130304 Economic Outlook and Commodity Prices

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


2/16


3/16

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


4/16

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


5/16

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


6/16

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)


7/16

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


8/16

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

8


9/16

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


10/16

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


11/16

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


12/16

Forecast

12

Global peaks: finished steel per capita intensities

ASEAN, Brazil, India and Africa unlikely to peak


13/16

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%


14/16

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

15


16/16

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

130304 Economic Outlook and Commodity Prices

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