Looking Beyond the Cycle. Andrew Shaw, Principal Industry Analyst. Copper. BHP Billiton. AJM 2 nd Annual Copper Forecast Conference

Transcription

1 Copper Looking Beyond the Cycle Andrew Shaw, Principal Industry Analyst BHP Billiton AJM 2 nd Annual Copper Forecast Conference Sydney, 29 August 21

2 A glance back! Forecast of LME price at year-end made by delegates in September 2 at AJM Copper Lowest 86 c/lb Highest 121 c/lb Average 95 c/lb Price at close 29 December 82 c/lb Q3 2 Average 85 c/lb 29 August 21 2

3 Prices bouncing along the bottom sowing the seeds for the next boom? Cycles in : separated by periods of relatively low, but stable, prices - a legacy of demand shocks and excess capacity Two major price spikes in , with no intervening period of stable prices but prices less than 8 c/lb in Copper Price (USc/lb) Reported Stocks (' tonnes) LME and Comex stocks up by more than 4 tonnes in 21 Reported Stocks Actual Price Real Price 29 August 21 3

4 Emerging market share above 4% (refined Cu) but demand advancing in all regions except Japan and the former Soviet Bloc growth spurt in the second half of the 199s Apparent Demand for Refined Copper (excl. direct melt scrap) Post war boom : % p.a. Major recessions :.6% p.a. Emerging Market and US growth 199-2: 3.5% p.a Collapse of USSR CIS/E. Europe China Asia Japan W. Europe N. America 22% Market Share in 2 L. America 7% 5% China 12% 2 North America W. Europe 27% 29 August 21 4 Japan 9% Asia 18% ' tonnes Cu

5 Stable intensity could persist indicating world copper demand growth of >3% p.a., in line with the trend Forecast of higher demand growth would require a higher Copper Demand/World GDP at different forecast demand growth rates (Index: 199=1) Intensity of use of copper falling, even in the 196s than expected increase in World GDP or a sustained rise in intensity of use Assumes World GDP growth of ~3% p.a. in 2-21 Higher growth is possible, but too many industry projections are based on trough-to-peak trends in the 199s % p.a. 3.5% p.a. 3% p.a. Historical Intensity of use stable since early 1992/93, coinciding with US economic boom and China s rapid industrialisation August 21 5

6 Copper demand outpacing other metals but all have benefited from world economic expansion, especially since the 1992/93 recession World Metal Demand (Index: 199=1) Collapse of Soviet Bloc economies (and demand) copper suffered less than Al and Ni from net E. Bloc flows and from 1991 s recession Aluminium Zinc Nickel Copper Trends in final use of copper reveal the importance of China, Asia s emerging markets and the USA in the 199s these areas account for 85% of growth Increase in Copper Demand in Copper- Containing Products in ( t Cu) World total = 5.2 Mt/y China Asia/Africa USA W. Europe S. Korea 29 August 21 6

7 Final Demand by sector and product Energy cable accounts for more than third of the market Scrap use is lowest in wire and cable but recycling could accelerate as scrap rates for new economy products rise Direct Melt Scrap 22% Energy Cable Telecom Cable Winding Wire Tube Plate, Sheet & Strip Rods, Bars, Sections Alloys & Mt Cu Total Copper Consumption: Mt Mt Market Share by Segment/Product in % 8.5% Building (4.5%) Wire & Cable (54.6%) 26.2% 11.6% 1.7% 7.9% Equipment and Machinery (44.4%) Copper Mill Products (45.4%) 2.7% 24.1% Infrastructure (15.1%) Refined Copper 78% Source: Bloomsbury Minerals Economics data for 1998 (demand for copper in copper-containing products), BHP Billiton % 9.5% 13.3% 14.2% 7.4% 5.4% 7.2% Non Res. Building Residential Building Transport Industrial Equip. Equipment General Market Telecom Power Mt Cu 2.4% 29 August 21 7

8 Construction drives growth principally in energy cable and tube 15 World Increase in Copper Consumed by Market Segment in ( t Cu incl. secondary) Wire and Cable (+1.8 Mt) Copper Products (+1.4 Mt) Copper Demand Growth by Sector and Product in (Contribution to total increase - %) Telecom Cable 1% Alloys 9% 8% 1 5 Equipment Construction Infrastructure Infrastructure 12% Winding Wire 11% Tube etc. 27% Equipment and Machinery 35% Building Construction 53% Energy Cable Telecom Cable Winding Wire Tube, rods, bars etc. Alloys Source: Bloomsbury Minerals Economics 29 August 21 8 Ene r gy Cable 35%

