global commodities comment - macquarie · near-term upside looks entirely possible. the slumpers:...

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GLOBAL

LME cash price

% change

US$/tonne day on day

Aluminium 1,884 -1.0

Copper 5,906 -0.2

Lead 2,243 -0.1

Nickel 10,936 2.0

Tin 19,471 0.8

Zinc 2,767 -0.2

Cobalt 51,000 -0.5

Molybdenum 14,901 0.0

Other prices

% change

day on day

Gold (US$/oz) 1,227 -0.9

Silver (US$/oz) 17.66 -3.7

Platinum (US$/oz) 985 -1.2

Palladium (US$/oz) 761 -1.5

Oil WTI 53.20 0.6

USD:EUR exchange rate 1.055 0.4

AUD:USD exchange rate 0.756 -0.2

LME/COMEX stocks

Tonnes Change

Aluminium 2,160,925 -19,850

LME copper 196,425 -3,575

Comex copper 114,968 445

Lead 189,750 -150

Nickel 377,730 -714

Tin 5,425 -225

Zinc 383,050 -1,025

Source: LME, Comex, Nymex, SHFE, Metal

Bulletin, Reuters, LBMA, Macquarie Research,

March 2017

Articles published this week:

Dollar a risk but not a key risk

IZA zinc conference: Entering Phase II of the

supply crunch

Peru takes the lead in copper concentrate

volumes to China

Chinese steel exports to continue to slide near

term

3 March 2017

Commodities Comment The best and worst commodities of 2017 thus far It has been an interesting start to 2017 for commodity markets, with a

maturing industrial recovery, rising inflation expectations and a surprising

degree of economic confidence. On an individual commodity basis, the vast

majority have followed the general trend, with a slight upward bias over the

period and only a few individual stories which show strong price moves.

After a 60% YTD price gain, cobalt is the clear outperformer, with rhodium

and phosphate also up over 15%. In contrast, coking coal, manganese ore

and bulk freight have suffered badly, falling over 25% YTD. The big surprises

have been iron ore, whose gains have outperformed steel, and nickel, which

is up 10% YTD despite a falling ore price and the Indonesian ban relaxation.

Latest news

Further suggestions of a Filipino ore ban helped nickel outperform LME peers

on Friday, rising 2% to $10,936/t. Meanwhile, copper and aluminium dropped

after >20kt WoW gains in reported SHFE inventories for both. Exchange

copper stocks are now up 87kt YTD, despite a 115kt fall on LME.

Our Australian resources analyst Hayden Bairstow has looked at Western

Australia iron ore shipment rates over January-February. Several recent

rainfall events have put pressure on export volumes. Pilbara iron-ore

shipments were running around 850mtpa in the December quarter but

declined to 801mtpa in January and 794mtpa in February, on the surface only

a modest decline. However, the weekly data show that the average shipping

rate over the last week of January and first two weeks of February fell to

725mtpa, a reduction of 125mtpa from the December quarter run-rate. While

rainfall has been significant we suspect that the lack of cyclones has subdued

market focus on what has been a much wetter wet season than seen in the

previous two years.

In terms of thermal coal, our China utilities team expects power demand

growth to remain strong in H1 17 due to the residual effect of strong property

investment last year. Recent data points (freight rate, vessels in queue, daily

coal use) also suggest strong coal demand from IPPs, while on the supply

side safety inspections are ongoing. This should help support the coal price in

March, usually a weak demand season – for further details please see this

note from our HK/China analyst Coria Chow. Meanwhile, Tianjin Port will have

to stop the transport of coal through toll roads into the port, effective from Sep

2017. This is part of the Beijing-Tianjin-Hebei (BTH) air pollution control

measures, and should divert about 56mt of coal volume to the railways. The

government has clear plans to ensure adequate railway capacity for this

change reinforces our view that stabilising the coal price remains key for

Beijing’s agenda, and that the government could use import controls to

balance the domestic market.

Rio Tinto has announced a 14% cut in aluminium output from its Boyne

Island smelters in Queensland, owing to a jump in power prices for the

proportion it buys outside a long-term contract. With combined production of

575kt from two smelters, the Boyne facility represent roughly a third of

Australian output, and cuts would total ~80ktpa. This will likely strengthen the

position of producers in the current MJP premium negotiations for Japan.

http://www.macquarie.com/research/disclosures

Macquarie Wealth Management Commodities Comment

3 March 2017 2

The best and worst commodities of 2017 thus far

It has been an interesting start to 2017 for commodity markets, with a maturing industrial recovery,

rising inflation expectations and a surprising degree of economic confidence. On an individual

commodity basis, the vast majority have followed the general trend, with a slight upward bias over

the period and only a few individual stories which show strong price moves.

The analysis below looks at commodity moves in the year to 28th February.

The stars:

Cobalt (+60%) – strong battery demand for portable electronics and a highly concentrated supply

side.

Fertilisers (+10%) – riding the coal and grains price uplift with 10% plus gains YTD (except

potash).

Precious metals (+8-20%) – benefitting from the increasing tail risk of inflation plus political

uncertainty.

Molybdenum (+16%) – Recovering US oil and gas output is boosting the demand outlook. Further

near-term upside looks entirely possible.

The slumpers:

Met coal (-27%) – an accelerated return towards normality as supply squeeze eased.

Manganese ore (-50%) – the spot price has halved YTD as South African supply responded. Low

grade prices are down even further.

Bulk freight (-26%) – a simple case of too many ships and falling demand.

Henry Hub natural gas (-32%) – weather unhelpful, and strong expectations of associated gas

recovery.

The resilient outperformers:

Alumina (flat) – Maintaining its strong margins over bauxite on Chinese aluminium output gains.

Chrome ore (flat) – no sign of correction yet after the Q4 surge. Still a raw material constraint.

Zinc (+10%) – the grind higher continues, with raw material supply pressure on smelters

increasingly evident.

The surprises:

Iron ore (+15%) – very positive Chinese steel sentiment and margins have helped it defy

expectations.

Nickel (+10%) – Despite the Indonesian ban and lower ore price YTD, prices have gained on

Filipino uncertainty.

Aluminium (+13%) – Outperforming base metal peers on expectations of Chinese cuts, despite

surging inventory.

Ferromanganese (+2%) – Up YTD despite the plunging manganese ore price.

