Commodities - Kitco · Commodities Quarterly Preview Please refer to the disclaimer at the end of...

Commodities Quarterly Preview

Please refer to the disclaimer at the end of this document *This document is not investment research, as it has not been prepared in accordance with the requirements designed to promote the independence of research. It therefore consti-

tutes a ―marketing communication‖ as defined by the UK FCA Handbook, and must not be considered a Research Report under US or any other regulatory regime. U.S. Disclosure: Standard Bank Group Limited does and seeks to do

business with companies covered in its reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in

making their investment decision.

October 2013

All of the commodities covered in this report are likely to stay in surplus markets this

year, or heading there soon. The exception is PGM. We maintain our view that

stockpiles for many commodities are high (even for PGM) and, with surpluses fore-

cast, above-ground stockpiles are set to grow even faster. Stockpiles are probably the

most visible in the metals space.

We have updated our bottom-up model for Chinese growth, and focus on two realis-

tic scenarios, in our view: (1) Our base-case scenario: the Chinese economy rebal-

ances towards consumption. (2) Alternative scenario: the Chinese economy remains

investment-driven. The two scenarios have markedly different outcomes for certain

commodities. We assign a 30% probability to a lower growth path driven by invest-

ment spending rather than consumption spending over at least the next two years.

Amongst the base metals, we believe tin and lead have the most upside over the next

12 to 24 months. We believe there are still inherently supportive factors that make it

unadvisable to get too bearish on copper over the next 12 months despite increased

supply coming to the global copper market. Aluminium in our view has little upside.

Annual surpluses in the aluminium market have been observed since 2007, and this

will remain the picture over our forecast period.

Tactically, we believe gold is likely to struggle in the next quarter and rallies should be

sold into. We expect gold to average $1,330 in Q4:13. On a strategic basis, we still

believe gold will trade higher over the next five years. Our view on PGM remains

largely unchanged — we believe from a tactical perspective, upside remains capped

for platinum, palladium and rhodium. We forecast relatively flat prices for all three

metals for Q4:13.

We believe supply for crude is ample, and, while demand has stabilised, it is unlikely

to push crude prices on a sustainable basis higher. We expect Brent crude to aver-

age a $107/bbl this quarter and $106/bbl next quarter. We expect WTI to average

$103/bbl this quarter, falling to $100/bbl in Q1:14. The risk lies to the downside for our

forecasts.

For iron ore the late Q3 cape-freight rally highlighted the additional supplies begin-

ning to flow from long-awaited, large-scale expansions. Next year, BHPB, FMG and

RioT will continue ramping up, with their next stage of expansions weighted to the

back end of Cal-14. We still expect prices to trend lower next year, but volatility will

remain. Thermal coal restocking and Chinese winter supply disruptions should hold

met coal pricing stable across Q4. Looking ahead, pricing power looks dominated by

supply growth (especially in China), more than offsetting demand growth, despite the

strength of China’s steel industry.

Research Analysts

Walter de Wet, CFA* [email protected] +27-11-3787236

Leon Westgate* [email protected] +44-20-31456822

Demand improves, but so does supply

Table of contents

Commodity cycle 2

Commodity forecasts 3

Growth forecasts 5

Will China rebalance or not? 8

Precious metals 15

Base metals 24

Energy 37

Bulk commodities 42

Melinda Moore* [email protected] +44-20-31456887

2

Commodities

Quarterly Preview — October 2013

Commodity cycle

With supply outpacing demand, markets are cruising

All of the commodities covered in this report are likely to be in surplus markets in 2013 or will

go there soon. Should the data out of China continue to point to fading growth momentum,

surpluses may be larger than anticipated. The exception is PGM where supply constraints, not

strong demand, is the main reason for deficits.

Stock levels remain high, further capping upside

We maintain our view that stockpiles for many commodities are high and, with surpluses fore-

cast across the board (except for PGM), above-ground stockpiles are set to grow even faster.

Stockpiles are probably most visible in the metals space. In terms of days’ consumption, most

metals exhibits relatively high levels of inventory by recent standards — the exception is cop-

per, where inventory levels have risen.

From CAPEX expansion to CAPEX cuts

Surpluses will lead to further CAPEX cuts, which in effect will cut future production. In some

cases, existing production will also need to be cut, which, over time, will lead to inventory

draw-downs and rising prices.

Developed markets are recovering — but China remains key

While the US and EU economies are recovering, we still believe that China remains the key

driver of commodity demand. However, whether China grows above 8% or not, has become

irrelevant. The more important question, in our view, in determining how demand for commodi-

ties pans out, is whether China manages to rebalance its economy (or not) in a lower growth

environment.

Our base case, and alternative scenario

Our base case remains that China steadily rebalances its economy towards consumption over

the next few years. However, we see a growing risk that in the medium term, the Chinese

economy may fail to rebalance, with investment-led growth remaining prevalent.

Source: Standard Bank Research

The commodity cycle

3

Commodities


Commodity forecasts Key forecasts

2012 2013F 2014F 2015F 2016F Long-term

Q3:13F Q4:13F Q1:14F Q2:14F Q3:14F 2017F

PRECIOUS METALS

Gold ($/oz) 1,669 1,429 1,440 1,525 1,620 1,600 1,333 1,330 1,400 1,410 1,450 1,720

(y/y %) -14.4 0.8 5.9 6.2

(% chg from previous) -1.9 - - - 14.3 -

3.4 -3.6 - -

Platinum ($/oz) 1,553 1,504 1,650 1,850 1,975 1,900 1,456 1,450 1,600 1,600 1,700 1,975

(y/y %) -3.1 9.7 12.1 6.8

(% chg from previous) 0.1 - - - - - -

Palladium ($/oz) 644 727 825 925 983 900 723 725 800 800 825 980

(y/y %) 12.9 13.4 12.1 6.3

(% chg from previous) 1.7 - - - - 3.6 - -

Rhodium ($/oz) 1,274 1,081 1,350 1,650 1,775 1,775 1,000 1,000 1,200 1,200 1,300 1,775

(y/y %) -15.1 24.8 22.2 7.6

(% chg from previous) -2.3 - - - - -4.8 - -

Silver ($/oz) 31.17 24.04 21.75 23.00 23.50 20.00 21.50 21.00 21.5 21.5 22 24.00

(y/y %) -22.9 -9.5 5.7 2.2

(% chg from previous) 5.0 4.9 4.9

BASE METALS

Aluminium ($/mt) 2,022 1,861 1,850 1,950 2,300 2,450 1,825 1,770 1,900 1,850 1,850 2,300

(y/y %) -7.9 -0.6 5.4 17.9

(% chg from previous) -9.2 -20.1 -22.0 -8.0 - -21.3 -16.7 -15.9

Copper ($/mt) 7,958 7,419 7,200 6,900 7,400 6,000 7,095 7,450 7,600 7,200 7,000 8,000

(y/y %) -6.8 -3.0 -4.2 7.2

(% chg from previous) -3.0 -11.7 -13.8 -5.1 - -9.7 -9.0 -8.9

Lead ($/mt) 2,062 2,139 2,525 2,650 2,850 2,000 2,110 2,100 2,450 2,400 2,500 2,850

(y/y %) 3.7 18.0 5.0 7.5

(% chg from previous) -5.5 - - 5.6 - -12.5 - -

Nickel ($/mt) 17,530 15,032 14,200 14,800 16,300 16,000 14,020 13,700 14,050 14,200 14,200 16,300

(y/y %) -14.2 -5.5 4.2 10.1

(% chg from previous) -3.7 -16.2 -9.2 0.3 - -10.2 -12.2 -17.4

Tin ($/mt) 21,087 22,656 28,000 32,000 31,600 24,000 21,250 24,300 27,350 28,000 28,000 28,000

(y/y %) 7.4 23.6 14.3 -1.3

(% chg from previous) -7.6 - 12.3 10.9 - -12.3 - 7.7

Zinc ($/mt) 1,948 1,901 1,870 2,000 2,500 1,850 1,890 1,840 1,920 1,820 1,810 2,500

(y/y %) -2.4 -1.6 7.0 25.0

(% chg from previous) -5.8 -11.6 -14.9 2.0 - -18.2 -12.7 -9.0

Sources: Standard Bank Research; SBG Securities

4

Commodities


Sources: Standard Bank Research; SBG Securities

Commodity forecasts Key forecasts

2012 2013F 2014F 2015F 2017F Long-term

Q3:13F Q4:13F Q1:14F Q2:14F Q3:14F 2016F

ENERGY

WTI ($/bbl) 94 99 103 105 100 95 105 103 100 102 100 105

(y/y %) 5.3 3.9 1.9 -

(% chg from previous) 3.7 - - -

5.1 - - -

Brent ($/bbl) 112 108 109 110 105 95 109 106 107 109 106 110

(y/y %) -3.5 1.1 0.9 -

(% chg from previous) 0.9 - - - - - - -

API2 ($/mt) 94 82 81 86 86 86 77 82 82 82 78 87

(y/y %) -12.6 -1.1 6.2 1.2

(% chg from previous) -1.5 -5.3 -2.3 - -

4.7 -7.9 -1.2 -3.3

API4 ($/mt) 93 80 79 81 83 84 73 78 79 78 77 83

(y/y %) -14.8 -0.6 2.5 2.5

(% chg from previous) -3.3 -5.7 -6.9 - -

7.1 -9.2 -4.9 -6.7

Newcastle ($/mt) 94 86 88 90 88 79 87 93 85 92

(y/y %) -8.1 1.9 2.3 2.2

(% chg from previous) - - - - - - - - -

BULKS

Iron ore - Indian fines spot to China ($/mt) 128 131 122 112 90 80 132 121 132 122 118 100

(y/y %) 2.5 -7.0 -8.2 -10.7

(% chg from previous) 6.5 14.0 14.3 -

12.0 11.9 9.9 11.1

Australia hard coking coal spot fob ($/t)

192 153 156 158 160 155 140 155 160 152 150 160

(y/y %) -20.3 2.0 1.3 1.3

(% chg from previous) - -0.6 -1.3 - - -3.0 - -1.2

5

Commodities


Growth forecasts

Key macroeconomic forecasts

2009 2010 2011 2012 2013F 2014F 2015F 2016F

Real GDP (y/y)

Global -0.6 5.1 3.8 3.3 3.6 4.1 4.4 4.5

USA -3.0 2.4 1.8 2.2 2.0 3.0 3.4 3.5

Eurozone -4.4 2.0 1.5 -0.6 -1.0 0.5 0.7 0.7

United Kingdom -3.9 1.8 0.9 0.2 1.0 1.2 1.4 1.4

Russian Federation -7.9 4.3 4.3 4.0 4.1 4.2 4.2 4.2

Canada -2.8 3.2 2.6 1.8 2.0 2.7 2.8 2.8

Brazil -0.3 7.6 2.8 0.9 2.4 2.6 2.6 2.5

China 8.5 10.4 9.3 7.8 7.5 7.4 7.4 7.4

India 5.1 11.4 7.8 4.0 4.9 5.3 5.6 5.7

Japan -5.5 4.7 -0.6 2.1 2.2 2.5 2.7 2.5

Australia 1.4 2.6 2.4 3.6 2.5 2.5 2.6 2.5

Sources: Standard Bank Research; IMF

Surplus/deficits in days consumption

Inventory in days consumption



2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F

Aluminium 8 19 6 3 1 9 7 8 2

Copper 4 4 -5 -4 -5 4 5 4 2

Lead 5 -9 -3 4 1 0 0 -4 -8

Zinc 6 12 8 11 8 5 6 4 1.5

Nickel 26 25 -5 2 20 14 14 12 5

Platinum -13 43 -2 26 -23 -27 -28 -21 -13

Palladium 35 39 -25 70 -51 -60 -66 -68 -76

Iron ore 0 16 -11 -4 -4 -5 4 8 15

2008 2009 2010 2011 2012F 2013F 2014F 2015F 2016F

Aluminium 48 67 73 76 77 86 93 101 103

Copper 22 26 21 17 12 16 21 25 27

Lead 18 9 6 10 11 11 11 7 -1

Zinc 27 39 47 58 66 71 77 81 82.5

Nickel 66 91 86 88 108 122 136 148 153

Platinum 987 1,179 1,057 1,166 1,046 1019 991 970 957

Palladium 844 883 858 928 877 837 771 703 627

Oil 89 92 92 90 92 91 90 90 91

Iron ore 28 44 33 29 25 20 24 32 47

6

Commodities


Standard Bank forecasts vs. Bloomberg consensus*

Source for all graphs : Standard Bank Research; Bloomberg

*Consensus figures as of 3 October 2013

Gold Silver

1,000

1,150

1,300

1,450

1,600

Q4:14 Q1:14 2014

$/oz

SB BBG median BBG high/low

1,350

1,500

1,650

1,800

1,950

Q4:14 Q1:14 2014

$/oz


Platinum Palladium

650

725

800

875

950

Q4:14 Q1:14 2014

$/oz


17

20

22

25

27

Q4:14 Q1:14 2014

$/oz


Precious metals

Base metals

Aluminium Copper

1,500

1,700

1,900

2,100

2,300

Q4:14 Q1:14 2014

$/mt


5,500

6,250

7,000

7,750

8,500

Q4:14 Q1:14 2014

$/mt


7

Commodities


Standard Bank forecasts vs. Bloomberg consensus

Source for all graphs : Standard Bank Research; Bloomberg

Lead Nickel

Base metals (continued)

Bulks and energy

Brent crude API2

1,700

1,950

2,200

2,450

2,700

Q4:14 Q1:14 2014

$/mt


1,500

1,750

2,000

2,250

2,500

Q4:14 Q1:14 2014

$/mt


75

87.5

100

112.5

125

Q4:14 Q1:14 2014

$/bbl


60

72.5

85

97.5

110

Q4:14 Q1:14 2014

$/mt


Iron ore Met coal

80

97.5

115

132.5

150

Q4:14 Q1:14 2014

$/mt


120

135

150

165

180

Q4:14 Q1:14 2014

$/mt


8

Commodities


Will China rebalance or not?

