September 2019

Nicky Shiels, Metals Strategist

Renewed risks driving a new regime: outlook for base & precious metals

2

Contents

Macro-Economic Backdrop Pages 3-6

2019 and the macro backdrop: a tale of two halves Pg. 4

Summer 2019: What happened – hot & cold wars emerged Pg. 5

Trade & the Fed: Copper and Gold are financialized proxies Pg. 6

Precious Metals Outlook Pages 7-16

Gold technicals – respected Pg. 8

Short-term outlook: Fed rate regime shift, trade & geopolitics Pg. 9

Medium term outlook: Bond bubbles, deficits, negative rates & asset dislocations Pg. 10-12

Known Gold flows: Investors vs Central Banks & physical Pg. 13

Short & Long-term Gold Outlook: factors for an upside repricing Pg. 14

Silver Outlook: fundamentally oversupplied, but some upside potential Pg. 15-16

Copper Outlook Pages 17-27

The short-term outlook & drivers: macros usually trumps micro Pg. 18-20

Short-term fundamentals: frustration to supply-side dynamics Pg. 21-22

Longerterm fundamentals: Supply outlook and project pipeline Pg. 23-24

Contending with cycles Pg. 25

Short-term Price Outlook: macro destabilized copper, it will take macro to reprice Pg. 26

Appendix Pages 27-33

Summary table: bullish vs bearish drivers for Gold & Silver Pg. 28

Summary table: short & long-term bullish vs bearish drivers for Copper Pg. 29

Full Global Copper Supply-Demand Table , 2009-2023 Pg. 30

Longer-term Copper Demand – “E-Copper” in a Green World Pg. 31

List of Macro Uncertainties Pg. 32

Commodities as an asset class: performance when needed Pg. 33

Scotiabanks Commodity Group: Product & Capabilities Offering Pg. 34

2019 and the macro backdrop

4

• 1H 2019:

• Low volatility, complacent regime

• Sustained Fed pause after the January FOMC

• Risk assets trend

• Summer 2019 -- macro inflection point

• Trade, geopolitics & Fed change course marking several

turning points

• Outsized repricings in global bonds, commodities &

some equities (but not the US$)

• 2H 2019:

• Higher volatility, anxious regime

• Havens continue to trend

2019 and the Macro Backdrop: A tale of two halves

4%

+17%

-22 -17 -12 -7 -2 3 8 13 18 23 28

US 3m T-bills

DXY

Commodities

US Gov Bonds

EM Equities

Industrial Metals

US I.G Corp Bonds

US H.Y Corp Bonds

EM Gov Bonds ($ den)

Energy

DM Equities (ex-US)

Precious Metals

US Equities

%

Macro assets performances, then (2018) vs now (2019)

Source: Scotiabank Commodities Strategy, Bloomberg, ICE BofA ML Source: Scotiabank Commodities Strategy, Bloomberg, ICE BofA ML

YTD 2019

2018

5

Q2’19 & Q3’19 marked several major turning points in trade, geopolitics/politics & monetary policy :

TRADE TENSIONS May 2019: last minute collapse of US/China trade deal; post-FOMC tariffs

GEOPOLITICAL TENSIONS June 2019: Iran / North Korea / Middle Eastern tensions, HK protests, Saudi Oil attack

CURRENCY WAR July/Aug 2019: yuan breach of 7-threshold marks a new front; threat of FX intervention

MONETARY POLICY WAR Aug 2019: the ‘first responders’ to the Fed cut by more than expected; alternative monetary policy tool explored given limits

Summer 2019: What happened - Hot & cold wars emerged

6

Trade & the Fed: Copper and Gold become financialized proxies

• Key “haven/cyclical “commodity ratios spiked in the summer 2019 to reflect renewed macro fear and the potential impact of trade on growth

• Gold/Copper ratio pricing in recessionary Fed cuts (of further ~200bps), which isn't occurring. Divergence is due

to gold premium pricing in a Fed policy mistake together with threat of further trade/geopolitics, • Copper (and now Gold) being financialized to depict US/China trade war AND the global fight of nationalism vs

globalism

• However, the two superpowers still far apart on core structural issues with dissimilar time horizons

Moral Hazard problem: The feedback loop between Fed policy and trade protectionism

Source: Scotia Economics

Trump’s Protectionism

Weak Congress

Damaged Growth

Fed Easing

Weakened Institutions

Precious metals outlook

8

Short-Term Precious Outlook – technically respected

DESPITE a resiliently strong & compressed US$, Gold makes a statement breakout • Gold hits record highs in 73 currencies indicating a global macro regime shift • Gold’s price in the majors (AUD, CAD, JPY, GBP, EUR) at peak, indicating a DM currency war against fiat • Technical Gold break aligns with shift in Fed policy entering new bull market

9

Gold is a rate cut hedge and more….

