Get documents about "Credit Suisse -Commodity Forecasts The Best of Times_ The Worst of Times
Description
Sluggish and Bumpy Growth”
Shared by: riteshbhansali
-
Stats
- views:
- 110
- posted:
- 12/1/2012
- language:
- pages:
- 184
Document Sample
12 October 2012
Securities Research & Analytics
http://www.credit-suisse.com/researchandanalytics
Commodity Forecasts: The Best
of Times, The Worst of Times
Connection Series
The Credit Suisse Connections Series
leverages our exceptional breadth of macro
and micro research to deliver incisive cross-
asset and cross-border thematic insights for
our clients.
Research Analysts Source: Credit Suisse
COMMODITIES RESEARCH
Ric Deverell
“Sluggish and Bumpy Growth”
ric.deverell@credit-suisse.com As with other risk assets, prices in commodity markets during Q3 were in large
+44 20 7883 2523
part driven by the latest efforts of the world’s largest central banks to stabilize
Tom Kendall the global financial system and to stimulate growth. To that end, the OMT and
tom.kendall@credit-suisse.com QE infinity have had the desired initial effect, with markets substantially
+44 20 7883 2432
reducing the perceived risk of another euro area crisis and looking forward to a
Andrew Shaw growth rebound over coming months.
andrew.shaw@credit-suisse.com
+65 6212 4244
For commodities and risk assets in general, the key question is whether the
better news has already been priced.
Jan Stuart
jan.stuart@credit-suisse.com
Our analysis suggests that many commodity prices have run ahead of their
+1 212 325 1013 fundamentals, with a combination of supply shocks (grains, oil, and platinum)
and a substantial relief rally pushing prices above levels that would normally be
EQUITY RESEARCH
associated with the still well-below-average growth seen in Q3. This suggests
David Hewitt
david.hewitt.2@credit-suisse.com that unless we see a rapid rebound in global growth (something we consider
+65 6212 3064 unlikely) many prices will consolidate over Q4 (we expect the CSCB to give
up some of the recent gains), with the risk of a substantial correction if, as
Paul McTaggart
paul.mctaggart@credit-suisse.com we expect, the pace of the growth rebound disappoints.
+61 429 328 247 Moving into 2013, our base-case scenario is for global growth to continue to
Michael Shillaker improve gradually. This is likely to see most industrial commodity prices
michael.shillaker@credit-suisse.com increase modestly (the CSCB should increase nearly 10% Q4 to Q4),
+44 20 7888 1344 although the risks remain to the downside.
Edward Westlake With growth unlikely to return to the pace seen in the 2000s, the commodity bull
edward.westlake@credit-suisse.com market looks to be over. Despite this, many opportunities remain, with prices
+1 212 325 6751
likely to move substantially over the cycle, with large variations in intra
(For a full list of contributors, see page 179) commodity performance (neither the best nor worst of times).
ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES ARE IN THE DISCLOSURE APPENDIX. FOR OTHER
IMPORTANT DISCLOSURES, PLEASE REFER TO https://firesearchdisclosure.credit-suisse.com.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION™
Client-Driven Solutions, Insights, and Access
12 October 2012
Table of Contents
Editor’s Summary: It Was the Best of Times, It Was the Worst of Times 4
The outlook........................................................................................ 6
Summary of Commodity Forecasts 10
Macro Outlook: “The Economy, Stupid!” 12
The Fed’s rational irresponsibility versus the fiscal cliff … ............... 14
China – Weak but not weak enough ................................................ 16
Japan – Back in recession ............................................................... 19
Petroleum: Riding the (Wide) Range 20
$110/b Brent +/- $10........................................................................ 20
Base case and scenarios ................................................................ 21
Fundamentals – Demand growth remains unconvincing ................. 25
Supply: Non-OPEC ex-US disappoints still more ............................ 29
US supply growth potential is very large .......................................... 30
Inventories: downstream tightness holds upside price risk .............. 31
Longer term ..................................................................................... 32
Positioning/risk ................................................................................ 33
Forecasts......................................................................................... 35
Natural Gas 38
Global LNG remains structurally tight .............................................. 38
North America – The good, the bad, and the ugly ........................... 41
UK NBP – Anemic demand, balancing supply ................................. 48
Steel 52
Caught between a rock and a hard place ........................................ 52
Bulks 60
Iron Ore – End of an era .................................................................. 60
Metallurgical Coal – Fault lines widen ............................................. 71
Thermal Coal – A dim and distant light ............................................ 77
Commodity Forecasts: The Best of Times, The Worst of Times 2
12 October 2012
Base Metals 87
Copper – Vulnerable without real demand improvement ................. 87
Aluminum – High premiums, vulnerable prices ............................... 96
Alumina – Indonesian ban creates change .................................... 102
Nickel – Short window for higher prices......................................... 111
Zinc – Squeezed today, but more surpluses tomorrow.................. 117
Lead – Moving into the spotlight .................................................... 122
Tin – Squeezed, but supply returning ............................................ 127
Gold and Silver 131
Key points: Further QE more likely than not .................................. 131
Silver ............................................................................................. 134
Forecasts....................................................................................... 136
PGMs: South African Situation Dominates 137
South African supply struggles ...................................................... 138
Demand: The missing link ............................................................. 140
Mineral Sands 145
Surpluses beginning to weigh ........................................................ 145
Titanium feedstocks....................................................................... 149
Uranium: Utilities in a “Wait-and-See” Mood 154
Agriculture 159
Overview ....................................................................................... 159
Corn – High(er) prices to ration demand ....................................... 160
Soybeans – Watching South American production ....................... 164
Wheat – Global supply risks .......................................................... 168
Financial Flows 172
Q3 2012 summary of commodity-linked flows ............................... 172
Technical Analysis 175
The CSCB Index is threatening a small top ................................... 175
Gold pivotal resistance remains at $1803...................................... 176
Crude Oil remains under pressure ................................................ 177
Copper setbacks should find support at $7850/16 ........................ 178
Contributors 179
Commodity Forecasts: The Best of Times, The Worst of Times 3
12 October 2012
Editor’s Summary: It Was the Best of Times, It
Ric Deverell
Was the Worst of Times1
ric.deverell@credit-suisse.com
+44 20 7883 2523
Late last year our chief economist, Neal Soss, noted that financial life is being buffeted by
two powerful but diametrically opposite financial forces (see Piecing Together or Falling to
Pieces?). On the one side we have the policy postures of the major central banks –
“monetary conditions,” and on the other side we have the terms and standards of access
to credit in open markets – “credit conditions.”
