Post on 26-Mar-2018
Copper Market
and Industry Outlook
Juan Carlos Guajardo B.Executive Director
25 May 2016
13th Shanghai Derivatives Market ForumNonferrous Metals Subforum
Shanghai Futures Exchange (SHFE)
Content
I. Introduction
II. Demand side
• China
• The dollar
• The oil price
III. Supply side
• Market cap
• Debts
• Cost and production cuts
• New supply
• Preference for copper
Content
I. Introduction
II. Demand side
• China
• The dollar
• The oil price
III. Supply side
• Market cap
• Debts
• Cost and production cuts
• New supply
• Preference for copper
4
Copper‘s super cycles
• Cyclic behavior as all commodities
• Steep rise in the early 2000s
• Increasing volatility
• Last peak in 2011
Source: Plusmining based on data from Cochilco
0
50
100
150
200
250
300
350
400
450
19
35
19
38
19
41
19
44
19
47
19
50
19
53
19
56
19
59
19
62
19
65
19
68
19
71
19
74
19
77
19
80
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83
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86
19
89
19
92
19
95
19
98
20
01
20
04
20
07
20
10
20
13
20
16
US$
cen
ts/l
b (
LME)
Evolution of the copper price 1935-2016, real
5
• Peak of growthbased on „OldNormal“
• Unregulated financial marketsfostering growth
• Low interest rate• Falling dollar
• Difficulties to increase production
• Long and steady GDP growthled to historical higherincome
China
Emerging economies
Main drivers of the last upward supercycle
SupplyUSA
Headwind:Europe
Tail wind:• Financial markets “in
love” with commodities
Source: Plusmining
6
• “New Normal”• Less commodities as collateral
• Modest economicgrowth
• Rise in interest rate –Turning point?
• Rising production• Little production cuts
• Structural weaknessesemerge, particularlylarge imbalancesgenerated during thebooming period
What has changed? USA
Supply
Emerging economies
China
Source: Plusmining
Content
I. Introduction
II. Demand side
• China
• The dollar
• The oil price
III. Supply side
• Market cap
• Debts
• Cost and production cuts
• New supply
• Preference for copper
8
Chinese demand pattern is changing
• Declining demand growth rate
• Still increasing demand
532 13
130
552
791
5%
15%
6%
15%
14%
9%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
0
100
200
300
400
500
600
700
800
900
% c
han
ge
Tho
usa
nd
to
ns
Additional annual demand Average annual change
Average annual Chinese copper demand change per decade(in % and absolute numbers, 1960-2015)
Additional copper demand (in ‘000 tons) forevery 1% increase in copper consumption
1960 1990 2010 2014
United
States12,2 21,5 17,7 17,8
China 0,8 5,8 73,9 109,9
India 0,6 1,3 4,1 4,4
Source: Plusmining based on ICSG
Content
I. Introduction
II. Demand side
• China
• The dollar
• The oil price
III. Supply side
• Market cap
• Debts
• Cost and production cuts
• New supply
• Preference for copper
10
80
85
90
95
100
105
110
115
120
125
130
0
50
100
150
200
250
300
350
400
450
500
JAN 1973
Mar-74
May-75
Jul-76
Sept-77
Nov-78
JAN 1980
Mar-81
May-82
Jul-83
Sept-84
Nov-85
JAN 1987
Mar-88
May-89
Jul-90
Sept-91
Nov-92
JAN 1994
Mar-95
May-96
Jul-97
Sept-98
Nov-99
JAN 2001
Mar-02
May-03
Jul-04
Sept-05
Nov-06
JAN 2008
Mar-09
May-10
Jul-11
Sept-12
Nov-13
JAN 2015
Dollarindex
USȼ/lb (real)
Dollar index and copper Price, 1973-2016
Precio del Cobre Dólar
Inverse relationship
Strong US growth
Higher interest rates
Stronger dollar
More capital inflow in US
Less capital inflow in emerging economies
which account for mostcommodity demand
growth
Falling commodity prices
Source: Plusmining based on data from the Federal Reserve and LME
Relationship between the US dollar and the copper price
Copper price Dollar index
11
The dollar’s performance• The turning point of the last bear market occurred in 2011
• The dollar bull market accelerated around mid-2014 and seems to be coming to an end nowadays
• A dollar bear market still not to be expected, rather stabilization over the next two years
Source: Plusmining based on LME and FED
112
114
116
118
120
122
124
126
128
01
.Mai
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12
.Mai
.15
21
.Mai
.15
02
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11
.Ju
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n.1
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01
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l.15
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l.15