• Gold is very dependent on the pace of Fed easing

cycle

• Pricing not only a hedge to a ~2 Fed cuts within 6

months, but also incorporates the threat of core

“fear” (trade, political and geopolitical) drivers re-

emerging

• Given current real rates & US$, Golds “fear

premium” is ~$180. Peak “fear premium” was $700

(in 2011)

• (Geo) political risk is still underpriced into 2020

Short-Term Precious Outlook: Fed rate regime shift & more…

Real US 10

Yields*DXY

Nominal

Yields

10year monthly Correlation with Gold -0.71 -0.45 -0.43

Gold with current real yields $ 1,390

Gold with current DXY $ 1,208

Weights 0.61 # 0.39

Gold with DXY/10yr weighted (40% DXY,

60% real) $ 1,317

Fear premium* $ 182

Current Gold price 1,499$

*10yr US Treasuries - 10yr Breakevens

Source: Scotiabank Commodities Strategy

2009 - 2019 (current)

10

Easy monetary policies and recession fears driving a bond bubble

• 70% of all developed market debt is trading with real negative yields with the remaining 30% close to or below 1%

• The pool of negatively yielding debt is ~$14tn (down from $17tn), almost double that of above ground Gold stocks.

• Gold becomes a yielding asset ‘relative’ to negative yielding bonds; alternative high quality, liquid assets are attractive as a

portfolio diversifier.

• Without sustained growth, low and falling global yields are expected; risk of negative yields spreading to the U.S. and other DM

countries

Medium-Term Precious Outlook: Bond bubbles & negative rates

$1,050

$1,100

$1,150

$1,200

$1,250

$1,300

$1,350

$1,400

$1,450

$1,500

$1,550

0

2

4

6

8

10

12

14

16

18

Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19

$ t

n

Negative yielding global debt vs Gold

Amount ofnegativeyieldingGlobal Debt,$tn (LHS,$tn)

Gold price(RHS)

Source: Scotiabank Commodities Strategy, Bloomberg

11

Medium-Term Precious Outlook: Deficits & debt

The world is more indebted today than before the GFC amid a government and corporate borrowing binge

• Total debt in China already exceeds that of the U.S. and has more than quadrupled since 2007

• U.S. budget deficit projected to surpass the $1tn mark in 2019 (highest apart from the few post GFC years) - on a dangerous

fiscal path by missing a valuable opportunity to start managing debt during a time of growth and high employment

• Ray Dalio (July, 2019): “There will have to be some combination of large deficits that are monetized, currency depreciations,

and large tax increases, and these circumstances will likely increase the conflicts between the capitalist haves and the socialist

have-nots”

12

With late cycle getting long, a strong disconnect between havens and risk assets

• US Treasury yields (and the yield curve) pricing in an imminent recession

• US equities pricing in easier monetary policy, relative US outperformance & reflation

• Commodities remains relatively underpriced vs risk metrics: real assets are under owned vs paper (equities) assets

• Without sustained growth, low and falling global yields are expected

• US yields are (even now) still too high vs the ROW; spread differential explains US$ strength

Medium-Term Precious Outlook: Overbought havens or equities?

13

Western investors & CBs buying at strongest pace in years, while Asia is dehoarding

• Strong physical selling from Asian Gold hubs

• New Central Banks – especially EM CBs - looking to “de-dollarize / re-commodidize”

• Investors turned net bullish in 2019 *; sentiment improving from underweight base

• Without equity market volatility and an unwind of the bull run, the larger equity / generalist investor remains underweight

Gold (holdings only 0.60% of SPX market cap, vs peak of >1.6%)

Known Gold Flows: who is behind the repricing, who is not?

