Key Sector Trends Prices, Policies & Economics (PPE) Prof. Allan Trench

Transcription

1 Key Sector Trends Prices, Policies & Economics (PPE) Prof. Allan Trench

2 Industry Context Iron Ore and Met Coal are key exports for Australia together comprising $80 billion Export Value $160.9 Billion Iron Ore Met Coal Thermal Coal Gold Base Metals (ex Cu) LNG Oil Copper Uranium Data: BREE

3 Economic Context The OECD still reeling from the Global Financial Crisis (GFC) Data: CRU index of OECD IP Early 1990s Early 2000s Mid-1970s Early 1980s GFC months after cyclical peak

4 Economic Context Chinese slower growth - but not a hard landing 2012 was worst GDP growth for 13 years (7.8%), but China is not about to crash land (<5%) 8.5 Chinese Medium-Term GDP Growth 8 Percentage Data: CRU China GDP Growth % Floor

5 Economic Context China is passing the economic growth baton on who is picking it up?

6 Economic Context India is Not the next China, recent performance has raised concerns about the ability to realise its potential 12 Indian GDP Growth 10 India s 12 th 5-year plan targets 9% Percentage Halving of GDP growth since Data: CRU

7 Data: CRU India s Growth will Return Forecast Copper consumption example 1400 Refined Copper Consumption 000t India India x 2

8 But India cannot replace China Refined Copper Consumption 000t India India x 2 China Data: CRU

9 Economic Context Central and Western China will drive growth as it catches up with the relatively developed East Percent of population living in urban areas Chinese population by region East: 624M C & W: 724M Central & Western China s share of national output, % Construction Industrial production Central & Western China Data: CRU Eastern China OECD Data: CRU

10 (Micro) Economic Context End of the global demand boom? Not really Global demand Index: 2000 = 100 Aluminium: CAGR = 4.6% Next 4 yrs = 5.5% Copper: CAGR = 2.0% Next 4 yrs = 4.0% Steel Aluminium Copper Zinc Lead Data: CRU Zinc: CAGR = 2.0% Next 4 yrs = 5.0% Steel: CAGR = 4.4% Next 4 yrs = 3.9% Lead: CAGR = 4.0% Next 4 yrs = 3.9%

11 (Micro) Economic Context The Asian Top 5 to drive metal demand growth China, India, Japan, South Korea, Taiwan Million tonnes Global Production of Crude Steel 2,000 1,800 Asian 5 1,600 Rest of World 1,400 1,200 1, % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Crude Steel Production within the Asian China India Japan South Korea Taiwan Data: CRU

12 Iron Ore Our demand versus long-run marginal cost analysis out to 2035 suggests that only those tonnes that lie within the first and second cost quartiles of the project universe will be required to meet demand. CRU Group Long-Term Outlook for Iron Ore Everything has its limit iron ore cannot be educated into gold. Mark Twain

13 Iron Ore Iron ore is not scarce and new iron ore projects will easily meet long term demand requirements... Gap analysis; iron ore demand and planned supply, Mt 4,500 4,000 Possible Probable Committed Demand 3,500 3,000 2,500 2,000 1,500 1,000 Way under half of new iron ore projects needed Data: CRU

14 Iron Ore China is chronically short of (low cost) iron ore Chinese business costs, 2013, normalised (0=global minimum, 1=global maximum) Copper Aluminium Iron ore Lead 0.6 Zinc % 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Data: CRU Global cumulative production, %

15 Iron Ore Understanding the cost structure of the industry explains the price... Operating cost Majors Mid-tier producers and new entrants Medium cost High cost China SOEs / Large mines China small private mines Rio Tinto / Vale / BHP Cumulative production

16 Iron Ore Margins remain high for good assets but are set to erode 1 st Quartile mining margins to remain above historical norms 250 Gross margin 1Q iron ore price / cost / margin c/dmtu (iron ore) Data: CRU

17 Coking Coal What goes around comes around. Anonymous With apologies to Adam s Smith s Invisible Hand of the market Our supply/demand balance suggests that by 2017, the Chinese metallurgical coal industry will need to increase output capacity by an amount equivalent in size to the Bowen Basin. CRU Group Coking Coal Market Outlook, August 2013

