The Structural vs. Cyclical Metals Debate

7/29/2019 The Structural vs. Cyclical Metals Debate

http://slidepdf.com/reader/full/the-structural-vs-cyclical-metals-debate 1/28

abcGlobal Research

Slowing Western GDP growth will hit

metals demand, but continued

urbanisation trends in China should

cushion the effect Our ‘Metal in Use’ analysis indicates

Chinese demand has significant upside We continue to like mining equities; we

are OW on Rio Tinto, BHP Billiton and

Anglo American Expectations for economic growth in developedmarkets have deteriorated, causing equity markets and

miners to de-rate in response. Investors have two concerns –

how short-term economic weakness might affect

commodities and whether there is there enough long-term

structural demand to absorb the production growth being

pursued by the industry. We discuss both of these issues in

this report.

Short-term risks have grown, but need to be seen in context.

“Stall Speed” in developed markets isn’t good enough for

metals markets, which need 2% economic growth to just keep

metals demand static, and we will see a metal demand

contraction in the West in 2012. But it matters less now that

China accounts for 40%+ of global metals demand and the net

impact of HSBC Economics’ revised economic assumptions is

likely to be of the order of 1 percentage point, not insignificant

in commodity markets but unlikely to be exacerbated by the

industrial deleveraging seen in 2008.

In terms of long-term structural trends, demand is now

driven by an urbanisation process that is far more

structural than consensus generally believes. Our analysis of

urbanisation and demand intensity concludes that the very

bearish view of metals in China (eg urbanisation reversal,

massive overcapacity of infrastructure) is misreading the

underlying structural trends in a developing economy. On our

analysis, China is only 20-25% along the path towards being a

mature materials market and it may take at least 6-9 years

before demand intensity peaks.

This research note includes the analysis behind a presentation to be made

by Andrew Keen at HSBC’s Global Natural Resources Conference, to be

held in Singapore on 26-27 September 2011.

Natural Resources & Energy

Global Metals & Mining

The structural vs.cyclical metalsdebateWill China offset a western slowdown?

20 September 2011

Andrew Keen*

Analyst

HSBC Bank Plc

+44 20 7991 6835 [email protected]

Thorsten Zimmermann*

Analyst

HSBC Bank Plc


Lourina Pretorius*

Analyst

HSBC Bank Plc


View HSBC Global Research at: http://www.research.hsbc.com *Employed by a non-US affiliate of HSBC Securities (USA) Inc,and is not registered/qualified pursuant to FINRA regulations

Issuer of report: HSBC Bank plc

Disclaimer & DisclosuresThis report must be read with thedisclosures and the analyst certificationsin the Disclosure appendix, and with theDisclaimer, which forms part of it

http://www.research.hsbc.com/





2



20 September 2011

abc

HSBC Metals & Mining Equities CoverageHSBC Global coverage overview

Company RIC Curr. Price Target Rating Marketcap

HSBC EPS _ __ EV/ EBITDA__

HSBC PE Price/ NAV

ROE Covering analyst

16 Sep price (USDm) 2011e 2012e 2011e 2012e 2011e 2012e 2011e 2012e

Global Base metals & Diversifieds

Aluminum Corp of China 2600.HK HKD 4.5 9.5 Overweight (V) 15,213 0.33 0.40 10.2 9.3 10.9 9.2 0.9 9% Sarah MakAnglo American AAL.L GBP 25.2 34.0 Overweight 52,732 5.19 5.89 3.9 3.5 7.8 6.9 1.2 18% Andrew KeenAntofagasta ANTO.L GBP 13.0 13.7 Neut ral (V) 20,239 1.48 1.59 4.4 4.3 13.9 12.9 3.1 22% Andrew KeenAurubis NAFG.DE EUR 42.4 46.2 Neutral 2,628 4.32 4.67 5.8 5.2 9.7 9.1 1.0 10% Thorsten ZimmermannBHP Billiton BLT.L GBP 20.0 27.6 Overweight 194,097 4.68 4.89 4.6 4.2 6.8 6.5 2.7 38% Andrew KeenBoliden BOL.ST SEK 83.1 125.0 Neutral 3,418 15.53 15.42 3.5 3.5 5.7 5.5 1.1 18% Thorsten ZimmermannChina Zhongwang 1333.HK HKD 3.2 4.3 Neutral (V) 2,198 0.20 0.29 2.6 1.9 12.9 8.9 0.9 10% Sarah Mak

Coal India Limited COAL.BO INR 379.2 472.0 Overweight (V) 50,652 26 31 8.5 6.3 15.5 12.3 7.2 45% Arun SinghHindalco HALC.NS INR 144.7 220.0 Overweight (V) 5,859 21 24 4.7 4.2 7.1 6.0 1.0 14% Jigar MistryHindustan Zinc Ltd HZNC.BO I NR 133.4 150.0 Overweight 11,922 12 14 6.3 4.5 11.0 9.3 2.4 20% Jigar MistryHochschild Mining HOCM.L GBP 5.2 5.1 Neutral (V) 2,784 0.67 0.66 3.8 4.2 12.3 12.5 2.5 19% Lucia MarquezJiangxi Copper Co 0358.HK HKD 18.7 25.0 Neutral (V) 13,378 1.98 1.79 8.5 8.9 7.7 8.6 1.3 14% Sarah MakNational Aluminium Co NALU.BO INR 65.7 90.0 Underweight 3,579 6 7 5.0 3.9 11.3 9.3 1.5 14% Jigar MistryNMDC Ltd NMDC.BO INR 250.2 250.0 Underweight (V) 20,981 17 17 8.8 8.4 14.9 14.8 5.2 31% Jigar MistryNorilsk Nickel GMKN.RTS USD 253.0 309.0 Overweight 48,229 38.49 36.41 5.3 5.1 6.6 6.9 2.4 31% Vladimir ZhukovNorsk Hydro NHY.OL NOK 30.3 56.0 Overweight 11,204 2.82 4.51 5.1 4.8 10.7 7.8 0.7 9% Thorsten Z immermannNyrstar NYR.BR EUR 7.8 14.0 Overweight 1,837 1.02 1.63 3.8 2.4 7.7 4.8 0.9 19% Thorsten ZimmermannRio Tinto RIO.L GBP 36.3 56.0 Overweight 116,123 10.04 9.13 3.4 3.6 5.7 6.3 1.9 30% Andrew KeenRusal 0486.HK HKD 8.1 13.9 Overweight 15,860 0.17 0.18 4.5 3.4 6.0 5.7 1.1 18% Vladimir ZhukovSesa Goa Ltd SESA.BO INR 223.9 220.0 Neutral 4,116 40 35 3.7 4.1 5.7 6.3 1.5 23% Jigar MistrySterlite STRL.NS INR 134.9 220.0 Overweight 9,585 16 21 5.0 3.5 8.9 6.5 1.0 12% Jigar MistryVALE VALE.N USD 27 35.5 Overweight (V) 141,123 5.17 4.34 4.1 4.1 5.3 6.3 1.5 22 % Jonathan BrandtVedanta VED.L GBP 14.2 24.6 Overweight (V) 5,968 5 6 4.7 3.9 4.8 3.5 1.1 27% Thorsten Zimmermann

Xstrata XTA.L GBP 1 0.4 15.0 Neutral (V) 48,738 2.20 2.56 4.0 3.3 7.5 6.4 1.1 16% Andrew KeenAverage (market cap weighted) 4.8 4.5 7.7 7.4 2.3 28%

Steel - Developed markets

ArcelorMittal MT.N USD 18.5 30.33 Overweight (V) 28,877 1.99 1.99 4.6 4.5 7.6 8.6 0.5 5% Thorsten Z immermannKloeckner & Co KCOGn.DE EUR 10.9 20.00 Overweight 1,503 0.73 1.61 5.1 3.4 14.9 6.8 0.6 10% Juergen SiebrechtPOSCO 005490.KS KRW 424,500 600,000 Overweight (V) 28,870 63,134 64,944 4.7 4.2 6.7 6.5 0.8 12% Brian ChoSalzgitter SZGG.DE EUR 39.0 52.0 Overweight 3,227 2.82 4.14 4.2 3.4 13.8 9.4 0.5 6% Juergen SiebrechtThyssenKrupp TKAG.DE EUR 21.5 31.6 Overweight 14,750 2.06 2.96 5.6 4.5 10.8 7.6 1.0 13% Thorsten Z immermannVoestalpine VOES.VI EUR 24.7 33.0 Overweight 5,754 4.05 4.49 4.0 3.6 6.6 5.7 0.9 15% Thorsten Zimmermann