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l.15
31
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l.15
11
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g.1
5
20
.Au
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5
31
.Au
g.1
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10
.Sep
.15
21
.Sep
.15
30
.Sep
.15
09
.Okt
.15
21
.Okt
.15
30
.Okt
.15
10
.No
v.1
5
20
.No
v.1
5
02
.Dez
.15
11
.Dez
.15
22
.Dez
.15
04
.Jän
.16
13
.Jän
.16
25
.Jän
.16
03
.Feb
.16
12
.Feb
.16
24
.Feb
.16
04
.Mär
.16
15
.Mär
.16
24
.Mär
.16
04
.Ap
r.1
6
13
.Ap
r.1
6
22
.Ap
r.1
6
03
.May
16
12
. May
16
190
210
230
250
270
290
FED
Bro
ad D
olla
r In
dex
Co
pp
erP
rice
(U
S ce
nts
/t)
Dollar index vs. copper price(May 2015 to date)
Copper price Fed Dollar Index
Content
I. Introduction
II. Demand side
• China
• The dollar
• The oil price
III. Supply side
• Market cap
• Debts
• Cost and production cuts
• New supply
• Preference for copper
13
Relationship between the oil and the copper price• Oil price were plummeting because of record production
• Oil price usually drags other commodity prices along
Source: Plusmining
190
210
230
250
270
290
25
30
35
40
45
50
55
60
65
Co
pp
erP
rice
(U
S ce
nts
/lb
)
Oil
Pri
ce (
US$
/bar
rel)
Oil and copper price(2015-today)
Oil price Copper price
Content
I. Introduction
II. Demand side
• China
• The dollar
• The oil price
III. Supply side
• Market cap
• Debts
• Cost and production cuts
• New supply
• Preference for copper
15
Mining companies‘ market value has been affected
Source: Plusmining based on data from Ycharts, 12.05.2016
GlencoreBHP Billiton
Anglo AmericanRio Tinto
ValeFreeport-McMoRan
47.2B
131.1B
247.5B
63.4B
164.4B
54.8B
• Since the peak of the boom in 2011, major mining companies have lost up to 86% (Vale) of their market value
Content
I. Introduction
II. Demand side
• China
• The dollar
• The oil price
III. Supply side
• Market cap
• Debts
• Cost and production cuts
• New supply
• Preference for copper
17
Will we see a wave of defaults in the mining industry?
• Debt maturity peaks in 2018 for most major mining companies (except Glencore and BHP)
• In case prices do not recover within the next 2-3 years, some mining companies may be under pressure in 2018
$2,000 $3,000 $3,800$2,100
$3,800$1,900 $1,900
$1,500$1,750
$3,000
$1,500
$1,983
$2,150 $2,000$200
$1,800
$3,400
$1,900
$2,900
$900$2,500$2,000
$3,100
$3,500
$2,800
$3,600
$1,100
$4,832
$4,754
$3,945
$4,623
$3,643
$3,115 $2,576
$906
$56
$1,256
$1,039
$1,032
$1,182 $1,266
$1,330
$1,610
$570
$2,000
$707
$2,000$1,120
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
$20,000
2016 2017 2018 2019 2020 2021 2022
Mill
ion
US$
Debt Maturity Profile of major miningcompanies, accumulated
Anglo American Rio Tinto Freeport Vale
Glencore Codelco BHP* *) BHP‘s debt maturity is estimated for each yearThere are no data for Vale for the year 2022
Source: Plusmining based on information from the respective companies
$0
$1,000
$2,000
$3,000
$4,000
$5,000
2016 2017 2018 2019 2020 2021 2022M
illio
nU
S$
Debt Maturity Profile of major miningcompanies, individual
Anglo American Rio Tinto Freeport
Vale Glencore Codelco
18
Debt in the mining industry
• Large investments during boom generated some cases of highly indebted companies
• Major mining companies divided into two groups
Source: Plusmining based on Bloomberg and the respective companies‘ financial reports
0.32 0.28
0.84
0.330.55
0.04
0.430.17
3.13 3.04 2.95 2.952.78
2.54
1.06 1.00 0.88 0.80
0
1
2
3
4
Debt- Market cap ratio of major mining companies
2011 (30.06) 2015 (31.12.)
18
Content
I. Introduction
II. Demand side
• China
• The dollar
• The oil price
III. Supply side
• Market cap
• Debts
• Cost and production cuts
• New supply
• Preference for copper
20
Cost evolution in copper mining• Cash cost rose sharply during the last boom
• First effects of cost reductions to be seen
Source: Cochilco and Wood Mackenzie
1st quartile 2nd quartile 3rd quartile Chile Peru USA Australia
21
Measurements to preserve cash
Operational
cost
Investments
Dividends
Costreduction
plans
• So far, measurements to preserve cash in the copper industry mainly consist in cost reduction plans
• Low oil price and strong dollar helped
Renegotiation of contracts, layoffs, optimization plans
Investment plans under scrutiny, Capex reductions
Reductions orcancellations
22
Measurements to preserve cash [cont.]
