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Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our
website www.macquarie.com.au/disclosures.
GLOBAL
Macquarie Capital (Europe) Limited Jim Lennon +44 20 3037 4271 [email protected] Max Layton +44 20 3037 4273 [email protected] Colin Hamilton +44 20 3037 4061 [email protected] Duncan Hobbs +44 20 3037 4497 [email protected] Hayden Atkins +44 20 3037 4476 [email protected] Kona Haque +44 20 3037 4334 [email protected] Macquarie Capital Securities Limited Bonnie Liu +86 21 2412 9008 [email protected] Graeme Train +86 21 2412 9035 [email protected] Macquarie First South Securities (Pty) Ltd Justin Froneman +27 11 583 2293 [email protected] Macquarie Capital (USA) Inc. Jan Stuart +1 212 231 2485 [email protected] Meredith Somers +1 212 231 2637 [email protected]
17 May 2011
Commodities Compendium Spring shower, summer sizzle Traded commodity prices have sold off particularly sharply in May 2011, with
some of the non-traded commodities, such as coking coal, also down over the
same period. For the remainder of 2011 and into 2012 we have selected copper
and zinc as the two most oversold base metals with the best prospects for
improving fundamentals, and iron ore as the bulk commodity with the best
prospects to surprise to the upside (i.e. we are neutral on the price outlook from
recent record high price levels but this is substantially above consensus). We
continue to recommend exposure to platinum and palladium in the precious
metals space. In soft commodities, our preference is strongly towards corn and
wheat, given weather risks for the 2011/12 crops and underlying tightness.
Chinese tightening appears overplayed, and is almost done
Most commodity end use indicators grew by 10%+ in 1Q11, with the strongest
growth coming from floor space under construction – up 26% YoY – and
consumer appliance output – up over 30% YoY. Other indicators that point to
healthy growth in commodity end use demand in China so far in 2011 include
strong power generation growth and the fact that steel inventories have been
falling even in the face of higher than expected levels of crude steel production.
Our China Economist Paul Cavey believes that the current tightness in credit
availability and weakness in key leading indicators is enough to ensure that
significant further tightening of policy is not needed, particularly as headline
activity indicators and more importantly inflation start to roll over in 3Q11. Cavey
expects policy will remain focused on squeezing lending in the remainder of 2Q,
with slower growth promoting looser policy into 2H. Overall the recently released
Chinese industrial output, inflation and new loans data for April showed that
growth was a little softer, and price inflation at least wasn‟t accelerating, and that
new loans were 5% lower YoY.
End to QE2 and European debt issues not expected to
significantly disrupt commodity consumption
We would note that while a generally declining US dollar has been supportive of
rising commodity prices in recent years, it is not a necessary condition for
commodity price strength (indeed there are numerous periods historically where
the US dollar has appreciated and commodities have gone up). However, the
dramatic drop in exchange trade commodities in the past few weeks highlights
the vulnerability of prices to changes in sentiment towards the macroeconomic
situation in the US/Europe.
The unpredictable nature of weather and tighter supply chains means that the risks around our price forecasts are
skewed to the upside
While we aim to have evenly balanced risks in our modelling of commodity
demand and supply, the apparently increasingly unpredictable nature of weather
conditions and tighter supply chains (the latter in the face of lower credit
availability from banks and high commodity and input prices) mean that risks are
actually likely to be skewed to the upside for our supply-demand balances and
thus price forecasts over the medium to long term. While such weather risks are
clear for the softs, copper, coking coal and iron ore seem the most vulnerable
hard commodities in this regard.
Macquarie Research Commodities Compendium
17 May 2011 2
Table of contents Executive summary and price forecasts 3
Copper
“Deficit to bite in 2H11, 2012” 7
Aluminium
“Significant underperformer in the face of solid global growth” 9
Zinc
“Market rebalancing, price prospects” 11
Lead
“Little slack in the supply chain” 13
Tin
“Market deficits support higher prices” 15
Uranium
“Market looking ugly, but China caking it on the make up” 17
Stainless Steel
“Ongoing strong growth supported by China” 19
Nickel
“Supply growth delayed....but its coming” 21
Ferrochrome
“FeCr prices falling, despite strong demand and rising costs” 23
Molybdenum
“Deficits delayed by renewed Chinese exports” 24
Cobalt
“No stopping the supply surge” 26
Steel
“Still playing the margin lottery” 28
Iron ore
“Can’t ignore cost inflation” 30
Manganese
“Prices fall under weight of strong supply, high stocks” 32
Metallurgical Coal
“Easing back towards normal in a post-supply shock world” 34
Thermal Coal
“China holds sway into summer” 36
Oil
“More upside than downside risk to our bullish 2011-13 forecasts” 38
Gold
“Biggest hurdle coming closer into view” 40
Silver
“Speculative swings drives volatility” 42
Platinum and Palladium
“Looking for a more sprightly performance in 2H11” 43
Wheat
“Corn dominates grain complex, but concerning wheat conditions” 46
Corn
“Large producer reaction, but strong demand limits recovery” 48
Soybeans
“Short term fundamental weakness, but 2011/12 could be tight”........... 50
Sugar
“Prices under pressure as market moves into surplus”........... 52
Coffee
“High prices amidst very tight markets”.......................................... 54
Cocoa
“Short term price weakness followed by a tighter 2011/12 market”......... 56
Cotton
“Market reacts to high prices, but weather risks prevail”...... 58
Macquarie Research Commodities Compendium
17 May 2011 3
Spring shower, summer sizzle Chinese activity has been growing strongly in the first four months of 2011 - Most
commodity end use indicators grew by 10%+ in 1Q11, with the strongest growth coming from
floor space under construction – up 26%YoY – and consumer appliance output – up over 30%
YoY. Other indicators that point to healthy growth in commodity end use demand in China so far
in 2011 include strong power generation growth and the fact that steel inventories have been
falling even in the face of higher than expected levels of crude steel production.
While end use indicators have generally been strong, Chinese inflation also remains relatively
high and sentiment has certainly weakened after months of tightening, with surveys
suggesting that obtaining credit is becoming increasingly difficult. Indeed, the PMI data are
suggesting activity is also struggling, and our China economist Paul Cavey expects the PMI
will print at or below 50 in June.
The only evidence of a slowdown in commodity use in China so far in 2011 has been some
indications of relatively poor apparent demand / semi‟s output in some commodities such as
copper (with high prices and a lack of credit squeezing supply chains and forcing severe de-
stocking of inputs). A normalisation of apparent demand in these markets would imply the use
of such commodities should rise very strongly sequentially through 2H11.
Almost finished with tightening in China - Our China Economist Paul Cavey believes that
the current tightness in credit availability and weakness in key leading indicators is enough to
ensure that significant further tightening of policy is not needed, particularly as headline
activity indicators and more importantly inflation start to roll over in the 3Q11. As such, the
second derivative of tightening is unlikely to get worse from this point. Cavey expects policy
will remain focused on squeezing lending in the remainder of 2Q, with slower growth
promoting looser policy into 2H. Overall the recently released Chinese industrial output,
inflation and new loans data for April showed that growth was a little softer, and price inflation
at least wasn‟t accelerating, and that new loans were 5% lower YoY.
Fig 1 Leading indicators in US and Europe to roll off a high base
Fig 2 China PMI has been weak....
Source: ISM, Markit, Macquarie Research, May 2011 Source: NBS, Macquarie Research, May 2011
Fig 3 ...but activity indicators in China have held firm
Fig 4 Monetary conditions don‟t need to get any tighter
Source: NBS, Macquarie Research, May 2011 Source: NBS, Macquarie Research, May 2011
25
30
35
40
45
50
55
60
65
2005 2006 2007 2008 2009 2010 2011
Ind
ex
25
30
35
40
45
50
55
60
65
Ind
ex
Japan
Eurozone
China
USA
Puchasing Managers Index (PMI) -
Manufacturing
35
40
45
50
55
60
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
35
40
45
50
55
60
20102009Median 2005-200720112008
Index IndexChina PMI
0%
5%
10%
15%
20%
25%
Jun 07 Mar 08 Dec 08 Sep 09 Jun 10 Mar 11
-20%
0%
20%
40%
60%
Industrial production (LHS)
Floor space under construction (RHS)YoY YoY
Macquarie Research Commodities Compendium
17 May 2011 4
World ex-China PMIs moderating slightly but still point to solid growth - After a strong
finish to 2010, leading indicators and manufacturing activity have remained robust in the
world ex-China. This surge, however, looks set to moderate. Leading indicators like the
PMIs appear set to drop from their current very high levels. This is not particularly alarming
given the PMIs are likely to remain in expansionary territory. Japan is the exception due to
the impact of the Tohoku earthquake in March. We understand that the disruption to
manufacturing shouldn‟t be too severe beyond June, with the power deficit likely to be more
of an issue for residents rather than industry.
Near term cyclical slowdown around strong long term trend - The near term inflection
point in activity growth appears to be a normal part of the economic cycle rather than a
deviation from trend. And it does appear that trend growth in industrial production remains
healthy in the wake of the financial crisis (chart below). Since industrial production reclaimed
its previous peak in early 2010, it has grown at around the same rate as seen prior to the
financial crisis, to levels around 5% above the previous peak.
Growth has been geared towards Asia and set to remain so - The growth in industrial
output since the downturn has been driven largely by Asia. Indeed, industrial output in
advanced economies is yet to reclaim the previous peak. This is no different to the period
leading up to the pre-crisis peak, with Asian IP growing by 52% since the start of 2005 to
early 2008, while advanced economy IP increased by 7% in the same period. Our forecasts
assume these trends will continue over the medium term.
Fig 5 Global industrial production is growing at around the same pace as pre-crisis since the previous peak in activity was reclaimed in early 2010
Source: CPL, Macquarie Research, May 2011
We assume the end to QE2 and European debt issues will not significantly disrupt
commodity consumption, although they can impact sentiment - the dramatic drop in
exchange trade commodities in the past few weeks highlights the vulnerability of prices to
changes in sentiment towards the macroeconomic situation in the US/Europe.
Our view is that the end of QE2 in the US will not be disorderly to debt or currency markets.
We would note that while a generally declining US dollar has been supportive of rising
commodity prices in recent years, it is not a necessary condition for commodity price strength
(indeed there are numerous periods historically where the US dollar has appreciated and
commodities have gone up).
The unpredictable nature of weather and tighter supply chains means that the risks
around our price forecasts are skewed to the upside – While we aim to have evenly
balanced risks in our modelling of commodity demand and supply, the apparently increasingly
unpredictable nature of weather conditions and tighter supply chains (the latter in the face of
lower credit availability from banks and high commodity and input prices) mean that risks are
actually likely to be skewed to the upside for our s/d balances and thus price forecasts over
the medium to long term.
85
90
95
100
105
110
1 7
13
19
25
31
37
43
49
55
61
67
73
79
85
Months from peak
Ind
ex:
At
peak i
nd
ustr
ial
ou
tpu
t =
100
Mid 1970's
Current Cycle
World industrial output in various
cycles
Pre-crisis peak reclaimed
Pre-crisis trend
Macquarie Research Commodities Compendium
17 May 2011 5
Steepening cost curves mean prices higher for longer (with cash generation from low
cost assets very strong and very high levels of capex) - With many high cost producers
processing lower grade ore and/or utilising relatively inefficient equipment or process routes
in the face of high commodity prices, the effect on higher cost producers (particularly from
energy price rises) is much more notable than for low cost assets. Rising marginal costs of
output (particularly in iron ore), together with RMB appreciation (for commodities where China
is the marginal cost producer) are set to continue to steepen the overall cost curve in US
dollar terms, supporting „stronger for longer‟ commodity prices, and resulting in particularly
strong cash generation from low cost assets.
Low cost miners or miners operating in particularly high margin industries (say, copper) are
expected to deal with this cash flow in one or more of the following ways in 2011:
1. Capital return to shareholders, though miners have not engaged in this extensively in
the past.
2. Increased M&A activity.
3. A large push in sustaining capital spending, particularly given that much was deferred
from the crisis in 2009. This should provide yet another strong boost for the machinery
sector.
4. A focus on the organic growth pipeline, with a potential implication an increase in the
long run prices being used by miners to value projects.
The upshot of 3 and 4 is likely to be a record year for capex in 2011, across a number of
areas, as the need to source ever-more taxing commodity units sets miners an ongoing
challenge.
Fig 6 Base metals forecasts – short, medium and long term
Source: Macquarie Research, May 2011
2010 2011 2011 2011 2011 2011 2012 2013 2014 2015
Unit CY Q1 Q2 Q3 Q4 CY CY CY CY CY LT $2011
Copper New c/lb 342 438 432 500 500 467 525 350 300 350 220
Old c/lb 342 420 480 550 550 500 500 350 300 350 220
%chg - 4.2% -10.0% -9.1% -9.1% -6.5% 5.0% - - - -
Aluminium New c/lb 99 114 120 120 120 118 105 120 125 130 110
Old c/lb 99 120 120 120 120 120 100 120 125 130 110
%chg - -5.4% - - - -1.4% 5.0% - - - -
Zinc New c/lb 98 109 103 102 108 105 111 120 115 100 85
Old c/lb 98 110 115 105 110 110 119 125 110 100 85
%chg -0.0% -1.3% -10.4% -2.9% -1.8% -4.2% -6.5% -4.0% 4.5% - -
Nickel New c/lb 990 1,220 1,150 1,050 1,025 1,111 950 875 850 900 900
Old c/lb 990 1,175 1,150 1,050 1,025 1,100 950 875 850 900 900
%chg - 3.9% - - - 1.0% - - - - -
Lead New c/lb 97 118 115 111 117 115 118 125 118 100 85
Old c/lb 97 115 118 110 113 114 119 120 100 90 80
%chg -0.0% 2.8% -2.1% 0.9% 4.0% 1.4% -0.9% 4.2% 18.0% 11.1% 6.3%
Tin New c/lb 926 1,359 1,360 1,350 1,385 1,363 1,388 1,180 1,125 1,030 907
Old c/lb 926 1,200 1,175 1,125 1,100 1,150 1,000 800 650 700 500
%chg - 13.2% 15.7% 20.0% 25.9% 18.6% 38.8% 47.5% 73.1% 47.1% 81.4%
Macquarie Research Commodities Compendium
17 May 2011 6
Fig 7 Bulk commodity price forecasts
Source: SBB, Platts, globalCOAL, Macquarie Research, May 2011
Fig 8 Precious metals and uranium forecasts
Source: LME, Macquarie Research, May 2011
2010 2011 2011 2011 2011 2011 2012 2013 2014 2015 LT $2011
Unit CY Q1 Q2 Q3 Q4 CY CY CY CY CY Long term
Aust fines to Asia New c/mtu fob 80 183 239 278 270 255 261 270 267 245 232 110
% chge yoy 88.6% 42.4% 3.7% -1.4% -8.3% -4.9%
Previous 183 183 250 250 250 250 237 224 194 181 94
% change - 30.8% 11.2% 7.9% 2.0% 4.2% 14.1% 18.9% 25.8% 28.1% 17.0%
Aust lump to Asia New c/mtu fob 103 248 264 306 302 288 304 295 290 270 255 135
% chge yoy 121.1% 22.8% -2.9% -1.9% -6.8% -5.6%
Previous 210 210 280 280 280 280 266 254 224 207 119
% change 18.2% 26.2% 9.3% 7.9% 2.7% 8.6% 11.2% 14.2% 20.7% 23.4%
Brazil pellet to Asia New c/mtu fob 118 235 283 335 324 312 314 327 324 298 274 146
% chge yoy 112.4% 33.7% 4.3% -1.1% -8.1% -7.8%
Previous 235 235 305 305 305 305 294 283 252 229 133
% change - 20.8% 9.9% 6.5% 2.5% 3.0% 11.3% 14.1% 18.2% 20.0% 9.8%
Spot China cfr (62% Fe) New $/t cfr 115 147 180 176 168 187 178 178 176 163 155 80
% chge yoy 82.8% 21.1% 0.3% -1.1% -7.8% -4.6%
Spot freight Aust-China New $/t 10 7 8 9 9 8 10 10 10 10 11
Spot freight Brazil- China New $/t 21 19 22 22 22 21 22 23 23 24 22
2010 2011 2011 2011 2011 2011 2012 2013 2014 2015 LT $2011
Unit CY Q1 Q2 Q3 Q4 CY CY CY CY CY Long term
Thermal coal - Jap reference New $/t fob 98 98 130 130 130 130 120 100 95 95 80
Previous 98 98 130 130 130 130 120 92 92 95 80
% change - - - - - - - 8.7% 3.3% - -
Spot thermal coal - fob RB New $/t fob 91 121 121 105 110 114 97 91 85 91 75
Previous 91 121 118 95 100 108 97 85 83 91 75
% change - - 2.5% 10.5% 10.0% 5.3% 0.5% 7.4% 2.4% - -
Semi-soft coking coal New $/t fob 164 180 264 250 222 238 204 179 162 155 95
Previous 141 180 270 200 175 206 157 179 139 128 90
% change 16.9% - -2.2% 25.0% 27.0% 15.4% 30.0% - 16.8% 20.8% 5.6%
LV PCI coal New $/t fob 171 180 275 262 234 250 217 194 178 173 115
Previous 149 180 275 210 185 213 168 194 154 146 110
% change 15.1% - - 24.8% 26.6% 17.6% 29.4% - 15.6% 18.3% 4.5%
Hard coking coal New $/t fob 215 225 330 315 285 303 264 236 223 215 145
Previous 191 225 330 260 235 263 221 234 208 178 135
% change 12.6% - - 21.2% 21.3% 15.2% 19.2% 1.1% 7.2% 21.1% 7.4%
Coke - spot fob China New $/t fob 453 473 458 442 439 481 455 435 438 423 330
Previous 453 470 485 480 460 474 433 450 415 378 300
% change - 1.6% 5.2% -3.3% 5.4% 11.9% 10.0%
Manganese ore New c/mtu fob 7.3 5.8 6.5 7.0 7.0 6.3 5.5
Previous 7.2 7.7 8.0 7.0 6.5 6.5 5.5
% change 1.7% -24.9% -18.8% - 7.7% -3.8% -
HC FeMn New $/t 1,382 1,300 1,250 1,250 1,300 1,275 1,400 1,450 1,450 1,300 1,100
Previous 1,382 1,300 1,450 1,550 1,550 1,463 1,450 1,350 1,300 1,300 1,100
% change - -12.8% -3.4% 7.4% 11.5% - -
Steel - Average HRC New $/t 653 800 826 785 766 794 802 808 780 768 590
Previous 653 799 788 729 711 757 720 808 744 746 570
% change - 0.1% 4.9% 7.7% 7.7% 5.0% 11.4% - 4.8% 2.8% 3.5%
Unit 2010 2011 2011 2011 2011 2011 2012 2013 2014 2015 LT $2011
CY Q1 Q2 Q3 Q4 CY CY CY CY CY Long term
Gold New $/oz 1225 1384.3 1525 1575 1475 1490 1350 1219 1088 1050 850
Old $/oz 1225 1365 1435 1550 1475 1456 1350 1219 1088 1050 850
% change - 1.4% 6.3% 1.6% - 2.3% - - - - -
Silver New $/oz 20 31.66 37 33 29 33 18 20 18 17 13
Old $/oz 20 28 28 26 24 27 17 20 18 17 13
% change - 13.1% 32.1% 26.9% 20.8% 23.3% 5.5% - - - -
Platinum New $/oz 1605 1794 1825 1850 1900 1842 1850 1750 1850 1900 1650
Old $/oz 1605 1750 1800 1850 1900 1825 1850 1750 1850 1900 1650
% change - 2.5% 1.4% - - 1.0% - - - - -
Palladium New $/oz 524 792 760 850 1000 851 750 744 750 750 700
Old $/oz 524 750 760 850 1000 840 750 744 750 750 700
% change - 5.6% - - - 1.3% - - - - -
Uranium spot New $/lb 46 64 57 58 60 60 56 45 60 65 50
Old $/lb 46 68 75 75 70 72 70 65 65 65 50
% change - -4.9% -24.0% -22.7% -14.3% -16.8% -20.0% -30.8% -7.7% - -
Macquarie Research Commodities Compendium
17 May 2011 7
Copper The market is tightening up and deficit will bite in 2H11, 2012
From current spot prices, our most bullish call in base metals is copper, notwithstanding our
short term copper sell call we put in place on March 7th and re-iterated on April 12th this year.
After a period of scrap and consumer de-stocking and weak Chinese semi‟s output (high
prices and tight credit), the fundamentals in the copper market are starting to turn and we see
this continuing for the remainder of 2011 and into 2012.
In particular, May has seen scrap discounts narrow, TCs fall, SHFE stocks falling sharply,
LME stocks start to decline, Chinese physical premiums rise, the Chinese forward curve
move into backwardation, the Chinese import arbitrage go from negative to slightly positive,
and semi‟s output show signs of improving in China. Ex-China continues to recover, with
consumption less than 10% below the level it was in 2007/1H08 before the financial crisis.
We expect that a 350-400,000t deficit in 2011 will see total global copper inventories in terms
of weeks of consumption fall to low levels (similar to those seen in the last boom period), and
we continue to forecast a 200,000t deficit in 2012. While our base case is that very strong
mine supply growth on a two-three year view will move the market into small surplus in
2013/14, inventories are not expected to rise much above critically low levels (about three
weeks of consumption) and as such, prices are forecast to remain >US$3/lb over the period.
Fig 9 Global copper supply and demand balance
'000 tonnes 2008 2009 2010f 2011f 2012f 2013f 2014f 2015f
World Consumption 18108 17416 18961 19821 20650 21489 22370 23295 % Change Y-o-Y 0.1 -3.8 8.9 4.5 4.2 4.1 4.1 4.1 World Production 18389 18256 18815 19441 20464 21785 22710 23063 % Change Y-o-Y 2.7 -0.7 3.1 3.3 5.3 6.5 4.2 1.6 Balance 281 840 -146 -380 -187 296 340 -233 World stocks (all) 1164 1921 1656 1276 1089 1385 1725 1492 Stocks (Weeks global) 3.3 5.7 4.5 3.3 2.7 3.4 4.0 3.3 ---Including ETF holdings of 150kt end 2011, 200kt end 2012 -- -- 4.5 3.0 2.2 -- -- LME Cash Price (c/lb) 316 234 334 467 525 350 300 350 LME Cash Price ($/t) 6968 5152 7361 10304 11574 7716 6614 7716
Source: ICSG, WBMS, CNIA, Macquarie Research, May 2011
Our bullish 3-18 month copper view rests on three pillars:
Chinese copper semi‟s output will „normalise‟. By semi‟s normalising, we mean,
semi‟s output recovering from the relatively low levels seen in Jan/Feb/Mar 2011, to a
level which gives 7% YoY growth for full year 2011. On this basis Chinese
consumption of copper units (refined and scrap) should rise by around 10% from
March levels through the remainder of 2011 (normally consumption is strongest in
May/June but this may be delayed in 2011 owing to a temporary squeeze on semi-
fabricators owing to tight credit and high prices).
That global consumer de-stocking will slow /end, with upside from potential re-
stock. Consumer stocks are very difficult to get data on. However, we do have
significant anecdotal information to suggest that Chinese consumers have de-stocked
from 10-14 days of stocks in mid 2009 to 2-3 days in 2H10 (voluntary de-stocking
owing to higher prices), and practically nothing recently (hand to mouth stock levels
owing to involuntary de-stocking following the tightening in credit conditions in 1Q11).
Outside of China ,various anecdotes point to consumers consolidating their supply
chains and reducing stocks, firstly in late 2008/09 (in line with lower demand) and then
de-stocking further over the past six months (owing to higher prices and tight credit).
On the one hand this consumer de-stocking has resulted in rising visible stocks (stock
shifting, exaggerating the apparent global surplus in recent months), and on the other
this de-stocking has reduced refined demand. As global de-stocking is largely thought
to have finished, consumer consumption of refined copper should rise significantly
over the coming months. To the extent Chinese consumers are underutilised owing to
tight credit; they could raise output and restock at the same time over the coming six
months, which would be particularly bullish.
The bull market is
on, with 2011 and
2012 likely to be the
peak years
Macquarie Research Commodities Compendium
17 May 2011 8
That global scrap de-stocking will slow / end. The increase in scrap availability
evidenced by a sharp widening in scrap discounts globally which began in Sept/Oct
2010 and evidenced by the increased use of scrap by Chinese smelters and refiners
through 2H10 is reportedly nearing an end. At the CESCO conference, we spoke with
scrap market participants and heard that scrap de-stocking was well advanced in
Europe, and to a lesser extent scrap de-stocking had taken place in the US. In line
with this we have seen a significant narrowing of scrap discounts across the globe
(particularly in China), as per Figure 11.