The latest salvo in this epic tussle was the key consideration in Q3, in our view, and
remains a fundamental factor underpinning the outlook for commodity prices (and risk
assets more broadly). As has generally been the case over recent years, the sheer force
of monetary conditions is likely to predominate most of the time, although this
central scenario will probably be accompanied by occasional outbursts of volatility
as the underlying fundamental/credit forces become visible.
While markets have been energized by the central bank interventions, over coming
months pricing for many risk assets will in large degree be determined by the
success of those policies in engineering a rebound in global growth.
As we discussed in Commodities Advantage: The Ben and Mario Show, history
suggests that the gains in prices will only be sustained if growth rebounds.
Or to paraphrase Bill Clinton’s campaign strategist, James Carville, it is “The
economy, stupid.”
Exhibit 1: Commodities rebound in Q3 overdone – look out for some payback
Annualized quarterly change in global GDP, and quarterly change in CCI (deflated by CPI) with forecasts
Global GDP, ann qoq Current estimate/forecast
5.0% Real CCI, qoq (rhs) CCI estimate based on forecasts 20.0%
15.0%
4.5%
Divergence in 10.0%
4.0% Q3-12
5.0%
3.5%
0.0%
3.0%
-5.0%
2.5%
-10.0%
Q3 estimate: 2¾%
2.0% -15.0%
3Q-10 1Q-11 3Q-11 1Q-12 3Q-12 1Q-13
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
In the near term the key question for commodity markets is whether the good news
has already been priced.
The backward looking data show that while commodity prices rallied substantially in Q3
(the CSCB was up 12% from July to September) global growth remained well below
average – commodities are anticipating a better future rather than reflecting
current underlying conditions.
1 "It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of
belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was
the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all
going direct the other way - in short, the period was so far like the present period, that some of its noisiest authorities insisted on
its being received, for good or for evil, in the superlative degree of comparison only." Charles Dickens. A Tale of Two Cities.
Commodity Forecasts: The Best of Times, The Worst of Times 4
12 October 2012
Growth is starting to rebound, but we continue to expect the bounce to be modest at
best – in the World Economic Outlook released earlier this week the IMF warned that
“The prospects are for sluggish and bumpy growth,” and that “Risks for a serious global
slowdown are alarmingly high.”
Our recent trip to China (see China Commodities Tour: Still Weak After All These
Months) suggests that the prospect of a rapid rebound is more remote than many
analysts realize.
In their late September update our economists significantly downgraded their
growth forecasts (see Global Economy Monthly Review – From unavailable to
unremunerative). They now expect global GDP growth to improve only modestly
in Q4, to 3.3% saar, up from 2.7% saar in Q3.
Given the likelihood that the rebound will be tepid, we believe that many commodity
prices have moved too far too fast, with a dip the most likely outcome in Q4.
While growth should recover a little in 2013, absent another euro-driven financial shock,
and assuming we avoid the worst of the US fiscal cliff, we expect it to remain relatively
subdued. Nonetheless, with growth moving a little above average in H2, many industrial
commodity prices are likely to move higher over the year (the CSCB should
increase nearly 10%), although the risks remain to the downside.
With global growth unlikely to return to the rapid rates seen during 2003-2007 anytime
soon, it has become increasingly clear that the upward trend in industrial commodity
prices has come to an end. However, in our view a collapse is also unlikely, with
commodity prices likely to move in a more contained range than seen in the dramatic
period from 2007-2011.
Exhibit 2: Bull market ended in 2006 – we expect dip in Q4 and rebound next year
Index level, real in 2010$ deflated by US CPI
1100 CSCB Excess Return (real) Forecast
1000 Oil bubble
900
800
700 Back to the future
600 Bull market
500
400
300
Post-Lehman prices
200
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
While little recognized, it is notable that the consistent, upward trend actually ended in
2006 – between 2007 and 2010 prices were extraordinarily volatile but with no clear trend 2.
Food and oil prices spiked in early 2008 (the oil bubble).
Most prices collapsed with the global economy in late 2008.
Prices then rebounded as the largest stimulus in history took hold.
2 Note that this result is highly subject to the index used, and the inherent weighting among commodities. There is really no such
thing as an "average" commodity.
Commodity Forecasts: The Best of Times, The Worst of Times 5
12 October 2012
From early 2011, however, markets began to find a new post Lehman equilibrium, which
increasingly looks to be near the level seen in early 2006. This suggests that the
opportunities in the future will be more about cyclical moves in individual commodity prices
and divergences among commodities, rather than following strong and persistent trends.
Or to paraphrase Dickens, neither the best of times nor the worst of times. More a
return to normal transmission, with individual fundamentals likely to reassert themselves.
The outlook
In the near term we expect many prices to retrace some of the recent gains, with US
natural gas and the base metals likely to see the largest corrections relative to current
market pricing (see Exhibit 3).
Exhibit 3: Commodities forecasts – Q4 2012 forecast against forward
Q4 2012 forecast market expectations for that period, data as of October 10, 2012
Source: the BLOOMBERG PROFESSIONAL™ service
Over a 12-month time horizon, however, we expect the price of crude oil, palladium, and
lead to be above current market pricing, while the grains, iron ore, and copper are likely to
become cheaper than the market currently expects.
Exhibit 4: Commodities forecasts – Q4 2013 forecast against forward
Q4 2013 forecast market expectations for that period, data as of October 10, 2012
Source: the BLOOMBERG PROFESSIONAL™ service
Commodity Forecasts: The Best of Times, The Worst of Times 6
12 October 2012
Summary of the outlook for individual commodities
Crude Oil – modest upward revision
From bullish to bearish and back again, the Brent market, and many analysts (including
us…), spent the past year oscillating between two extremes. Zoom out from the day-to-
day market swings, however, and it quickly becomes apparent to us that Brent has
essentially moved sideways in a large range since late 2010, with quarterly average prices
falling between $105 and $120 for seven straight quarters.