9 Not handed out Led by USA in the industrialised world A US growth story dominated by use in buildings. European copper demand growth is patchy and modest. Japan has fallen behind Increase in Copper Consumed by Market Segment and Region in ( t Cu) USA W. Europe Japan Equipment Construction Infrastructure Energy Cable Telecom Cable Winding Wire Tube, rods, bars etc. Alloys Energy Cable Telecom Cable Winding Wire Tube, rods, bars etc. Alloys Energy Cable Telecom Cable Winding Wire Tube, rods, bars etc. Alloys Source: Bloomsbury Minerals Economics 29 August 21 9

10 US demand intensity relatively high in the US construction sector. Copper is powering the US growth phase, centred on IT and rising per capita wealth Annual Compound Growth by Sector in the USA in (%) Copper Demand IP GDP Auto Production Housing Starts Non Res. Construction Residential Construction Electrical Machinery and Apparatus Office & Computing Machinery 23% p.a. 33% p.a. Copper intensive Less copper intensive August 21 1

11 And Asia s growth? Not handed out Centred on China use of copper (and other metals) eclipsing underlying GDP expansion. Rising manufacturing base elsewhere in Asia is also important Increase in Copper Consumed by Market Segment and Region in ( t Cu) China Spread typical of emerging market growth infrastructure, construction and manufacturing Korea/Taiwan Maturing industrialisation phase high apparent consumption associated with export focus Equipment Construction Infrastructure Asia Heavy reliance on export driven manufacturing feeding US boom? Energy Cable Telecom Cable Winding Wire Tube, rods, bars etc. Alloys Energy Cable Telecom Cable Winding Wire Tube, rods, bars etc. Alloys Energy Cable Telecom Cable Winding Wire Tube, rods, bars etc. Alloys Source: Bloomsbury Minerals Economics 29 August 21 11

12 Strong demand growth in a complex system Copper a major beneficiary of the technology boom Predominantly a US pattern in the 199s Associated with workplace and lifestyle products A feature of strong economic growth (business investment) and wealth creation But some other metals have benefited too e.g. aluminium Maintenance of strong demand growth probably requires: Renewed strong economic growth in USA and/or Repeat of US phenomenon (and wealth effect) elsewhere Sustained high levels of investment activity and strong economic growth in China and emerging markets Forecast of 3-3½% p.a. demand growth in 2-21 In line with expected expansion of World GDP 29 August 21 12

13 No structural shortage of supply Not handed out except at very high demand growth rates. Established mines and highly likely expansions and projects are expected to meet demand until 27-8, although cyclical shortage is possible 25 Probable and Possible Additions to Mine Capacity (Mt/y) Possible new mine supply Probable restarts Mine-by-mine forecasts are unreliable beyond the near term, due to unforeseen additions or losses forecasts widely underestimated demand and supply in the 199s Established production and financed projects less depletion Probable new mines Probable expansions Required mine supply at demand growth of 4% p.a. Required mine supply at demand growth of 3% p.a. 21 supply gap at: 4% p.a. = 7 Mt/y 3.5% p.a. = 6 Mt/y 3% p.a. = 5 Mt/y Source: BHP Billiton August 21 13

14 Incentive prices? 5% of Idled Mine Capacity Increases Under Way About 6 Mt/y of identified new capacity is viable at perceived long run prices of less than US$1. c/lb Analysis excludes effects of depletion but also omits a number of likely projects for which cost details are unavailable Committed or highly likely expansions and new mines (cash costs) 1 c/lb As in the past, high cyclical prices can be expected to woo some project developers, despite inadequate returns for all investors 6 Mt/y cumulative capacity 29 August Full Cost of 15% IRR Required new supply at 3.5% p.a. growth Uncommitted Projects 1 c/lb 9 c/lb Cost (c/lb Cu)

15 Costs (and prices) in decline Real prices fell by 1.3% p.a. in and by 1.9% p.a. in , reflecting similar reductions in steady state industry costs (C1) during this period. Further productivity gains are expected to translate into real long run (trend) price decline as producers pursue cost reduction strategies 3. C1 Cost Curves 1975, 199, 2 and 21 (US$2/lb) Average Copper Mine Production Costs (US$2/lb) Source: Brook Hunt Source: Brook Hunt, BHP Billiton Cumulative Production (Millions of tonnes). C3 Cost C2 Cost C1 Cost Price August 21 15

