perspectives of the commodities market and its … of the commodities market and its impact in...

Perspectives of the Commodities Market and its impact in Brazil

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Victor Rodriguez,Principal Consultant

May 16th 2016

Source: CRU (London, Sydney, Tokyo, Beijing, Hong Kong, Mumbai, Toronto, New York, Pittsburgh, Sao Paulo, Santiago) 2

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2SIMEXMIN 2016. CRU – Perspectives of the Commodities Market

SIMEXMIN 2016. CRU – Perspectives of the Commodities Market 3

CRU has unrivalled coverage. We are specialist in our sector

Continuosly monitored / analysed / published

Covered through consultancy

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The fragile health of the global

economy has been long looming

over the commodity spectrum

5Data: CRU Note: *Average annual consumption for crude steel, coking coal, aluminium, copper, fertilizer, stainless steel, nickel, lead, and zinc.

0%

2%

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14%

World China

CAGR consumption growth rate, average for selected commodities

2010/2005 2015/2010 2020/2015

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Annual consumption growth average for selected commodities; China’s share in

consumption.

China consumption growth (LHS)

China's share in world consumption (RHS)

Global demand prospects changed abruptly affecting commodities marketCAGR consumption growth, simple average for selected commodities*

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Data: CRU Note: *Average annual consumption for crude steel, coking coal, aluminium, copper, fertilizer, stainless steel, nickel, lead, and zinc.

SIMEXMIN 2016. CRU – Perspectives of the Commodities Market

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46

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Jan-15 Apr-15 Jul-15 Oct-15 Jan-16

Developed economies

China

Other emerging economies

Manufacturing PMIsDiffusion index

Data: Markit, CRU

-1

0

1

2

3

4

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6

2011 2012 2013 2014 2015 2016 2017

Other emergers Crisis countries

Developed China

Regional contributions to global IP growth

% points

Note: 'Crisis countries' are Russia, Brazil, Thailand, Ukraine and Venezuela

Data: Oxford Economics, CRU

2016: Global IP growth in heavily reliant on China2017: Pick up dependent on developed economies

• Lousy start to 2016 in developed economies and global IP growth now forecast to be no better than 2015

• China contributes three quarters of global IP growth this year …and manufacturing PMI picked up strongly in March

• Manufacturing PMIs for other emergers have also firmed


Data: CRU

Longer term, China’s transition remains the biggest risk

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China concerns have eased, but have not gone away and could quickly return:

• Dampener for market sentiment

• Recipe for volatility (daily turnover on the nation’s futures markets has jumped by $183 bn)

An orderly economic transition in China is CRU’s base case (probability ≈ 55%)

A disorderly transition would be focused on investment

• Bulks and base metals have greatest exposure

The probability of a disorderly transition is high (≈ 35%)

• Need for scenarios and sensitivity analysis

• Need for contingency plan

A disorderly evolution in China would have significant impact investment & IP

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2015

2016

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2018

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Disorderly transition

Orderly transition

China investment level

2010 US$ trillions

Data: CRU

28%

11%


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Despite common trends…

…commodities are a mixed bag

Source: CRU 10

Bu

lk C

om

mo

dit

ies Sector in structural oversupply

Many, new, low cost, mine development opportunities

Significant, sustainable & cyclical cost reductions

Opportunistic M&A – calling the bottom?

Price upside capped by distressed or mothballed assets

Supply is sustainable if 1st

Quartile remains profitable

Easy to identify the right assets

Ba

se M

eta

ls

Sector has limited oversupply

Limited appetite to invest in, high risk, new mines

Limited sustainable & cyclical cost savings to date

M&A opportunities delaying new mine investment discussion

Price upside capped by stocks and distressed consumers

New projects will not enter in the 1st Quartile

Difficult to identify the right assets

In the medium term we favour base metals over bulks…


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Iron Ore: The turnaround in real estate took mills and traders by surprise. Inventories of ore and steel are low in China…

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0

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Spot price Mills' ore inventories

Inventories of finished steel products in China's 26

major cities, MtLHS: benchmark iron ore price, $/t

RHS: Chinese mills' iron ore inventories, days

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Source: CRU, UMetal, MySteel.


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… but supply weakness is temporary. A weak Q1 increases the chances of a stronger H2, as the majors play catch-up and Roy Hill ramps up

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Breakdown of Australian supply growth, Mt

810

8,0

5,93,0

17,0

0,6843,9

800

805

810

815

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850

2015 RioTinto

BHP FMG Roy Hill Others 2016

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2016 Q1 2016 Q2 2016 Q3 2016 Q4

Vale’s production required to meet guidance , Mt

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Source: CRU. N.B: assumes BHP will hit 265 Mt in sales from Australia in 2016 CY

90 90


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At $55 /t, the vast majority of the seaborne market is cash positive, including most Australian mid-caps, the marginal players in the market

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Breakeven benchmark price of major seaborne producers in 2016 Q1

Source: CRU


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In summary… a bear market rally

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A massive annualised decline of 130 Mt/y in seaborne supply in Q1 is, in our view, the major contributor of the unexpected rally in price. A weak Q1 increases the chances of a stronger push on volumes later this year, as the majors strive to meet targets.

Second main driver: strong real estate data from China. It does not look sustainable and we maintain our view that the Chinese housing sector will, eventually, have to go through an adjustment cycle.

We conclude that the recent price rise is a ‘bear market rally’ that should correct itself by year-end.