Economic growth across the globe is on a better footing than in 2009. More importantly, cycli-

cally, Chinese growth has stabilised. However, we continue to believe that, structurally, the

Chinese economy is likely to grow at a slower pace.

However, to us the more important question for many commodities is not whether the Chinese

economy will grow at a slower pace, but rather whether the Chinese economy can become a

consumption-led economy within a lower-growth scenario.

Since 2001, GFCF average annual contribution to economic growth has been more than

5 percentage points (pps). To put China’s annual investment into perspective: China’s GFCF

overtook the GFCF of the United States in 2009 despite China’s economy being three times

smaller.

The growth in GFCF has come at the expense of household consumption expenditure (HHCE)

— more commonly known as ―private consumption‖. HHCE as a percentage of GDP has been

in a steady decline, with the low point of 34% coinciding with the GFCF-directed stimulus of

2009 (see Figure 1). In 2011, the ratio of HHCE reached 38% in 2011. GFCF as a percentage

of GDP has edged lower, coming in at 44% for 2011 (see Figure 2).

There is a well known intension in China to shift this economy towards one driven by HHCE

rather than GFCF. We analyse what such a change might imply for China’s consumption of

commodities.

Last year, we presented four scenarios for Chinese growth and what it may imply for demand

for certain commodities from China (see our report titled Economic rebalancing in China could

put commodity demand at risk dated 13 August 2012).

We presented two scenarios of high-GDP-growth in which China either rebalances its econ-

omy (to a HHCE/GDP ratio of 50% and a GFCF/GDP ratio of 30%), or doesn’t rebalance.

We also represented two other scenarios, but with a low-GDP-growth trajectory. Under each of

the scenarios, we performed a bottom-up analysis for China’s demand for copper, aluminium

and steel demand.

We have updated our bottom-up model for Chinese growth, but focus now only on two realis-

tic scenarios, in our view:

Our base-case scenario: the Chinese economy rebalances towards consumption.

Alternative scenario: the Chinese economy remains investment-driven.

Sources: CFL; Standard Bank Research

Figure 2: Expenditure breakdown of GDP 2011

Sources: World Bank; Standard Bank Research

Figure 1: HHCE and GFCF as a percentage of GDP

20

33

45

58

70

1970 1975 1980 1985 1990 1995 2000 2005 2010

Household consumption expenditure (HHCE)

Gross fixed capital formation (GFCF)

% of GDP

38%

44%

13%

5%

Household consumption Gross fixed capital formation

Government consumption Net exports

9

Commodities


In both cases, we consider only a lower growth scenario as we believe the risk to Chinese

growth slowing to 5% by 2017 is far greater than the ―risk‖ of the Chinese economy growing at

8.5% in 2017.

Rebalancing dynamics: the type of growth does matter

Ultimately, growth is the most important driver of commodity demand, and it doesn’t seem to

matter whether it is consumption-driven or investment-led growth. We find that higher growth

(irrespective of the type of growth) implies higher demand for commodities under most scenar-

ios. However, when one is dealing with slower growth rates, the type of growth does matter.

When an economy rebalances, there are many dynamics to consider, in terms of commodity

demand:

Firstly, there is the trade-off between the higher growth in HHCE vs. growth in GFCF.

If China’s economy were to rebalance, HHCE must grow faster than GFCF in any GDP-

growth scenario. That trade-off would affect demand for commodities differently. It goes

without saying that the lower GDP growth is, the slower both HHCE and GFCF can

grow.

Secondly, when the growth rate in GFCF changes, it is highly likely that the growth rate

in residential and commercial construction will change too. Construction is an important

component in GFCF and also a large driver of commodity demand. In rebalancing an

economy, analysing the potential path of construction growth is crucial to determine

commodity demand growth.

Thirdly, when HHCE grows faster, spending patterns of households change too.

For example, households would spend more on transportation as a percent of their

income and less on food. Changing consumption patterns within a rebalancing econ-

omy will affect commodity demand differently.

With these dynamics in mind, we perform a bottom-up analysis of Chinese demand for

copper, aluminium, nickel, lead, platinum, palladium and oil demand:

Firstly, we set a GDP growth path for China. In our case, we expect China’s growth to

slow towards 5% by 2017, and then remain at this level until 2023 (see Figure 3 over-

leaf).

Secondly, we simulate a transition path for China’s GDP to rebalance from GFCF/GDP

ratio of 44% to a 30% over 10 years. In this transition, as GFCF’s share in the economy

reduces, so does the share of HHCE rise towards 50% by the end of 10 years (see

Figures 4 and Figure 5).

Thirdly, we analyse China’s construction sector to make a judgement on how this im-

portant sector may change. We estimate the countries stock of urban housing as well

as the expected urbanisation rate of families and through this obtains expected growth

rates for the expansion of residential and commercial construction.

Lastly, as HHCE rises, we adjust for expected changes in spending patterns by house-

holds, under a scenario where HHCE expands its share of GDP vs. one where HHCE’s

share of GDP remains unchanged.

We keep GCE’s share of GDP unchanged (around 13%). As far as imports and exports are

concerned, we simulate export growth for China over the period based on GDP growth rates of

China’s major trading partners (US, Eurozone and Asia) as well as the rest of the world.

We use the marginal propensities to import of the countries/regions to determine how much

China’s exports will grow over the period. We determined import’s growth path a direct func-

tion of our assumed GDP growth path (high/low) for China and China’s estimated marginal

10

Commodities


propensity to import.

Given estimates on how much of each commodity is used in different consumer products

(vehicles, fridges etc.), construction and other fixed asset investment, we project China’s de-

mand for these commodities under the event where the country does rebalance towards our

target HHCE/GDP and GFCF/GDP ratios, given our GDP growth rate. We feed this into our

supply/demand balances for commodities to determine how the market balances changes.

We see a rising risk of no or little rebalancing over the medium term

Despite our base-case scenario, we assign a 30% probability to a lower growth path driven by

investment spending rather than consumption spending over at least the next two years. This

is evident in data prints which show that fixed asset investment has not slowed substantially,

while e.g. retail sales growth remains relatively flat.

We believe that one has to be cognisant of the fact that any economic growth path under tran-

sition is not going to be linear, and there is a growing risk that for a period of time, China’s

lower growth will be dominated by investment-led spending.

Domestic consumption expenditure is too small to utilise excess capacity in the Chi-

nese economy — especially with foreign demand lower than the pre-2008 levels. Given

that household consumption expenditure constitutes only 38% of GDP, even if the gov-

ernment stimulates domestic demand, domestic demand cannot take up the slack left

Base case

Target HHCE as % of GPD = 50%

Alternative scenario

Target HHCE as % of GPD = 38%

HHCE Government GFCF GDP HHCE Government GFCF GDP

2012 7.80% 7.80%

2013E 10.09% 10.00% 4.00% 7.50% 5.05% 8.00% 9.00% 7.50%

2014E 7.86% 8.00% 4.00% 7.00% 4.85% 7.00% 7.00% 7.00%

2015E 9.03% 7.00% 3.00% 6.00% 7.29% 7.00% 5.00% 6.00%

2016E 6.26% 7.00% 3.00% 6.00% 4.26% 7.00% 5.00% 6.00%

2017E 8.16% 4.00% 2.00% 5.00% 5.05% 5.00% 5.00% 5.00%

2018E 8.76% 4.00% 1.00% 5.00% 6.24% 5.00% 4.00% 5.00%

2019E 8.51% 4.00% 1.00% 5.00% 6.22% 5.00% 4.00% 5.00%

2020E 8.29% 4.00% 1.00% 5.00% 6.20% 5.00% 4.00% 5.00%

2021E 8.09% 4.00% 1.00% 5.00% 6.18% 5.00% 4.00% 5.00%

2022E 7.91% 4.00% 1.00% 5.00% 6.16% 5.00% 4.00% 5.00%

0%

25%

50%

75%

100%

'10

'11

'12

'13

'14

'15

'16

'17

'18

'19

'20

'21

'22

Figure 4: Base case scenario — composition of GDP

0%

25%

50%

75%

100%

'10

'11

'12

'13

'14

'15

'16

'17

'18

'19

'20

'21

'22

Figure 5: Alternative scenario — composition of GDP

Figure 3: GDP growth and rebalancing scenarios

Source: Standard Bank Research Source: Standard Bank Research


11

Commodities


by slower growth in both fixed capital formation and exports, or any one of them indi-

vidually.

Furthermore, many SOEs, local governments and individuals are highly leveraged, and

consumption, driven by credit extension, may by constrained for now. As a result, ei-

ther growth may be even lower than anticipated, or central government will have to

deliver more investment led growth in the interim to prop up growth.

It is undeniable that a surge in unproductive, stimulus-related and debt-financed invest-

ment is going to result in a surge in non-performing loans and defaults. The majority of

the debt siphoned off to local government balance sheets — who were tasked with

propagating the stimulus programme — came from (1) bank lending (usually three-year

money paying for projects which will only generate cash flow in 5-10 years) and (2) land

sales to developers (meaning that the housing correction could lead to defaults). Logi-

cally, defaults will rise, swallowing up the banking sector, placing pressure on the state

to bail out the financial sector — which would undermine the shift towards consumption,

and choke growth.

While we acknowledge investment growth is not sustainable longer term, we believe it is prob-

able in the medium term.

Simulating rebalancing of Chinese economy: a balance sheet perspective

Under our base-case scenario for China, from a balance sheet perspective, we favour

platinum, palladium, lead and oil.

Our base-case scenario, and represented in our supply/demand balances, are a Chinese

economy shifting towards consumption. Under this scenario, from a deficit/surplus perspective

out to 2016, we favour platinum, palladium, lead and crude oil (see Figure 6 to Figure 9 ).

These commodities are either in deficits already, or go into deficits by 2016. Crude oil is not in

a deficit, but because supply is managed to a large degree by OPEC, the market remains very

much balanced throughout the time period under consideration. Apart from the fact that all

these commodities have a disproportionate exposure to consumption, the other factor they

have in common is that they also have large exposure to transport. When disposable income

of individuals rises, one of the areas where spending rises fast, is transport.

Under our base-case scenario, we do not favour aluminium, nickel and copper.

All three these base metals see rising surpluses. Aluminium, which actually ahs large expo-

sure to consumption driven growth (we estimate 53% of aluminium demand in China is related

to consumption driven sectors), is a market that is likely to produce to large surpluses to get

positive on price action.


Figure 6: Platinum deficit/surplus under scenarios Figure 7: Palladium deficit/surplus under scenarios

(2,800)

(2,400)

(2,000)

(1,600)

(1,200)

(800)

(400)

0

2012 2013E 2014E 2015E 2016E

ozs ('000)

Base case Alternative

(800)

(600)

(400)

(200)

0

200

400

2012 2013E 2014E 2015E 2016E

ozs ('000)


12

Commodities


Under our alternative scenario, where the Chinese economy fails to rebalance, from a

balance sheet perspective, we favour copper, nickel and palladium.

Our alternative scenario favours commodities with exposure to infrastructure. Although palla-

dium has large exposure to transport (which is likely to grow at a slower pace if the economy

doesn’t rebalance towards consumption), the deficits projected for palladium is large enough

to offset slower demand growth under our alternative scenario.

Copper and nickel, both of which have large exposure to infrastructure and construction

spending, fare better. We don’t see copper moving into a deficit market, but the surpluses re-

duces substantially. Nickel, eventually moves back into a deficit market by 2016.

Under our alternative scenario, we don’t favour aluminium, lead, platinum and crude oil.

Platinum, because of its large exposure to not only transport, but also jewellery demand in

China, platinum deficits may actually decline by 2016. Jewellery demand constitutes 30% of

total platinum demand. In turn, China’s constitutes 70% of total jewellery demand.

Lead, because of its exposure to transport, sees less demand growth with the market moving

into surplus.

While we have a sizable surplus growing for crude oil under our alternative scenario, in reality

we doubt the surplus would be as big as we project. The simple reason is that oil supply can

be easily controlled by especially OPEC. However, should OPEC need to decrease output by

an additional 5mpbd, it may result in the cartel output becoming unstable as OPEC members

start producing more than their quota to maximize revenue. This is negative for prices.