Given this, in adjusting our forecast we are mostly marking-to-market the balance of the
year and keep our quarterly averages for 2013-2014 within the $105-$120 price range.
Though oil demand should continue to recover modestly, swing-producer Saudi Arabia is
likely to continue to massage supply (with or without the aid of strategic petroleum
inventories) so that prices do not stray far from their “acceptable” price range.
Of course, there are still a multitude of risks, both bullish and bearish, arrayed to either
side of our base-case scenario.
Global Gas – unchanged
Recent signs of relative weakness in global LNG markets do not mean that the tightness
caused by Japan’s early 2011 nuclear disaster will fade altogether. Japan is no closer to
resolving its power generation dilemma, and its utilities also have to renegotiate long-term
supply deals that are rolling off. In addition, new consumers for long-term deals are waiting in
the wings. On the supply side, promising new discoveries are years away from a final
investment decision while the next batch of new developments still remains years away from
first gas. We don’t think that incremental additions to existing supply terminals and the two
new 2012 plants can tip the LNG balance back into oversupply within the next few years.
North American Gas – unchanged
Enhanced sensitivity of coal-to-gas switching to natural gas price levels has kept summer
gas prices range bound. The views we expressed in our quarterly outlook found at least
partial support, as year-on-year (yoy) power demand growth ebbed and flowed with gas
prices above and below $3/MMbtu in the third quarter. By that same dynamic, however,
recent strength in Q4 2012 futures prices could reverse parts of the yoy upside in winter
2012-2013 power demand. Add surprisingly strong supply, and we remain worried.
We generally think gas prices modestly improve into 2013 as storage levels push toward
more normal levels. But we cannot turn bullish relative to the forward curve in the short to
medium term (i.e., before 2015), until we see pronounced declines in US gas supply. And
so, despite the recent upturn in US gas prices and despite having undershot actual prices
in the third quarter of $2.81/MMbtu by 30 cents (12%) in Q3, we are leaving our relatively
subdued forecast through 2014 unchanged and note further downside risk.
UK (NBP) Gas – broadly unchanged
Prices at the UK’s National Balancing Point have fallen over the last year, but in our view
they remain high, propped up by tight post-Fukushima LNG markets. A combination of
poor economic growth, power-generation economics favoring coal over gas, and efficiency
gains is consistently moving natural gas demand lower in Northwest Europe. But with
lower supply from LNG, the market is more easily balanced by variable pipeline imports
from Norway. In fact, recent contract negotiations between Russia’s Gazprom and
European consumers resulted in price reductions for pipeline imports into continental
Europe, leaving increased volumes of Norwegian gas to be sent to Great Britain. From our
viewpoint, without resolution from the nuclear situation in Japan, which as previously noted
is not expected until summer 2013 at the earliest, prices at NBP should stay supported.
We leave our forecasts unchanged.
Commodity Forecasts: The Best of Times, The Worst of Times 7
12 October 2012
Bulk Commodities
Iron Ore – large downward revision
The era of windfall pricing for iron ore miners has come to a close. Although there remains
room for a cyclical price increase in early 2013 (to a quarterly average of US$120/t in Q1),
aided by seasonal factors and a restocking phase, we believe the market is witnessing a
structural shift to lower prices, reflected by the steady ebbing of spot prices in our base-
case view. Even with 4% p.a. global steel production growth, firmly planned expansions to
iron ore supply far exceed incremental demand and can only be accommodated by
displacing existing marginal sources of production and halting installation of unnecessary
new mines. If China’s higher-cost supply proves harder to dislodge than we currently
forecast, or world steel production fails to step up from recent growth rates of 2.2% p.a.,
the scene would be set for fierce competition between suppliers and a more precipitous
fall in prices to rebalance the market.
Metallurgical Coal – modest downward revision
Metallurgical coal has suffered a precipitous fall over the past three months, with spot
volumes trading below US$150/t FOB Australia and benchmark quarterly contracts settling
at $170/t, down from $225/t. With the demand-side dynamics of iron ore and the supply-
side dynamics of thermal coal, met coal has endured particularly torrid short-term
fundamentals, from which we forecast only a modest recovery – gradually back towards
$190/t by 2015. Continued supply surpluses in coming years, combined with the
aforementioned lower growth profile for steel production, make it unlikely that met coal will
return to prices substantially above $200/t.
Thermal Coal – modest downward revision
Prices are expected to remain trapped in a subdued range for the remainder of this year and
into 2013, supported by marginal costs of production and relatively robust demand on the
one hand, yet capped by a persistent surfeit of supply on the other. The market should,
however, move into a more balanced position through 2013, creating the possibility for prices
to stabilize around US$100/t in late 2013 and into 2014. At this point, price volatility should
also return to the coal market, with the loosening of these fundamental caps and collars.
Commodity Forecasts: The Best of Times, The Worst of Times 8
12 October 2012
Base Metals – modest upward revisions
Base metals have rallied on the back of central bank easing and improving macro
sentiment. However, an improvement in real demand is required to hold on to recent gains,
much less move prices higher. Outside of demand, a major influence on base metals is
the shortage of available metal in LME warehouses and the supply response to
rebounding prices.
Nickel represents our preferred metal in the short term, as supply difficulties have
temporarily brought the market closer to balance. Tin is our least preferred, as supply is
expected to re-emerge in response to higher prices. Copper looks to be moving into
surplus as mined supply emerges, though hypothetical incentive pricing is now around
US$6,500/t. Aluminum supply is rebounding and aluminum likely faces a continued high
premium and low price environment. Lead is seeing a stronger pull from the US and
bullish mid-term fundamentals. Zinc is increasingly resembling aluminum and has seen
major mine closures delayed.
Gold and Silver – stronger for longer
Gold and silver performed as expected during Q3, reacting strongly to the promise and
delivery of additional quantitative easing. That was instrumental in drawing investors back
to the metals after a rather quiet H1. In light of the Fed’s open-ended commitment to asset
purchases, the shift in language on rates, and the potential for an additional program of
Treasury buying once Operation Twist expires, we have shifted our gold forecast
moderately upwards and outwards. Our Q4 forecast average of $1,760/oz remains
unchanged – we expect a period of consolidation after the strong run in September – but
we have lifted our forecasts for 2013 through 2015.