In addition there are medium term supply risks such as unexpected weather issues (another
La Nina in 2012 for example affected Chilean output from the SIC grid) or political issues
(which could affect DRC output or Humala potentially winning the Peruvian election in June
and nationalisation impacting future Peruvian copper supply growth). So far in 2011 we have
used up over half of our 720,000t disruption allowance, and we are less than half way through
the year.
Although we cannot be certain, we continue to think it is more likely than not that the
Blackrock (US$1bn) and JP Morgan (US$0.5bn) physically backed copper ETFs will be
approved and will absorb at least the initial 150,000t of copper. In Fig 9, we show the impact
on global stocks in terms of weeks of consumption if 150,000t of copper is “taken” from the
market as at end-2011 and 200,000t as at end-2012.
Fig 10 Treatment charges falling, set to continue Fig 11 Chinese scrap market tightening up
Source: ICSG, WBMS, CNIA, Macquarie Research, May 2011 Source: ICSG, WBMS, Brookhunt, Macquarie Research, May 2011
Fig 12 Supply forecasts look ambitious Fig 13 Ex-China recovering solidly – YoY growth
Source: ICSG, Macquarie Research, May 2011 Source: ICSG, WBMS, CNIA, Macquarie Research, May 2011
0
5
10
15
20
25
30
35
40
45
50
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Month of Calendar Year
Sp
ot
TC
/RC
s (
Co
mb
ined
)
2003 2004 2005 2006 2007
2008 2009 2010 2011
Spot Treatment Charges
20,000
25,000
30,000
35,000
40,000
45,000
50,000
55,000
60,000
65,000
70,000
Jan
07
Mar
07
May 0
7Ju
l 07
Sep
07
No
v 0
7Jan
08
Mar
08
May 0
8Ju
l 08
Sep
08
No
v 0
8Jan
09
Mar
09
May 0
9Ju
l 09
Sep
09
No
v 0
9Jan
10
Mar
10
May 1
0Ju
l 10
Sep
10
No
v 1
0Jan
11
Mar
11
May 1
1
'000R
mb
/t
-2000
-1000
0
1000
2000
3000
4000
5000
Scra
p D
isco
un
t to
SH
FE
cash
pri
ces R
mb
/t
Refined metal price (excl Vat) - LHSNo 1 Scrap copper (ex Vat) - LHSScrap discount - RHS
-300-200-100
0100200300400500600700800900
100011001200130014001500
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
20
09
20
11
f
20
13
f
20
15
f
'00
0 t
on
ne
s
Copper Mine Supply Changes
Post-disruption
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
Ja
n-0
7
Ma
r-0
7
Ma
y-0
7
Ju
l-0
7
Se
p-0
7
No
v-0
7
Ja
n-0
8
Ma
r-0
8
Ma
y-0
8
Ju
l-0
8
Se
p-0
8
No
v-0
8
Ja
n-0
9
Ma
r-0
9
Ma
y-0
9
Ju
l-0
9
Se
p-0
9
No
v-0
9
Ja
n-1
0
Ma
r-1
0
Ma
y-1
0
Ju
l-1
0
Se
p-1
0
No
v-1
0
Ja
n-1
1
Ma
r-1
1
% C
ha
ng
e Y
oY
Macquarie Research Commodities Compendium
17 May 2011 9
Aluminium A significant underperformer in the face of solid global growth
We have been „short-term‟ bullish on the prospects for aluminium from October 2010 but we
turned neutral on aluminium last month as the price got into the high US$2600‟s/t. As at the
time of writing spot prices were trading at ~ US$2,500/t.
The bullish case for aluminium only lasts while interest rates remain low and bank/trader
opportunity cost of capital remains low. This is because there is a vast amount of aluminium
in warehouses, tied up, under financing deals that return only 0.5-2% annualised which will
become available if the deals roll off (we estimate there is 3-3.5mt of off market, off LME,
inventory that could fairly easily come to market).
Until then, the aluminium price is likely to range trade between perceived cost support of
US$2,400-2,500/t and US$2,700-2,800/t. The market balance is actually very tight ex-China,
as evidenced by record high aluminium physical premiums. In China, the market has been in
balance overall this year, but stocks are falling at present and this is set to continue despite a
strong production rebound (following the efficiency related power cuts which disrupted
industry output in 4Q10).
In our view there will be a lot of noise surrounding power restrictions, rising tariffs and energy
costs for Chinese aluminium smelters, however the base case is that production will continue
to rise (assuming current prices) through 2H11 taking the Chinese market into small surplus
by the end of the year.
Our best guess is that interest rates will not rise significantly until 1H12, when we expect
aluminium to trade on average at US$2,200/lb in 2012, following the release of up to 3-3.5mt
of off market aluminium stock. Given rising LIBOR rates and opportunity costs of capital
allocated to aluminium financing are most likely to occur in an improving global economic
environment, aluminium is set to underperform in this environment (our base case).
It is worth noting that we recently upgraded our 2H12 price forecast by 10% from US$2,200/t
to US$2,420/t owing to our belief that a pullback is likely to be shorter and shallower than
previous aluminium price corrections. The reasoning is two fold – firstly costs are rising
sharply so the price doesn‟t need to fall as far for as long to lead to high cost smelter closures
(in China), and secondly that Chinese smelters can shut and restart capacity more quickly
than western smelters (meaning the costs of shutting are lower and there is less reluctance to
hold of on shutting capacity in response to lower prices).
Fig 14 Developed world physical premia point to an EXTREMELY tight physical market for aluminium
Fig 15 But reported stocks are still very high, and off market stocks still very substantial
Source: LME, CRU, Macquarie Research, May 2011 Source: LME, CRU, Macquarie Research, May 2011
50
60
70
80
90
100
110
120
130
140
150
160
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Avera
ge P
rem
ium
$/t
1000
1200
1400
1600
1800
2000
2200
2400
2600
2800
3000
3200
Al
pri
ce $
/t
Average premium, $/t (lhs)
LME cash Al price, c/lb (rhs)
0
2
4
6
8
10
12
14
16
18
20
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
We
ek
s o
f W
orl
d c
on
su
mp
tio
n
1000
1200
1400
1600
1800
2000
2200
2400
2600
2800
3000
3200
$/t
Producer - Consumer - PortExchangeAl price
Aluminium prices
will only hold up as
long as LIBOR rates
remain low
Macquarie Research Commodities Compendium
17 May 2011 10
When the financing saga ends, that is the entry point: The first reason is fundamental –
aluminium has the best demand growth prospects of any base metal we cover over the next
3-5 years and the largest producer (China) will find it very difficult to displace its high-cost
capacity with lower-cost capacity AND raise supply to meet growing demand over the same
period. The second reason is that the likely presence of a physical aluminium ETF will mean
that the price rebound post correction will be accelerated by speculators buying the ETF,
which has the pro-cyclical effect of helping tighten the market. How low could aluminium go in
the worst case scenario? In our view, anything below US$2,000/t would be a good entry
point.
Fig 16 Refined aluminium supply and demand balance (price collapse see‟s China cut output within 12 months)
'000 tonnes 2008 2009 2010e 2011f 2012f 2013f 2014f 2015f
World Consumption 36662 34160 40984 44976 48429 51226 54140 57251 % Change Y-o-Y -3.5 -6.8 20.0 9.7 7.7 5.8 5.7 5.7
World Production 39737 37634 41770 44258 47375 51626 55136 58506 % Change Y-o-Y 4.0 -5.3 11.0 6.0 7.0 9.0 6.8 6.1
Capacity Utilisation 90.1 81.9 83.4 85.5 88.4 91.6 93.2 92.9
Global Balance 3075 3474 786 -717 -1054 401 997 1256
Prices LME Cash Price (c/lb) 116.8 74.9 91.9 118.4 110.0 120.0 125.0 130.0 LME Cash Price ($/t) 2575 1652 2027 2610 2425 2646 2756 2866 Source: IAI, CRU, CNIA, Macquarie Research, May 2011
Fig 17 Longer term financing no longer profitable – only just working on 3 month time frame
Fig 18 Chinese output ramp only just keeping up with consumption, and pace of ramp up set to slow
Source: IAI, CNIA, Macquarie Research, May 2011 Source: IAI, CNIA, Macquarie Research, May 2011
Fig 19 Aluminium demand by region – growth to be driven by China
Fig 20 Chinese output growth, largely from self generated power and relatively low cost (for China)
Source: ISM, AA, Macquarie Research, May 2011 Source: IAI, CNIA, Macquarie Research, May 2011
-140
-120
-100
-80
-60
-40
-20
0
20
40
60
80
100
120
Ja
n 0
9F
eb
09
Ma
r 0
9A
pr
09
Ma
y 0
9J
un
09
Ju
l 0
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ug
09
Se
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No
v 0
9D
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09
Ja
n 1
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10
Ma
r 1
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pr
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Ma
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Ju
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Ja
n 1
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11
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11
Pro
fit
or
los
s o
n f
ina
nc
ing
LME storage costs
Half LME storage costs
7c/day storage costs
Profitability on 12 month aluminium financing deals
Assumes 1% cost of finance
Aluminium Production (Annualised Rate)
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
2004 2005 2006 2007 2008 2009 2010 2011
An
nu
alis
ed
Pro
du
ctio
n (
m t
pa
)
22.0
22.5
23.0
23.5
24.0
24.5
25.0
25.5
26.0
26.5
China (LHS)
World Ex-China (RHS)
`
'000 tonnes 2008 2009 2010f 2011f 2012f 2013f 2014 2015
N.America 5620 4230 5060 5465 5683 5797 5913 6031
Japan 2310 1730 2175 2284 2375 2470 2569 2672
W. Europe 6785 4825 6160 6468 6597 6729 6864 7001
China 12202 14269 17188 19594 21946 23701 25597 27645
Asia (ex China, Japan) 5204 5381 6172 6574 7002 7459 7946 8466
CIS 1000 700 800 950 998 1047 1100 1155
Other 3541 3025 3429 3641 3828 4022 4151 4281
Total 36662 34160 40984 44976 48429 51226 54140 57251
World Ex China 24460 19891 23796 25381 26483 27524 28542 29605
% Change 2008 2009 2010f 2011f 2012f 2013f 2014 2015
USA -10.3 -24.7 19.6 8.0 4.0 2.0 2.0 2.0
Japan -4.1 -25.1 25.7 5.0 4.0 4.0 4.0 4.0
Europe -6.2 -28.9 27.7 5.0 2.0 2.0 2.0 2.0
China -0.7 16.9 20.5 14.0 12.0 8.0 8.0 8.0
Asia -1.3 3.4 14.7 6.5 6.5 6.5 6.5 6.5
CIS -7.0 -30.0 14.3 18.8 5.0 5.0 5.0 5.0
Other 2.9 -14.6 13.3 6.2 5.1 5.1 3.2 3.1
Total -3.5 -6.8 20.0 9.7 7.7 5.8 5.7 5.7
World Ex China -4.8 -18.7 19.6 6.7 4.3 3.9 3.7 3.7
Aluminium Production Growth by Region
-4
-3
-2
-1
0
1
2
3
4
5
2007 2008 2009 2010 2011f 2012f 2013f 2014f 2015f
Mil
lio
n t
on
nes
China Middle EastIndia CISOceania NAFTAEurope Japan/Other AsiaSouth America AfricaTotal
Macquarie Research Commodities Compendium
17 May 2011 11
Zinc Market rebalancing, price prospects rising
The zinc price has underperformed the LME market as a whole since the start of 2010,
weighed down by high and rising visible stock levels and worries of oversupply with refined
zinc output rising to all time record levels in recent months. However we think the zinc market
is rebalancing as demand remains good and supply moderates, while the rise in visible stocks
represents more a transfer of existing inventories rather than the accumulation of any
substantial new surplus metal.
Recent data releases demonstrate good zinc demand. In China, galvanised steel production
(the main first use market for zinc) continues to rise (Fig 21) and reached a new record for the
first quarter of the year of 6.9mt in Q1 2011 as the country becomes an increasingly important
world market for galvanised steel, now accounting for almost one quarter of global output.
Elsewhere, European steel stockholders‟ shipments of hot-dipped galvanised sheet reached
the third highest monthly total on record in March and we note independent analysts‟ estimates
of global galvanised steel production are being revised up to catch up with better demand
than has been widely appreciated. Firm demand for zinc is reflected in rising physical
premiums (Fig 22).
Fig 21 Galvanised steel production continues to climb
Fig 22 Physical zinc premiums firm and rising
Source: CRU, Macquarie Research, May 2011 Source: CRU, Macquarie Research, May 2011
At the same time, refined zinc production has recently started to roll over from previous record
levels. The International Lead & Zinc Study Group‟s (ILZSG) latest data show global output
dipped to 13.1mt on a three-month moving average annualised basis in January and
February 2011, from a peak of 13.4mt in November 2010. Moreover, we would highlight early
signs of pressure on supply following the price falls of late April / early May in reports of
Chinese zinc miners starting to withhold sales of zinc concentrates from the domestic market.
As noted, high and rising visible stocks have weighed on zinc prices over the last year or so.
In volume terms reported stocks are at a 15-year high of over 1.6mt and even measured as a
ratio to consumption (to adjust for the increase in the size of the market over time), reported
stocks are now 50% above the average of the last economic cycle (2001-2009) at 46 days of
global consumption. However, these headline numbers miss two important points.
First, much of the stock held is not easily accessible to end users due to carry trades, financed
by the contango in forward prices, and limits on withdrawals from LME-listed warehouses
(over 80% of the build in LME zinc stocks since the start of 2009 has taken place in New
Orleans, which now holds almost 60% of total LME zinc stocks). Second, data comparing the
rate of change in China‟s apparent zinc consumption (reported production plus imports minus
exports) with the rate of change in galvanised steel output strongly suggest there has been a
draw down of unreported zinc stocks in the world‟s largest market in 2010, continuing into
Q1 2011, in what is the world‟s largest zinc market. The SHFE zinc stock build is now
slowing and the number of open warrants has recently started falling. The fact that stocks are
not readily accessible to end users is reflected in firm physical premiums.
-50%
-25%
0%
25%
50%
75%
2009 Q
1
2009 Q
2
2009 Q
3
2009 Q
4
2010 Q
1
2010 Q
2
2010 Q
3
2010 Q
4
2011 Q
1
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0
25
50
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100
125
150
175
J 2
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Recent data
releases
demonstrate good
zinc demand;
physical premiums
remain firm
Refined zinc
production rolls
over at the start of
2011
Reported zinc
stocks high but
metal is not easily
accessible
to end users
Macquarie Research Commodities Compendium
17 May 2011 12
Fig 23 Changes in world demand and mine output Fig 24 Zinc prices forecast to rise
Note: 2011-2015 data are forecasts Source: CRU, ILZSG, Wood Mackenzie, Macquarie Research, May 2011
Note: LME cash prices. 2011-2015 data are forecasts Source: LME, Macquarie Research, May 2011
The zinc price has traded in a range from early to mid US$2,000s for most of the last year or
so and we think it is most likely to keep trading within this range over the next 6-12 months.
With this in mind the recent price retreat probably offers a buying opportunity. From a
fundamental point of view we think downside risk to the zinc price should be limited by firm
demand and an improving metal market balance, as well as an emerging tightness in the
market for zinc concentrates. This can be seen already in the sharp fall in benchmark
treatment charges for 2011 (down by 16%-17% from 2010, reducing smelter revenues by
US$85/t zinc metal produced at the basis price of US$2,500/t) while spot TCs for
concentrates imported into China continue to trade at a substantial discount to benchmark.
Looking further ahead over the next two-to-three years we maintain our positive view on
the zinc market outlook and anticipate a progressively tighter balance in the market for zinc
concentrates as the rate of increase in mine supply falls short of rising zinc demand (Fig 23),
which will limit metal output, and we expect the zinc price to rise as a result (Fig 24). A number
of large, high profile zinc mines will close in the coming years as a result of resource depletion,
starting with Xstrata‟s Brunswick mine in Canada in Q1 2013, and others will reduce output as
grades decline, including Antamina, Red Dog and San Cristobal. In 2015-2016, MMR‟s Century
mine, the world‟s third largest zinc mine producing over 500,000 tpa of zinc contained, will close.
Fig 25 Global zinc supply and demand balance
'000t zinc 2009 2010 2011F 2012F 2013F 2014F 2015F
Mine production 11,492 12,629 12,950 13,615 14,173 14,810 14,911 YoY change -1.7% 9.9% 2.5% 5.1% 4.1% 4.5% 0.7% Refined production 11,250 12,600 13,000 13,800 14,300 14,900 15,200 YoY change -3.4% 12.0% 3.2% 6.2% 3.6% 4.2% 2.0% Consumption 10,627 12,176 12,965 13,874 14,318 14,783 15,122 YoY change -5.7% 14.6% 6.5% 7.0% 3.2% 3.2% 2.3% Balance 623 424 35 -74 -18 117 78 LME Cash Price (c/lb) 75.3 97.9 110.0 118.8 125.0 110.0 100.0 LME Cash Price (US$/t) 1,659 2,159 2,425 2,618 2,756 2,425 2,205
Source: ILZSG, LME, Macquarie Research, May 2011
However, while we think the zinc market will be tighter, and prices higher, our medium-term
outlook is tempered by the fact that there is a sufficient number of new mine and expansion
projects in prospect, and sufficient incentive in current price expectations for project
development, to avoid a deep deficit in the market.
0%
2%
4%
6%
8%
2011 2012 2013 2014 2015
Yo
Y c
han
ges
Mine supply
Consumption
98 1
05 111 120
115
100
0
25
50
75
100
125
150
175
2001
2003
2005
2007
2009
2011
2013
2015
US
¢/lb
an
nu
al avera
ges
Nominal
2010 USD
We think zinc will
most likely continue
range trading over
next 6-12 months
We maintain our
positive outlook on
zinc demand and
prices over next
2-3 years
Macquarie Research Commodities Compendium
17 May 2011 13
Lead Little slack in the supply chain, risk of price spike remains
We estimate that world lead consumption increased by almost 7% to a new record of 8.9mt in
2010 and the indications are that demand has continued increasingly in the first months of
2011 (Fig 26). North American lead-acid battery shipments increased by 25% YoY on an
annualised basis and have been running at all-time record levels of over 125m units on a
three-month moving average annualised basis for the last six months. China‟s SLI lead-acid
battery exports have been rising at double-digit percentage rates for the last year, reaching a
record 18m units in 2010, and increasing by 21% YoY on a three-month moving average
annualised basis in February 2011. And Japan‟s lead use in storage batteries had also been
rising since late 2009 but did dip after the earthquake in March. Firm demand for lead is
reflected in the fact that physical premiums remain firm.
However, there have been some short term concerns over lead market conditions. Some
Chinese lead-acid battery makers have reportedly been buying only minimal amounts of lead
metal given worries associated with ongoing government investigations into reports of
poisonings in a number of provinces, although reports of battery makers actually reducing
stocks have declined recently, suggesting the drag on apparent lead demand is waning. The
steep rise in reported stocks seen in recent months has also raised some concerns.
However, we think this represents more redistribution of existing stock (deliveries onto the LME
prompted by the price backwardation seen since the start of this year) rather than the
accumulation of any substantial new surplus, and the current ratio of reported stocks to global
lead consumption at 23 days is only moderately above the average of the last economic cycle
(18 days from 2001-2009).
Fig 26 Data suggest strong growth in lead demand Fig 27 Lead scrap prices rise to record levels
Source: BCI, GTIS, METI, Macquarie Research, May 2011
Note: prices are for whole undrained batteries. EU – Germany and France Source: CRU, Macquarie Research, May 2011
Price signals in the markets for lead making raw materials continue to suggest that there is
little slack in the supply chain. Lead scrap prices continue to rise, reaching new records in
dollar terms (Fig 27), well ahead of the levels prevailing when the LME lead price spiked in
2008, and also as a proportion of the LME lead price. Average lead scrap prices across the
US, EU and UK markets have been trading at upwards of 55% of the LME price for the last
six months. Meanwhile, spot treatment charges for lead concentrates imported into China
continue to trade at levels well below a year ago (~US$85/dmt CIF for low-silver lead
concentrates in April), which suggests a tighter balance between the availability of material
from lead mines and demand from lead smelters.
The latter observation is of particular significance, in our opinion, since it occurs despite
a very strong rise in China‟s domestic lead mine output, which increased by 36% YoY to
1.8mt lead contained in 2010. Production continued to rise strongly in the first quarter of
2011, climbing by over 30% from the corresponding period a year ago. Whether China can
continue to raise its lead mine output further is uncertain.
-60%
-40%
-20%
0%
20%
40%
60%
J 2
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M 2
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J 2
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M 2
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S 2
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J 2
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3M
MA
, Y
oY
ch
an
ge N.American battery
shipments
Japanese lead use in
storage batteries
Chinese lead-acid
battery exports
0
250
500
750
1,000
1,250
1,500
1,750
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
US
$/t
on
ne lead
co
nta
ined
EU
USA
UK
Strong growth in
lead demand in 2010
continues into 2011
Short term worries
over demand from
battery makers in
China now waning
Price signals from
raw materials
markets indicate
little slack in supply
chain
Macquarie Research Commodities Compendium
17 May 2011 14
Fig 28 World‟s mine lead mines are flat lining… Fig 29 …and price is forecast to rise further
Note: 2011-2015 data are forecasts Source: CRU, Wood Mackenzie, Macquarie Research, May 2011
Note: LME cash prices. 2011-2015 data are forecasts Source: LME, Macquarie Research, May 2011
Outside China, output from the world‟s major lead mines is flatlining. Magellan remains offline
and no net increase in production is forecast from the five largest mines – Cannington, SE
Missouri, McArthur River, Red Dog and Penasquito – after 2011 and output will probably be
falling by 2015 (Fig 28). There is little new lead mine supply coming to market from other
producers over the next five years and output ex-China could be falling as early as 2014.
While there is some uncertainty over future primary lead supplies, prospects for lead demand
continue to point to strong growth in the coming, driven by China. In China today the number
of motor vehicles on the roads relative to population is equivalent to the level reached in the
USA over 90 years ago (56 motor vehicles per 1,000 people in China in 2010; 60 in the USA in
1918). If China follows a similar road to that seen in the USA from a similar point it could add
~180m units to the country‟s motor vehicle fleet by 2021 – which, to put that in perspective, is
equivalent to almost 70% of the entire vehicle fleet in the USA today – and it appears to be on
track. In 2010 China produced ~18.5m motor vehicles. At the same time China continues to
add to its fleet of electric bikes, powered by lead-acid batteries, and conditions in congested
cities in a number of other highly populous Asian countries suggest that e-bikes could be an
effective transport solution here too.
Taken together the combination of prospects for strong growth in lead demand and limited
growth in lead mine supply suggest the balance in the lead market will remain quite tight in the
coming years. As a result we expect the lead price to remain well bid in the short term and to
rise to the high US$2,000s over the next two-to-three years (Fig 30). The risk of a spike on
an upside surprise in demand and / or supply side outage remains very real.
Fig 30 Global lead supply and demand balance
'000t lead 2009 2010 2011F 2012F 2013F 2014F 2015F
Mine production 3,945 4,091 4,034 4,254 4,479 4,544 4,411
YoY change 9.0% 3.7% -1.4% 5.4% 5.3% 1.4% -2.9%
Refined production 8,410 8,955 9,300 9,650 10,000 10,200 10,300
YoY change -1.6% 6.5% 3.9% 3.8% 3.6% 2.0% 1.0%
Consumption 8,327 8,900 9,343 9,703 9,985 10,192 10,333
YoY change -2.0% 6.9% 5.0% 3.8% 2.9% 2.1% 1.4%
Balance 83 55 -43 -53 15 8 -33
LME Cash Price (c/lb) 78 97 115 118 125 118 100
LME Cash Price (US$/t) 1,726 2,148 2,542 2,608 2,756 2,601 2,205
Source: ILZSG, LME, Macquarie Research, May 2011
0
100
200
300
400
500
600
700
800
2010
2011
2012
2013
2014
2015
'000 t
on
nes lead
co
nta
ined
Penasquito
Red Dog
McArthur River
SE Missouri
Cannington
97
115
118 125
118
100
0
25
50
75
100
125
150
2001
2003
2005
2007
2009
2011
2013
2015
US
¢/lb
an
nu
al avera
ges
Nominal
2010 USD
China forecast to
continue driving
growth in lead
demand
Risk of future price
spike remains real
Little new mine
supply coming to
market ex-China
Macquarie Research Commodities Compendium
17 May 2011 15
Tin Market deficit supports high prices
The tin price has outperformed all other LME base metals since the start of 2010 (Fig 31),
fairly reflecting the fact that the market for tin has run a deeper deficit than any of the other
LME traded metals over that time frame. Strong demand for tin has been driven by rising output
of solder alloys for electronics and industrial goods (this is the main end use market for tin,
accounting for ~55% of total use) and record tinplate production.
