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Commodity prices forecasts AIECE General Meeting London, May 2015

Federico Ferrari

London, May 21-22

proprietary and confidential May 21, 2015 | Commodity prices forecasts | Aiece General Meeting, NIESR, London| 2»

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Recent developements in commodity prices

40

60

80

100

120

140

160

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Food total Industrial raw materials Energy raw materials

-50 -30 -10 10

Crude oil

Iron ore

Natural rubber

Natural gas

Steam coal

Wheat

Copper

Total (ex. energy)

Maize

Zinc

Aluminium

The decline of the industrial raw materials prices started in the aftermath of the last massive Chinese stimulus and went until early 2015. In the same period the energy complex (which, in the last years, had always maintained a remerkably stable profile) tumbled, zeroing the gap that, up to that point, had divided the energy and the industrial raw materials.

Crude oil is traded almost 50% lower compared to one year ago. In the last 12 months the other industrial commodities retrenched, though far less intensely then energy complex. Oversupply is the key factor behind the recent fall of oil price, while the declining path of industrial commodities is mostly related to the weakness of Emerging markets growth, particularly in China…

Energy, Agriculture and Metals, Us$

Avg % chg for selected commodities Post-2011 developments of raw materials prices

2015Q1 vs 2014Q1

2010 avg =100 index

proprietary and confidential May 21, 2015 | Commodity prices forecasts | Aiece General Meeting, NIESR, London| 4

0

5

10

15

20

25

40

45

50

55

60

65

70

2005 2007 2009 2011 2013 2015

China IPI growth

-10

-5

0

5

10

15

20

25

30

35

2011 2012 2013 2014

Beijing GuangzouShanghai Avg 100 cities

China industrial activity is cooling

Property prices are falling

Outlook | Chinese slowdown continues…

The enormous stimulus program introduced in 2011 saw credit expansion and large-scale investment in infrastructure. It moreover caused the emergence of several problems, as highlighted by the real estate bubbles and massive manufacturing overcapacity. China is now in the midst of a process of rebalancing its exports and public expenditure growth model towards a more long-term sustainable path, marked by a rising share of private consumption at the expense of investments. This goes hand in hand with a gradual economic slowdown, which necessarily implies that import growth will structurally come down in the future. Most importantly, the Chinese leadership is demonstrating a willingness to accept the lower growth rates environment. Chinese agenda will shift emphasis from investment and employment to environment, anti-corruption, overcapacity and internal reform. All in all, Chinese economy is expected to become less commodity intensive compared to the recent past.

datastream

China PMI

property prices (Yuan) in selected cities, y/y % chg

volu

me

ind

ex

, Y/Y

% ch

g.

datastream


China imports of selected commodities

5.6 6.8

3.0

2.9

4.8

10.8

6.3

3.2 3.1 3.0 2.9

0

2

4

6

8

10

12

2005 2007 2009 2011 2013 2015

70

90

110

130

150

170

190

210

2012 2013 2014 2015

Iron Ore Coal Copper scrap

0

50

100

150

200

250

300

2012 2013 2014 2015

Zinc Nickel Aluminium

China imports of selected commodities China oil demand

International Energy Agency estimates

Outlook | … industrial commodities demand is fading…

Not surprisingly in recent years the need for additional raw material steadily decreased; hand in hand with the weakening of the most commodity intensive sectors (industry & building), the imports volume for most of the industrial commodities slid at a rapid pace. Moreover, after years of driving world energy markets, the growth of China's oil demand is slowing. According to the International Energy Agency (IEA), the country's oil demand will rise at an average annual pace of 2.6 percent through 2020, i.e. about half the rate during China's expansion of the previous decade.

% y/y growth M

b/d

Imports volume, 2010=100, China Customs

Imports volume, 2010=100, China Customs


China share in global : Consumption Production

Aluminium 48% 51%

Bauxite 20%

Coking Coal 59% 52%

Copper 47% 35%

Iron Ore 64% 47%

Nickel 50% 35%

Zinc 45% 41%

(Oil) 11% 5%

25

35

45

55

65

75

85

95

105

115

2012 2013 2014 2015Iron Ore

Coking Coal Dom. Del China U$/MT

Steel CR Coil Price EU Domestic

Thermal Coal

65

75

85

95

105

115

125

2012 2013 2014 2015

Aluminium Zinc Copper Nickel

Bulk commodities prices

LME metals prices

Metals | … no wonder the widespread price declines

China plays a dominant role in the global consumption and trade of metals and energy. It accounts for more than 50% of the market for bulk commodities and steelmaking ingredients. No wonder the steep imports decline for most of the raw materials went hand in hand with price drop in the past few months.