Silver outperformed gold in August and early September as risk assets more generally
were well bid. That has led us to push up our Q4 forecast average by 4% to $32/oz. Given
the changes to our gold forecast we have also moved our projections for the silver price
upward from 2013 through to 2015.
Platinum Group Metals – platinum revised up, palladium trimmed
We had previously incorporated a certain amount of supply disruption in South Africa into
our price forecasts but the deepening labor crisis in the country has led us to push those
numbers up moderately. We now forecast an average of $1,620/oz in Q4 for platinum, up
from $1,560 previously but well below spot at the time of writing, as we think a correction
in price is imminent. However, we have edged our 2013 numbers up by 1%-2%. In
contrast, our previous palladium forecasts appear overly optimistic in light of the
sluggishness of global growth. We have cut our palladium forecasts sharply from Q4
onwards. We now forecast an average of $640 for the current quarter and have cut our
2013 average from $905 to $700.
Grains – modest upward revision
Following the effects of the US summer drought, we expect prices to trend lower slowly
over the next few months. In the near term, we believe the focus for corn and soybeans
will shift towards South American production, which is currently expected to rebound from
last year’s poor output. At the same time, we think there will be increased scrutiny of
wheat-related news, particularly given the depths to which expected global production has
fallen, on the back of the latest Russian and Ukrainian projections.
Against this backdrop we expect prices to remain elevated but to trend lower towards the
end of the year. As such, we have adjusted our corn and soybean forecasts to $7.25 and
$15 per bushel, and wheat forecasts to $8.50 per bushel in Q4 2012.
For a summary of our trade recommendations go to Trading Recommendations: The Best
of Times, The Worst of Times.
Commodity Forecasts: The Best of Times, The Worst of Times 9
Commodity Forecasts: The Best of Times, The Worst of Times
Summary of Commodity Forecasts
Exhibit 5: Global Commodities Research price forecast summary
Units as stated below, quarterly and annual averages, annual figures may be rounded, revised forecasts are above previous forecasts, arrows indicate near-term forecast revision changes
2011 2012 2013 2014 2015 LT
Yr Avg (a) Q1 (a) Q2 (a) Q3 (a) Q4 (f) Yr Avg (f) Q1 (f) Q2 (f) Q3 (f) Q4 (f) Yr Avg (f) Q1 (f) Q2 (f) Q3 (f) Q4 (f) Yr Avg (f) Yr Avg (f) (real)
Energy
Brent (US$/bbl) ▲ 109.97 118.28 108.95 109.62 105.00 110.00 110.00 115.00 115.00 120.00 115.00 115.00 110.00 110.00 105.00 110.00 100.00 90.00
previous 109.97 118.50 108.95 95.00 95.00 104.00 100.00 100.00 105.00 105.00 103.00 110.00 115.00 115.00 100 90.00
WTI (US$/bbl) ▲ 90.70 102.91 93.43 92.51 89.00 94.00 97.00 106.00 108.00 113.00 106.00 107.00 102.00 102.00 97.00 102.00 93.50 83.50
previous 90.70 102.91 93.43 84.00 82.00 91.00 91.00 95.00 101.00 101.00 97.00 106.00 111.00 111.00 94 84.00
U.S. Natural Gas (US$/MMBtu) 4.07 2.77 2.26 2.81 3.10 2.74 3.60 3.40 3.80 4.00 3.70 4.40 4.20 4.20 4.40 4.30 4.50 4.50
previous 4.07 2.77 2.26 2.50 3.10 2.66 3.60 3.40 3.80 4.00 3.70 4.40 4.20 4.30 4.50 4.50
U. K. NBP (GBp/Therm) - 56.40 57.50 56.00 57.00 65.00 59.00 65.00 58.00 58.00 68.00 62.00 73.00 63.00 63.00 73.00 68.00 66.00 50.60
previous 56.40 57.50 56.00 53.00 65.00 58.00 65.00 58.00 58.00 68.00 62.00 73.00 63.00 68.00 66.00 50.60
Iron Ore
Iron ore fines - 62% (China CFR) US$/t ▼ 168 142 140 112 110 126 120 115 110 100 111 95 95 95 95 95 90 90
previous 168 142 140 135 140 139 145 150 145 140 145 135 130 128 115 90
Iron ore fines - (China CFR) US¢/dmtu 271 229 225 181 177 203 194 185 177 161 179 153 153 153 153 153 145 145
previous 271 229 225 218 226 224 234 242 234 226 234 218 210 206 185 145
Coking Coal (contract)
Hard coking coal (US$/t) ▼ 289 235 210 225 170 210 170 170 175 175 173 180 180 185 185 183 190 170
previous 289 235 210 225 215 221 210 210 210 210 210 205 205 205 200 170
Semi soft coal (US$/t) 212 157 141 141 117 139 119 119 123 123 121 126 126 130 130 128 133 130
previous 212 157 141 141 144 146 141 141 141 141 141 137 137 137 134 134
PCI coal (US$/t) 223 172 153 164 125 154 125 125 128 128 127 131 131 135 135 133 139 130
previous 223 172 153 162 155 161 151 151 151 151 151 148 148 148 144 134
Thermal Coal
Thermal Coal (Newcastle FOB) US$/t ▼ 123 113 95 86 90 96 95 95 100 100 98 105 105 110 110 108 118 110
previous 123 113 95 90 95 98 95 100 100 105 100 105 110 110 120 120
Thermal Coal (ARA CIF) US$/t 122 100 90 91 90 93 95 95 100 100 98 105 105 110 110 108 118 110
previous 122 100 90 90 95 94 95 100 100 105 100 105 110 105 120 120
Thermal Coal (RBCT FOB) US$/t 117 105 94 89 89 94 94 94 99 99 97 104 104 109 109 107 117 110
previous 117 105 94 89 94 96 94 99 99 104 99 104 109 109 119 120
Uranium
Uranium spot (US$/t) ▼ 57 52 52 48 48 50 52 55 58 60 56 65 65 65 65 65 70 65
previous 57 52 52 52 54 53 55 55 60 65 59 65 65 65 70 65