The frankly dull:

Oil (flat) – overall Jan-Feb price move essentially zero. We expect small gains in H2 before 2018

pressure.

Steel (+3%) – for all the expectations of stronger demand and protectionism, prices have hardly

moved.

Lithium (flat) – after the surge last year, stable so far in 2017 at not far off the highs.


3 March 2017 3

Fig 1 Breakdown of Jan-Feb commodity price moves Fig 2 Price move over Jan-Feb – Precious Metals

Source: China Customs, Macquarie Research, March 2017 Source: Bloomberg, Macquarie Research, March 2017

Fig 3 Price move over Jan-Feb – Fertilisers Fig 4 Price move over Jan-Feb – Energy

Source: CRU, Macquarie Research, March 2017 Source: Bloomberg, IHS, Macquarie Research, March 2017

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3 March 2017 4

Fig 5 Price move over Jan-Feb – Base Metals

Source: LME, C&M, Macquarie Research, March 2017

Fig 6 Price move over Jan-Feb – Steel & raw materials

Source: TSI, Metal Bulletin, Macquarie Research, March 2017

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3 March 2017 5

Fig 7 Price move over Jan-Feb – Agricultural Commodities

Source: Bloomberg, Macquarie Research, March 2017

Fig 8 Price move over Jan-Feb – Minor metals

Source: Platts, Metal Bulletin, Macquarie Research, March 2017

9%7% 7% 7% 6%

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3 March 2017 6

Fig 9 Commodity & financial asset price moves, YTD, US$ terms, %

Source: LME, Bloomberg, Macrobond, Macquarie Research, March 2017

(40%) (30%) (20%) (10%) 0% 10% 20% 30%

Coking coal

Natural Gas

Orange Juice

Tin

Thermal coal

Heating Oil

Russian stocks

Feeder Cattle

Brent

Soybean Oil

GSCI TR

Dollar Index (inv)

Sugar 11

Rough Rice

Eurozone bonds

Coffee robusta

Moly

GBP

BCOM TR

European banks

WTI

Euro

US bonds

German Bonds

TIPS

GSCI Spot

CAD

CNY

CHF

EuroSTOXX

Sugar

INR

UK bonds

Lean Hogs

BCOM spot

Coffee C

Soybean

CLP

PEN

NZD

JPY

Japan bonds

Wheat

Corn

Nikkei

BZL

ZAR

Dow Jones

RUB

S&P 500

Shanghai Comp

AUD

Soybean meal

Live cattle

Cotton

Copper

Nasdaq

LMEX index

Gold

Nickel

Zinc

Lead

Oats

Palladium

Platinum

Aluminium

Silver

Lumber

Rhodium

Uranium

Iron ore

Equity indicesFXBondsIndustrial metals/raw materialsPrecious metalsAgricommoditiesEnergyCommodity indices


3 March 2017 7

Closing price * Closing price *

03-Mar-17 03-Mar-17 02-Mar-17 02-Mar-17 % ch. day 2017 YTD Ave 2016

US$/tonne US¢/lb US$/tonne US¢/lb on day US$/tonne US$/tonne

LME Cash

Aluminium 1,884 85 1,903 86 -1.0 1,830 1,605

Aluminium Alloy 1,706 77 1,681 76 1.5 1,610 1,555

NAASAC 1,939 88 1,944 88 -0.2 1,816 1,704

Copper 5,906 268 5,918 268 -0.2 5,847 4,863

Lead 2,243 102 2,246 102 -0.1 2,278 1,872

Nickel 10,936 496 10,725 486 2.0 10,338 9,609

Tin 19,471 883 19,320 876 0.8 20,084 18,006

Zinc 2,767 126 2,773 126 -0.2 2,783 2,095

Cobalt 51,000 2,313 51,250 2,325 -0.5 39,828 25,655

Molybdenum 14,901 676 14,900 676 0.0 15,250 14,453

LME 3 Month

Aluminium 1,892 86 1,911 87 -1.0 1,832 1,610

Aluminium Alloy 1,715 78 1,690 77 1.5 1,624 1,577

NAASAC 1,955 89 1,960 89 -0.3 1,836 1,725

Copper 5,917 268 5,930 269 -0.2 5,863 4,867

Lead 2,249 102 2,253 102 -0.2 2,279 1,878

Nickel 10,990 498 10,780 489 1.9 10,393 9,657

Tin 19,500 885 19,350 878 0.8 20,076 17,912

Zinc 2,775 126 2,782 126 -0.3 2,791 2,102

Cobalt 51,000 2,313 51,250 2,325 -0.5 39,846 25,758

Molybdenum 15,000 680 15,000 680 0.0 15,250 14,472

* LME 2nd ring price - 1700 hrs London time. Year-to-date averages calculated from official fixes.

1,227 1,238 -0.9 1,214 1,249

17.66 18.33 -3.7 17.36 17.14

985 997 -1.2 988 987

761 773 -1.5 760 613

53.20 52.88 0.6 53.08 43.24

1.055 1.051 0.4 1.063 1.107

0.756 0.757 -0.2 0.757 0.745

Change since last report Cancelled End-16 Ch. since

(tonnes) 03-Mar-17 02-Mar-17 Volume Percent warrants stocks end-16

LME Aluminium 2,160,925 2,180,775 -19,850 -0.9% 859,950 2,202,175 -41,250

Shanghai Aluminium 221,058 193,552 27,506 14.2% 0 100,722 120,336

Total Aluminium 2,381,983 2,374,327 7,656 0.3% 859,950 2,302,897 79,086

LME Copper 196,425 200,000 -3,575 -1.8% 107,675 311,825 -115,400

Comex Copper 114,968 114,523 445 0.4% - 80,112 34,856

Shanghai Copper 313,873 289,899 23,974 8.3% - 146,598 167,275

Total Copper 625,266 604,422 20,844 3.4% 107,675 538,535 86,731

LME Zinc 383,050 384,075 -1,025 -0.3% 179,700 427,850 -44,800

Shanghai Zinc 199,033 197,895 1,138 0.6% - 152,824 46,209

Total Zinc 582,083 581,970 113 0.0% 179,700 580,674 1,409

LME Lead 189,750 189,900 -150 -0.1% 69,400 194,900 -5,150

Shanghai Lead 68,419 67,935 484 0.7% - 28,726 39,693

Total Lead 258,169 257,835 334 0.1% 69,400 223,626 34,543

Aluminium Alloy 13,280 13,280 0 0.0% 460 12,980 300

NASAAC 119,800 119,420 380 0.3% 380 97,380 22,420

Nickel 377,730 378,444 -714 -0.2% 107,118 372,066 5,664

Tin 5,425 5,650 -225 -4.0% 1,185 3,750 1,675

Source: CME, LBMA, LME, Reuters, SHFE, Macquarie Research

Friday 03 March 2017

Exchange Stocks

Prices

Gold - LBMA Gold Price (US$/oz)

