Commodities Through 2013: Buying Opportunities, or Buyer Beware?

Commodities Through 2013 Buying Opportunities, or Buyer Beware?

John Anton

Director, IHS Steel Service

[email protected]

(202) 481-9231

mailto:[email protected]

Copyright © 2012 IHS Inc. All Rights Reserved.

www.ihs.com/PricingPurchasing

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3

Value Prop: Quantifying price changes

A simple but powerful way to look at prices:

The Stages of Processing Model

Model highlights flows from the bottom up

(scrap to hot rolled bars)

Explains price movements by examining: production costs - labor, materials,

equipment, energy, -- along with market activity, seasonal patterns

Advantages: Model resembles production process; provides

framework to analyze sources of price change

Macroeconomic

Models

Components for

Construction

Components for

Durable

Manufacturing

Raw

Materials

Energy Models

Wages

Nonferrous

Metals

Ferrous

Metals

Machinery

and

Equipment

Consumer

GoodsFacility Costs

Figure 1

The General Interaction of Prices and Wages

Through the Stages of Processing




•Steel

• Buy now, or sit on your wallet until July or August 2013

•Organic Chemicals

• Mixed. Ethylene is flat, but for Propylene buy now

•Copper

• Live hand to mouth; waiting is to your benefit

•Aluminum

• Buy on the dips, wait for 2013H2

Buying Opportunity? Or Sit on Your Wallet?

4




Recovery Struggling To Gain Traction

0

1

2

3

4

5

2010 2011 2012 2013 2014

(Real GDP, annualized real rate of growth, Q/Q, percent)

5


../My Documents/test US/Data/US Update - New.xlsx



Credit Conditions Gradually Loosening,

Except For Home Mortgage Credit

6

-25

0

25

50

75

100

2007 2008 2009 2010 2011 2012

Large& Med.Firms

SmallFirms

-20

0

20

40

60

80

100

2007 2008 2009 2010 2011 2012

Source: Diffusion Indexes from Fed Senior Loan Officer Survey

Comm. & Ind. Credit Commercial Mortgage Credit

Consumer Loans Home Mortgage Credit

(Percent of banks reporting tightening credit conditions)

-40

-20

0

20

40

60

80

2007 2008 2009 2010 2011 2012

CreditCards

Autos

-20

0

20

40

60

80

2007 2008 2009 2010 2011 2012

Prime Loans




Housing Starts (Millions of Units)

Permanent

0.0

0.3

0.6

0.9

1.2

1.5

1.8

2.1

Fixed Multi

Mobile Homes

7

0.00

0.05

0.10

0.15

0.20

0.25




8

8

9

10

11

12

13

14

15

16

17

18

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Mil

lio

ns

8%

10%

12%

14%

16%

18%

20%

22%

24%

Volume - L Canada- R Mexico - R

`

(Units in millions)

North America - Light Vehicle Production

(Share of NA Prod.)




China Synopsis

9

• Growing strongly but not as great as recent years

• 2010 10.5%

• 2011 9.2%

• 2012 7.4%

• 2013 7.6%

• Risk of hard landing

• Balanced against government stimulus

• CANNOT CONSUME ALL STEEL BEING MADE

• Boom/Bust like the USA did from 1995 thru 2003




Greece Leaves the Euro

10

• Eurozone Sovereign Debt Crisis

• Eurozone recession deepening, euro expected to weaken

• Greece Exit

• In early 2013 Greece finds it impossible to meet obligations

• By mid-2013 (Q3 forecast) Greece leaves the euro, returns to

drachma

• ECB must get serious within a week, must act within a month

• If decisive action not taken, -4% to -6% European recession

• -1% to -2% in USA, Japan

• Hard landing in China




Steel Overview:

Meet the New Cycle, Same as the Old Cycle

• Output finally declining in China, several months too late

• Falling output tightens supply by late 2012/early 2013

• Tighter supply rallies prices late this year or early 2013

• Unfortunately, China (and probably USA) will react by

• Boosting prices too much (2013Q1)

• Restarting every ounce of idle capacity (2013H1)

• The increase in output causes prices to crash next summer

• Followed by production cuts once again in late 2013




12

Steel Fundamentals Lower Because of Iron Ore

• Miners were profitable when ore was $80-$90 per metric

tonne (mt)

• Prices moved above $150/mt in 2008 and stayed there

except for the recession

• Based on extraction cost, prices should be in $80-$100 range

• But we did not think it would happen

• Ore companies all bought the myth that Chinese steel

production would grow forever

• Now they have excess capacity and excess production




13

Hot Rolled Carbon Sheet (Dollars per metric tonne)

• Demand is good from autos, soft

from appliances

• China gross over-production

overwhelms restraint in USA

• Persistent import bargains

through 2013, assume

convergence beyond

600

700

800

900

1000

1100

1/1/2010 1/1/2012 1/1/2014 1/1/2016

USA Europe China




Petrochemicals (cents per pound)

• Low priced natural gas (ethane)

makes ethylene family cheap

• Recovering export demand keeps

PE prices from plummeting

• Propylene prices remain higher

and more volatile than ethylene

due to natural gas cracking

• More “on purpose” propylene

projects expected longer term

14

30

40

50

60

70

80

90

2010:1 2011:1 2012:1 2013:1 2014:1

Ethylene Propylene




Aluminum

• Prices already bounced

• Below production costs

• Economic stimulus impacted

investor psychology

• Choppy through the first half of

2013

• Little overall trend for six months

• Buy on the dips

• Prices tumble when Greece

leaves the euro

• Longer trend is up, but limited

15

1,750

2,000

2,250

2,500

2,750

2010:1 2011:1 2012:1 2013:1 2014:1




Copper

• Bounced when stimulus announced

• Fundamentals point down

• New mines

• Extreme profit margins

• Choppy through early 2013

• Large downward move as Greece

exits

• Longer term points down as new

mines cause profit erosion

16

6,000

7,000

8,000

9,000

10,000

2010:1 2011:1 2012:1 2013:1 2014:1




• Steel – Buy now

• Large upside rise from Australian flooding

• Nonferrous - Neutral

• Speculators can always distort the market

• Long pushes prices up

• Short pushes prices down

• Stainless Steel, Platinum, Palladium, Gold – Buy now

• Platinum, palladium, gold, and ferrochrome depend on South Africa

• South Africa is not dependable

• Mine strikes

• Very bad power grid

So, What Are the Risks?

17




Thank you!

John Anton

Director, IHS Steel Service

[email protected]




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Commodities Through 2013: Buying Opportunities, or Buyer Beware?