real” Federal Funds Rate
(Adjusted for Inflation)*
per cent
15
August 2012 = -1.29%
Average = 2.02%
10
10
Average
10
10
5
5
5
5
0
0
0
0
-5
-5
60
65
70
75
80
85
90
95
00
05
10
15
Federal Funds Target Rate is 0-25 bps in November 2012.
Exceptionally low Funds rate expected to be warranted at least
through mid-2015.
60 65 70 75 80 85 90 95 00 05 10 15
* Inflation-adjusted with the U.S. Personal Consumption Deflator
(PCE) and the core PCE. Shaded areas represent U.S. recession
periods.
15
Strong Auto Assemblies Buoy U.S. Industrial Activity In 2012,
But Employment Gains Have Been Sub-Par
U.S. Employment Growth
U.S. Industrial Activity Revives
10
yr/yr % change
15 2.0
14
million units, quarterly
8
U.S. Industrial
Production
6
13 1.0
4
12
2
11 0.0
0
10
-2
9
U.S.
Consumers
Replace
Aging Fleet,
Japanese
Assemblers
re-stock in
Early 2012
-4
-6
-8
-10
-12
-14
yr/yr % change
1.0
0.0
U.S.
Payrolls
-1.0
-1.0
U.S.
employment
recovery has
been 5-times
less than
normal.
8
-2.0
U.S. Motor
Vehicle
Assemblies
7
6
-3.0
5
4 -4.0
3
Latest Data:
Advance in
Payrolls
06
07
08
09
10
11
12
13
-2.0
-3.0
October +171,000
-4.0
Gain in +1,949,000
Past Year
2 -5.0
-16
2.0
-5.0
06
07
08
09
10
11
12
-- North American motor vehicle assemblies will strengthen to 15.6 million units in 2012 (+20%) and are forecast to
climb to 16.4 million in 2013 (+4%). Output in Mexico will reach a record 3.0 million in 2012 – lifted by Mexico’s free
trade agreements with Japan, the EU and the USA.
16
Price Outlook
‘Geopolitical Supply Risks’ Will Keep Oil
Prices High in 2013
150
*
US$ per barrel
140
150
140
Scotiabank Commodity Price Index
130
120
130
120
Record High:
July 11, 2008: US$147.90
110
110
Despite slow growth in petroleum
demand, international oil prices will
remain high in 2013 – underpinned
by ‘geopolitical supply risks’ in the
Middle East.
100
90
80
70
60
Iranian
Revolution
50
40
30
Gulf
War
100
+
80
70
60
Iraq
War
50
40
30
Arab Oil
Embargo
20
90
20
10
10
0
0
60
64
68
72
76
80
84
88
92
96
00
04
08
Canada has the third-highest oil reserves in the world.
+ WTI Oil on November 2, 2012: US$84.92.
Key world benchmarks:
Brent Blend Spot: US$107.17
Nigerian Bonny Light: US$106.85
Malaysian Tapis: US$110.64
12
2008
2009
2010
2011F
2012F
2013F
WTI Oil
US$99.62
US$62
US$79
US$95
US$95
US$98
Brent Oil
US$97.95
US$62
US$80
US$112
US$112
US$112
Saudi Arabia stepped-up its oil production above the
‘call’ for OPEC crude in 2012:H1 to offset the loss of
Iranian oil due to sanctions and prevent high oil
prices from derailing an already fragile world
economy; this move accounts for the significant
decline in oil prices in 2012:Q2.
However, prices rebounded in early July alongside
the EU embargo on Iran, U.S. banking measures
aimed at curbing oil exports from Iran and positive
investor reaction to proposals at the EU Summit to
steady Eurozone financial markets.
Global oil market conditions genuinely tightened in
2012:Q3, with the ‘call’ on OPEC oil rising by 0.8
mb/d due to a seasonal pick-up in demand and
supply outages in the North Sea due to strikes &
maintenance (cutting North Sea output in half to a
record low of only 600,000 b/d in Sept). Canada and
the United States will account for 75% of new nonOPEC oil capability in the 2012-17 period, centred in
the Alberta oil sands, light ‘tight’ oil and NGLs.