Figure 8: Lead deficit/surplus under scenarios


Figure 9: Oil deficit/surplus under scenarios


(2)

0

2

4

6

2012 2013E 2014E 2015E 2016E

bbls (millions)


(400)

(100)

200

500

800

2012 2013E 2014E 2015E 2016E

mt ('000)


Figure 10: Copper deficit/surplus under scenarios


Figure 11: Nickel deficit/surplus under scenarios


0

100

200

300

400

2012 2013E 2014E 2015E 2016E

mt ('000)


(100)

(50)

0

50

100

150

2012 2013E 2014E 2015E 2016E

mt ('000)


13

Commodities


Figure 12: Aluminium deficit/surplus under scenarios


0

1,000

2,000

3,000

4,000

2012 2013E 2014E 2015E 2016E

mt ('000)


Simulating the rebalancing of the economy: an inventory perspective

We believe that looking at the balance sheet of commodities is a partial picture and can be

misleading. Inventory, and above-ground stock needs to be taken into account when making a

strategic and tactical decisions.

Under our base-case scenario for China, from an inventory perspective, we still favour

lead, platinum and palladium. All three metals show significant drawdown in inventory. We

Figure 13: Platinum inventory


900

950

1,000

1,050

1,100

1,150

1,200

2008

2009

2010

2011

2012

2013F

2014F

2015F

2016F

Days


Figure 14: Palladium inventory


400

600

800

1,000

1,200

2008

2009

2010

2011

2012

2013F

2014F

2015F

2016F

Days


Figure 15: Lead inventory


0

15

30

45

60

2008

2009

2010

2011

2012

2013F

2014F

2015F

2016F

Days


note that our estimates point to very high inventory levels for platinum and palladium which will

cap upside for the time being. However, we also believe that a sizable portion of the inventory

is closely held and unlikely to come back to the market anytime soon (see the PGM section

page 19 for details).

Under our alternative scenario, we would favour copper as the inventory in terms of days’ con-

sumption remains at low levels which should support the price. However, relative to other com-

modities, we also believe crude oil should hold up well, simply because we would expect sup-

ply to be better managed.

Lastly, we note that our surplus markets take into account only announced production cuts. Of

course, surplus market get to large, and inventory build to fast, existing production may be cut

(in addition to CAPEX). That may result in more balance markets sooner. Nevertheless, we do

believe this analysis provides an indication of which commodities are most likely to see ongo-

ing CAPEX cuts, and are at risk of potential production cuts under both scenarios.

14

Commodities


Figure 17: Copper inventory


Figure 18: Nickel inventory


Figure 19: Aluminium inventory


Figure 16: Oil inventory


88

89.5

91

92.5

94

2008

2009

2010

2011

2012

2013F

2014F

2015F

2016F

Days


0

7

14

21

28

2008

2009

2010

2011

2012

2013F

2014F

2015F

2016F

Days


20

40

60

80

100

120

2008

2009

2010

2011

2012

2013F

2014F

2015F

2016F

Days


0

25

50

75

100

2008

2009

2010

2011

2012

2013F

2014F

2015F

2016F

Days


15

Commodities


Gold — rising real rates are key

On a strategic basis, we still believe gold will trade higher over the next five years. From a

monetary perspective, we believe gold is undervalued and should trade higher. However, this

is unlikely to happen within the next 12 months as US bond yields move higher (see Figures

20 and 21). As a result, from a tactical perspective, we believe the metal is likely to struggle in

the next quarter and rallies should be sold into. We expect gold to average $1,330 in Q4:13.

Gold demand YTD has been exceptionally strong. Our Standard Bank Gold Physical Flow

index provides an indication of how strong 2013 demand has been relative to 2012 and 2011

(see Figure 22). YTD we believe China’s imports of gold is in excess of 1000mt already, and

while it may taper of towards year-end, we do believe Chinese demand could absorb most of

the upcoming ETF liquidation.

In recent weeks, physical demand has tailed of substantially — albeit, as mentioned, from high

levels. Tactically, one has to question the sustainability of a move in the gold price much

higher without strong physical demand, especially with our view that US 10-year bond yield will

move towards 4% over the next 12 months which will likely to keep ETF investors at bay.

In the past, we have seen an improvement in demand starting in September. However, this

year is different for a few reasons. Firstly, the Indian rupee is weak and gold in rupee is close

to all time highs (see Figure 23). Not only may the high gold price in rupee dampen buying, but

it may attract scrap selling. YTD we have not seen much selling in general because of the low

gold price but recent currency moves may change this. Secondly, we have seen strong buying

at lower prices during May to July, and combined India import duties, the seasonal pick-up in

demand may be much lower than previous year.

For now, we still doubt the sustainability of longs entering the market even if the Fed’s tapering

starts only in December (or perhaps even February). The main reason would be that we ex-

pect US bond yields to be at similar levels in 12 months’ time irrespective of whether tapering

starts in December or February. As a result, from a purely Fed-action perspective, we expect

the market to look through the exact timing of tapering to the actual outcome which, as pointed

out, we believe will be unchanged.

Longer term, we expect ETF liquidation to stop, which combined with cost pressures on mines,

should see gold turning steadily higher. This will be assisted by stronger fabrication demand.

Figure 21: US real interest rate


Figure 20: Gold vs. global liquidity

Sources: Standard Bank Research; Bloomberg

0

100

200

300

400

500

Jan

-04

Oct-0

4

Jul-0

5

Ap

r-06

Jan

-07

Oct-0

7

Jul-0

8

Ap

r-09

Jan

-10

Oct-1

0

Jul-1

1

Ap

r-12

Jan

-13

Index

Global liquidity Gold price

-4.0

-2.0

0.0

2.0

4.0

Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jul-13

QE US generic inflation-indexed bond yield

%

16

Commodities


Figure 23: Gold in Indian rupee

Source: Bloomberg

Figure 22: Relative strength of physical demand in 2013


Sources: GFMS; World Gold Council; Standard Bank Research; SBG Securities

Key forecasts (tonnes)

2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F

Mine supply 2,416 2,611 2,740 2,838 2861 2,861 2,804 2,748 2,693

Old scrap supply 1,316 1,735 1,719 1,649 1592 1,300 1,408 1,492 1,586

Primary supply 3,732 4,346 4,459 4,487 4453 4,161 4,212 4,240 4,279

Jewellery 2,193 1,814 2,017 1,975 1893 2,296 2,365 2,436 2,509

Industrial 439 410 466 453 407 416 428 441 455

Total fabrication 2,632 2,223 2,483 2,428 2300 2,712 2,793 2,877 2,963

Bar hoarding/coins/medals 856 791 1184 1513 1247 1,421 1,464 1,508 1,553

Exchange traded funds 321 617 368 162 279 (680) 100 150 200

Primary demand 3,809 3,631 4,035 4,103 3826 3,453 4,357 4,535 4,716

Primary surplus (deficit) (77) 715 424 384 627 708 (145) (295) (438)

Total official sector supply 296 34 (76) (440) (528) (350) (309) (309) (309)

Net hedging (de-hedging) (352) (234) (108) 11 (40) (40) 10 10 10

Net surplus (deficit) residue (133) 514 240 (45) 59 318 (444) (594) (737)

Gold price ($/oz) 872 974 1,227 1,573 1,669 1,456 1,440 1,525 1,620

Supply/demand balance for gold

0

30,000

60,000

90,000

120,000

Jan

-04

Aug

-04

Mar-0

5

Oct-0

5

May-0

6

Dec-0

6

Jul-0

7

Feb-0

8

Sep

-08

Ap

r-09

No

v-0

9

Jun

-10

Jan

-11

Aug

-11

Mar-1

2

Oct-1

2

May-1

3

INR/oz

0

75

150

225

300

113

25

37

49

61

73

85

97

109

121

133

145

157

169

181

193

205

217

229

241

253

Index

Trading days

2011 2012 2013

17

Commodities


Silver — we remain bearish

We still believe that silver is likely to trade below $20/oz for short bouts this year.

Our fundamental view on the metal remains unchanged. We maintain that silver’s underlying

demand/supply fundamentals remain weak and that inventory is abundant. In fact, we estimate

that above-ground inventory in China (the growing source of demand for the metal since 2009)

remains as high as 18 months of fabrication demand, up from 16 months at the start of 2012

and only 4 months in 2009 (see Figure 24).

Looking at the volumes of silver that China has imported since 2010, it is clear why inventory

is high in China (see Figure 25). In 2009, China was still a net exporter of silver. Due to

changes in export tax rebates and demand growth, China turned net importer of the metal in

2010. In that year, the country imported an average of 298mt per month. In addition, China

added another 288mt per month of silver from mine supply and scrap, leaving the total

monthly supply of metal at 586mt in 2010. In contrast, China’s average monthly fabrication

demand in 2010 was only 330mt per month, implying a monthly surplus of 256mt per month in

the local Chinese market during that year. This, by implication, had to be taken up by invest-

ment demand or stockpiled by fabricators. And even though China’s imports have slowed from

298mt per month in 2010 to 166mt per month in 2012, the decline in imports was still not

enough to stop the rise in metal within China.

The situation within China implies that one of two scenarios should play out before silver could

rise substantially higher on a sustainable basis (1) internal demand (fabrication and investment

demand) must grow faster to decrease the stockpiles; or (2) China must become a net ex-

porter of silver again.

On the former, although China’s manufacturing activity has picked up, we do not believe it is

strong enough to make a material difference yet (see Figure 26). As far as the latter is con-

cerned: even if China becomes a net exporter of silver, it would only imply that the metal has

shifted location and not been consumed — the result of which would be price-neutral at best.

Therefore, we believe that the former is the only scenario that could see silver stockpiles de-

crease and build a substantial bullish case for the metal. While our estimate of inventory in

China has increased at a slower pace in the past year, it is still rising. This, we believe, will cap

upside. As a result, we see silver struggling throughout most of this year. Furthermore, silver

has a beta of 1.4 with gold, implying that, if gold moved lower, silver would struggle even

more.


Figure 25: China net imports of silver Figure 24: China silver inventory (months of fabrication demand)

Source: China Customs

-1,000

0

1,000

2,000

3,000

4,000

2006 2007 2008 2009 2010 2011 2012

mt

0

5

10

15

20

2009 2010 2011 2012 2013E

months

18

Commodities


Sources: Silver Institute; Standard Bank Research

Key forecasts (tonnes)

2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F

SUPPLY 27,510 28,493 30,483 31,674 32,228 33,141 34,004 34,751 35,538

Mine production 21,263 22,272 23,370 23,689 24,281 25,131 26,011 26,791 27,595

Scrap recovery 6,248 6,221 7,113 7,985 7,947 8,010 7,993 7,960 7,943

DEMAND 27,225 24,325 27,684 27,265 27,447 28,193 29,164 30,223 31,376

Industrial 15,323 12,601 15,552 15,132 15,739 16,382 17,154 18,021 18,950

Photography 3,150 2,465 2,241 2,056 1,871 1,702 1,575 1,472 1,384

Jewellery, silverware & coins 8,751 9,259 9,891 10,078 9,838 10,109 10,436 10,730 11,042

SURPLUS/DEFICIT 286 4,168 2,799 4,409 4,781 4,948 4,840 4,528 4,162

PRICES ($/oz) 15.0 14.7 20.2 35.3 31.2 23.5 21.8 23.0 23.5

Supply/demand balance for silver

Sources: Bloomberg; Standard Bank Research

Figure 27: Industrial fabrication demand Figure 26: Global PMI

Sources: GFMS; Standard Bank Research

25%

13%

12%

20%

30%

US Japan India China Rest of the world

40

46

53

59

65

Jun-10 Jan-11 Aug-11 Mar-12 Oct-12 May-13

US Eurozone China Japan

Index

19

Commodities


Platinum Group Metals — no near-term upside

Our view on PGM remains largely unchanged — we believe from a tactical perspective, upside

remains capped for platinum, palladium and rhodium. We forecast relatively flat prices for all

three metals in Q4:13. That said, from a strategic perspective we believe all three metals

should trade higher, especially into 2015. We expect platinum to average $1,450 this quarter.

We pin our estimate for palladium at $725, and rhodium at $1,000 during Q4:13. Our fore-

casts for the year as a whole remain largely unchanged.

Largely unchanged balance sheets

We have adjusted our supply/demand balances only marginally from the previous quarter.

For platinum, we have adjusted South African mine supply lower over the forecast period.

Our demand forecast is unchanged. However, we have marked-to-market the rise in ETF hold-

ings seen over the past few months. Because of mainly supply side adjustments, our deficit

forecasts have grown for all three metals. We now expect platinum to register a 578Kozs defi-

cit in 2013, compared to our previous estimate of 451Kozs. For 2014, we expect a deficit of

620Kozs next year, compared to our previous estimate of 559Kozs for 2014. For palladium,

we expect a deficit of 1,256Kozs (unchanged from our previous deficit forecast for 2013).

However, we have increased our deficit forecast marginally for 2014, from 1,803Kozs to

2,003Kozs (see Figures 28 and 29).

Market still well supplied

Despite our bullish deficit projections for 2013 and beyond, we have a muted price outlook for

PGM, premised on a well-supplied spot platinum market, as evidenced by the almost un-

changed platinum price despite ETF holdings rising by 700Kozs since May (see Figure 30).

