where do we go from here?portaldamineracao.com.br/wp-content/uploads/2018/... · this report is...
TRANSCRIPT
WORKING DRAFT
Last Modified 18/09/2017 17:50 Romance Standard Time
Printed
This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside
the client organization without prior written approval from McKinsey & Company. This material was used by McKinsey &
Company during an oral presentation; it is not a complete record of the discussion.
Where do we go from here? The Market Forces Changing Mining
Outlook for Key Commodities
EXPOSIBRAM
Belo Horizonte September 2017
La
st M
od
ified
18
/09
/20
17
17
:50
Ro
ma
nce
Sta
nd
ard
Tim
eP
rinte
d
2McKinsey & Company
The Boom & Bust cycle is here to stay
Since 2005, the mining sector went through 5 massive price swings (boom & bust)
▪ Conventional wisdom often tries to describes these events as “demand driven”
▪ Real commodity demand however is robust, and X-rates, oil prices,.. have far bigger impact on prices
as they create swings in marginal cost structures of +/- 25%. These price swings induce supply shifts,
(sometimes also demand shifts), which will feed the next price correction
▪ Price bands are very wide. The 85% confidence interval (for historic prices over a 15 yr cycle), goes
from X to 2X for primary commodities, and from X to 4X for by-product commodities. In other words, a
gold price outlook could be 1100 to 2200 USD/oz, silver could be 10 to 40 USD/oz.
▪ Average prices over a cycle do not respond to a price regime or archetype. They are neither
cash cost, nor incentive prices. They are typically 30% (20%-40%) above cash cost (e.g., floor prices).
Floor prices (and hence the price bands) inflate with average productivity declines in the industry
when measured over longer periods in time (10 years). Until 1995, the opposite was true, prices
declined in line with historic productivity gains.
▪ Pricing regimes for most commodities are now improving. In absence of demand catalysts, price
recoveries are supported by differentiated supply stories (China cuts and/or depletion and grade
erosion). We favor “exploration” dependent commodities, but beware of the next hype (Lithium, Co,..)
La
st M
od
ified
18
/09
/20
17
17
:50
Ro
ma
nce
Sta
nd
ard
Tim
eP
rinte
d
3McKinsey & Company
The mining sector has been fundamentally reshaped,
but has also become more volatile, and more vulnerable
600
400
200
1,200
1,600
1,400
1,000
800
0
1990 92 94 12
21% p.a.
10060402 0896 98 00
-6% p.a.
0% p.a.
SOURCE: McKinsey Mining Model
14 16
REVENUES AND EBITDA OF THE GLOBAL MINING INDUSTRY
USD billions (nominal)
“Supercycle up”Steady State “Supercycle down” SUPERCYCLE UP
50% volume
growth (75%
of this from
China demand)
50% drop in
mining
productivity
Mega-swings in
Forex/oil prices
Revenue
EBITDA
Volumes: +4% p.a.
Prices: +16% p.a.
Volumes:
+10%
Prices:
-35%
5McKinsey & Company
La
st M
od
ified
18
/09
/20
17
17
:50
Ro
ma
nce
Sta
nd
ard
Tim
eP
rinte
d
4McKinsey & Company
High volatility
▪ Since 2011, drop of 71
MPI points, versus 50
in 2008/09
▪ Stagnating demand in
2015 and strengthening
USD in 2014/15 leading
to 2009 pricing
or worse
▪ Commodities priced
below cash cost
in 2015
▪ MPI of 55 (absolute
bottom; “zero EBITDA”)
reached
in Dec ‘15/Jan ‘16
▪ Low price levels start
triggering production
cutbacks (1H’16)
▪ Back to normal
in ’17?
Extreme volatility is here to stay
SOURCE: McKinsey Mining Model
8588
126
109
40
130
20
90
50
10
100
120
80
110
70
60
30
0
2017
55
2015 2016
65
201420132008
59
201220112009
MONTHLY PRICE-INDEX FOR THE GLOBAL MINING INDUSTRY
1 MPI = 1 USD billion/month revenue
Price Bust in ’15/16 despite
volume Boom
Greenfield
expansions
Production
cutbacks
Fly-up zone with
price pull-back
Index
6McKinsey & Company
2010
La
st M
od
ified
18
/09
/20
17
17
:50
Ro
ma
nce
Sta
nd
ard
Tim
eP
rinte
d
5McKinsey & Company
Mining productivity (total factor
productivity and geological factors)
is a key driver of price performance
and revenue development
SOURCE: McKinsey Basic Materials Institute (BMI Mining Model); MPI study 2015
0
120
140
80
100
160
-4.0% p.a.
+1.0% p.a.
08 12
-7.2% p.a.
201410200405 06 09 11 1307
07 20141009 1205 131108
-2,6% p.a.
062004
100
150
200
11 13
-0.8% p.a.
-10.1% p.a.