17
Gold Prices – Boosted by QE3
Price Outlook (US$)
The Re-Monetization of Gold
2,000
2,000
US$ per ounce
1,800
+
1,800
New Record:
Sept 9, 2011 spot US$1,921.15
1,600
1,400
1,200
Jan. 21, 1980
peak US$850
1,000
1,600
March 17, 2008
US$1,032.70,
following collapse
of Bear Stearns
1,400
*
1,200
1,000
800
800
Gold Prices
London PM Fix
600
600
400
400
200
200
0
0
75
80
85
90
95
00
05
10
15
London PM Fix on November 2, 2012: US$1,685.
Gold prices were pushed lower on Nov 2 by a stronger
U.S. dollar, in reaction to somewhat better U.S.
employment in October.
2007
2008
2009
2010
2011
2012F
2013F
697
872
973
1,225
1,569
1,675
1,700
(range 1,600-1,800)
Gold prices have been on a ‘Bull Run’ since 2001 –
with high government debt and deficits triggering a
loss of investor confidence in paper currencies
(especially the two reserve currencies – the U.S.
dollar and euro).
Gold prices drifted lower through most of 2012, with
traders awaiting QE3. However, announcement of
a third round of quantitative easing by the Fed,
combined with the ECB’s proposed bond purchase
program, propelled gold back to a high of
US$1,791.75 in London. Prices could level out in
2013 alongside a somewhat stronger U.S. dollar.
Gold will be re-classified as Tier 1 capital for bank
holdings under Basle III , due to be implemented in
January 2013 – regaining its status as a fullyfledged financial asset.
18
Currency Trends
Canadian Dollar Expected to Remain
Above Par
U.S. Dollar Trends
March 1973=100
US cents
160
160
euro: peak US$1.60
July 15, 2008
US cents
Canadian dollar likely to
remain above par to U.S.
currency in 2013 due to
Canada’s Triple-A credit rating,
low federal government debtto-GDP ratio and relatively
tight monetary policy
110
100
140
140
euro
90
120
In 2013, U.S. dollar
expected to strengthen
modestly against euro
and rise slightly on a
trade-weighted basis
100
80
U.S. Dollar
Trade-Weighted
60
98
00
02
04
06
08
10
12
17
US cents
16
15
120
14
Canadian Dollar
80
100
13
70
80
60
60
50
Chinese Yuan
12
11
98
00
02
04
06
08
10
12
Data to November 2, 2012: euro US$1.2835; Cdn$= US$1.0042. 1US$ = 6.2416Rmb.
19
Copper Prices Remain Lucrative
5.00
US$ per pound
4.50
4.00
5.00
New Record High: US$4.60
on February 14, 2011
*
Global supply & demand conditions
for copper were in ‘deficit’ in 2011
and have been roughly in balance in
2012, with a small ‘deficit’ late in the
year.
3.50
3.00
2.50
4.50
+
3.50
3.00
2.50
Low During
Credit Squeeze
(Dec. 24, 2008)
2.00
4.00
2.00
1.50
1.50
++
1.00
1.00
0.50
LME Copper Prices
0.00
72
76
80
84
88
92
96
00
04
08
Price Outlook
2009
US$2.34
2010
US$3.42
2011
US$4.00
2012F
US$3.62
2013F
US$3.58
Extraordinary recovery in copper prices in early
2009 reflected buying by China’s State Reserve
Bureau, massive credit expansion and a rapid
rebound in China’s industrial activity.
The strength of copper prices in the past five
years has reflected only limited global mine
development -- up 1.7% per annum from 20082012 -- in the face of strong demand growth from
China and the rest of the ‘emerging’ world.
0.50
China’s refined copper consumption:
0.00
2009
+25%
12
2010
+13%
2011
+8%
2012F 2013F 2014F
+6.3% +8.5% +7.5%
LME cash settlement prices. + Latest data: November 2, 2012:
US$3.52, yielding a 44% profit margin over average world
breakeven costs including depreciation, interest & indirect costs.