Silver - LBMA Silver Price (US$/oz)

Platinum - London 3pm price (US$/oz)

Palladium - London 3pm price (US$/oz)

Oil WTI - NYMEX latest (US$/bbl)

EUR : USD exchange rate - latest

AUD : USD exchange rate - latest


3 March 2017 8

Summary of changes, week ended 03 March LME metal prices (%) Cash 3-Month

Aluminium -0.1% 0.4%

Aluminium Alloy 3.8% 3.6%

NAASAC 1.8% 1.8%

Copper -0.2% -0.20%

Lead -0.4% -0.4%

Nickel 1.2% 1.2%

Tin 1.5% 1.80%

Zinc -2.1% -1.9%

Cobalt 6.8% 6.8%

Molybdenum 0.0% 0.0%

Other prices (%)

Gold -2.2%

Silver -3.3%

Platinum -3.3%

Palladium -2.6%

Oil WTI -1.6%

EUR : USD exchange rate -0.3%

AUD : USD exchange rate -1.7%

Exchange stocks tonnes %

LME aluminium -20,750 -1.0%

Shanghai aluminium 27,506 14.2%

Total aluminium 6,756 0.3%

LME copper -14,375 -6.8%

Comex copper 4,010 3.6%

Shanghai copper 23,974 8.3%

Total copper 13,609 2.2%

LME zinc 1,625 0.4%

Shanghai zinc 1,138 0.6%

Total zinc 2,763 0.5%

LME lead -575 -0.3%

Shanghai lead 484 0.7%

Total lead -91 0.0%

LME aluminium alloy 0 0.0%

LME NAASAC 1,460 1.2%

LME nickel -1,950 -0.5%

LME tin -310 -5.4%

Source: CME, LBMA, LME, Reuters, SHFE, Macquarie Research, March 2017


3 March 2017 9

Macquarie commodity price forecasts

Source: LME, TSI, CRU, Metal Bulletin, Macquarie Research, March 2017

2015 2016 2017 2017 2017 2017 2017 2018 2019 2020 2021 2022

Unit CY CY Q1 Q2 Q3 Q4 CY CY CY CY CY CY LT $2017

Base Metals

Copper $/tonne 5,503 4,863 5,900 6,100 5,800 5,600 5,850 5,500 5,750 6,088 6,425 6,425 5,900

Aluminium $/tonne 1,663 1,604 1,800 1,700 1,650 1,850 1,750 1,730 1,575 1,513 1,550 1,550 1,350

Zinc $/tonne 1,932 2,092 2,740 2,850 2,950 3,100 2,910 3,100 2,600 2,325 2,188 2,188 2,300

Nickel $/tonne 11,836 9,599 10,250 9,750 9,750 9,500 9,813 11,000 12,000 13,000 14,000 14,000 15,000

Lead $/tonne 1,786 1,871 2,300 2,400 2,500 2,600 2,450 2,525 2,103 1,945 1,928 1,928 1,950

Tin $/tonne 16,077 17,991 21,500 23,000 22,000 20,500 21,750 21,375 23,000 21,000 20,500 20,500 18,000

Steel and Raw Materials

Iron ore - 62% Fe $/t CFR 56 58 60 55 50 50 54 47 50 60 60 60 60

Hard coking coal $/t FOB 102 114 285 230 175 155 211 140 130 135 140 140 115

Steel - World Export HRC $/tonne 370 382 490 440 390 370 423 350 360 365 365 365 380

Energy

Crude Oil - Brent $/barrel 53 44 56 56 59 59 57 56 61 70 72 74 64

Crude Oil - WTI $/barrel 49 43 54 54 57 57 55 53 57 65 67 69 60

Henry Hub Gas $/MMBTU 2.6 2.5 3.2 3.2 3.5 3.5 3.3 3.2 2.7 3.1 3.2 3.3 2.8

Thermal coal - Aus Spot $/t FOB 59 66 75 73 70 70 72 65 63 60 58 58 48

Uranium $/lb 37 26 20 20 22 22 21 24 27 30 33 33 33

Lithium carbonate $/t CFR China 5,190 8,447 10,000 9,000 8,000 8,000 8,750 7,500 7,000 6,750 6,750 6,750 6,000

Precious Metals

Gold $/oz 1,160 1,248 1,115 1,125 1,275 1,350 1,216 1,375 1,363 1,400 1,375 1,375 1,250

Silver $/oz 16 17 17 17 19 21 18 21 22 22 23 23 18

Platinum $/oz 1,053 986 950 975 1,025 1,075 1,006 1,188 1,306 1,338 1,300 1,300 1,400

Palladium $/oz 692 612 700 650 625 650 656 756 813 769 738 738 800

Agriculture

MacPI 1997-2000=100 149 146 155 154 155 156 155

Potash $/t FOB 303 245 225 230 230 220 226 230 240 250 250 323 280

Urea $/t FOB 273 199 235 230 220 220 226 220 220 230 240 274 230

Ammonia $/t FOB 385 234 285 250 250 230 254 225 230 230 245 282 230

Others

Alumina $/t FOB 301 254 350 335 325 325 334 276 260 235 240 240 225

Manganese ore $/mtu CIF 2.9 4.6 7.0 5.5 4.8 3.8 5.3 3.5 3.8 3.8 4.0 4.0 2.8

Ferrochrome (EU contract) c/lb 107 96 165 170 150 130 154 140 125 125 133 133 110


3 March 2017 10

Articles of the Week

Dollar trending higher but risks limited

After a rocky start to 2017, the US dollar is once again pushing higher and further gains seem

likely. This will pressure metal prices, though the impact for most will be mitigated by greater

economic optimism. Further ahead we don’t see a major shift higher, though US trade and tax

reforms are a wildcard.