14

Gold Outperformance Only 2/4 drivers “on”

1. Sustained equity market volatility ()

2. A negative U.S. Dollar catalyst (-)

3. Lower yields for longer ()

4. A dovish Fed ()

() Achieved. (-) Undecided; TBD. (x) Not achieved

Short-term Gold outlook:

• $1,450 is the new hard floor; +-$1500 is its comfort handle;

$1600 soft ceiling into 2H’2019.

• Upside Risk ($1500-1700): increasingly dependent on 1) U.S.

politics/geopolitics and trade, 2) Fed outlook, 3) the US$.

• Key downside risk (~$1400): reflation risk – improved US data

and/or trade deal leading to the end of the “mid-cycle Fed

adjustment”

Long & Short-term Gold Outlook: Factors required for an upside pricing

Longer-term Gold outlook:

• Gold has entered new bull market $1,350 is the new hard

floor into the next recession/global slowdown

• Old peak ($1900) dependent on US elections & ability for CB

to control equity market volatility, given that the generalist

investor is underinvested

• Comfort zone is $1450-1650 as swelling twin deficits and US

politics expected to structurally weaken the appeal of the US$,

while real/hard assets increasingly become attractive as a

source to hedge volatile paper assets (equities)

15

Soft fundamentals but attractive as a cheap high beta Gold proxy

• Gold/Silver ratio to remain in structural uptrend as macro markets navigate a delicate late cycle era

• The large physical overhang, with exchange inventories at record highs, ensures Silver wont return to its 'wildcat' high-volatility era seen

during 2009-2012

• But relatively underweight ownership vs historical measures (on AUM basis) and as a % of portfolios

Short-Term Silver Outlook: Fundamentally Oversupplied

16

4 key factors required for upside in the industrial precious metals

PGMs & Silver: A tactical rally requires

1. Easing of trade tensions enough to boost Chinese confidence and deter paper shorts ()

2. A weaker U.S. Dollar (-)

3. Collectively dovish CBs (especially PBOC), giving EM assets a chance to outperform & putting recession fears on hold (-)

4. Bottoming out in global manufacturing sectors ()

Short-term Silver outlook:

• The new fairer & more “aligned” range (vs Gold

above $1450) is $17-19/oz, given a world of growing

negative interest rates, strong technical momentum

and relatively under-owned precious positioning

• Recent Silver repricing confirms that Silver is still a

precious metal, and can play a role as a currency

hedge or quality asset, as well as provide relatively

cheap optionality on further Gold upside

• The large physical overhang, ensures Silver

outperformance (vs Gold) remains short-lived.

Short-Term Silver Outlook: Upside Factors & Price Outlook

Outlook for Copper

18

Escalating trade war

• A new & unpredictable multi-front trade war “Economic WWIII”

• More tariffs now, than before the summer (~$550 bn worth of planned & imposed tariffs on China, vs $290bn before summer)

• Sentiment, as depicted by Copper positioning, has soured – investors either short or sidelined & correlated to swings in trade headlines/rhetoric

• Peak of 1.3m mt worth of bearish bets or 5x Scotias 2019 deficit figure

Short-term Outlook: Macro (usually) always trumps micros

Global manufacturing mini-recession

• Not just about sentiment & financial flows impact from trade war

• Collective rollover in manufacturing PMIs for 18 months

• The US is now (barely) holding the ROW up. But China & Eurozone PMIs show early signs of bottoming out

350,000

550,000

750,000

950,000

1,150,000

1,350,000

1,550,000

0

20

40

60

80

100

120

"Trade War" search terms vs Copper shorts

GoogleTrend hits"trade war"*(LHS)

Gross COT/Paper HGShorts, mt(RHS)

* Google Trend interest over time represent numbers where worldwide search interest is relative to the highest point on the chart. A value of 100 is the peak popularity for the term. A value of 50 means that the term is half as popular.

Source: Scotiabank Commodities Strategy, Bloomberg, CFTC Commitment of traders

* Google Trend interest over time represent numbers where worldwide search interest is relative to the highest point on the chart. A value of 100 is the peak popularity for the term. A value of 50 means that the term is half as popular.

