130304 Economic Outlook and Commodity Prices
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7/29/2019 130304 Economic Outlook and Commodity Prices
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Economic Outlook and
Commodity PricesVivek TulpulHead of Economics and Markets
4 March 2013
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3
China cyclical momentum and reform process
OECD financial fragility
Loose monetary conditions - Quantitative Easingand potential unwinding
Macroeconomic influence on commodity prices will continue through 2013
Cost escalation and supply cycles
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Mixed performance in OECD
Modest US recovery while Eurozone and Japan stillweak
European bond yield fall highlighting the reduced riskof Eurozone breakup
Source: Bloomberg Source: Bloomberg
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
Jan-1
2
Fe
b-1
2
Mar-
12
Apr-
12
May-1
2
Jun-1
2
Ju
l-12
Aug-1
2
Sep-1
2
Oc
t-12
Nov-1
2
Dec-1
2
Jan-1
3
Fe
b-1
3
Ten yearbondyields
Spain Italy
25
30
35
40
45
50
55
60
65
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
US Eurozone Japan
Above 50 = Expansion
Below 50 = Contraction
4
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Expectations for a strong first half in China and moderation in the secondhalf
Inflation is benign but residential housing costs are aleading indicator of a pick-up in CPI
A sharp increase in bank credit and banker sacceptances is supporting current pick up
Land sales have increased sharply with the pick up inresidential sales and prices
Leading indicators have picked up pace; decline inflash February PMI likely due to CNY effects
0
500
1,000
1,500
2,000
J-10 J-10 J-11 J-11 J-12 J-12 J-13
RMBBillion
Total Social Financing, 3mma
New Banker's Acceptance Bills New Trust and Entrusted Loans
New Bank Loans
90
95
100
105
110
40
45
50
55
60
J-08 J-09 J-10 J-11 J-12 J-13
Leading Index & HSBC PMI
HSBC Economic Climate Leading Index-RHS
100
101
102
103
104
105
106
107
108
J-10 J-11 J-12 J-13
Inflation
CPI CPI Residence
50%
30%
10%
10%
30%
50%
J10 D10 J11 D11 J12 D12
Resident ial Land Sales Growth in133 Cities3mma YoY
5
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Aluminium capacity additions and stocks continue to weigh on market
Strong growth in China alumina imports has been dueto concerns over availability of imported bauxite
Outside of China financing deals will continue to t ieup metal away from the physical market
Source: Goldman Sachs Source: GTIS
Greater semis exports from China risk market over supply (000tpy,Aluminium equivalent)
6
0
500
1000
1500
2000
2500
3000
3500
Jul-2010 Jan-2011 Jul-2011 Jan-2012 Jul-2012
Alumina Bauxite (Kt AL2O3)
China bauxite and alumina imports(expressed as Kt AL2O3 equivalent)
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Copper short term small surplus, but longer term supply responserequired in an increasingly challenged industry
Expectations of near term supply growth, but stil l aneed for significant new supply in long term
LME stocks have been rising, particularly in Europeas warehouse owners attract material to earn rent
Source: WoodMacKenzie
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
500,000
Jan
12
Fe
b12
Mar
12
Apr
12
May
12
Jun
12
Ju
l12
Aug
12
Sep
12
Oc
t12
Nov
12
Dec
12
Jan
13
Fe
b13
Global Europe (rhs)
LME Copper inventories by location, t
0
5
10
15
20
25
30
35
40
1992 1997 2002 2007 2012 2017 2022
Possible Projects
Probable Projects
Highly Probable Projects
Base Case ProductionCapability
Primary Demand
Global copper production and primary demand Mt
7
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Pigment consumpt ion per capita 1995-2011Pigment production accounts for 90% of TiO2 use
Long run demand fundamentals are strong for TiO2
Approximate population in
2020 shown
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Structural supply constraints remain a long term challenge for coals
Al ternat ive to blast furnace technology unlikely at longrun HCC prices below $200/t based on consensus pr ices
Chinese and Indian imports - price opportunism andstructural supply deficits
Source: Salva, GTIS, Global Coal
Error bars are +/- 2 Stdevs
Source: Rio Tinto analysis. Assuming long run consensus prices.