The rally in the US dollar that began after the US Presidential election on 8 November peaked at

the turn of the year, with gains of between 5-6% depending on the index used (in fig 1 we show

the DXY, the BBDXY and the Fed broad index1). The US currency then sold off markedly in

January, giving back the majority of those gains. In February its performance was mixed: using the

DXY it saw a reasonable recovery, using the BBDXY, a more modest one, using the Fed broad

index it was essentially flat. By the start of March it stood only 2-3% higher than it was on Election

Day, though it added another 0.5% on 1 March.

The differences between the dollar’s performance according to which index one uses can be

understood more clearly by looking at the key individual FX pairs, shown in fig 2. The biggest gain

for the dollar post-election came against the Japanese yen, but it has been falling against that

currency since mid-January. The bounce in the DXY in February was caused by the dollar

resuming its gains against the euro, which has a 58% weight in that index. And the reason for the

underperformance as measured by the Fed broad index in February looks to be because it lost

ground against some ‘emerging’ market currencies that feature in that index, in particular the

Mexican peso, which has a 13% weight.

In the metals markets we pay a lot of attention to the gyrations of the US dollar. This is because

we almost always look at metal prices quoted in dollars, despite the fact metals are produced and

consumed around the world. Mathematically when the dollar is rising against other currencies, it

must mean the dollar price of metals is falling relative to the price of metals in other currencies. If

the metal price in those other currencies is not rising, or rising only slowly, this will mean the dollar

price is falling in absolute terms.

Gold typically shows the most sensitivity to this, and this has been true of the recent moves too.

Post the US election the price suffered as the dollar rallied, but in 2017 it recovered as the dollar

fell back (fig 3 overleaf).The chart shows the BBDXY, which has had the closest relationship

recently, though the picture using the more familiar DXY is very similar. Neither index can explain

gold’s rally in February, however.

1 These indices differ mainly by the weights they give to FX pairs. The well-known DYX is the narrowest, a weighted

geometric mean of just six currencies, the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc. The euro has a 58% weight. The BBDXY has 10 - adding the Mexican peso, Australian dollar, Korean won, offshore Chinese yuan and Brazilian real (and excluding the Swedish krona). In this the euro has a 32% weight. The BBDXY also reweights every year in line with changing trading patterns. Finally the Fed’s broad index includes 26 FX pairs, with the euro weight 17%, and the Chinese yuan the largest at 22%.

Fig 1 Dollar off its highs, depends on index though

Fig 2 Trends depend on peso, yen, euro in main part

Oct Nov Dec Jan Feb Mar Apr May Jun Source: Macrobond, Macquarie Research, March 2017 Source: Macrobond, Macquarie Research, March 2017


3 March 2017 11

Looking over the last 12 months, and using a 60-day rolling daily correlation, we see in fig 4 the

Fed broad index consistently has a lower correlation to the gold price than the other two indices.

This is probably explained by its lower weighting for the Japanese yen, which has had an

astonishingly strong negative correlation with the gold price, even surviving (unlike that of the

euro) the 23 June Brexit referendum (when gold jumped, and the dollar jumped, except against

the yen). Normally though the dollar indices have a higher correlation with gold than any individual

FX pair, explaining why we focus our analysis on those.

Turning to the dollar and base metals, the correlation is typically lower than for gold, and recently

fig 5 shows the relationship has been erratic (here we use the LMEX index, a basket of base metal

prices, to show the trends). Initially post the US election base metal prices rallied despite a surge

higher in the dollar, i.e. a positive correlation. From December until mid-January normal service

was resumed as base metal prices moved broadly inverse to the dollar. Since then there has been

little relationship, though February ended with both rising.

The rolling correlation chart, fig 6, shows that for much of 2016 there was a negative correlation

(though not for prices against the dollar/yen exchange rate), but post the election it has been

replaced by no or even a positive correlation. We have noted (in “US dollar stronger but less scary

for (most) metal prices”) three reasons for this odd result – first, the dollar is only one of many

factors driving base metal prices; second, the dollar is losing importance in terms of base metal

supply and demand, as the yuan is no longer as fixed against it; and finally the dollar has been

acting less a safe-haven currency, and more as a risk-on currency.

Fig 3 Gold recovers on dollar’s weaker start to 2017

Fig 4 Correlation highly negative most of the time


Fig 5 LMEX diverged from dollar… briefly

Fig 6 LMEX/dollar correlation negative except yen


(70%)

(60%)

(50%)

(40%)

(30%)

(20%)

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3 March 2017 12

Where next for the dollar? And as importantly, as our analysis above show, why will it go there?

The dollar’s initial rally post the election was, we would argue, on a combination of relief the

election was over, and in anticipation that the new administration would boost growth through

larger fiscal deficits. In an economy near full-employment (on some measures), this was seen as

pushing up real interest rates, especially if the Fed felt it had to raise the benchmark Fed funds

rate faster (a view which gained ground after their projections post the December hike foresaw

three hikes in 2017, compared to two previously).

This likely increase in yields was seen as contrasting with other countries, most notably the

Eurozone and Japan, where lacklustre growth, large spare capacity and easy and easing

monetary policy was seen as keeping yields close to zero. Yield differentials have a reasonable

relationship to exchange rates as shown in fig 7.

In general we do believe the US economy will outperform the Eurozone and Japanese economies,

and the yield differential will grow. However, what matters is how it grows compared to market

expectations, and here we see limited potential for outperformance. The risk is probably more to

the upside in the US, given the potential for fiscal stimulus which is missing in the Eurozone,

though the pullback in the dollar in early 2017 was partly because investors have become more

sceptical on that story.

What hasn’t happened, however, as it did in early 2016 when the dollar had enjoyed a similar rally,

is any major downgrade to US expectations. Then the dollar plunged as the economic outlook

turned bearish and expectations for rate hikes crumbled. This time around the US economy has

maintained momentum (if not exceeded it) and Fed expectations have held steady, even

strengthening in the last few days. Instead what has been constraining the dollar is politics -

indirectly a focus by the administration on reducing the US trade deficit, which would need a lower

dollar, and directly comments from President Trump and senior figures saying the currency was

overvalued. To what extent they can continue to talk it down is in question, but certainly on a

historical basis the dollar’s value looks rich, nearing its most recent major peak in 2002 on some

indices (fig 8).