2014122004 06 10080705 09
Global Mine Productivity (Calculated)
Grade Erosion
Typical productivity growth in
manufacturing sector of 2-3% p.a.
Total Factor Productivity (MPI)
La
st M
od
ified
18
/09
/20
17
17
:50
Ro
ma
nce
Sta
nd
ard
Tim
eP
rinte
d
6McKinsey & Company
1 Includes copper, aluminum, iron ore, tin, nickel, zinc, lead, and uranium price indices
Volumes
Oil price
(WTI)
-5-23
-10-4-17
14
48
-19-8
17
56
223512
-3-10
0-16
03
-8
5
-5-5
7910
1020
5
-3
0604 05 09 10 13072001 0302 08 11 12 20161514
-12
-48
-5
4
-1
2029
-38
38917
363319
1
-15
1
00
5569
-2
154565
22
Comparison of price drivers
Year on year change, percentage
Contrary to common belief, the boom/bust cycle was not shaped by demand —
forex, oil prices and growing (over) supply contributed significantly
SOURCE: IMF, McKinsey Global Institute, McKinsey Basic Materials Institute
US$/Euro
IMF Metals
Price Index1
La
st M
od
ified
18
/09
/20
17
17
:50
Ro
ma
nce
Sta
nd
ard
Tim
eP
rinte
d
7McKinsey & Company
Global Mining RevenueNominal Currency (USD)
SOURCE: McKinsey Mining Model
321
1,200
600
800
1,400
400
1,600
200
0
1,000
1,170
2003 07 0804 0605
1,309
11 1612 20171513 14
1,090
1,593
1009
863
US Dollar
La
st M
od
ified
18
/09
/20
17
17
:50
Ro
ma
nce
Sta
nd
ard
Tim
eP
rinte
d
8McKinsey & Company
Global Mining RevenueNominal Currency (USD)
SOURCE: McKinsey Mining Model
321
1,200
600
800
1,400
400
1,600
200
0
1,000
1,170
2003 07 0804 0605
1,309
11 1612 20171513 14
1,090
1,593
1009
863
US Dollar
• Demand boom (4% pa)
• Productivity decline
(-10% pa)
La
st M
od
ified
18
/09
/20
17
17
:50
Ro
ma
nce
Sta
nd
ard
Tim
eP
rinte
d
9McKinsey & Company
Global Mining RevenueNominal Currency (USD)
SOURCE: McKinsey Mining Model
321
1,200
600
800
1,400
400
1,600
200
0
1,000
1,170
2003 07 0804 0605
1,309
11 1612 20171513 14
1,090
1,593
1009
863
US Dollar
• Week USD
• Peak oil
• Demand boom (4% pa)
• Productivity decline
(-10% pa)
La
st M
od
ified
18
/09
/20
17
17
:50
Ro
ma
nce
Sta
nd
ard
Tim
eP
rinte
d
10McKinsey & Company
Global Mining RevenueNominal Currency (USD)
SOURCE: McKinsey Mining Model
321
1,200
600
800
1,400
400
1,600
200
0
1,000
1,170
2003 07 0804 0605
1,309
11 1612 20171513 14
1,090
1,593
1009
863
US Dollar
• Weak USD
• Peak oil
• Demand boom (4% pa)
• Productivity decline
(-10% pa)
• Strong USD
• Weakening Oil
La
st M
od
ified
18
/09
/20
17
17
:50
Ro
ma
nce
Sta
nd
ard
Tim
eP
rinte
d
11McKinsey & Company
863
321
834
600
1,000
1,600
800
0
200
1,400
1,200
400
1,046
1,170
0504 0807062003
372
1,597
1,282
2017
1,309
161512
1,593
10
1,090
1,260
141309 11
Global Mining Revenue RevisitedNominal Currency (USD; GMU)
Global Mining Unit
US Dollar
SOURCE: McKinsey Mining Model
La
st M
od
ified
18
/09
/20
17
17
:50
Ro
ma
nce
Sta
nd
ard
Tim
eP
rinte
d
12McKinsey & Company
863
321
834
600
1,000
1,600
800
0
200
1,400
1,200
400
1,046
1,170
0504 0807062003
372
1,597
1,282
2017
1,309
161512
1,593
10
1,090
1,260
141309 11
Global Mining Revenue RevisitedNominal Currency (USD; GMU)
Global Mining Unit
US Dollar
SOURCE: McKinsey Mining Model
▪ The Global Mining
Unit is a currency
basket made
up from major
“commodity”
currencies,
proportional to their
share in the global
mining revenue
▪ In GMU-terms,
neither the peaks
of 2011/12, nor
the crisis of 2015/16
appear. These were
largely due to USD
volatility since 2009.