Platinum and palladium lease rates also remain almost at zero (see Figure 31). We believe

that above-ground inventory for both metals is high, which should cap price upside. In short,

the price behaviour of platinum and palladium seems to indicate large amounts of above-

ground inventory, which we believe calls for a focus on the inventory of these two metals. Our

analysis of above-ground platinum and palladium inventory indicates that above-ground inven-

tory is indeed high. In fact, these metals’ price behaviour is consistent with a market that re-

quires a PGM basket price which cuts into the cost curve in order to limit mine production. Our

estimates of above-ground inventory of platinum is 1,046 days of consumption, and 879 days

for palladium — probably higher than market consensus (see Special Report: PGM—much

more than we thought dated 26 June 2013).

We estimate the US has built substantial inventory in platinum and palladium since at least the


Figure 29: Palladium deficit forecasts Figure 28: Platinum deficit forecasts


20

Commodities


early 1990, while Japan and Switzerland have destocked. The UK has some inventory —

largely due to the shift of metal form Zurich to London (see Figures 32 and 33). We also find

evidence that other countries, such as China and South Korea, potentially have relatively large

stockpiles of platinum.

That said, we do believe that a fairly large portion of inventory, especially for platinum, may

indeed be tightly held, which if inventory is drawdown enough, should push prices higher. That

said, we do believe prices will take longer to rise than the market anticipated.

Platinum — autocat demand up marginally

The demand outlook for platinum remains relatively robust. For 2013, we expect (excluding in-

vestment demand) growth in net demand for platinum of 3% y/y. We still expect the EU to deliver

another poor auto volume year in 2013 (-1% y/y), but looking to recover somewhat into 2014.

We expect jewellery demand to remain robust into this year (5% y/y).

Palladium — strong growth in autocat demand

As far as palladium is concerned, the key driver behind our palladium view remains palladium’s

underlying use in gasoline autocats. Based on our global auto forecasts, this gasoline-biased

exposure has unquestionably provided palladium with valuable demand insulation from Euro-

zone auto-demand weakness, maintaining palladium’s exposure to key emerging-market growth,

relative stability in China, and a US recovery. We expect 2013 global auto assembly to increase

to 82.9m units, led by an expected 15% y/y in China (to 18.9m units) and the US adding 5% y/y

(to 10.6m units). Importantly, gasoline vehicles are expected to maintain a market share of 78%

in 2013. We therefore expect palladium net autocat demand to increase to 5.3moz in 2013, 8%

y/y. Total net demand for palladium is forecast at 7.7moz in 2013, representing yet another re-

cord level of demand.

China demand for platinum more price sensitive — capping upside for now

China is the dominant player in the platinum jewellery market, accounting for 70% of the world

platinum jewellery demand. Jewellery demand constitutes around 30% of total platinum de-

mand. The latest import data from China indicates that China’s platinum imports declined

17.5% m/m in August to 237Kozs, following a 6.6% m/m in July when China imported

289Kozs. The m/m decline in platinum imports by China follows an average platinum price of

$1,500 in August, up from an average platinum price of $1,405 in July.

We maintain that Chinese platinum imports have become increasingly sensitive to changes in

the platinum price since 2012 (see Commodities Daily dated 21 August 2013). A comparison

between platinum imports on a monthly basis vs. the platinum price also indicates price sensi-

tivity.

Source: Various ETFs; Standard Bank Research; Bloomberg

Figure 31: Palladium lease rates Figure 30: Platinum ETF holdings vs. price

Source: Standard Bank

21

Commodities



Figure 35: China platinum imports vs. price Figure 34: Pt and Pd by ownership


The fact that imports seem more sensitive to prices since 2012 implies that China has undergone a

cycle of stockpiling (over and above platinum consumed in jewellery, autocatalysts and other indus-

trial demand) and that perhaps China is more content to buy platinum at low prices rather than at any

price (see Figure 35). This would be consistent with our estimates that China has accumulated

2.3mozs of platinum inventory since 2008.

While China’s palladium imports are slowing

We also note that palladium imports into China are down despite the fact that auto production contin-

ues to move up (although at a slower pace than before — see Figure 36 and Figure 37). China can

get its metal from only three sources — imports, recycling, and inventory. Given that imports are

lower, the data would suggest that China either has enough palladium inventory for the time being, or

recycling in the country is higher than thought. Either way, import data suggests that China is con-

suming less metal than previous years relative to the number of autos produced. The China customs

data would also be broadly consistent with the Swiss customs data which indicates China’s YTD pal-

ladium volumes from Switzerland are largely unchanged compared to levels seen in 2012.

Rhodium outlook still muted by oversupply

Despite maintaining our view of relatively attractive rhodium market fundamentals and predicting sus-

tained rhodium market deficits from 2014 onwards, we are still not convinced that this will translate

into sustainable upside for the rhodium price. This lack of conviction is largely based on the inherent

Figure 33: Palladium above-ground inventory by location Figure 32: Platinum above-ground inventory by location


1,300

1,450

1,600

1,750

1,900

150

190

230

270

310

Jan

-12

Mar-1

2

May-1

2

Jul-1

2

Sep

-12

No

v-1

2

Jan

-13

Mar-1

3

May-1

3

Jul-1

3

USDKozs

China Pt imports Platinum spot

22

Commodities


Figure 36: China vehicle production

volatility in rhodium’s price over the last 10 years, with the absence of a notable rhodium price correction since the GFC further

compounding the issue. In addition, we believe that the rhodium market remains very well supplied, and that metal will be sold

into rallies, preventing a sustainable rhodium price lift in the near term. The underlying rhodium market fundamentals continue

to closely mirror those of platinum, with the rhodium market expected to continue operating within a tightly balanced range.

Figure 37: China palladium imports

Sources: SBG Securities; Johnson Matthey

Supply/demand balance for platinum

Source: China AIA Sources: China Customs

Key forecasts (thousands of oz)

2009 2010 2011 2012 2013F 2014F 2015F 2016F 2008

South Africa 4,635 4,635 4,855 4,095 4,023 3,789 4,028 4,643 4,515

Russia 785 825 835 800 790 790 790 790 805

North America 260 200 350 295 292 289 285 282 325

Zimbabwe 226 280 340 340 423 463 468 468 180

Other 119 110 100 110 110 110 110 110 116

Total producer supply 6,025 6,050 6,480 5,640 5,638 5,441 5,682 6,294 5,940

Recycled supply 830 1,085 1,225 1,130 1,212 1,289 1,384 1,461 1,130

Total supply 6,855 7,135 7,705 6,770 6,849 6,729 7,066 7,755 7,070

Gross autocatalyst 2,185 3,075 3,105 3,240 3,377 3,655 3,966 4,224 3,655

Autocatalyst recovery (830) (1,085) (1,225) (1,130) (1,212) (1,289) (1,384) (1,461) (1,130)

Net autocatalyst 1,355 1,990 1,880 2,110 2,165 2,366 2,582 2,763 2,525

Jewellery (net) 2,245 1,685 1,670 1,890 1,993 2,083 2,178 2,277 1,365

Chemical 290 440 470 450 459 468 478 487 400

Electrical 180 220 220 155 155 155 155 155 230

Fuel cells 0 0 0 0 0 0 0 0 0

Glass 10 385 555 180 180 180 180 180 315

Investment 660 655 460 455 473 0 0 0 555

Petroleum 210 170 210 200 204 208 212 216 240

Medical and biomedical 250 230 230 235 243 250 259 268 245

Other 190 300 355 340 345 349 354 359 290

Total demand 5,390 6,075 6,050 6,015 6,086 6,061 6,398 6,706 6,165

Surplus (deficit) 635 (25) 430 (375) (448) (620) (716) (412) (225)

Price ($/oz) 1,208 1,612 1,722 1,553 1,504 1,650 1,850 1,975 1,611

23

Commodities


Sources for tables: SBG Securities; Johnson Matthey


2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F

South Africa 574 663 632 641 576 566 533 567 653

Russia 85 70 70 72 90 89 89 89 89

North America 18 15 10 20 23 23 22 22 22

Zimbabwe 15 19 19 29 30 37 41 41 41

Other 3 3 3 3 3 3 3 3 3

Total producer supply 695 770 734 765 722 718 688 722 808

Recycled supply 227 187 241 277 259 287 324 359 377

Total supply 922 957 975 1,042 981 1005 1012 1081 1185

Gross autocatalyst 768 619 727 715 782 846 934 1026 1100

Autocatalyst recovery (227) (187) (241) (277) (259) (287) (324) (359) (377)

Net autocatalyst 541 432 486 438 523 559 610 667 724

Chemical 68 54 67 72 81 83 84 86 88

Electrical 3 3 4 6 6 6 6 6 6

Glass 38 19 68 77 31 31 31 31 31

Other 25 21 21 38 66 26 29 33 37

Total demand 675 529 646 631 707 705 761 823 885

Surplus (deficit) 20 241 88 134 15 13 (73) (101) (77)

Price ($/oz) 6,529 1,597 2,452 2,018 1,274 1,081 1,350 1,650 1,775

Supply/demand balance for rhodium


2009 2010 2011 2012 2013F 2014F 2015F 2016F 2008

South Africa 2,370 2,640 2,560 2,330 2,140 2,048 2,254 2,645 2,430

Russia 3,635 3,720 3,480 2,880 2,700 2,600 2,600 2,600 3,660

North America 755 590 900 905 913 930 957 964 910

Zimbabwe 180 220 265 265 327 358 362 362 140

Other 160 185 155 165 167 168 170 172 170

Total producer supply 7,100 7,355 7,360 6,545 6,247 6,105 6,343 6,742 7,310

Recycled supply 965 1,310 1,655 1,660 1,779 1,901 2,080 2,149 1,140

Total supply 8,065 8,665 9,015 8,205 8,180 8,207 8,773 9,053 8,450

Gross autocatalyst 4,050 5,580 6,155 6,615 7,115 7,826 8,609 9,256 4,465

Autocatalyst recovery (965) (1,310) (1,695) (1,660) (1,779) (1,901) (2,080) (2,149) (1,140)

Net autocatalyst 3,085 4,270 4,460 4,955 5,336 5,924 6,528 7,106 3,325

Chemical 325 370 440 530 242 230 219 208 350

Dental 635 595 540 530 541 551 562 574 625

Electronics (net) 975 970 895 770 778 785 793 801 1,025

Jewellery (net) 705 495 295 255 520 510 500 490 855

Investment (net) 625 1,095 -565 470 -19 0 0 0 420

Other 70 90 110 105 106 107 108 109 75

Total demand 6,420 7,885 6,175 7,615 7,503 8,108 8,711 9,288 6,675

Surplus (deficit) 680 (530) 1,185 (1,070) (1,256) (2,003) (2,367) (2,546) 635

Price ($/oz) 266 529 733 644 727 825 925 983 351

Supply/demand balance for palladium

24

Commodities


Aluminium — too few production cuts

Demand robust, but still the slowest since 2009

Despite an apparent slowdown in aluminium demand over Q3:13, we still expect aluminium

demand to increase by a healthy 4.6% in 2013. However, this will be the slowest year of

growth since 2009 and will fall beneath the 5.5% CAGR of the last 12 years. Positive growth is

being largely supported by China, the US, India, and, to a lesser degree, Germany.

At times of recession, aluminium benefits from the fact that sales into the packaging sector, in

the form of cansheet and foil, account for almost half of global demand. In mature economies,

packaging is a fairly stable, recession-proof sector, providing an extremely strong base for

aluminium demand (see Figure 38). Meanwhile in emerging economies, the growing middle

classes tend to aspire to live a more Western lifestyle which includes a greater per capita con-

sumption of packaged goods.

In addition to these more traditional uses, aluminium continues to make good progress in its

use in the transportation sector. It is here where big gains are being made. Light-weighting and

fuel economy is losing none of its appeal, with oil prices back over the $100/bbl mark yet

again.

The real drag on aluminium demand in recent years has been the lacklustre performance in

the construction sector. Current spending on aluminium products for construction use remains

very patchy, and will continue to constrain aluminium demand growth potential over our fore-

cast period.

Supply outlook — cuts not enough

Major aluminium producers Alcoa and Rusal have announced a significant amount of capacity

curtailments, though over the year to August global ex-China aluminium production showed a

decrease of only 0.4%. Increases in the GCC, North America and Africa — the only IAI report-

ing regions to show growth — almost entirely offset reduced output in other regions.

In China, central and south-western provinces continue to shutter high cost smelters, but these

are being more than offset by increases in the northwest of the country. State-owned compa-

nies and small-scale individual operations are seeing the brunt of the closures.

Some smelters in Europe remain at serious threat of closure at sub-$1,800/tonne prices and

falling premia. This threat is not about to be lifted. Over the next couple of years premium lev-

els will play a central role in determining whether high cost European smelters can remain in

operation. We doubt they will and have factored in further production declines in Europe over

Figure 38: Global demand for aluminium by sector

Source: MBR Sources: LME; Standard Bank Research

Figure 39: LME warehouse stock

20%

32%

7%

9%

21%

5%

6%Building & construction

Transportation

Electrical & electronic

Machinery

Packaging

Consumer durables

Other

0

1,325

2,650

3,975

5,300

Jul-03 Jan-06 Jul-08 Dec-10 Jun-13

Other Detriot Baltimore

mt ('000)

25

Commodities


Figure 40: Brent crude vs. aluminium

Sources: Standard Bank Research; Bloomberg Source: MB; Bloomberg

Figure 41: Europe aluminium premium

our forecast period.