The wildcard in all of this is trade and tax reform. Leaving aside any fallout from a trade war, the

administration has blown hot and cold on a key plank of the congressional Republicans’ tax

policies – a border-adjusted corporate income tax. This would allow companies to deduct 100% of

export sales revenue before calculating their liability tax, but would disallow any imported inputs to

be deducted. In effect this would subside exports by 20% (the proposed rate) at the cost of taxing

imports by the same. But many trade economists argue that it not affect trade flows because the

US dollar would rise by 25%, sufficient to restore the initial relative costs. This appears fanciful.

The dollar is affected by many other factors than trade flows, and some trade flows, such as direct

imports, would be excluded. Our US economist David Doyle thinks a modest appreciation would

be more likely, though there is very little clarity and there are many variations of this policy that

could be implemented.

Fig 7 Yield differentials in Germany v EURUSD

Fig 8 Dollar near 2002 peak on some indices (2017 election day = 100)

Source: Macrobond, Macquarie Research, March 2017 Source: Macrobond, Macquarie Research, March 2017


3 March 2017 13

Summing up, the dollar will always have an impact on dollar prices, and historically has had a big

impact on precious metal prices, and a lesser one on base metal prices.

It has been very strong now for over two years, and recently has rallied further as investors get

relatively more positive on the US economy. This rally has a bit further to go given the Fed’s likely

more hawkish stance and will pressure metals prices, especially gold/silver. But another large

appreciation – absent some major structural shift such as border adjustment – is hard to see given

the US administration’s stated concerns over its value, and as a major acceleration in the US

economy still seems unlikely2.

Such a backdrop appears supportive for metal prices, especially base metals given the most

plausible reason for further gains is faster growth. For commodity investors the dollar will always

need to be closely watched, but it shouldn’t always be feared.

2 Of course FX is two-way and any major political or other upheaval in Europe, Japan or China would play a part.


3 March 2017 14

IZA zinc conference: Entering Phase II of the supply crunch

Miners, smelters, traders, galvers and alloyers of the zinc industry met in California earlier this

week for the annual IZA conference, which typically is the setting for rounds of intensive

negotiations over the headline or benchmark concentrate treatment charge (TC) for the calendar

year. The tone was upbeat for miners, naturally, given the shortage of concentrate in the market,

which has sent spot TCs plummeting to multi-year lows. Smelters were not having as much fun,

and the early chatter indicated some distance between miners and smelters’ opening negotiating

positions. The headline ideas apparently got closer by the end of the gathering, but the question of

escalators continued to thwart agreement.

On the metal side, the Valleyfield smelter strike in Canada has thrown the regional balance into

disarray, with SHG premiums climbing to the 8–9c/lb area (compared with term figures of ~5-

7c/lb), with some sources quoting higher, while the market for CGG jumbos is even more fraught,

with one consumer quoting premiums for this smelter alloy product having doubled to 14-15c/lb.

Consumers are faced with either sourcing foreign imports, perhaps from Brazil, India or Europe, or

attempting to pay local alloyers to create the product to their specifications, as long as the smelter

is running at low levels (management are operating the plant currently).

Demand was seen as ok in most areas, if slow given the time of year, though we heard from one

party that felt the contraction in the oil and gas industry in the US was still impacting business, and

another that has begun to feel the encroachment of aluminum in their specific business area due

to prices. Despite this, the raw materials shortfall means there remains broad (but not unanimous)

agreement in zinc prices taking another leg higher as global refined tightness kicks in, which is our

thesis and we presented on this at the event: “Entering Phase II”.

Fig 1 Zinc in a structural deficit after mine closures drain concentrate stocks in 2016

Fig 2 Spot terms say it all; it’s just not the smelters’ year

Source: ILZSG, CRU, WoodMac, LME, Macquarie Research, February 2017

Source: CRU, Metal Bulletin, Macquarie Research, February 2017

TC benchmark talks grind: With spot TCs at levels around $30/t Cif Shanghai, versus well over

$100/t a year ago, miners did not have to work too hard to point to a tight concentrate market and,

thereby, press their advantage. Besides a reduction in the TC, we understand there was a move

to remove altogether the escalator structure (whereby smelters received a higher TC as prices

rise, and a lower charge if they fall, a.k.a., price participation), and even talk of lifting the payability

level. At present zinc smelters pay for just 85% of zinc in concentrate despite recovering around

96%, compared with ~96.5% for copper and similar levels for lead. We understand miners opened

with an offer of around $100/t flat (no escalator), to the dismay of the smelters, who started much

higher, but movement closer together in terms of the TC occurred as the conference wore on. The

escalator matter, however, is a key hurdle, with the miners’ demand of no escalators meeting stiff

resistance from smelters.

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3 March 2017 15

Spot market sees opportunists and sceptics: Amongst the spot concs trading going on, we

understand a certain trader came in with very aggressive bids for some South American material

and secured a substantial quantity for low (sub<$10/t TC) terms, while other traders were not

prepared to go so far. There was talk that more concentrate is being offered, and indeed regionally

the fact that Valleyfield has declared force majeure to some of its customers (see below) implies

that on the other side, concentrate feed intended for the smelter may be looking for a home. That

said, Glencore supplies Valleyfield with its concentrates, and the miner/trader is unlikely to rashly

dispose of material given its efforts to tighten the market entailed closing its own mines back in

2015. Given their noted wider strategic stance, they may well choose to hold material back from

the market for as long as they deem necessary.

Chinese mines, nothing last year, but are they coming? One key topic amongst Asia-focussed

concs traders has been the ramp-up at a few Chinese projects and disquieting talk of a mega new

mine project in Xinjiang province called Huoshaoyun, said to have grades of 2–20% and (very

ambitiously) intended to start ore production at the end of this year. Given the mine is at an

altitude of 5.5km and in a very remote part of a very sparse province, we have doubts around the

timeline proposed by owner, Xinjiang Guanghui Group, and do not expect meaningful contribution

until 2019, if at all. However, it is true that some other Chinese projects are set to contribute this

year, with ramp-up at 120ktpa Guojiagou in Gansu continuing and incoming tonnes from new

players, Bangzhong, Elunchun Bachagou and Maliping, amongst others. In any case, last year

Chinese output was hampered by environmentally driven closures, the focus of which has not

eased and is still likely to cause disruptions. While the incoming projects should help to deliver

higher mine output, we recall that a year ago we expected Chinese output to gain by ~5% on

higher zinc prices, yet environmental cutbacks crushed growth, and we ended up nearer +1% by

the end of the year.