Source: ICSG at Metall Bulleting conference; Macquarie
• Copper production cuts so far only represent 4% of market size
• Reason: Very costly to shut down mines
• Hence preference for cost reductions
Copper production cut backs as of February 2016
Content
I. Introduction
II. Demand side
• China
• The dollar
• The oil price
III. Supply side
• Market cap
• Debts
• Cost and production cuts
• New supply
• Preference for copper
24
Peru‘s copper production is increasing rapidly• The production growth in the Peruvian mining industry nowadays is comparable to that of Chile in the 90s
1,933 2,055 2,2202,489
3,1163,392
3,687
4,391 4,602
0
1,000
2,000
3,000
4,000
5,000
1992 1993 1994 1995 1996 1997 1998 1999 2000
Chile’s copper production in the 90s
1,247 1,236 1,299 1,376 1,380
1,7011,900
2,3002,500
0
500
1,000
1,500
2,000
2,500
3,000
2010 2011 2012 2013 2014 2015 2016 2017 2018
Peru’s current and near-term future copper production
Source: Plusmining based Cochilco and Banco Central de Reserva de Perú
25
Peru‘s copper production is increasing rapidly [cont.]• Such sharp increases by major producers may momentaneously influence the global copper price
1,933 2,055 2,2202,489
3,1163,392
3,687
4,391 4,602
0
20
40
60
80
100
120
140
0
1,000
2,000
3,000
4,000
5,000
1992 1993 1994 1995 1996 1997 1998 1999 2000
US
cen
ts/l
b
Chile’s copper production in the 90sChile's production
Copper price
1,247 1,236 1,299 1,376 1,380
1,7011,900
2,3002,500
0
100
200
300
400
500
0
500
1,000
1,500
2,000
2,500
3,000
2010 2011 2012 2013 2014 2015 2016 2017 2018
US
cen
ts/l
b
Peru’s current and near-term future copper productionPeru's production
Copper price
Source: Plusmining based Cochilco, Banco Central de Reserva de Perú and Macquarie
26
Greenfield, Brownfield and expansion projects in copper mining
• Many difficulties with new projects
• Investment programs revisions led to the delay or cancellation of many projects
Projects initiating operations: Status January 2015(Projects with planned capacity >100kt/y)
Projects initiating operations: Status March 2016(Projects with planned capacity >100kt/y)
Source: Cochilco
14 Months later
27
Copper projects in Chile
Source: Plusmining based on Cochilco
2013-2014 2014-2015 2015 – 1Q16
Number ofprojects
+4 projects -11 projects -7 projects
Investment-US$7,705
million-US$27,561
million-US$20,341
million
Net changes of the portfolio of projects(Projects within the next 10 years)
The number of copper projects was reducedfrom 31 to only 23. Apart form copper
projects, there are currently 7 gold projects(+1 since 2015) and 5 iron ore projects in the
Chilean project portfolio.
28
Copper supply and demand - outlook
• Deficit to be expected from2019 onwards
• Together with other influencing factors such as USD cycle, will have a positive (upward) impact on price
Source: Plusmining
-200
-150
-100
-50
0
50
100
150
2016 2017 2018 2019 2020
Tho
usa
nd
ton
s
Copper market balance forecast(Supply – demand)
Content
I. Introduction
II. Demand side
• China
• The dollar
• The oil price
III. Supply side
• Market cap
• Debts
• Cost and production cuts
• New supply
• Preference for copper
30
Major mining companies’ preference for copper
• Drastic simplification: Platinum, copper and diamonds
Anglo American
• Clear focus on copper in new strategic plan
Freeport McMoRan
• Elected former chief executive of copper unit, Jean-Sebastién Jacques, as new CEO
• Developing greenfield and brownfield copper project amongst strategic goals
Rio Tinto
• Preference for copper and oil in their potential hunt for assets
BHP Billiton
• Mentioned copper as possible growth opportunity
South32
• Mining companies giving up diversification strategies
• Many decided to focus or to prioritize on copper
• Confirms the advantageous market situation to be expected for copper producers in the medium and long term
• Economy driven more and more by energy and less by fossil fuels
Copper Market
and Industry Outlook
Juan Carlos Guajardo B.Executive Director
25 May 2016
13th Shanghai Derivatives Market ForumNonferrous Metals Subforum
Shanghai Futures Exchange (SHFE)