++ Dec. 24, 2008: US$1.26.
20
China Dominates World Copper Consumption
% of total
(% of Total)
"Emerging"
Markets = 66.8%
"Industrialized"
Markets = 27.0%
China
40.9%
USA
9.0%
Western
Europe
12.9%
Other Asia +
Middle East +
Latin America +
Other
25.9%
Russia
+ CIS
6.2%
Japan
5.1%
2012 estimates of world consumption.
China's consumption = 1.5 times USA + Japan
+ Western Europe.
Source: Scotiabank Commodity Price Index.
21
LME Copper Prices Likely To Remain High In 2013
LME copper prices are currently US$3.52 per pound – yielding a 44% profit margin over
average world break-even costs including depreciation, interest and indirect costs.
World demand has only increased by about 1.9% in 2012 – with higher consumption in
China (up 6.3%), the Middle East including Turkey (6%) and the United States (up 1%),
just offsetting a 7% decline in Europe & Russia. However, the anticipated increase in
copper mine production this year has again failed to meet expectations (up only 3.9%).
Technical problems and lower ore grades at a number of major mines have been
substantial – especially in Chile (Collahuasi, Los Bronces), Zambia and Indonesia
(Grasberg) – keeping global supply & demand conditions balanced.
World mine production should finally increase more substantially in 2013 (+7.5%).
However, global demand will also pick up (+5.5%), with some restocking of copper,
after inventory liquidation this year. The net result, copper prices are likely to remain
high at US$3.58. Market observers remain skeptical about the extent of new mine
output, with a risk that actual production could again turn out lower. A number of
mines in the Democratic Republic of Congo may not start as quickly as planned.
Longer-term, copper prices are expected to remain relatively high at US$3 per pound,
given escalating capital and operating costs.
22
Copper Exchange Inventories
(LME, COMEX, Shanghai Futures Exchange) Remain Below A Year Earlier
600
Copper – Exchange Stocks
‘000 tonnes
US$ per tonne
month end
500
Price Arbitrage: SHFE - LME
600
400
400
500
LME
Inventories
400
daily data
200
200
400
0
300
0
300
Low Exchange Stocks
-16% yr/yr
-200
-200
-400
-400
200
200
100
100 -600
0
Jan 10
Shanghai Futures
Exchange Stocks
Jul 10
Jan 11
Jul 11
Jan 12
0
Jul 12
However, China holds substantial stocks in bonded
warehouses (around 700,000 tonnes).
-800
Jan 10
Arbitrage Into
China Is
Turning
Positive Again
Jul 10
Jan 11
Jul 11
Jan 12
-600
Jul 12
-800
Jan 13
Based on SHFE near-by futures less LME Cash + 17%
VAT. Data to October 2012.
23
Zinc – Supply & Demand Conditions
Will Tighten in Second Half of The
Decade
2.50
2.50
US$ per pound
Zinc prices could
climb as high as
US$1.50 by 2016
LME Zinc Prices
2.00
‘Junior mining’
company interest
in zinc continues
to be strong in
Canada
1.50
2.00
1.50
1.00
Zinc Price Outlook
2009
US$0.75
2010
US$0.98
2011
US$0.98
2012F
US$0.88
2013F
US$1.01
Zinc supply & demand conditions for refined
metal have shifted from ‘surplus’ into a
surprising ‘deficit’ in 2012. This reflects an 8.5%
contraction in smelter output in China this year
due to low treatment charges on imported
concentrates and poor profitability. With global
‘concentrate’ supplies moving into surplus, some
mine curtailment at high-cost mines may occur
(in China as well as overseas). Smelter
rationalization in China is likely in 2013-14.
1.00
0.50
0.50
Credit Crisis
Late 2008
0.00
0.00
00
02
04
06
08
10
12
LME official cash settlement prices. November 2, 2012:
US$0.84 – yielding a 32% profit margin over average world
breakeven costs including depreciation.
