mf commodity seminar final
TRANSCRIPT
Outlook for commodity markets
Neal BrewsterRio Tinto Economics Department
MF Global Seminar
15 October 2009
15 October 2009 MF Global Conference 2
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foreign currency exchange rates on market prices and operating costs, operational problems, political uncertainty and economic conditions
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and such other risk factors identified in Rio Tinto's most recent Annual Report on Form 20-F filed with the United States Securities and
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of such risk factors and undue reliance should not be placed on forward-looking statements. These forward-looking statements speak only
as of the date of this presentation.
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necessarily match or exceed its historical published earnings per share.
Cautionary Statement
15 October 2009 MF Global Conference 3
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Global financial crisis has been the biggest shock to the world economy since the Second World War
The Great Depression
WW2
Note: Data prior to 1950 excludes Africa, Asia and Former Soviet UnionSource: IMF, Rio Tinto
4.8%
2.5%3.3%
Clash of ideologies
Post War OECD Growth
Emergence of Developing Countries
Maturing OECD
Growth in global GDP (percent a year on purchasing power parity basis)
Financial crisis
Oil price shocks
15 October 2009 MF Global Conference 4
0
10
20
30
40
50
60
1990 2000 2008
Copper
Aluminium
Traded iron ore
-20
-15
-10
-5
0
5
10
15
75 80 85 90 95 00 05
In a “metals weighted” world the downturn is comparable to the early 1980’s and “dot-com” downturns
Growth in industrial production (percent a year)
OECD
Global, weighted by share of metals consumption(1)
Source: IMF, WBMS, CRU, Brook Hunt, Rio Tinto
China’s share of world consumption (percent)
15 October 2009 MF Global Conference 5
We are now seeing a cyclical upturn in the developed world but underlying recovery may not be strong
20
25
30
35
40
45
50
55
60
Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09
US
JapanEurozone
Source: ISM Factory (US), Nomura JM (Japan), Markit (Eurozone)
Purchasing manager indicators suggest recovery …
• Release of ‘pent up’ demand, government stimulus and end to destocking is driving current ‘normalisation’ in demand
• Excess capacity is still holding back investment and producers are not restocking
• Structural fiscal deficits will eventually need rebalancing
• Western consumers unlikely to go back to previous levels of borrowing
.. but a number of ‘headwinds’
15 October 2009 MF Global Conference 6
0
2
4
6
8
10
12
14
16
18
20
Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 1020
25
30
35
40
45
50
55
60
65
percent yoy, index
Rapid pick up in Chinese economic activity
Chinese industrial production and Purchasing Managers Index
Industrial production* (LHS)
PMI** (RHS)
This may not matter for commodities if the strong Chinese recovery continues; but a longer term shift in the balance of its growth is required
Source: Reuters Ecowin, Consensus Economics
* 3 month moving average** NBS series. Forward 1 month
Chinese GDP growth
0
2
4
6
8
10
12
14
2005 2006 2007 2008 2009f 2010f
percent yoy
15 October 2009 MF Global Conference 7
Production Volume Index
Inland Chinese provinces have been the focus of Chinese infrastructure spending
Acceleration in investment growth in China
Increase in fixed asset investment Jan-Aug 2009
Per cent yoy (bars denote relative growth)
Source: Chinese National Bureau of Statistics
Urban fixed asset investment
15
20
25
30
35
40
45
Jan04
Jan05
Jan06
Jan07
Jan08
Jan09
Jan10
percent yoy, 3 month moving average
15 October 2009 MF Global Conference 8
Surge in Chinese imports during 2009 have been the driving force behind commodity markets offsetting fall in demand in other regions
0
10
20
30
40
50
60
70
Jan-0
5
Jan-0
6
Jan-0
7
Jan-0
8
Jan-0
9
Jan-1
0
Source: Chinese trade statistics
Iron ore Aluminum
0
100
200
300
400
500
Jan-0
5
Jan-0
6
Jan-0
7
Jan-0
8
Jan-0
9
Jan-1
0
Copper
Chinese net unwrought copper imports
thousand tonnes a month
Chinese iron ore imports
million tonnes a month
-300
-200
-100
0
100
200
300
400
Jan-0
5
Jan-0
6
Jan-0
7
Jan-0