Average (market cap weighted) 4.7 4.2 8.2 7.5 0.7 10%Steel - Emerging markets

Angang Steel 0347.HK HKD 5.4 12.5 Neutral (V) 5,994 0.60 0.62 5.6 5.4 7.3 7.2 0.6 8% Sarah MakBaoshan Iron & Steel 600019.SS CNY 5.1 8.5 Overweight (V) 14,090 0.89 0.96 3.1 2.7 5.8 5.3 0.8 14% Sarah MakChina Steel Corp 2002.TW TWD 30.3 35.2 Overweight (V) 15,391 2.94 3.11 10.2 9.8 10.3 9.8 1.5 15% Sarah MakCSN CSNA3.SA BRL 16.4 24.5 Overweight 13,897 2.41 2.17 3.7 4.2 6.8 7.5 2.2 27% Jonathan Brandt

Erdemir EREGL.IS TRY 3.3 5.3 Overweight 3,958 0.44 0.53 5.5 4.9 7.4 6.2 1.0 16% Bulent YurdagülEzz Steel Rebars ESRS.CA EGP 7.8 11.5 Overweight (V) 712 0.75 3.33 5.9 2.6 10.3 2.3 0 .9 32% Patrick GaffneyGerdau GGBR4.SA BRL 14.8 18.0 Neut ral 13,924 1.28 1.42 6.1 5.0 11.5 10.4 1.0 10% Jonathan BrandtJsw Steel JSTL.BO INR 686 720 Neutral (V) 3,239 72 111 6.9 6.0 9.6 6.5 0.9 9% Jigar MistryJindal Steel & Power JNSP.BO INR 545 710 Overweight 10,781 44 42 8.7 8.5 12.4 12.9 3.4 24% Jigar MistryKardemir KRDMD.IS TRY 0.9 1.25 O verweight 472 0.09 0.13 5.5 3.9 9.2 6.6 0.9 12% Bulent YurdagülMaanshan 0323.HK HKD 2.0 4.7 Neutral (V) 3,198 0.28 0.31 3.8 3.4 5.9 5.4 0.4 8% Sarah MakMetalurgica Gerdau GOAU4.SA BRL 18.4 23.0 Neutral 4,202 2.21 2.39 6.8 5.7 8.3 7.7 1.0 12 % Jonathan BrandtSAIL SAIL.BO INR 109 Restricted Jigar MistryTata Steel TISC.BO INR 461 710 Overweight 9,350 63 79 5.3 4.7 7.3 6.0 1.3 18% Jigar MistryUsiminas USIM5.SA BRL 12.3 17.5 Neut ral 10,629 0.69 1.42 12.0 7.7 17.7 8.6 0.7 8% Jonathan Brandt

Average (market cap weighted) 6.1 5.7 8.7 8.2 1.4 16%

Source: HSBC estimates



3



20 September 2011

abc

HSBC Global coverage overview (continued)

Company RIC Curr. Price Target Rating Marketcap

HSBC EPS __ EV/ EBITDA__

_HSBC PE _ Price/ NAV

ROE Covering analyst

16 Sep Price (USDm) 2011e 2012e 2011e 2012e 2011e 2012e 2011e 2012e

Coal

China Coal Energy 1898.HK HKD 9.9 10.8 Neutral (V) 18,969 0.74 0.83 5.9 5.3 11.0 9.8 1.3 13% Sarah MakChina Shenhua Energy 1088.HK HKD 34.2 47.0 Overweight (V) 81,328 2.35 2.75 6.3 5.2 11.9 10.2 2.4 21% Sarah MakCoal India Limited COAL.BO INR 379.2 472.0 Overweight (V) 50,652 26 31 8.5 6.3 15.5 12.3 7.2 45% Arun SinghHidili Industry Int 1393.HK HKD 3.5 4.7 Neutral (V) 927 0.35 0.41 7.1 6.4 8.2 6.9 0.7 10% Sarah MakYanzhou Coal Mining 1171.HK HKD 20.7 26.2 Neutral (V) 18,136 1.93 1.79 8.1 8.6 8.8 9.5 1.9 19% Sarah Mak

Average (market cap weighted) 7.1 5.9 12.5 10.7 3.6 27%Global Gold & PGM

African Barrick ABGL.L GBP 5.9 10.0 Overweight 3,834 0.83 1.54 4.9 2.1 11.2 6.1 20% Patrick ChidleyAngloGold Ashant i AU.N USD 47.6 76.0 Overweight 18,176 4.88 8.61 5.1 2.6 9.7 5.5 3 .2 44% Sabrina Grandchamps

Barrick Gold Corp ABX.N USD 53.6 97.0 Overweight 53,550 5.43 7.64 6.6 4.5 9.9 7.0 2.2 27% Pat rick ChidleyCenterra Gold CG.TO CAD 21.2 27.0 Overweight (V) 5,081 1.84 2.61 9.0 5.5 11.7 8.2 3.2 33% Sabrina GrandchampsGoldcorp Inc. GG.N USD 51.5 79.0 Overweight 41,598 2.99 3.82 11.6 7.9 17.2 13.5 1.9 14% Patrick ChidleyGold Fields GFI.N USD 17.1 30.0 Overweight 12,372 3.04 3.68 3.3 2.3 6.4 4.7 1.7 36% Sabrina GrandchampsIamgold Corporation IAG.N USD 22.1 30.0 Overweight (V) 8,294 1.62 1.92 6.9 5.4 13.6 11.5 2.2 18% Sabrina GrandchampsHarmony Gold Mining HMY.N USD 13.1 17.0 Overweight 5,652 0.61 1.23 13.2 4.4 39.2 11.0 1.3 9% Sabrina GrandchampsKinross Gold KGC.N USD 17.4 30.0 Overweight 19,809 1.26 1.48 6.9 5.7 14.9 11.9 1.3 11% Pat rick ChidleyNewmont Mining NEM.N USD 65.7 116.0 Overweight 32,043 5.54 8.96 5.4 3.6 11.9 7.3 2 .0 26% Patrick ChidleyPetropav lovsk Plc POG.L GBP 8.4 15.0 Overweight (V) 2,480 1.88 2.05 4.8 4.1 7.0 6.5 1.4 20% Sabrina GrandchampsPolymetal OJSC PMTLq.L USD 19.3 30.0 Overweight (V) 7,704 1.96 2.87 7.9 4.9 9.9 6.7 3.6 42% Sabrina GrandchampsRoyal Gold Inc RGLD.O USD 80.4 76.0 Overweight 4,383 1.55 2.01 21.3 16.3 53.3 40.4 3.0 7% Patrick ChidleyRandgold Resources GOLD.O USD 108.8 165.0 Overweight 9,958 4.90 9.04 13.7 6.6 22.2 12.0 4.4 31% Patr ick Chid leyYamana Gold AUY.N USD 16.1 20.0 Overweight 12,033 1.15 1.51 7.6 5.6 14.1 10.7 1.5 14% Patrick Chidley

Average (market cap weighted) 7.9 5.2 14.1 9.6 2.2 24%




4



20 September 2011

abc

Structural and cyclicaldemand concernsThis report centres on two major concerns we find

among investors at present. Our impression of

these can be summarised as follows:

Mining companies are directing all of their

excess cash flow towards organic growth at

present, which will come on in 2012-15,

creating oversupply as Chinese growth slows.

Therefore this growth should have little value

placed on it by the market.

The world appears to be ending again – 2008

was not pleasant for commodities and the

risks now are significant.

We discuss these two concerns in turn in this report.

In terms of long-run demand trends, we conclude

that China’s urbanisation process is driving metal

demand. Our analysis of peak commodity demand

intensity and “metal in use” shows that the rate of

metal demand is unlikely to have peaked and the

cumulative level of demand is still very low in

comparison to historical precedents. As long as

this persists, demand rates are likely to stay above

historical rates.