Cookson Group, the world‟s largest producer of solder alloys reported an 18% increase in
underlying revenues (revenue at constant currency and eliminating the impact of commodity
price changes) in its electronics division in 2010, which earns most of its revenue from
assembly materials (i.e. solder products). Meanwhile, global tinplate output rose by 26% YoY
to a record of ~20mt (excluding CIS countries) in 2010, driven by strong production growth
from China and rebound from the recession in Japan and other Asian countries.
Tin supply has been rising over the last year but it has been slow by comparison with the
rebound in consumption. Whereas world tin consumption increased by 16% YoY in 2010,
refined metal production rose by 4.8% and mine output by only 2% on the same comparison.
However, there are signs that supply is now starting to rise more fully in response to strong
demand and the record high prices of recent months (Fig 32).
In Indonesia, the world‟s second largest tin producer and leading exporter to international
markets, the tonnage of tin metal checked for export ahead of shipment (as required by the
Ministry of Trade regulations) increased by 23% YoY to 9,708t in April. This is the highest
monthly total recorded in the last two years and is the highest figure for April since the export
licensing system was first introduced in 2007. On a three-month moving average basis, which
gives a better guide to the underlying trend than a single data point, the average monthly
tonnage surveyed for export was up by 18% YoY to 8,313t for the period February to April
2011.
Fig 31 Tin price outperforms other LME traded metals Fig 32 Indonesian tin metal cleared for export
Source: LME, Macquarie Research, May 2011 Source: Ministry of Trade, Macquarie Research, May 2011
Nonetheless it will take time to rebalance the tin market. The three major tin mining countries
– China, Indonesia and Peru – all produced less mine output in 2010 than in 2006. We
expect with the incentive of today‟s high prices that mine output and smelter production will
increase in all three countries, contributing to strong growth in tin supplies over the next
several years. Data releases for the first months of this year suggest that China‟s refined tin
production is on course to rise by 11% YoY to almost 150,000t in 2011. Similarly, Indonesian
output is on track to reverse most of last year‟s decline with a rise of 12% to 64,000t.
Similarly strong increases are expected with supply-side momentum from high prices carrying
through into 2012. Further ahead, new mine and expansion projects in South America, Africa
and Australia should increase the supply of feed material for smelters in some other countries
to increase refined tin production and we expect the market to rebalance by 2013.
50
75
100
125
150
175
200
225
J 2
010
M 2
010
M 2
010
J 2
010
S 2
010
N 2
010
J 2
011
M 2
011
M 2
011
Ind
ices 1
Jan
2010 =
100
Sn
Ni
Cu
Al
Pb
Zn
-50%
-25%
0%
25%
50%
75%
100%
J 2
009
M 2
009
M 2
009
J 2
009
S 2
009
N 2
009
J 2
010
M 2
010
M 2
010
J 2
010
S 2
010
N 2
010
J 2
011
M 2
011
3M
MA
, Y
oY
ch
an
ge
LME tin price
outperforms other
metals; reflects
market deficit
Recent data
releases suggest tin
supply is starting to
rise more strongly
It will take time to
rebalance the tin
market
Macquarie Research Commodities Compendium
17 May 2011 16
Fig 33 Tin production forecast to rise sharply Fig 34 Tin price forecast to rise to new records
Source: CRU, ITRI, Macquarie Research, May 2011
Note: LME cash prices. 2011-2015 data are forecasts Source: LME, Macquarie Research, May 2011
Rising tin supplies will be needed not only to close the existing gap to demand but also to
meet new demand. For example, Cookson, at its recent annual results release, presented
forecasts showing growth of 8%-9% pa in global output of electronic equipment from 2011-13
and anticipates demand for solder alloys (and thereby tin) to rise accordingly. Tinplate
production is rising as a result of expansion in Asia. Nippon Steel (5401 JP, ¥244, Neutral,
TP: ¥290), one of the world‟s largest tinplate producers is adding 8% to its capacity in
Japan, equal to about 150,000tpa. It is also expanding capacity at its Indonesian tinplating
subsidiary, by 30,000tpa from 2012, and recently announced it is setting up a new joint
venture in China with Wuhan Steel to build a new 200,000tpa tinplate line in Hubei province
to start up in mid-2013. Nippon Steel has forecast that China's total tinplate demand will
increase to between 3.3mt and 3.7mt by 2015, from less than 3mt in 2009.
Concerns have been raised about risks to tin demand from substitution incentivised by high
prices. However, tin use in making solder alloys is price inelastic in the short to medium term
because solder alloys account for only a small fraction of the cost of consumer electronics,
and there are no simple substitutes for solder alloys or for the use of tin in making solder.
Moreover, major electronics manufacturers have substantial capital invested in existing
production processes. Some applications in the chemicals sector may be vulnerable to some
substitution but we do not expect it to happen on a scale sufficient to reduce world tin demand
overall. We expect the tin market to remain in deficit and prices to reach new records in
20122011-2012 (Fig 34).
Fig 35 Global tin supply and demand balance
'000t lead 2009 2010 2011F 2012F 2013F 2014F 2015F
Mine production 283.2 288.8 305.6 330.1 356.1 371.1 370.1
YoY change -3.1% 2.0% 5.8% 8.0% 7.9% 4.2% -0.3%
Refined production 330.6 346.5 373.0 399.0 423.0 432.5 431.0
YoY change -1.8% 4.8% 7.7% 7.0% 6.0% 2.2% -0.3%
US DLA stock changes -3.7 -0.1 - - - - -
Consumption 318.3 369.3 382.9 401.1 414.5 419.6 422.4
YoY change -10.5% 16.0% 3.7% 4.8% 3.3% 1.2% 0.7%
Balance 16.0 -22.7 -9.9 -2.1 8.5 12.9 8.6
LME Cash Price (c/lb) 616 928 1,363 1,388 1,180 1,125 1,030
LME Cash Price (US$/t) 13,591 20,453 30,057 30,589 26,015 24,802 22,708
Source: CRU, ITRI, LME, Macquarie Research, May 2011
0
100
200
300
400
2010
2011
2012
2013
2014
2015
'000 t
on
nes
ROW
S.America
SE Asia
Indonesia
China
1,3
63
1,3
88
1,1
80
1,1
25
1,0
30
928
0
250
500
750
1,000
1,250
1,500
1,750
2001
2003
2005
2007
2009
2011
2013
2015
US
¢/lb
an
nu
al avera
ges
Nominal
2010 USD
Forecasts for
growth in tin
demand
are good
Tin price forecast to
reach new record
in 2011-2012
Macquarie Research Commodities Compendium
17 May 2011 17
Uranium Market looking ugly, but China caking on the make up
Since our last Commodities Compendium the current and future uranium market balances
have been significantly affected by the impact of the Fukushima nuclear disaster on both the
Japanese and global nuclear market. We have significantly revised our forecast balances for
the uranium market.
While we now expect the global market to be in significant surplus over the next five years
and the industry to go through a period of pain on the back of uncertainty regarding future
uranium demand, we expect China will continue to stockpile uranium (based on a
continuation of strong imports from Kazakhstan) and this will keep the ex-China ex-
Kazakhstan market (i.e. the spot market) in balance / small deficit in 2011 and at least 1H12.
As a result of our balance / small deficit forecast for the spot market, we forecast that the
post price will trade at ~ US$60/lb until China stops stockpiling (our best guess of
when this is, is 2H12). In other words, the only thing stopping prices from digging deeply into
the cost curve is Chinese stockpiling, and our best guess is that China will stop in late 2012.
We expect the uranium spot price will average US$60/lb in 2011, US$56/lb in 2012 and fall to
US$45/lb in 2013, before rising to US$65/lb in 2015-2017. Over the medium term we are
looking to buy uranium at US$40-45/lb (say, in 12-24 months time).
Fig 36 Uranium spot price fell on back of nuclear disaster, but still trading above 90%ile of cost curve
Fig 37 Prices are holding up owing to still strong Chinese imports from Kazakhstan
Source: LME, CRU, Macquarie Research, May 2011 Source: LME, CRU, Macquarie Research, May 2011
The Fukushima disaster has resulted in lower uranium demand from Japan and Germany in
the short and long term, and the knock on effect of higher spare enrichment capacity means
the impact is heightened (higher enrichment means less uranium needed to produce 1t of
enriched product that is loaded into reactors). In addition, we have taken out the bulk of US
reactor new build to 2020. However, we continue to believe that China will reach 33GW of
nuclear capacity by 2015 and 90GW of capacity by 2020.
In the modelling we assume China imports all of the growth in Kazakh output in 2011 as well
as the same amount of material that was imported in 2010 from Kazakhstan (~11,500tU of
imports per year in 2011 and 2012), and imports only negligible amounts of uranium from all
other countries (for reference, ex-Kazakh imports by China in 2010 totalled 7,500tU).
By the end of 2012, on our numbers, China will have accumulated around 36,000tU of stock
between 2006 and 2012, which is equivalent to around two years of consumption at 90GW
(the country‟s 2020-2025 rough target). We therefore assume no further stockpiling beyond
2012. If China stops stockpiling or does so less than we expect, the market will move into
surplus and spot will fall – we expect this will occur around 2H12 / 2013 (but its very hard to
say).
35
40
45
50
55
60
65
70
Ja
n 0
9
Ma
r 0
9
Ma
y 0
9
Ju
l 0
9
Se
p 0
9
No
v 0
9
Ja
n 1
0
Ma
r 1
0
Ma
y 1
0
Ju
l 1
0
Se
p 1
0
No
v 1
0
Ja
n 1
1
Ma
r 1
1
Ma
y 1
1
$/lb
U3
08
0
500
1000
1500
2000
2500
3000
3500
Jan
08
Mar
08
May 0
8
Ju
l 08
Sep
08
No
v 0
8
Jan
09
Mar
09
May 0
9
Ju
l 09
Sep
09
No
v 0
9
Jan
10
Mar
10
May 1
0
Ju
l 10
Sep
10
No
v 1
0
Jan
11
Mar
11
mt
U
Uzbekhistan
Russia
Namibia
Kazakhstan
Australia
World (3MMA)
Chinese uranium imports, monthly
We see spot
uranium trading at
US$60 for remainder
of 2011 and 1H12
Macquarie Research Commodities Compendium
17 May 2011 18
Why do we have any conviction that China will continue to stockpile? Firstly, the infrastructure
is in place to continue to take Kazakh material – there is a rail line that runs through
Kazakhstan in Xinjiang (Urumqi) which began operating in April 2008. Secondly, the Kazakhs
have been selling uranium at US$45/lb to China through 2010 and this continued in 1Q11
(China has imported 2,600tU of uranium from Kazakhstan - annualising at 10,400tU - at an
average price of US$44/lb), compared to average spot prices of US$55/lb, suggesting longer
term supply deals.
The other factors are that there have been numerous reports of the Kazakhs paying back
loans from the Chinese in the downturn with uranium, and reports that Kazatomprom has
recently become far more interested in obtaining material for export to China (i.e. Chinese
demand for Kazakh material still very strong).
With this price profile through 2013, we expect significant project delays and cancellations
over the next two years, and can see a vast amount of the 2014-2017 production growth not
coming to market. In particular, there is major downside risk to our Ranger supply forecasts
beyond 2013.
Fig 38 Cumulative Chinese imports since 2006, mainly coming from Kazakhstan and Uzbekistan
Fig 39 China has stockpiled 23,000tU as at end
1Q11 at ‘cheap’ prices, mainly from Kazakhstan – we assume this continues in 2011 and 2012
Source: Trade Statistics, Macquarie Research, May 2011 Source: Trade Statistics, Macquarie Research, May 2011
Source: Macquarie Research, WNA, Industry Sources, Trade Statistics, May 2011
0
2500
5000
7500
10000
12500
15000
17500
20000
22500
25000
27500
30000
32500
Jan
06
Ap
r 06
Ju
l 06
Oct
06
Jan
07
Ap
r 07
Ju
l 07
Oct
07
Jan
08
Ap
r 08
Ju
l 08
Oct
08
Jan
09
Ap
r 09
Ju
l 09
Oct
09
Jan
10
Ap
r 10
Ju
l 10
Oct
10
Jan
11
mt
U
Australia Kazakhstan
Namibia Russia
Uzbekhistan
Chinese uranium imports
cumulative since 2006 tU 2006 2007 2008 2009 2010 Sum
Apparent demand 2523 1979 2805 5943 16405 29656
Actual demand 1152 1427 1641 2347 3004 9572
Stockbuild 1371 553 1164 3596 13401 20084
Price paid ($/lbs U308) 40 66 55 47 45 46
Spot ($/lbs U308) 48 99 64 47 43 61
World uranium balanceTonnes U 2009 2010 2011f 2012f 2013f 2014f 2015f 2016f 2017f
---Total Primary 50815 52199 54004 58552 61053 64826 70297 77438 82716
----of which Kazakh 14020 17803 19600 20000 20000 21000 22000 24000 25000
----of which Cigar Lake 0 0 0 0 385 1155 3080 5005 6930
---Other Supply 21521 19143 17688 17534 17352 11836 11378 12354 11969
----of which from HEU 7700 7700 7700 7700 7700 3000 3000 3000 3000
Total Supply 72336 71342 71692 76086 78404 76662 81675 89792 94685
% Change YoY 12.2% -1.4% 0.5% 6.1% 3.0% -2.2% 6.5% 9.9% 5.4%
Total Requirements 64827 67212 66491 69564 73277 76596 80292 81108 89327
% Change YoY 1.1% 3.7% -1.1% 4.6% 5.3% 4.5% 4.8% 1.0% 10.1%
Balance 7508 4130 5201 6522 5127 66 1383 8684 5357
Surplus/deficit (%mkt) 11.6% 6.1% 7.8% 9.4% 7.0% 0.1% 1.7% 10.7% 6.0%
Imports natural uranium 5109 17136 11426 11826 6414 6653 7469 6779 11043
Chinese stock change assumption 3463 14902 7485 7641 0 0 0 0 0
Ex-China deficit / stock shifting 4046 -10772 -2284 -1119 5127 66 1383 8684 5357
Spot price forecast (new) 47 46 60 56 45 60 65 65 65
Spot price forecast (old) 47 46 72 70 65 65 65 65 65
Change 0% 0% -17% -20% -31% -8% 0% 0% 0%
Fig 40 Ex-China uranium balance is what matters for the spot market
Macquarie Research Commodities Compendium
17 May 2011 19
Stainless Steel Ongoing strong growth in 2011 led by China
Following strong global stainless steel growth in 2010 (with a strong first half and weaker
second half), 2011 has started strongly with first-quarter growth being very strong. While we
expect growth rates to ease as some destocking takes place, 2011 growth should still be
around 9%.
China continues to drive global growth with a forecast growth of 17.2% YoY in 2011
compared to 27.5% in 2010. China is gradually becoming a significant net exporter of
stainless steel despite talk of anti-dumping cases.
Fig 41 World stainless rebounds after collapse – China leads the way – annual to 2011F
Fig 42 Quarterly world stainless apparent demand = massive gyrations in 2009/2010
Source: ISSF, CNIA, Macquarie Research, May 2011 Source: ISSF, Macquarie Research, May 2011
Fig 43 Global stainless steel production by quarter ('000t)
2010 2010 2010 2010 2011 2011 2011 2011 Year Year Year Year '000t Q1 Q2 Q3 Q4 Q1 Q2F Q3F Q4F 2009 2010 2011F 2012F
USA 621 566 541 472 666 645 555 580 1618 2201 2446 2470 Japan 825 891 849 861 867 800 840 825 2606 3427 3332 3432 Europe 1970 2124 1606 1782 2020 2028 1653 2035 5972 7482 7736 8164 Taiwan 414 398 359 343 377 375 375 390 1468 1514 1517 1548 China 3038 3098 3054 3103 3443 3606 3536 3826 9644 12292 14412 15572 Other 830 816 830 813 848 907 907 928 3084 3289 3590 3826 Total 8203 8393 7743 7915 8766 8901 8413 9124 26068 32254 35204 37250 Total Ex-China 5165 5295 4689 4812 5323 5295 4877 5298 16424 19962 20792 21678 % change yoy USA 71.0% 67.2% 0.6% 25.0% 7.2% 13.9% 2.5% 22.8% -16.0% 36.0% 11.1% 1.0% Japan 100.0% 65.1% 4.1% 2.9% 5.0% -10.3% -1.1% -4.2% -26.9% 31.5% -2.8% 3.0% Europe 58.0% 49.0% 1.2% 4.1% 2.6% -4.5% 2.9% 14.2% -23.6% 25.3% 3.4% 5.5% Korea 66.0% 32.1% 1.3% 8.7% 7.9% 8.2% 8.6% -0.2% -3.8% 22.2% 6.0% 3.0% Taiwan 59.0% -4.5% -14.6% -7.3% -8.8% -5.7% 4.4% 13.5% 13.2% 3.2% 0.2% 2.0% China 60.7% 27.0% 11.5% 20.5% 13.3% 16.4% 15.8% 23.3% 36.8% 27.5% 17.2% 8.1% Other 24.4% 4.8% -3.4% 4.3% 2.2% 11.1% 9.3% 14.2% -3.3% 6.6% 9.1% 6.6% Total 59.5% 32.9% 3.8% 10.7% 6.9% 6.1% 8.7% 15.3% -2.0% 23.7% 9.1% 5.8% Total Ex-China 58.7% 36.5% -0.6% 5.2% 3.1% 0.0% 4.0% 10.1% -15.9% 21.5% 4.2% 4.3%
Source: Macquarie Research, May 2011
0
3000
6000
9000
12000
15000
18000
21000
24000
27000
30000
33000
36000
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
'000t
melt
ed
World World Ex-China
-45%
-35%
-25%
-15%
-5%
5%
15%
25%
35%
45%
55%
65%
75%
85%
Q104
Q304
Q105
Q305
Q106
Q306
Q107
Q307
Q108
Q308
Q109
Q309
Q110
Q310
Q111
% c
han
ge Y
oY
China Ex-China
Stainless
production
recovering after
2H10 correction
Macquarie Research Commodities Compendium
17 May 2011 20
Nickel price changes tend to lead to stainless steel price changes, so when nickel rises,
stainless buyers tend to over-order, while they destock in a falling nickel price environment.
This creates some volatility in the order and production patterns for stainless and in part
generated the substantial recovery in production in the first half of 2010 and first half of 2011.
There are now signs of this being reversed as alloy surcharges on stainless steel prices are
anticipated to fall in May and June during the early part of 2011. This may start to ease
production rates by mid-year.
The volatility in nickel prices appeared to have led to large substitution away from the
standard high-nickel 300-series grades (Fig 44) in recent years. We would argue that it was
the lack of nickel availability that did the most harm however. Now that nickel is more
available (in large part due to the surge in Chinese nickel pig iron production), we are seeing
a stabilisation in the share of 300-series in total production. Indeed, the availability of cheap
nickel pig iron is giving Chinese stainless steel producers a significant global competitive
advantage in producing high-nickel grades, leading to rising exports.
We remain positive about the outlook for global production in the 2011–15 period, with
average growth in global production of close to 5–6% per year. For the stainless industry, the
current and future overcapacity, mainly driven by China, will make it difficult for the industry to
re-establish the strong margins seen in the bull market years.
Fig 44 300-series ratio in total stainless steel production starting to stabilise?
Fig 45 Stainless steel prices in Europe – falling alloy surcharges lead to lower orders and vice versa
Source: ISSF, Macquarie Research, May 2011 Source: CRU, Macquarie Research, May 2011
50%
55%
60%
65%
70%
75%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011f
2012f
% o
f to
tal
sta
inle
ss
7.0%
7.2%
7.4%
7.6%
7.8%
8.0%
8.2%
8.4%
8.6%
8.8%
9.0%
% n
i in
au
ste
nit
ic
300 series share %
Nickel content %
500
1000
1500
2000
2500
3000
3500
2007 2008 2009 2010 2011
Eu
ro/t
on
ne
Alloy surcharge Base price
Nickel price
movements create
volatility in the
stainless production
cycle
Macquarie Research Commodities Compendium
17 May 2011 21
Nickel Nickel supply growth delayed…but it is coming
The nickel market has remained extremely tight so far in 2011 with prices holding at attractive
levels in relation to costs for most of the industry. The market has benefited from strong
demand from most parts of the stainless steel industry (particularly the USA and China) in
early 2011 with global output rising by 7% YoY in 1Q 2011.
The other support to nickel has come from the supply side with an estimated 50kt (or 3%) of
nickel production losses from plan at existing output expected in 2011 (so far). The shortfalls
include around 20kt at Vale‟s Canadian and Indonesian operations, 10kt at Pacific Metals in
Japan, around 10kt at BHP Billiton‟s Australian and Colombian operations, around 3kt losses
at Posco‟s Korean smelter as well as smaller issues at Talvivaara, Xstrata Norway, Minara
Nickel and small Chinese conventional operations. In addition, there was virtually no
production from any of the major Greenfield operations currently under commissioning. We
estimate a 1H deficit of around 56kt split between LME stock falls and continued non-
recorded falls in Chinese stocks.
Our forecasts now suggest a small overall deficit in 2011 of 25kt (implying a 2H 2011 surplus)
but then surpluses in 2012-13 as new supply hits the market. Prices are likely to experience a
downside correction in 2H 2011, but the downside remains limited by the rising cost of
Chinese nickel pig iron, which supports prices above US$8/lb and possibly US$9/lb. We
have our price forecasts virtually unchanged from our previous forecasts and are forecasting
an average of US$11.11/lb this year and US$9.50/lb in 2012.
Fig 46 Nickel quarterly supply/demand balance („000t Ni)
Source: LME, Macquarie Research, May 2011
The return to work at Vale‟s Ontario and Voisey‟s Bay operations will add around 45kt to
production YoY in 2011. Supply will also rise in 2011 from the start-up of a number of
Greenfield nickel productions (Vale New Caledonia (Vale, 60ktpa), Onça Puma (Vale –
52ktpa), Barro Alto (Anglo American – 42ktpa), Ramu River (32ktpa), Ambatovy
(Sherritt/KORES, Sumitomo – 60ktpa) and Taguang (Myanmar – 23ktpa). In addition, First
Quantum is planning to restart the 40ktpa Ravensthorpe HPAL project in 2H 2011.
In addition to these projects there is also new Chinese nickel pig iron production (+60kt).
Delays in the big projects suggest now that 2012 will be a bigger growth year than 2011
however. There remains significant project risk from the high-pressure acid leach (HPAL)
projects in this list (VNC, Ramu, Ambatovy and Raventhorpe). We expect only around +20kt
from these four projects in 2011.
The large projects have mostly experienced substantial cost over-runs and technical failure of
any of these projects could have a negative impact on further investment in this sector. The
market could ultimately become more dependent on Chinese nickel pig iron as the swing
factor in the market. There appears to have been a major rise in NPI production so far in 2011
and there is upside risk to our supply forecasts for this product.