8
Jan-0
9
Jan-1
0
Chinese net unwrought aluminium imports
thousand tonnes a month
15 October 2009 MF Global Conference 9
0
50
100
150
200
250
300
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Spot iron ore (62% Fe, fob)AluminiumCopperGoldThermal coal (NEWC)
9
Daily spot price index (2 October 2009 = 100)
Minus 60-70%
Plus 40-120%
After a record decline in 2008H2 commodity prices have staged a strong recovery
Source: Metal Bulletin, Reuters Ecowin
US dollar has declined 11%
15 October 2009 MF Global Conference 10
0.5
0.8
1.0
1.3
1.5
1.8
2.0
-12 -8 -4 0 4 8 12 16 20 24
Lag from economic trough (quarters)
Current metals price cycle has been much more severe than in previous periods but prices have risen more quickly off lows
Aluminium price as ratio of 5 year trailing average(2)
(1) Average of cycles centred around 1978, 1982, 1992 and 2001 (2) Real termsSource: LME, Rio Tinto
Copper price as ratio of 5 year trailing average(2)
0.5
1.0
1.5
2.0
2.5
3.0
-12 -8 -4 0 4 8 12 16 20 24
Lag from economic trough (quarters)
Average of previous cycles(1)
Current cycle
Average of previous cycles(1)
Current cycle
15 October 2009 MF Global Conference 11
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Jan-90 Jan-95 Jan-00 Jan-05
Aluminium: Prices in Q1 reflected excessive risk but large stock overhangs have developed
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
90 92 94 96 98 00 02 04 06 08 10
World aluminium production and price-cost relationship
Source: IAI, CRU, LME
Western aluminium stocks Aluminium prices and costs
million tonnes $ per tonne in real 2009 terms
Median industry costs
Spot aluminium price
Exchange
Producers
15 October 2009 MF Global Conference 12
Consumption is now starting to recover but remains well below previous levels outside China
1.00
1.20
1.40
1.60
1.80
2.00
2.20
2.40
Jan02
Jan03
Jan04
Jan05
Jan06
Jan07
Jan08
Jan09
Jan10
World aluminium shipments
Source Rio Tinto estimates
Non-China
monthly, million tonnes
Chinamonthly, million tonnes
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
Jan02
Jan03
Jan04
Jan05
Jan06
Jan07
Jan08
Jan09
Jan10
Year-to-date -29%
Year-to-date +9%
15 October 2009 MF Global Conference 13
Large smelter capacity overhangs remain both inside and outside China
17
18
19
20
21
22
23
Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10
World aluminium production and capacity
Source: IAI, WBMS, Rio Tinto estimates
Western world
monthly, annualised million tonnes
Capacity
Production
China
monthly, annualised million tonnes
5
7
9
11
13
15
17
19
21
Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10
Capacity
Production
15 October 2009 MF Global Conference 14
Copper: Constrained supply and record Chinese imports pushed market back into deficit in H1 but destocking may be a short run negative
Low copper stocks and constrained supply growth
Source: WBMS, LME, NYMEX, WBMS, Chinese trade statistics
Western copper stocks Western world copper mine production
monthly, annualised million tonnesthousand tonnes
8
9
10
11
12
13
14
15
Jan00
Jan02
Jan04
Jan06
Jan08
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
Jan02
Jan04
Jan06
Jan08
Exchange
Producers and consumers
1.1 percent per annum growth in mine production between 2005-9
15 October 2009 MF Global Conference 15
(20)
(10)
0
10
20
30
40
Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10
Iron ore spot price and domestic Chinese mine production
Chinese steel production is responding to recovery in construction activity and infrastructure spending and driving spot iron ore prices
Iron ore: Current spot prices are supported by call on high cost marginal producers required to meet Chinese demand
Source: World Steel Association, Chinese trade statistics, Reuters Ecowin
Floor space under construction
Apparent steel consumption
Residential construction and apparent steel consumption in China
percent yoy (3 month moving average)
(15)
(10)
(5)
0
5
10
15
20
25
30
Jan 08 May 08 Sep 08 Jan 09 May 09 Sep 09
0
20
40
60
80
100
120
140
160
180
200
Domestic iron ore production (LHS)
Spot iron ore price (RHS)
$ per tonne (63.5% Fe, cfr China)
percent yoy(3 month moving average)
15 October 2009 MF Global Conference 16
0
2
4
6
8
10
12
14
16
18
20
1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Consumption/production (million tonnes)