In terms of short-run risks, we conclude the net risk

to metal demand from a slowing West is around 1

percentage point, but the industry supply response is

still slow. Also, we do not believe the aggressive

destocking seen at the end of 2008 is likely to

reappear, as we are entering a period of poor growthwith a manufacturing chain much emptier than in

2009. Weakness in 2012 in the West is likely to ease

commodity prices, but we had already factored this

in, and do not see a reason at present to adjust our

commodity price estimates.

Although this report centres on the industry rather

than stock specifics (which we plan to return to),

we highlight that the sector contains little of the

balance sheet risk of 2008. We believe the

industry would slow capex in response to anaggressive downturn, as it did in 2009.

Long-term structural trendsWe are getting some specific investor pushback

on mining equities at present, not dissimilar to

those aired at the end of 2008 – namely materials

demand is levered, rather than immune, to

slowing developed market growth as China has

over-invested in infrastructure and housing. But

before we delve into some of the data on

urbanisation and materials demand to disprove

this common misconception, we also want to

provide a more prosaic sense check.

A long way to go

Long-term demand growth is key to the value of production growth

currently being pursued by the industry

Recent downward revision of global growth forecasts by HSBC

Economics only shifts global metal demand by 1 percentage point

Unlike 2008, industrial deleveraging is unlikely to be repeated



5



20 September 2011

abc

A visitor landing in Manhattan 80 years ago could

arguably have concluded that the US looked built

back then (see Chart 1); and a modern-day visitor to

Beijing or Shanghai (admittedly transport has

moved on from the airship pictured) could conclude

that China looks similarly developed today.

The reason we highlight the US 80-90 years ago is

because its urbanisation rate was roughly

equivalent to current urbanisation in China (on

our estimates China will approach the 50%

urbanised level in 2014, a level reached around

1920 in the US).

Although we acknowledge upfront that there are

all kinds of problems with both official

urbanisation data in many countries and long-run

income comparisons, there is a reasonably

consistent pattern of urbanisation rising as wealth

increases (see Chart 2 below). China in 2010

looks not dissimilar to Japan in 1967 and is less

urbanised than the US in 1920 and Korea in 1976.

Chart 1: Manhattan in the early 1930s

Sour ce: U.S. Naval Historical Centre

Development paths are somewhat idiosyncratic,

and, as we discuss below, the nature of

urbanisation and materials intensity even more so

– for example, the US urban landscape is

generally much less dense and suburban than the

Asian landscape, which involves high-rise

apartments that are very steel intensive. But, it is

fair to generalise, humans tend to reach a certain

level of wealth and urbanise.

Chart 2: China, US, South Korea & Japan – official urbanisation rates versus per capita income

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0 5 10 15 20 25 30

Real GDP per Capita

(Thousands of 1990 USD in Geary Khamis PPPs)

U r b a n i s a t i o n R a t e

China United States South Korea Japan

China in 2010

US in 1920

Japan in 1967

Korea in 1976

China in 2025*

Source: United Nations, GDDC and HSBC analysis * Based on scenario in HSBC Economics’ “The world in 2050 ” report, published 4 January 2011.

http://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=obmmnf1l6k&n=282364.PDF





6



20 September 2011

abc

The reasons for this can fill an entire research

report on its own, but include access to

opportunity (wages in Chinese cities can be three

times those in rural areas), better education and

government policy (some studies suggest that

dense urban centres accelerate economic

development and minimise the loss of arable land

during development), to name but a few. The

government has also progressively relaxed

restrictions on where people live, which has

promoted urbanisation (although the formal

classification of urban versus rural, or Hukou, has

probably lagged the actual trend).

It is also important to note that these trends also

appear irreversible. Although some of the trends

below show horizontal fluctuation in per-capita

income, the trend in urbanisation is irrevocably up

– even during the Great Recession, urbanisation

did not reverse in the US. Good times or bad,

humans like to live with one another. In the wordsof the song penned by Lewis and Donaldson in

1918, just as the US crossed the 50% urbanisation

barrier, “How ‘ya gonna keep 'em down on the

farm, after they've seen Paree”. Maybe we should

insert Shanghai?

An unsustainable rate?

Not really, at least according to historical trends. As

Charts 3 and 4 show, urbanisation in China has been

increasing at an average 10 percentage points per

decade over the past 20 years, while rates have been

maintained in South Korea and Japan for several

decades – only slowing once absolute urbanisation

reaches 60-70%, 10-20 years away for China at

current rates. It is also hard to argue that countries

have a natural limit to urbanisation. Certainly, in

countries highly constrained by space (Singapore)

there is a logic, but even where space is not

remotely an issue (eg Australia), urbanisation rates

can be high (see Chart 5).

Chart 3: China, US, South Korea & Japan – decades’ changein urbanisation rates (1840-2010)

0

5

10

15

20

1 8 4 0

1 8 7 0

1 9 0 0

1 9 3 0

1 9 6 0

1 9 9 0

P e r c e n t a g e P o i n t s

China United States

South Korea Japan

Source: United Nations and HSBC calculations

Chart 4: China, US, South Korea & Japan – urbanisation rate(1830-2010)

0%

20%

40%

60%

80%

100%

1 8 3 0

1 8 6 0

1 8 9 0

1 9 2 0

1 9 5 0

1 9 8 0

2 0 1 0

China United States

South Korea Japan


Another problem with urbanisation data (and a

pushback we get occasionally from clients) is that

China is a large and diverse country and all of the

per-capita trends are distorted by this. It is true,

there are distinct differences between urban and

rural populations, and this has an impact on

materials demand (steel demand intensity, which

we discuss in more detail below, is much higher

in urban areas – see Chart 6).



7



20 September 2011

abc

The chart below separates the aggregate Chinese

data into these two separate categories. Here

consumption in the urban centres is much higher,

although it should not be read that these look

excessive in comparison to historical trends. We

do not have an equivalent breakdown betweenurban and rural demand intensity for other

countries historically, but it is highly likely that

urban intensity was, naturally, much higher than

the national aggregate in developed urban centres

in the US as it was urbanising.

Chart 6: Steel Intensity of Use – China Urban versus ChinaOverall (1974-2010)

0

200

400

600

800

1,000

0 4,000 8,000 12,000 16,000

Real GPD per Capita

C o n s u m p t i o n p e r C a p

i t a ( k g )

Overal l China Urban China

Source: GGDC, National Bureau of Statistics China and HSBC calculations

It is the spread of development from the more

developed coastal areas of China to smaller cities

inland that is likely to provide an ongoing source of

demand. China has 4 Tier 1 cities (populations 8-

20m), 16 Tier 2 cities, (3-7m) and 24 Tier 3 cities

(2m and less). We believe expecting economicdevelopment to stop at the coast is wrong.

Chart 5: Global urbanisation rates by country (2010)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

S i n g a p o r e

B e l g i u m Q a t a r

I c e l a n

d

I s r e a l

A u s t r a l

i a

L e b a n o

n

N e w

F r a n c

e

K o r e

a

U S

C a n a d

a

U K

P e r

u

G e r m a n y

R u s s i a

M a l a y s i a

I t a l y

J a p a

n

A r m e n i a

I r e l a n

d

G r e e c

e

K a z a k h s t a

n

S y r i a n

A l b a n i a

P h i l i p p i n e

s

C h i n

a

I n d o n e s i a

S e n e g a l

Z i m b a b w

e

P a k i s t a

n

T h a i l a n

d

Y e m a

n

I n d

i a

B a n g l a d e s

h

T a j i k i s t a

n

A f g h a n i s t a

n

K e n y a

C a m b o d i a




9



20 September 2011

abc

Materials-specific trendsSome investors are concerned that materials

intensity in China may have reached that of a

mature market. Global demand growth for metal

may therefore begin to slow. We disagree.

Certainly simplistically, demand looks incredibly

high – we focus on copper, due to its importance

to mining generally, and steel, which is the driver

for iron ore, coking coal, ferrochrome, zinc and

nickel demand. China consumed 577Mt of steel in2010, a massive amount of material and 6.3 times

US steel demand in the same year (91Mt). Even in

its peak year of 1973, the US only managed

141Mt of steel consumption, one-quarter of

current Chinese demand. Even considering the

relative population size, it looks too large, at

426kg/head of population, 50% higher than US

levels of 265Kg/capita. At first glance, this is

pretty scary stuff.