US$, 01/2012 =100 , datastream

WBMS statistics and various sources


2010

2012

2014

30

50

70

90

110

130

150

170

190

210

2010 2011 2012 2013 2014 2015

Iron Ore(Fe63.5%) INCIF China $/MT

Iron Ore Cost Curve, 2010 - 2014

Iron Ore price

Metals | beyond demand, supply factors are at work

… what matter most, the capacity additions have been low cost, i.e. occurred in the low end of the curve. As a consequence, the entire cost curve shifted to the right, the equilibrium between demand and supply moved to the downside, pushing the high cost operators out of the market. This is particularly evident for iron ore.

Due to huge investments operated when prices were higher, most metals and bulk commodities benefited from huge capacity improvements in the past 2-3 years…

Us$

/to

n

Cumulated production volume

Prometeia estimates on various sources, Datastream

Prometeia estimates on various sources,


Aluminium C1 cash cost & price Nickel C1 cash cost & price

Metals | metals costs on decline (but close to marg. prod. cost)

Adding to the fall in Chinese demand and rise in capex spending, following the commodity super cycle the mining industry efficiency improved considerably. Depreciating currencies and falling oil price gave further strength to the cost reversal trend. Cash cost for base metals are expected to decline between 7 and 15% in 2015, compared to 2013.

C1 cash costs = the costs of mining, milling and concentrating, onsite administration and general expenses, property and production.

0

500

1000

1500

2000

2500

3000

2008 2009 2010 2011 2012 2013 2014 2015

0

2000

4000

6000

8000

10000

2008 2009 2010 2011 2012 2013 2014 2015

0

5000

10000

15000

20000

25000

2008 2009 2010 2011 2012 2013 2014 2015

LME price

LME price

LME price

Avg c1 cost

Avg c1 cost Avg c1 cost

Us$

/t

Us$

/t

Us$

/t

Copper C1 cash cost & price

Prometeia estimates on various sources,


-1%

-1%

0%

1%

1%

2%

2%

3%

3%

40000

45000

50000

55000

60000

65000

70000

75000

2010 2011 2012 2013 2014 2015

Mig

liaia

China steel production

y/y growth

-40%

-20%

0%

20%

40%

60%

80%

100%

0

2000

4000

6000

8000

10000

12000

2010 2011 2012 2013 2014 2015

Ce

nti

nai

a China steel export

y/y growth

Falling domestic demand lead to lower production… … chinese export increase…

Metals | (the case for steel) the China «peak steel» scenario

400

452

504

556

608

660

04/2013 10/2013 04/2014 10/2014 04/2015

HRC China Ports, FOB

HRC steel South. Europe CIF

HRC steel North. Europe CIF

… adding pressure to WW $ steel prices… …& triggering policy reactions from importers

Reuters 25/3/2015

Us$/t

* 10

00

0 t

on

s

* 10

00

0 t

on

s


Forecast | Metals & Raw Materials

40

50

60

70

80

90

100

110

120

130

140

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Industrial raw materials Agricultural raw materialsTextile fibres Wood products

40

50

60

70

80

90

100

110

120

130

140

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Ferrous raw materials Non-ferrous metalsIndustrial raw materials

Us$ Index, 2000=100

forecast

Industrial commodities price forecasts

forecast

The nonferrous metals aggregate index decreased by 10% in the first three months of the year, even though a recovery started to emerge in most recent weeks. The price for most of the base metals is close to the marginal production costs: further retrenchment from current values are then unlikely. Looking ahead we expect an overall recovery, as mine depletion and closures of uneconomical plants would tighten the physical balance for most of the LME metals. On aggregate, the nonferrous metals are expected to decline (by 3%) in 2015 before showing a substantial recovery starting from 2016. World steel markets suffer from significant excess capacity, which depresses the steel market outlook. While the old and inefficient capacities are shut markedly - especially by a dominant producer China - more new capacities is coming on stream due to past strong investments. Wood products should fare relatively better compared to other commodities, due to strong demand and constrained supply, while the textile fibers are expected to slowly recover starting in 2016.