18 Coking Coal Unlike iron ore, the long term outlook indicates coking coal may be in short supply Gap analysis; hard coking coal demand and planned supply, Mt 1,200 1, Possible Probable Committed Demand 2035 demand = 702 Mt demand = 603 Mt 90% of new projects in the pipeline required in order to meet demand Data: CRU

19 Cumulative production Coking Coal Operating cost Vertical scale exaggerated for effect China Types: 1 Large Shanxi Mines 2 Large Hebei Mines 3 Inefficient / SOEs located distant from market 4 Small private mines China Type 1 & Other Australia BMA BMA portfolio approach closing high cost while opening lower cost operations China Type 2 China Type 3 SCHEMATIC ONLY United States Swing Producers China Type 4

20 Copper Copper prices are supported by demand from China which never fails to deliver and by supply from the miners which frequently fails to deliver. John Sykes Principal, Greenfields Research Copper grades will continue to fall at an overall global rate of 0.8% (of the average mine grade) per annum with particular pressure on Chile s many porphyry mines CRU Group Copper Studies August Issue 2013

21 Grade decline can result from a combination of geological, mining and economic factors acting together... GEOLOGY Grade Enhancement Near Surface Mined First MINING Preferential Bring-Forward of High Grade General grade decline with depth Surface Enrichment zone Low grade High grade (blind) Pit outline 2013 High grade taken first ECONOMICS High Prices Creates Low Grade Ore So Grade Must Fall Over Time... % Cu (eq) Enriched cap Mine design brings this forward Final pit outline High grade pod Economic low-grade CRU 21 STRATEGIES CRU Strategies

22 Copper % Cu Average ore grade in 2002: 0.81% Cu Average ore grade in 2012: 0.65% Cu Forecast of ore grades at currently operating mines Average ore grade in 2022: 0.60% Cu Source: CRU Group

23 Copper a coming shift in the geology of copper mine supply Existing Cu mine operations Major Cu mine projects VMS 0.4% Other 6.2% Sediment 12.4% Other 11.1% Porphyry 61.7% IOCG 7.0% IOCG 6.2% Porphyry 86.5% VMS 8.5% Data: CRU

24 Gold Glad that you're bound to return There's something I could have learned You're indestructible, always believe in Spandau Ballet - Gold Central Banks still keep buying gold but investors flee. Surging physical demand sending market towards equilibrium CRU Group Gold Outlook September 2013

25 Gold We are heading for a rise & stall of Australian gold production A. Trench Strictly (Mining) Boardroom 2013, Major Street Press

26 Uranium Uranium is the next great China story. What China did for iron ore in the last decade, it will do for uranium in the coming decades. A Trench & D Packey Australia s Next Top Mining Shares Major Street Press the hour before dawn is always the darkest is this the case for uranium? Philip Sewell CRU Group

27 Uranium 180,000 Uranium demand to ,000 tonnes U 3 O 8 60, Data: CRU USA Japan Europe China - Mainland India Russia RoW

28 Uranium 1000 Uranium faces a grade decline challenge similar to copper Grade (kg U 3 O 8 /t) Closed Mine Operating Mine Development Feasibility Exploration Stalled Data: CRU Pre-Mined Resource (mt ore)

29 Trends or Just Constants? Minerals Sector decision-makers face challenges on a myriad of issues Production Grades & Operating Costs Resource Nationalism & Public Perception Environmental Concerns & Governance Infrastructure & Energy Reticulation External Supply Factors e.g. Scrap, ETF s

30 Prices Where are 2013 prices relative to Long-run Marginal Costs? Per cent Aluminium Copper Nickel Iron ore Zinc Lead Data: CRU

31 Commodity Sundial DAWN Commodity amongst those viewed as the next big thing 2013 example Palladium, Zinc ( early dawn) DAWN Price at around long-run marginal cost (equilibrium level). Solid producer margins attracts interest. Strong and easily understood demand story. Eg Chinese growth, technology led demand, light-weighting. Supply concerns on tightening market. Market opportunity for early movers.