Fig 3 After stalling lately, new projects to propel Chinese mine output higher

Fig 4 N America’s second-largest smelter’s workers are on strike, operating rate <50% capacity

Source: CRU, Wood Mac, Macquarie Research, February 2017 Source: CRU, Wood Mac, Macquarie Research, February 2017

Refined market still set to tighten: Even with these new tonnes coming in, however, recovery in

India and rising zinc output at Antamina in Peru, amongst others, we still see a concentrates

shortfall heavy enough to drive a refined deficit of ~500ktpa in 2017 and 2018. (A balanced zinc

metal market would require concentrates deficits of ~660ktpa this year, and after last year’s

substantial 780kt contained destock we do not believe the tonnes exist to make such a draw.) We

believe we are thus moving into “Phase II” of the structural undersupply in this market, where

smelters are forced to cut back or suspend operations due to lack of raw materials and the refined

zinc market therefore tightens.

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3 March 2017 16

China the main victim: Despite its new mines, China will still be short and needing to come to the

international market for feed, but sellers with too many aspiring buyers are likely to prioritise larger

customers with a more certain future. Given the small average profile of Chinese smelters

(~70ktpa on average vs ~180ktpa outside China), we see the country being short ~400kt of zinc in

concentrate and, therefore, smelter closures concentrating here. This means more zinc metal will

need to be imported, and so we have heard that traders have been positioning material over the

last few weeks towards Asia, with some of the outflowing tonnes from New Orleans LME

warehouses heading this way. Focus on the SHFE/LME arbitrage, ingot premiums in Asia, and

eventually ingot imports has sharpened, as market participants of all stripes try to determine

whether closures are beginning.

Valleyfield throws a spanner in the (regional) works: The above is not new, however, so what

excited the gathering this year was the Valleyfield situation: Unionized workers at Noranda Income

Fund’s Salaberry-de-Valleyfield smelter in Quebec, who are affiliated with United Steelworkers of

America, went on strike beginning 12 February over changes to their collective compensation

agreement. Years of a concentrate supply agreement at attractive treatment charges are to come

to an end on 3 May this year, when a new supply agreement (with Glencore as in the past) at

market terms comes into effect. These terms will be substantially less profitable for the plant, and

management is seeking to balance this change with amendments to employee benefits.

Employees are less keen and walked, so at present the smelter is being operated by

management, at 25–30% of operating capability, we were told. (A particular problem for the

smaller workforce is said to be the plant’s manual casthouse.)

Regional premiums climb: The smelter is the second-largest in the region (Fig. 4) and a key

supplier of jumbo-shaped zinc SHG (special high grade, which is the grade that can be delivered

to the LME) and CGG (continuous galvanising grade, which contains small amounts of aluminium

and is made to order) to galvers and alloyers. We hear that force majeure was declared to many

of its customers, putting them in a tough spot, as Teck, Hudbay and the Mexican smelters are said

to be pretty much fully booked for the year, while the offtake from Nyrstar’s Clarksville goes to

Glencore. Premiums are unsurprisingly rising, with SHG deals done at 8–9c/lb, we were told

(prompt), and some saying they achieved higher, while much of the material leaving New Orleans

in recent weeks is now believed to be positioning to cover the shortfall in North America.

CGG tightens sharply: Meanwhile, matters are worse for buyers of CGG. As much as half of

Valleyfield output could have been CGG jumbo, according to some people we spoke with

(compared with ~20% of smelter output in Europe, based on a survey we did last year) and

because these products are made to suit each customer (size and aluminium content can vary),

there is no wider commodity market or stockpiles to tap into as with SHG. We learned that buyers

are facing premiums that have shot up to 14–15c/lb in the local market and are talking to overseas

suppliers to see what can be sourced. In a sign of the scale of the problem, approaches have

been made to the alloyers to see if they can remelt SHG and introduce the additional metal

content, but along with the chemical composition challenges, the right mould shapes for jumbo will

also need to be found or fabricated.

Demand mixed: Most metal players tell us that actual demand is a little slow given the season,

but signs of life are emerging. In Asia, premiums have begun to lift slightly, although whether this

is more reflective of strong anticipation of China tightness than actual shortages is hard to say.

Consumers we spoke with in the US were mixed, with some galvers we spoke with reporting

healthy conditions, but one actually saying his orders were down 3% YoY, which he directly

related to continued sluggishness from the oil & gas sector, despite signs of a pickup here in terms

of rig count and other factors. Smaller alloyers, particularly those geared away from the

automotive sector, showed more concern about substitution, although others played down any

encroachment. One European zinc consumer we spoke with, however, reported that his market,

which is a (small) sector in direct competition with aluminum products, is certainly seeing losses

since the zinc/aluminium spread has widened.

Still bullish for another 12–18 months, but see price fading afterwards: The latter point is a

useful reminder of how we think zinc will eventually be restrained. For the next year to 18 months

we are happy to remain bullish, looking for another leg up in prices to be triggered when we

encounter the strong Chinese call for metal and attendant metal tightness around the world.

Beyond this, however, we think zinc’s tenure at an elevated spread (>1.5:1) to aluminium (and

other materials) will be driving a reduction in demand for low-end diecast alloys and other zinc-

majority products (i.e., not galv steel) with direct competitors to the extent that metal tightness

begins to fade, thus allowing prices to retrace later in the decade.


3 March 2017 17

Peru takes the lead in copper concentrate volumes to China

China’s copper concentrate imports in January were weak – the lowest since January 2016. This

isn’t too much of a surprise given the Chinese New Year effect. What is more interesting however

is that, for the second consecutive month, China sourced more copper concentrate from Peru than

from Chile. While this happened during occasional months in 2016, it was never to the extent

seen over the past two months, with ~30% more material arriving from Peru.

