Copper: Five things to look for in 2017 International Copper Study Group Industry Advisory Panel Thursday 27 April 2017 Lisbon, Portugal
Copper: Five things to look for in 2017 Introduction Global macro economic outlook Trump or China? What will drive demand in 2017? The changing supply story Copper on the turn in 2017 Where now for copper costs and margins? 2
Global economic growth rebounding from 2016 low Commodity recovery and strong US consumption drive improved outlook, but European fragility remains a concern 5.0% 4.0% Real global GDP growth 3.0% 2.6% 2.5% 2.3% 2.5% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 USA Europe China Commodity producers Other Global Source: Wood Mackenzie, World Bank 3
Global risks weighted to the downside Automation and robotics drive productivity surge European fragmentation Protectionism leads to trade wars The rise of the autocrat and increased nationalism China leadership reshuffle Backlash: what if Trump cannot deliver on promises OPEC behaviour Radical policy reform Source: Wood Mackenzie 4
Refined copper consumption China surprises in 2016 but will be hard to repeat Outlook for first use refined consumption to 2020 N. America Europe Russia & Caspian China M. East L. America Asia ex-china Africa Oceania 5 2014 2015 2016 2017 2018-20 World 4.6% 1.5% 2.2% 1.8% 1.8% China 7.3% 3.7% 4.6% 2.2% 1.9% World Ex-China 2.4% -0.4% 0.1% 1.4% 1.7% Source: Wood Mackenzie
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 China construction will struggle to regain its 2015 peak Copper demand in the construction sector Residential building completion and policy timeline 1,200 1,100 March 2017: More stringent policies released for tier 1, tier 2, tier 3 and tier 4 cities 1,000 Million m 2 900 800 700 600 500 400 Housing 930 2016: more than 30 cities (mostly tier 1 and tier 2) in China released new policies to curb investment demand Source: CEIC, Wood Mackenzie 6 Source: CEIC, Wood Mackenzie
Auto: copper demand from passenger cars will grow much faster than production growth due to increasing EV penetration Passenger car production Passenger car production vs copper consumption Copper Passenger car prod. Increasing share of public service and commercial building Source: CEIC, Wood Mackenzie 7
Trump policies have caused uncertainty over North American demand Current auto output forecast US and Mexico 2017 US infrastructure rating - in need of an upgrade Mn units 14 US Mexico 12 10 8 6 4 2 0 2000 2005 2010 2015 2020 Source: Wood Mackenzie 8
2016 China India & Asean Middle East Latin America North America Europe North East Asia ROW 2020 Million tonnes Despite lower growth, on a tonnage basis, it s still all about China 25 Changes in refined copper consumption by region: 2016-2020 24 23 22 22.4 0.9 0.4 0.1 0.1 0.1 0.0 (0.1) 0.1 24.0 21 20 Source: Wood Mackenzie 9
Mine supply (Mt copper) Mine production growth set to pause this year Mine production (forecasts after 5% disruption allowance) 26 25 24 23 22 21 20 19 18 17 16 15 Kamoto/KOV Restart (+365kt/a) Cobre Panama (+320kt/a) Escondida 3rd Mill (+250kt/a) Las Bambas (+100kt/a) Sentinel (+135kt/a) Mopani (+100kt/a) Toquepala Expn (+100kt/a) Aktogay (+80kt/a) 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Probable Projects Highly Probable Projects Existing supply Source: Wood Mackenzie 10
Mine supply (Mt copper) Requirement for additional mine supply from 2020 peak Mine production (forecasts after 5% disruption allowance) 26 25 mine supply growth to pause base case mine supply to peak additional supply required 24 23 22 21 20 Probable Projects 19 18 17 16 Highly Probable Projects Existing supply 15 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 11
Copper prices recover on the back of supply disruptions and higher demand 8000 7500 The influence of macro and other events on copper prices 7000 6500 6000 5500 5000 4500 4000 Greek debt crisis Copper sell off by US/Chinese funds Glencore announces cuts at Katanga and Mopani Weak China PMI Fresh Chinese stimulus package Brexit vote Trump stimulus; Production losses and Upgraded Chinese demand Large deliveries into Asian LME warehouses Escondida strike Grasberg closure 3500 12 Source: Wood Mackenzie, LME, Thompson Reuters Datastream
Global metal stocks (days) Copper price (c/lb) Annual average copper price set to recover Global stocks of refined copper and annual average copper price 100 90 80 70 60 50 40 30 20 10 0 Average stocks 450 400 350 300 250 200 150 100 50 0 Source: Wood Mackenzie, LME, Comex, SHFE Other stocks SRB stocks Price - Q1 2017 estimate Source: Wood Mackenzie 13
Cost / Margin ($/lb paid copper) Where now for copper costs and margins? Global residual cash flow for primary copper mines 5.0 Base case and probable projects only 4.0 3.0 1.63 1.57 0.60 0.33 0.29 2.0 1.98 1.30 0.76 0.19 0.26 0.56 0.70 0.88 1.12 1.55 1.86 1.0 0.0 2007 2009 2011 2013 2015 2017 2019 2021 LT Source: Wood Mackenzie Q1 2017 Expansion Capex Sustaining Capex Indirect Costs Mine Site Costs Net Revenue 14
Key conclusions Global growth has improved from a year ago. The short-term outlook is relatively positive, owing to a stronger US economy and a recovery in commodities, but Europe remains a cause for concern. Demand growth in the world ex-china should improve on 2016. Overall refined demand will remain subdued, in part reflecting a stronger contribution from scrap, yet China is still the main driver for growth. Mine supply forecast to pause during 2017 before recovering to peak in 2020. Additional mine production capability is required from ~2020. There is a lack of advanced development stage projects to meet this need. The combination of slower supply growth and moderate demand growth will push the refined market into deficit this year. With global stocks set to decline, we would expect annual average prices to trend higher. Prices have been lower, but so has opex and capex. As prices improve from 2017, we would expect healthier margins. This should support a new cycle of investment. Source: Wood Mackenzie 15
Disclaimer Strictly Private & Confidential This report has been prepared for the ICSG Industry Advisory Panel by Wood Mackenzie Limited. The report is intended solely for the benefit of this meeting and its contents and conclusions are confidential and may not be disclosed to any other persons or companies without Wood Mackenzie s prior written permission. The information upon which this report is based on our own experience, knowledge and databases as well as any information publicly available. The opinions expressed in this report are those of Wood Mackenzie. They have been arrived at following careful consideration and enquiry but we do not guarantee their fairness, completeness or accuracy. The opinions, as of this date, are subject to change. We do not accept any liability for your reliance upon them. 16
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