Source: Credit Suisse
12 October 2012
10
Commodity Forecasts: The Best of Times, The Worst of Times
Exhibit 6: Global Commodities Research price forecast summary of changes
Units as stated below, quarterly and annual averages, annual figures may be rounded, revised forecasts are above previous forecasts, arrows indicate near-term forecast revision changes
2011 2012 2013 2014 2015 LT
Yr Avg (a) Q1 (a) Q2 (a) Q3 (a) Q4 (f) Yr Avg (f) Q1 (f) Q2 (f) Q3 (f) Q4 (f) Yr Avg (f) Q1 (f) Q2 (f) Yr Avg (f) Yr Avg (f) (real)
Base Metals
Copper (US$/t) ▲ 8,887 8,329 7,860 7,720 7,800 7,927 8,000 8,300 8,000 7,700 8,000 7,600 7,500 7,500 7,400 7,500 7,000 5,500
previous 8,887 8,329 7,860 7,300 7,500 7,747 7,800 8,300 8,000 7,700 7,950 7,500 7,500 7,500 7,000 5,500
Aluminium (US$/t) ▲ 2,424 2,188 1,987 1,929 2,020 2,031 2,100 2,150 2,200 2,250 2,175 2,300 2,350 2,350 2,400 2,350 2,400 2,250
previous 2,424 2,188 1,987 1,920 2,000 2,024 2,050 2,150 2,200 2,250 2,163 2,300 2,300 2,350 2,400 2,250
Alumina spot (US$/t) ▲ 378 317 317 316 330 320 350 350 375 375 363 400 400 400 400 400 415 400
previous 389 317 317 310 315 315 315 325 340 340 330 400 400 400 415 400
Nickel (US$/t) - 23,015 19,654 17,157 16,354 18,000 17,791 18,500 19,000 19,000 19,000 18,875 19,500 20,000 20,000 20,500 20,000 21,000 20,000
previous 23,015 19,654 17,157 17,000 18,000 17,953 18,500 19,000 19,000 19,000 18,875 20,000 20,000 20,000 21,000 20,000
Lead (US$/t) ▲ 2,405 2,097 1,979 1,983 2,130 2,047 2,200 2,300 2,350 2,450 2,325 2,550 2,600 2,650 2,700 2,625 3,000 2,000
previous 2,405 2,097 1,979 1,850 1,900 1,957 2,000 2,100 2,200 2,200 2,125 2,500 2,500 2,500 3,000 2,000
Zinc (US$/t) ▲ 2,220 2,031 1,930 1,892 2,000 1,963 2,100 2,150 2,200 2,250 2,175 2,350 2,400 2,450 2,500 2,425 2,800 1,900
previous 2,220 2,031 1,930 1,800 1,850 1,903 1,900 2,000 2,050 2,100 2,013 2,250 2,400 2,400 2,800 1,900
Tin (US$/t) ▲ 26,191 22,953 20,550 19,287 20,000 20,698 21,000 21,000 21,500 22,500 21,500 23,000 23,000 23,000 23,000 23,000 24,000 20,000
previous 26,191 22,953 20,550 18,500 19,500 20,376 20,500 21,000 21,500 22,500 21,375 23,000 23,000 23,000 24,000 20,000
Precious Metals
Gold (US$/oz) ▲ 1,571 1,689 1,612 1,653 1,760 1,680 1,790 1,820 1,870 1,880 1,840 1,820 1,750 1,730 1,690 1,750 1,500 1,300
previous 1,571 1,690 1,615 1,670 1,760 1,680 1,820 1,760 1,680 1,600 1,720 1,500 1,500 1,500 1,400 1,300
Silver (US$/oz) ▲ 35.20 32.59 29.48 29.94 32.00 31.00 33.80 33.70 32.80 31.90 33.10 31.40 31.30 31.50 31.30 31.40 26.30 22.40
previous 35.20 32.70 29.60 28.80 30.90 30.50 32.50 30.30 28.00 25.80 29.20 25.40 25.40 25.40 23.30 21.70
Palladium (US$/oz) ▼ 730 685 625 613 640 640 660 680 720 730 700 760 790 810 830 800 850 900
previous 730 685 625 610 650 640 690 710 720 750 720 800 800 800 840 900
Platinum (US$/oz) ▲ 1,720 1610 1510 1500 1620 1,560 1660 1680 1730 1760 1710 1750 1800 1820 1840 1,800 1,850 1,900
previous 1,720 1,610 1,510 1,470 1,560 1,540 1,630 1,660 1,690 1,730 1,680 1,800 1,800 1,800 1,850 1,900
Rhodium (US$/oz) ▼ 2,010 1460 1500 1175 1200 1,330 1400 1550 1750 1850 1640 1900 2000 2200 2500 2,150 2,500 3,000
previous 2,010 1,460 1,500 1,350 1,400 1,430 1,500 1,550 1,750 1,950 1,690 2,200 2,500 2,500 2,800 3,200
Minerals
Zircon bulk (US$/t) ▼ 1,880 2500 2500 2500 2400 2,480 2300 2200 2200 2100 2,200 2,000 1,900 1,900 1,800 1,900 1,700 1,500
previous 1880 2,500 2,500 2,500 2,500 2500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 1,875 1,500
Rutile bulk (US$/t) - 1,055 2400 2400 2400 2400 2,400 2000 2000 2000 2000 2,000 1,750 1,750 1,400 1,400 1,575 1,125 1,000
previous 1055 2,400 2,400 2,400 2,400 2400 2,400 2,400 2,400 2,400 2,400 2,400 2,400 2,400 1,650 1,000
Synthetic Rutile (US$/t) - 858 2050 2050 2050 2050 2,050 1850 1850 1850 1850 1,850 1,625 1,625 1,300 1,300 1,463 1,025 890
previous 858 2,050 2,050 2,050 2,050 2050 2,050 2,050 2,050 2,050 2,050 2,050 2,050 2,050 1,450 890
Ilmentite - sulphate 54% (US$/t) - 209 325 325 300 300 313 300 300 300 300 300 250 250 250 250 250 225 200
previous 209 325 325 350 350 338 350 350 350 350 350 300 300 300 250 200
Titanium Slag - SA Chlor 86% (US$/t) - 798 1750 1750 1750 1750 1,750 1700 1700 1700 1700 1,700 1,500 1,500 1,200 1,200 1,350 925 760
previous 798 1,750 1,750 1,750 1,750 1750 1,750 1,750 1,750 1,750 1,750 1,750 1,750 1,750 1,225 760
Agriculture
Wheat-CBOT (US¢/bu) ▲ 710 643 641 869 850 750 825 800 750 700 770 700 675 650 650 670 650 600
previous 710 643 641 800 750 710 750 725 700 700 720 650 650 650 600 600
Corn-CBOT (US¢/bu) ▲ 680 641 618 781 725 690 700 625 550 550 610 550 525 500 500 520 500 500
previous 680 641 618 700 700 660 650 625 550 550 590 500 500 500 500 500
Soybeans-CBOT (US¢/bu) ▲ 1,320 1,273 1,425 1,674 1,500 1,470 1,450 1,450 1,300 1,300 1,380 1,250 1,250 1,200 1,200 1,230 1,200 1,100
previous 1,320 1,273 1,425 1,550 1,500 1,440 1450 1400 1280 1220 1,340 1,200 1,200 1,200 1,200 1,100
Source: Credit Suisse
12 October 2012
11
12 October 2012
Macro Outlook: “The Economy, Stupid!”