-5
2833
54 51
43
-34
6
-29
-47
-4
20
-27 -29
11
20
270
290
310
330
350
370
390
410
430
Q108
Q208
Q308
Q408
Q109
Q209
Q309
Q409
Q110
Q210
Q310
Q410
Q111E
Q211F
Q311F
Q411F
SD
: '0
00t
Ni
-60
-40
-20
0
20
40
60
Bala
nce:
'000t
Balance Supply Use (not demand)
The market is now
closer to balance
after a large deficit
in 1H10
There are significant
risks to the large
pipeline of
production capacity
to come online in
2011/12
Macquarie Research Commodities Compendium
17 May 2011 22
Fig 47 Nickel supply/demand balance ('000t Ni)
`000t 2009 2010 2011f 2012f 2013f 2014f 2015f 2016f
Total SS Production 26068 32254 35204 37250 39280 41495 43853 45927 % Change -2.0% 23.7% 9.1% 5.8% 5.5% 5.6% 5.7% 4.7% Ni-containing SS Prod. 19012 23158 25063 26678 28122 29544 31254 32781 % Change 1.2% 21.8% 8.2% 6.4% 5.4% 5.1% 5.8% 4.9% Nickel Consumption 1263 1492 1585 1689 1767 1848 1946 2037 % Change -1.8% 18.1% 6.2% 6.6% 4.6% 4.6% 5.3% 4.7% Nickel Supply 1347 1431 1559 1737 1831 1847 1993 2037 % Change -3.9% 6.2% 9.0% 11.4% 5.5% 0.9% 7.9% 2.2% World Market Balance 84 -61 -25 48 64 0 47 0 China stock change 125 -51 -25 0 0 0 0 0 Non-Chinese balance -42 -10 0 48 64 0 47 0 LME/Producer stocks 247 227 201 249 313 313 360 360 Weeks' world demand 10.0 7.8 6.5 7.5 9.0 8.6 9.4 9.0 LME Cash Price (cents/lb) 670 990 1111 950 875 850 900 950 LME Cash Price ($/tonne) 14775 21824 24500 20944 19290 18739 19841 20944
Source: INSG, CRU, Macquarie Research, May 2011
Fig 48 Sharp rise in nickel costs supports a permanently higher price
Fig 49 YoY changes in world production: huge 2011 and 2012 growth in prospect
Source: CRU, Macquarie Research, May 2011 Source: INSG, CRU, Macquarie Research, May 2011
Fig 50 Where we see 2011 supply growth Fig 51 Many new projects coming on stream but delayed
Source: Company data, Macquarie Research, May 2011 Source: ICSG, Macquarie Research, May 2011
0
1
2
3
4
5
6
7
8
9
10
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
E
$/l
b n
om
inal
90th percentile Median
48
22
62
19
52
65
-5
-54
84
128
177
95
0
134
48
32
-70
-50
-30
-10
10
30
50
70
90
110
130
150
170
190
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
Ch
an
ge
('0
00
t)
Note: After disruption allowance
4
5
4
7
11
17
22
45
0 10 20 30 40 50
Eramet
Vale New Caledonia
Cunico
Macedonia/Kosovo
Ambatovy
Xstrata Norway/DR
Vale Onca Puma
Anglo American
Vale Canada/UK
'000t nickel
2011
Company Project Process Capacity Start-up Contribution
Greenfield projects
Vale VNC (Goro) HPAL 60.0 1Q 11 9.0
Vale Onça Puma FeNi 52.0 1Q 11 17.0
First Quantum Ravensthorpe HPAL 39.0 2H11 5.0
Anglo American Barro Alto FeNi 40.0 1Q 11 18.0
Sherrit/Kores/Sumitomo Ambatovy HPAL 60.0 3Q11 7.0
MMC/Highland Pacific Ramu HPAL 32.0 2H 11? 0.0
Chinese NPI Various FeNi 70.0 Year 60.0
Taguang Taung Nickel Taguang FeNi 23.0 2H 11? 6.0
Subtotal 376.0 122.0
Main brownfield expansions
Mirabella Santa Rita Mine Year 7.0
Xstrata Falcondo restart FeNi 1Q 11 12.0
Cunico Macedonia Feni Year 4.0
Talvivarra Finland Leach Year 15.0
Subtotal 38.0
Macquarie Research Commodities Compendium
17 May 2011 23
Ferrochrome FeCr prices falling, despite strong demand and rising costs
Ferrochrome is used mainly in stainless steelmaking (we estimate 80%-plus of total usage).
With this in mind it should come as no surprise, of course, that the 30-year record rebound in
world stainless steel output in the first half of last year supported some recovery in ferrochrome
prices from the recession of 2008-09. Prices softened again for mainly seasonal reasons in
Q3 2010 before beginning to rise once more, culminating in an increase in the headline
contract price for charge chrome sales into Europe of 10¢/lb to 135¢/lb DDP in Q2 2011.
However, spot market ferrochrome prices have started falling once more over the last
two months (Fig 52) and we think that contract prices will be weaker as a result in H2 2011.
The pressure on prices comes from strong supply and a slowdown in the rate of increase in
stainless steel production, and despite rising costs led by power charges, notably in South
Africa, where the dollar impact is amplified by the present strength of the rand.
Fig 52 FeCr spot prices are now falling again Fig 53 China‟s Cr ore imports are on a rising trend
Note: HC FeCr, 58%-60% Cr, 6%-8% C Source: SBB, Macquarie Research, May 2011
Source: GTIS, Macquarie Research, May 2011
In the medium term we think that China will continue to import more chrome bearing
raw materials from overseas (Fig 53) in order to increase its own FeCr production (Fig 54).
Other producers are also expected to expand output, notably Kazakhstan-based ENRC,
which is the industry‟s most cost competitive producer. As a result, we think the market
balance is unlikely to tighten sufficiently to prompt a repeat of the price spike of 2008.
Fig 54 China, Kazakhstan forecast to lead rising output from to 2015
Fig 55 FeCr prices forecast to remain range bound in the next five years
Note: chart shows net increase in output from 2010 to 2015 Source: CRU, SBB, Macquarie Research, May 2011
Note: European charge chrome contract price, nominal terms Source: CRU, SBB, Macquarie Research, May 2011
80
85
90
95
100
105
110
115
120
J 2
010
F 2
010
M 2
010
A 2
010
M 2
010
J 2
010
J 2
010
A 2
010
S 2
010
O 2
010
N 2
010
D 2
010
J 2
011
F 2
011
M 2
011
A 2
011
M 2
011
US
¢/lb
CIF
Ch
ina
0
100
200
300
400
500
600
700
800
900
J 2
009
M 2
009
M 2
009
J 2
009
S 2
009
N 2
009
J 2
010
M 2
010
M 2
010
J 2
010
S 2
010
N 2
010
J 2
011
3M
MA
, '0
00 t
on
nes
1,100
525
300 275 250
100 100
500
0
200
400
600
800
1,000
1,200
Chin
a
ENRC
Xst
rata
Outo
kum
pu
India
Turkey
Sam
anco
r
Oth
ers
'000 t
on
nes g
ross w
eig
ht
0
25
50
75
100
125
150
175
200
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
US
¢/lb
DD
P E
uro
pe
Ferrochrome is
used mainly in
stainless
steelmaking
FeCr prices forecast
to remain range
bound
Spot FeCr prices
are falling
Macquarie Research Commodities Compendium
17 May 2011 24
Molybdenum Deficit delayed by renewed Chinese exports
Molybdenum (moly) prices have been relatively stable over the past two years. While the
market appears to have moved into deficit, China moved from being a substantial net
importer in 2009 back to being a small net exporter with suggestions of destocking taking
place. There appears to be destocking of some of the speculative inventory built in 2010,
leading to a non-Chinese market surplus. We expect prices to recover in late-2011 as
Chinese destocking ends, Chinese exporter quotas are filled and the market moves into defict
in both China and ex-China.
Prices remain well above historical normals supported by high-Chinese costs. Recent
changes in the market structure (mainly due to rapidly rising Chinese demand and uncertain
Chinese supply) have combined to create higher and more volatile prices and a higher price
floor. Much higher prices have been established, although molybdenum has not been so
heavily influenced by the wave of speculative and investment interest that has swept across
the exchange-traded commodity markets. This may eventually change with the new LME
contract, but there is no sign of that happening in the short run as the LME contract has
remained largely unused.
We have left our price forecasts largely unchanged from previously due to a similar supply
demand picture. Our forecasts for prices for 2011 to 2015 are based on the assessment that
the market will need high-cost Chinese marginal primary capacity to meet incremental
demand. This capacity needs prices in the US$13–17/lb range, and costs will most likley rise
in US$ terms. It is really only in 2014 and 2015, when Freeport-McMoran‟s (FCX US,
US$99.88, Not rated) Climax primary mine is fully onstream, that prices may relax as reliance
on this high-cost Chinese supply eases.
In the short run (next two years), prices should be stronger due to an expected market deficit
and lower 2012 production from two of the larger players, Thompson Creek and Rio Tinto,
due to lower Mo grades. Also extremely high copper prices will probably push the main
copper by-product produers to maximise copper at the expense of molydenum grades in ore
bodies. There could well be some downside supply risk.
In 2013-2015, however, the expansion at Kennecott plus higher production from Climax plus
a number of likely greenfield projects should push prices lower again. Freeport says that its
30m lbs/year Climax primary mine will be ready from 2012 but says the actual startup date
will depend on market conditions – we are assumining a 2H2012 start, after prices are
sustained above US$20/lb once again.
Following a (revised) 50m lb surplus in 2009, we estimate that there was a 8m lb deficit in
2010 and a further 32m lb of deficts in 2011 and 2012 combined, followed by a relatively
balanced market in 2013/14 until a larger surplus emerges in 2015.
Chinese market fundamentals will play a key role in the market going forward and are the key
uncertainty. We assume trend demand growth rate of 7–8% a year from 2011 to 2015. We
assume mine output and capacity will continue to grow steadily but from 2011 onwards,
China will be a growing net importer of molybenum. A higher Chinese growth rate and some
restictions on Chinese supply growth remain a possibility, pushing the market into an even
larger deficit.
Supply and demand outside China are still important. We estimate that demand outside
China bounced back by 23% YoY in 2010, having fallen 25% in 2009 and 9% in 2008. We
forecast that mine production outside China will grow at a reasonably rapid rate, with
byproduct output up 11% this year after disruption but then fall back to 2% in 2012.
China is back to
being a small
exporter of moly
Mine supply in the
world ex-China is
bouncing back
Macquarie Research Commodities Compendium
17 May 2011 25
Fig 56 World molybdenum supply/demand balance (m lb Mo)
2007 2008 2009 2010 2011F 2012F 2013 2014 2015F
Demand Europe 132 128 80 91 93 95 97 100 102 USA 90 81 65 95 100 103 105 108 111 Japan 54 53 35 48 48 49 50 51 52 China 92 120 150 180 207 224 241 258 274 Other 103 85 80 86 92 99 106 113 121 Total Demand 471 466 410 500 540 569 600 630 660 Change YoY 7.6% -0.9% -12.1% 22.0% 7.9% 5.4% 5.4% 5.1% 4.7% Supply Primary production 225 250 243 268 267 281 298 313 332 By-product production 239 208 207 229 253 258 273 277 322 Catalysts 11 10 10 10 11 12 12 13 13 Total Supply 474 467 460 492 520 557 604 640 714 Change YoY 12.5% -1.5% -1.6% 7.0% 5.8% 7.1% 8.3% 6.0% 11.5% Market Balance 4 1 50 -8 -20 -12 4 10 54 Price $/lb Mo oxide 30.27 29.09 11.17 15.56 17.75 21.00 17.00 15.00 15.00
Source: WBMS, CNIA, C&M, Macquarie Research, May 2011
Fig 57 Molybdenum prices – waiting for the rebound
Fig 58 Chinese net trade – suspected large stock build in 2009 when prices were low
Source: Platts, Macquarie Research, May 2011 Source: WBMS, Platts, Macquarie Research, May 2011
Fig 59 Chinese demand to grow faster than supply
Fig 60 Moly production by supplier – primary share of supply to decline to 50%
Source:, CNIA, Clark and Marron, Macquarie Research, May 2011 Source: Company data, WBMS, Macquarie Research, May 2011
5
10
15
20
25
30
35
Ja
n-0
8
Ma
r-0
8
Ma
y-0
8
Ju
l-0
8
Se
p-0
8
No
v-0
8
Ja
n-0
9
Ma
r-0
9
Ma
y-0
9
Ju
l-0
9
Se
p-0
9
No
v-0
9
Ja
n-1
0
Ma
r-1
0
Ma
y-1
0
Ju
l-1
0
Se
p-1
0
No
v-1
0
Ja
n-1
1
Ma
r-1
1
Ma
y-1
1
$/lb
Mo
-10
-8
-6
-4
-2
0
2
4
6
8
Jan
-07
Mar-
07
May-0
7Ju
l-07
Sep
-07
No
v-0
7Jan
-08
Mar-
08
May-0
8Ju
l-08
Sep
-08
No
v-0
8Jan
-09
Mar-
09
May-0
9Ju
l-09
Sep
-09
No
v-0
9Jan
-10
Mar-
10
May-1
0Ju
l-10
Sep
-10
No
v-1
0
Jan
-11
Mar-
11
Net
exp
ort
s:
lbs M
o
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
Pri
ce:
$/lb
Net exports Mo
Price of mo oxide
0
50
100
150
200
250
300
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011F
2012F
2013F
2014F
2015F
m lb
s M
o
Production Consumption
2009 2010 2011F 2012F 2013F 2014F 2015F
Freeport 54.0 72.0 78.0 82.0 77.0 66.0 66.0
Codelco 47.5 47.8 48.0 49.0 49.0 49.0 50.0
Grupo Mexico 41.2 45.2 45.8 46.8 54.0 60.5 65.5
China Molybdenum 34.0 35.3 36.4 38.0 40.0 45.0 50.0
JDC (China) 30.0 30.0 30.0 30.0 30.0 30.0 30.0
Thompson Creek 25.3 32.6 30.0 27.0 26.8 29.0 29.2
Rio Tinto 24.9 28.4 27.0 15.0 20.0 12.0 50.0
Antofagasta 17.2 19.3 20.9 20.9 20.9 20.9 20.9
Teck 6.6 5.7 5.9 6.0 6.0 6.0 6.0
Anglo America 2.5 4.3 7.9 10.1 7.9 7.9 7.9
Other China 105.1 111.4 122.8 133.8 143.8 153.8 163.8
Former Soviet Union 23.1 23.2 24.3 25.3 29.3 30.3 30.3
Other (inc catalysts) 102.32 108.59 121.24 155.38 176.07 195.73 210.34
Total 459.7 491.9 520.4 557.4 603.9 640.2 714.0
% change YoY -1.6% 7.0% 5.8% 7.1% 8.3% 6.0% 11.5%
of w hich:
Primary 246.4 271.7 279.6 300.5 318.5 334.7 354.9
Primary share % 54% 55% 54% 54% 53% 52% 50%
Macquarie Research Commodities Compendium
17 May 2011 26
Cobalt No stopping the supply surge
In a market as heavily oversupplied as cobalt, it is difficult to find anything to get overly
enthused about. While the market is not as out of kilter as suggested by the CDI statistics for
2010 (>10kt in a 70kt market), the balance is not favourable. After an early year push
supported by rampant industrial output, the cobalt prices have remained stubbornly below the
US$20/lb mark for high grade material. However, after selling off well before other metals on
the back of a potential decline in Japanese demand post-disaster, early May has seen
renewed buying interest. Meanwhile, after falling through the February-March period, LME
stocks have almost doubled since this point, and the spectre of oversupply will continue to
weigh on the market throughout our forecast period.
As ever, Chinese trade is key to sentiment in the cobalt market. With plenty of potential
supply available, there should be fewer impediments to, or competition for sourcing cobalt
seen in other commodities where China is the marginal buyer. However, while not falling,
Chinese imports of cobalt concentrate and intermediate products has been reasonably static,
even in a rising demand environment. This suggests there is plenty of material available on
the ground in China, acting as a buffer to upward price movements. That said, with
concentrate prices having remained relatively robust as metal prices have fallen, the margin
squeeze on Chinese processors should mitigate significant downside risk.
The problem of supply-demand imbalance in cobalt has never come from weak demand
potential. Indeed, cobalt is strongly exposed to sectors with rapid growth planned in the
coming years. We see aircraft engine demand rising at 14% CAGR in the 2011-2016 period,
while the combination of ageing and heavier populations should see prosthetic demand for
cobalt grow at 12% CAGR. Cobalt also has exposure to the machinery cycle through high
strength steel demand while the rechargeable battery sector has always promised much with
for cobalt demand – we still see this area adding the most growth in absolute terms.
Fig 61 Cobalt has consistently underperformed its LME listed peers since the contract inception
Fig 62 LME stocks hit another new high in May 2011, up 42% since the start of the year
Source: LME, Macquarie Research, May 2011 Source: LME, Macquarie Research, May 2011
With demand so strong, much of cobalt‟s difficulties come from the fact that, unlike many
other commodities, the supply side is performing. Part of this can be attributed to the fact that
40% comes from by-product operations, however other key parts of the market have been
growing at or above expectation. Refined metal output in Africa has rebounded strongly after
the financial crisis, with output now equivalent to over 10,000tpa, from under 5,000tpa in H1
2009. Meanwhile, H2 2010 metal production performed better than the chemicals side,
however still-strong Chinese IP numbers seems to have redressed this in 2011.
With the fully-traded LME cobalt contract now one year old, it does appear to be gaining
increasing acceptance in the marketplace. Volumes have been increasing through Q2, while
open interest positions have remained reasonably unchanged.
LME Cobalt price vs. LMEX
30000
32000
34000
36000
38000
40000
42000
44000
46000
02/0
6/1
0
02/0
7/1
0
02/0
8/1
0
02/0
9/1
0
02/1
0/1
0
02/1
1/1
0
02/1
2/1
0
02/0
1/1
1
02/0
2/1
1
02/0
3/1
1
02/0
4/1
1
02/0
5/1
1
$/t
on
ne
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
LME Cobalt LMEX index (RHS)
0
50
100
150
200
250
300
350
400
450
May-10 Jun-10 Jul-10 Aug-10 Oct-10 Nov-10 Dec-10 Feb-11 Mar-11 Apr-11
ton
nes
LME Stocks
Little sign of
excitement in the
cobalt market
Unlike other metals,
supply growth is
performing
LME contract
volumes starting to
pick up
Chinese trade
reasonably static,
plenty of material
available
Demand growth has
never been the
problem
Macquarie Research Commodities Compendium
17 May 2011 27
Fig 63 Cobalt supply and demand balance
Cobalt Demand (t) 2008 2009 2010F 2011F 2012F 2013F 2014F 2015F 2016F
Total Demand 58,942 54,228 61,413 66,275 70,064 74,844 80,408 86,536 90,991 % change YoY -2.4% -8.0% 13.2% 7.9% 5.7% 6.8% 7.4% 7.6% 5.1% Total Supply 55,862 57,792 71,741 74,431 80,071 87,764 93,553 100,371 104,257 % change YoY -0.3% 3.5% 24.1% 3.8% 7.6% 9.6% 6.6% 7.3% 3.9% Disruption allowance 2,492 5,131 5,902 6,523 7,409 7,862 Stockpile change (303) 1,550 (7,000) (400) (400) - - - - Balance -3,384 5,114 3,328 7,757 9,606 12,920 13,144 13,835 13,266 Price ($/lb) 99.8% free market/LME 39 17 20 18 16 15 14 15 15
Source: CRU, Metal Bulletin, Macquarie Research, May 2011
Fig 64 Flow of cobalt raw materials into China has been reasonably constant on a trend basis
Fig 65 Production of cobalt chemicals fell in H2 2010, rebound expected this half
Source: CRU, China Customs, Macquarie Research, May 2011 Source: CRU, Macquarie Research, May 2011
Fig 66 Refined metal output from African operations continues to perform very well
Fig 67 Cobalt is exposed to a number of high growth sectors in the coming years
Source: CRU, Company reports, Macquarie Research, May 2011 Source: CRU, Avicenne, Macquarie Research, May 2011
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Jan
Feb
Mar
Ap
r
May
Ju
n
Ju
l
Au
g
Sep
Oct
No
v
Dec
Jan
Feb
Mar
Ap
r
May
Ju
n
Ju
l
Au
g
Sep
Oct
No
v
Dec
Jan
Feb
Mar
2009 2010 2011
ton
nes,
Co
co
nta
ined
Orec and Concs IntermediatesHoH growth in cobalt supply by type
-5% 0% 5% 10% 15% 20% 25%
H1
H2
H1f
2010
2011
Secondary
Chemicals
Metal
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
H1 H2 H1 H2 H1f
2009 2010 2011
ton
nes c
ob
alt
Gécamines Mopani Chambishi
Kasese Katanga Mining
CAGR in cobalt demand by sector, 2011-2016
14.0%
12.0%
9.5%
6.6%7.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
Aircraft Engines Prosthetics Batteries PET processing High Strength
Steel
Macquarie Research Commodities Compendium
17 May 2011 28
Steel Still playing the margin lottery
The run up in steel prices from the start of November 2010 was certainly impressive, with US
domestic hot rolled coil rising over 50% in a four month period and European equivalent
offers up US$250/t, taking prices to the highest level since mid-2008. Much of this was
undoubtedly driven by strong figures emanating from the manufacturing sector, with PMIs in
highly expansionary territory allowing forward stocking of material backed by confidence in
future demand. However, such periods of rapid margin expansion have historically been
short lived. With PMIs, though still expansionary, now trending downwards and
manufacturing preparing for slower growth rates, the desire to add to steel positions has now
reversed. Furthermore, that large arbitrage that had built up between Asian and US/EU
prices was undoubtedly unsustainable, particularly when the differential in utilisation rates
suggested the converse should be true. In recent weeks, European HRC prices have fallen
~US$100/t (12%), with US prices down US$80/t, and we see further downside in the near
future.
Every year seems to bring around market doubts that China‟s steel industry can continue to
grow rapidly, and yet again steel output has surprised on the upside. Jan-Apr production has
averaged 707.5mtpa, 2.5% above our full year forecast of 690mtpa. However, we have yet to
see the full effects of monetary tightening come through in end demand, while the typical
stock cycle of building inventory ahead of Chinese New Year was amplified this year by the
need to make up for Q4 2010 production curtailments. With real demand set to fall
sequentially and the export arbitrage closing, we expect to see production and apparent
demand ease back into Q3 before reaccelerating out of it.
At the current time, steelmakers are having to pay record high raw material prices for both
iron ore and met coal, putting strong upward pressure on production costs. Despite the fact
that freight rates are less than 1/5 of that seen in mid-2008, raw material costs for spot
purchasers have now matched the levels seen during this period, while those for contract
buyers are over US$100/t higher. The fact remains simple – with raw materials now above
70% of production costs to hot rolled product for the average steelmaker, without effectively
managing risk from movements in raw materials, earnings in the sector will continue to be
very much unpredictable. In this cycle, the result has been falls in „immediate‟ margins
(today‟s prices for both raw materials and steel directly compared, no lag) by around
US$150/t for contract buyers from the 1st of April. With prices continuing to slide as apparent
steel demand moves past the peak, further margin compression is likely in the coming months
Fig 68 Falling steel prices and record high raw materials are compressing steel margins in Q2
Fig 69 The strength in US steel prices led to a massive premium over Chinese material, we expect this to close
Source: Platts, CRU, WSD, Macquarie Research, May 2011 Source: CRU, Mysteel, Macquarie Research, May 2011
Steel price minus raw material costs
0
100
200
300
400
500
600
700
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep
-08
Nov
-08
Jan-
09
Mar
-09
May
-09
Jul-0
9
Sep
-09
Nov
-09
Jan-
10
Mar
-10
May
-10
Jul-1
0
Sep
-10
Nov
-10
Jan-
11
Mar
-11
May
-11
$/to
nne
Using contract raw material costs Using spot raw material costs
0
200
400
600
800
1000
1200
1400
Jan
-05
Ma
y-0
5
Se
p-0
5
Jan
-06
Ma
y-0
6
Se
p-0
6
Jan
-07
Ma
y-0
7
Se
p-0
7
Jan
-08
Ma
y-0
8
Se
p-0
8
Jan
-09
Ma
y-0
9
Se
p-0
9
Jan
-10
Ma
y-1
0
Se
p-1
0
Jan
-11
Ma
y-1
1
$/t
on
ne
Chinese domestic HRC
US domestic HRC
Steel still at the
mercy of raw
materials
China running
strong, but current
run rate unlikely to
be maintained
Western price party
petering out
Macquarie Research Commodities Compendium
17 May 2011 29
One of the most interesting steel market drivers in coming years is likely to be changes in
trade flows. Rapidly developing countries – even those blessed with resources of key raw
materials such as India and Brazil – are struggling to add steel capacity to meet their needs.
By 2016, we see India being a net importer to the tune of 13mt, Latin America 16mt, Middle
East 27mt, Africa 24mt and Asia ex-China, Japan and India 51mt. These flows will become
more important price drivers, and offer opportunities for key exporters to secure volumes.
With strong economic growth in emerging markets, and many countries running into capacity
constraints, the medium-term outlook for steel demand continues to look good. While growth
rates are set to decelerate as Chinese demand moves into a sub-GDP phase, we still forecast
growth above the 20-year CAGR average of 3.1% through 2016. Furthermore, this is based
on only a slow rebound in the OECD, to levels below that seen prior to the global financial
crisis. Any significant rebound in OECD construction – the most notable absentee from steel
demand over the past two years – provides further demand upside.
