CRU Mineral Commodity Outlook 2020 Vision. Dr Allan Trench

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1 CRU Mineral Commodity Outlook 22 Vision Dr Allan Trench

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3 What is driving commodity prices?...that depends on which commodity you are looking at Each has it s own dynamics CRU looks at the fundamentals: Supply of raw materials, production capacity, industry demand, stocks & the market balance, costs of production & investment capital and financial market influence, as well as prices Each commodity has a story & individual fundamentals China s growth in consumption is common to all and this has been a factor in driving prices higher 3

4 Metal prices have increased dramatically over 1 years 6 Copper Tin Lead, Copper & Tin 5 4 Lead Zinc 3 Aluminium Nickel 2 1 Aluminium & Zinc Source: CRU 4

5 Here s on reason why: China has accounted for more than 1% of global metals demand growth this millennium Chinese metals consumption growth as a proportion of global metals consumption growth % 14% 12% 1% 8% 6% 4% 2% % Data: CRU Analysis Average growth as proportio of total global growth =118% Copper Nickel Lead Zinc Steel Aluminium

6 China s share of metal consumption At the turn of the last millennium China accounted for around1% metal consumption Today China s share of world consumption is over 4% The industry size and structure has changed in the last decade; and continues to be shaped by China s growth 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % There are industry constraints to be managed... Copper World Ex-China Lead World Ex-China Zinc World Ex-China Nickel World Ex-China Aluminium World Ex-China Copper China Lead China Zinc China Nickel China Aluminium China Source: CRU

7 China s development has compensated for lower metal growth elsewhere Looking at consumption growth of industrial metals China is driving demand growth The World Ex-China is cyclical but stable Metal Consumption Copper Zinc Lead Aluminium Tin Nickel yoy 1/9 8.5% 15.8% 7.9% 19.5% 15.% 15.9% yoy 11/1 3.5% 4.4% 5.3% 8.8% 5.8% CAGR % 2.9% 3.6% 5.1% 2.4% 2.7% CAGR % 5.% 4.5% 7.6% 5.7% Source: CRU

8 China is reliant on imports across a range of major commodities 5% 45% 4% 35% 3% 25% 2% 15% 1% 5% % Net imports/demand Aluminium Alumina Bauxite Fe Ore Copper Nickel Source: CRU 8

9 But importantly China is self-sufficient in Aluminium & Steel Copper 8 Lead 4 Zinc Nickel 8 Aluminium 9 Steel Source: CRU Indexed Price Production Consumption 9

10 Business costs & 21 average metal price...at these prices just about every miner is making money Copper US$/t 5 Nickel US$/t 5 Aluminium US$/t Lead US$/t Zinc US$/t Alumina US$/t

11 3 Business costs $/t 25 v 21 Changes in the shape of the cost curve over time reflect changes in industry structure Aluminium US$/t 2 Nickel US$/t Copper US$/t 25 Lead US$/t Costs $/t 25 Costs $/t 21 Linear Costs 11

12 Supply-side Challenges to buoy Long-Term prices Influences vary from commodity to commodity Mining houses can t do everything simultaneously adding to the challenge Room for smaller scale commodity-specific producers to add to contestable supply - Examples Copper Nickel Iron Ore Coking Coal Zinc 12

13 (Mt contained Cu in concentrates and SXEW cathode) We need more mines to meet consumption growth... Copper Example Production needed 2.67% per year 24 2 (21-235) Incremental Discoveries Prospects Extra potential supply requirement = 13.1Mt New technology 16 Firm projects Probable projects Possible projects 12 Existing mines Source: CRU World copper mine production,

14 Production ( t contained Cu) Miners are responding but it takes time...on average it take 1 years to bring a project on stream 12 1 After Escondida, insufficient influx of new supply Mining start-up gap of approx 1 years Significant volumes from relatively new locations: Mongolia, Pakistan, Alaska 8 6 Escondida Collahuasi Oyu Tolgoi 4 2 Los Pelambres Toromocho Tenke Fungurume Source: CRU Expected Year of production start-up 14

15 Production ( t contained Ni) Threat of several large-scale nickel projects... New conventional* nickel operations and their start-up dates, tonnes, Two medium sized operations start-up Raglan Murrin Murrin Mainly small-sized sulphide mines starting up over this 1-year period Voisey s Bay Talvivaara Onca- Puma Barro Alto Many large-sized projects scheduled to start-up at the same time VNC Ambatovy Koniambo Ravensthorpe Expected year of production start-up Data: CRU Analysis *Excluding mines in the Philippines and Indonesia that supply the Chinese nickel pig iron sector. 15

16 New mines help balance the market (copper example) New copper capacity is coming on stream 212/13 The market will remain tight before we return back to defect after 214 New capacity additions delays are likely Project pipeline delays are likely Source: CRU 16

17 US$/tonne (211$) 7, 6, 5, 4, 3, 2, 1, Copper development costs have increased substantially... Cu Mining, Refining and Smelting CRU estimates real development cost inflation of 13% pa over this time period Source: CRU 17

18 Projects compete for capital Source: BHP Billiton Half Year Results Presentation 16 th Feb

19 Iron Ore A great business to be in... Global business cost curve for iron ore fines, (UScents/dmtu) cents/ dmtu...demand firmly at the high end of a steep cost curve providing strong pricing support & strong margins M tonnes Data: CRU iron ore cost model