Zinc demand for galvanized steel has been
relatively strong in 2012 in both the United States
and China, given the recovery in U.S. motor
vehicle production, expansion of U.S.
petrochemical plant in the southern U.S. (linked
to new sources of ethane feedstock from shale
development) and China’s recent infrastructure
spending program and rail expansion.
World ‘concentrate’ supplies will shift back into
deficit by 2016, due to ongoing demand growth in
the face of significant global mine depletion. The
closure of the Brunswick mine in Canada in late
2013, Vedanta’s Lisheen mine in Eire in 2014 and
Century in Australia in 2016, among others, will
shift sentiment towards zinc.
24
Vehicle Production, 2013
Cars, Trucks & Commercial Vehicles
China’s Vehicle Output
(million units)
2010: 18.3 (34%)
2011: 18.4 (1%)
2012e: 19.3 (5%)
2013f: 20.9 (8%)
Some Positive News:
China 24.1%
BRIC Nations
Will Drive in
the Fast Lane
&
North
American
Auto
Production
Also
Recovers
Other
(including
Brazil, India,
Thailand)
25.9%
North America
18.9%
Western
Europe 16.4%
Japan
12.2%
Russia 2.5%
Source: Scotiabank Global Auto Report
Global car sales will
climb to record highs in
2012 and 2013.
Asia dominates global
vehicle production,
accounting for half of
output.
North American
production revs up again,
likely climbing above 16
million units in 2013 for
the first time since 2005.
25
Term Contract Prices,
Premium Hard Coking Coal
FOB Vancouver to Asia
(US$ per tonne)
Hard Coking Coal Prices To Asia
500
500
US$ per tonne
Hard Coking Coal
(premium grade)
400
400
Spot Prices
(FOB Australia)
300
300
200
200
100
100
Term-contract prices
Vancouver to Japan
0
0
04
05
06
07
08
09
10
11
12
JFY2008 US$300
JFY2009 US$128
JFY2011 US$291
JFY2012 US$189
JFY2013F US$227
China’s crude steel production has totaled
542.3 million tonnes in 2012 (January to
September) – 47.2% of world output.
Production has only edged up by 1.7% year-todate – held back by weak private-sector
property construction earlier in the year and
steel production curbs over the summer to
reduce inventories of steel & raw materials.
However, China’s recently announced
infrastructure spending program, strong
railway investment and reduced stocks of
consumer appliances such as air conditioners
have boosted steel output since September.
13
Data to October 2012. The medium-term outlook for
premium-grade hard coking coal remains favourable,
underpinned by limited global supply (the premium grade is
‘geologically scarce’) and rising demand as China increases
the size of its blast furnaces (requiring high quality coking
coal).
Contract prices for premium-grade hard coking
coal from Western Canada to Japan/Asia have
fallen from US$225 to US$170 per tonne in the
Oct-Dec 2012 quarter. Prices are expected to
recover by next spring.
26
Iron Ore Benchmark Prices
Retreat, But Remain Profitable For Major
Producers
300
300
US cents per dmtu
FOB loading port
Fiscal Years
Pilbara
Blend/Newman
Fines,
Australia to
Contract Prices,
Asia
Annual Average
250
200
JFY 2009
97
2011
265
2012
198
2013F 190/195
150
Data to
JFY2012
Q3
200
Spot Prices
Delivered to
China*
rebound in
Sept/October
100
250
150
50
50
0
0
04
05
06
07
08
09
10
11
12
13
14
Spot prices for 62% Fe, delivered to
northern China came under pressure in the
late summer from cutbacks in China’s steel
production and inventory liquidation of iron
ore stocks. Higher-cost Chinese iron ore
mines have been closed in recent months
(5-10% of overall capacity) due to squeezed
profit margins.
100
‘Great
Recession’
03
The contract price for Pilbara Blend/Mt.
Newman fines to Japan/Asia, FOB Australia
have declined to 185 US cents per dmtu in
JFY2012:Q3 (the current calendar quarter).
However, prices remain profitable for the
major producers in Western Australia.