Fig 70 Steel supply and demand balance (crude steel basis, million tonnes)
'000 tonnes 2008 2009 2010 2011f 2012f 2013f 2014f 2015f 2016f
World Consumption 1349 1201 1420 1510 1591 1653 1721 1792 1856 % Change Y-o-Y -0.3% -11.0% 18.3% 6.3% 5.4% 3.9% 4.1% 4.1% 3.6%
World Production 1331 1231 1426 1512 1598 1658 1721 1783 1831 % Change Y-o-Y -1.8% -7.5% 15.8% 6.0% 5.7% 3.7% 3.8% 3.6% 2.7%
Balance -18 30 6 2 8 5 0 -8 -25
Prices 2008 2009 2010 2011f 2012f 2013f 2014f 2015f 2016f Global average HRC ($/t) 878 528 653 794 802 808 780 768 754
Source: worldsteel, Macquarie Research, May 2011
Fig 71 Chinese steel output has been much higher than expected, but we expect the next leg to be down
Fig 72 Inability to build capacity on time looks set to leave India as a large net importer of steel
Source: CISA, Macquarie Research, May 2011 Source: GTIS, Macquarie Research, May 2011
Fig 73 Strong leading indicators in early 2011 looks to have prompted a restock, we foresee a destock into Q3
Fig 74 Global steel consumption growth looks set to stay above long term norms through our forecast period
Source: worldsteel, GTIS, Ecowin, Macquarie Research, May 2011 Source: worldsteel, Macquarie Research, May 2011
CISA 10 day production data
594
570
571 58
4
587 60
0 610 61
6
631
654
619 624
652 66
2
698
692
710
702
704
695 70
8
525
545
565
585
605
625
645
665
685
705
725
1-10
Oct
11-2
0 O
ct
21-3
1 O
ct
1-10
Nov
11-2
0 N
ov
21-3
0 N
ov
1-10
Dec
11-2
0 D
ec
21-3
1 D
ec
1-10
Jan
11-2
0 Ja
n
21-3
1 Ja
n
1-10
Feb
11-2
0 Fe
b
21-2
8 Fe
b
1-10
Mar
11-2
0 M
ar
20-2
1 M
ar
1-10
Apr
11-2
0 A
pr
21-3
0 A
pr
Cru
de
stee
l pro
duct
ion
(mtp
a)
Indian net steel exports
-20
-15
-10
-5
0
5
2005
2006
2007
2008
2009
2010
f
2011
f
2012
f
2013
f
2014
f
2015
f
2016
f
2017
f
2018
f
2019
f
2020
f
mil
lio
n t
on
nes
-30%
-20%
-10%
0%
10%
20%
30%
40%
Ja
n-0
7
Ma
y-0
7
Se
p-0
7
Ja
n-0
8
Ma
y-0
8
Se
p-0
8
Ja
n-0
9
Ma
y-0
9
Se
p-0
9
Ja
n-1
0
Ma
y-1
0
Se
p-1
0
Ja
n-1
1
Yo
Y c
ha
ng
e -
Wo
rld
Steel Consumption
Industrial Production
18.3%
6.3%5.4%
3.9% 4.1% 4.1% 3.6%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
2010 2011f 2012f 2013f 2014f 2015f 2016f
YoY consumption growth
20 year CAGR
Adding sufficient
steel capacity a
challenge for many
developing
countries
Demand growth still
set to be above
trend, with OECD
construction giving
upside
Macquarie Research Commodities Compendium
17 May 2011 30
Iron Ore Can‟t ignore the cost inflation
We believe iron ore remains undervalued as a commodity, as a combination of factors is likely
to cause the supply side to underperform in the medium term. The robust growth in iron ore
demand in recent years has strained seaborne supply to the limit; and, as with many other
commodities, China has mobilised its own resources in order to prevent raw material
availability from becoming a bottleneck to economic growth. This material is typically low
grade (Fe levels which simply would not be mined anywhere else) and thus high cost. Of the
300mt (62% basis) of ore production in China at present, we estimate only 100mt would be
present in an equilibrium market environment, and thus one could say that the iron ore market
is undersupplied by about 200mtpa.
Even in the short term, seaborne supply is stretched to the limit. In Q1 2011 Australian
exports were down 12% QoQ with Brazil down 16% over the same period, both hampered by
heavy rains during the quarter. Furthermore, Indian exports have been down YoY for 11
consecutive months, and in Jan-Apr 2011 we have already lost 12mt of Indian supply YoY.
We do see some recovery in H2, but very limited increase to seaborne capacity in this period.
With the importance of spot sub-market dynamics on overall pricing, the likely moderation in
China‟s iron and steel output into mid year will be felt by the small Chinese mills, who remain
the marginal buyers in the marketplace. However, any destock is likely to prove short-lived
this time round, as inventories held by small mills are low, at around the 30 days of use mark.
Therefore, we think iron ore will stabilise at a level above US$150/t CFR China, before
reaccelerating into Q2.
With seaborne supply struggling to deliver, we think in excess of 300mtpa of Chinese
domestic ore (62% basis) will be needed to balance the iron ore market through 2013, before
new projects erode this requirement. While such volumes are required, the market remains
critically tight, and iron ore is likely to trade at a level to make even the marginal tonnages
viable to extract. Moving forward, two crucial factors are at play. From 2012 onward, slightly
less Chinese domestic ore should be needed to balance the market each year. However, the
amount that is left in the market is inflating at a very fast rate, likely to be around 6% per
annum (mining inflation in China has been running close to 20% pa for the past couple of
years). Therefore, we still see the spot price being well underpinned by the cost structure of
Chinese domestic ore at around US$150/t in 2015 – well above market expectations.
Fig 75 Seaborne trade has struggled thus far in 2011, with Australian and Brazilian shipments down
Fig 76 With seaborne supply growth struggling, Chinese domestic ore is not being displaced fast enough
Source: Platts, Macquarie Research, May 2011 Source: NBS, Macquarie Research, May 2011
One of the key stories running through the iron ore sector is the surge in capital intensity,
which has more than doubled in the past five years and reaccelerated again into 2011. This
has been highlighted in BHP‟s recent announcement that its expansion to 220mtpa in the
Pilbara will come in at capex of US$180 per tonne of annualised capacity. In pushing capital
cost inflation through our incentive price calculation for a West African project funded by the
Chinese, this has necessitated a 12.7% increase in our long run price to US$80/t CFR China.
Monthly seaborne trade in iron ore
0
10
20
30
40
50
60
70
80
90
100
Ja
n-0
5
Ju
l-0
5
Ja
n-0
6
Ju
l-0
6
Ja
n-0
7
Ju
l-0
7
Ja
n-0
8
Ju
l-0
8
Ja
n-0
9
Ju
l-0
9
Ja
n-1
0
Ju
l-1
0
Ja
n-1
1
mil
lio
n t
on
ne
s p
er
mo
nth
, 3
MM
A
To China To ex-China
Required Chinese domestic iron ore output
0
50
100
150
200
250
300
350
400
2009 2010 2011f 2012f 2013f 2014f 2015f 2016f
millio
n t
on
nes, 62%
basis
We consider iron
ore to be strongly
undersupplied
Seaborne trade set
to be down in H1
2011, limited growth
in H2
Ever-rising capital
intensity pushing up
incentive price
required for new
projects
Steel pullback will
drag price down, but
inventories are
already low
Chinese domestic
cost inflation still
crucial to the iron
ore outlook
Macquarie Research Commodities Compendium
17 May 2011 31
Fig 77 Iron ore supply and demand balance
Iron Ore Summary
million tonnes 2009 2010 2011f 2012f 2013f 2014f 2015f 2016f Ex-China Seaborne Demand 270 376 394 404 410 414 417 423 YoY change (mt) -122 107 18 10 6 4 3 6 % Change y-o-y -31.2% 39.6% 4.8% 2.5% 1.5% 0.9% 0.8% 1.4% Total Chinese demand (62% basis) 895 963 1028 1088 1131 1175 1217 1261 Total contestable market demand 1165 1339 1422 1493 1541 1589 1634 1685 Supply Total Seaborne Supply 938 1042 1089 1157 1245 1334 1410 1483 % Change y-o-y 10.9% 11.0% 4.6% 6.3% 7.6% 7.1% 5.7% 5.2% Required Chinese domestic ore (62% basis) 226 298 333 335 296 255 224 202 Price Forecasts Spot fines CFR China (62% Fe) 143 147 178 178 176 163 155 140
Source: Trade data, Macquarie Research, May 2011
Fig 78 We see the iron ore price trading well above the current forward curve into the medium term
Fig 79 Indian supply continues to disappoint, down 12mt YoY in the first four months of 2011
Source: SGX, TSI, Macquarie Research, May 2011 Source: Shipping sources, Macquarie Research, May 2011
Fig 80 Monthly moves in the iron ore price have consistently moved in the same direction as demand
Fig 81 Iron ore inventory at small Chinese mills is low in days of use, preventing any prolonged destock
Source: Company reports, Macquarie Research, May 2011 Source: Macquarie Research, May 2011
100
110
120
130
140
150
160
170
180
190
200
Apr-
11
Jul-11
Oct-
11
Jan-1
2
Apr-
12
Jul-12
Oct-
12
Jan-1
3
Apr-
13
Jul-13
Oct-
13
$/t
on
ne C
FR
Ch
ina
SGX forw ard curve
Macquarie forecast
YoY growth in Indian export volumes
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
Jan-0
8
Apr-
08
Jul-08
Oct-
08
Jan-0
9
Apr-
09
Jul-09
Oct-
09
Jan-1
0
Apr-
10
Jul-10
Oct-
10
Jan-1
1
Apr-
11
MoM % change in Chinese steel and iron ore prices
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
Ja
n-1
0
Fe
b-1
0
Ma
r-1
0
Ap
r-1
0
Ma
y-1
0
Ju
n-1
0
Ju
l-1
0
Au
g-1
0
Se
p-1
0
Oct-
10
No
v-1
0
De
c-1
0
Ja
n-1
1
Fe
b-1
1
Ma
r-1
1
Change in iron ore price
Change in steel output
Iron ore inventory (small mills) and spot prices
25
27
29
31
33
35
37
39
41
43
45
03/0
9/2
010
03/1
0/2
010
03/1
1/2
010
03/1
2/2
010
03/0
1/2
011
03/0
2/2
011
03/0
3/2
011
03/0
4/2
011
03/0
5/2
011
Iro
n o
re i
nven
tory
- d
ays o
f u
se
130
140
150
160
170
180
190
200
Sp
ot
iro
n o
re p
rices -
62%
Fe,
CF
R
Ch
ina
Iron ore inventory
Spot iron ore prices
Macquarie Research Commodities Compendium
17 May 2011 32
Manganese Prices fall under weight of strong supply, high stocks
Manganese is used mainly in the production of manganese ferroalloys for steelmaking.
We estimate that ~94% of world manganese ore mine output is used to produce manganese
ferroalloys (including manganese ore used in the production of electrolytic manganese metal).
As a result demand for manganese is driven by steelmaking.
Manganese has three uses in steelmaking:
1. As an alloying agent to achieve specific metallurgical properties in finished steel products.
Manganese increases tensile strength, toughness, hardness, wear resistance and machinability
(although it also reduces ductility and weldability) and this is its main use in steelmaking today.
2. To “fix” residual sulphur impurities originating from the raw materials used in steelmaking.
Since hot metal desulphurisation is standard practice in steelmaking today use of manganese
for this purpose has fallen from past levels. However, manganese remains essential for fixing
the residual sulphur that remains in all steelmaking and there are no substitutes.
3. Historically manganese has been used to “kill” (de-oxidise) steel but has mainly been
replaced in this role by aluminium and silicon today.
Rising steel production has driven a recovery in demand for manganese ore and ferroalloys,
which in the first half of last year was sufficient to lift prices with spot manganese ore into
China trading to over US$8/dmtu CIF in Q2 2010. Since then, however, prices have come
under pressure and fallen almost continually over the last 12 months (Fig 82). The initial
weakness through the second half of last year can be attributed to the sharp reduction in steel
output in China, which swung from an annualised rate of ~670mt in April to an annualised rate
of only ~570mt in October 2010.
China‟s crude steel production has recovered, however, and in recent months has been
running at new record levels of over 700mt annualised but this has not been sufficient to
arrest the fall in prices for manganese ore. Indeed, in May, BHP Billiton announced it was
reducing prices for June shipments of medium-grade (43–44% Mn) lump ore by US70¢/dmtu
(12%) to US$5.30/dmtu CIF China. Prices for low-grade carbonate ores (37–38% Mn) from
South Africa have fallen even further by US100¢/dmtu (17%) to US$4.80/dmtu CIF China.
Manganese ore prices at these levels will leave little margin for high cost producers in our
opinion.
The reason for the fall in prices appears to be strong supply, reflected in rising levels of
reported stocks. Chinese port stocks of manganese ore increased by 3.5% MoM to 3.9mt
gross weight (wet basis) in April, which was more than double the level of the corresponding
month a year ago (Fig 83). The outlook over the next three to six months appears to be quite
bleak with most major producers and traders expecting prices to be flat at best.
Fig 82 Mn ore spot prices fall sharply… Fig 83 …as stocks continue to build at ports in China
Source: CRU, May 2011 Source: IMnI, Macquarie Research, May 2011
5
6
7
8
9
J 2
010
F 2
010
M 2
010
A 2
010
M 2
010
J 2
010
J 2
010
A 2
010
S 2
010
O 2
010
N 2
010
D 2
010
J 2
011
F 2
011
M 2
011
A 2
011
US
$/d
mtu
CIF
Ch
ina
0
1
2
3
4
J 2
010
F 2
010
M 2
010
A 2
010
M 2
010
J 2
010
J 2
010
A 2
010
S 2
010
O 2
010
N 2
010
D 2
010
J 2
011
F 2
011
M 2
011
A 2
011
m t
on
nes w
et
gro
ss w
eig
ht
Manganese is used
mainly as an alloy
and to “fix” residual
sulphur in
steelmaking
Manganese ore
prices fall sharply in
2011
Macquarie Research Commodities Compendium
17 May 2011 33
Fig 84 China drives forecast rise in crude steel output Fig 85 Rising intensity of manganese use in steel
Source: worldsteel, Macquarie Research, May 2011
Source: Note: excludes EMM and direct-charged Mn ore Source: IMnI, worldsteel, Macquarie Research, May 2011
Fig 86 Manganese content of selected steel products
Source: Macquarie Research, May 2011
However, the medium term outlook for manganese ore prices is more promising. Demand
is forecast to rise as a function of both increasing crude steel production (Fig 84) and greater
intensity of manganese use in steelmaking on average (Fig 85 and Fig 86). However, a
return to the double-digit price levels of 2008 appears improbable.
Fig 87 Manganese ore prices fall this year before moderate recovery over the next two-to-three years
Note: prices are for medium grade (43%-44% Mn) lump ore Source: CRU, Macquarie Research, May 2011
0
250
500
750
1,000
1,250
1,500
1,750
2,000
2010 2011F 2012F 2013F 2014F 2015F
m t
on
nes
ROW
USA
Japan
EU-27
China
6.8
6.3
6.0
6.2
6.4
6.6
6.8
7.0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
3Y
MA
, kg
Mn
/ t
on
ne s
teel
0.4%
0.4%
0.5%
0.7%
0.9%
0.9%
1.0%
1.0%
1.2%
1.4%
1.5%
2.0%
9.0%
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
Mild auto sheet - non-exposed
Mild auto sheet - exposed
Mild carbon steel flat products
Mild carbon steel long
High-strength auto sheet
Engineering steels
Stainless 300 / 400 series
API seamless
Rail
API-grade plate
High strength plate
Extra high-strength auto sheet
Stainless 200 series
Average Mn content
0
2
4
6
8
10
12
14
16
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
US
$/d
mtu
CIF
Ch
ina
Medium term
outlook for
manganese ore
prices is brighter
Macquarie Research Commodities Compendium
17 May 2011 34
Metallurgical coal Easing back towards normal in a post-supply shock world
The US$330/t Q2 contract settlement was certainly a „supply shock‟ price, but even with the
tight general fundamentals, the met coal market is at a level unlikely to be sustained. As
supplies have started to flow from flood-afflicted Queensland back into the global market so
the pressure has been eased slightly, while recent weeks have seen a pullback in interest
from key purchasers in the seaborne market. As is often the case, the effect is being felt first
in the semi-soft and PCI markets, with the discount to hard coal set to widen in the near term.
The supply disruptions through Q1 have stretched the coal chain to the limit, such that quite
simply there hasn‟t been enough to go around. China‟s self-sufficiency coupled with a milder-
than-expected winter has allowed Chinese buyers to steer away from seaborne purchases to
a great extent, and thus yet again China has stabilised a commodity market. Moreover, when
the effect of rising coke exports is taken into account, China underwent a substantial shift in
1Q to a small net exporter of met coal product in March in order to take advantage of the
pricing arbitrage available into the undersupplied international market. While impressive, in
our view this is unsustainable (particularly with steel output at high levels), as coal/coke
stocks have been drawn down and exports of primary energy are not looked upon favourably
by the government. If such volumes were to be maintained, an increase in the coal export tax
may swiftly follow. However, short term, price driven net trade swings from China will likely
be commonplace in tightly balanced markets into the future
Fig 88 The hard coking coal spot price jumped post-Queensland, but is now starting to wane
Fig 89 Even with supplies coming back, Australian exports are likely to be down YoY in 2011
Source: Platts, Macquarie Research, May 2011 Source: GTIS, Macquarie Research, May 2011
Even with a strong response from US export volumes and China disappearing from the
market, the 12mt drop in Queensland supply vs. expectations this far in 2011 has led to a
dramatic destock at all points in the chain. A mid-year lull in steel output should allow a
degree of replenishment, however given our expectation that blast furnace production should
reaccelerate out of Q3 inventories are likely to remain below critical levels. While this
situation prevails, prices for hard coking coal are likely to trade above „equilibrium‟ levels.
Our supply/demand balance suggests that, even with the strong growth in Australian and
greenfield exports, the market overall remains in small annual deficit in the coming years. The
lack of strong, geographically diverse supply response is the prime reason metallurgical coal
remains our favourite bulk commodity on a longer-term view. We do factor in strong growth
from Mongolia, Mozambique and Indonesia in coming years, however with over 50% of future
seaborne growth coming from Australia the importance of Queensland cannot be diluited.
In our view, the new „normal‟ through the medium term is a US$225–250/t FOB Australia
price for hard coking coal, well above cost support, with brand sensitivity from Japanese
buyers driving an increasing „premium for premium‟. Meanwhile, rising capital cost for new
projects has seen our long run price rise US$10/t to US$145/t FOB Australia for hard coking
coal.
150
200
250
300
350
400
02-A
pr
02-M
ay
02-J
un
02-J
ul
02-A
ug
02-S
ep
02-O
ct
02-N
ov
02-D
ec
02-J
an
02-F
eb
02-M
ar
02-A
pr
02-M
ay
$/t
on
ne F
OB
Au
str
alia Premium HCC Spot Assessment
YoY growth in seaborne met coal supply
-4%-2%
9%
0%
35%
5%
33%
-10%
-5%
-
5%
10%
15%
20%
25%
30%
35%
40%
Australia Canada US Russia Indonesia Other Mongolia
Pricing slowly
easing back, but
ongoing effects
from Queensland
floods still felt
China’s reactivity in
altering net trade
position has
alleviated pressure
on the market
Key to pricing in
coming quarters is
how quickly
depleted inventories
are replenished
No easy solution to
Queensland
overreliance
Ongoing potential
for supply shocks
drives security
premium
Macquarie Research Commodities Compendium
17 May 2011 35
Fig 90 Seaborne met coal demand and supply
2008 2009 2010 2011F 2012F 2013F 2014F 2015F 2016F
Met coal demand (mt) Europe 68 44 64 65 68 70 71 71 73 China 3 37 38 30 44 50 54 55 59 Asia ex-China 118 102 134 141 149 152 157 161 167 Brazil 12 11 14 14 16 16 17 18 19 Other 21 12 16 19 19 21 22 24 26 Total Demand 223 206 266 269 295 309 321 330 344 % change 3.4% -7.7% 29.3% 1.1% 10.0% 4.7% 3.6% 2.9% 4.2% Met coal supply (mt) Australia 135 131 159 153 171 179 182 190 202 Canada 25 20 26 26 27 28 32 32 32 USA 35 31 48 52 52 52 52 52 52 Other 27 23 33 36 40 44 51 57 52 Total Supply 223 206 266 268 290 304 317 331 339 % change 3.4% -7.7% 29.3% 0.7% 8.5% 4.7% 4.2% 4.5% 2.4% Notional Balance - - - -1 -5 -6 -4 1 -5 Price ($/t FOB Aus) 2008 2009 2010 2011F 2012F 2013F 2014F 2015F 2016F Hard Coking Coal 300 129 215 303 264 236 223 215 205
Source: GTIS, Macquarie Research, May 2011
Fig 91 Two elements of the met market in Q1 2011 are likely to repeat in coming years – firstly US exports have again swung to the rescue …
Fig 92 …but it is really the swing in Chinese net trade position which has been the big stabilising shift – look for more price-driven shifts in future
Source: Customs data, GTIS, Macquarie Research, May 2011 Source: China Customs, Macquarie Research, May 2011
Fig 93 The response from Chinese domestic coal production to increased demand was impressive
Fig 94 A pullback in iron and steel output in key demand regions may allow some degree of stock rebuild
Source: NBS, Macquarie Research, May 2011 Source: worldsteel, Macquarie Research, May 2011
-70
-50
-30
-10
10
30
50
Mar 03 Mar 05 Mar 07 Mar 09 Mar 11
-70
-50
-30
-10
10
30
50
Coal in Coke exportsImports
ExportsNet exports
mt annualised mt annualisedChinese seaborne met coal net
exports
Chinese apparent production of coking coal
413
457463
472
428
492
460
352
412
429
469
493
460
511
482493
536
300
350
400
450
500
550
Q1 0
7
Q2 0
7
Q3 0
7
Q4 0
7
Q1 0
8
Q2 0
8
Q3 0
8
Q4 0
8
Q1 0
9
Q2 0
9
Q3 0
9
Q4 0
9
Q1 1
0
Q2 1
0
Q3 1
0
Q4 1
0
Q1 1
1
An
nu
alised
mt
Changes in blast furnace output
-10%-8%
-6%-4%
-2%-
2%4%
6%8%
10%
Q1
11
f
Q2
11
f
Q3
11
f
Q4
11
f
Qo
Q g
row
th
Western Europe Japan World
US met coal exports by quarter
-
2
4
6
8
10
12
14
16
1Q
04
2Q
04
3Q
04
4Q
04
1Q
05
2Q
05
3Q
05
4Q
05
1Q
06
2Q
06
3Q
06
4Q
06
1Q
07
2Q
07
3Q
07
4Q
07
1Q
08
2Q
08
3Q
08
4Q
08
1Q
09
2Q
09
3Q
09
4Q
09
1Q
10
2Q
10
3Q
10
4Q
10
1Q
11
Qu
art
erl
y e
xp
ort
s (
mt)
Premium coal base level
Crossover coal
New base level
Macquarie Research Commodities Compendium
17 May 2011 36
Thermal Coal China holds sway into summer
There has been an incredible amount of activity in thermal coal markets over the past few
months. Supply disruptions in most parts of the world in early 2011 gave way to the ructions
created by the Tohoku earthquake in Japan. This had a huge impact on Japanese appetite
for coal in the short term and knocked contract pricing to a lower than previously expected
level, although the agreed price of US$129.85/t is still a record and a very good result for the
miners in light of the recent drop to ~ US$115-116/t. And while we think it may take some
time to recover lost tonnages, it‟s still clear that JPUs are still willing to pay a large premium
for coal.
The indirect impact of the Japanese disasters has also been significant, particularly in
Europe. Natural gas prices have tended to be a little higher than they otherwise would have
been given the expected pick up in Japanese LNG imports, while a change in tune on
Nuclear phase out policy in German looks to have increased the burden on coal. The net
affect seems to be that while there may have been some tonnes lost, coal demand should be
higher than it otherwise would be in the medium term.
Fig 95 Chinese domestic market heats up, Newcastle coal close to pricing into China
Source: sxcoal, globalCOAL, Macquarie Research, May 2011
The future of the seaborne market, however, does not lie with established markets in Japan
or Europe, but with emerging countries like China, India and Indonesia. This has come right
back into view, with recent developments in the Chinese domestic market now having
considerable bearing on the seaborne market. We would be relatively neutral on Newcastle
pricing now that it has come down to ~ US$116/t in the prompt, as it is now quite close to
pricing into China, where the risk to domestic prices appear to the upside.
While China has been garnering all the attention, we understand that Indian imports have
also been extremely strong in the last couple of months and this is providing a solid
foundation to the Indonesian sub-bit market. The coming monsoon season could bring a
period of subdued interest from India, particularly if last year‟s weather conditions are
repeated. But nonetheless, it is encouraging to see the pillars of future demand performing
strongly as supply is coming back into the market.
In the longer term, the market looks to be finely balanced over the forecast horizon. While we
estimate prices coming down towards the long-run price over the next five years, the market
is vulnerable to even small shifts in supply from disruption or larger than expected demand.
This shifts the balance of risks to the upside to our forecasts in the event of such a shock.