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5-year forecast: As marginal costs rise and displacement requirement shrink, we expect prices to increase but only after 2018

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In our view full equilibrium state is unlikely to be achieved by 2020:

• Given the typical lag to any supply-side response and the extent of the required re-structuring

• By 2020 prices would hit 80th percentile of the cost curve

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90th percentile price

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January 2016 Outlook April 2016 Outlook

Displacement requirement, Mt Iron ore price and marginal cost, $ /t

Source: CRU. Outlook based on two key assumptions: flat Chinese crude steel production and slowing supply growth


2016 price forecast: up by 0.3% from $9,356/t to $9,387/t

Source: CRU Nickel Market Outlook April 2016

Global balanceGlobal consumption of Nickel

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2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

mill

ion

to

nn

es

Consumption

yoy change %

$18 Market Value (bn)

22016 Total Production

(mt)

22016 Total

Consumption (mt)

28%% of Chinese

Production in 2016

51%% of Chinese

Consumption in 2016

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Balance

Wks of Consumption

• Additional production curtailments have resulted in larger deficits in the short-term than previously expected, resulting in prices bottoming out. The large deficit hinges on global demand growing by 2.3% this year, which still carries a number of risks.

• More than two-thirds of producing assets appear to be lossmaking with LME prices above $9,000 and there remains a risk of further cuts if prices continue to languish at low levels.

• Even with the larger deficits, industry stocks levels will still be around 19.3 weeks of consumption by the end of 2017 from an estimated 25 weeks currently.

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Nickel LME 3M(’000 $/t)

Nickel: Long-awaited deficit will arrive in 2016


2016 price forecast: up by 3% from $4,608/t to $4,746/t

Source: CRU Copper Market Outlook April 2016

Global balanceGlobal consumption of Copper

$105 Market Value (bn)

222016 Total Production

(mt)

222016 Total

Consumption (mt)

35%% of Chinese

Production in 2016

46%% of Chinese

Consumption in 2016

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Copper LME 3M Price (’000 $/t)

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2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

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es Consumption

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Balance

Wks of Consumption

• Copper prices have trended upwards, despite setbacks, since the beginning of the year. The main price driver has been an improvement in macroeconomic data stemming from China.

• Prospects for copper in 2016 have improved. Monetary easing has temporarily boosted Chinese demand, sentiment is less bearish and cost cutting improved producer cash flow.

• Our concerns are now focussed on 2017/18 supply. We now expect the copper market to see sizeable surpluses in 2017 and 2018, while we expect a market deficit in 2020 the price recovery is projected to be slower than previously envisaged

Copper: Sentiment improves but challenges remain


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Brazil has been affected…

…but it is in a good position to

capitalize mid-term recovery

Iron Ore. Brazil’s recent gains in cost are main non-controllable

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• World average business costs went down 29% from 2014 to 2015

• Brazilian average business costs went down 26% from 2014 to 2015

• A substantial part of cash cost reductions in Brazil are due to the weaker real (non-controllable)

• ~80% of Brazil production remains in 1st and 2nd quartiles

Iron Ore Business Costs, 2015 ($/t)

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Cumulative production

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Cumulative production (m tons)

Average price (2015)


Source: CRU

Vale’s strategy is a key factor to watch in the iron ore industryBrazil to grow its market share in global production to 22% by 2020

Source: CRU

[$/t]Cash cost,

FOBFreight

Cash cost,

CFR

Business

Costs

Northern system 14 13 27 25

SE system 21 13 34 36

Southern system 19 13 32 34

300

340

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500

2015 2016 2017 2018 2019 2020

Vale’s weighted avg Business Costs, 2017

Brazil’s mined iron ore production, m tons

• Higher cost exits and output cuts in 2016 will be offset in the medium-term by S11D ramping up

• Brazil is expected to grow at a slightly higher CAGR than Australia from 2015 till 2020. Rio Tinto, BHP and FMG are all expected to operate close to full capacity by 2018

2015-2020 CAGR = 3.6%


Nickel. An industry in lousy shape; bottom should have been reached

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• World average business costs went down 17% from 2014 to 2015, helped by a stronger US dollar

• Brazilian average business costs went down 22% from 2014 to 2015

• Three of the country’s largest mines are in the 2nd quartile

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Cumulative production (‘000 tons)

Nickel Production Business Costs, 2015 ($/t)



Source: CRU

Copper. Cost cutting measures have lowered the price floor

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• World average business costs went down 8% from 2014 to 2015.

• Brazilian average business costs went down 30% from 2014 to 2015.

• Brazil has 90% of its production within 1st & 2nd quartile

• Prices would need to fall to below $4000/t on a sustained basis for supply to respond

Copper Mining Business Costs, 2015 ($/t)

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/t)


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Cumulative production (‘000 tons)



Source: CRU

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Takeaway

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Global economy still looks fragile. China’s transition is a key factor medium term. Orderly / disorderly?

Base metals look more promising than bulk commodities. No 1st

quartile projects coming in, less convincing cost reduction.

Iron ore market will not reach full equilibrium by 2020. Large displacements of high cost prod. expected to be finished by 2018.

Copper to enter large surplus in 2017/2018 with deficit looming by 2020. Price to recover only by end of decade.

Nickel. Bottom has been reached? 2/3 of the industry are not profitable. Large inventories weight on future recovery.

Brazil: good position in cost curves. Cost reduction mainly due to weak real.


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