Capacity additions in the GCC will continue, as most smelters in this region can still operate at

a profit even at current LME prices thanks to low cost gas supply contracts. Expansion plans in

Russia have been put on hold as Rusal becomes increasingly proactive in reducing aluminium

output. The ramp-up rate of already-completed smelter expansions in India is questionable as

Vedanta’s plants in particular struggle to source sufficient alumina to operate. For now, we

continue to factor in these expansions, but they are perhaps some of the most at risk in our

forecasts.

China will continue to dominate future aluminium production growth, but will remain close to

being a self-sufficient market. This is a key assumption of our aluminium outlook. Despite

strong growth in domestic production, there are still only negligible amounts of primary alumin-

ium coming out of the country. The risk is from increased exports of semi-fabricated products

rather than exports of primary metal.

Balance and price outlook

Annual surpluses in the aluminium market have been observed since 2007, and this will re-

main the picture over our forecast period; by 2016 a full decade of annual surpluses would

have been observed amounting to a large above-ground inventory level.

Recent cuts have tightened up the outlook for 2013-14, but not by enough to make much of an

impact on prices given the huge availability of metal directly from stock. As a result, aluminium

prices will, on average, likely remain below the $2,000/tonne mark out to 2015 which will keep

the pressure on smelters to reduce output further, assuming there is no rebound in premia

levels (see Figure 41).

By 2016, we believe that the market will finally start to tighten as demand remains strong but

production additions slow. If this tightening materialises, we believe that only then will we see

aluminium prices convincingly rebounding over $2,000/tonne.

Further upside potential for prices over the forecast period is fairly limited. What could trigger a

rally is more likely to come from a stronger-than-expected resurgence in demand. It is likely

that any price rally would be heavily sold into, while with so much idled capacity on standby,

the threat remains that restarts could quickly quash any longer-run price improvement.

The greatest threat to the aluminium price recovery that we model is the ongoing possibility of

financed stocks becoming unprofitable, or unworkable in the face of LME warehousing rule

changes, and being suddenly made available to the market. Such a flood, although highly

unlikely in our opinion, would see physical premia fall sharply and may also then weigh on

outright prices.

0

57.5

115

172.5

230

Jul-03 Jan-06 Jul-08 Dec-10 Jun-13

$/mt

R² = 0.3902

0

40

80

120

160

1,000 1,625 2,250 2,875 3,500

Aluminium ($/mt)

Brent ($/bbl)

26

Commodities


Supply/demand balance for aluminium

Sources: Standard Bank Research; IAI; WBMS; LME

Key forecasts (thousands of tonnes)

2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F

Production

Africa 1,715 1,681 1,744 1,795 1,683 1,700 1,726 1,728 1,789

North America 5,783 4,850 4,690 4,989 4,843 4,882 4,603 4,864 4,865

Latin America 2,660 2,508 2,306 2,183 2,038 1,914 1,870 1,961 1,970

Asia (ex. China) 3,700 4,321 4,854 5,759 6,637 7,576 9,043 10,725 11,135

Western Europe 4,840 3,964 4,089 4,139 3,622 3,510 3,586 3,417 3,345

Australasia 2,296 2,211 2,252 2,253 2,204 2,025 2,119 2,119 2,104

China 13,076 13,550 16,432 18,405 21,200 22,749 24,769 26,301 27,821

CIS and Eastern Europe 5,269 4,745 4,798 4,977 4,736 4,450 4,489 4,569 4,839

Total 39,339 37,830 41,166 44,500 46,964 48,806 52,205 55,684 57,868

Year-on year % change 3.5 -3.8 8.8 8.1 5.5 3.9 7.0 6.7 3.9

Consumption

North America 6,913 5,043 5,437 5,654 5,888 6,023 6,216 6,371 6,531

Asia (ex. China) 7,140 6,675 7,740 8,057 8,444 8,653 9,099 9,564 10,028

Western Europe 7,256 5,900 6,525 6,844 6,283 6,220 6,338 6,571 6,670

China 12,934 14,100 16,414 18,959 20,684 22,359 24,626 27,049 28,969

Others 4,288 4,163 4,390 4,610 4,705 4,856 5,001 5,139 5,301

Total 38,531 35,882 40,507 44,124 46,004 48,112 51,280 54,694 57,499

Year-on year % change 2.6% (6.9%) 12.9% 8.9% 4.3% 4.6% 6.6% 6.7% 5.1%

Implied surplus (deficit) 807 1,949 659 376 577 694 925 990 369

LME cash prices ($/tonne) 2,576 1,671 2,173 2,398 2,022 1,861 1,850 1,950 2,300

27

Commodities


Figure 43: Cumulative copper imports (refined & waste/scrap)


Figure 42: Copper LME Grade CIF premiums in Shanghai

Sources: Standard Bank Research; Metals Bulletin

Copper — surpluses on the horizon

Increased supply is coming and the global copper market appears to have entered an ex-

tended period of structural surplus for the first time in a decade. However, there are still inher-

ently supportive factors that make it unadvisable to get too bearish or assume that copper is

going to go the way of aluminium or nickel.

As mine supply grows, annual TC/RCs are also set to rise in 2014 from the benchmark level of

$70/7c this year towards current spot terms in the range of $90-100/9-10c.

Outright prices will be burdened by improved supply and reduced liquidity, but are likely to find

support from rising marginal costs, improved economic conditions overall and the likelihood

that availability of LME stocks will continue to be restricted to some degree.

We believe that the key variable in the outlook for copper prices going forward (as well as for

physical premia and TC/RCs) will be how quickly the concentrate surplus is processed into

refined metal. Our belief is that the major Chinese smelting groups (among others) will demon-

strate restraint and slow the conversion of the concentrate surplus into cathode. If that does

prove to be the case then we think the annual refined market surpluses can be contained to

200-300k tpy during 2014-2015, and even start to narrow by 2016.

We forecasts a copper price of $7,200/mt in 2014, $6,900/tonne in 2015 and $7,400/tonne in

2016.

Bonded warehouse inventory down, demand strong

Copper prices may have one last hurrah in Q4, possibly spilling over into early 2014, before a

run of annual surpluses see prices grind lower. As has been the case in recent years, there is

much focus on unreported cathode inventories held in Chinese bonded warehouses. Some

reports put stock levels as high at 1m tonnes early this year, having risen steeply during the

second half of 2012. They have fallen steadily this year, however, and are believed to have

been in the 350-450k-tonne range in recent months, as consumers have drawn down ton-

nages fairly regularly, while bonded inventories have also been topped up periodically, helped

by the intermittent opening in the SHFE-LME arbitrage window.

In China, official data shows that copper semis output grew by 21.6% over the seven months

to July, topping the 8m-tonne mark and breaking monthly records in the process. However,

this strength is not reflected in y/y data for copper consuming sectors, which has been gener-

ally solid, but certainly not spectacular. Admittedly, strong year-on-year growth has been seen

0

50

100

150

200

Jun-10 Jan-11 Sep-11 Apr-12 Nov-12 Jun-13

$/mt

0

2,000

4,000

6,000

8,000

10,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2010 2011 2012 2013

mt ('000)

28

Commodities


Sources: Standard Bank Research; MBR; CEIN Sources: LME; SFE; Standard Bank Research

Figure 44: Copper LME inventories Figure 45: Copper intensity of China exports by destination

66%

7%

1%

3%

17%

6%

European Union US India

Japan Asia (excl. Japan) RoW

0

210

420

630

840

Jul-03 Jul-05 Jul-07 Jun-09 Jun-11 Jun-13

LME New Orleans LME Other SFE

mt ('000)

in the production of vehicles (15.1%), household fridges and freezers (12.4% and 10.9%, re-

spectively) and power cable output (8.8%) and aircon unit production (8%) have been decent.

However, production of telecommunication cable (-7.5%), AC motors (1.2%), transformers

(4.9%) has been poor, and power generation capacity has grown by only 5.2%. Copper also

continues to face competition from aluminium in various applications, with aluminium alloy

even making inroads into LV and MV power cabling.

Lastly, we estimate that most of the exported goods manufactured in China which contains

copper goes to Europe. While copper contained in exports constitute only a small part of

Chinese demand (we estimate that construction and construction related activity accounts for

56% of China copper demand), an improved performance from Europe should benefit copper

demand form China at the margin (see Figure 45).

Mine supply more, disruptions fewer

Prior to 2012, annual growth in global copper mine supply had been less than 1% in four of the

six preceding years, and averaged just 0.4%/year in 2010-2011. However, a new era began in

2012 as unplanned disruptions slowed, albeit perhaps only temporarily, and as investment in

new capacity began to bear fruit. We see global growth at or above 4%/year over the 2012-

2016 period, peaking at 6.1% in 2014. One of the main reasons that copper prices have come

under such sustained pressure it the realisation that there is no holding back the rising tide of

concentrate supply.

Apart from the past year or so, the copper mining industry has shown itself to be fragile and

prone to disruptions. The accompanying table lists the disruptions seen this year, and though

there is scope for more before the year-end, disruptions have been relatively minor in 2013

compared with the +1m tpy losses seen during years.

CAPEX cuts on the rise

Further forward, capex reductions, lower prices, rising costs and greater industry consolidation

are likely to combine to see the next generation of projects curtailed somewhat too. Our table

of copper projects delayed or suspended has grown since this time last year. The total af-

fected capacity has risen to 3.1m tpy from last year’s assessment of 1.7m tpy, as the Que-

brada Blanca and Los Pelambres expansions have been delayed by Teck and Antofagasta,

respectively, and Oyu Tolgoi’s underground expansion has been put in doubt. Northern Dy-

nasty’s Pebble project in Alaska has also been added to our list with Anglo American’s with-

drawal from the JV placing an even bigger question marks over this ambitious project’s future.

29

Commodities


Supply/demand balance for copper

Sources: Standard Bank Research; ICSG; WBMS: LME


2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F

Mine production

Total 15,531 15,898 16,020 16,023 16,740 17,544 18,614 19,414 20,191

Year-on year % change 0.3 2.4 0.8 0.0 4.5 4.8 6.1 4.3 4.0

Refined production

Africa 689 952 1,103 1,178 1,242 1,341 1,435 1,521 1,643

North America 2,013 1,753 1,664 1,706 1,649 1,677 1,727 1,798 1,834

Latin America 3,771 3,948 3,877 3,700 3,413 3,348 3,318 3,338 3,371

Asia (ex. China) -3,795 3,976 4,009 3,902 3,991 3,999 4,159 4,242 4,369

China 3,795 4,051 4,540 5,163 5,824 6,523 7,175 7,749 8,214

Australasia 502 446 424 477 461 463 471 475 475

Europe 3,620 3,442 3,616 3,714 3,736 3,658 3,617 3,650 3,690

Total 10,595 18,568 19,233 19,840 20,316 21,009 21,903 22,774 23,597


Refined consumption

North America 137 2,063 2,176 2,219 2,233 2,313 2,346 2,393 2,417

Latin America 41 521 656 599 623 620 642 674 714

Asia (ex. China) -5,202 4,540 4,739 4,455 4,425 4,507 4,696 4,837 5,006

China 5,202 7,086 7,385 7,881 8,840 9,370 9,886 10,528 11,160

Europe 4,917 3,568 3,970 3,976 3,599 3,639 3,690 3,756 3,831

Other 412 349 344 365 361 372 383 391 398

Total 5,507 18,127 19,270 19,495 20,081 20,821 21,642 22,578 23,527

Year-on year % change -0.8 0.1 6.5 3.2 3.1 3.7 3.9 4.3 4.2

Implied surplus (deficit) 176 222 (239) (228) (266) 188 261 196 71


30

Commodities


Lead — not as heavy as other metals

The lead market has only experienced one year of significant oversupply in the last 12 years

and has been in deficit for the past four consecutive quarters (see Figure 48).

Lead demand is robust though not particularly spectacular. Strong auto markets in the US and

China have been key drivers of above-trend demand growth for lead this year. We have an

optimistic outlook for these markets going forward, which should offset a slow recovery in the

European auto market and concerns over growth in emerging economies ex-China. In non-

auto markets, the outlook for industrial batteries is also solid in both developed and emerging

markets, and although China’s e-bike market is maturing and facing greater completion from

other battery technologies, there is the potential for strong growth in e-bikes to be seen in

other populous Asian markets (see Figure 46).

That said, against a supply side feeling constraints on primary production growth and suffering

regional scrap tightness, there is little scope in our view for the global refined lead market to

slip into surplus like its peers. On the contrary, we are looking for small deficit this year (29k

tonnes) and a larger deficit in 2016 (75k tonnes), with a finely balanced market seen in the two

intervening years.

We note that Chinese supply has the habit of surprising on the upside and, if clampdowns (not

only primary production, but ongoing actions against the battery recycling industry too) prove

to be less effective than anticipated, then Chinese refined lead output could well come in

above our current expectations. We view this as the main risk to our base-case forecasts.

This outlook will keep the global stocks-consumption ratio trending lower, from around three

weeks currently to 2.4 weeks by the end of 2016. Compared with aluminium at 11 weeks and

zinc at 10 weeks, lead really is in a different league, and this will see prices for the heavy

metal maintain a healthy premium over these two peers, which have often been traded along-

side lead as relative value pairs for much of the year.