Source: Scotiabank Commodities Strategy, Bloomberg, CFTC Commitment of traders

19

Short-term Outlook: The CNH and EMFX implications for Copper

New $5800 Copper ceiling, but dips shallower

• Weakening of the yuan through sacrosanct 7 per US$ was/is a game changer for base metals

• A weaker yuan sours sentiment, lowers Chinas purchasing power for all goods, provides negative tailwinds for EM assets/markets

• However:

• Major negative trade headlines (#1-3) resulted in shallower dips; diminishing effect of impact on traditional trade war proxies (yuan, copper)

• Potential US currency intervention (targeting the yuan), is an upside risk for Copper

1. US/China trade dispute begins. 2. US/China trade deal collapses 3. US levies (new) tariffs on China after FOMC; China devalues its currency through 7 per-US$

Base Metals more sensitive to EM growth

• Softer EM growth profiles, weaker currencies

• Relative EM Equities underperformance weighing on industrial metals pricing

• Correlation between Base metals Index & EM/DM equities proxy is ~0.60

20

Short-term Outlook: Global CB easing should allay the worst of fears

Global CB easing should allay the worst of fears (Copper sub $5000) & support PMIs

• Synchronized easing should support Global Manufacturing sector /PMIs

• Fed is likely to ease in the next 6 months – preemptively early due to trade, not late and sorry..

• Chinese macro demand data is still overall supportive Copper demand, with solid growth in machinery and household appliances offsetting weak auto and investment grid spending

21

Short-term Fundamentals: “Frustration” amidst missed opportunities

Trade war and demand impact hasn’t given supply story, deficits & low inventories a chance to matter

• Negative supply growth in 2019

• Codelco strikes, Zambia nationalization fears, Latam weather outages etc had no sustainable effect on pricing

• 1H’2019 disruptions have totaled ~480K mt; on annualized basis, higher vs 2018 but still overall low vs historical disruption allowance of 5.5%

• Global inventories building from cyclical lows, signaling weaker demand – a missed opportunity

2019 expected to be the 2nd year of negative supply growth in 3 years

22

Short-term fundamentals: “Frustration”

Trade war and demand impact hasn’t given supply story, deficits & low inventories a chance to matter

• Short-term balance forecast 2019-2021 = average net deficits, 173k mt, even despite a weaker demand outlook

23

The Longer-term Fundamentals: Supply outlook and project pipeline

Grade declines, water constraints, rising input

costs, and a scarcity of high-quality/high grade

development opportunities continue to

constrain the industry’s ability to meet growing

demand.

Average grades to continue falling to 0.53% by

2030 (from 0.63 in 2018) but rate of declines is

slowing

Copper capex has halved since 2013 (from

$25bn to $13bn)

While the pipeline appears well populated,

many possible projects have been

“development opportunities” for a while; now a

dearth of probable projects

Market requires ~4m mt/pa copper by 2028

from ‘Possible’ projects

These next gen projects will require higher

capex and will likely operate at higher costs

and/or carry greater political risk

20

18, 0

.63

20

30

, 0.5

8

0.50

0.60

0.70

0.80

0.90

1.00

198

0

198

3

198

6

198

9

199

2

199

5

199

8

20

01

20

04

20

07

20

10

20

13

20

16

20

19

20

22

20

25

20

28

Co

pp

er

gra

de

, Cu

%

Copper grades: structurally in decline, but

rate of declines expected to slow

Average

Grade

(Weight by

Ore

Processed)

*Forecasts include, base case and probable projects Source: Wood Mackenzie

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$0

$5

$10

$15

$20

$25

$30

HG

Cu

pri

ce, $

/lb

s

Ca

pe

x in

US

D b

illi

on

s

Mining Expansion Capex for Copper

Copper Capex

Copper

Source: Scotia GBM Metals & Mining Equity Research, Wood Mackenzie

24

The Longer-term Fundamentals: Supply outlook and project pipeline

Supply growth profile: • Very strong supply growth (+5.1% before

disruptions) in 2020 driven by ramp-ups at Cobre Panama, Escondida, and Grasberg, but likely represents peak supply growth

• Strong but declining primary supply growth of 2.9%, 2.7%, and 1.9% in 2021-2023

• Supply growth to plunge in 2024-25 driven by

grade declines and depletions which more than offsets limited new project growth

• Current weak price environment, if it continues, likely to delay many projects from moving forward

