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Base metals outlook Drivers on the supply and demand side
February 2012
Jim Lennon
Macquarie Capital (Europe) Limited
Level 7, 28 Ropemaker St, London, UK
+44 203 037 [email protected]
Macquarie Research is a division of Macquarie Group Limited, an affiliate and parent company of Macquarie Capital (USA) Inc., a registered broker
-
dealer and member of The Financial Industry Regulatory Authority (“FINRA”). All transactions by U.S. investors involving securities discussed in this report must be effected through Macquarie Capital (USA) Inc., which assumes responsibility in the U.S. for the contents of this report.
This research report has been prepared in whole or part by foreign research analysts. These research analysts are not registered/qualified as a research analyst with FINRA, but instead have satisfied the registration/qualification requirements or other research-related standards of a foreign jurisdiction that have been recognized for these purposes by FINRA
Page 2
The supply story so farThe bull market of the past 10 years has been driven by the massive increase in Chinese demand
What has largely differentiated price performance has been supply response
Relative price performance has reflected extent to which China has been able to source its own supply to meet demand…and the cost of that supply
Non-Chinese suppliers have generally struggled to meet incremental Chinese demand
Page 3
Not all commodities have performed well and some have re-balanced
Index of selected prices since 2000
0100200300400500600700800900
100011001200130014001500
2000
2000
2001
2001
2002
2002
2003
2003
2004
2004
2005
2005
2006
2006
2007
2007
2008
2008
2009
2009
2010
2010
2011
2011
Jan
2000
= 1
00
Iron ore Au Coking coal Mo Uranium Cu Ni Steel Zn Al
Source: LME, Nymex, Platts, Tex, Metal Bulletin, CRU, Macquarie Research, February 2012
Page 4
Base metals price to cost curves…copper stands out
Source: LME, Macquarie Research, February 2012
Page 4
LME Copper prices and cash costs
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
$/to
nne
copp
er
90th percentile LME cash
LME Aluminium prices and cash costs
1,000
1,500
2,000
2,500
3,000
3,500
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
$/to
nne
alum
iniu
m
90th percentile LME cash
LME nickel prices and cash costs
0
10000
20000
30000
40000
50000
60000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
$/to
nne
nick
el90th percentile LME cash
LME zinc prices and cash costs
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
$/to
nne
zinc
90th percentile LME cash
Page 5
Iron ore hits all-time highs –
copper has been there before
Iron ore prices since 1900Annual average
0
20
40
60
80
100
120
140
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
$/to
nne
fob
Real terms (2010 $) Nominal terms (actual)
Copper prices since 1900!Annual averages
0
100
200
300
400
500
600
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
cent
s/lb
Real terms (2010 $) Nominal terms (actual)
Source: LME, USGS, Tex, Macquarie Research, February 2012
Page 6
It’s all been China for demand over the past decade…
China's share of global consumption
3% 3% 4%2%
4%5% 5%8%
4%7%
12% 13%15%
6%10%
38%42% 41% 40%
43%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Copper Aluminium Zinc Nickel Lead
% o
f tot
al
1980 1990 2000 2010
Average growth in consumption, 2000-2010
15.0%18.0%
13.9%
24.4%
18.9%
-1.3%
0.9%
-0.8% -1.7% -1.7%-5%
0%
5%
10%
15%
20%
25%
30%
Copper Aluminium Zinc Nickel Lead
% C
AG
R
China Rest of world
Source: Antaike, ICSG, ILZSG, INSG, IAI, Brook Hunt, Macquarie Research, February 2012
Page 7
Surge in demand over the past decade
Source: Antaike, ICSG, ILZSG, INSG, IAI, Brook Hunt, Macquarie Research, February 2012
Lead demand growth by decade
-1.0-0.50.00.51.01.52.02.53.03.5
1980-90 1990-2000 2000-10
mt P
b
China World Ex-China Total
Copper demand growth by decade
-2-10123456
1980-90 1990-2000 2000-10
mt C
u
China World Ex-China Total
Nickel demand growth by decade
-200-100
0100200300400500600
1980-90 1990-2000 2000-10
'000
Ni
China World Ex-China Total
Zinc demand growth by decade
-1.0-0.50.00.51.01.52.02.53.03.54.0
1980-90 1990-2000 2000-10
mt Z
n
China World Ex-China Total
Page 8
All about China in copper
Source: ICSG, IMF, Macquarie Research, February 2012
Chinese and world copper demand in the historical context
0
2500
5000
7500
10000
12500
15000
17500
20000
1900
1905
1910
1915
1920
1925
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
'000
t cop
per
China World Ex-China World
Copper consumption per person
0.0
1.0
2.0
3.0
4.0
5.0
6.0
1950
1954
1958
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010
kg c
oppe
r/cap
ita
China World ex-China World average
Page 9
How copper consumption has evolved –
no growth from 1973-1993 then take-off!