60
70
80
90
100
110
120
130
140
150
Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11
Pri
ce (
$/t
, d
eli
vere
d C
hin
a)
60
70
80
90
100
110
120
130
140
150
Pri
ce (
$/t
, d
eli
vere
d C
hin
a)
QHD delivered
Guangzhou ex stock
Newcastle Delivered
Thermal coal prices delivered Southern China
Net impact of the
Japan disasters is
bullish for coal in
the medium term
China has come
back to the market
as domestic
markets tighten into
summer
Macquarie Research Commodities Compendium
17 May 2011 37
Fig 96 Seaborne Thermal Coal Demand and Supply
demand (mt) 2008 2009 2010F 2011F 2012F 2013F 2014F 2015F
Atlantic 225 201 180 200 207 218 224 226
China 35 80 114 109 112 112 118 125
India 36 60 75 88 109 121 130 146
Other Pacific 316 312 343 345 358 389 407 419
Total Demand 612 653 712 742 786 840 879 915
% change 0.9% 6.6% 9.1% 4.2% 5.9% 6.9% 4.6% 4.0%
Supply (mt)
Australia 126 139 141 147 174 193 208 225
Indonesia 200 233 284 289 302 324 342 362
China 36 18 14 14 14 14 14 14
South Africa 62 65 69 69 73 77 80 80
Russia 72 82 85 85 89 91 91 91
Colombia 69 63 70 72 85 90 92 96
Other 48 52 50 48 47 51 53 54
Total Supply 612 653 713 723 784 839 879 921
% change 0.9% 6.6% 9.2% 1.4% 8.4% 7.1% 4.8% 4.8%
Notional Balance - - - -20 -3 -2 - 6
Price ($/t FOB)
JPU contract 125.0 70.0 98.0 129.9 120.0 100.0 95.0 95.0
Source: GTIS, Macquarie Research, May 2011
Fig 97 API#2 takes the lead
Fig 98 Lower CV coal is starting to price more competitively
Source: GTIS, Macquarie Research, May 2011 Source: globalCOAL, Macquarie Research, May 2011
Fig 99 Seaborne supply still stagnant Fig 100 Restocking in UK provides Europe upside
Source: sxcoal, Macquarie Research, May 2011 Source: McCloskey, globalCOAL Macquarie Research, May 2011
80
90
100
110
120
130
140
Sep 10 Nov 10 Jan 11 Mar 11 May 11
(US
D/t
)
80
90
100
110
120
130
140
(US
D/t
)
Delivered Europe
FOB South Africa
Newc FOB
Month ahead forward Coal prices
0%
5%
10%
15%
20%
25%
Jun 09 Nov 09 Apr 10 Sep 10 Feb 11
Energy adjusted discount forIndonesian Sub-bit coal (4,900kcal/kg)
20
25
30
35
40
45
50
55
60
65
70
2005 2006 2007 2008 2009 2010 2011
Million tonnes
-20%
-10%
0%
10%
20%
30%
40%
50%
% c
ha
ng
e Y
oY
(3M
MA
)
% change yoy
World demand
6
8
10
12
14
16
18
20
22
24
Ja
n
Fe
b
Ma
r
Ap
r
Ma
y
Ju
n
Ju
l
Au
g
Se
p
Oc
t
No
v
De
c
Uti
lity
sto
ck
s (
mt
ha
rd c
oa
l)
2007 2008 2009
2010 2011
UK stocks at power stations
Macquarie Research Commodities Compendium
17 May 2011 38
Oil More upside than downside risk to our bullish 2011-13 forecasts
Consensus thinking about oil markets is about US$10-US$15 more bearish than us. Many
expect that 2010‟s soaring oil demand growth will decelerate to below trend this year.
Consensus also would have one believe that political upheaval across the Middle East and
North Africa will subside and oil supplies should quickly return to normal.
We fundamentally disagree with both these strands of thought. We forecast that Brent oil
futures will average about US$117/b this year, as they rebound to around US$120/b in 3Q
and a little higher still in 4Q 2011. We expect to see uncomfortably low spare capacity
through 2013 and prices therefore sustained near US$120/b – as that level theoretically
suffices to bring down oil demand growth (Fig 101).
Fig 101 Macquarie‟s oil price forecasts (unchanged from March 2011)
Source: Bloomberg, Macquarie Research, May 2011
Strong global oil demand growth
We forecast more than 2% global oil demand growth this year, about 70bps more than trend.
Across emerging markets we see expansion rates slowing from their „flattered‟ 6% pace in
2010 to 3.5% this year. In our forecast, tightening macro-policy decelerates growth in several
key economies. First quarter data show EM growth of +4.5% and suggest that once again
we‟re too cautious. What‟s more, risks include potential diesel demand surges in China, Iraq
and elsewhere for power-generation. And there is as yet little to no evidence of „demand
destruction‟ driven by relatively high prices.
Across the more mature economies of the OECD we expect to see modestly higher oil
demand (+1% this year vs +1.2% in 2010). The drivers are extension of the sluggish recovery
across North America and modestly higher oil demand in Japan driven by reconstruction
efforts (diesel) and higher oil use in powergen (fuel and crude oil). Europe‟s recovery,
meanwhile is largely oil neutral. Our forecast of modest growth in OECD oil demand is the
biggest single difference between us and official forecast from the International Energy
Agency, Opec and the US Dept of Energy.
Supply risk, tight spare capacity and politics support high prices
Spare capacity for the global system is shrinking from the very generous 5mb/d (6%) cushion
of early 2009, to barely more than 3mb/d this summer, we think. And despite our greater than
consensus optimism on non-Opec production growth, that spare capacity count could shrink
to near zero in the next year or two, in our balances, unless demand trends get curbed.
Meanwhile, the shifting political landscape across the world‟s dominant oil exporting region
entails unquantifiable supply risk. We cannot pinpoint when the next significant disruption of a
part of the roughly 22mb/d of oil exports that flow from the Middle East and North Africa will
hit markets. We do know that conflict across Libya has taken 1.5mb/d off the market. Conflicts
across Yemen and Syria, the suppressed revolt in Bahrain and the aftermath of the power
shift in Egypt threaten not supplies so much as they introduce fundamental uncertainty into
regional power-structures. Any further disruption is upside risk to our forecast.
One easy to see consequence has been increased government spending across the wealthy
exporters of the GCC – which has driven Saudi Arabia‟s government budget break even oil
price to US$90/b Brent, reports the Institute for International Finance (30 March 2011). And
that prices rises to US$105/b (real 2010) by 2015.
We strongly suspect that the so-called “comfort range” of oil prices has been ratcheted up to
above US$100/b and that risks are coalescing to the upside, not the downside.
Q410A 2010A Q111A Q211E Q311E Q411E 2011E 2012E 2013E Long Run
WTI
US$ 85.31 79.58 94.42 112.00 118.00 114.00 110.00 115.00 117.00 90.00
Brent
US$ 87.45 80.32 105.52 116.00 121.00 124.00 117.00 120.00 119.00 88.00
Futures 114.77 113.73 112.56 112.55 107.87 103.67
Tapis
US$ 92.31 83.83 109.28 120.00 125.00 128.00 120.50 123.50 122.50 92.00
Dubai
US$ 84.56 84.56 100.48 112.00 117.00 120.00 112.00 115.00 114.00 86.00
Oil demand: EM
trend adds to slow,
cyclical recovery in
OECD
Supply side risk &
shrinking spare
capacity
We see US$120 oil,
if nothing else goes
wrong on either side
Macquarie Research Commodities Compendium
17 May 2011 39
Fig 102 Global oil demand, supplies and key inventories
Source: IEA, Macquarie Research, May 2011
Fig 103 Our forecasts in context
Fig 104 New Saudi budget a key factor in oil cost curve
Source: Bloomberg, Macquarie Research, May 2011 Source: Bloomberg, Macquarie Research, May 2011
Fig 105 Emerging market oil demand growth decelerates, OECD oil use recovers into 2H11
Fig 106 In volume terms, EM consumption closing in on OECD
Source: IEA, Macquarie Research, May 2011 Source: IEA, Macquarie Research, May 2011
(Million barrels daily) 2007 2008 2009 Q3-'10 Q4-'10 Q1-'11 Q2-'11E Q3-'11E Q4-'11E 2010 2011E 2012E
Global demand 86.9 86.2 85.6 89.6 90.2 89.1 89.6 91.6 91.8 88.6 90.5 92.5
YoY change 1.8% -0.8% -0.7% 4.4% 3.6% 2.5% 2.2% 2.2% 1.8% 3.5% 2.2% 2.2%
Less non-Opec supply 50.8 50.6 51.4 52.4 53.2 53.0 53.1 53.2 54.1 52.6 53.4 54.4
Less Opec non-crude 4.3 4.3 4.7 5.4 5.3 5.2 5.5 5.6 5.6 5.2 5.5 5.7
Less Iraq 2.0 2.3 2.4 2.4 2.5 2.7 2.7 2.8 2.9 2.5 2.8 3.2
='Call on Opec11' & inventory 29.8 28.9 27.1 29.4 29.2 28.2 28.4 30.0 29.2 28.4 28.9 29.2
Less actual / Est. Opec-11 28.9 29.4 26.8 27.9 27.5 27.4 28.0 28.6 28.8 27.5 28.2 29.4
Implied inventory change -0.9 0.5 -0.3 -1.5 -1.7 -0.8 -0.4 -1.4 -0.3 -0.9 -0.6 0.1
Reported inventory surplus
to 5yr norm (mbls)* +11 +137 +74 +81 +52 +34
Stocks demand cover (days) 52.1 57.5 57.6 58.6 57.5 57.8 56.2 54.3 54.1 57.5 54.1 54.0
*Includes 'Independent' storage
20
40
60
80
100
120
140
160
12/1/201312/1/201112/1/200912/1/200712/1/200512/1/2003Brent mthly Macquarie fcast Global depression
Scarcity by 2012 Futures futures - 1mth
US$/b
$-
$20
$40
$60
$80
$100
0 10 20 30 40 50 60 70 80 90 100
mb/d
Saudi
budget BEP
US$88/b
Canada oil sands
IRR 10-15%
Brent US$/b
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11
YoY %chg
OECD EM Global
Est OECD Est EM Est Global
35
39
43
47
51
Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11
78
82
86
90
94
OECD Non-OECD Est OECD
Est non-OECD Global (rhs) Est Global (rhs)
mb/dmb/d
Macquarie Research Commodities Compendium
17 May 2011 40
Gold Continued strength, biggest hurdle coming closer into view
Gold has continued to advance in early 2011, with its ascent in the first stages of this year in
US$ terms not dissimilar to what was observed in 2010. The big difference at the start of this
year is that gold‟s strength is mostly a function of dollar weakness. In 2010, the opposite was
true, as the market grew increasingly concerned about the emerging sovereign debt issues in
Europe.
Whether gold remains locked to the current relationship with the US dollar is not clear given
this relationship tends to be vulnerable to unexpected change. Although it is significant that
despite headlines of concerns surrounding long term US credit ratings and tightening the
Euro Area, gold‟s relationship with the dollar has been fairly consistent since QE2 first began
to be priced into markets back in August last year. .
The big hurdle to the current bull run in gold for many is the normalisation of monetary the
US. It seems likely at this stage that first an end to quantitative measures and a gradual shift
towards removing accommodative policy settings by the Fed is increasingly coming into view
notwithstanding recent market wobbles. Gold may already have passed the first test heading
towards this event, with the gold price remaining strong despite the fact that real yields at the
longer-end of the yield curve have stopped falling and risen somewhat . Nonetheless a
change in US policy will be the most important litmus test for gold.
Fig 107 Gold has continued to rise despite real rates not rising and has tracked the US dollar‟s decline since QE2
Source: Bloomberg, Macquarie Research, May 2011
Expectations on the US$ and interest rates do tend to underpin most views about the
direction for gold, but we would highlight that this alone can‟t explain why gold has been so
strong since the bull run began. We think this is largely thanks to the impact that the
emerging world and China in particular have had on financial markets over the past decade.
While Chinese policy makers have tightened policy significantly within China, part of this is
only to soak up the huge amount of capital inflows, with Chinese forex holdings rising
6.9%QoQ in 1Q11 to an astonishing US$3.04 trillion. This suggests that global liquidity
growth remains very strong, with recent coordinated interventions in foreign exchange
markets to stabilise the yen also helping to boost liquidity in global markets
Very strong global liquidity growth is something that has affected many financial markets, but
is something that is likely to have a larger effect on a scarce asset like gold. While global
monetary conditions stay loose and facilitate such strong liquidity growth at a global level, it
seems likely that gold will continue to strengthen. This will be challenged by a shift in interest
rates in the US and/or appreciation in the RMB to a point where it is no longer seen as
undervalued, although this will only decisively change the outlook.
600
700
800
900
1000
1100
1200
1300
1400
1500
1600
May 07 May 08 May 09 May 10 May 11
0
0.5
1
1.5
2
2.5
3
Gold price (LHS)
10-yr TIPS yield
(inverted, RHS)
US$/oz % yield
200
400
600
800
1000
1200
1400
1600
90 100 110 120 130
2000 to mid-
05Mid 05- Sep
08Oct 08 to End
09Short Euro
Long GoldQE2
USD Broad Index
US$/oz US$ BROAD INDEX vs GOLD
Policy elsewhere in
the world is also
critical to global
liquidity growth
A change in tack in
US monetary policy
is the big challenge
to the current
bull run
Macquarie Research Commodities Compendium
17 May 2011 41
Fig 108 Gold demand-supply balance
(tonnes) 2007 2008 009 2010 2011F 2012F 2013F
Jewellery 2,417 2,193 1,759 2,017 2,098 2,182 2,269
Industrial 462 436 368 467 485 503 522
Coins 208 257 286 295 200 150 120
Bar Hoarding 236 244 645 531 880 550 500
Net producer de-hedging 444 352 254 103 60 -10 -10
ETFs 251 321 617 338 250 255 260
Total Demand 4,032 4,314 3,870 4,100 3,692 3,641 3,728
Mine production 2,473 2,409 2,589 2,689 2,743 2,770 2,798
Central bank sales 484 235 34 -73 -80 -80 -80
Gold Scrap 982 1,316 1,695 1,645 1,275 1,225 1,100
Total supply 3,939 3,960 4,318 4,261 3,938 3,925 3,828
Implied Investment -93 -354 448 161 245 284 100
Gold price $/oz 696.3 872.6 972.3 1225.8 1455 1350 1220
Source: WGC, Macquarie Research, May 2011
Fig 109 Inflation appears to have turned in the US, although remains low
Fig 110 Recent strength in gold is not reflected across all currencies
Source: Ecowin, Macquarie Research, May 2011 Source: WGC, Macquarie Research, May 2011
Fig 111 The continued surge in Chinese FX reserves suggests global liquidity remains very strong
Fig 112 ETFs inflows have returned after losses in early 2011
Source: WGC, Macquarie Research, May 2011 Source: Bloomberg, Macquarie Research, May 2011
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Implied break even inflation
CPI ex food and energy
Trimmed mean PCE deflator
% chg on prev yr % chg on prev yrUS inflation
95
105
115
125
135
145
Jan 10 Aug 10 Mar 11
US$ Euro A$ Swiss Franc
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Q1
2000
Q3
2001
Q1
2003
Q3
2004
Q1
2006
Q3
2007
Q1
2009
Q3
2010
-300
200
700
1200
1700
2200
2700
3200% in gold
Foreign exchange reserves
US$ billion% of fx reservesChinese foreign
exchange reserves
500t of gold needed
to lift holdings to 2%-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Ma
r-10
May-1
0
Jul-10
Sep-1
0
Nov-1
0
Jan-1
1
Ma
r-11
Gold
% of ann
demand
4-week rolling
ETF flows
Macquarie Research Commodities Compendium
17 May 2011 42
Silver Massive volatility created by huge swings in speculative interest
Silver has been thrust into the spotlight recently following a massive surge in prices in April
and a stunning capitulation, falling 30% in the space of a few days. The silver price still
remains incredibly volatile with the risks still appearing skewed to the downside.
The rise in margin requirements on futures by the CME have widely been blamed as the
reason why silver has fallen so sharply. But it is worth noting that speculative interest via
futures has not been particularly vibrant during the big rise in prices through April. To be
sure, it seems that interest via ETFs has been more important, given the huge swings in
holdings of physical metal, which have swung from massive inflows to a loss the equivalent of
3.3% of demand in the space of a week.
Fig 113 Significant liquidation of silver ETF holdings in recent weeks
Source: Bloomberg, Macquarie Research, May 2011
This suggests that it is really investment interest that is driving the rapid rising in silver prices
more recently rather than any physical tightness from industry. There are some promising
aspects of industrial usages such as the use of silver in electronics and solar photovolatic
cells. But we would note that the rate of growth of demand from these sectors are likely to
slow quite significantly in the short/medium term. For example, our solar analysts expect
solar installed capacity growth to stagnate over the next couple of years after the massive
subsidy induced boom in 2010. Tech-growth should also slow over the next few quarters
after a surge at the end of 2010
Demand from China is another factor seen as supporting the gain in the silver price, but it is
not well understood that silver for industrial use prices at a discount to LBMA pricing. This is
so much so that zinc/lead smelters in China do not want to process high silver concentrates
because they make a loss on the payable silver. This price differential does not appear to
have changed as prices have pulled back.
Silver is seen as a hedge against currency risk like other precious metals, but its relative
performance is probably determined by more unique aspects of the metal like its industrial
usages or relative supply constraints. The gold/silver ratio has pulled back sharply very
recently after a large drop through April, which hasn‟t been an unusual event in the past ten
years. It still remains relatively low in the context of historical averages and the strong growth
in global IP from 2005 to early 2008.
We therefore remain cautious on current prices for silver, with swings in investor appetite
likely to continue to create significant volatility.
-5.0%
-3.0%
-1.0%
1.0%
3.0%
5.0%
Mar 10 Jul 10 Nov 10 Mar 11
Silver
% of ann
demand
4-week rolling
ETF flows
25
45
65
85
2001 2003 2005 2007 2009 2011
25
45
65
85Gold/Silver Ratio
Huge shifts in Silver
ETF holdings
Macquarie Research Commodities Compendium
17 May 2011 43
Platinum and Palladium Looking for a more sprightly performance in 2H11
The performance of platinum group metals in the early stages of 2011 has been sluggish.
Palladium has pulled back after explosive gains in 2010 while platinum has failed to gain any
momentum in a falling US$ environment, with the platinum/gold ratio falling from 1.25 to 1.18.
Rhodium prices have also remained very weak since the start of the year.
With metals pricing sluggish and the South African Rand remaining strong, the PGM basket
price that the average producer receives within South Africa has been able to gain any
momentum albeit for a brief period when the Rand weakened. This price still seems
unsustainably low in the longer run given the rising cost of sustaining marginal supply.
Fig 114 Platinum has continued to be the laggard
Fig 115 PGM Basket price is not showing any momentum
Source: Chinese customs, Baltic Exchange, Macquarie, May 2011 Source: Chinese Customs, Baltic Exchange, Macquarie, May 2011
That said, we have not yet reached the point where low pricing has tilted the demand and
supply balance towards providing better incentive pricing. There have been concerns about
demand for PGMs following the natural disasters in Japan, which has had significant impact
on global auto production. The impact on global auto production is not yet clear, but it does
appear for the year as a whole, production will be around ~1½ m autos lower than it otherwise
would have been with annual growth slowing to ~4%YoY after an incredible 26%YoY gain in
2010.
While there will be lasting impacts on auto demand within Japan as a consequence of the
natural disasters, this will not have an impact on demand for autos elsewhere, with the
outlook for Chinese auto consumption remaining robust and the recovery in the US remaining
on track. Europe has also tended to be stronger than expected, with the strength of the
German market helping to offset weakness elsewhere following the roll off of incentive
schemes.
Demand for commercial vehicles, which is an import segment for platinum has also proven to
be much stronger than anticipated. Production of commercial vehicles rose over 40%YoY in
2010, and monthly data from Volvo (the world‟s second largest truck producer) suggests this
momentum has been maintained in early 2011. With truck production still below 2007, there
still seems to be plenty of upside to demand as the capex cycle gains momentum after the
huge downturn in 2008/2009.
90
100
110
120
130
140
150
160
170
180
Aug
10
Sep
10
Oct
10
Nov
10
Dec
10
Jan
11
Feb
11
Mar
11
Apr
11
May
11
90
100
110
120
130
140
150
160
170
180
Gold
Platinum
Palladium
Index, Aug 2010 = 100
Precious metals
Index, Aug 2010 = 100
8,500
9,000
9,500
10,000
10,500
11,000
11,500
12,000
Aug
10
Sep
10
Oct
10
Nov
10
Dec
10
Jan
11
Feb
11
Mar
11
Apr
11
May
11
1,200
1,250
1,300
1,350
1,400
1,450
1,500
1,550
1,600
1,650Rand Basket Price (LHS)
US$ Basket Price (RHS)
PGM Basket PriceRand/oz US$/oz
Japan disasters
impact on
auto production
should be
temporary
Macquarie Research Commodities Compendium
17 May 2011 44
Fig 116 Some loss of production from Japan quake, but demand outside of China not affected
Fig 117 Truck demand should be an ongoing source of demand into 2012
Source: OICA, Macquarie Research, May 2011 Source: ETFSecurities, Macquarie Research, May 2011
The short-term ructions in auto production appear to have sapped investor appetite via ETFs
in the past few months. Palladium holdings have fallen ~105 koz, after the big run-up in late
2010, while inflows into platinum ETFs have been steady, although unspectacular compared
to that seen in other precious metals like silver. While the absence of ETF interest has
weighed on prices, it does mean that the current entry point does not have a large speculative
element overhanging the market.
On the supply side, it does appear that supply for platinum will be down in 2011 relative to
2010. The ramp up at Vale‟s Sudbury operation (which has already happened) is the only
major expansion this year. The Unki project in Zimbabwe is the only greenfield operation due
this year, while a recovery/ramp up at Everest should also make a significant contribution.
But there is a void of large planned expansions in 2011 and 2012.
Fig 118 Not much new Pt supply, vulnerable to supply disruptions
Source: Company reports, Macquarie Research, May 2011
15
16
17
18
19
20
21
22
1Q11 2Q11 3Q11 4Q11
Jan-17 Mar-17 Apr-158.3%
12.9%
Quarterly Global Auto
production: Forecast Revisions
million vehicles
0
50
100
150
200
250
1 2 3 4 5 6 7 8 9 10 11 12
Th
ou
sa
nd
s
2007
2008
2009
2010
2011
Volvo truck deliveries (annualised)
Month
-125 -100 -75 -50 -25 0 25 50 75 100 125
-75 -50 -25 0 25 50 75 100 125
Mogalakwena
Kroondal
Implats
Zimplats
Norilsk
Rustenburg
Elands
Vale
Unki
Everest
Crocodile River
Blue Ridge
Lonmin
2011E
2010
Major changes in refined production ('000s oz)
Where will the
supply come from?
Macquarie Research Commodities Compendium
17 May 2011 45
Any other gains in supply will require improved operational performance, which will be very
difficult to achieve. Safety has been a huge issue in South Africa at the start of 2011, with a
significant rise in Loss Time Injury Frequency Rates across the industry, coupled with a more
heavy handed approach by the DMR leading to longer stoppage times affecting entire
minesites rather than individual shafts. This has meant production results have been patchy
across the industry, although currently within our disruption allowance used in the model.
All this should mean the platinum market is in deficit this year after a small surplus in 2010.
We project further deficits into 2015, with the magnitude of these deficits potentially much
larger if investors stockpile metal via ETFs, which we assume to be neutral over the forecast
horizon.
Fig 119 Platinum demand supply balance
Mine Supply 2008 2009 2010E 2011F 2012F 2013F 2014F 2015F
SAf and Zim 4,695 4,865 4,932 4,885 5,105 5,365 5,575 5,700 Russia 805 785 787 798 790 790 790 790 North America 325 260 208 364 361 363 372 375 Others 115 115 125 120 120 120 120 120 Disruption allowance 0 0 0 -178 -186 -276 -286 -293 Total Mine Supply 5,940 6,025 6,052 5,988 6,189 6,362 6,570 6,693 Recycling 1,130 830 1,095 1,122 1,303 1,352 1,348 1,421
Demand Net autocatalyst 2,525 1,355 2,078 2,555 2,598 2,712 2,853 2,918 Jewellery 1,365 2,245 1,685 1,756 1,830 1,907 1,978 2,047 Chemical 400 290 450 445 440 435 430 425 Glass 315 10 380 381 397 414 432 450 Other 1,005 825 918 947 977 983 990 996 Investment 555 660 488 150 0 0 0 0 Total Demand 6,165 5,385 5,999 6,233 6,241 6,451 6,682 6,837
Surplus/Deficit -225 640 53 -245 -51 -88 -112 -144
Price (US$/oz) 1572 1206 1610 1836 1850 1750 1850 1900
Source: Johnson Matthey, Macquarie Research, May 2011
The challenges facing Platinum supply also extend to Palladium, although this is further
confused by the Russian stockpile situation. We understand there may have been some
stockpile material sold at the start of 2011, although this is likely to be small and shouldn‟t
have been enough to eliminate the current deficit position. ETFs also present a huge
uncertainty, with the current outflows of 105koz in stark contrast to the ~1000koz of inflows in
2010. We think investor appetite should return in 2H11, with ETF demand neutral to the
market balance.