• “We’re not investing in new projects until we have more clarity.” Richard Adkerson April 2019

• “There won’t be copper available long term if prices continue like this. Current prices are not high enough for mining companies across the world to make large investments.” Roberto Ecclefield in an interview at the annual Copper Club dinner, June 2019

25

The Longer term Fundamentals: cycles & large underinvestment

Capex expansion by commodity vs Commodity Price Index, 2009 - 2021

Source: Bloomberg, Wood Mackenzie, Scotiabank Equities Metals & Mining estimates

• Current commodity capex 1/5th of peak

• Peak commodity capex was $100bn (2012),

dwindled to $20bn in 2019, as 2012-2016 bear market resulted in large underinvestment by the capital-constrained mining sector

• Copper net deficit position over the next few years

should drive upside price pressures & thus reinvestment, within this capex cycle. But if current weak price environment, continues, likely to delay many projects from moving forward

• Copper/base demand also needs to contend with

very late business cycle, and commodities broadly in a supercycle downswing that peaked in 2011

Estimated Fundamental Commodity Positioning Relative to Cycle Peak/Trough

26

A tactical base metals rally (within a structural decline that’s nearing the bottom) requires:

1. Easing of trade tensions enough to boost Chinese confidence and deter paper shorts ()

2. A weaker U.S. Dollar (-)

3. Collectively dovish global CBs (), especially the PBOC, giving EM assets a chance to outperform & putting recession fears on hold ()

4. Bottoming out in global manufacturing sectors ()

() Achieved. (-) Undecided; TBD. (x) Not achieved

Copper & base metals short-term outlook

Short-term Copper outlook (Scotia Strategy): 2H’19 and 2020

• New comfort range $5700-$5900: due to trade escalation, renewed tariffs threatening a ‘manufacturing recession’ and

Rmb 7 per US$ the new macro/currency floor

• Upside risk ($6000): Reflation in 2H’19 (US/China trade deal), Chinese demand rebound, easier monetary & fiscal

policies), speculative short covering

• Downside risk ($5300): continued demand destruction from trade, tendency for market to not self-regulate given bullish

forecasts and expected deficits, rising inventories

Long-term Copper Outlook (Scotia Research) to be released mid October 2019.

macro destabilized copper, it will take macro to reprice

Appendix

28

Current Bullish vs Bearish Drivers for Gold & Silver

Tailwinds Neutral Headwinds

Feds reaction function shifts, pre-emptively cutting

rates due to trade/geopolitical risks & slower growth.

Likely global central bank policies follow suit

A stubbornly perky US$. Outlook on whether the $

extends into cyclical weakness is mixed, given its

reserve currency status & historical resilience

Lack of sustained macro fear/equity volatility

(VIX <25) given the inbred resilience of US equities

to bounce.

Geopolitics: an unpredictable & escalating multi-

front trade/cold war. Outlook increasingly uncertain

with formal US/China trade deal unlikely before US

2020 elections

Higher pace of Central Bank gold buying,

diversifying against fiat and US$ in 1H'19; risk of CB

demand slowing due to significantly higher prices in

2H'19

Muted physical support from India & China as

higher prices in local terms defer purchases; XAUINR

near record highs & XAUCNH at 6 year highs

deterring jewelry consumption

Expanding pool of negative yielding debt securities &

lower for longer global bond yields; talk of the

threat of negative rates in the US in the medium term

Positioning and sentiment flipped from peak

bearish (2018) to bullish; while fast money (COT)

own peak holdings, the generalist investor is largely

underweight

Large dishoarding from traditional physical Gold

countries given price surge

Fiat currencies politicized with markets in a cold

currency war; growing risk of US currency

intervention to weaken the $ as yuan devalues

through 7 per-US$

Gold Producer consolidation / M&A driving "peak

gold" supply calls; (bullish sentiment theme in the

short-term; negligent in the longer-term)

Higher yielding Gold ‘detractors’ like alternative

currencies (Bitcoin) or assets compete for similar

flows, especially in EM markets where currencies are

depreciating

Growing talk around alternative CB tools (MMT,

QE+, negative interest rates globally) more relevant

as rate cuts arrive earlier

2H reflation risk or fear on US data outperformance

and / or trade ceasefire promoting a "one-&-done"