World copper consumption and GDP per capita, 1950-2011
1500
2000
2500
3000
3500
4000
4500
5000
5500
6000
6500
7000
7500
1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9
kg copper/capita
$US/
capi
ta ($
1995
) 2000
1993 1989
1983 1979
1966
19711975 1973
1962First and second oil prices and subsequent recessions led to massive light-weighting of steel-containing products
Collapse of USSR led to steel consumption collapse in Eastern Europe
Asian crisis China takes off!
1950
2009
2011
Phase 1
Phase 2
Phase 4
Global financial crisis
US hi-tech spending boom in 1990s
Phase 3
Post war expansion to 1973 led to predictions of seemingless endless growth
Source: ICSG, IMF, Macquarie Research, February 2012
Page 10
Where supply came: China dominates except in mining
Source: Antaike, ICSG, ILZSG, INSG, IAI, Brook Hunt, Macquarie Research, February 2012
Mine and
scrap
Copper supply growth
0.00.51.01.52.02.53.03.54.0
2000-10 2000-10
Mined Refined
mt c
oppe
r
China Ex-China
Zinc supply growth
0.00.51.01.52.02.53.03.54.0
2000-10 2000-10
Mined Refined
mtt
Zn
China Ex-China
Nickel supply growth
050
100150200250300350
2000-10 2000-10
Mined Refined
'000
t Ni
China Ex-China
Lead supply growth
-1.0-0.50.00.51.01.52.02.53.0
2000-10 2000-10
Mined Refined
mtt
Pb
China Ex-China
Scrap
Page 11
China has met a lot of its own requirements, especially in smelting/refining
China has excelled in smelting/refining due to:
Extremely low capital costs of building new smelters (1/4th to 1/3rd of rest of world)
Short lead times to build – 12-18months vs. 3-4 years elsewhere
Lower environmental standards (arguably now changing)
Access to cheap finance and other incentives
Source: Antaike, ICSG, ILZSG, INSG, IAI, Brook Hunt, Macquarie Research, February 2012
China's share of copper mine and refined production and consumption
4%
9%12%
8%
25%
38%
0%5%
10%15%20%
25%30%35%
40%45%
Mined Refined Consumed
% o
f tot
al
20002010
China's share of zinc mine and refined production and consumption
23% 22%
15%
29%
41% 41%
0%5%
10%
15%20%25%30%
35%40%45%
Mined Refined Consumed
% o
f tot
al
20002010
China's share of nickel mine and refined production and consumption
5% 5% 6%6%
23%
40%
0%5%
10%15%20%25%30%35%40%45%
Mined Refined Consumed
% o
f tot
al
20002010
China's share of lead mine and refined production and consumption
22%
17%
10%
46% 47%43%
0%5%
10%15%
20%25%30%
35%40%
45%50%
Mined Refined Consumed
% o
f tot
al
20002010
Page 12
We think that there is yet more growth to come, albeit slower in China than in the past decade
Source: Antaike, ICSG, ILZSG, INSG, IAI, Brook Hunt, Macquarie Research, February 2012
Trend growth in Chinese consumption
15.0%18.0%
13.9%
24.4%
18.9%
5.3%
9.5%
6.1%8.0% 7.3%
0%
5%
10%
15%
20%
25%
30%
Copper Aluminium Zinc Nickel Lead
% C
AG
R
2000-10 2010-20F
Trend growth in Ex-Chinese consumption
-1.3%
0.9%
-0.8%
-1.7% -1.7%
0.9%
1.5%1.3%
0.6%
1.3%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
Copper Aluminium Zinc Nickel Lead
% C
AG
R
2000-10 2010-20F
Page 13
Summary of demand forecasts to 2020 –
still lots of growth
Source: Antaike, ICSG, ILZSG, INSG, Macquarie Research, February 2012
Actual and "needed" supply growth for copper
1.5
4.0 4.0
6.2
0
1
2
3
4
5
6
7
1980-90 1990-2000 2000-10 2010-20F
mt r
efin
ed c
oppe
r
Mine and
scrap
Actual and "needed" supply growth for zinc