The reasons for this are a combination of ownership and simple arithmetic. Chile has had well

documented struggles to grow copper output, and has always had a balanced export structure

both in terms of geographies and cathode/concentrate mix. Peru on the other hand saw 38%

output growth over 2016, all of which was exported as concentrate, with the vast majority to China

given the Chinese ownership of major assets. Peru's importance is growing, but with ~2.4 times

the mined copper unit output of its neighbour, Chile is still the big beast in town.

January’s concentrate import weakness seasonal more than anything else

At only 1.25mtpa gross weight and only +6.7% YoY (versus a full year average of 26%), China’s

copper concentrate imports in January were disappointing by recent standards – certainly

compared to the ~1.7mtpa averages over recent months. While the much documented supply

issues at major mines may spring to mind, these are too recent to affect January arrivals. Rather,

the weakness is more likely to be down to a lack of registered arrivals over the Chinese New Year

period at the end of the month – indeed export volumes from major supply countries were strong

in December, suggesting a February pick up is highly probable.

Where the concentrate imports were more interesting however was in their source – for the

second consecutive month Peru usurped Chile as the largest source of material. Moreover,

imports from Peru were 25% higher than from Chile in the month, following on from being 41%

higher in December. This sets the scene for 2017 being the year where Chile is no longer China’s

largest copper concentrate supplier.

Fig 1 January was a weak month overall for Chinese concentrate imports, owing to Chinese New Year…

Fig 2 …while on a rolling average basis, imports from Peru relative to Chile are at a new high

Source: China Customs, Macquarie Research, February 2017 Source: China Customs, Macquarie Research, February 2017

So is this a huge market structure change? Not really, in fact travelling down this path was almost

inevitable for a number of factors, mainly down to the strength in Peruvian output and the Chinese

ownership of major Peruvian operations such as Toromocho and Las Bambas. And naturally,

mined copper from these operations is pretty much all destined for Chinese smelters. If anything,

the surprise is that it hasn’t happened sooner.

It should be noted that, despite Chilean mine output not growing (Cochilco data showed 2016

down 3.8% YoY and in line with the 10 year average), concentrate shipments to China have

actually been rising in recent years. At 1.38mt of copper contained, China’s 2016 imports from

Chile were up ~27% YoY and 61% on 2014 levels. Meanwhile, at 1.20mt of copper contained

China’s imports from Peru rose 72% YoY and 126% over 2014 levels.

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3 March 2017 18

This shift is all part of the Chinese business model we have discussed before. Chinese buyers

want to source raw material wherever possible, build process technology (such as smelters) in

China to control more of the value chain and ideally export a small amount of finished product to

buffer against inflationary pressures.

In copper this means sourcing as much concentrate as is available (a process helped by the fact

smelter margins have been crippled by industry overcapacity, leading to closures) and ideally less

cathode. 2016 was a big success in this regard, with imports of copper contained in concentrate

exceeding those in cathode form for the first time in recent years.

Fig 3 Strong growth in material arriving from both Chile and Peru in recent years…

Fig 4 …has seen China’s imports of copper in concentrate exceed those in cathode form

Source: China Customs, Macquarie Research, February 2017 Source: China Customs, Macquarie Research, February 2017

The ramp-up in imports from Chile is not down to greater overall raw material output as discussed

above. And while Chilean concentrate exports did grow 4.4% last year, the fact that China

received so much more material naturally means other countries received less amid a reallocation

of destinations. In particular, Chilean exports to Brazil dropped 27% YoY, to Japan 16%, to India

2% and to Europe 1%.

In contrast, overall Peruvian copper mine output rose ~38% YoY in 2016 owing to the ramp-ups at

Cerro Verde, Constancia and Las Bambas. Notably, it could have been higher had Toromocho

output not been down YoY after a weak period over Q2-Q3.

Fig 5 While Chile struggled for growth in 2016… Fig 6 …Peru certainly didn’t, with output up over 35%

Source: Cochilco, Macquarie Research, February 2017 Source: Minem, Macquarie Research, February 2017

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3 March 2017 19

The differing form of export volumes is also important in Peru surpassing Chile into China for

concentrate. With only one well-established copper smelter (owned by Southern Copper) and

environmental restrictions making further builds nigh on impossible, plus only ~70kt of SXEW

output (Cerro Verde and Toquepala) all Peruvian growth is exported as concentrate. Essentially,

Peru is highly aligned with the Chinese copper business model.

In contrast, despite some sequential declines in recent years as SXEW operations dwindle, Chile

still exports half of mined copper in cathode form. When cathode is included, Chile remains

China’s most important source of copper units. Moreover, Chile’s concentrate exports are more

geographically balanced – China still accounts for less than half of total volumes, with~10% still

destined for Europe and ~40% for Asia ex-China. While clearly important, exports to China aren’t

the be all and end all in the copper market.

So will 2017 see this trend continue? Depending on Chile’s issues, perhaps not. With many of

the major mines now close to fully ramped, Peruvian output growth will be much lower in absolute

terms this year. Meanwhile, on our base case Chile should see >200kt of output growth. This

does factor in a recovery in Escondida volumes however, making the duration of the current

disruption highly important.

Fig 7 Peru ships most of its output in concentrate form, while Chilean exports are more balanced

Fig 8 While Peru has dominated growth for the past two years, we have more Chilean growth over 2017-18

Source: Minem, Cochilco, Macquarie Research, February 2017 Source: Wood Mackenzie, CRU, Macquarie Research, February 2017

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3 March 2017 20

Chinese steel exports to continue to slide near term

Chinese steel exports fell back significantly over 2H16, and according to our latest steel survey,

they are set to continue falling in the near future. Chinese exports in 4Q16 declined to their lowest

since early 2014, as recovering domestic demand and prices made export markets less attractive.

Additionally, protectionism against Chinese steel imports into many destinations also contributed

to the reduced competitiveness of Chinese steel exports into some countries.

Fig 1 Chinese steel exports in 4Q16 were their lowest since early 2014

Fig 2 Chinese steel prices are now less competitive globally, driven by domestic price recovery

Source: China Customs, Macquarie Research, February 2017 Source: Steel Business Briefing, Macquarie Research, February 2017

Globally China is the biggest steel exporter by far, at 108mt last year, ahead of Japan at 41mt and

both Russia and South Korea at 31mt. Exports as a percentage of steel production remain

relatively low for China, however, at 15%, while of the top five export countries, Germany exports

over two-thirds of its steel production, and South Korea and Russia both export nearly half of their

output.