Fed cut

The independence of CBs increasingly under

threat from populist governments; skepticism growing

around power of CBs s to remove volatility & pump

up asset prices amidst trade tensions

Unsustainable US debt/fiscal path with swelling twin

deficits; Structural theme, and one which has taken a

backseat to trade/politics

A pickup in socialist rhetoric and policies with social

pendulum swinging left in US (democtatic nominees)

and abroad

29

Current Bullish vs Bearish Drivers for Copper

Tailwinds Neutral Headwinds

2H reflation risk on US data outperformance

and / or trade ceasefire promoting a "one-&-

done" Fed cut

Exchange inventories running just below 10

year average; LME + SHFE + CME hold 520k mt

Collective rollover in Global Manufacturing

sector

Extreme negative sentiment reflected in outsized

short paper positioning

The Fed pre-emptively cuts rates due to

trade/geopolitical risks & slower growth. Likely

global central bank policies follow suit which

should support manufacturing PMIs

An unpredictable & escalating multi-front

trade/economic war. Outlook increasingly

uncertain with formal US/China trade deal

unlikely before US 2020 elections

Chinese stimulus: fiscal response (recent

increase in project approvals and special bond

issuance by local gov should translate into more

infrastructure spending in near term); monetary

policy (the loan prime rate to be guided lower;

potential cut in RRR)

Chinese macro demand data still overall

supportive (auto sector remains weak and

investment in the power grid running behind

budget but offset by solid growth in machinery

and household appliances)

A stubbornly perky US$ and weak EM/FX &

yuan. Outlook on whether the $ extends into

cyclical weakness is mixed, given its reserve

currency status & historical resilience

Expected negative supply growth in 2019 (the

second year in the past 3 years)

Scrap supply and aluminum substitution are

constraints to upside Copper pricing

Fundamental balances shifting from period of

surpluses to deficits, as highlighted by large

downward trend in TCRCs indicating a

structurally tightening path

Late business cycle, late supercommodity

cycle, provide structural headwinds

The decarbonisation of stationary power (wind

technology) and electrification of transport

(Electric Vehicles) should progress. 

Emerging Asia (China, India, ASEAN), China’s

Belt and Road initiative, population growth,

rising living standards and the continuation of

urbanization to drive demand are opportunities

for Cu demand growth

Grade declines, rising input costs and a

scarcity of high-quality future developments

should constrain the ability to meet growing

demand at low cost and with limited political risk

<<

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NG

ER

-TE

RM

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HO

RT

-TE

RM

---

->>

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----

LO

NG

ER

-TE

RM

---

- S

HO

RT

-TE

RM

---

->>

Source: Scotiabank Commodities Strategy

30

Global Copper Supply-Demand Balance

GLOBAL COPPER SUPPLY-DEMAND BALANCE(kt Cu)

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E

GROSS TOTAL MINE PRODUCTION 15,892 16,051 16,088 16,661 18,034 18,476 19,253 20,238 20,138 20,835 21,118 22,195 22,846 23,466 23,903

LESS: DISRUPTION ALLOWANCE (317) (999) (1142) (1291) (1315)

NET TOTAL MINE PRODUCTION 15,892 16,051 16,088 16,661 18,034 18,476 19,253 20,238 20,138 20,835 20,802 21,196 21,704 22,176 22,589

Mined Cu production growth % 1.2% 1.0% 0.2% 3.6% 8.2% 2.5% 4.2% 5.1% -0.5% 3.5% -0.2% 1.9% 2.4% 2.2% 1.9%

REFINED COPPER PRODUCTION 18,275 18,943 19,720 20,150 20,816 21,758 22,020 22,733 22,992 23,476 23,460 23,978 24,526 25,068 25,560

Refined Cu production growth % 0.1% 3.7% 4.1% 2.2% 3.3% 4.5% 1.2% 3.2% 1.1% 2.1% -0.1% 2.2% 2.3% 2.2% 2.0%

CONSUMPTION 17,354 19,195 19,596 19,563 20,705 21,607 21,909 22,554 23,015 23,513 23,738 24,144 24,600 25,085 25,574

Global Cu consumption growth % -3.8% 10.6% 2.1% -0.2% 5.8% 4.4% 1.4% 2.9% 2.0% 2.2% 1.0% 1.7% 1.9% 2.0% 2.0%