20

40

60

80

100

120

140

2010 2011 2012 2013 2014 2015

-3

-2

-1

0

1

2

3

4

5

6

2010 2011 2012 2013 2014 2015

Mill

ion

bar

rel /

day

Kuwait Iraq Nigeria Libya Iran

surplus

Us cumulat. prod. from 2010

-3

-2

-1

0

1

2

3

4

5

6

78

80

82

84

86

88

90

92

94

96

98

2010 2011 2012 2013 2014 2015

Demand

Supply

Deficit-surplus

+2

.5m

bd

Opec unplanned production outages vs US shale oil

World oil balance Brent price

Oil | the global shale-oil-driven oversupply

The impact of the shale revolution on global oil prices has been delayed by the emergence of the Arab Springs. However, in late 2013 the Us oil production was already strong enough to offset the entire ME outages and a large part of the global oil demand increase. The combination of the (temporary) recovery of Libyan production, disappointing consumption numbers, and Saudi unwillingness to cut its output volumes pushed the global oil market into a supply glut - paving the way for a steep price decline. (2014H2).

Mil

lio

n b

arre

l/d

ay

Us$

/bar

rel

International Energy Agency, Energy Information Admin., Datastream


Middle East Other Conventionals

Ru

ssia

Bakken

Eagle Ford

Conv. Heavy

Conv. Light

Niobrara Shale

Bitumen

Dakota Bakken

Permian Basin

Oil Sands

0

10

20

30

40

50

60

70

80

90

100

1 2 3 4 6 8 cumulative oil prod.

pro

du

ctio

n c

ost

s weigh. avg. –approx 70 Us$

Us oil cost curve

World oil cost curve

Oil demand

Oil price

Saudi supply is flexible & at the lower end of the supply curve

North America

<- cumulative oil prod. ->

Production costs Us$/b

Shale oil operates in the upper end of the global cost curve

Oil | beyond demand … the oil supply scenario is different ! While the iron ore supply curve moved rightward and downward due to the new and more efficient capacity additions, in the case of oil the new capacity additions occurred in the high-end of the curve. That means that the Arab producer can manage their output and push the price higher (to maximise rents) or lower (pushing the marginal players out of the market).

Prometeia estimates on various sources


0

200

400

600

800

1000

1200

1400

1600

1800

3

4

5

6

7

8

9

10

2010 2011 2012 2013 2014 2015

Mil

lio

n b

arre

ls/d

ay N

um

be

r of active

rigs

54

56

57

59

60

62

63

2010 2011 2012 2013 2014 2015

50

60

70

80

90

100

110

120

1 3 5 7 9 11 13 15 17 19 21 23

01/06/2014

01/09/2014

01/12/2014

01/03/2015

Oil | despite capex fall, no clear signs of production slowdown

Rig Count & US oil production

OECD stock at record levels Strong availability depress prompt deliveries

?

ICE Brent futures curve, Us$/b

OE

CD

oil

inv

en

tori

es,

Mb

/d, I

EA

The Saudi strategy is apparently working. Shale investments are falling at a rapid pace, especially in the less productive areas of North America, and the total number of NAM active rigs more than halved in a few months. Interestingly, the oil price fall has not yet translated in an oil production decline. Crude oil inventories are indeed accumulating at a rapid pace.


Oil | it’s only matter of time before US unconv. supply react

Once the investment is done, a conventional oil field reach its production peak within several years: an oil conventional well is expected to keep on pumping oil whatever happens to prices. In the new unconventional oil field the production peak is reached within a few months. New unconventional oil field requires a continuous flows of investments just to keep the current output volumes unchanged. If the oil spot price is lower than the breakeven price, the flow will stop – and production halted within months

12.0

12.4

12.8

13.2

13.6

14.0

apr/14 ott/14 apr/15 ott/15 apr/16

Us EIA forecast on Us crude production

Oil production curves for selected basins

forecast actual

Mil

lio

n b

arre

ls

Various sources, EIA


40

50

60

70

80

90

100

110

120

130

140

2012 2012 2013 2013 2014 2014 2015

Iran (137)

Oman (113)

S.Arabia (105)

Iraq (98)

Russia (90)

UAE (78)

Qatar (62)

Kuwait (58)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Breakeven price* for selected countries, 2014 Oil export dependence

Oil | geopolitical risk looming

More political risk ahead?