The global economy has been highly volatile over the past year, with global industrial
production growth (3mma saar) moving in a choppy range between around zero and 8%.
Looking through this volatility, however, it is clear that the European financial panic earlier
in the year has had a substantial impact on output, with global GDP growth dipping below
3% in Q2 (saar) and remaining near that pace in Q3.
Thankfully, the Ben and Mario show, and their latest salvos against the “financial forces of
darkness”, the OMT and QE infinity, have achieved the initial objectives, with the European
tail risk much diminished, and the preconditions for a growth rebound falling into place.
Global IP momentum, the CSBMI, and more recently the global PMI, have all begun to
suggest that growth momentum is improving as we enter Q4, although the pace of the
rebound so far is tepid at best.
Our economists expect global GDP growth to recover to 3.3% saar in Q4 and to 3.7% by
Q2 next year (see Global Economy Monthly Review – From unavailable to
unremunerative), up from about 2.75% saar in Q3. They note, however, that while it
appears unlikely that the economy will fall back into a Great Recession-like abyss, barring
outright policy failures; there is equally little prospect of getting back to the strong rates of
growth seen in the middle of the last decade anytime soon.
Exhibit 7: Global IP growth 3mma against CSBMI 3mma
3mma of annualized monthly changes of Global IP, and 3mma of CSBMI (right axis)
Global IP, ann 3MMA of mom change forecast
15.0% long run average CSBMI, 3mma (right axis) 2.5
1.5
10.0%
0.5
5.0%
-0.5
0.0%
-1.5
-5.0%
-2.5
-10.0% -3.5
2000 2002 2004 2006 2008 2010 2012
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 12
12 October 2012
Exhibit 8: Commodities rebounded in Q3 – will growth follow? Or will
commodities retrace?
Annualized quarterly change in global GDP, and quarterly change in CCI (deflated by CPI) with forecasts
Global GDP, ann qoq Current estimate/forecast
5.0% Real CCI, qoq (rhs) CCI estimate based on forecasts 20.0%
15.0%
4.5%
Divergence in 10.0%
4.0% Q3-12
5.0%
3.5%
0.0%
3.0%
-5.0%
2.5%
-10.0%
Q3 estimate: 2¾%
2.0% -15.0%
3Q-10 1Q-11 3Q-11 1Q-12 3Q-12 1Q-13
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Super Mario and tail risks
The main catalyst for the resurgence in risk appetite over the past two months has been
the ECB’s extraordinary moves to settle European financial markets (European Economics
and Strategy: ECB – Over to you politicians). While many uncertainties remain, the largest
positive to us is the fact that Draghi has demonstrated that in addition to his obvious
economic credibility (he has a PhD in Economics from the Massachusetts Institute of
Technology – arguably the best macro school in the world …), he is also an astute
politician, well able to collaborate with other European leaders.
It is obvious to us that his experience at the Italian Treasury, where he dealt with a new
finance minister every year or so for a decade has assisted in his ability to deal with the
political classes.
Draghi’s sure-footed approach (and the fact that he has at least to date effected policy
despite the Bundesbank’s opposition) has for the moment assured markets that the
continent is in good hands and that the tail risk of a significant euro area issue in coming
months has been significantly reduced.
Our economists now expect modest growth to resume next year. Indeed, IP has
performed much better than the PMI over recent months, suggesting that a modest
rebound may already be underway – a much better outcome than most are currently
factoring.
It is notable, however, that the quid pro quo for the new ECB policy is further
fiscal tightening, which in turn is likely to keep growth subdued at best.
While the outlook is clearly on the improve, recent history suggests that we should never
underestimate the capacity of the European political classes to seize defeat from the jaws
of victory.
At the risk of stating the obvious, there are still significant structural impediments to a
lasting recovery in Europe (see Commodities Forecast Update: The Danger Zone). And
in the near term, it is likely that the markets will test Spain’s appetite for assistance at
some stage in coming months.
Commodity Forecasts: The Best of Times, The Worst of Times 13
12 October 2012
Exhibit 9: Has European IP already started to Exhibit 10: Peripheral yields have fallen – not bad as
rebound? no bonds have yet been bought …
EU manuf’g PMI new orders and Euro IP, 3mma of annualized monthly change Spanish and Italian 2-year yields
Euro IP Ex Construction MoM SA, rhs 9.0%
65.0 25% Italy 2y Spain 2y
EU Manuf PMI New Orders
Euro IP Ex Construction ann 3MMA MoM SA, rhs 8.0%
20%
60.0
7.0%
15%
55.0 6.0%
10%
5.0%
50.0 5%
4.0%
0%
45.0 3.0%
-5%
2.0%
40.0
-10% 1.0%
Divergence
35.0 -15% 0.0%
2007 2008 2009 2010 2011 2012 2005 2006 2007 2008 2009 2010 2011 2012
Source: the BLOOMBERG PROFESSIONAL™ service, Markit, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
The Fed’s rational irresponsibility versus the fiscal cliff …
Over the past year the US has once again shown itself to be the most stable part of the
developed world economy. However despite this, growth slowed to a near standstill in Q3,
with our economists expecting GDP to have grown by only 1.3% saar. Thankfully, growth
looks to have stabilized over recent months, with the recent uptick in the ISM a clear
positive. Despite this, it is hard to see growth rebounding strongly until the fiscal cliff is
dealt with in one way or another, which in effect means early next year at the earliest.