Our annual price forecasts for lead are $2,525/tonne in 2014, $2,650/tonne in 2015 and

$2,850/tonne in 2016 — significantly higher than current levels. This is because much higher

prices are required to incentivise investment in necessary greenfield and brownfield capacity

additions outside China. Without these, the lead market risks slipping into deeper deficits dur-

ing the second half of this decade.

Source: ILZSG

Figure 46: Global demand for lead by sector

80%

6%

5%

3%1% 2%

3% Batteries

Rolled & extruded products

Pigments & other compounds

Shot/ammunition

Cable sheathing

Alloys

Other

Sources: MBR; Standard Bank Research

Figure 47: China share of Lead demand and supply

10%

22%

34%

46%

58%

2006 2008 2010 2012 2014

Production Consumption

31

Commodities


Supply/demand balance for lead

Mine production 2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F

Total 3,818 3,810 4,291 4,683 5,238 5,296 5,656 5,870 6,010


Refined production

Africa 116 98 116 120 99 102 114 119 120

North America 1,791 1,701 1,785 1,777 1,827 1,884 1,799 1,831 1,853

Latin America 330 274 252 282 275 329 395 407 415

Asia (ex. China) 1,372 1,306 1,396 1,549 1,653 1,623 1,656 1,672 1,689

China 3,452 3,773 4,158 4,604 4,646 4,878 5,269 5,585 5,920

Australasia 270 259 229 246 203 199 207 215 219

Europe 1,815 1,636 1,721 1,756 1,754 1,807 1,830 1,821 1,812

Total 9,146 9,047 9,657 10,334 10,457 10,822 11,268 11,650 12,028


Refined consumption

North America 1,695 1,490 1,642 1,581 1,667 1,817 1,781 1,772 1,754

Latin America 296 360 365 384 379 376 389 405 429

Asia (ex. China) 1,732 1,689 1,721 1,878 2,032 2,095 2,118 2,182 2,247

China 3,456 3,925 4,171 4,588 4,628 4,813 5,246 5,561 5,950

Europe 1,813 1,500 1,639 1,626 1,600 1,634 1,609 1,601 1,596

Others 130 116 111 125 118 120 125 129 133

Total 9,122 9,080 9,649 10,182 10,424 10,855 11,268 11,649 12,111


Implied surplus (deficit) 24 (41) (41) (2) 7 (33) 0 1 (82)



Sources: Standard Bank Research; ILZSG; WBMS; LME

Figure 48: Implied surplus/deficit

Source: ILZSG; Standard Bank Research

-120.0

-80.0

-40.0

0.0

40.0

2008

2009

2010

2011

2012

2013F

2014F

2015F

2016F

mt ('000)

Figure 49: Lead stocks as weeks’ consumption


0.0

0.9

1.7

2.6

3.4

2009 2010 2011 2012 2013F 2014F 2015F 2016F

weeks

32

Commodities


Figure 50: Growth in refined nickel consumption

Sources: INSG; Standard Bank Research Source: INSG

Figure 51: Global demand for nickel by sector

Nickel — selling into rallies

We see nickel demand driven by continued strong growth in Chinese stainless steel output

and gradually improving conditions in the world ex-China. Growth in Chinese NPI output is

expected to slow from its recent break-neck pace, as credit is tighter and ore and electricity

costs rise.

NPI remains swing supply

Antaike estimates that NPI production will reach 450k tonnes in 2013, which is on the high

side in our view, but certainly not beyond the realms of possibility, given the outperformance

so far. In our own model, we are factoring in annual output of closer to 425k tonnes, which is

closer to a 20% increase from 2012. Rising costs for Chinese NPI producers should help to

underpin nickel prices, even if the market remains in surplus. We do, however, see break-even

shifting from around $12,000/tonne at its lowest this year back towards $20,000/tonne in 4-5

years from now.

We expect non-Chinese nickel supply to edge higher as major HPAL and ferronickel projects

gradually overcome problems and improve operating performances, but this will be a slow

process.

The growth in use of 200-series stainless steel, which contains far less nickel than 300-series.

This switch scaled back demand growth for nickel units when prices were high and volatile.

But with lower prices more recently, the pendulum is swinging back to 300-series, which

makes for a more nickel-intensive stainless steel industry as we move forward.

Overall, therefore, the pace of global nickel supply growth is expected to moderate in the com-

ing years, though we do not expect a return to deficit until later in the decade. At the same

time, a blanket ban on Indonesian ore exports next year will not happen in our view, as it

would be counter-productive for the government. We do not expect to see prices mounting a

sustained price rally, even with a potential supply shock.

Q2 production reports from the world’s nickel majors were mostly disappointing as there was

very little in the way of the production cutbacks this oversupplied market so desperately needs.

That said, most companies did report lower production y/y. For the first six months, year-on-

year declines in output were seen by Norilsk (-4.2%), BHP Billiton (-2%), Anglo American

(-35.8%), Anglo Platinum (-33.7%), Sherritt (-11.4%), Eramet (-8%) and Talvivaara (-31.4%).

With increases only achieved at Vale (4.9%), First Quantum (31.1%) and Glencore Xstrata

(1.5%), the net effect on the market balance of these companies is a reduction in supply dur-

ing H1 2013 of 12,085 tonnes compared to H1 2012.

64%

18%

8%

5%5%

Stainless steel

Super alloy & nonferrous alloys

Plating

Batteries

Chemicals

-7

0

7

14

21

2006

2007

2008

2009

2010

2011

2012

2013F

2014F

2015F

2016F

% (y/y)

33

Commodities


Source: LME Source: International Stainless Steel

Figure 53: World stainless steel production Figure 52: LME nickel inventory

While Norilsk’s performance was partly due to the previously announced closure of Johnston

Lake, Eramet was the only company to imply an intentional market-related cutback, and stated

that it would continue to adjust production in line with market conditions. Further intentional

cutbacks are sorely needed, but a lack of producer response to lower prices is something we

have seen in other base metal markets too, so we should not be surprised by the lack of it in

nickel, yet.

Nickel remains a surplus market

But given the large surpluses in coming years, any price strength has, and will continue to be,

sold into for the foreseeable future. So we don’t hold out much hope of prices making any sus-

tainable headway above $15,000/tonne in the short to medium term. However, we believe that

the downside is relatively protected too, and we do not expect prices to extend their slump.

One reason for this is that the scale of short positions, acting as hedges against the record

high LME stock level (see Figure 52), looks to have reduced the capacity of speculators to

short the market aggressively, and may even become the trigger for short-covering rallies if

the rolling forward of speculative short positions serves to tighten up the nearby forward curve.

3,000

4,500

6,000

7,500

9,000

10,500

Jun-09 Mar-10 Dec-10 Sep-11 Jun-12 Mar-13

mt ('000)

0

50

100

150

200

250


mt ('000)

34

Commodities


Supply/demand balance for nickel

Sources: Standard Bank Research; INSG; WBMS; LME


2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F

Mine production

Total 1,550 1,356 1,580 1,959 2,178 2,261 2,421 2,528 2,634

Year-on year % change -3.3 -13.2 17.1 22.6 5.0 3.8 7.1 4.4 4.2

Refined production

Africa 42 36 36 36 41 60 73 88 97

North America 168 117 105 142 140 138 140 141 142

Latin America 137 122 124 130 155 140 152 166 181

Asia (ex. China) 178 179 206 194 210 227 239 254 261

China 200 254 332 435 519 633 659 665 699

Australasia 142 168 141 150 174 187 221 251 282

Europe 510 444 502 525 512 497 507 512 512

Total 1,377 1,320 1,446 1,612 1,751 1,882 1,990 2,077 2,173


Refined consumption

North America 137 98 130 141 145 148 156 161 163

Latin America 24 24 23 24 22 22 25 28 32

Asia (ex. China) 328 318 354 347 332 339 354 364 376

China 360 443 575 704 770 901 1,000 1,080 1,177

Europe 408 318 356 365 363 345 347 359 368

Others 29 33 27 27 27 26 27 28 30

Total 1,286 1,234 1,465 1,607 1,659 1,780 1,908 2,020 2,146


Implied surplus (deficit) 90 85 (19) 7 89 102 82 57 27


35

Commodities


Zinc — smaller surpluses

The prospects for further robust demand growth for zinc from North American and Chinese auto

markets are strong; construction (and related sectors, such as appliances) is setting out on a mod-

est recovery path in the US; Europe is showing stability and will back this up with timid growth in

the coming years; and, in China, policymakers seem willing to give the economy a shot in the arm

when needed. As a result, we are comfortable forecasting global refined zinc consumption growth

in excess of 4% a year during our forecast period after a bumper 5.2% pace this year. Although

above-trend, this strong pace of demand growth in 2013 comes on the back of two very weak

years (+0.9% in 2011 and -2.7% in 2012) and is in line with ytd ILZSG estimates.

Supply consolidation grows

Our main interest in zinc going forward is on the supply side. Unlike many other base metals the

focus in zinc is now shifting to supply shortcomings and the outlook is becoming increasingly frag-

ile. This reflects a turnaround from our view up to last year when the pipeline of new mine projects

was overflowing. Then we were looking for larger surpluses and had greater confidence in that

view. Now the forecast surpluses are smaller and could disappear altogether sooner rather than

later.

Industry consolidation

What has changed since last year? The level of industry consolidation is greater, which should

breed more producer discipline. The demand for capital preservation among mining majors has

resulted in far more restraint on capital expenditure, while funding options for juniors has deterio-

rated further, which is slowing the pace of investment in new projects overall. Prices of zinc itself

and, importantly, its by-products, are lower-than-expected. And there have been technical difficul-

ties at certain new projects, which is uncharacteristic for zinc.

With the supply outlook ex-China looking more vulnerable, the focus shifts to China. Providing gov-

ernment efforts to increase regulation and control over the small mines sector are successful, we

believed domestic mine supply growth will be capped, resulting in a tightening global concentrate

market from around 2015-2017, which should start to spill over into the refined market.

Shrinking surpluses

Our current supply-demand model for zinc sees global annual surpluses shrinking in the coming

years, from 278k tonnes this year, to 118-148k tonnes in 2014-2015, and 43k tonnes in 2016.

Figure 54: Zinc LME 3-month price

Source: Bloomberg Source: LME

Figure 55: Zinc market balance

0

100

200

300

400

2007

2008

2009

2010

2011

2012

2013F

2014F

2015F

mt ('000)

1,700

1,950

2,200

2,450

2,700

Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13

$/mt

36

Commodities


Supply/demand balance for zinc

Sources: Standard Bank Research; ILZSG; WBMS; LME


2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F

Mine production

Total 11,882 11,620 12,527 12,661 13,534 13,954 14,540 14,961 15,290


Refined production

Africa 260 265 273 246 167 165 165 169 170

North America 1,356 1,224 1,261 1,232 1,233 1,230 1,226 1,232 1,239

Latin America 482 427 554 642 603 621 638 651 664

Asia (ex. China) 2,543 2,526 2,712 2,816 2,851 2,888 2,917 3,004 3,059

China 4,042 4,286 5,209 5,212 4,829 5,408 5,841 6,308 6,813

Australasia 499 519 499 515 501 505 507 509 511

Europe 2,476 2,050 2,382 2,425 2,412 2,458 2,477 2,465 2,453

Total 11,658 11,297 12,890 13,088 12,596 13,276 13,773 14,339 14,909

Year-on year % change 2.1 -3.8 13.7 2.5 -4.0 5.4 3.7 4.1 4.0

Refined consumption

North America 1,295 1,144 1,184 1,221 1,224 1,267 1,297 1,323 1,347

Latin America 432 340 427 436 386 371 393 424 450

Asia (ex. China) 2,578 2,381 2,669 2,594 2,656 2,736 2,790 2,874 2,932

China 4,145 4,659 5,403 5,468 5,291 5,873 6,343 6,755 7,262

Europe 2,626 1,939 2,488 2,513 2,363 2,382 2,425 2,461 2,486

Others 430 375 335 388 360 371 379 386 394

Total 11,506 10,858 12,544 12,722 12,352 12,999 13,627 14,224 14,870

Year-on year % change 2.0 -5.6 15.5 1.4 -2.9 5.2 4.8 4.4 4.5

Implied surplus (deficit) 152 356 210 350 196 277 146 115 39


Figure 56: LME zinc inventory

Source: LME Source: Standard Bank Research

Figure 57: Growth in refined zinc production

-5

0

5

10

15

2006

2007

2008

2009

2010

2011

2012

2013F

2014F

2015F

% (y/y)

0

325

650

975

1,300


Other Detroit New Orleans

mt ('000)

37

Commodities


Sources: Bloomberg; Standard Bank Research

Figure 58: Oil consumption vs. OECD leading indicator: high correla-

Crude oil — supply ample

We continue to believe that Brent crude oil will remain well supported on approach of $100/bbl.

However, we equally believe that demand over the next 12 months is unlikely to push crude oil

on a sustainable basis above $110/bbl. We expect Brent crude to average a $107/bbl this

quarter and $106/bbl next quarter. We expect WTI to average $103/bbl this quarter, falling to

$100/bbl in Q1:14. The risk lies to the downside for our forecasts.

Growth turns up

Oil demand has a high correlation with the OECD leading indicator which more recently has

shown signs of improvement (see Figure 58 and Figure 59). We do believe that this uptick in

economic recovery, driven by some extent by the US but also the EU (from a very low base),

will support demand growth. Downside risk lies in the US, where the partial shutdown of the

Federal government could dent GDP growth this quarter. As a result, WTI may be more vul-

nerable to a slide in prices than Brent.