Fig 120 Palladium demand supply balance
Mine Supply 2008 2009 2010E 2011F 2012F 2013F 2014F 2015F
SAf and Zim 2,570 2,550 2,955 2,968 3,047 3,183 3,314 3,358 Russia 2,700 2,675 2,722 2,700 2,700 2,700 2,700 2,700 North America 910 755 677 920 965 980 1,035 1,108 Others 170 160 165 150 150 150 150 150 Disruption allowance 0 0 0 -122 -126 -131 -137 -140 Total Mine Supply 6,350 6,140 6,520 6,615 6,736 6,882 7,062 7,176 Russian Stockpile sales 960 960 1,000 0 0 0 0 0 Total Supply 7,310 7,100 7,520 6,615 6,736 6,882 7,062 7,176 Recycling 1,140 965 1,308 1,350 1,423 1,477 1,514 1,550
Demand Net autocatalyst 3,325 3,085 3,937 4,137 4,474 4,736 4,956 5,196 Chemical 350 325 364 371 378 386 394 402 Dental 625 615 606 598 553 517 487 446 Electrical 1,025 875 992 982 972 962 953 943 Jewellery 855 745 577 583 589 595 601 607 Investment 495 695 1,120 173 175 176 178 180 Total Demand 6,675 6,340 7,596 6,844 7,141 7,373 7,569 7,774
Surplus/Deficit 635 760 -77 -229 -406 -491 -507 -598
Price (US$/oz) 264 527 786 851 925 744 750 750
Source: Johnson Matthey, Macquarie Research, May 2011
Pt and Pd in deficit
in 2011 and beyond
Macquarie Research Commodities Compendium
17 May 2011 46
Wheat Corn dominates grain complex, but concerning wheat conditions
In the 2010/11 season all of the world‟s major wheat exporters crops bar the US were
affected by some form of weather event. These effects caused nervousness in the market at
a time of rising food inflation. And despite relatively comfortable global ending stocks, the
market maintained the strong price gains originally inspired by last year‟s Russian drought.
Looking forward to 2011/12, the producer reaction to high prices is going to be limited and not
to the scale that was seen in 08/09. Prospects for the forthcoming season began getting
constrained by adverse weather events affecting winter planting across the FSU. As we have
moved into the spring, with winter wheat crops just coming out of dormancy, significant
additional concerns are being raised in northern Europe and the hard red winter region of the
US. There are also major delays for hard red spring plantings in the US and the Canadian
spring wheat crop due to overly wet conditions, which provide additional yield loss risks.
Fig 121 Wheat prices continue to rally on weather risks
Fig 122 Global Wheat Balance: still comfortable, but supply is trending lower
Source: USDA, Macquarie Research, May 2011 Source: USDA, Macquarie Research, May 2011
Our projections for 2011/12 indicate global ending stocks will fall to 177,581m tonnes -
implying a 26.5% stocks-to-use ratio. More importantly, we expect stocks held by the global
exporters to also decline, leaving them with a combined stocks/use ratio of 16.1%. Against
this backdrop, without a significant improvement in the crop outlook, higher prices will
continue to be maintained – particularly given that we are now in a weather-driven market.
The upcoming US wheat crop does look relatively poor, as indicated by this season‟s USDA
plant conditions reports. There is a relatively strong correlation between the average spring
good/excellent rating and the eventual yield achieved. To date, this number stands at just
37%. This percentage is comparable to 2006 and 2002, when non trend adjusted yields came
in at lows of 2.36 and 2.6 in 2002 and 2006, respectively. At the least, this suggests yields
will underperform their trend and also points to potential for a poor total wheat crop. Looking
at the global perspective we expect to see a significant improvement in FSU wheat production
from last year‟s drought blighted crop. A return to normal though is being thwarted in Russia
as weather issues and infrastructure problems continue to cause issue. Russia is likely to
remove their export ban. But the large exports seen in 2008 and 2009, when FSU accounted
for 27% of world exports, won't be possible – and will instead likely come in at 20%.
We have far more concerns for the world‟s quality wheat crops than for the lower feed grades.
With major quality wheat export crops in the US, Canada, France and Germany suffering from
adverse weather conditions the quality wheat spreads will be unlikely to reverse this season‟s
trend. We expect wheat prices to remain at historically high levels through 2011 and into
2012, though current weather risk will inspire volatility as we move towards harvest. The
majority of wheat price direction will be derived from the more critical conditions facing the
global corn crop.
0%
50%
100%
150%
200%
250%
300%
Jan-0
7
May-0
7
Sep-0
7
Jan-0
8
May-0
8
Sep-0
8
Jan-0
9
May-0
9
Sep-0
9
Jan-1
0
May-1
0
Sep-1
0
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1
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1
Ind
ex 1
=01/0
1/0
7
MATIF CBT
450
500
550
600
650
94/9
5
95/9
6
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7
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8
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9
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0
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1
01/0
2
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3
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4
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5
05/0
6
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7
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8
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9
09/1
0f
10/1
1f
11/1
2f
Prod/con (mt)
50
100
150
200
Stocks (mt)
Ending stocks Demand Supply
Adverse weather is
limiting the supply
response to high
prices
Stocks held by
major wheat
exporters will fall
again
High quality wheat
supplies will be
tighter than feed
quality
Macquarie Research Commodities Compendium
17 May 2011 47
Fig 123 Global wheat supply and demand
Macquarie forecasts
(1000 t) 05/06 06/07 07/08 08/09 09/10f 10/11f 11/12f Global production 619,054 595,912 611,019 683,670 682,612 646,406 666,288 y/y % chg -1.19% -3.74% 2.54% 11.89% -0.15% -5.30% 3.08% US 57,243 49,217 55,821 68,016 60,310 60,083 56,303 Argentina 13,800 16,300 18,600 10,100 9,600 14,912 15,075 Australia 25,173 10,822 13,569 21,420 21,923 26,202 24,754 Canada 25,748 25,265 20,054 28,611 26,848 23,167 24,529 EU 132,356 124,870 120,133 151,114 138,675 136,185 139,347 FSU 91,070 84,905 92,493 115,457 113,830 80,634 100,900 Global consumption 616,451 618,764 613,710 641,750 651,760 663,053 669,502 y/y %chg 1.76% 0.38% -0.82% 4.57% 1.56% 1.73% 0.97% Balance 2,603 -22,852 -2,691 41,920 30,852 -16,647 -3,214 Ending stocks 150,313 130,646 124,417 166,590 197,442 180,795 177,581 y/y % chg -1.93% -13.08% -4.77% 33.90% 18.52% -8.43% -1.78% Stocks/use ratio 24.38% 21.11% 20.27% 25.96% 30.29% 27.27% 26.52% Prices USc/bu 359 636 798 530 581 759 743
Source: USDA, Macquarie Research, May 2011
Fig 124 Limited producer rationing in the wheat market, maintaining exporters stock without improvement
Fig 125 US wheat conditions ratings for all wheats – turnaround is needed in May
Source: USDA, Macquarie Research, May 2011 Source: USDA, Macquarie Research, May 2011
Fig 126 The Black Sea region will resume exports again but limited in scale compared to the recent past
Fig 127 Quality wheat spreads continue to gain strength as demand stays strong
Source: USDA, Macquarie Research, May 2011 Source: Reuters, Macquarie Research, May 2011
10
20
30
40
50
60
70
80
05/06 06/07 07/08 08/09 09/10 10/11f 11/12f
Ending stocks
(mt)
0%
5%
10%
15%
20%
25%
Stock:use
Stocks all majors Stocks all majors ex-FSU
Stocks:use all majors Stocks:use all majors ex-FSU
54.1
41.2
31.5
53.7
44.7
58.0
33.7
54.9
47.643.6
67.1
37.1
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Good/Excelent
Ave. Spring Rating
Black Sea Exports
0
5
10
15
20
25
30
35
40
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010f
2011f
mT
Russia Ukraine Kazakhstan
-50
0
50
100
150
200
Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11
c/bu
Minneapolis/Chicago Kansas/Chicago
Macquarie Research Commodities Compendium
17 May 2011 48
Corn Large producer reaction, but strong demand limits recovery
Through 2011 the situation for corn has continued to tighten, with further reductions to global
supplies and stocks in the face of resilient demand. The situation in the US has become
perilously tight, as ethanol and feed demand remain strong. US corn ending stocks for
2010/11 will fall to 730m bu, which represents pipeline stocks. In the face of high prices US
export demand has begun to be rationed by Asian importers switching to cheap Australian
feed wheat supplies. Further downward revisions are possible for US exports if feed wheat
continues to be aggressively offered. However, not even with this scenario will corn stocks
return to a comfortable level.
We anticipate the US will increase the planted corn area to 91.5m acres, slightly lower than
earlier expected due to delayed planting progress in what is still a very rainy and soggy
Midwest. Production will rise by an insufficent amount to 13.721b bu in 2011/12, leaving the
US with still tight inventories, equivalent to a stocks-to-use ratio of 6.1%. Globally we see
corn production rising 5% in response to higher prices, particularly in Brazil and Argentina.
Together, this will allow world ending stocks to recover modestly to 128.7mt. We forecast
2011/12 at a still critically tight 15%, providing very little room for error.
Fig 128 Corn trades at record high as US ending stocks fall to 5% as a proportion of consumption
Fig 129 World corn balance is moving into surplus in 2011/12, but stocks will remain tight
Source: Reuters, Macquarie Research, May 2011 Source: USDA, Macquarie Research, May 2011
The key focus at present for the corn markets is the current planting progress in the US. We
saw significant delays during the beginning of the planting window, although in recent weeks
progress has begun to catch up with the average level. If plantings continue to be delayed,
however, yield expectations will be constrained, due to the shorter growing period.
Prospects for demand rationing will be a key topic in the coming months as the large
producer reaction looks to be limited by strong demand prospects. As both ethanol and feed
margins remain in positive territory the main focus will be the limitations of US exports - either
through importers rationing internal feed demand, or through increases in the feed wheat
demand. If China successfully negotiates supply agreements with Argentina, this would
provide some import demand relief to the US‟s tight supplies next season. From a macro
perspective as ethanol has become an increasingly important factor for corn we have seen
corn prices become intrinsically linked to the price of oil. As such, any major sell off in the
price of oil would have a negative impact on corn – a bearish risk that flows though to the rest
of the grains and oilseed complex.
We expect corn prices to reach their quarterly high in Q2 11, due to extremely tight old crop
supplies. From Q3, harvest pressure will see them easing off gently through the rest of 2011
as increased production stabilises the market. We don‟t expect prices to fall back too sharply,
however, due to low stocks, and prices will stay at historically elevated levels. Our forecast
for CBOT corn futures for calendar year 2011 and 2012 is 673c/bu and 635c/bu, respectively.
0%
50%
100%
150%
200%
250%
Jan-0
7
May-0
7
Sep-0
7
Jan-0
8
May-0
8
Sep-0
8
Jan-0
9
May-0
9
Sep-0
9
Jan-1
0
May-1
0
Sep-1
0
Jan-1
1
May-1
1
Ind
ex 1
=0
1/0
1/0
7
Corn
250
350
450
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650
750
850
950
90/9
1
91/9
2
92/9
3
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7
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99/0
0
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1
01/0
2
02/0
3
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4
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6
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7
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8
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9
09/1
0f
10/1
1f
11/1
2f
Prod/Con (mt)
-40
-30
-20
-10
10
20
30
40
Balance (mt)
Balance Production Consumption
Still tight conditions
mean prices will not
collapse sharply
US planting delays
give concern for
yields
Corn stocks are so
tight there is little
room for error
Macquarie Research Commodities Compendium
17 May 2011 49
Fig 130 Global Corn Supply & Demand
Macquarie forecasts
2005/06 2006/07 2007/08 2008/09 2009/10f 2010/11f 2011/12 Production 699,405 713,451 793,615 797,838 812,380 812,015 856,773 -2.3% 2.0% 11.2% 0.5% 1.8% 0.0% 5.5% US 282,263 267,503 331,177 307,142 333,011 316,176 348,540 China 139,365 151,600 152,300 165,900 158,000 167,417 168,771 Brazil 41,700 51,000 58,600 51,000 56,000 54,288 54,560 Argentina 15,800 22,500 22,017 15,000 22,500 21,700 22,000 Consumption 705,963 724,352 772,242 779,169 815,660 837,119 848,783 2.7% 2.6% 6.6% 0.9% 4.7% 2.6% 1.4% Balance -6,558 -10,901 21,373 18,669 -3,280 -25,104 7,990 Ending stocks 124,594 110,069 131,317 149,070 145,790 120,686 128,677 Stocks/use 17.65% 15.20% 17.00% 19.13% 17.87% 14.42% 15.16% Prices US c/bu 260 373 527 374 427 673 635
Source: USDA, Macquarie Research, May 2011
Fig 131 Corn vs crude oil price correlation 2007-2011: Prior to 2007 the R
2 was 0.0003
Fig 132 Producer ethanol margins remain positive in spite of elevated corn price
Source: Reuters, Macquarie Research, May 2011 Source: Reuters, Macquarie Research, May 2011
Fig 133 Mid season catch up to delayed plantings, but still running significantly below 10 yr avg
Fig 134 US exports to date by major customer; high prices are slowing the export pace
Source: USDA, Macquarie Research, May 2011 Source: USDA, Macquarie Research, May 2011
R2 = 0.5175
100
200
300
400
500
600
700
800
900
20 40 60 80 100 120 140 160
Crude oil ($/b)
Co
rn (
c/b
u)
-20
-10
0
10
20
30
40
50
60
70
Feb/0
9
Apr/
09
Jun/0
9
Aug/0
9
Oct/09
Dec/0
9
Feb/1
0
Apr/
10
Jun/1
0
Aug/1
0
Oct/10
Dec/1
0
Feb/1
1
Apr/
11
US Corn Planting Progress
0
10
20
30
40
50
60
70
80
90
100
13 14 15 16 17 18 19 20 21 22 23 24 25
% Plantings
Complete
10 Yr Avg 2011
US Corn exports by destination as of end Apr
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
2009
2010
Japan Korea Egypt Taiwan Canada Mexico Selected
South
America
'000 t
Macquarie Research Commodities Compendium
17 May 2011 50
Soybeans Short-term fundamental weakness, but 2011/12 could be tight
The dominant force in the soybean market remains Chinese demand, which over recent years
has placed a strain on supplies from the US and South America. The first half of the 2010/11
season exhibited strong import demand from China, which helped support soybean prices in
conjunction with bullish momentum from the grains markets. Currently, however, the soybean
fundamentals have turned less constructive in comparison to the grains. This is due to a drop
in the pace of China‟s soybean imports, and the higher than expected soybean harvests in
Brazil and Argentina. Together, these factors will keep soybean prices fairly netural in the
short term. For the forthcoming 2011/12 season, however, the global market will remain fairly
tight. We anticipate limited change in global ending stocks as Chinese demand is expected to
rise again, and remain strong. We forecast global ending stocks for 11/12 at 60.1m tonnes
which implies a stocks-to-use ratio of 23.08%. US soybean production growth will be limited
by the dominance of corn in this season‟s acreage battle, and will remain little changed from
this season at 3,293b bu.
Fig 135 Soybean Complex Price Evolution Fig 136 World Soybean Balance
Source: USDA, Macquarie Research, May 2011 Source: USDA, Macquarie Research, May 2011
A key reason why Chinese imports are weak is due to the fact that China‟s soy crush margins
(based upon imports of both US and Brazilian soybeans) are negative right now, following the
build up of surplus stocks and government caps on Chinese veg oil prices. We anticipate
crush margins will return to positive territory within a few months. By 2011/12 we expect
Chinese imports to increase again YoY to the level of 61mt. Continued strength in Chinese
soybean demand will be the key fundamental support to the soybean complex. However, the
influence of the South American soybean crops will continue to become more pronounced in
2011/12, and the increased export competition will provide resistance to any significant price
rally. Although US production will fall slightly next season, we expect Brazilian and Argentine
production to increase to 72.5mt and 50.6mt respectively. Elsewhere in the oilseed complex,
we anticipate rapeseed production to increase on the back of greater planting intentions in
Canada. EU-27 rapeseed area is expected to be maintained at a similar level, but the
worrying weather conditions across northern Europe over recent months raise supply-side
concerns.
In the near term US soybean futures will be restricted by movements in the corn price; any
further delays to US corn plantings could see soybean plantings potentially expand. Only on
June 30th will the USDA acreage report help shed clarity on final planted area. After this point
the price outlook will be dominated by Chinese demand growth and competition from South
America exports. We expect prices to move in tandem with the grains complex, easing over
the remainder of 2011 post the US harvest. Into 2012, however, the fact that global
production will not rise and ending stocks will diminish further will provide some bullish
impetus to the market, preventing prices from collapsing. As always, any weather risks to the
South American 2011/12 crops or greater than expected Chinese buying could cause prices
to spiral higher.
0%
50%
100%
150%
200%
250%
300%
Ja
n-0
7
Ma
y-0
7
Se
p-0
7
Ja
n-0
8
Ma
y-0
8
Se
p-0
8
Ja
n-0
9
Ma
y-0
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Se
p-0
9
Ja
n-1
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Ma
y-1
0
Se
p-1
0
Ja
n-1
1
Ma
y-1
1
Ind
ex
1=
01
/01
/07
Soybean Soymeal Soyoil
50
100
150
200
250
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010f
2011f
Prod/Con (mt)
10
20
30
40
50
60
70
Stocks (mt)
Ending stocks Supply Demand
Chinese soybean
imports may
surprise on the
upside
Ending stocks will
fall again in 2011/12,
preventing a
collapse in prices
Macquarie Research Commodities Compendium
17 May 2011 51
Fig 137 Global soybean supply and demand
Macquarie forecasts
(1000 t) 2005/06 2006/07 2007/08 2008/09 2009/10f 2010/11f 2011/12f Global production 220,670 237,126 221,006 211,964 260,270 258,942 258,638 % chg y/y 2.27% 7.46% -6.80% -4.09% 22.79% -0.51% -0.12% US 83,507 87,001 72,859 80,749 91,419 90,602 89,611 Braz 57,000 59,000 61,000 57,800 68,704 71,647 72,588 Arg 40,500 48,800 46,200 32,000 54,708 49,765 50,644 Global consumption 215,231 225,118 229,619 221,130 238,550 256,037 260,327 % chg y/y 5.04% 4.59% 2.00% -3.70% 7.88% 7.33% 1.68% China imports 28,317 28,726 37,816 41,098 50,338 56,500 61,000 % chg y/y 9.75% 1.44% 31.64% 8.68% 22.48% 12.24% 7.96% Ending stocks 53,237 62,990 51,420 42,580 58,880 61,785 60,096 % chg y/y 12.14% 18.32% -18.37% -17.19% 38.28% 4.93% -2.73% Stocks/use ratio 24.73% 27.98% 22.39% 19.26% 24.68% 24.13% 23.08% Prices USc/bu 592 862 1,234 1,030 1,048 1,320 1,288
Source: USDA, Macquarie Research, May 2011
Fig 138 Chinese soy crush margins remain negative due to government veg oil price caps
Fig 139 As Chinese crush margins weaken China‟s import pace takes a nose dive
Source: USDA, Macquarie Research, May 2011 Source: China Customs, Macquarie Research, May 2011
Fig 140 Brazilian FOB basis turns negative in reaction to large crop
Fig 141 Sustained growth in the South American soybean crops is expected to continue
Source: Reuters, Macquarie Research, May 2011 Source: USDA, Macquarie Research, May 2011
China crush margins CNY/t
-1000.0
-800.0
-600.0
-400.0
-200.0
0.0
200.0
400.0
600.0
800.0
Jan/08 Jul/08 Jan/09 Jul/09 Jan/10 Jul/10 Jan/11
China crush margins - US FOB China crush margin - Brazil FOB
Monthly China soybean imports (1000t)
1000
2000
3000
4000
5000
6000
7000
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
5-yr range 2009/10 5-yr avg 2010/11
Brazil FOB premiums basis Chicago -
Paranagua (US$/t)
-20
-10
0
10
20
30
40
50
60
70
80
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2010 2011
20
40
60
80
100
120
140
98/9
9
99/0
0
00/0
1
01/0
2
02/0
3
03/0
4
04/0
5
05/0
6
06/0
7
07/0
8
08/0
9
09/1
0f
10/1
1f
11/1
2f
prodn (mt)
1.0
1.5
2.0
2.5
3.0
3.5
yie
ld (
t/ha)
Arg prodn Brz prodn Arg Yield Brz Yield
Macquarie Research Commodities Compendium
17 May 2011 52
Sugar Prices under pressure as market moves to surplus
After peaking out at above US35c/lb in January, sugar prices have fallen steadily. High prices
have encouraged importers to delay purchases, whilst waiting for the onset of the 2011/12
Brazilian cane crop. That, along with unexpectedly higher Thai production and the much-
awaited release of Indian exports, has pushed prices to 20-22c/lb. Although the Brazilian
crushing has been slow to start, due to adverse weather which led to poor yields in April, the
sharp increase in Thai sugar production (stemming from farmers in the Northeast switching
out of cassava planting) has more than offset this. At some 3mt more than previously
expected, Thailand‟s supply has tilted our 2010/11 global market balance back into a modest
surplus. This will be the first in two seasons, and will be followed by a much larger surplus in
2011/12. With the market no longer facing a short term supply shortage, the futures forward
curve has shifted back to contango; and short term, we expect prices to languish at US19-
21c/lb.
The additional Thai supplies as well as an early start to Australia‟s harvest (following
standover cane left from last season‟s flood affected crop) will go some way to help reduce
potential Brazilian port congestion. This will be important in the early part of the crushing
season in Centre South of Brazil, when domestic mills will be producing more ethanol over
sugar due to an acute domestic shortage of both hydrous and anhydrous ethanol. With India
no longer an importer this year, and some port efficiency improvements (e.g. loading in wet
weather), Brazil is unlikely to face as much congestion as last year. We expect the CS
Brazilian cane crop this season to at best match last season‟s 565mt, due to lower yielding
and ageing cane. Although timely rains in recent weeks have helped offset earlier drought
concerns, production risks are skewed to the downside, unless perfect weather is achieved.
Overall Brazil will produce 39mt of sugar - a modest expansion of just 2.6% - although this will
require prices remain above the ethanol equivalent price, which at present stands at 20c/lb.
There is a risk for prices to rise from July onwards as imports pick up from refineries that need
to replenish raw inventories and as Muslim countries stock up ahead of Ramadan. But given
that the import deficit will not be as severe as last season‟s, any price rally will likely be
capped to the 25-26c/lb levels. From Q4, however, the market will start to anticipate northern
hemisphere crops, which assuming ENSO neutral conditions, should be much larger than last
season‟s. High prices, coupled with good beet sowings in Western regions and forecasts for a
normal monsoon in Asia, point to a strong rebound in global production for the 2011/12
season. Even if sugar demand picks up alongside economic growth, the supply side recovery
should be more than ample to cater for it. However, it is clear that longer term, we will need
Brazil to invest in greater sugarcane expansion to avoid the kind of price volatility witnessed
in the last two years. For this, we will need prices to stay above US19c/lb, a level we
considered necessary to incentivise production growth in countries such as Brazil and India.