But a developing economy should not be confused

with another that is, in commodity intensity terms,

over the hill. Chart 8 shows per capita consumption

against per capita income (log scale at purchasing

power parity), known by various names, including

an S- or kuznet curve – and increasingly commonly

known in materials analysis. Here it shows that

Chinese per capita demand is not unusual for its

point in economic development.

To understand ‘over the hill’, it is worth looking

at China versus the US in more detail (Chart 8

again). China has just breached the 400kg/head

barrier, a level reached in the US at the end of the

1930s. It should be highlighted that US demand

intensity did not fall below this level until the

1982 recession, some 43 years later, and in the

interim hovered between 500 and 600kg/head, 25-

50% higher than current intensity in China.

Chart 8: US and China – Steel demand intensity curves

0

100

200

300

400

500

600

700

0 5 10 15 20 25 30 35

Income per Capita (000 PPP)

C o n s u m p t i o n p e r C a p i t a ( k g )

USA China

US in 1939

US in 1982

China in 2010

Source: USGS, GGDC and HSBC calculations

But even this may not represent peak intensity and

maturity for China, where urbanisation may be

more materially intensive – as Chart 9 shows, per

capita demand in Japan peaked around

750kg/head, and Taiwan and Korea have reached

over 1,000kg/head.

The difficulty is that these curves are heavily

country-specific, and dependent on factors such as

urbanisation patterns and reliance on export

industries (some of Taiwan/Korean production is

re-exported in cars/ships, and this could not be

achieved in China given the relative scale).

There is also a pace of development issue. It has

been known for several decades that materials

demand rises with economic development, but

there has been significant debate around whetherthe path of development is changing over time. It

has been argued that historical rates of materials

intensity should be lower because more newly

developing countries have the ability to leapfrog

technologies. Certainly in developed markets

there is a tendency for materials intensity to

decline over time or in the absence of economic

growth (we discuss this in more detail in our

cyclical forecast section on page 12).



10



20 September 2011

abc

We include the equivalent chart for copper below,

and show these demand intensity curves in more

detail in the Appendix.

Chart 10: Copper – Demand Intensity curves by country

0

2

4

6

8

10

12

14

1,000 10,000 100,000

Income per Capita (PPP)*

D e m a n d p e r C a p i t a ( k g )

US China India

Europe Japan Em. Asia

China in 2010

Source: USGS, GGDC and HSBC calculations *Logarithmic scale.

Looking for an inflection point?

What is commonly missed in this analysis,

however, is the importance of inflection points.

The metals industry will need to build the

capacity to meet peak demand intensity, but once

this is reached, may need to cope with excess

capacity as intensity eases. This holds for

processing-driven materials such as aluminium

and steel, as well as mined commodities such as

iron ore and copper.

Perhaps one way of identifying this is the peak

value of per capita demand. We have stripped out

the entire trend data in the development curves for

both steel and copper (see Charts 11 and 12), butleft Chinese demand in 2010 in as trend data. In

terms of copper demand, demand per capita is only

46% of the comparative series in this analysis

(Europe, Japanese, emerging Asia and the US). At

current rates of demand growth, it will take nine

years to reach the average of these four series.

The same exercise for steel yields a similar result

– splitting out peak steel intensities for our data

series (we have used Taiwan, Korea, Japan and

the US) indicates demand is 47% of a simple

average of peak values, and 56% of peak values

seen in the US and Japan. This gap, at current

rates of steel demand growth, will take six to eight

years to close. As we discuss earlier, steel

intensity (and hence also iron ore demand) is

more variable than copper due to export

dependency and urbanisation styles but, in any

case, China remains well below all levels.

Chart 9: US, China, India, Korea, Japan & Taiwan – Steel kuznet curves

0

200

400

600

800

1,000

1,200

1,400

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000

Real GPD per Capita

C o n s u m p t i o n p e r C a p i t a ( k g )

US* China India Korea Japan Taiw an

Source: USGS, GGDC and HSBC calculations * US data from 1900; rest of world 1974.



11



20 September 2011

abc

Chart 11: Steel – Peak demand intensity and China’s currentposition

0

200

400

600

800

1,000

1,200

1,400

1,000 10,000 100,000

Income per capita (PPP) Log Scale

S t e e l c o n s u m p t i o n k g / c a p i t a

USA China Korea

Japan India Taiwan

China in 2010

Intensity is

47% of

average

peak values;

requires 6-

8yrs of

growth at

curent rates

to approach

that level

Source: USGS, IISI, GGDC and HSBC calculations *Log scale.

Chart 12: Copper – Peak demand intensity and China’scurrent position

0

2

4

6

8

10

12

14

1,000 10,000 100,000

Income per Capita (PPP)*

C u d e m a n d p e r C a p i t a ( k g )

US China IndiaEurope Japan Em. Asia

China 46% of

typical peak

intensity;requires 9 yrs

at cu rrent

growth rate to

approach that

level

Source: USGS, GGDC and HSBC calculations *Log scale.

Why does the inflection point matterfor stocks?

Commodity markets struggle to keep up with

structurally high demand, and are likely to

continue to struggle until China reaches an

inflection point in demand intensity. The history

of commodity markets is that supply responses,

on their own, take a very large amount of time to

return a market to long-run prices.

As such, operating profit margins are likely tostay above normal for a period – we discussed this

specifically in our piece “The end of the metals

cycle?” on 27 June. Here we looked at the value

of cash flow above normal long-run operating

profit margins (30%) for a major miner (Rio

Tinto). Assuming this excess cash has value (it

will either be returned, eg buybacks, special

dividends – or grow the business, M&A or

organic growth), it is possible to produce a grid of

the value of this cash. There are two elements tothe value of excess cash – how high margins will

be relative to history and for how long. Table 1

reflects the cumulative NPV of this excess cash as

a percentage of the current stock price for

differing operating profit margins.

Table 1: NPV of excess cash flow at differing operating profitmargins and years to normality

Op. profit margin _________ Years to normality __________1 2 3 4 5

30% 5% 9% 13% 17% 20%35% 7% 13% 19% 24% 29%40% 9% 18% 26% 33% 40%45% 12% 24% 34% 43% 52%50% 16% 30% 43% 55% 66%55% 20% 38% 54% 69% 83%


http://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=wLB6hWfStH&n=301648.PDF






12



20 September 2011

abc

An analysis of “steel in place”An alternative way of thinking about maturity is

to look at “steel in place”, or effectively the

amount of steel required in total to build a

developed economy. This is far rarer analysis and

the only data that we are aware of has been

produced by the US Geological Survey (USGS).

The last data that we are aware of is for 2002,

where 4.13Bt of steel was “in place”, ie in the

general economy, in the form of cars, bridges,

infrastructure, housing, white goods, etc. Given

the rate of increase from 1995 to 2002, this figure

is likely to stand at approximately 4.6bn tonnes in

2010. In 2002, the steel in place represented 14.4

tonnes per head.

Chart 13: US – Steel stocks in use (1960s-2002)

0.0

0.8

1.5

2.3

3.0

3.8

4.5

Mid

1960s

1975 1985 1995 2001

T o t a l ( B i l l i o n

t o n n e s )

0

4

8

12

16

T o n n e s P e r

C a p i t a

Total Per Capita

Source: USGS, IISI, GGDC and HSBC calculations

Unfortunately we are not aware of similar “steel

in use” data for other nations (particularly where

urbanisation is more Asian in nature), but using

historical steel demand trends, we can make an

approximate estimate.

For Japan, we have annual demand data back to the

early 1970s and some data points to the mid-1960s

and early 1950s, which we have interpolated using

compound growth rates (see Chart 14 on the next

page). This data points to cumulative steel demand

of 3.24bn tonnes since 1950.

Converting this into per-capita demand yields

25t/person, 73% higher than the steel in use in the

US. This is not quite a valid comparison as we are

ignoring a number of factors here, particularly losses

due to scraping and redundancy of previous use.

But if we look at the US as a guide, we do know

both the historical cumulative demand as well.

Steel in place of 4.13bn tonnes in 2002

represented 53% of cumulative demand since

1900 and 71% since 1950. Applying this 71%ratio to Japanese per capita usage (based on

historical cumulative demand) implies steel in

place of 18.3t/head, 26% higher than US levels.

There are potential complicating factors here (eg

technological changes in end-use demand, scrap

recovery and the pace of development), but it does

indicate that the Asian style of urbanisation is

likely to require higher levels of steel in place.