0.6
2.2
3.7
4.4
0.00.51.01.52.02.53.03.54.04.55.0
1980-90 1990-2000 2000-10 2010-20F
mt r
efin
ed z
inc
Actual and "needed" supply growth for nickel
183 166
328
808
0
100200
300400
500600
700800
900
1980-90 1990-2000 2000-10 2010-20F
'000
t ref
ined
nic
kel
Actual and "needed" supply growth for lead
0.1
1.2
2.3
4.5
0.00.51.01.52.02.53.03.54.04.55.0
1980-90 1990-2000 2000-10 2010-20F
mt r
efin
ed le
ad
Mine and
scrap
China's share of global consumption
12% 13%15%
6%10%
38%42% 41% 40%
43%
49%
60%
53%58% 57%
0%
10%
20%
30%
40%
50%
60%
70%
Copper
Aluminium Zinc
Nickel
Lead
% o
f tot
al
2000 2010 2020F
Page 14
Per capita consumption still has some way to goAluminium consumption per capita since 1950
0
5
10
15
20
25
30
35
1950
1954
1958
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010
2014
2018
kg/p
erso
n
China Japan India Korea USA
Copper consumption per capita since 1950
0
5
10
15
20
25
1950
1954
1958
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010
2014
2018
kg/p
erso
n
China Japan India Korea USA
ZInc consumption per capita since 1950
0123456789
1011
1950
1954
1958
1962
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
2010
2014
2018
kg/p
erso
n
China Japan India Korea USA
Steel consumption per capita since 1950
0
200
400
600
800
1000
1200
1400
1600
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
kg/p
erso
n
China Japan India Korea USA
Source: Antaike, ICSG, ILZSG, INSG, IAI, world steel, World Bank, Macquarie Research, February 2012
Page 15
All growth in lead is from China –
in zinc, China is all the smelting growth
Chinese zinc mine production have average 13% a year since 2000, while rest of world production has averaged 10% a year; lead mine and zinc and lead refined production has not grown outside China
Source: Brook Hunt, Macquarie Research, February 2012
Index of lead and zinc mine production
50
100
150
200
250
300
350
2000 2002 2004 2006 2008 2010
2000
= 1
00
China zinc World Ex-China zincChina lead World Ex-China lead
Index of lead and zinc metal production
50
100
150
200
250
300
350
400
2000 2002 2004 2006 2008 2010
2000
= 1
00World Ex-China lead China leadChina zinc World Ex-China zinc
Page 16
Virtually ALL nickel supply growth has come from China in recent years, mainly from nickel pig iron
Chinese nickel pig iron at the top of global cash cost curves – extremely low capex means 1-3 year capital payback possible on investments
Raw materials: low-grade nickel ores (from Indonesia/Philippines) which are plentiful and easy to mine
Source: Antaike, INSG, Brook Hunt, Macquarie Research, February 2012
World refined nickel production by quarter to 4Q 2011
250260270280290300310320330340350360370380390400410420430
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
e
'000
t Ni
World ex-NPI Total world
Chinese NPI production
0
10
20
30
40
50
60
70
80
90
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
e
'000
t Ni
Page 17
All nickel supply growth is from laterite
exports from Indonesia and Philippines
Nickel mine production by country
0
25
50
75
100
125
150
175
200
225
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
'000
t Ni
Australia Russia New Caledonia Canada
Estimated nickel ore exports from Indonesia and Philippines
-10
10
30
50
70
90
110
130
150
1Q05
4Q05
3Q06
2Q07
1Q08
4Q08
3Q09
2Q10
1Q11
4Q11
'000
t Ni (
est.)