9
0
50
100
150
200
250
0
50
100
150
200
250
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
ThermalCoal US$/t
Mt
China
India
Newc
0
50
100
150
200
250
DRI (Gas) + EAF with carbon DRI (Gas) + EAF withoutcarbon
HCC $/tFOB
Austral ia
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Iron ore supply continues to be exposed to downside shocks
Indian exports continue to be constrained.We expect a return to market, at much lower levels
Iron ore forward curve in backwardation
Source: Platts, SGX Source: Louis Dreyfus, Port Authorities, RT Analysis
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
0
20
40
60
80
100
120
140
160
180
200
Jan08 Jan09 Jan10 Jan11 Jan12 Jan13
Westcoast
Eastcoast
Indianexportsshareof
seabornetrade
Annualised(Mt)
10
0
20
40
60
80
100
120
140
160
180
200
Mar10 Dec10 Sep11 Jun12 Mar13 Dec13 Sep14
ForwardCurve(1Mar2013)
PlattsIODEX
62%Fe
US$/dmt.FOBWA,real2013
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Steep iron ore cost curve provides scope for price fly-ups
2012 Industry cost curve($/wmt CFR)
Source: Rio Tinto
Note: Includes shipping and sustaining capital expenditure and is adjusted for inflation and FX
0
50
100
150
200
250
0 500 1,000 1,500 2,000 2,500
FMGPilbara ValeBHPPilbara RTIOassets
Mtpa
$/wmtCFR
Cumulativecapacity
RT Pilbara
IOC
11
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Forecast
12
Global peaks: finished steel per capita intensities
ASEAN, Brazil, India and Africa unlikely to peak
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Detailed China bottom-up demand analysis example for machinery
sector
50-69 HP
25-49 HP
>100 HP
ClassAgricul ture
Tractors
70-120 HP
>120 HP
Source: Expert surveys, Rio Tinto analysis
Compact
tractors
Utilitytractors
High-powertractors
Harvester
Combinedharvester
ClassConstruction
30t
6t1
5t
Excavator
Wheeled
loader
20-30t31-50t
51-100t
20-3031-50t
20-30t31-50t51-100t>100t
Miningvehicle
Coalshuttlecars
Shearer
Mining Class
13
Steel 2012 (Mt)
CAGR 2012-2030
8.8Mt
6.5%
14.3Mt
-0.4%
21.2Mt
3.3%
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Appendix
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Rural
National
Stylised overview of Chinese commodity demand modelling framework
SectorsIntensity by buildingtype kg/m2
Industrial
Commercial
ResidentialNew floor space m2
DemolitionReplacement factorby product % andlife cycle
SectorsFloor space stockSqm
Exports
Power Generation
SectorsIntensity by M&Eclass kg/productivecapacity
Agricu lture
Mining
ConstructionNew demand
required to satisfyproduction
M
ac
hineryan
d
Equ
ipmen
t
Scrap andreplacementReplacement factor
by product %
SectorsStock of M&E bysector GDP
Bu
ildinga
nd
Cons
truct
ion
Volume factors Intensity factors
National levelmacro forecasts
City levelforecasts
Population GDP Consumer and Industry
trends
Top down and bottom upapproach leads toconsistent stories acrosscommodit ies demand
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Source:Expert surveys, Rio Tinto analysis
Axle
Axle housing
Cockpit
Control unit
Engine
Oil block
Oil filter housing
AC tubes
AC condenser
Motor components
Hydraulics Pump housing
Interface seal
Radiator
Transmission
Gear box wear ring
Wet clutch friction plate
Synchronizer blockerrings
Other parts
Throughout
Cables
Gaskets
Nameplates
Other electrical parts
Cu Al
Commodity
While HP-driven components are concentrated in
the engine and transmission, weight-driven
components are found throughout the tractor
- U.S. Advanced Automotive expert
Fe
Example of breakdown used to determine commodity intensity16
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