The resilience of the US consumer in the face of the country’s various fiscal hurdles bodes

well, although we would warn against extrapolating the recent and abrupt pick-up in some eco-

nomic indicators — such extrapolation to our mind has perhaps led to over-enthusiasm in the

WTI market. We expect Chinese demand to hold steady, and since this quarter’s correction,

we feel that prices more or less also reflect such a view. However, we must note that a further

slowing of China’s economy is a non-negligible risk to our current pre-diction. Renewed sover-

eign debt problems in the Eurozone economy also pose another down-side risk, although our

baseline sees a modest improvement in the region’s economic activity.

Supply and production capacity ample

On the supply front, OPEC has expressed its comfort with current prices (choosing to maintain

its production ceiling at 30mbd), leaving the oligopoly as a relatively neutral factor for now (see

Figure 60). Ample OPEC spare capacity (currently at 5.4mbpd), as well as a relatively good

compliance level by OPEC members (producing 1.04mbpd more than the quota), should sup-

port prices on the downside, but free OPEC up to increase supply should it be needed (Figure

62). Furthermore, Saudi Arabia has at least another 2.5mbpd of spare capacity, and given

their willingness to increase supply in the past when needed, it may calm market fears about

the possible tightness in the market in the event of further political uncertainty in the Middle

East (see Figure 61).

Overall we believe the demand and supply picture from the US paints a less positive picture,

Figure 59: OECD leading indicator turning up in recent months

Sources: OPEC; Bloomberg; Standard Bank Research

-6

-4

-2

0

2

4

6

8

01-D

ec-0

7

01-A

pr-

08

01-A

ug

-08

01-D

ec-0

8

01-A

pr-

09

01-A

ug

-09

01-D

ec-0

9

01-A

pr-

10

01-A

ug

-10

01-D

ec-1

0

01-A

pr-

11

01-A

ug

-11

01-D

ec-1

1

01-A

pr-

12

01-A

ug

-12

01-D

ec-1

2

01-A

pr-

13

% y/y

-6

-2

2

6

10

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

% (y/y)

Oil demand (y/y) OECD leading indicator (y/y)

38

Commodities


Source: Bloomberg

and this is where we see the largest risk to lower oil prices emanate from. In the US oil produc-

tion continues to rise and imports continue to decline (see Figure 63). This in itself should see

some demand pressures ease in the global oil market. While crude inventories at Cushing has

come off all time highs and should continue to decline towards more normal levels seen in the

past five years (see Figure 66), total commercial oil inventories in the US remains near a five-

year high (see Figure 67).

On the demand side, we believe that demand for crude oil in the US may be soft in coming

months, partly because of fiscal policy, but also because we are not witnessing any substantial

uptick in US highway miles driven. We use US highway miles as a proxy for discretionary driv-

ing and transport needs for the underlying real economy (see Figure 65). Since 2008 there has

been very little growth.

As always, China remains a key driver of growth in oil demand. It is important that the econ-

omy has stabilised, but we also see a growing risk that the Chinese economy may under per-

form in terms of oil demand growth, largely because of growth that remains investment driven

as opposed to consumption drive. Given that the largest part of crude consumption goes to-

wards transport, slower growth in consumption would also implies slower growth in transport

needs.

Figure 60: OPEC production and spare capacity Figure 61: Saudi Arabia production and spare capacity

20

25

30

35

40

Jan

-00

Se

p-0

0

May-0

1

Jan

-02

Se

p-0

2

May-0

3

Jan

-04

Se

p-0

4

May-0

5

Jan

-06

Se

p-0

6

May-0

7

Jan

-08

Se

p-0

8

May-0

9

Jan

-10

Se

p-1

0

May-1

1

Jan

-12

Se

p-1

2

May-1

3

mbpd

OPEC production OPEC capacity

Figure 62: OPEC compliance Figure 63: US oil imports and oil production

2

4.5

7

9.5

12

Jan

-00

Se

p-0

0

Ma

y-0

1

Jan

-02

Se

p-0

2

Ma

y-0

3

Jan

-04

Se

p-0

4

May-0

5

Jan

-06

Se

p-0

6

Ma

y-0

7

Jan

-08

Se

p-0

8

Ma

y-0

9

Jan

-10

Se

p-1

0

Ma

y-1

1

Jan

-12

Se

p-1

2

Ma

y-1

3

mbpd

US crude production US oil imports

Sources: Bloomberg; OPEC; Standard Bank Research Sources: Bloomberg; OPEC; Standard Bank Research

Source: US DOE

0.00

0.70

1.40

2.10

2.80

Jan

-12

Mar-1

2

May-1

2

Jul-1

2

Sep

-12

No

v-1

2

Jan

-13

Mar-1

3

May-1

3

Jul-1

3

Sep

-13

mbpd

6

8

10

12

14

mbpd

Saudi Arabia production Saudi Arabia capacity

39

Commodities


Sources: DOE; Standard Bank Research

On the political front, it does appear as if at least for the next quarter, the political premium

priced into crude oil may be less as the UN start implementing its resolution on Syria, and the

US and Iran relations improves.

Figure 64: US refinery capacity utilisation

Figure 67: US total crude oil inventory Figure 66: Cushing crude oil inventory

Figure 65: US highway miles driven (12month MA)

Sources: US Dept. of Transportation; FHA;; Standard Bank Research

250,000

287,500

325,000

362,500

400,000

Jan Mar May Jul Sep Nov

5-yr range 2010 2011

2012 5-yr average 2013

k bbl

Sources: DOE; Standard Bank Research

61%

10%

13%

16%

Transport Industry Non-energy use Other sectors

Sources: Standard Bank Research; EIA

Sources: Standard Bank Research; IEA

Oil supply/demand balance

Key forecasts (millions of barrels per day)

2009 2010 2011 2012 2013F 2014F 2015F 2016F 2017F

DEMAND 85.4 88.3 88.9 89.9 90.8 92.3 93.4 94.4 95.47

OECD 46.3 46.9 46.5 46.0 45.5 45.4 45.3 45.1 45.20

Non-OECD 39.1 41.4 42.4 43.9 45.3 46.9 48.1 49.4 50.00

SUPPLY 85.4 87.5 88.6 91.0 92.1 93.3 94.5 95.6 95.00

Non-OPEC 51.4 52.7 52.8 53.4 54.3 55.2 56.2 56.9 57.00

OPEC oil and OPEC NGL 34.0 34.8 35.8 37.6 37.8 38.1 38.4 38.7 38.00

PRICES ($/bbl)

WTI 62 80 95 94 99 103 105 105 100

BRENT 63 80 111 112 108 109 110 110 105

11,000

22,000

33,000

44,000

55,000

Jan Mar May Jul Sep Nov

5-yr range 2010 2011

2012 5-yr average 2013

k bbl

0

75

150

225

300

Dec-7

0

Jul-7

5

Feb-8

0

Sep

-84

Ap

r-89

No

v-9

3

Jun

-98

Jan

-03

Aug

-07

Mar-1

2

miles (bn)

40

Commodities


Sources: Bloomberg; McCloskey; ICE

Figure 69: Atlantic thermal coal and Brent crude oil Figure 68: Pacific thermal coal prices

Sources: Bloomberg; McCloskey

Thermal coal — uphill struggle

Q3 Thermal Dynamics proved the most interesting for a while. Drummond’s 54-day strike, impacting c.4mt; the threat of a

Fenoco (45mtpa) rail strike; German elections potentially levering the Greens Party into a stronger position, impacting Euro-

pean emission prices; nascent signs of a synchronised global economic recovery; the threat of a 3-day Coal of India strike

(4mt); the Indian rupee devaluation to a 68.8:1 peak; a hotter-than-usual Chinese summer; and a freight dislocation rally led by

capes causing CFR & FOB spreads to widen, all served to push and pull at the Quarter’s prices. API2 & API4 fell just c.$3/t.

Newcastle bore the brunt of a larger c.$9/t fall, no longer supported by regional Asian (ex-China) contract demand, given the

overarching Pacific oversupplies.

For the Atlantic

For Q4:13 API 2, seasonal winter residential demand patterns can be expected to rise, compared to the Q3 summer holiday

season, together with some bottoming in European industrial demand. However, the ongoing rise of EU wind/solar/renewable

power alternatives and power plant closures, coupled with rising regional nuclear/gas and imported gas competition, plus

fewer supply disruptions from Colombia’s coal sector (+5mt q/q) will make any significant rally in thermal prices difficult, unless

the current Baltic cape freight rally doubles again from c.$30,000/day. Merkel’s choice of post-election coalition partner could

be the quarter’s wild card if her choice impacts Emissions pricing policy.

The 2-3 year price outlook remains relatively glum, given the European move away from a high ―C‖ energy mix towards renew-

ables; structurally weakening industrial demand and rising Colombian supplies (+10-15mt), with Russia remaining in the wings,

ahead of the US, and with RBCT supplies a memory.

For the Pacific

For the Pacific, Q4 will be largely be dictated by the strength of underlying Asian winter restocking momentum, particularly the

timing of China’s winter onset and the level of northern dislocation to its own production rates. Although we don’t expect a con-

tinuation of Chinese power demand growth at 13% y/y, as in August, we do expect growth in the 7-8% y/y range. India’s rupee

movements appear to have calmed, although the economy is far from strong, with India’s government struggling to pump-

prime due to high debts and inflation. Freight rates need to plateau too, before the Indians feel comfortable to re-stock, with the

Coal of India strike postponed until Dec’13. Newcastle Q4 quarterly contract benchmark negotiations between Glencore and

Tohoku Electric are expecting to settle in the range of $82-85/t FOB, vs. $92/t in Q2 and $89.95/t in Q3.

The Pacific’s longer-term outlook remains caught between several large elephants, including Indonesian & Chinese supply

momentum and Chinese/Indian import arbitrage dynamics. China is beginning to message a move away from LT coal con-

sumption (2017’s total energy mix aiming to fall from 70% to 65%), which will also impact LT growth projections. India is far

from an affordable position to follow suit this decade; however, yet may only support 5-10mtpa of imported demand growth

until the end of this decade.

0

50

100

150

200

250

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

$ /mt or $/bbl

API 2 (ARA) Brent Crude (front month)

0

1

2

3

4

5

6

7

8

9

0

50

100

150

200

250

May-0

4

Aug

-05

No

v-0

6

Feb-0

8

May-0

9

Aug

-10

No

v-1

1

Feb-1

3

RMB/USD $/mt

Newcastle 6700 kcal GAD FOB - prompt

Richards Bay 6000 kcal NAR FOB - prompt

RMB-USD exchange

41

Commodities


Sources: Standard Bank Research; McCloskey; BP

Supply/demand balance for thermal coal

Key forecasts (millions of metric tonnes)

2006 2007 2008 2009 2010 2011 2012 2013F 2014F

IMPORTS 588 607 612 649 693 732 777 814 842

Europe 160 162 160 150 135 155 160 160 160

China 30 40 35 80 110 105 106 110 105

India 28 35 35 60 75 90 100 110 120

Japan 120 120 120 125 130 115 125 130 120

Other 250 250 262 234 243 267 286 304 337

EXPORTS 605 608 612 650 690 730 770 815 845

Australia 110 112 125 140 140 160 175 190 200

Indonesia 185 195 200 230 270 270 280 290 300

China 55 45 35 20 18 17 16 15 15

Columbia 60 65 70 65 65 70 80 85 88

South Africa 67 66 62 62 62 70 75 80 86

Other 128 125 120 133 135 143 144 155 156

PRICES ($/mt)

API2 63 114 148 70 92 121 94 83 86

API4 50 80 122 64 91 118 93 82 84

Sources: Bloomberg; Port of Newcastle

Figure 71: Newcastle thermal coal exports Figure 70: Chinese thermal coal imports

Sources: Bloomberg; China Customs

-9

0

9

18

27

36

45

Dec-0

4

Jun

-05

Dec-0

5

Jun

-06

Dec-0

6

Jun

-07

Dec-0

7

Jun

-08

Dec-0

8

Jun

-09

Dec-0

9

Jun

-10

Dec-1

0

Jun

-11

Dec-1

1

Jun

-12

Dec-1

2

Jun

-13

mt (millions)

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

Oct-

06

Feb-0

7

Jun

-07

Oct-

07

Feb-0

8

Jun

-08

Oct-

08

Feb-0

9

Jun

-09

Oct-

09

Feb-1

0

Jun

-10

Oct-

10

Feb-1

1

Jun

-11

Oct-

11

Feb-1

2

Jun

-12

Oct-

12

Feb-1

3

Jun

-13

mt (millions)

42

Commodities


Figure 72: Iron ore 62% Fe prices

Sources: Bloomberg; TSI Sources: Bloomberg; Antaike

Figure 73: Chinese iron ore and steel inventories

Iron ore — still steady for now

Q3 Fe 62% iron ore (IO) prices rose to average c. $130/t, having reached $148/t in Q1 and

$126/t in Q2. Prices traded well above our expectations and our $125/t cost curve estimate for

nearly the entirety of the quarter. Chinese steel restocking demand strength was the dominant

cause of Q3’s price upswings, with August-September pig iron output rising well above-trend,

at 11.5% y/y. This left Q3 IO demand in line with Q2, normally the dominant quarter. Incoming

Chinese authorities turned policy 180-degrees at the end of June, shifting from messaging

negative property sector policies, to pump-priming the sector via social housing starts & devel-

oper funding, after witnessing July’s poor PMI results. While seaborne IO supplies began ris-

ing c.3mt/mth during the quarter, with improvements from Vale and ramp-ups from BHPB,

FMG and RioT, these were not enough to balance the surprisingly strong Q3:13 market, in full

re-stock mode.