However, spot iron ore prices, delivered to
China have firmed up from a low of only 145
US cents per dmtu in August to 193.5 US
cents in late October. Steel mills are restocking iron ore alongside a sharp pick-up
in steel prices and steel demand due to
stepped-up infrastructure and local
building activity.
dmtu = dry metric tonne unit;
* Spot prices, 62% Fe, delivered to Northern China –
indicative of prices paid for Labrador Trough iron ore (if
sold on a spot basis).
In the medium-term, market conditions for
iron ore are likely to be more competitive
than in the past 10 years, as new supplies
are ramped up in Australia, Brazil and other
producing regions.
27
Nunavut/Labrador Trough
New World-Class Iron Ore Region
28
Scotiabank’s Global Presence In Resource Industries
Corporate Banking – Global Mining
YTD 2012, Scotiabank is ranked as the No.1 lead arranger (by deal count) in the Canadian and
North American mining sectors; the most international of the Canadian banks, with
operations across Latin America (including of note: Mexico, Chile, Peru, Brazil and Colombia)
and offices in London and throughout Asia/Pacific.
Investment Banking and M&A Advisory Services
#1 Canadian Equity Issuer and a leading mining underwriter January 2011 to present.
Landmark Transactions:
-- Exclusive Financial Advisor to Red Back Mining’s C$8.0 billion merger with Kinross Gold –
Fourth largest M&A transaction ever completed in the gold sector.
-- Co-Bookrunner on Barrick’s US$4.0 billion equity offering – the largest equity offering in
Canadian history and the largest equity financing ever made in the international gold sector.
-- Sole Financial Advisor to China Investment Corporation in their landmark private placement
in Teck Resources (US$1.5 billion) -- largest investment in a mining company by a Chinese
investor in Canadian history.
#1 world leader in upstream Oil & Gas M&A and Divestiture mandates from January 2006
through October 2011; with offices in Calgary, Houston, Denver, London, Hong Kong and
Singapore;
Co-Bookrunner of Gibson Energy Initial Public Offering (C$568 million ) – the largest
Canadian IPO in 2011. Advised BHP Billiton on acquisition of Petrohawk Energy and
Chesapeake’s Fayetteville assets.
29
ScotiaMocatta – Precious & Base Metals Trading
ScotiaMocatta provides innovative hedging & base metal trading solutions
with offices in New York, Toronto, London & Mumbai.
ScotiaMocatta is a global leader in precious metals trading and finance
dating back to 1671; ranks #1 in physical trading worldwide.
Member of the Shanghai Gold Exchange, permanent Chair of the London
Silver Fixing and an original member of the London Gold Fixing.
More than 150 professionals around the world supply 24-hour coverage
of the precious metals markets and provide risk management expertise.
Offices in Shanghai, Hong Kong, Singapore, London, Toronto, New York,
Bangalore, Coimbatore, Dubai, Mexico City, Mumbai and New Delhi.
Fully integrated and innovative solutions across a complete
range of metal services:
. Spot, forward and options trading
. Metal leases, consignments and loans
. Global physical delivery
. Forward rate agreements
. Metals certificate programs
.
.
.
.
.
Hedging programs
Custodial services One of the
founding
Approved COMEX depository
members of the
London Gold
Location swaps
Fixing
Structured notes
30
Scotiabank is Canada’s most international bank
Global Operations
Scotiabank has operations in 11 Asian countries,
the largest network of any Canadian bank.
Scotiabank has Canadian banking’s
largest network in mainland China.
31
Disclaimer
TM
Trademark of The Bank of Nova Scotia. Used under license, where applicable.
This report has been prepared by Scotia Economics as a resource for the clients of Scotiabank. Opinions,
estimates and projections contained herein are our own as of the date hereof and are subject to change
without notice. The information and opinions contained herein have been compiled or arrived at from
sources believed reliable but no representation or warranty, express or implied, is made as to their
accuracy or completeness. Neither Scotiabank nor its affiliates accepts any liability whatsoever for any loss
arising from any use of this report or its contents.
32