20 Million tonnes Iron ore Demand: The original China story and still running Iron ore steel construction, transport, infrastructure... 2,5 Chinese percentage of global steel production rising 2, 1,5 1, 5 - Data: CRU Analysis Rest of World China

21 With China tracking towards more than 1 billion tonnes steel demand by 22 Per capita crude steel equivalent consumption kg/head Shanghai Tianjin Beijing Jiangsu Zhejiang Guangdong Inner Mongolia Shandong Liaoning Fujian Jilin Heilongjiang Inner Mongolia Hebei Hubei Chongqing Hunan Shaanxi Sichuan Jiangxi Guangxi Anhui Shanxi Hainan Xinjiang Qinghai Ningxia Tibet Yunnan Gansu Guizhou Source: CRU China 39% POPULATION 22% POPULATION 39% POPULATION National average 29 = 45kg/head National average 22 = 794kg/head Regional Kg/head Coastal Central Regional Kg/head 22 Western Coastal Central Western 2 1

22 But is future steel demand-growth simply about Asia? % of global growth in crude steel production % 8% 6% YES! >95% 4% 2% % -2% Western Europe Other Europe & CIS North America South America Africa Asia Oceania Data: CRU Analysis

23 Longer term, continued and rapid industrialisation expected in China, India and other developing nations X-axis: 21 GDP/capita, US$ (1), Y-axis: 21 Apparent finished steel consumption/capita, kg Bubble area proportional to 21 apparent finished steel consumption 1,2 1, South Korea 8 China 6 Taiwan Italy Japan Russia 4 Saudi Arabia Spain Germany Canada Turkey 2 Russia USA UK France Brazil India Data: International Monetary Fund, CRU Analysis Note: (1) current prices 23

24 Continued recovery in developed markets and further growth in emerging economies will see steel demand rise steadily LHS: Industrial production by country, year-on-year change, % RHS: Global finished steel consumption, m tonnes 2% 15% 1% 5% % -5% -1% Consumption Global China India USA Germany f 212f 213f 214f 215f Data: CRU Analysis, OE Note: f forecast

25 m tonnes Coking Coal - Chinese import potential is great, though Mongolia will help fill the gap Net imports/exports of metallurgical coal, China, Imports from Mongolia Seaborne Imports Exports Net exports Data: CRU Analysis, GTIS 25

26 Steel mills have been aggressive in acquiring captive coal supply, and this should continue Recent upstream integration movements from steel mills USA Essar Trinity Coal 21 JSW Steel WV ops 21 Metinvest United Coal 29 Mechel Bluestone Coal 29 Severstal PBS Coals 28 ArcelorMittal Mid-Vol Coal 28 Data: CRU Analysis, TEX Report Russia MMK Belon 29 ArcelorMittal Kuzbass mines 28 ArcelorMittal? POSCO? Mozambique Nippon Revuboe 21 POSCO Revuboe 21 WISCO Zambeze 21 CSN Benga, etc. 29 ArcelorMittal CoAL (S Afr.) 28 Tata Steel Benga Mongolia Tavan Tolgoi? Australia Nippon Foxleigh 21 POSCO Sutton Forest 21 Xinyang Maryborough 21 Jindal Rockalds Richfield jv 21 Baosteel Aquila 29 JFE Steel Byerwen 29 ArcelorMitta Macarthur l 28 POSCO Cockatoo, Macarthur 28 Bhushan Steel Bowen Energy 27

27 But there are no perfect solutions for coking coal supply, and the market will be dependent on higher-risk areas Russia (Kuzbass) Western Canada High cost to develop, run coal operations Appalachia Dwindling base of quality reserves, high operating costs, decreasing yields, increased regulation Poland, E. Europe Deep reserves, poor geology, increased local demand. Quality questionable. Will continue to struggle with transport limitations, and focus on domestic market Western Ukraine Size and quality of deposits largely unknown Mongolia Political risks, no infrastructure, and limited seaborne export options Siberia (Elga deposit) Infrastructure lacking, transport costly, and export capacity uncertain Indonesia Limited current production. Development of hard coal deposits has proven difficult logistically Primary seaborne supply sources Other important suppliers Prospective major projects Mozambique Good reserves and mining conditions, but limited infrastructure, and high ash 27 Central Queensland Costs rising, fewer development opportunities though substantial reserve base remains

28 Commodity Price Climate Change : Zinc to lead Global Warming in Prices Even cooling commodities will be highly profitable CRU Commodity Price Climatic Zones What s hot to 215? Torrid Zinc (215, not before) Warm Temperate Uranium, Tin, Nickel, Molybdenum, Alumina, Lead, Copper, Aluminium, Manganese, Cobalt, Vanadium Cool Temperate Platinum, Iron Ore, Palladium, Gold Frigid Phosphate Rock, Coking Coal, Met Coke, Ammonia, Urea, Silver, Sulphur, Sulphuric Acid * Relative forecast average 215 prices versus June 1 st 211 e as a base level

29 Thank you Dr Allan Trench Associate Consultant, CRU Strategies Philip Sewell Business Development Manager, Australasia With Thanks to Peter Ghilchik CRU International Ltd 31 Mount Pleasant, London WC1X AD Phone: Peter.Ghilchik@crugroup.com 29