NET SURPLUS/(DEFICIT) 921 (252) 124 587 111 151 111 179 (23) (37) (278) (167) (74) (17) (14)

Total exchange inventories (LME/SHFE/CMX/Bonded) 691 568 795 1,339 1,007 845 872 1,024 993 702 424 258 183 166 153

Days of forward consumption 15 11 15 25 18 14 15 17 16 11 7 4 3 2 2

Total inventories (exchange + non-exchange) 3,499 3,297 3,427 4,014 4,124 4,275 4,385 4,565 4,541 4,504 4,226 4,059 3,985 3,968 3,955

Days of forward consumption 74 63 64 75 73 72 73 74 72 70 65 61 59 58 56

LME spot price (USD/lb) $2.32 $3.42 $4.00 $3.61 $3.33 $3.12 $2.50 $2.21 $2.80 $2.96 $2.80 $3.00 $3.25 $3.50 $3.50

Production Disruption Allowance % 1.5% 4.5% 5.0% 5.5% 5.5%

Total Scrap 3,368 4,268 4,609 4,895 4,620 4,525 4,399 4,439 4,574 4,149 4,390 4,551 4,652 4,783 4,913

Scrap as a % Consumption 19.4% 22.2% 23.5% 25.0% 22.3% 20.9% 20.1% 19.7% 19.9% 17.6% 18.5% 18.9% 18.9% 19.1% 19.2%

Consumption Growth by Region %

China 24.3% 10.8% 9.4% 5.3% 11.7% 7.3% 3.5% 4.8% 3.5% 5.5% 1.0% 2.1% 2.3% 2.2% 2.0%

Rest of Asia (Ex China) -12.2% 7.8% -6.8% -3.3% 0.5% 4.3% 1.7% 3.6% 2.4% -3.7% 1.1% 1.8% 1.9% 2.7% 2.8%

Europe -20.5% 12.0% 1.2% -8.7% 1.4% 0.9% -4.4% 0.4% 0.8% 0.0% 0.5% 1.0% 1.0% 1.0% 1.0%

North America -18.7% 7.0% -0.1% 0.4% 2.1% -1.7% 2.4% 0.7% -0.8% 1.2% 0.7% 0.9% 1.4% 1.4% 1.6%

Latin America -14.3% 21.0% -5.0% 2.8% 3.6% -0.5% -5.4% -4.9% -1.9% 1.2% 1.1% 1.4% 1.8% 1.8% 1.8%

Rest of world -0.2% 12.3% -1.2% -0.5% 2.1% 5.7% 4.2% 1.8% -0.3% -0.6% 1.4% 1.5% 1.7% 1.7% 1.7%

Consumption Mix by Country/Region:

China 37.5% 37.5% 40.2% 42.4% 44.8% 46.0% 47.0% 47.9% 48.6% 50.2% 50.2% 50.4% 50.6% 50.7% 50.7%

Rest of Asia (Ex China) 20.4% 19.9% 18.1% 17.6% 16.7% 16.7% 16.7% 16.8% 16.9% 15.9% 15.9% 15.9% 15.9% 16.1% 16.2%

Europe 20.6% 20.9% 20.7% 18.9% 18.1% 17.5% 16.5% 16.1% 15.9% 15.6% 15.5% 15.4% 15.3% 15.1% 15.0%

North America 10.3% 9.9% 9.7% 9.8% 9.4% 8.9% 9.0% 8.8% 8.5% 8.5% 8.4% 8.4% 8.3% 8.3% 8.3%

Latin America 4.4% 4.8% 4.5% 4.6% 4.5% 4.3% 4.0% 3.7% 3.6% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5%

Rest of world 6.9% 7.0% 6.8% 6.7% 6.5% 6.6% 6.8% 6.7% 6.5% 6.3% 6.4% 6.4% 6.4% 6.3% 6.3%

Source: Wood Mackenzie, Scotiabank estimates

Note: last updated July 2019

31

Outlook for Cumulative EV Growth:

Approximately 2mn passenger EVs were sold globally in 2018, an increase of 1.1mn from 2017.

Total annual EV sales are forecast to account for 57% of sales in 2040.