Fig 142 NY sugar futures trending lower again as supply pressure builds up
Fig 143 The 2010/11 deficit has been resolved and the 2011/12 season will be in surplus too
Source: Bloomberg, Macquarie Research, May 2011 Source: ISO, national trade sources, Macquarie Research, May 2011
10
15
20
25
30
35
40
04/0
9
06/0
9
08/0
9
10/0
9
12/0
9
02/1
0
04/1
0
06/1
0
08/1
0
10/1
0
12/1
0
02/1
1
04/1
1
US c/lb
100
110
120
130
140
150
160
170
180
2000
/01
2001
/02
2002
/03
2003
/04
2004
/05
2005
/06
2006
/07
2007
/08
2008
/09
2009
/10f
2010
/11f
2011
/12f
Prod/Cons
(Mn t)
-10
-5
0
5
10
15
20
Market balance
(Mn t)
Balance Production Consumption
Greater Thai
supplies have
pushed the market
into surplus
There will be only
modest supply
growth in Brazil
2011/12 global
supply is expected
to rebound
Macquarie Research Commodities Compendium
17 May 2011 53
Fig 144 The sugar forward curve backwardation has disappeared as short term supply constraints ease
Fig 145 Production recovery expected at major producers next season as weather “normalises”
Source: Bloomberg, Macquarie Research, May 2011 Source: ISO, national trade sources, Macquarie Research, May 2011
Fig 146 Lack of cane renewals and adverse weather means CS Brazilian cane production will be flat
Fig 147 India‟s domestic supply/demand for sugar is loosening, implying greater export availability
Source: Unica, Macquarie Research, May 2011 Source: ISMA, Macquarie Research, May 2011
Fig 148 Global sugar supply and demand balance
(m tonnes) 2005/06 2006/07 2007/08 2008/09 2009/10f 2010/11f 2011/12f
Demand India 21.1 22.40 23.00 23.50 23.00 23.75 25.00 China 12.0 13.83 14.50 14.82 15.21 15.82 16.25 EU27 18.3 18.43 18.92 18.63 18.66 18.67 18.75 World consumption 147.6 152.76 157.94 159.73 160.25 162.91 166.87 % change 1.8 3.5 3.4 1.1 0.3 1.7 2.4 Supply Brazil 27.9 30.45 31.04 32.32 35.83 38.56 39.02 EU27 22.2 18.40 17.84 16.45 17.31 15.65 16.50 India 20.9 30.10 28.50 14.70 18.70 25.00 27.00 World production 151.9 169.24 170.26 152.56 156.22 164.78 173.48 % change 5.9 11.5 0.6 -10.4 2.4 5.5 5.3 Balance Supply less demand 4.2 16.5 12.3 -7.2 -4.0 1.9 6.6 Closing stocks 42.5 48.7 52.3 42.5 38.4 40.3 46.9 Stocks-to-use ratio (%) 28.8 31.9 33.1 26.6 24.0 24.7 28.1 Raw sugar price (USc/lb) 14.8 10.1 12.1 17.7 22.4 25.0 21.5
Note. Oct-Sep years
Source: ISO, LMC, national trade sources, Macquarie Research, May 2011
14
16
18
20
22
24
26
28
30
32
Mar
-11
May
-11
Jul-1
1
Sep
-11
Nov
-11
Jan-
12
Mar
-12
May
-12
Jul-1
2
Sep
-12
Nov
-12
Jan-
13
Mar
-13
US c/lb
27-Jul-10 26-Oct-10 1-Mar-11 27-Apr-11
0
5
10
15
20
25
30
35
40
45
Bra
zil
EU27
India
Chi
na US
Thaila
nd
Aus
tralia
Mex
ico
Cen
t Am
erica
Pak
ista
n
Rus
sia
Mn tonnes
2009/10f 2010/11f 2011/12f
0
100
200
300
400
500
600
2007/08 2008/09 2009/10 2010/11f 2011/12f
Mn t cane
crushed in CS
Brazil
0
5
10
15
20
25
30
35
40
Mn t sugar
produced
Cane crushed Sugar prod
0
5
10
15
20
25
30
35
1995
/96
1996
/97
1997
/98
1998
/99
1999
/00
2000
/01
2001
/02
2002
/03
2003
/04
2004
/05
2005
/06
2006
/07
2007
/08
2008
/09e
2009
/10f
2010
/11f
2011
/12f
m tonnes
Production Consumption
Macquarie Research Commodities Compendium
17 May 2011 54
Coffee High prices amidst very tight markets
As we forecast in our last compendium, coffee prices surged higher to get past the US300c/lb
mark in early May, following extremely tight conditions. With prices hovering at 14 year highs
for much of the first quarter, Brazil and other origins (including Central America) have
exported record high volumes to take advantage. Yet this has not been enough to rebuild
global inventories of coffee, which still remain at historical lows. According to ICO, world
coffee exports rose 15.4% in the first half of 2010/11 from the same period a year earlier;
some of this was likely absorbed to fill gaps in the pipeline created by last year‟s deficit. This
pace of exports will not continue in the second half of the season, as most of the Central
Americans front loaded their exports, while Brazilians have run out of old crop coffee.
Colombia‟s main harvest may have been good, but the upcoming mitaca harvest will likely
come in at under 3.5m bags due to heavy rains and road blockages - taking the total
Colombian 2010/11 output to an insufficient total of 9m bags.
The start of the new Brazilian 2011/12 coffee harvest and the anticipation of hedging and
selling pressure has caused speculators to take profit in the last few weeks, after having built
a large net long position in the preceding few past months. In our view, the sharp drop in NY
arabica futures in the last ten days represents good buying opportunities, as many roasters
still remain insufficiently forward covered. With the “off” season harvest likely to be around
10m bags smaller than last season‟s, at 47m, and Brazil‟s domestic demand ever strong at
20m, exports will fall short of the level required to meet global needs. There is still a good
chance that prices could head back up above 300/lb in a few months – especially if there is a
frost risk, or demand remains unfulfilled. The Brazilian real has soared about 50% against the
US dollar since the start of 2009, adding pressure for producers to reap higher prices.
According to our analysis, global coffee stocks will barely rise in 2010/11 due to a
combination of strong consumption growth at origin countries and hefty export demand. In
consumer markets, demand remains as resilient as ever, irrespective of recent roaster price
hikes, as coffee buyers change their habits towards home consumption and away from more
expensive outdoors/café consumption. Roasters are still struggling to get hold of fine cup
Arabica or high quality Milds. Others, however, are adjusting their blends to take advantage of
the steep discount of lower grade coffees. In consumer markets we are noticing demand
growth for Natural arabicas is currently outpacing that of robustas or mild washed arabicas,
as roasters seek to compromise taste with costs. Given the expected decline of Brazilian
arabicas this harvest, Brazil‟s Naturals will be subject to upside price risks until the 2012/13
Brazilian “on” season comes round to provide proper supply-side relief. Although the Robusta
market has also benefited from a strong export pace in the season so far – thanks to
aggressive supplies from Vietnam following soaring prices – the second half of 2010/11 will
be much slower. Vietnam‟s sales are pretty much over now, and the Indonesian robusta
supplies will be much lower than last season‟s due to rainy weather. This will provide for
some tightening in the robusta market, particularly in a context of rising demand pressures.
Fig 149 Both NY arabica futures and London robusta futures have had a strong run
Fig 150 Cash differentials against futures contracts are easing; but the NY-Lon arb remains very wide
Source: Bloomberg, Macquarie Research, May 2011 Source: ICO, LMC, Macquarie Research, May 2011
50
100
150
200
250
300
04/0
9
06/0
9
08/0
9
10/0
9
12/0
9
02/1
0
04/1
0
06/1
0
08/1
0
10/1
0
12/1
0
02/1
1
04/1
1
US c/lb
NY arabica futures London robusta futures
0
20
40
60
80
100
120
140
160
180
Jan-0
9
Mar-0
9
May-
09
Jul-0
9
Sep-09
Nov-09
Jan-1
0
Mar-1
0
May-
10
Jul-1
0
Sep-10
Nov-10
Jan-1
1
Mar-1
1
US
c/lb
Colomb Milds/Other Milds Colomb Milds/Braz Naturals
Colomb Milds/NY futures Oth Milds/Robustas
Braz Naturals/Robustas NY futures/London futures
The 2010/11 export
pace will be front
loaded
The recent sell off
represents good
buying opportunity
Natural Arabicas
will be subject to
most tightness
Macquarie Research Commodities Compendium
17 May 2011 55
Fig 151 Brazil‟s Apr/May 2011/12 “off season” will see a sharp fall in Natural Arabicas production…
Fig 152 … at a time when Natural arabicas are increasing their demand market share in Europe
Source: Government data, Macquarie Research, May 2011 Source: NKG Stats, ICO, USDA, Macquarie Research, May 2011
Fig 153 Tight arabica supply/demand to persist until the 2012 Brazilian “on season” brings relief
Fig 154 Robusta coffee also slipping into deficit on higher demand pressures
Source: Government data, Macquarie Research, May 2011 Source: NKG Stats, ICO, USDA, Macquarie Research, May 2011
Fig 155 Coffee supply and demand balance
(m 60-kg bags) 2005/06 2006/07 2007/08 2008/09 2009/10f 2010/11f 2011/12f
Production
b 116.9 125.5 132.8 127.6 134.1 132.3 140.8
Arabica 76.6 76.1 80.7 75.6 80.1 79.1 84.4 Robusta 40.3 49.4 52.1 52.0 53.4 52.8 56.4 Growth 4.6% 7.3% 5.9% -3.9% 5.1% -1.3% 6.4% Consumption 118.5 121.5 124.6 130.2 133.6 136.0 137.1 Arabica 74.0 74.7 75.9 79.0 80.6 81.0 81.4 Robusta 44.5 46.8 48.8 51.2 53.0 55.0 56.0 Growth 0.2% 2.5% 2.6% 4.5% 2.6% 1.8% 1.0% Balance -1.6 4.0 8.2 -2.6 0.6 -3.7 3.4 Arabica 2.6 1.4 4.9 -3.4 -0.4 -1.9 3.0 Robusta -4.2 2.6 3.3 0.8 0.4 -2.2 0.4 Stocks
c 49.6 41.8 39.3 32.6 33.7 30.0 33.4
Stock ratio (%) 41.9 34.4 31.5 25.1 25.2 22.1 24.3 Prices 2006 2007 2008 2009 2010 2011 2012 NY Arabica prices (US$/lb) 107.7 117.3 121.5 125.2 163.2 272.1 206.3 London Robusta price ($/tonne) 1402.3 1772.0 2109.3 1462.5 1585.7 2472.0 2162.5 a Oct-Sep. b For Southern Hemisphere producers, volumes adjusted from Apr-Mar crop years to fit in with Oct-Sep. c Gross stocks in exporting countries and estimated inventories in importing countries on September 30.
Source: ICO, NKG Stats, USDA, Macquarie Research, May 2011
0
10
20
30
40
50
60
70
2002
/03
2003
/04
2004
/05
2005
/06
2006
/07
2007
/08
2008
/09
2009
/10
2010
/11f
2011
/12f
Mn bags
Arabica Robusta
20%
25%
30%
35%
40%
45%
Jan-
06
May
-06
Sep
-06
Jan-
07
May
-07
Sep
-07
Jan-
08
May
-08
Sep
-08
Jan-
09
May
-09
Sep
-09
Jan-
10
May
-10
Sep
-10
Naturals Robusta Washed
70
72
74
76
78
80
82
84
2005/06 2006/07 2007/08 2008/09 2009/10f2010/11f2011/12f
S/D Arabica
(Oct/Sep)
-4
-3
-2
-1
0
1
2
3
4
5
6
Market
Balance
Balance Production Consumption
35
40
45
50
55
60
2005/06 2006/07 2007/08 2008/09 2009/10f 2010/11f 2011/12f
S/D Robusta
(Oct/Sep
-5
-4
-3
-2
-1
0
1
2
3
4
Market Balance
Balance Production Consumption
Macquarie Research Commodities Compendium
17 May 2011 56
Cocoa Short term price weakness followed by a tighter 2011/12 market
2010/11 was the first season in many when cocoa producers in West Africa enjoyed bumper
crops. But the violence and political stand-off in Ivory Coast prevented much of this from
reaching end markets and prices were very firm in Q1 despite a large global market surplus.
With Gbabgo stepping down, the Ivorian unrest finally ended in April. The export ban on
cocoa has been lifted, making way for the backlog of shipments and stockpiles to leave the
country. Anticipation of this had seen cocoa fall sharply in the weeks preceding this, to below
US$3,000/t by late March. But major teething problems and delayed restoration of normal
operations such as banks, customs and general marketing– amidst a continued lack of
security – has seen very little cocoa come out of the country so far. Consequently, prices held
up fairly well in view of a continued scarcity of Ivorian cocoa and pent up grinding demand.
However, the commodity-wide sell-off is dragging cocoa prices down too now, and in the
short term we see little upside price risk given that shipments of the 500kt or so of
warehoused cocoa are now starting to leave Ivorian ports and harvesting of the mid crop has
begun (which, due to continued favourable La Niña weather, could easily exceed 300kt).
There is a risk, however, that not all of this mid crop will get harvested due to the loss of
migrant labour following the war, lack of security in the bushes due to loitering gunmen and
still poor access to cash. That said, output flow from neighbouring Ghana continues at a fast
pace, running 50% ahead of last season. Ghana is aiming for production of 1mt by 2012.
Although this may be ambitious in just one year, Ghana‟s production could easily surpass
Ivory Coast‟s within the next five years. Production from Indonesia, however, has suffered
due to heavy rains and exports have fallen short following the government‟s cocoa export tax.
In our view, the weak prices are unlikely to last too long, as our latest market balances
suggest that this season‟s surprisingly large global cocoa surplus (of 80,000t) will be followed
by a much tighter season in 2011/12. Meteorologists are expecting La Niña, which tends to
favour African production, to fade by June, which will mean Ivory Coast and Ghana are
unlikely to reap another bumper harvest. The Ivorian unrest has led to many cocoa workers
fleeing the country and President Ouattara has a huge task ahead of him to restore the
country‟s operation, before it can even start thinking of boosting the ailing cocoa sector. As
such, we believe Ivorian production will resume its structural downtrend. This, along with a
resumption of “normal” yields elsewhere in West Africa, could wipe out this season‟s surplus.
With demand expected to remain healthy, this will tilt the 2011/12 market back to balanced
and much tighter conditions. Demand for cocoa powder continues to drive overall grindings
growth – not just in Asia, but also in Europe and North America, as evidenced by rising
powder ratios. The tentative recovery in grindings in the latter two regions will continue apace
in 2011/12, necessitating production expansion outside of Ivory Coast. To incentivise this,
prices by Q4 may need to bounce back to US$3,300-3,400/t.
Fig 156 NY and Liffe cocoa futures prices – will fall before rising again
Fig 157 Global cocoa market – this season‟s surplus will be wiped out again in 2011/12
Source: Bloomberg, Macquarie Research, May 2011 Source: ICCO, national trade sources, Macquarie Research, May 2011
2000
2200
2400
2600
2800
3000
3200
3400
3600
3800
4000
04/0
9
06/0
9
08/0
9
10/0
9
12/0
9
02/1
0
04/1
0
06/1
0
08/1
0
10/1
0
12/1
0
02/1
1
04/1
1
US$/t
1500
1700
1900
2100
2300
2500
2700
2900
UK£/t
NY ICE futures London LIFFE futures
1,500
2,000
2,500
3,000
3,500
4,000
4,500
2000
/01
2001
/02
2002
/03
2003
/04
2004
/05
2005
/06
2006
/07
2007
/08
2008
/09
2009
/10
2010
/11f
2011
/12f
Sup/Dem
-300
-200
-100
0
100
200
300
400
Market balance
Balance Production Consumption
Prices have held up
as Ivory Coast
tries to normalise
operations...
… but will ease as
Ivorian supplies are
finally mobilised
The 2011/12 season
will be much tighter
than this season
Macquarie Research Commodities Compendium
17 May 2011 57
Fig 158 Global cocoa grindings demand has rebounded on restocking, but margins are weak
Fig 159 As Ivory Coast output reverts to declining trend next season, so too will the global surplus
Source: ICCO, LMC, Macquarie Research, May 2011 Source: ICCO, LMC, Macquarie Research, May 2011
Fig 160 Global cocoa supply and demand
('000 tonnes) 2005/06 2006/07 2007/08 2008/09 2009/10f 2010/11f 2011/12f
Production 3,773 3,399 3,698 3,529 3,572 3,801 3,960 % change 12.5 -9.9 8.8 -4.6 1.2 6.4 4.2 Côte d'Ivoire 1,408 1,229 1,382 1,235 1,200 1,290 1,315 Ghana 740 615 719 710 700 795 850 Indonesia 585 545 485 490 535 525 560
Consumption 3,512 3,663 3,775 3,547 3,659 3,795 3,890 % change 4.3 4.3 3.1 -6.0 3.1 3.7 2.5 EU27 1,328 1,390 1,408 1,330 1,373 1,425 1,435 'US 432 418 391 361 382 400 425 Origin 1,278 1,382 1,425 1,412 1,490 1,500 1,545 Balance 298 -230 -39 18 -50 44 100 Stocks 1,890 1,615 1,574 1,592 1,542 1,586 1,686 % change 13.7 -14.6 -2.5 1.1 -3.2 2.9 6.3 Stocks/use ratio 53.8 44.1 41.7 44.9 42.1 41.8 43.3 Price (NY ICE) US$/tonne 1,502 1,882 2,556 2,794 2,943 3,214 3,263
Source: ICCO, national trade sources, Macquarie Research, May 2011
Fig 161 Speculators in NY cocoa futures market – fairly neutral in outlook
Fig 162 Output needs to be ramped up outside of Ivory Coast to ensure global supply growth
Source: CFTC, Macquarie Research, May 2011 Source: ICCO, LMC, Macquarie Research, May 2011
0
500
1000
1500
2000
2500
3000
3500
4000
4500
1995
/96
1997
/98
1999
/00
2001
/02
2003
/04
2005
/06
2007
/08
2009
/10
2011
/12f
Cocoa g
rindin
gs '000 t
onnes
EU27 US Origin Others
-300
-200
-100
0
100
200
300
400
500
1995/9
6
1996/9
7
1997/9
8
1998/9
9
1999/0
0
2000/0
1
2001/0
2
2002/0
3
2003/0
4
2004/0
5
2005/0
6
2006/0
7
2007/0
8
2008/0
9
2009/1
0f
2010/1
1f
2011/1
2f
Global market
surplus/deficit
('000t)
1,000
1,050
1,100
1,150
1,200
1,250
1,300
1,350
1,400
1,450
Ivory Coast
production
('000t)
Global market balance Ivory Coast production
-60
-40
-20
0
20
40
60
80
05/0907/09 09/09 11/09 01/10 03/10 05/10 07/10 09/10 11/10 01/11 03/11
Contracts
('000)
0
500
1000
1500
2000
2500
3000
3500
4000
Price
(US$/t)
Non Commerical Long Non Commerical Short
Net Non Commerical NY cocoa price
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2005
/06
2006
/07
2007
/08
2008
/09
2009
/10f
2010
/11f
2011
/12f
('000t)
Côte d'Ivoire Ghana Indonesia Nigeria
Cameroon Brazil Ecuador
Macquarie Research Commodities Compendium
17 May 2011 58
Cotton Market reacts to high prices, but weather risks prevail
Since peaking out in March, cotton futures have been under pressure for most of April –
particularly for the July contract. It appears that the previous record-high cotton prices have
done their job: demand is falling and producers are responding positively. Reduced import
demand (especially from China and other Asia), competitive pressure from new supplies out
of Southern hemisphere origins (both Brazil and Australia are seeing double digit growth due
to the favourable returns in planting cotton right now) and reduced speculative interest have
pushed front month futures down to under US150c/lb from a peak of US227c/lb in early
March. Despite a lower than expected USDA acreage number for the 2011/12 US cotton
plantings, the anticipation of strong supply responses in other cotton producing countries
such as India, China, and Central Asia has spooked investors away from cotton futures. Total
open interest on ICE has fallen to lows last seen in Oct 2009.
The backwardated forward curve has encouraged importers to delay cotton purchases as
much as they can until the new harvests arrive, whilst drawing down inventories. US export
sales were negative for the sixth week in a row, as weaker new sales were offset by
cancellations. But new crop sales remain at high levels. Slowing apparel and yarn demand
growth in Asia following tighter monetary policy – particularly in China - is dampening import
demand. Mills are shying away from committing to large cotton orders or are switching to
synthetic fibres. China accounted for 30% of global imports this season, but in 2011/12 their
imports could rise by just 5-10% (against the last two years‟ 30-50% annual growth). This
would be due to higher domestic production - acreage in China is set to rise 6% - and slower
demand growth. Healthy production expansions are also expected in India and Pakistan,
which will add to world exportable supplies next season, whilst reducing import needs.
While short term demand destruction may continue to pressure the July contract, there
remain upside risks to the Dec (new crop) cotton futures. The latter are currently trading at
116c/lb, historically a very attractive price, given the potential of lower acreage and yields. Dry
weather in Texas, coupled with flooding in Missouri are providing for very unfavourable
planting conditions. Latest planting progress data show the US cotton crop at 42% planted,
compared with a five year average of 44%. The USDA expects virtually no growth in US
production and is pencilling in huge abandonment rates. However, ending stocks will rise
modestly owing to a reduction in exports as other countries ramp up output.
However, once the weather risks are gone, the US, along with a strong recovery in production
elsewhere, could see world production expanding by up to 8%. Assuming demand rises 2.8%
next season, global stocks-to-use ratio should improve to around 39% from this season‟s
36%. This will be the first time in five seasons that the world would be able to replenish
inventories (albeit modestly), but stock cover remains far below historical norms of 45-55%.
Prices will accordingly drift lower, but remain comfortably around 100c/lb through much of
2011/12.
Fig 163 NY cotton futures peaking out… Fig 164 …as world cotton market edges to a surplus
Source: Bloomberg, Macquarie Research, May 2011 Source: ICAC, USDA, Macquarie Research, May 2011
50
70
90
110
130
150
170
190
210
230
18/0
5/1
0
18/0
6/1
0
18/0
7/1
0
18/0
8/1
0
18/0
9/1
0
18/1
0/1
0
18/1
1/1
0
18/1
2/1
0
18/0
1/1
1
18/0
2/1
1
18/0
3/1
1
18/0
4/1
1
USc/lb
80
85
90
95
100
105
110
115
120
125
130
2000
/200
1
2001
/200
2
2002
/200
3
2003
/200
4
2004
/200
5
2005
/200
6
2006
/200
7
2007
/200
8
2008
/200
9
2009
/201
0f
2010
/201
1f
2011
/12f
Mn bales
-20
-15
-10
-5
5
10
15
20
Mn bales
balance (RHS) production consumption
Record high prices
as cotton enters
fifth season of
deficit
Importers are
shying away from
purchasing due to
high prices
Strong production
recovery expected
ex-USA
Macquarie Research Commodities Compendium
17 May 2011 59
Fig 165 Cotton vs PTA prices as quoted in China‟s futures: spread is narrowing
Fig 166 US cotton stocks sharply lower, despite projected production expansion
Source: Reuters, Macquarie Research, May 2011 Source: USDA, Macquarie Research, May 2011
Fig 167 US cotton plantings for 2011/12 are lagging behind normal levels due to dry conditions…
Fig 168 … but US weekly export sales are slowing down amidst cancellations and weaker import demand
Source: NOAA, Macquarie Research, May 2011 Source: USDA, Macquarie Research, May 2011
Fig 169 Global cotton supply and demand balance
(1000 480lb bales) 2005/06 2006/07 2007/08 2008/09 2009/10f 2010/11f 2011/12f
Production China 28,400 35,500 37,000 36,700 32,000 30,000 33,500 India 19,050 21,800 24,000 22,600 23,200 25,000 27,500 US 23,890 21,588 19,210 12,815 12,190 18,130 18,262 World total 116,691 121,953 119,908 107,140 101,150 115,031 124,749 % change -4.0% 4.5% -1.7% -10.6% -5.6% 13.7% 8.4% Consumption China 43,500 48,000 48,500 41,700 50,000 47,000 48,000 India 16,700 18,100 18,600 17,750 19,450 21,000 21,500 Pakistan 11,525 12,025 12,025 11,250 10,800 10,250 10,750 World total 115,061 121,979 120,906 109,950 118,400 116,830 119,695 % change 6.7% 6.0% -0.9% -9.1% 7.7% -1.3% 2.5% Balance Production less consumption 1,630 -26 -998 -2,810 -17,250 -1,799 5,054 Stocks 61,841 62,108 60,613 60,520 43,850 42,051 47,105 Stocks-to-use ratio 53.7% 50.9% 50.1% 55.0% 37.0% 36.0% 39.4% Price NY ICE (US cents/lb) 52.2 57.2 63.7 56.9 93.7 148.8 98.8
Source: ICAC, USDA, national trade sources, Macquarie Research, May 2011
0
5000
10000
15000
20000
25000
30000
35000
Jun/0
7
Sep/0
7
Dec/0
7
Mar/
08
Jun/0
8
Sep/0
8
Dec/0
8
Mar/
09
Jun/0
9
Sep/0
9
Dec/0
9
Mar/
10
Jun/1
0
Sep/1
0
Dec/1
0
Mar/
11
ZCE cotton ZCE PTA
0
5
10
15
20
25
2005/06 2006/07 2007/08 2008/09 2009/10 2010/11f 2011/12f
Mn bales
Production Exports Beginning stocks
-200
-100
0
100
200
300
400
500
600
700
800
900
6-J
an
6-F
eb
6-M
ar
6-A
pr
6-M
ay
6-J
un
6-J
ul
6-A
ug
6-S
ep
6-O
ct
6-N
ov
6-D
ec
'000 running
bales
2009 2010 2011 5 yr Avg
Macquarie Research Commodities Compendium
17 May 2011 60
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 return <-10%
Macquarie First South - South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%
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 (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return
Volatility index definition*
This is calculated from the volatility of historical 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/Canada stocks only
Recommendations – 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 31 March 2011
AU/NZ Asia RSA USA CA EUR
Outperform 45.65% 65.72% 59.70% 43.02% 68.91% 51.16% (for US coverage by MCUSA, 14.36% of stocks covered are investment banking clients)
Neutral 39.49% 19.00% 29.85% 53.09% 26.43% 35.73% (for US coverage by MCUSA, 17.55% of stocks covered are investment banking clients)
Underperform 14.86% 15.28% 10.45% 3.89% 4.66% 13.11% (for US coverage by MCUSA, 0.00% of stocks covered are investment banking clients)
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