Commodities Outlook. Weakness Weighs on Commodity Markets. Paul Robinson, Senior Economist October 3, 2012

Transcription

1 Commodities Outlook Weakness Weighs on Commodity Markets Paul Robinson, Senior Economist October 3, 2012

2 Menu of the Day Rare Earths Overview Commodity Market Overview Steel Deep Dive 2

3 Rare Earths Overview The Whirlwind Tour of Rare Earths Markets

4 Overview What are Rare Earths? Elements and oxides Heavy vs. light Why do they matter? Industrial application and end use Thousand foot view of China The rise and fall of

5 The Outlook Supply Issues Critical, near critical, low risk Pricing Risk Danger in 2013 The Chinese wildcard Production outlook- too little too late? Good news, bad news Bringing it all together What this means for you 5

6 What is a Rare Earth 6

7 Industrial Application Autos (Hybrids) Cell Phones and Electronics Defense Lighting Green Energy Power Generation 7

8 China: The Center of the Rare Earth s Universe 97% of global production in 2011.But only 40% of reserves 8

9 UP. and DOWN 7.0 IHS Global Insight Rare Earths Oxides Price Index Jan 2011=

10 Low Risk, Near Critical, and Critical Critical Dysprosium Neodymium Yttrium Terbium Near Critical Europium Indium Tellurium Low Risk Cerium Praseodymium Samarium Gallium 10

11 2013 Pricing Risk Dysprosium Pricing Risk Cerium Lanthanum Samarium Europium Indium Tellurium Neodymium Terbium Yttrium Gallium Supply Risk 11

12 What Does this Mean for You Potentially turbulent 2013 for critical and high risk metals Pricing risk for most metals is still on downside given current price levels and weak demand China needs to be monitored closely Medium term relief is coming, but be ready for the rollercoaster ride in

13 Commodity Market Overview What to Expect in 2013

14 Commodity Market Overview: Key Take-Aways 1. Commodity markets weakened worldwide through the summer 2. Global central bank action will reverse the declines temporarily 3. Markets will return to elevated levels of volatility 14

15 Global Supply Chains Show Buyers Market New Orders Goods industry weighted average Source: Markit, ISM Backlogs 60 Delivery Times Lower number means slower deliveries Stocks of Purchases (Inventory) Lower number means higher stocks

16 Stimulus and Prices: QE3 3,200,000 QE1 Announced QE ,800,000 QE1 Ramped Up 3.5 Millions of US dollars 2,400,000 2,000,000 1,600, (2002:1=1.000) 1,200,000 Up 16% 1.5 Up 108% 800, Federal Reserve Bank Total Assets (Left) GIIMPI Global GDP Weighted Currency (Right) 16

17 QE3 Size Comparison 2,000 1,800 1,600 Billions of US dollars 1,400 1,200 1, QE1 (15 months) QE2 (8 months) QE3 (24 months) MBS LT Securities Government Sponsored Enterprise Debt 17

18 Liquidity, Volatility, and Prices Global Insight Industrial Materials Price Index (GIIMPI), 2002:1=1.0, left scale CBOE Market Volatilty Index, right scale

19 Automotive Material Costs Chart (2000 = 1.000) 3.0 Some relief for auto costs *Weighted average of key material costs such as steel, plastics, aluminum, rubber, and glass Excludes Fuel, Processing and Transportation costs

20 Rubber The buying environment for rubber will be less favorable in 2013 than 2012, as supply controls and QE3 elevate prices Sourcing Guidance: Now is a buying opportunity as further price increases are likely in the next 12 months 2012 Q Q4 Prices Rising Flat Demand Rising Slowly Rising Supply CONTROLLED Rising (US Cents/Pound) Demand + Automotive (slowing growth) Supply + Rubber growers in SE Asia controlling supply Price Price growth returning to previous trend Supply controls helped arrest fall, QE3 provides the boost for increases