Electric vehicles contain between 4 and 10 times as much copper as conventional vehicles.

By 2035, demand for copper in charging and distribution upgrades are estimated to reach between 1.2m – 1.7m mt.

Copper is also required for charge ports. Currently, the amount of charge points will need to increase by more than 44 times by

2025.

Longer-term Copper Demand – “E-Copper” in a Green World

Copper Usage by Vehicle Type Metals Usage and Composition by Part type

32

• 3 known core macro uncertainties:

– Shaky Banks in Europe

– Debt mountain in China

– Corporate Leverage in the U.S

• Potential lesser known macro uncertainties:

– Global growth falters further ()

– US$ or liquidity shortage ()

– A Central Bank policy mistake

– Escalating geopolitical or trade tensions ()

– Official currency intervention

– Credit event

– A dollar-yuan break through 7-handle ()

– 2020 U.S. election race

– Threat of a US debt default

A list of macro uncertainties

WSJ: “Behind the broad, swift (stock) market slide of 2018 is an underlying new reality: roughly 85% of all trading is on autopilot – controlled by machines, models or passive investing formulas, creating an unprecedented trading heard that moves in unison and is blazingly fast” (Dec, 2018)

“We have probably the riskiest credit market that we have ever had. We see it in the buildup in corporate leverage, the decline in credit quality, and declining underwriting standards — all this late-cycle credit behavior we began to see in 2005 and 2006.” Scott Mather, CIO of U.S. core strategies at Pimco.

“[Democratic socialism] puts the word democratic in front of the word socialism, but you know, socialism is not a very good way of building wealth, as shown by... hundreds of years of history, most recently down in Venezuela. That's all you have to look at” Jeffrey Gundlach, DoubleLine Capital

“It is also a good time to ask what will be the next-best currency or storehold of wealth to have when most reserve currency central bankers want to devalue their currencies in a fiat currency system” Ray Dalio, Founder Bridgewater Associates

Potential catalysts for Gold to reprice above $1,600:

33

Commodities as an asset class: Perform When Needed the Most

*Average returns since 2000 Source: Scotiabank, Bloomberg

• Average monthly returns during worst 10% of observations and the corresponding commodity returns

• Large divergence between Commodities & Equities

34

Commodity Investments: Our product & capabilities offerings

Metals

Scotiabank is one of the world’s top bullion dealers in precious and base metals trading,

financing, hedging, and physicals metals distribution. We operate bullion vaults in New

York and Toronto.

We are one of the largest participants on the CME/COMEX, an LBMA market maker,

and an LME Category 2 member.

We offer customized metal Index solutions capabilities and solutions.

Services Offered:

Storage & Transportation

OTC Swaps, Forwards & Options

Customized Index Solutions

Precious Metals:

Gold (Au)

Silver (Ag)

Platinum (Pt)

Palladium (Pd)

Rhodium (Rh)

Commodity Index Alpha generating strategies look to exploit the following risk premia

Value: capture value by investing in commodities that are discounted to fundamentals

Curve / Carry: capture dislocations in futures prices or roll returns by taking a long position in a farther dated contract

Trend / Momentum: capture value based on technical indicators based on trend signals

Liquidity / Congestion: capture value by modifying the futures roll window to avoid congestion experienced during the standard benchmark roll

Volatility: capture the premium between implied and realized volatility in option markets

Base Metals:

Aluminum (Al)

Copper (Cu)

Zinc (Zn)

Nickel (Ni)

Tin (Sn)

Iron Ore (Fe)

Lead (Pb)

Energy

Scotiabank has more than 150 years of Corporate and Investment Banking

experience in the Oil and Gas Upstream, Midstream, Refining, Specialty

Chemicals, Oilfields, Pipelines, Power and Utilities, and Mining sectors.

Strong presence in Canadian, US, LatAm, European and Asian Markets allows

us to provide a global perspective and unique insights.

Crude & Refined Products:

WTI Crude Oil

ICE Brent

Gasoline

Diesel

Jet Fuel

Bunker Fuel

Natural Gas:

NYMEX Henry Hub

Houston Ship Channel

Tetco STX

Many other basis & locations

Services Offered:

OTC Swaps & Options

Customized Index Solutions

Locations:

Premier vaults in Toronto

and NYC

Access to vaults globally

35

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