32 Commodity Sundial NOON NOON Commodity considered to be Getting Hot 2013 example - Tin Price above the cost curve. Record producer margins (price-driven), particularly in the 1 st & 2 nd Quartile. Producers focus on volume growth over cost control. Consumers respond via substitution and economisation. Reliability of supply an industry issue. New production technologies, low grades, tailings rework all considered viable. A market optimism that proclaims market conditions as the new normal.

33 Commodity Sundial EVENING Commodity still in favour but doubters emerge 2013 examples Copper, Iron Ore EVENING Prices gradually eroding. Strong margins (volume-driven). Demand growth solid but not spectacular. Supply growth rates meet and exceed demand expectations. As short term signals weaken optimists have to rely on medium-term fundamentals to maintain optimism.

34 Commodity Sundial TWILIGHT Commodity out of favour examples Met Coal, Uranium TWILIGHT Prices well down into the cost curve, 3rd & 4 th Quartile assets fight for survival with state owned protected assets. Margins squeezed across the industry. Producers sacrifice volume for cost reductions. Demand-side, even if healthy, fails to influence price. Supply growth and future expectations far higher than demand growth. Supply (and stocks) overhang. A market pessimism that proclaims market conditions as the new normal.

35 Prices Hot or Not? 2017 price impact: commodities heat up by 17% on average but prices are still expected to be down 20%, on average, from their cyclical highs Hot > 15% Warm 5% to 15% Mild 0% to 5% Cool 0% to -5% Cold -5% to 15% Freezing < -15% Sulphuric Acid, Uranium, Palladium, Zinc, Tin, Nickel, Coking Coal, Cobalt, Lead, Platinum, Aluminium, Coke Molybdenum, Alumina, Phosphate DAP, Bauxite Oil, Ferrochrome, Urea Copper, Manganese Gold, Potash Sulphur, Ammonia, Iron Ore, Phosphate Rock, Silver * 2017 annual average price forecast over 2013 Q2 average actual prices

36 Minerals GDP is changing Key Issues/Trends Grades A default towards lower grades will require technical innovations from mine to mill - to either change the game (locally) else to adapt to it (generally). Distribution Creating economic rent from mining and equitable and transparent distribution thereof - is one of mining s greatest challenges for both the private and public sector. Great improvement potential here. People Greater innovation, efficiency & effectiveness of mining workforces needed Zones of excellence displaying alignment of mining with the broader community

37 Distribution Challenges Price Willingness The default Government response globally continues to be a rent-seeking one aimed at the capture of a greater public share of economic rent through cost impost mineral policy change Trench (2013) Economic gain accrues to companies holding concessions Fixed-Rate Supply Curve for Concessions Concessions will be applied for by Exploration companies here Concessions will NOT be applied for here Increasing Quantity (Decreasing Quality) of Concessions Supplied

38 Distribution Challenges Price Willingness Economic gain accrues to companies holding concessions Fixed-Rate Supply Curve for Concessions..but just because governments the world over are doing it does not make it correct: Lost economic opportunity and a narrower taxation base are actually the default outcome Trench (2013) Concessions will be applied for by Exploration companies here Concessions will NOT be applied for here Increasing Quantity (Decreasing Quality) of Concessions Supplied

39 People A Leadership Challenge Right? We need a new captain Most large mining companies have switched CEOs in

40 The Real People Challenge Engaging mining company workforces is more the imperative

41 Looking Forward Grades Distribution FROM THIS.. Operating costs rise as grade falls Ever larger project scale & capital requirements Lack of clarity of private versus public returns Focus upon the division of returns from mining TO THIS.. Innovation offsets cost impact of grade decline Right-size projects capture scale & scope benefits Top-down clarity in pre-tax NPV split private and public Delivery of growth in societal returns from mining People Marginal units of labour Incremental innovation Focus on leadership performance Highly-valued workforce Step-change improvement Focus upon team performance

42 Conclusions Glass half empty? OECD recovery is moderate and risk prone Chinese growth will be slower Commodity margin gains (by price) incremental or half full? OECD has avoided worst outcomes so far China is reforming and still fast growth is from a larger base Central and Western China is closest to being the next China Australia s commodity export gains (by volume) will continue to be strong