The reasons for this are likely to be more dense

urban areas requiring higher buildings and moregeneral infrastructure, and this is likely to apply

directly to China.

Table 2: China – estimate of steel in place per capita*

___ Steel in place ____ __Cumulative demand__Total

(Bt)Per capita

(t)Since 1950

(Bt)Ratio

US 4.13 14.4 5.82 71%Japan 2.3 18.3 3.24 71%

Since 1990 BtChina 4.66 3.47 5.18 90%

Source: USGS, IISI, GGDC and HSBC calculations *Base reported data is shaded.

So how does China compare? The evidence is

that it is still in its infancy. If we look at

cumulative demand since 1990 (the limit of our

data on steel demand, as pre-1990 demand was

very small) we find that steel consumed (to end of

2011e) totals 5.18bn tonnes. Applying the US rate

of wastage implies around 90% (4.66bn tonnes) of

this cumulative demand would still be in place, or

3.47t/capita (see Table 2).



13



20 September 2011

abc

Chart 15: US – Cumulative Steel Demand (1900-2002)

0

2

4

6

8

1 9 0 0

1 9 1 0

1 9 2 0

1 9 3 0

1 9 4 0

1 9 5 0

1 9 6 0

1 9 7 0

1 9 8 0

1 9 9 0

2 0 0 0

B i l l i o n T o n n e s

Since 1900 Since 1950


This is 24% of US levels and 19% of Japanese

levels. It will take until 2026 to reach the US

average and until 2029 to reach the Japanese level

of intensity using the CAGR of the past five years

and allowing for losses. It is worth remembering

that in terms of total infrastructure and materialsinvestment, China is nowhere near maturity.

Chart 14: Japanese cumulative steel demand

0

20

40

60

80

100

1 9 5 0

1 9 5 4

1 9 5 8

1 9 6 2

1 9 6 6

1 9 7 0

1 9 7 4

1 9 7 8

1 9 8 2

1 9 8 6

1 9 9 0

1 9 9 4

1 9 9 8

2 0 0 2

2 0 0 6

2 0 1 0

C u m u l a t i v e ( B i l l i o n T o n n e s )

0

500

1,000

1,500

2,000

2,500

3,000

3,500

A n n u a l ( M i l l i o n T o n n e s )

Reported Annual Interpolated Annual Cumulativ e


Chart 16: Japanese cumulative steel demand (absolute and per capita)

0

5

10

15

20

25

30

1 9 5 0

1 9 5 4

1 9 5 8

1 9 6 2

1 9 6 6

1 9 7 0

1 9 7 4

1 9 7 8

1 9 8 2

1 9 8 6

1 9 9 0

1 9 9 4

1 9 9 8

2 0 0 2

2 0 0 6

2 0 1 0

A b s o l u t e ( B i l l i o n T o n n e s )

0

500

1,000

1,500

2,000

2,500

3,000

3,500

P e r C a p i t a ( T o n n e s )

Per Capita Absolute




14



20 September 2011

abc

But this is not a cyclicalforecast

Knowing that there is plenty of structural

headroom to demand is reassuring at times such

as these (and reassuring when looking at organic

growth plans of the majors), but valid pushback

would be that this structural upside existed at the

end of 2008 and did not prevent a downturn in

global metals demand in 2009 (although we

would strongly argue was the main reason for oneof the shortest commodity recessions on record).

Why should we escape this time?

Slower demand growth in 2012

Firstly, how will demand growth be affected by a

slowing world? The HSBC Economics team

recently (6 September 2011) cut its estimates for

global GDP growth – please see the report “The

New Global Cooling” for full details.

For metals, the critical elements are the mix of developed and Chinese demand growth. We

include in the appendix the demand-grid analysis

methodology we used in our report of 27 June

“The end of the Metals Cycle?” We expand these

growth/metals demand relationships in Chart 18

on page 16.

The net impact on global metals demand from our

lower growth forecasts is a lowering from 4.8% to

3.9% (we have used the “Developed Market”

GDP number for the World ex China).

Although a drop of the order of 1 percentage point

in demand sounds negligible, commodity markets

do tend to turn on fine margins. However, for a

balanced market, this could generate 3.6 days of

inventory over the course of a year, not overly

significant for the market which holds between 14

and 45 days of exchange inventory (see Chart 19

on page 17), especially given that inventory/price

relationships have become substantially less

reliable than in the past.

Table 3: HSBC growth and Inflation forecasts

______________ An uphill struggle ______________ ______________ Latest forecasts _______________GDP 2011f 2012f 2011f 2012f

World* 3.0 3.4 2.6 2.8Developed 1.8 2.3 1.3 1.6Emerging 6.3 6.2 6.2 6.1US 2.5 2.9 1.6 1.7UK 1.2 1.6 1.1 1.3Eurozone 2.0 1.4 1.6 0.7Japan -0.6 2.4 -0.6 2.4Turkey 5.8 3.7 5.1 3.0Brazil 4.1 4.4 3.5 4.0Russia 5.5 4.0 4.2 3.0India 7.5 8.1 7.4 8.0China 8.9 8.6 8.9 8.6

______________ An uphill struggle ______________ ______________ Latest forecasts _______________Inflation 2011f 2012f 2011f 2012f

World* 3.4 2.5 3.5 2.6Developed 2.5 1.5 2.6 1.6Emerging 6.4 5.8 6.3 5.7US 2.9 1.5 3.1 1.8UK 4.3 2.2 4.4 2.3Eurozone 2.7 1.9 2.7 1.8Japan -0.1 -0.3 -0.1 -0.3Turkey 6.4 7.1 5.9 7.4

Brazil 6.5 5.3 6.5 5.7Russia 9.6 8.5 8.6 7.6India 8.0 7.7 8.6 7.5China 4.8 2.9 4.8 2.9

Source: HSBC estimates, *Nominal GDP weights; An uphill struggle : HSBC previous forecasts published in Global Economics, Q3 2011 (29 June 2011).

http://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=GzXWBV00Vw&n=307610.PDF








15



20 September 2011

abc

The real risk for metals arguably comes at the

start of economic weakness (and this is again

borne out by the significant upcycles in inventory;

see Chart 19). The underlying reason for this is

the behaviour of physical buyers. When end-use

demand is strong and manufacturing output is

close to full capacity, purchasing managers stock

up on raw materials. These stocks protect them

from any interruptions to the supply chain, and

also reward purchasing managers as prices

increase over time. In an economic downturn,

these concerns reverse, and average inventory

levels are typically cut. In 2008/09, this process

was particularly vicious as credit markets

contracted, requiring working capital to be

liquidated as much as possible.

Even if sentiment along the value chain turns as or

more negative than it did in 2008, we doubt that

the same amount of industrial destocking is likely

to occur. We are entering the current period of

weakness from anaemic growth, not strength, and

we doubt that the industrial manufacturing chain

ever fully restocked.

Therefore our overall impression is that developed

market weakness in 2012 along the lines of our

economic forecast will weigh only lightly onmetals markets. We have already accounted for a

softening of many key commodity prices into

2012, and do not see a reason for any revision on

the current evidence.