21 Aluminum The buying environment for aluminum is favorable now, but getting less so through the close of 2012 Sourcing Guidance: Either lock in now or wait until mid-2013 for price pull backs 2012 Q Q4 Prices Slightly Higher Lower Demand Flat Stronger Supply Tight Ample (US Dollars/Metric Tonne) Demand + Automotive (slowing growth) + Aerospace and defense Chinese demand stumbles Supply 2012 likely to end with the market in deficit, but 2013 holds a large expected surplus Price + Prices to inch higher into the end of the year 2013 will show setback on Greek exit from Eurozone

22 Commodity Market Overview: Summary 1. Commodity markets weakened worldwide through the summer Led by: Chemicals, Rubber, Steel, and Oil 2. Global central bank action will reverse the declines temporarily Exchange-traded commodities to see boost (aluminum & rubber) 3. Markets will return to elevated levels of volatility Increased liquidity and lower borrowing costs = higher leverage 22

23 Steel Deep Dive Details on Our Latest Forecast Revisions

24 Steel Deep Dive or Steel s Deep Dive? In August, the whole steel market collapsed, because any steelmaker, including Baosteel, would have to make a loss at the current miserably low price levels Wu Xichun Chairman of the Chinese Iron and Steel Association 24

25 Steel Overview: Weakness but No Collapse It remains a BUYER S MARKET. Overproduction is leading to bargain prices. Steel demand is growing but the pace is slow China and other Asia pulling the load USA near zero for steel Europe is declining China is starting to cut production, will accelerate in coming months Too little too late for prices, but it will hit raw material prices 25

26 Iron Ore Breaks Through Bottom (Iron Ore, $/Metric Tonne Imported into China)

27 Iron Ore Imports Lag Iron Ore Production (Y/Y) Chinese Iron Ore Production Chinese Iron Ore Imports 27

28 Iron Ore: Breaking the Triopoly? New iron ore supply coming online globally 100% 90% 80% 70% Greater impact because of Chinese weakness 60% 50% 40% Downward revisions to our forecast 30% 20% 10% 0% Steel Producer's percentage of profits Iron Ore Miner's percentage of profits 28

29 Iron Ore: Closer to Cost (Iron Ore, $/Metric Tonne Imported into China) Contract Current Previous 29

30 Steel Scrap: Not Revised As Deeply As Ore (#1 Bushels, $/Long Ton United States) Scrap is down as economic conditions undercut buyer strength Current Previous But the revision is less Scrap supply is fixed, ore supply can increase via mine expansion The relative cost of production has narrowed between ore and scrap 30

31 Flat Product Prices Revised Downwards Lower prices inevitable for remainder of 2012 (Hot rolled carbon sheet, $/Metric Tonne United States) Rally in 2013 falls short, decline after Greek exit The rally of 2014 and 2015 is still there but it is greatly dampened Current Previous 31

32 Mexico Against the World (Hot-Rolled Sheet, $/Metric Tonne) Brazil China Europe Mexico United States 32

33 Why Are Mexican Prices So Close to US Prices? (Hot-Rolled Sheet Imports into Mexico, Metric Tonnes) 120, ,000 80,000 60,000 40,000 20,000 0 I II III IV I II III IV AUS BEL CAN CHN DEU FIN GBR IND JPN MKD NLD POL RUS TUR UKR USA AUT BRA CHE CZE ESP FRA HKG ITA KOR MYS NZL ROU SWE TWN UN1 ZAF

34 Long Product Prices Revised (Less) Downwards (Rebar, $/Metric Tonne United States) Greater linkage with scrap prices means a slightly smaller downward revision Current Previous Construction still expanding, but growth rates backing off Not hit as hard by Greek crisis because excess supply not as great 34

35 Bottom Line Buyer s market globally (US will fall in coming months) Production cuts lead to recovery next year... Briefly Raw materials revised lower through 2013 (at least) 35

36 ANY QUESTIONS? THANK YOU! Paul Robinson Senior Economist 36