As our economists highlight, low interest rates are clearly beginning to work on the
interest-sensitive sectors – with housing and car sales the most obvious beneficiaries.
Note that in our view the housing sector remains key to the longer-term health of
the economy. While it is likely to be some time before housing construction can
make a substantial contribution to growth (the base is too low), increasing house
prices are a clear positive for the small business sector, where most owners
finance expansion through a house mortgage.
On the other hand, several sectors that punched above their weight earlier in the
expansion – exports, business investment, and federal spending – are no longer doing so.
Fiscal policy is already tightening, with real federal spending falling in six of the
past seven quarters. And while our economists expect the worst of the possible
January tightening to be averted, they still expect policy to be tightened by 1½
percentage points of GDP next year, exerting a substantial drag on the economy.
The uncertainty surrounding fiscal policy has seen business investment growth
slow over recent months, with business clearly in a wait-and-see-mode (Exhibit 11).
With politicians continuing to delay any decisions on fiscal policy (or anything else for that
matter), the Fed has once again taken upon itself to step into the fray, demonstrating that
it is really the only stimulatory game in town at present. While the impact of QE infinity on
the price of money is likely to be minimal – yields really can’t move much lower – to fully
understand Bernanke’s thinking it is useful to step back in time.
In the early 2000s, Bernanke, and his then MIT professorial colleague, Paul Krugman,
wrote extensively on the failings of Japanese monetary policy at that time.
Commodity Forecasts: The Best of Times, The Worst of Times 14
12 October 2012
They both felt that the Japanese authorities had been too timid in dealing with the
Japanese liquidity trap. While purchasing bonds was part of the recommendation put
forward by the erstwhile academics, another part of their “solution” was for monetary
policy to behave in an “irresponsible fashion.” In essence they argued that the central
bank should commit to generating inflation as a way of increasing inflation expectations
and thereby reducing real interest rates.
We think this is the main goal for Bernanke and his QE infinity experiment. While the
end result is far from clear, the chairman is making every effort to ensure that history
does not judge him for doing too little to close the US output gap.
Exhibit 9: US house prices are rebounding, although
the pace of growth may be showing early signs of
slowing Exhibit 11: But business investment has hit a wall
Case-Shiller house price monthly change, saar US core capex – core capex shipment spread
25.0% 8
20.0% 6
15.0% 4
10.0%
2
5.0%
0
0.0%
-2
-5.0%
-4
-10.0%
-6 Jul '12
-15.0%
-20.0% -8
-25.0% -10
2005 2006 2007 2008 2009 2010 2011 2012 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12
Source: the BLOOMBERG PROFESSIONAL™ service Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Exhibit 12: Will QE infinity succeed in boosting inflation expectations, and
therefore reducing the real interest rate?
Fed’s five-year forward breakeven inflation rate
3.5%
3.0%
2.5%
2.0%
1.5%
2000 2002 2004 2006 2008 2010 2012
Source: the BLOOMBERG PROFESSIONAL™ service, Federal Reserve
Commodity Forecasts: The Best of Times, The Worst of Times 15
12 October 2012
China – Weak but not weak enough
In the last week of September Credit Suisse held its annual commodities tour of China
(see China Commodities Tour: Still Weak After All These Months). Over the course of the
week we met with numerous large companies involved in the consumption and production
of commodities and commodity-intensive products. We also met with policymakers and
international institutions with an eye on China.
From a macroeconomic perspective there was a near universal feeling that the much
forecast rebound in growth has yet to materialize. While Q1 looks to have been the
weakest quarter for GDP (6.6% saar), the risk is that Q3 prints weaker than the 7.4% saar
seen in Q2. While the authorities are cautiously optimistic that growth will recover a little in
Q4, they note that final inventories of manufactured goods remain high, suggesting a
continued drag on manufacturing production into the new year.
In year-on-year terms, GDP growth for Q3 will drop out the 10% saar seen last year,
suggesting that it could be substantially weaker than the current consensus forecasts
(official release on 18 October).
Exhibit 13: China’s GDP growth to remain in the 7%-8% range: “the new normal”
Quarterly Chinese GDP in annualized quarterly change terms and yearly change terms
QoQ annualized YoY 1977 to Present Average
14%
13%
12%
11%
Assuming
10% Q3 at
7.4% saar
9%
8%
7%
6%
2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: the BLOOMBERG PROFESSIONAL™ service
While government infrastructure spending has rebounded a little, it has only been
sufficient to offset the continued weakness in investment in manufacturing capacity by the
private sector (a direct result of ongoing overcapacity) so far.
Note that after surging in Q2, in the first two months of Q3 infrastructure spending
growth slumped again despite a rush of new announcements (Exhibit 15).
Similarly, while housing sales have begun to recover (as highlighted in Chinese Real
Estate and Basic Materials Demand: The Tide Is Turning...), the government remains
highly reluctant to stoke demand in this all important sector, with most people we met
expecting restrictions to remain in place, effectively capping the rebound.
Commodity Forecasts: The Best of Times, The Worst of Times 16
12 October 2012
Exhibit 15: With the surge in infrastructure
Exhibit 14: FAI looks to have slowed a little in Q3 spending in Q2 fading away
Chinese fixed asset investment, qoq saar and yoy Chinese infrastructure fixed asset investment, qoq saar and yoy
60% QoQ SAAR YoY (right axis) 45.0% 100% QoQ SAAR YoY (right axis) 50.0%
40.0% 45.0%
80%
50%
40.0%
35.0%
60% 35.0%
40% 30.0%
30.0%
25.0% 40%
30% 25.0%
20.0% 20%
20.0%
20% 15.0%
0% 15.0%
10.0%
10.0%
10%
-20%
5.0% 5.0%
0% 0.0% -40% 0.0%
2005 2006 2007 2008 2009 2010 2011 2012 2005 2006 2007 2008 2009 2010 2011 2012
Source: NBS, Credit Suisse Source: NBS, Credit Suisse
Exhibit 16: All three main indicators of real estate
activity – starts, completions, and sales – have Exhibit 17: Though volatile, land sales also
turned upwards rebounded strongly in August
Trended qoq, seasonally adjusted, Q3 2012 based on July and August data Million square meters
Sold Completed Started 45
30%
25%
40
20%
15% 35
10%
5% 30
0%
25
-5%
-10%
20
-15%
-20% 15
2006 2007 2008 2009 2010 2011 2012 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: NBS, CEIC, Credit Suisse Source: NBS, CEIC, Credit Suisse
Consistent with the official data and the PMIs, several of the basic materials traders we
met on our trip were of the view that industrial production growth was still slowing – official
sector and other market participants alike expressed surprise at the persistence of the
slowdown, with many pointing to continued very weak exports as a key factor.