16



20 September 2011

abc

Chart 18: Exchange inventories, days of demand

0

10

20

30

40

50

60

70

S e p

- 9 1

S e p

- 9 2

S e p

- 9 3

S e p

- 9 4

S e p

- 9 5

S e p

- 9 6

S e p

- 9 7

S e p

- 9 8

S e p

- 9 9

S e p

- 0 0

S e p

- 0 1

S e p

- 0 2

S e p

- 0 3

S e p

- 0 4

S e p

- 0 5

S e p

- 0 6

S e p

- 0 7

S e p

- 0 8

S e p

- 0 9

S e p

- 1 0

S e p

- 1 1

I n v e n t o r y ( D a y s o f D e m a n d )

Copper Zinc Nickel Aluminium

Source: Thomson Reuters Datastream, LME, SHFE, Comex and HSBC calculations

Chart 17: Economic growth and metal demand growth in China and the World ex-China

GDP growth -1.00% 0.00% 0.20% 0.40% 0.60% 0.80% 1.00% 1.20% 1.30% 1.40% 1.60% 1.80% 2.00% 3.00% 4.00%

Metal demand -8.1% -5.2% -4.7% -4.1% -3.5% -3.0% -2.4% -1.8% -1.5% -1.2% -0.7% -0.1% 0.5% 3.3% 6.2%

5.00% -1.6% -5.5% -3.8% -3.5% -3.1% -2.8% -2.4% -2.1% -1.7% -1.6% -1.4% -1.1% -0.7% -0.4% 1.4% 3.1%

6.00% 1.9% -4.1% -2.4% -2.0% -1.7% -1.4% -1.0% -0.7% -0.3% -0.2% 0.0% 0.4% 0.7% 1.0% 2.8% 4.5%

7.00% 5.4% -2.7% -1.0% -0.6% -0.3% 0.0% 0.4% 0.7% 1.1% 1.3% 1.4% 1.8% 2.1% 2.5% 4.2% 5.9%

7.50% 7.2% -2.0% -0.3% 0.1% 0.4% 0.8% 1.1% 1.4% 1.8% 2.0% 2.1% 2.5% 2.8% 3.2% 4.9% 6.6%

8.00% 8.9% -1.3% 0.4% 0.8% 1.1% 1.5% 1.8% 2.1% 2.5% 2.7% 2.8% 3.2% 3.5% 3.9% 5.6% 7.3%

8.10% 9.3% -1.2% 0.6% 0.9% 1.3% 1.6% 1.9% 2.3% 2.6% 2.8% 3.0% 3.3% 3.7% 4.0% 5.7% 7.4%

8.20% 9.6% -1.0% 0.7% 1.1% 1.4% 1.7% 2.1% 2.4% 2.8% 2.9% 3.1% 3.5% 3.8% 4.1% 5.9% 7.6%

8.30% 10.0% -0.9% 0.8% 1.2% 1.5% 1.9% 2.2% 2.6% 2.9% 3.1% 3.3% 3.6% 3.9% 4.3% 6.0% 7.7%

8.40% 10.3% -0.7% 1.0% 1.3% 1.7% 2.0% 2.4% 2.7% 3.1% 3.2% 3.4% 3.7% 4.1% 4.4% 6.1% 7.9%

8.50% 10.7% -0.6% 1.1% 1.5% 1.8% 2.2% 2.5% 2.8% 3.2% 3.4% 3.5% 3.9% 4.2% 4.6% 6.3% 8.0%

8.60% 11.0% -0.4% 1.3% 1.6% 2.0% 2.3% 2.6% 3.0% 3.3% 3.5% 3.7% 4.0% 4.4% 4.7% 6.4% 8.1%

8.80% 11.7% -0.2% 1.6% 1.9% 2.2% 2.6% 2.9% 3.3% 3.6% 3.8% 4.0% 4.3% 4.6% 5.0% 6.7% 8.4%

8.90% 12.1% 0.0% 1.7% 2.0% 2.4% 2.7% 3.1% 3.4% 3.8% 3.9% 4.1% 4.4% 4.8% 5.1% 6.8% 8.6%

9.00% 12.4% 0.1% 1.8% 2.2% 2.5% 2.9% 3.2% 3.6% 3.9% 4.1% 4.2% 4.6% 4.9% 5.3% 7.0% 8.7%

10.00% 16.0% 1.5% 3.2% 3.6% 3.9% 4.3% 4.6% 5.0% 5.3% 5.5% 5.6% 6.0% 6.3% 6.7% 8.4% 10.1%

11.00% 19.5% 2.9% 4.7% 5.0% 5.3% 5.7% 6.0% 6.4% 6.7% 6.9% 7.1% 7.4% 7.7% 8.1% 9.8% 11.5%

G D P g r o w t h

M e t a l D e m a n d

C H

I N A

World Excluding China

Source GGDC, Brook Hunt, MG and HSBC calculations



17



20 September 2011

abc

Spot commodity prices vs. HSBC estimatesChart 19: Copper Chart 22: Iron Ore

6,000

7,000

8,000

9,000

10,000

11,000

D e c - 0 9

J u n - 1 0

D e c - 1 0

J u n - 1 1

D e c - 1 1

J u n - 1 2

D e c - 1 2

U S D / t

Spot prices Av erage spotEstimated av erage

120

140

160

180

200

D e c - 0 9

J u n - 1 0

D e c - 1 0

J u n - 1 1

D e c - 1 1

J u n - 1 2

D e c - 1 2

U S D / t


Source: LME and HSBC estimates Source: Bloomberg and HSBC estimates

Chart 20: Aluminium Chart 23: Thermal Coal

1,800

2,100

2,400

2,700

3,000

D e c - 0 9

J u n - 1 0

D e c - 1 0

J u n - 1 1

D e c - 1 1

J u n - 1 2

D e c - 1 2

U S D / t

Spot prices Av erage spotEstimated average

65

75

8595

105

115

125

135

D e c - 0 9

J u n - 1 0

D e c - 1 0

J u n - 1 1

D e c - 1 1

J u n - 1 2

D e c - 1 2

U S D / t


Source: LME and HSBC estimates Source: CRU and HSBC estimates

Chart 21: Nickel Chart 24: Coking Coal

16,000

18,000

20,000

22,000

24,000

26,000

28,000

30,000

D e c - 0 9

J u n - 1 0

D e c - 1 0

J u n - 1 1

D e c - 1 1

J u n - 1 2

D e c - 1 2

U S D / t

Spot prices Av erage spot

Estimated av erage

230

250

270

290

310

D e c - 0 9

J u n - 1 0

D e c - 1 0

J u n - 1 1

D e c - 1 1

J u n - 1 2

D e c - 1 2

U S D / t

Spot prices Av erage spot

Estimated av erage

Source: LME and HSBC estimates Source: CRU and HSBC estimates



18



20 September 2011

abc

Appendix I:Demand grid methodology

Our demand grid analysis uses an index of metals

demand back to 1960 (HSBC Metals Demand

Index, HMDI). The weighting of this index

represents the value of global production over

time at long-run prices (2010 weights: copper

41%, aluminium 41%, nickel 10% and zinc 9% –

see Chart 25 below for index weighting over

time). Metals generally behave similarly throughthe cycle in terms of demand, so in our view a

weighted average index of demand is a valid

indicator of industry-wide trends.

Chart 25: HSBC Metal Demand Index – weighted by metal

0%

10%

20%

30%

40%

50%

60%

1 9 5 9

1 9 6 7

1 9 7 5

1 9 8 3

1 9 9 1

1 9 9 9

2 0 0 7

I n d

e x W e i g h t

Copper Aluminium Nickel Zinc

Source: Brook Hunt, MG, HSBC calculations

As Chart 26 shows, there is a clear pattern to

metals demand around recessions – usually a large

fall, followed by recovery, then a return to trend.

These falls in the HDMI unsurprisingly coincide

with recessions (mid-1970s, early-1980s, early-

1990s, 2001) and 2009 was no exception, with a

contraction of 6%. Our data indicate that 2010

saw the traditional rebound, with an expansion of

11% – again only surpassed by the mid-1970s

cycle. This exaggerated cycle of demand is due to

working capital movements throughout the

manufacturing chain.

It is important to emphasise that recovery is

usually followed by a return to trend.

Consensus was very bullish about the metals cycle

at the start of this year, yet it was almost certain to

see a moderation in demand growth. We forecast

growth of 7% in 2011 and further moderation

towards 5% in 2012.

Chart 26: HSBC Metal Demand Index – absolute level andannual growth

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

1 9 6 0

1 9 6 5

1 9 7 0

1 9 7 5

1 9 8 0

1 9 8 5

1 9 9 0

1 9 9 5

2 0 0 0

2 0 0 5

2 0 1 0

0

200

400

600

800

1000

Demand Grow th Metal Demand Index


What are the risks around this view? Supply in

most markets is growing due to surging capital

spending (more on this below) but generally

speaking, only demand growth rates less than 3%

(which is the long-term trend) will be a concern

and a move towards another contraction is a major

negative catalyst for the sector.

To calculate the risk, we have divided demand as

Chinese and non-Chinese (see Chart 27 below).



19



20 September 2011

abc

Chart 27: Metals Demand Index – China & Non-China

0

5

10

15

20

25

30

35

1985 1989 1993 1997 2001 2005 2009 2013

H D M I

Wor ld ex -China China


Chart 28 shows it is clear that Chinese demand has

had an increasingly positive effect on average rates

of metals demand growth globally. In part this is

because average rates of demand growth are

higher, but also because the proportion of demand

accounted for by China has risen over time.