Q4 demand momentum remains in China’s hands

We expect China’s Q4 demand growth to drop back from Q3’s 9.8% y/y average into a

7-8% y/y range. We anticipate ex-China will continue to gain little positive traction, after re-

cording YTD falls of -0.4% y/y, with previous success stories, Korea and Turkey, displaying

growth fatigue. China will conclude 2013 consuming over 1.4bln tonnes of ore; the seaborne-

ROW just 260mt.

Beyond Q4:13, Chinese demand volatility remains difficult to pre-plot, with annual growth rates

likely to swing in range from 5-8% y/y, equating to ore consumption growth of anywhere be-

tween 70-130mt next year alone (the law of very large numbers). At this stage, +80-90mt

seems the most plausible range, however, growth remains dependent on the extent Beijing

authorities continue to use social housing and infrastructure to prop up their annual GDP

growth targets and urbanisation goals.

Supply has many potential elephants to monitor

The late Q3 cape-freight rally highlighted the additional supplies beginning to flow from long-

awaited, large-scale expansions in the Pilbara particularly (FMG +20mt; BHPB +8mt; RioT

+20mt). For Q4, the momentum continues. While RioT’s late-Q3 +20mt first-phase Pilbara

expansion will gain traction, BHPB’s next expansion (+12mt) begins in Q4, as does FMG’s

(+20-40mt) Solomon project, with some uncertainty as to likely ramp-up rates, given the pro-

ject’s scale. Vale’s shipments continue to display erratic conditions; however overall Brazilian

shipments are expected to be stable-to-up in Q4. Goa’s Supreme Court mine ban hearings

offer the industry’s elephant risk, where as much as 4.5mt/mth tonnage could return across the

0

50

100

150

200

No

v-0

8

Ap

r-09

Sep

-09

Feb-1

0

Jul-1

0

Dec-1

0

May-1

1

Oct-1

1

Mar-1

2

Aug

-12

Jan

-13

Jun

-13

$/mt CFR

China Iron Ore Fines (62% Fe; CFR Tianjin)

China Iron Ore Fines (58% Fe; CFR Tianjin)

10

13

16

19

22

60

75

90

105

120

Jun

-10

Aug

-10

Oct-

10

Dec-1

0

Feb-1

1

Ap

r-11

Jun

-11

Aug

-11

Oct-

11

Dec-1

1

Feb-1

2

Ap

r-12

Jun

-12

Aug

-12

Oct-

12

Dec-1

2

Feb-1

3

Ap

r-13

Jun

-13

Aug

-13

Steel (mt)IO (mt)

China Iron Ore Inventory (LHS)

Chinese steel inventories (RHS)

43

Commodities


crucial Q4/Q1 period (when other regions are impacted by weather disruptions), if bans are

lifted. Meanwhile Chinese winter should expect to see at least 5mt/mth pulled from the market,

with 2012/13 not a useful comparative, given the prevailing cost pressures then.

Next year, BHPB, FMG and RioT will continue ramping up, with their next stage of expansions

weighted to the back end of Cal-14. Vale is meanwhile expected to bring +10mt from the

southern systems, with the timing of the next Carajas +40mt uncertain. MMX and Usinimas

may bring 7-12mt on-line if the Sudeste Superport is completed. Meanwhile Anglo’s Minas Rio

+26mt project will be keenly watched for its completion date, with ownership issues still out-

standing.

44

Commodities


Key forecasts (millions of tonnes)

2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F

Demand

China 457 646 622 704 742 815 891 1046 1081

Rest of the world 386 299 370 388 383 383 391 398 398

Total 843 945 992 1,092 1,125 1,198 1,282 1,445 1,480

Year-on year % change 12.0 5.0 10.0 3.0 6.5 7.0 12.7 2.4

Supply

Indian 105.7 119.2 107.6 79.5 43.0 9.1 10.5 28.0 28.0

Australian 327.3 375.3 430.9 465.8 495.3 593.7 672.3 737.9 778.8

Brazilian 276.5 267.8 311.3 299.7 316.5 312.9 363.7 434.7 465.7

Other South America 13.5 16.4 24.2 35.1 30.9 24.5 32.6 55.5 55.5

South Africa 31.5 44.1 47.0 49.4 54.2 55.0 55.0 55.4 55.4

Other Africa 12.0 12.0 13.0 17.1 23.7 33.9 49.2 60.5 71.0

North America 19.7 19.7 19.7 25.5 34.2 34.5 40.8 56.4 56.4

Northern European 31.0 43.4 41.8 71.9 59.9 56.5 59.4 65.8 65.8

Other (Asia/Middle East) 14.1 16.7 22.8 34.9 37.3 35.6 36.0 36.0 36.0

China landborne 4.2 7.3 10.4 4.8 5.7 6.0 6.0 6.0 6.0

China domestic concentrates 326.7 255.0 350.9 359.9 351.3 365.2 333.0 186.0 175.0

Total 1,162 1,177 1,380 1,444 1,452 1,527 1,658 1,722 1,794


ex China domestic concentrates 914.5 1018.3 1078.9 1094.8 1155.7 1319.4 1530.2 1612.6 831.4


-30.0 26.2 -12.9 -30.2 -42.0 37.8 85.4 133.1 ex China notional surplus (deficit) -11.7

Indian fines spot to China ($/mt) 152 86 151 171 128 131 122 112 100

Sources: World Steel Association; Company Announcements; Standard Bank Research

Supply/demand balance for iron ore

45

Commodities


Figure 78: China daily steel output rates — 2012/2013

Sources: Bloomberg; CISA Sources: Bloomberg; Energy Publishing

Figure 79: Hard coking coal vs. thermal coal (Qld FOB/t)

Metallurgical coal — supply dominates demand growth

Q3’s met coal spot price performance was rescued by China’s dramatic steel restock, which caused August pig iron

output to grow at a whopping 11.5% y/y. This had been enabled partly by the Chinese Central government’s clan-

destine property pump-priming, approving developers to re-finance and initiating above-trend social housing starts

during the quarter. The end-Q3 rally came, despite thermal coal price drops of c.$7/t, due to regional weather

(Indian Monsoon hydro growth and Chinese autumn destocking), together with the start-up of BHPB-BMA’s 4.5mtpa

Daunia mine in Qld. Met prices did not actually bottom until mid-August, in the low $130’s for premium HCC materi-

als. Spot for the quarter averaged c.$140/t, down from Q2’s $149/t and Q1’s $167/t. For 2013, spot prices look to be

heading to average c.$40/t lower than 2012, with the recent freight rally further eating into miner realisations.

For Q4, contract benchmark prices have been settled already between BHPB-BMA and Nippon, on behalf of Japa-

nese mills, at $152/t for Peak Downs and $148/t for Goonyella. These are up $7/t (c.5%) q/q, from $145/t for Peak

Downs and $141/t for Goonyella in Q3, reflecting the latter-stage Q3 pricing strength. PCI rates have settled at

$120.50/t.

Chinese demand offsetting ROW Stragglers

Seaborne Met Coal demand ex-China has remained relatively weak all year, growing at a paltry 0.3%. Of the strag-

glers, Europe has seen its pig iron output drop -2.4% y/y; Australia has dropped -5.3% y/y; South Korea has

dropped -6.3% y/y. Offsetting them, Turkey has grown 8.7% y/y; Taiwan has grown 15.3% y/y; India has lifted 3.7%

y/y, while Japan has managed to grow 2.3% y/y. However, with China included (up 6.6% y/y), the key seaborne met

coal consuming regions of the world have grown 4.7% (+43mt of pig iron annualised), equating to c.25-30 million

tonnes of additional met coal/PCI demand. A lack of demand growth is therefore NOT responsible for met coal’s

price falls this year.

Sustained supplies from the US and thermal crossover

Not only are all miners working to reduce costs to stay competitive rather than close; not only are US coking coal

exports continuing in the 55-60mtpa range (although -10mt since 2012); not only has the 4.5mtpa Daunia mine be-

gun production and port maintenance been completed at Haypoint; but of most relevance, China’s dominant ther-

mal /cross-over coking coal supplies continue to grow, overwhelmingly remaining Supply’s ―elephant in the room‖.

Price outlook

For Q4, we expect Chinese steel output growth, as the main driver for seaborne met coal demand, to drop back,

from above-trend 11+% y/y peak levels of Q3, towards 2013’s average GDP 7.5-8% growth range, while India’s

rupee devaluation; poor growth outlook & iron ore policy restrictions continue to hamper met coal imports. However

thermal coal restocking and Chinese winter supply disruptions should hold met pricing stable across Q4. Looking

ahead, pricing power looks dominated by supply growth (especially in China), more than offsetting demand growth,

despite the strength of China’s steel industry.

1.60

1.70

1.80

1.90

2.00

2.10

2.20

JuneAprilMarJanNovOctAugJuneMayMarjan

Mt/day

60

80

100

120

140

160

180

100

200

300

400

Feb-1

0

May-1

0

Aug

-10

No

v-1

0

Feb-1

1

May-1

1

Aug

-11

No

v-1

1

Feb-1

2

May-1

2

Aug

-12

No

v-1

2

Feb-1

3

May-1

3

Aug

-13

$/mt FOB

Premium Hard Coking Coal (Qld FOB) $/t Newcastle Thermal

46

Commodities


Sources: World Steel Association; Company Announcements; Standard Bank Research

Supply/demand balance for metallurgical coal

Key forecasts (millions of tonnes)

2008 2009 2010 2011 2012 2013F 2014F 2015F 2016F

Supply

Australia 134.6 135.2 136.0 111.0 142.0 146.0 154.0 160.0 165.0

USA 38.7 34.5 52.0 62.0 70.0 60.0 50.0 40.0 30.0

South Africa 2.5 2.0 1.5 2.0 2.0 2.0 2.0 2.0 2.0

Indonesia 5.5 6.0 6.0 7.0 10.0 12.0 13.0 14.0 15.0

Canada 27.0 21.4 27.0 27.0 27.0 28.0 30.0 32.0 34.0

Poland 1.6 1.0 1.3 2.0 2.0 2.0 2.0 2.0 2.0

China 3.5 0.6 1.0 1.0 1.0 4.0 6.0 8.0 10.0

Colombia 2.1 2.0 2.0 2.0 4.0 6.0 6.0 6.0 6.0

Russia 13.6 13.2 18.0 19.0 21.0 23.0 25.0 26.0 27.0

Mozambique 0.5 2.0 6.0 10.0 15.0 20.0

Other 7.0 7.0 7.3 8.0 9.0 10.0 12.0 13.0 14.0

Total 236 223 252 242 290 299 310 318 325

Year-on year % change -5.7 15.8 -2.2 18.4 7.6 8.6 9.3 9.3

China domestic tonnage 325 345 365 402 410 430 451 474 492


Demand

Ex China seaborne demand 223 175 222 237 237 242 247 252 257

Year-on year % change -21.8 27.3 6.8 0.0 2.0 2.0 2.0 2.0

China total demand 328 378 412 445 463 486 510 536 557


China seaborne imports 3 31 38 32 36 45 55 65 75

ex China notional surplus (deficit) 17 (8) (28) 17 12 8 1 0 9

156 220 273 192 153 156 158 160 Australia hard coking coal spot fob ($/t) 319

Figure 80: China coking coal imports

Sources: Bloomberg; China Customs Sources: Bloomberg; Australian Customs

Figure 81: Australian coking coal exports

0.0

2.0

4.0

6.0

8.0

Ap

r-11

Jul-1

1

Oct-1

1

Jan

-12

Ap

r-12

Jul-1

2

Oct-1

2

Jan

-13

Ap

r-13

Jul-1

3

Mt

China Mongolia Met Coal imports China Met Coal imports

0.0

4.0

8.0

12.0

16.0

Mar-0

4

Jun

-05

Sep

-06

Dec-0

7

Mar-0

9

Jun

-10

Sep

-11

Dec-1

2

Mt

47

Commodities


Figure 82: China coking coal imports

Sources: Bloomberg; China Customs Sources: Bloomberg; Australian Customs

Figure 83: Australian coking coal exports

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Jan

-11

Mar-

11

May-1

1

Jul-

11

Sep

-11

No

v-1

1

Jan

-12

Mar-

12

May-1

2

Jul-

12

Sep

-12

No

v-1

2

Jan

-13

Mar-

13

Million to

nnes

China Mongolia Met Coal imports China Met Coal imports

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Jan

-04

Aug

-04

Mar-

05

Oct-

05

May-0

6

Dec-0

6

Jul-

07

Feb-0

8

Sep

-08

Ap

r-09

No

v-0

9

Jun

-10

Jan

-11

Aug

-11

Mar-

12

Oct-

12

Million to

nnes

Australian Coking Coal Exports

48

Commodities


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