16 Poor average performance Little overall value created, despite a decade of high prices but masking high returns for some producers but industry concentration is unlikely to reduce fragmented ownership of second tier mines overall supply discipline is weak Copper Sector - EVA (US$ million) Mine Supply Ownership Concentration 3 1% 2 1 9% 8% 7% 6% Source: CRU Group EVA in : US$B Copper -.8 Non Ferrous % 4% 3% 2% 1% % Top 5 Top 1 Top 25 Total (>15) August 21 16

17 Price cycle a powerful influence Prompting mine closures when prices are weak And influencing decisions to invest in new supply in good times Announced Temporary and Permanent Mine Closures and Supply Reductions LME Price (USc/lb) Temporary Closures LME Copper Price Permanent Closures Committed/Financed Planned Additions to Mine Capacity (within 5 year timeframe) LME Copper Price Re-activated Mines Planned Capacity (' tonnes Cu) Copper Price (USc/lb) Expansions New Mines 29 August 21 17

18 assumptions but with caveats! Resources/reserves not running out. Limited scope for introduction of very low cost mega operations (no more Escondida s and Grasberg s waiting in the wings)? But average resource quality not deteriorating rapidly No sudden supply disruption. Major losses or additions to supply excluded from base case forecast but risks of supply shocks remain Advanced technology - evolutionary, not revolutionary, influence on industry cost reduction. Leach/EW processing for sulphides emerging, but unlikely to result in rapid, industry-wide plunge in production costs. Broad improvement to persist Smelting/Refining Capacity - no long lasting bottleneck giving rise to higher prices. Steady reduction in tariff barriers (e.g. Japan) unlikely to result in major loss of smelting/refining capacity sufficient new capacity encouraged by cyclical increases in TCRCs, local market incentives, and strategic imperatives Scrap contribution not expected to surge except during periods of high prices. Sustained strong demand growth centred on building applications means long residence times for copper s key uses. However, higher contribution from scrapped equipment (e.g. PCs) could emerge 29 August 21 18

19 And no disruption from former E. Bloc trade A positive net influence: lower risks of rapid supply growth in China than for aluminium and zinc China Copper Demand (Refined) and Production ( t Cu) Mine Supply Refined Consumption Refined Production Source: Metal Statistics, WBMS, CRU Group, Macquarie Research Net E. Bloc Exports as a % of Western Consumption Copper Lead Zinc Aluminium Nickel Supply/demand gap > 1 Mt/y August 21 19

20 Supply - characterised by Ample physical resources and sufficient reserves? Expansions and projects expected to meet demand until 27-8? Potential decline of US production base an important caveat Commodity price cycle influencing investment decisions Leading to periods of over and under investment in new supply Producers unable to distinguish between price trend and price cycle Permanent upward shift in prices above current average (~9 c/lb) is improbable, especially if believed by many producers Consolidation and value focus does not herald real price trend rise Producers cannot expect to regain major influence over pricing industry too fragmented to orchestrate real long run price rise Strategies continue to centre on revenue growth and cost reduction Survival instinct and steep exit barriers hamper removal of poor assets Real costs and hence prices will continue to fall Rewards for disciplined, value-focused companies but success built on outstanding market knowledge, not gambling on price 29 August 21 2

21 But the future remains very uncertain There are plenty of wild cards! For example: US supply is the sun setting? Russia a riddle wrapped in a mystery! Central Africa untapped treasure trove? Any potential Bougainvilles? Major demand shocks (positive or negative)? 29 August 21 21

22 Summary Dealing with price cycles remains a major challenge for producers lumpy investment in new capacity Strong longer term demand growth prospects possibilities of very high growth, but also risks of setbacks! Heavy reliance on China (and emerging markets) and US demand growth No looming physical resource scarcity but US production critical Collective investment efficiency and supply discipline unlikely to emerge rapidly; sector still comprises many owners Permanent severe capital rationing an implausible outcome but companies with highest returns will be rewarded Producers maintaining strong focus on cost reduction and revenue growth real price decline in a commodity business likely to persist There are no easy fixes! Cannot afford to be average 29 August 21 22

23 Outstanding value is hidden! Escondidas are rare!