Indonesia Philippines
Source: Antaike, INSG, Brook Hunt, Macquarie Research, February 2012
Page 18
Copper supply tightness driven by lack of China supply response
China can meet only one-third of its copper demand (from concentrate and scrap)
Non-Chinese production has not responded to price incentive over past six years
Change in global copper mine supply and average LME price
3.8%
2.6%
-0.9%
0.7%
7.3%
1.8%1.4%
2.8%
1.3% 1.7%1.3%
0.6%
-2%-1%0%1%2%3%4%5%6%7%8%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
f
min
e su
pply
: % c
hang
e yo
y
010002000300040005000600070008000900010000
LME
pric
e: $
/tonn
e
% change YoY (mine supply) LME cash price
Source: Antaike, ICSG, Brook Hunt, LME, Macquarie Research, February 2012
Chinese domestic copper supply and demand
0
1000
2000
3000
4000
5000
6000
7000
8000
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
'000
t con
tain
ed C
u
Domestic mine production and scrap generationConsumed
Page 19
Global copper mine output continues to fall short of expectations…
- 1 . 5
- 1 . 0
- 0 . 5
0
2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1
m to
nnes
cop
per c
onta
ined
- 9 %
- 6 %
- 3 %
0 %
% of global m
ine output
L H S : v o l u m e t e r m s R H S : p ro p o r t i o n a l t e r m s
Source: CRU, Wood Mackenzie, Macquarie Research, February 2012
Shortfall in global mine output compared with forecasts made one year previously
Page 19
Page 20
All sorts of reason for supply under-performing…Too much optimism from mine promoters!
Declining run-of-mine ore grades
Longer and longer lead times on key items such as mine truck tyres, SAG mills
Technical operating challenges, e.g., pit wall failures from over-mining, equipment failures from over use and maintenance postponements
Shortage of water – high and rising costs of desalination plants in Chile
Shortage of skilled labour, strikes and high labour turnover
Environmental challenges (extended time in getting approvals, etc)
Weather and earthquakes (seemingly more prevalent)
Deferral/delay of projects due to difficulty in obtaining finance amid massive capital and operating cost escalations and concerns over new legislation and fiscal regimes in mining countries
Source: Brook Hunt – A Wood Mackenzie company, Macquarie Research, February 2012
Page 21
Some reasons for copper supply disruptions
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
2004 2005 2006 2007 2008 2009 2010
Dis
rupt
ion
(% o
f Orig
inal
Pro
duct
ion
Targ
et)
Pit Walls Strikes Technical Slow Ramp Up Weather Grades Other
540kt 1190kt 1090kt 950kt 1360kt 960kt 835kt
Source: Brook Hunt – A Wood Mackenzie company, February 2012
Page 22
Head grades are falling in most metals
Falling grades reflect end of temporary high-grading, lower-quality ore deposits and reserve depletions at better ore bodies
Source: Brook Hunt – A Wood Mackenzie company, Derived from Demenc data, Macquarie Research, February 2012
Average head grade at copper mines
0.90
0.95
1.00
1.05
1.10
1.15
1.20
1.25
1.30
1.35
2000 2005 2010 2105F 2020F 2025F
% c
oppe
r
Cu
Average head grade at lead and zinc mines
5.05.25.45.65.86.06.26.46.66.87.0
2000 2005 2010 2105F2020F2025F
% z
inc
1.5
1.7
1.9
2.1
2.3
2.5
2.7
2.9
% le
ad
Zinc (LHS)Lead (RHS)
Average grade of nickel saprolite ore mined in New Caledonia
2.2%2.3%2.4%2.5%2.6%2.7%2.8%2.9%3.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
% N
i (dr
y) 1
2MM
A
Page 23
Analysis of Chilean copper mine production - running harder to stand still…
Chilean copper mine production, 2000-2011E
0
1000
2000
3000
4000
5000
6000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Cop
per (
kt)
Capacity That Existed in 2000 Brownfield expansions carried out since 2000New Mines added since 2000 Highly Probable ProjectsProbable Projects Possible ProjectsActual
Existing Chilean mines will lose another 1mtpa of production
between now and 2020 due to reserve and grade depletion
Source: WoodMac, Macquarie Research, February 2012
mt copper 2004-112004 2011E Change
Capacity that existed in 2000 4.77 3.80 -0.97
Brownfield expansions 0 0.80 0.80
Greenfield expansions 0 0.70 0.70
Actual production - total 4.77 5.30 0.53
Page 24
Copper supply needs to grow faster than demand increases due to depletions at existing operations –
this is the case for copper, which
is similar for zinc and nickel
10
15
20
25
30
35
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Rec