0
100
200
300
400
500
600
700
800
900Price (c/lb in real 2009$)
Long run price levels are the outcome of a continuous tussle between demand and supply
Refined copper consumption and real copper price
Consumption
Price
Production
Source: LME, Brook Hunt, Rio Tinto
15 October 2009 MF Global Conference 17
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000 60,0000
2
4
6
8
10
12
GDP per capita(in 2006 US$ at PPP)
Copper consumption (kg/capita)
Population distribution (millions by income group)
Future metals consumption trends will be driven by growth in population and wealth in developing nations, particularly China and India
2008 Population Distribution
2025 Population Distribution
Copper Consumption
China 2025India 2008
Global population distribution and per capita copper consumption
India 2025
China 2008
China 2008 copper consumption
China est. 2025 copper consumption
India 2025 copper consumption
India 2008 copper consumption Source: Brook Hunt, Ecowin, World Bank, Rio Tinto estimates
15 October 2009 MF Global Conference 18
0
20
40
60
80
100
0 10,000 20,000 30,000 40,000 50,000
GDP per capita (US$ at PPP rates in 2006 terms)
Urb
an
isa
tio
n r
ate
(p
erc
en
t)
National averages
Chinese provinces
Industrialisation and urbanisation within China have some way to run
Source: Global Insight, CIA Factbook
Urbanisation rates across Asia, the United States and European Union in 2008
Urbanisation rates, income and population
Note: Size of bubble reflects total population
United States
Japan
India
EU15
China
15 October 2009 MF Global Conference 19
Metals consumption could double in next 15-20 years and implies sustained pressure on capital and people …
10
20
30
40
50
60
70
80
78 82 86 90 94 98 02 06
Capital spending by non-ferrous mining sector ($billion in 2009 terms)
0
10
20
30
40
50
60
70
80
2009-15
Base metals
Steel raw materials
Aluminium
Precious metalsTraded energyFertiliserOther
Note: Base metals consists of cobalt, copper, lead, manganese, molybdenum, nickel, tin and zincSteel making consists of seaborne coking coal and seaborne iron oreAluminium consists of alumina refining and aluminium smeltingPrecious metals consists of gold, silver, PGMs and diamondsEnergy consists of seaborne thermal coal and uraniumBased on current unit capital costs and Rio Tinto demand projections and assuming sustaining capital at 4% of revenue.
Sources: MICA (CRU), Rio Tinto estimates
Estimates for 2009 industry
capex $26-55bn
Future sustaining and new capital spending requirement ($billion in 2009 terms)
15 October 2009 MF Global Conference 20
… and resources. The location and grade of Copper ore will create challenges for the industry.
26%
40%
2009 2025
Notes: 1 Existing mines and funded projects2 Rio Tinto classification
Source: Brook Hunt Q2 2009
Increasing depth . . .
Underground copper production1
(% of global production)
… and higher risk
Current production and project capacity in high risk2 regions
1.17%
1.03%
2009 2025
…decreasing grade…
Copper Industry average grade1
(% Cu)
12%
20%
Current New Projects% Global production % New project capacity
15 October 2009 MF Global Conference 2121
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
2006 2015 2020 2025 2030
Long run upwards pressure on Chinese costs will support long run aluminium prices
• Chinese smelters will face increasing competition for access to power
• Renminbi appreciation is expected to resume once export market conditions stabilise
• Carbon pricing will lead to upwards industry cost and price pressure and benefit low carbon sources of production
Source: IEA World Energy Outlook (2008)
Chinese electricity generation requirements
TWh
… including energy. Positive long run aluminium outlook underpinned by rising demand and energy constraints
15 October 2009 MF Global Conference 22
Current market conditions and outlook
• Spot metals prices are 40-120% above Q1 cyclical lows but remain well under previous peaks
• Stimulus spending, loans growth and stocking activities in China provided initial basis for recovery
• Could see some ‘pay-back’ for this in coming months but may be offset by normalisation in developed world consumption levels
• Strong longer run fundamentals remain intact