With oil below fiscal breakeven levels, pressure on budgets is increasing amid rising regional instability. Sovereign reserves can provide cushions, but for how long? 1 million barrels / day of Iranian supply still offline due to embargo. What if a comprehensive deal on nuclear with Western Countries is reached?

oil

ex

po

rt s

har

e o

f to

tal c

ou

ntr

y e

xp

ort

*oil price needed to balance the fiscal budget, IMF, 2014

Var

iou

s so

urc

es


Forecast | Energy complex

20

40

60

80

100

120

140

160

180

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Energy raw materials Coal Crude oil

forecast

Us$ Index, 2000 avg =100

Energy commodities price forecasts Thanks to the low price environment the overall picture for oil demand should brighten in the coming months, but we don’t expect it to improve considerably, a view confirmed by the International Energy Agency, which projects it to increase by 1 million b / d in 2015. As a consequence of lower returns on investment for the Us upstream industry, the Us oil production will soon flatten. The gap between oil supply and demand could then begin to tighten, leading oil price to converge towards a more sustainable level. In all likelihood, the triple digit oil price era is definitely over. Rather, a Us$ 70-75/barrel bandwidth appears a more reasonable forecast for crude oil.


Agriculture | record production depresses prices

Stock/use ratio for selected agri commodities

50

70

90

110

130

150

170

190

210

2005 2007 2009 2011 2013 2015

Wheat

Corn

Soybeans

Cotton

20

05

=10

0, U

sda

Global grain stockpiles are indeed large and growing, suggesting price stability will persist in the coming season. 2015 acreage will confirm generally robust for most of the commodities, even though sooner or later will likely decrease given the farm income decline. Declining energy and fertilizer cost is another headwind for the agricultural price recovery.

Agricultural prices continued their broad-based declines in 2015Q1, with real food prices not far from 2007 level. In its April 2015 assessment the U.S. Department of Agriculture maintained its already comfortable outlook for the coming season, further pressuring prices.

USDA

40

60

80

100

120

140

160

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Food total CerealsTropical bevg. and sugar Oilseeds, veg. oils

forecast

Food & beverages price forecasts

Us$ Index, 2000 avg =100


Exchange rates & commodity prices

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

2001 2003 2005 2007 2009 2011 2013 2015

0

20

40

60

80

100

120

140

160

0.8

0.9

1

1.1

1.2

1.3

1.4

1.5

1.6

1.7

2001 2003 2005 2007 2009 2011 2013 2015

Us$/€ exch. Rate

Brent, US$/b.

Rolling correlation of monthly returns

Brent and Us$

Brent vs Us$/€ exch rate

There are several reasons why the value of the dollar has an impact on commodity prices. However, prior to the emergence of the supercycle commodities had no apparent correlation with Us$. Strong coupling between Usd and commodities occurred in the supercycle years, when a strong commodity demand rise had not been matched by an adequate increase in supply (2005-2008). Furthermore, the timing coincides with the emergence of commodity as an asset class, at a time when commodities began to be seen as a protection against infaltion/investment product. The end of the commodity supercycle marked the start of a structural loosening of this relationship, and the correlation between dollar and commodities reversed towards the pre-supercycle levels. The oil and other raw materials fall went hand in hand with a rise in Us$ value, however, it’s unclear whether the currency movement should be considered a causal factor for the recent commodity slowdown.


0.9

1

1.1

1.2

1.3

1.4

1.5

1.6

60

70

80

90

100

110

120

130

140

150

160

2010 2011 2012 2013 2014 2015 2016

Industrial raw materials Energy raw materials$/€

60

70

80

90

100

110

120

130

140

150

2010 2011 2012 2013 2014 2015 2016

2015-’16 outlook – Exchange rates

Divergent central bank policy increased volatility in currency markets. While the Fed is preparing for policy tightening, globally monetary policy has loosened considerably. The ECB started its bond-buying program at the beginning of this year, and similar measures are expected from the BoJ. This divergence has led to a significant appreciation of the dollar against other currencies. Expectations are for Us$/€ exch. rate to stay close to parity in the next 2 years.

Clearly, the vantage for the European manufacturing industry related to the fall of commodity prices will be largely tempered by the large depreciation of € against dollar.

Us$/€ exch rate

Commodity indexes

Exchange rate and commodities

€

Us$

The HWWI commodity index

Index 2010=100

Index 2010=100


thank you for your attention


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