over
able
Min
e C
oppe
r - M
t
Base Case Mine Production Highly Prob. & Prob. Brow nfield Projects
Highly Probable Greenfield Probable Greenfield Projects
Other identif ied Projects Demand for Mine Production
Source: Brook Hunt – A Woodmac Company, Macquarie Research, February 2012
Page 25
Nickel projects abound but many are late and some may not work…
Source: Company reports, INSG, Macquarie Research, February 2012
Main changes in nickel capacity (before disruption allowance)
0
50
100
150
200
250
300
350
400
450
500
2009 2010 2011 2012F 2013F 2014F 2015F
'000t nickel
0
50
100
150
200
250
300
350
400
450
500
SNNCEagleKevitsaCunicoPT IncoNkomatiRavensthorpeTalvivaaraTaganitoCoral BayRustenburgDoniamboWestern AreasKoniamboSanta RitaRamuBarro AltoGoroOnca Puma
Actual and forecast growth in nickel supply
75
48
2232
62
1934
45
6
-49
122
156
122 126
77
40
-80
-60
-40
-20
0
20
40
60
80
100
120
140
160
180
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
F
2013
F
2014
F
2015
F
'000
t ni
Page 26
Main new projects and losses in 2011
Page 26
Source: Company reports, Macquarie Research, February 2012
000t NiCompany Project Process Capacity Start-up 1H 2011 2H 2011F 2011F 2012FVale VNC (Goro) HPAL 60 1Q 11 4 4 8 12Vale Onça Puma FeNi 53 1Q 11 1 6 7 22First Quantum Ravensthorpe HPAL 39 2H11 0 4 4 15Xstrata Koniambo FeNi 60 2H12 0 0 0 2Anglo American Barro Alto FeNi 40 1Q 11 1 5 6 26Sherritt/Kores/Sumitomo Ambatovy HPAL 60 1Q12 0 0 0 9MMC/Highland Pacific Ramu HPAL 32 2H 11 0 0 0 5Taguang Taung Nickel Taguang FeNi 23 2H 11 0 1 1 11Total 367 6 19 25 102
Losses from existing operations Deviations from "plan" (our forecasts of a year ago)Vale Canada 18BHP Billiton Colombia 10 Previous Now "Loss"BHP Billiton Australia 5 Vale - VNC 20 8 12PT Inco Indonesia 3 Vale - Onça Puma 16 7 9Pacific Metals 11 Ravensthorpe 5 4 1Xstrata Norway 2 Barro Alto 26 6 20SNNC Korea 5 Ambatovy 16 0 16Talvivarra 14 Ramu 5 0 5Total 68 Total above 88 24 64
Page 27
New projects abound (naturally) but delivery has been extremely disappointing
On paper, most markets look set to re-balance over next 2-5 years
…but we said this in every year from 2005!
Dual issues of (China and OECD) demand growth and project delivery remain the big uncertainties
Where prices go depends on costs, in particular in China, which we think is at the top of the cash cost curve for most commodities
Page 28
Chinese import demand is price sensitive!
Chinese net imports of refined zinc
0 2776
720
626
712
059
4073
9473 78
54 6610
4
0255075
100125150175200225250275
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2008 2009 2010 2011
'000
t
50
60
70
80
90
100
110
120
cent
s/lb
Net imports Price
Chinese net imports of primary nickel
56 50 47 4165
120
114
3852 4459 55 60 55
7181
0
25
50
75
100
125
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2008 2009 2010 2011
'000
t
40050060070080090010001100120013001400
cent
s/lb
Net imports Price
Chinese net imports of refined copper
382
249
260
481
758
1041
773
573 75
078
973
161
851
741
970
010
45
0
200
400
600
800
1000
1200
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2008 2009 2010 2011
'000
t
150
200
250
300
350
400
450
500ce
nts/
lb
Net imports Price
Source: LME, Chinese Customs, Macquarie Research, February 2012
Page 29
High cost Chinese commodity supply has come out of the market
Page 29
Source: NBS, Macquarie Research, February 2012
Page 30
Prices will not return to previous levels since cost pressures will remain upwards
Major rise in operating and capital costs (in $US) unlikely to be unwound due to:
Energy and steel prices to remain high (coal, oil and iron ore costs to remain high), keeping capex and operating costs near current levels
The next generation of Greenfield projects are mostly lower grade and in remote locations requiring large expenditure on infrastructure
Governments are targeting the industry as a source of revenue and taxes and these will rise (which in tight markets will be passed on to consumers)
China’s dominance in supply (except for copper) means that Chinese costs matter and we think that due to rising labour, energy, transport costs in RMB terms and a 3-5% a year revaluation of the RMB against the US dollar, Chinese costs can rise by 7-10% a year in US dollar terms (before offsetting efficiencies)
Ongoing weakness of US$ against producer currencies generally?