Chart 28: Metals Demand Index Growth – China & Non-China

-20%

-10%

0%

10%

20%

30%

40%

1

9 8 6

1

9 9 1

1

9 9 6

2

0 0 1

2

0 0 6

2 0

1 1 E

M e t a l D e m a n d G r o w t h

Global China World ex China

-20%

-10%

0%

10%

20%

30%

40%

1

9 8 6

1

9 9 1

1

9 9 6

2

0 0 1

2

0 0 6

2 0

1 1 E

M e t a l D e m a n d G r o w t h

Global China World ex China


We have correlated these separate indices for

China and non-China against GDP growth in each

region. For the “World ex China”, this analysis

yields a reasonably well-known relationship:

economic growth is positively and reliably

correlated with metal usage with an intercept

around 2% (ie developed economies generally

need to grow by 2% to prevent metal demand

from shrinking).

Chart 29: Global metals demand accounted for by China1970-2011

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1 9 7 0

1 9 7 4

1 9 7 8

1 9 8 2

1 9 8 6

1 9 9 0

1 9 9 4

1 9 9 8

2 0 0 2

2 0 0 6

2 0 1 0

C h i n e s e s h a r e w o r l d d e m a n d %

Copper Aluminium ZincSteel Nickel

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1 9 7 0

1 9 7 4

1 9 7 8

1 9 8 2

1 9 8 6

1 9 9 0

1 9 9 4

1 9 9 8

2 0 0 2

2 0 0 6

2 0 1 0

C h i n e s e s h a r e w o r l d d e m a n d %

Copper Aluminium ZincSteel Nickel


Chart 30: GDP & metals demand – World ex China

y = 2.8264x - 0.0524

R2 = 0.7243

-20%

-15%

-10%

-5%

0%

5%

10%

-4% -2% 0% 2% 4% 6%

World ex China GDP Growth

W o r l d E x C h i n a D e m a n d

Source: GGDC, Brook Hunt, MG, HSBC calculations

For China, the relationship is less reliable, but still

workable – Chart 31 below shows the correlationof the Chinese portion of the HMDI post 1994 with

GDP (as the charts on this page show, Chinese

metal demand growth was very volatile up to the

mid-1990s, but it was also relatively immature).



20



20 September 2011

abc

Chart 31: GDP & metals demand – China

y = 3.5207x - 0.1924

R2 = 0.4396

0%

10%

20%

30%

40%

4% 6% 8% 10% 12% 14%

Chinese GDP Growth

C h i n e s e D e m a n d

Source: GGDC, Brook Hunt, MG, H SBC calculations

This relationship shows that metal demand in

China is geared more to the rate of economic

growth than in the West – the gradient of the

relationship is higher, and the intercept is at 5.5%

(ie GDP growth in China needs to be 5.5%

according to this relationship to prevent metal

demand from contracting). In reality, the threat of

China growing at this slower rate is probably lessthan this historical relationship implies, as it is

likely that the demand relationship for metal will

slowly shift to that of a more developed nation

(more steady consumer-driven demand for metal in

white goods, packaging and consumer goods rather

than stimulus/infrastructure driven spurts of

demand). In the short run, however, the

downside of such elastic metal demand growth

cannot be denied.

It is possible to combine these two relationships to

provide a grid of global demand outcomes for

different combinations of economic growth(shown in Chart 32). At 2011 GDP growth of 9%

for China and 2% for the rest of the world, these

relationships indicate global metals demand

growth rates of 5.3%, below the 7% average

growth over 2002-07 (the up-cycle following the

last recession), but in line with the 10-year

average to 2011. Also, our bottom-up demand

analysis by metal is for average growth of 7% –

slightly higher due to specific reasons in each

industry (notably tightness in some scrap marketsboosting demand for primary metal).

Chart 32: Economic growth and metal demand growth in China and the World ex-China

GDP growth -1.00% 0.00% 0.20% 0.40% 0.60% 0.80% 1.00% 1.20% 1.30% 1.40% 1.60% 1.80% 2.00% 3.00% 4.00%

Metal demand -8.1% -5.2% -4.7% -4.1% -3.5% -3.0% -2.4% -1.8% -1.5% -1.2% -0.7% -0.1% 0.5% 3.3% 6.2%

5.00% -1.6% -5.5% -3.8% -3.5% -3.1% -2.8% -2.4% -2.1% -1.7% -1.6% -1.4% -1.1% -0.7% -0.4% 1.4% 3.1%

6.00% 1.9% -4.1% -2.4% -2.0% -1.7% -1.4% -1.0% -0.7% -0.3% -0.2% 0.0% 0.4% 0.7% 1.0% 2.8% 4.5%

7.00% 5.4% -2.7% -1.0% -0.6% -0.3% 0.0% 0.4% 0.7% 1.1% 1.3% 1.4% 1.8% 2.1% 2.5% 4.2% 5.9%

7.50% 7.2% -2.0% -0.3% 0.1% 0.4% 0.8% 1.1% 1.4% 1.8% 2.0% 2.1% 2.5% 2.8% 3.2% 4.9% 6.6%

8.00% 8.9% -1.3% 0.4% 0.8% 1.1% 1.5% 1.8% 2.1% 2.5% 2.7% 2.8% 3.2% 3.5% 3.9% 5.6% 7.3%

8.10% 9.3% -1.2% 0.6% 0.9% 1.3% 1.6% 1.9% 2.3% 2.6% 2.8% 3.0% 3.3% 3.7% 4.0% 5.7% 7.4%

8.20% 9.6% -1.0% 0.7% 1.1% 1.4% 1.7% 2.1% 2.4% 2.8% 2.9% 3.1% 3.5% 3.8% 4.1% 5.9% 7.6%

8.30% 10.0% -0.9% 0.8% 1.2% 1.5% 1.9% 2.2% 2.6% 2.9% 3.1% 3.3% 3.6% 3.9% 4.3% 6.0% 7.7%

8.40% 10.3% -0.7% 1.0% 1.3% 1.7% 2.0% 2.4% 2.7% 3.1% 3.2% 3.4% 3.7% 4.1% 4.4% 6.1% 7.9%

8.50% 10.7% -0.6% 1.1% 1.5% 1.8% 2.2% 2.5% 2.8% 3.2% 3.4% 3.5% 3.9% 4.2% 4.6% 6.3% 8.0%

8.60% 11.0% -0.4% 1.3% 1.6% 2.0% 2.3% 2.6% 3.0% 3.3% 3.5% 3.7% 4.0% 4.4% 4.7% 6.4% 8.1%

8.80% 11.7% -0.2% 1.6% 1.9% 2.2% 2.6% 2.9% 3.3% 3.6% 3.8% 4.0% 4.3% 4.6% 5.0% 6.7% 8.4%

8.90% 12.1% 0.0% 1.7% 2.0% 2.4% 2.7% 3.1% 3.4% 3.8% 3.9% 4.1% 4.4% 4.8% 5.1% 6.8% 8.6%

9.00% 12.4% 0.1% 1.8% 2.2% 2.5% 2.9% 3.2% 3.6% 3.9% 4.1% 4.2% 4.6% 4.9% 5.3% 7.0% 8.7%

10.00% 16.0% 1.5% 3.2% 3.6% 3.9% 4.3% 4.6% 5.0% 5.3% 5.5% 5.6% 6.0% 6.3% 6.7% 8.4% 10.1%

11.00% 19.5% 2.9% 4.7% 5.0% 5.3% 5.7% 6.0% 6.4% 6.7% 6.9% 7.1% 7.4% 7.7% 8.1% 9.8% 11.5%

G D P g r o w t h

M e t a l D e m a n d

C H I N A

World Excluding China

Source GGDC, Brook Hunt, MG and HSBC calculations



21



20 September 2011

abc

Appendix II:Detailed usage curves

Chart 33: Common commodity intensity curves

Steel intensity - USA from 1900, EU15 from 1950 China f rom 1974

0

100

200

300

400

500

600

700

0 5000 10000 15000 20000 25000 30000 35000

real GPD/capita

S t e e l c o n s u m p

t i o n k g / c a p i t a

China EU15 U SA

early

70s

mid 50s

Steel intensity - USA from 1900, all others from 1974

0

200

400

600

800

1,000

1,200

1,400

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000

real GPD/capita

S t e e l c o n s u m p t i o n k g / c a p i t a

US from 1900 China Korea Japan India Taiw an

Source: USGS, GGDC, National Bureau of Statistics Ch ina and HSBC analysis



22



20 September 2011

abc

Notes



23



20 September 2011

abc

Notes



24



20 September 2011

abc

Notes



26



20 September 2011

abc

stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the pastmonth's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,

however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

Rating distribution for long-term investment opportunities

As of 16 September 2011, the distribution of all ratings published is as follows:

Overweight (Buy) 54% (26% of these provided with Investment Banking Services)

Neutral (Hold) 35% (21% of these provided with Investment Banking Services)

Underweight (Sell) 11% (21% of these provided with Investment Banking Services)

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment

banking revenues.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that

company available at www.hsbcnet.com/research.