La
st M
od
ified
18
/09
/20
17
17
:50
Ro
ma
nce
Sta
nd
ard
Tim
eP
rinte
d
13McKinsey & Company
Copper Price DevelopmentNominal Global Mining Units per ton (and not USD) Copper Price
SOURCE: McKinsey Mining Model
▪ Modest volume
growth Modest
productivity declines
▪ Oil price decline
▪ Modest oversupply
(high-grading)
▪ Easing over-supply
▪ Medium volume
growth
▪ Sharp productivity
and grade decline
▪ Early “resetting
of the cost curve”
▪ Oil price increase
5,000
10,000
11,000
8,000
7,000
9,000
6,000
3,000
0
4,000
6,473
3,533
+1% p.a.
1613
+10% p.a.
201712
7,500
1411
6,973
10 15
6,863
09
4,985
0807
6,335
0605
2,061
042003
La
st M
od
ified
18
/09
/20
17
17
:50
Ro
ma
nce
Sta
nd
ard
Tim
eP
rinte
d
14McKinsey & Company
Gold Price DevelopmentNominal Global Mining Units per Ounce (and not USD)
SOURCE: McKinsey Mining Model
▪ Large productivity
loss
▪ Gradual “resetting
the cost curve”
▪ Speculative bubble
▪ Oil price increase
Gold Price (GMU)
421
2,200
1,600
400
0
2,000
1,800
1,400
1,200
1,000
800
600
200
+4% p.a.+10% p.a.
1,555
20171605 07 1309
1,437
04
1,692
14 15
779
12062003 1008 11
▪ Demand curve shift
▪ Changing investor
sentiment
(worsening, more
recently improving)
▪ Oil price decline
La
st M
od
ified
18
/09
/20
17
17
:50
Ro
ma
nce
Sta
nd
ard
Tim
eP
rinte
d
15McKinsey & Company
Thermal Coal FOB Export Price DevelopmentNominal Global Mining Units per ton (and not USD) Thermal Coal
Export (GMU/t)
SOURCE: McKinsey Mining Model
110
93
116
80
100
140
60
0
180
20
160
120
40
05
71
08200304 1409
+9% p.a.
1613
35
49
201715
+3% p.a.
07 1206
69
1110
▪ Oil price increase
impacting supply
curve & demand
curve
▪ Oil and gas
price decline, again
impacting supply &
demand curve
▪ Easing over-supply
(China,..) for now?
La
st M
od
ified
18
/09
/20
17
17
:50
Ro
ma
nce
Sta
nd
ard
Tim
eP
rinte
d
16McKinsey & Company
Iron Ore FOB Price DevelopmentNominal Global Mining Units per ton (and not USD) Iron Ore (FOB; 62%)
SOURCE: McKinsey Mining Model
▪ Demand boom
and dropping
productivity (resetting
supply curve &
demand curve)
▪ New supply flattening
the cost curve
▪ Productivity gains
by majors
▪ Easing hi-grade over-
supply (China,..) for
now
80
124
94
160
180
60
140
120
0
100
20
80
40
16111008 09
+10% p.a.
1505 12 14
5660
0706042003
22
2017
-7% p.a.
13
La
st M
od
ified
18
/09
/20
17
17
:50
Ro
ma
nce
Sta
nd
ard
Tim
eP
rinte
d
17McKinsey & Company
Expected evolution of price regimes
Based on Value Pool Model20202015 Based on average pricePrice regime Based on Qualitative Model2025
Divergent expectation for each commodity’s price regime in the short/long
run, mostly due to supply factors
Brownfield GreenfieldCash cost
2020 2025Aluminum Spot2015
20202025Gold Spot2015
2025 2020Seaborne thermal coal Spot2015
2020 2013Seaborne iron ore Spot20252015
Seaborne coking coal 20202025 Spot2015
2025Nickel 20202015 Spot
20202015 2025Phosphate rock Spot
2020 20152025Potash Spot
Fly-up
Alumina 20202025 Spot2015
2015 2025Copper Spot 2020
20202015 2025Zinc Spot
SOURCE: McKinsey Mining Model
La
st M
od
ified
18
/09
/20
17
17
:50
Ro
ma
nce
Sta
nd
ard
Tim
eP
rinte
d
18McKinsey & Company
REVENUES AND EBITDA OF THE GLOBAL MINING INDUSTRY
USD billion (real as of 2017)
1.000
2.000
500
2.500
0
1.500
1006 14 18
11% p.a.
16% p.a.
Revenues
2422
1% p.a.
02981990 94
Robust price & volume recovery ahead, potentially
with some margin pressure
SOURCE: McKinsey Mining Model
Weakening $ Strong $
Revenues
EBITDA
▪ “Middle class”
consumers
underpinning
demand
▪ Revenue growth of
around 5-6%
in next cycle (2018 -
25)
▪ Robust EBITDA,
aided by “cheap”
oil and price
recovery
▪ Significant volatility
risk (+/- $250 b)
from USD AND
China: “the $ is
trying to ride a
Chinese tiger”