Page 31
Capital and operating cost escalation has been huge and steady since 2004 –
the case of copper
-15%-10%-5%0%5%
10%15%20%25%30%35%40%
2004 2005 2006 2007 2008 2009 Average
Cos
t Esc
alat
ion
(yea
r-on
-yea
r)
General OpEx Escalation Mining Specific OpEx Escalation CapEx Escalation
Source: Brook Hunt – A Wood Mackenzie Company, Macquarie Research, February 2012
Page 32
Why the nickel price withstood the global financial crisis…
sharply rising cash costs at the margin
Page 32
Source: Brook Hunt – A Wood Mackenzie Company, Macquarie Research, February 2012
The rising cost of nickel at the margin
0123456789
10
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
E
$/lb
nom
inal
90th percentile Median
Page 33
Cash costs in China set to rise –
our assessment for Chinese nickel pig iron –
a $2.50/lb rise by 2015?
Cost w ill be a lot higher by 2015 (VAT ex-cluded)
0.00
2.00
4.00
6.00
8.00
10.00
12.00
Ore Coke Coal Electricty Other costs $/lb
US
D/lb
2011 2015
Source: Macquarie Research, September 2011
Page 34
In summarySupply growth has been strong (but disappointing relative to expectations) over the past 10 years
China has played a dominant role in both demand and supply growth
Rising costs have raised equilibrium prices for all commodities
Chinese cost pressures will continue to be upwards, placing further upwards pressure on longer term equilibrium prices
Supply is difficult to forecast, but “don’t count the chickens before they are hatched”!
Page 35
Important disclosures:
Recommendation definitions
Macquarie -
Australia/New Zealand
Outperform – return > 3% in excess of benchmark return Neutral – return within 3% of benchmark return
Underperform – return > 3% below benchmark return
Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield
Macquarie – Asia/Europe
Outperform – expected return >+10%
Neutral – expected return from -10% to +10%
Underperform – expected <-10%
Macquarie First South -
South Africa
Outperform – return > 10% in excess of benchmark return
Neutral – return within 10% of benchmark return
Underperform – return > 10% below benchmark return
Macquarie -
Canada
Outperform – return > 5% in excess of benchmark return
Neutral – return within 5% of benchmark return
Underperform – return > 5% below benchmark return
Macquarie -
USA
Outperform – return > 5% in excess of benchmark return
Neutral – return within 5% of benchmark return
Underperform – return > 5% below benchmark return
Volatility index definition*This is calculated from the volatility of historic price movements.
Very high–highest risk – Stock should be expected to move up or down 60-100% in a year – investors should be aware this stock is highly speculative.
High – stock should be expected to move up or down at least 40-60% in a year – investors should be aware this stock could be speculative.
Medium – stock should be expected to move up or down at least 30-40% in a year.
Low–medium – stock should be expected to move up or down at least 25-30% in a year.
Low – stock should be expected to move up or down at least 15-25% in a year.
*Applicable to Australian/NZ stocks only
Recommendation
– 12 months
Note:
Quant recommendations may differ from Fundamental Analyst recommendations
Financial definitions
All "Adjusted" data items have had the following adjustments made:
Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense
Excluded:
non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests
EPS
= adjusted net profit /efpowa*
ROA
= adjusted ebit / average total assets
ROA Banks/Insurance
= adjusted net profit /average total assets
ROE = adjusted net profit / average shareholders funds
Gross cashflow
= adjusted net profit + depreciation
*equivalent fully paid ordinary weighted average number of shares
All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).
Recommendation proportions –
For quarter ending 30 June 2011
AU/NZ Asia RSA USA CA EUROutperform 50.37% 64.60% 64.62% 45.63% 67.74% 48.02% (for US coverage by MCUSA, 12.44% of stocks covered are investment banking clients)Neutral 36.86% 21.22% 29.23% 51.30% 28.50% 38.42% (for US coverage by MCUSA, 12.95% of stocks covered are investment banking clients)Underperform 12.77% 14.18% 6.15% 3.07% 3.76% 13.56% (for US coverage by MCUSA, 0.00% of stocks covered are investment banking clients)
Page 36
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