* HSBC Legal Entities are listed in the Disclaimer below.

Additional disclosures

1 This report is dated as at 20 September 2011.2 All market data included in this report are dated as at close 16 September 2011, unless otherwise indicated in the report.3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its

Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Researchoperate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrierprocedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/orprice sensitive information is handled in an appropriate manner.



27



20 September 2011

abc

Disclaimer

* Legal entities as at 04 March 2011

‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation

Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; ‘CA’ HSBC Securities (Canada)

Inc, Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf;

000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai;

‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC

Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking

Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul

Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC

Securities (South Africa) (Pty) Ltd, Johannesburg; ‘GR’ HSBC Securities SA, Athens; HSBC Bank plc,

London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim

Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC;

HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC

Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch

Issuer of report

HSBC Bank plc

8 Canada Square

London, E14 5HQ, United Kingdom

Telephone: +44 20 7991 8888

Fax: +44 20 7992 4880

Website: www.research.hsbc.com

In the UK this document has been issued and approved by HSBC Bank plc (“HSBC”) for the information of its Clients (as defined in the Rules of FSA) and

those of its affiliates only. It is not intended for Retail Clients in the UK. If this research is received by a customer of an affiliate of HSBC, its provision to the

recipient is subject to the terms of business in place between the recipient and such affiliate.

HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All U.S. persons receiving

and/or accessing this report and wishing to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United

States and not with its non-US foreign affiliate, the issuer of this report.

In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of

institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (“SFA”) and accredited investors and

other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It

may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated

by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore

Branch" representative in respect of any matters arising from, or in connection with this report.

In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for

the general information of its “wholesale” customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is

distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned

in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No

consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient.

This publication has been distributed in Japan by HSBC Securities (Japan) Limited. It may not be further distributed, in whole or in part, for any purpose. In

Hong Kong, this document has been distributed by The Hongkong and Shanghai Banking Corporation Limited in the conduct of its Hong Kong regulated

business for the information of its institutional and professional customers; it is not intended for and should not be distributed to retail customers in Hong

Kong. The Hongkong and Shanghai Banking Corporation Limited makes no representations that the products or services mentioned in this document are

available to persons in Hong Kong or are necessarily suitable for any particular person or appropriate in accordance with local law. All inquiries by such

recipients must be directed to The Hongkong and Shanghai Banking Corporation Limited. In Korea, this publication is distributed by The Hongkong and

Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") for the general information of professional investors specified in Article 9 of

the Financial Investment Services and Capital Markets Act (“FSCMA”). This publication is not a prospectus as defined in the FSCMA. It may not be further

distributed in whole or in part for any purpose. HBAP SLS is regulated by the Financial Services Commission and the Financial Supervisory Service of Korea.

This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch.

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has

based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee,

representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. The opinions contained within the report are based

upon publicly available information at the time of publication and are subject to change without notice.

Nothing herein excludes or restricts any duty or liability to a customer which HSBC has under the Financial Services and Markets Act 2000 or under the Rules

of FSA. A recipient who chooses to deal with any person who is not a representative of HSBC in the UK will not enjoy the protections afforded by the UK

regulatory regime. Past performance is not necessarily a guide to future performance. The value of any investment or income may go down as well as up and

you may not get back the full amount invested. Where an investment is denominated in a currency other than the local currency of the recipient of the research

report, changes in the exchange rates may have an adverse effect on the value, price or income of that investment. In case of investments for which there is no

recognised market it may be difficult for investors to sell their investments or to obtain reliable information about its value or the extent of the risk to which it

is exposed.

HSBC Bank plc is registered in England No 14259, is authorised and regulated by the Financial Services Authority and is a member of the London Stock

Exchange.

© Copyright. HSBC Bank plc 2011, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted,

on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Bank plc. MICA

(P) 208/04/2011 and MICA (P) 040/04/2011

[308437]



abc

Metals and Mining

EMEAAndrew KeenGlobal Sector Head, Metals and Mining +44 20 7991 6764 [email protected]

Lourina Pretorius+44 20 7992 3686 [email protected]

Thorsten Zimmermann, CFA+44 20 7991 6835 [email protected]

Vladimir Zhukov+7 495 783 8316 [email protected]

North America & Latin AmericaJonathan Brandt+1 212 525 4499 [email protected]

Lucia Marquez+1 212 525 7669 [email protected]

James Steel+1 212 525 3117 [email protected]

Sabrina M Grandchamps+1 212 525 5150 [email protected]

Patrick Chidley, CFA+1 212 525 4915 [email protected]

Richard Trotman+1 212 525 4914 [email protected]

AsiaSarah Mak +852 2822 4551 [email protected]

Jigar Mistry, CFA+91 22 2268 1079 [email protected]

Energy

EuropePaul SpeddingGlobal Sector Co-head, Oil and Gas +44 20 7991 6787 [email protected]

David PhillipsGlobal Sector Co-head, Oil and Gas +44 20 7991 2344 [email protected]

Peter Hitchens+44 20 7991 6822 [email protected]

Kirtan Mehta, CFA+91 80 3001 3779 [email protected]

CEEMEA, LatamAnisa Redman+1 212 525 4917 [email protected]

Bülent Yurdagül

+90 212 376 46 12 [email protected]

Ildar Khaziev, CFA+7 495 645 4549 [email protected]

AsiaSonia Song, CFA+852 2996 6557 [email protected]

Dennis Yoo+852 2996 6917 [email protected]

Kumar Manish+91 22 2268 1238 [email protected]

Puneet Gulati+91 22 681235 [email protected]

Alternative Energy

Robert Clover

Global Sector Head, Alternative Energy +44 20 7991 6741 [email protected]

Charanjit Singh+91 80 3001 3776 charanjit2singh@hsbc co in

Chemicals

EuropeDr Geoff Haire+44 20 7991 6892 [email protected]

Sebastian Satz, CFA+44 20 7991 6894 [email protected]

Jesko Mayer-Wegelin, CFA+49 211 910 3719 [email protected]

CEEMEAYonah Weisz+972 3 710 1198 [email protected]

Sriharsha Pappu, CFA+971 4 423 6924 [email protected]

Omprakash Vaswani+91 80 3001 3786 [email protected]

Asia

Sonia Song, CFA+852 2996 6557 [email protected]

Dennis Yoo+852 2996 6917 [email protected]

Utilities

EuropeAdam Dickens+44 20 7991 6798 [email protected]

José A López+44 20 7991 6710 [email protected]

Verity Mitchell+44 20 7991 6840 [email protected]

AsiaSuman Guliani

+91 80 3001 3747 [email protected] AmericaReginaldo Pereira+55 11 3371 8203 [email protected]

Eduardo J Gomide+55 11 3371 9502 [email protected]

CEEMEALevent BayarAnalyst +90 212 376 46 17 [email protected]

Dmytro Konovalov+7 495 258 3152 [email protected]

Credit

EuropePhilippe Landroit


Rodolphe Ranouil, CFA+44 20 7991 5918 [email protected]

Specialist Sales

Mark van Lonkhuyzen+44 20 7991 1329 [email protected]

Billal Ismail+44 20 7991 5362 [email protected]

Annabelle O'Connor+44 20 7991 5040 [email protected]

James Lesser


Global Natural Resources & Energy

Research Team

mailto:[email protected]






























The Structural vs. Cyclical Metals Debate

Documents

Transcript of The Structural vs. Cyclical Metals Debate