Fig 3 Top global steel exporters, 2016

Production (mt) Exports (mt) Export share

China 807 109 15%

Japan 105 41 43%

Russia 71 31 49%

South Korea 69 31 49%

Germany 42 25 67%

Source: Customs data, Macquarie Research, February 2017

In terms of the destinations for Chinese steel exports, these are increasingly being concentrated

within Asia. Total Chinese steel exports last year declined by 3% to 109mt, with exports to every

region bar Asia in decline, led by double-digit declines in exports to North America, South America

and Europe. Exports to the Asian region in contrast rose by 5% yoy, with nine of the top ten

export destination countries for Chinese steel being in the region. China’s steel exports to the US,

meanwhile, were only 1.2mt, down by over 50% from 2015.

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3 March 2017 21

Fig 4 Chinese steel exports by region

2016 2015 YoY Change

Total 108,973 112,397 -3%

Asia 68,485 64,923 5%

Middle East 13,459 14,729 -9%

Africa 8,843 9,430 -6%

Europe 7,650 9,555 -20%

South America 7,187 8,445 -15%

North America 2,513 4,463 -44%

Oceania 836 852 -2%


In terms of individual export destinations, Korea remained the main destination for Chinese steel

exports, with 14.4mt going to the country from China in 2016, up 6% yoy. However, South Korea

remains China’s second largest steel import source, with 4.4mt of steel going the other way,

leaving Chinese net steel exports to South Korea at 10mt in 2016.

Fig 5 Chinese steel top export destinations

2016 (mt) 2015 (mt) YoY

Korea 14.4 13.5 6%

Vietnam 11.7 10.1 15%

Philippines 6.5 5.6 17%

Thailand 6.2 4.7 32%

Indonesia 5.8 5.1 14%


China imported 13.2mt of steel last year, and Japan was the biggest source of imports, providing

5.5mt. With China exporting less than 1.3mt of steel to Japan, Japan is the only country from

which China is a net steel importer.

Looking ahead, China’s steel exports are likely to remain a function of domestic steel demand and

prices, and given the strong rise in prices so far in 2017, steel mills in our latest China Steel

Survey told us that exports have continued to fall in the first two months of the year. Prior to 2014,

steel mills in our survey tended to report export and domestic orders in largely the same trajectory;

however, since 2014 export orders have consistently moved in an inverse way to domestic orders.

This makes sense, as mills looked to export markets to bail them out of poor domestic demand

and weak prices in 2014 and 2015.


3 March 2017 22

Fig 6 Mills continue to see a decline in export orders as Chinese steel prices are not competitive

Fig 7 Export orders tend to be inverse to domestic steel orders

Source: Macquarie Research, February 2017 Source: Macquarie Research, February 2017

We continue to see little impact on Chinese steel exports from supply side reforms, as we do not

believe enough real effective capacity will be closed in China, and steel will not be in a structurally

short supply environment. One key policy area which could influence steel exports, however,

could be environmentalism. With all the recent policy discussions around closing steel output for

environmental purposes, one quick way to achieve a reduction in Chinese steel output would be to

introduce steel export taxes, such as those which existed prior to 2009. So far, however, there has

been no public discussion of changes to export policy, with the policy focus remaining more on

domestic capacity issues.

While Chinese steel exports are likely to remain weak over 1H17, we are forecasting Chinese

steel demand and prices to ease in 2H17, which will improve their export competitiveness.

Additionally the ongoing improvement in global demand indicators such as IP and OECD lead

indicators suggest that steel demand should continue to improve ex-China, which should also

serve to make ex-China markets more attractive to Chinese steel mills as domestic demand

conditions ease.

0

10

20

30

40

50

60

70

80

90

100

Ju

l-11

Oct-

11

Ja

n-1

2

Apr-

12

Ju

l-12

Oct-

12

Ja

n-1

3

Apr-

13

Ju

l-13

Oct-

13

Ja

n-1

4

Apr-

14

Ju

l-14

Oct-

14

Ja

n-1

5

Apr-

15

Ju

l-15

Oct-

15

Ja

n-1

6

Apr-

16

Ju

l-16

Oct-

16

Ja

n-1

7

Have export orders increased or decreased over the last month?

Total

Increasing no. of mills seeing orders rise

Increasing no. of mills seeing orders fall

0

10

20

30

40

50

60

70

80

90

100

Jul-

11

Oct-

11

Jan

-12

Ap

r-12

Jul-

12

Oct-

12

Jan

-13

Ap

r-13

Jul-

13

Oct-

13

Jan

-14

Ap

r-14

Jul-

14

Oct-

14

Jan

-15

Ap

r-15

Jul-

15

Oct-

15

Jan

-16

Ap

r-16

Jul-

16

Oct-

16

Jan

-17

Have domestic orders increased or decreased over the last month?

TotalIncreasing no. of mills seeing orders rise

Increasing no. of mills seeing orders fall


3 March 2017 23

Important disclosures:

Recommendation definitions

Macquarie - Australia/New Zealand Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield

Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie – South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie - Canada

Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return Underperform – return >5% below benchmark return

Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return

Volatility index definition*

This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be

expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only

Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Financial definitions

All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Recommendation proportions – For quarter ending 31 December 2016

AU/NZ Asia RSA USA CA EUR Outperform 57.53% 50.72% 45.57% 42.28% 60.58% 52.79% (for global coverage by Macquarie, 8.71% of stocks followed are investment banking clients)

Neutral 33.90% 33.97% 43.04% 50.11% 37.23% 35.62% (for global coverage by Macquarie, 8.05% of stocks followed are investment banking clients)

Underperform 8.56% 15.30% 11.39% 7.61% 2.19% 11.59% (for global coverage by Macquarie, 4.63% of stocks followed are investment banking clients)

Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures.

Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group’s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN 58 002 832 126, AFSL 238947, a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Wealth Management, a division of Macquarie Equities Limited ABN 41 002 574 923 AFSL 237504 ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited (“MENZ”) an NZX Firm. Macquarie Private Wealth’s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) (“MBL”) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Apart from Macquarie Bank Limited ABN 46 008 583 542 (MBL), any MGL subsidiary noted in this research, , is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary’s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research contains general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group‘s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures © Macquarie Group

This publication was disseminated on 03 March 2017 at 19:36 UTC.

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