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Digging for Victory An overview of mining and metals

PwC London School of Mines

Paul Robinson Director, CRU Group

www.crugroup.com

Disclaimer This presentation is private and confidential. It must not be disclosed in whole or
Disclaimer
This presentation is private and confidential. It must not be disclosed in whole or
in part, directly or indirectly or in any other format without the prior written
permission of CRU International Limited.
CRU International Limited’s responsibility is solely to its clients and its liability is
limited to the amount of the fees actually paid for professional services.
Although reasonable care and diligence has been used in the preparation of this
presentation, we do not guarantee the accuracy of any data, assumptions,
forecasts or other forward-looking statements.
We accept no liability to third parties, howsoever arising.
CRU International Limited 2016. All rights reserved.
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About CRU Focused on the quality of our work, our customer contact & our delivery
About CRU
Focused on the quality of our work, our customer contact & our delivery channels
CRU offices in London, Sydney, Tokyo, Beijing, Shanghai , Hong Kong, Mumbai, Pittsburgh, New York, Toronto, Santiago, Sao Paulo
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In 2015, CRU’s heat chart fell by an average of 16%* CRU basket of 36
In 2015, CRU’s heat chart fell by an average of 16%*
CRU basket of 36 mining, metals and fertilizer commodities
Source: CRU, *2015 annual average price over 2014
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Prices are at multi-year lows despite healthy demand… Most prices are at pre-GFC levels whilst
Prices are at multi-year lows despite healthy demand…
Most prices are at pre-GFC levels whilst most consumption hits all time highs
Global commodity prices, various
Global commodity demand, various
nominal, index 2000=100
nominal, index 2000=100
600
250
Iron Ore
Iron Ore
Thermal Coal
Thermal Coal
Copper
Copper
500
Aluminium
Aluminium
Nickel
200
Nickel
Zinc
Zinc
400
300
150
200
100
100
0
50
2000
2002
2004
2006
2008
2010
2012
2014
2016
2000
2002
2004
2006
2008
2010
2012
2014
2016
Source: CRU
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…as global demand expectations have changed dramatically Short and long term assumptions for commodity demand
…as global demand expectations have changed dramatically
Short and long term assumptions for commodity demand are being challenged
Demand Indicators
Iron Ore
Thermal Coal
Copper
Aluminium
Nickel
Zinc
Global consumption estimates
2014/2013
2.6%
0.1%
3.5%
7.8%
5.0%
2.3%
2015/2014
-2.0%
0.2%
1.3%
4.0%
0.8%
-0.2%
2016/2015
-1.1%
0.7%
1.1%
4.4%
2.3%
2.1%
CAGR 2000-2015
5.7%
3.9%
2.5%
5.6%
3.5%
2.7%
CAGR 2015-2020
0.7%
0.3%
1.8%
3.6%
3.1%
2.7%
Chineseconsumptionestimates
% global demand
61%
50%
46%
52%
51%
47%
CAGR 2000-2015
13.7%
7.8%
11.8%
16.7%
20.0%
10.7%
CAGR 2015-2020
-0.5%
-2.0%
1.5%
4.3%
1.7%
3.5%
Source: CRU, note pre-2006 thermal coal data source EIA
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Costs have declined across the commodity complex… Cost cutting now widespread, aggressive for bulks and
Costs have declined across the commodity complex…
Cost cutting now widespread, aggressive for bulks and less extensive for base metals
HCC BusinessCosts reduction, 2015,
Copper net of by-product cash costs
nominal, $/t, FOB
$/lb (lhs) / $/tonne (rhs)
2.5
5,500
By-product revenues
World
Cash Costs (excluding by-product)
Cash Costs (net of by-product)
2.0
4,400
Currency
US
Energy
Consumables
Sus Capital
1.5
3,300
China
Other*
Canada
1.0
2,200
Australia
0.5
1,100
Russia
0.0
0
11
11
12
12
13
13
14
14
15
15
0%
5%
10%
15%
20%
25%
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Note: *Other includes controllable cutting/productivity and reductions from high-cost mine closures
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…and miners are focused on protecting margins… Chinese Nickel NPI costs have fallen by over
…and miners are focused on protecting margins…
Chinese Nickel NPI costs have fallen by over 25% and margins were positive until 2016
NPI margins Jan15 - Apr16
NPI production 2006-2017
000’s tonnes
Margin, $/tonne
2,000
600
1,500
500
1,000
400
500
300
0
200
100
-500
1.5% Jiangsu
1.5% Shandong
0
-1,000
Source: CRU Beijing Office
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…but costs will increase if energy and forex reverse Selected Iron Ore cost reductions Q1
…but costs will increase if energy and forex reverse
Selected Iron Ore cost reductions Q1 2014 - Q1 2016
Cost reduction, by category
Cost reduction,by category
US$/tonne
% breakdown
60
100%
Other
Other
Directly Controllable
Directly
Controllable
50
80%
40
60%
30
40%
20
20%
10
0
0%
Source: CRU, company reports
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Market prospects for the next 12 months? www.crugroup.com 10
Market prospects for
the next 12 months?
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We assume that China avoids an economic hard landing… The challenge is to predict economic
We assume that China avoids an economic hard landing…
The challenge is to predict economic transition and impact on commodity demand
Fixed asset investment by sector
y/y% 3 month moving average
25%
20%
• Slower headline IP growth was largely due
to the extractive industries and utilities.
Manufacturing output growth was little
changed.
15%
10%
• Auto value added is growing faster than
unit output, which in part reflects changing
output mix. Underlying volume sales will
strengthen in 2016.
5%
0%
• We believe that slower April FAI growth is
noise and an unwinding of March's New
Year effect.
Infrastructure
Real estate
-5%
Heavy industry
• Real estate sales growth accelerated, to a
38-month high, but may be reaching a peak.
Light industry
Other
-10%
• Retail sales growth, particularly furniture
and appliances, remain firm, supported by
the property market.
Source: CEIC, CRU Economic Service. Note: Infrastructure includes utilities
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…but our disorderly transition scenario would be catastrophic What if China experienced a Japanese style
…but our disorderly transition scenario would be catastrophic
What if China experienced a Japanese style crisis experienced between 1991 - 2005?
China investment share of GDP
Chineseindustrial productionlevel
%
2010 US$ trillions
50%
7.0
Base Case
Disorderly Transition
17%
Boom
6.0
Decline
40%
5.0
12%
30%
4.0
Base Case
Disorderly Transition
20%
3.0
2003
2007
2011
2015
2019
2023
2027
2015 2017 2019 2021 2023 2025 2027 2029
Source: CRU Economic Service
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We also assume more cost reductions and too few closures There remain too many reasons
We also assume more cost reductions and too few closures
There remain too many reasons to assume significant mine closures
Source: CRU
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Iron Ore, unfortunately, is a great case in point Global cuts and displacement requirements (2014-2019)
Iron Ore, unfortunately, is a great case in point
Global cuts and displacement requirements (2014-2019)
Actual iron ore displacement
Required iron ore displacement
Million tonnes, 2014 & 2015
Million tonnes, 2014-2020
200
0
-20
150
-40
100
-60
-80
50
-100
0
Non-traditional
China
Juniors
-120
exporters
2014
2015
2016
2017
2018
2019
2020
Source: CRU, includes estimates of a lag time lags from announcement to ending of shipments
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2016 will be another difficult year for commodities Zinc is at the front of the
2016 will be another difficult year for commodities
Zinc is at the front of the fundamental pack but where is the finishing post?
Source: CRU, Notes: (1) Over and above announced. (2) Average price in 2016 versus Q4-2015
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In the medium term it all comes down to asset value How well does your
In the medium term it all comes down to asset value
How well does your portfolio match your Risk Appetite and Risk Tolerance?
Source: CRU
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Next 12 months? Challenging for China, miners & commodities • A lack of demand confidence
Next 12 months? Challenging for China, miners & commodities
• A lack of demand confidence & oversupply are keeping prices low
• CRU assumes flat global IP growth in 2016 with China avoiding an
economy-wide, hard landing
• Demand: The world waits for stronger evidence of an orderly Chinese
economic transition
• Supply: Miners continue ‘digging for victory’ focusing on lowering
costs, cash conservation and portfolio rationalisation
• There will not be enough supply cuts, further asset divestments will
extend fundamental pain
• Prospects for commodities and assets need to be assessed on an case
by case basis
Source: CRU
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For more information Paul Robinson @BaseMetals Director paul.robinson@crugroup.com Tel. +44 20 7903 2221 Mob. +44
For more information
Paul Robinson
@BaseMetals
Director
paul.robinson@crugroup.com
Tel. +44 20 7903 2221
Mob. +44 7962 432 303
Rod Cave
Regional Director
Russia, Eastern Europe & Central Asia
rod.cave@crugroup.com
Tel. +44 20 7903 2251
Mob. +44 7915 476063
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Appendix: CRU analysts expect 2016 YoY price declines* CRU basket of 37 mining, metals and
Appendix: CRU analysts expect 2016 YoY price declines*
CRU basket of 37 mining, metals and fertilizer commodities to decline by over 10%
Source: CRU, *2016 annual average price forecast over 2015 annual prices (3 rd Jun 2016). Tin forecast ITRI
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