Commodity Forecasts: The Best of Times, The Worst of Times 17
12 October 2012
Exhibit 18: IP Growth remains weak
Average of NBS and Markit PMI new orders against annualized monthly trend change in Chinese IP
65.0 Average PMI New Orders Chinese IP ann mom trend sa (right axis) 30%
25%
60.0
20%
55.0
15%
10%
50.0
5%
45.0
0%
40.0 -5%
2006 2007 2008 2009 2010 2011 2012
Source: NBS, Markit, Credit Suisse
Despite the ongoing weakness, expectations for a further stimulus in the near term
remain low. The general feeling was that, faced with continued weakness in the external
sector, policymakers are broadly happy with growth in the current 7%-8% range –
suggesting that things would need to get worse before the government would unleash
another substantial stimulus.
A key factor in this calculus remains the labor market, where despite the
slowdown there is little sign of significant stress – note that the data are poor in this
area so policymakers rely heavily on anecdotal information.
When pushed, several suggested that growth would need to dip below 7% before more
substantial stimulus would be forthcoming.
Exhibit 19: Policy has already been eased, but the growth rebound in new loans
remains relatively subdued
In billions of RMB, 3m/3m change, sa
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
-20.0%
-40.0%
-60.0%
-80.0%
2005 2006 2007 2008 2009 2010 2011 2012
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
While a couple of government officials felt that another substantial stimulus would emerge
once the leadership transition had been locked down, they believed that this would not be
until after the Chinese New Year at the earliest.
Commodity Forecasts: The Best of Times, The Worst of Times 18
12 October 2012
Japan – Back in recession
Our economists believe that the Japanese economy has dipped back into recession in the
second half of 2013. IP fell by 2.3% in the first two months of Q3, with the economists
expecting GDP to contract by about 1% saar in both Q3 and Q4, before beginning a
modest recovery next year. The slowdown is being driven mainly by the continued weak
external sector, as well as the expiration of a consumption stimulus measure. While the
Bank of Japan has joined other central banks in further expanding its balance sheet, we
think that this new stimulus is mainly aimed at the strong yen, with developments in the
external sector the key to the Japanese growth outlook; growth in our view remains
essentially derivative.
Exhibit 20: Japanese GDP and IP – likely to be lower in Q3
GDP qoq saar, and IP qoq, Q3 2012 estimated based on two months of data
15.0% GDP saar qoq IP qoq
10.0%
5.0%
0.0%
-5.0%
IP continued to
-10.0%
weaken in the first
2 months of Q3-12
-15.0%
-20.0%
2009 2010 2011 2012
Source: the BLOOMBERG PROFESSIONAL™ service
Commodity Forecasts: The Best of Times, The Worst of Times 19
12 October 2012
Petroleum: Riding the (Wide) Range
$110/b Brent +/- $10
Commodities Research
Jan Stuart Intro: The oil market continues to be dominated by the tug-of-war between macro
jan.stuart@credit-suisse.com concerns (euro issues and China in particular) and geopolitical risks (concerns about
+1 212 325 1013
political instability in the Middle East). Looking through the substantial volatility, however,
Stefan Revielle oil prices have now been essentially range bound for the past 20 months, with quarterly
stefan.revielle@credit-suisse.com average prices falling between $105 and $120 for seven straight quarters.
+1 212 538 6802
As the large swings have unfolded, our tendency has been to overanalyze each move and
Equity Research
Edward Westlake
to extrapolate the latest swing in our forecasts. Evidently this has been a mistake. The
edward.westlake@credit-suisse.com benefit of hindsight reveals that, contrary to much of the analysis on the Street,
+1 212 325 6751 “fundamentals” have remained broadly stable for the past 18 months. In part that is
David Hewitt
because, despite the innate skepticism in the market, the “central bank of oil” (Saudi
david.hewitt.2@credit-suisse.com Arabia) has acted to ensure that the market has in the main remained relatively tight but
+65 6212 3064 ultimately adequately supplied.
For our new forecasts we assume that this broad dynamic will persist. We are mostly
marking-to-market the balance of the year, while we keep quarterly averages for 2013-
2014 in that range near $110/b Brent as well.
While we expect demand to continue to recover over the next year, in line with our
broader economic forecasts, we expect the upswing to be relatively modest.
Under this scenario, it is likely that the Kingdom of Saudi Arabia will be able to continue
to massage supply to maintain the broad range.
If prices dip below the range, Saudi Arabia will likely reduce production (as it did
in late 2010).
If demand recovers more quickly than we anticipate, the Saudis should be able to
increase production to offset the increased demand. In addition, the market is
now well aware of the risk of a further SPR release.
Exhibit 21: Revealed preference – Saudi Arabia likes Brent around $110
($/b)
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 20
12 October 2012
Of course, a multitude of risks, which are generally fairly evenly arrayed to either side,
suggest that oil prices could diverge meaningfully from this base case – possibly both the
upside and downside during the forecast horizon. And we have again included two
scenarios each to the bullish and bearish side.
In our base case we project a relatively uneventful end of 2012 and further growth in the
“call on OPEC and inventories” next year (see Exhibit 25).
In 2013, slightly more oil demand growth globally (+1.6%, yoy), mostly derives
from zero demand declines in the OECD economies. We factor in a relatively
muted expansion of oil use in Emerging Market economies of some +3.4%.
From the supply side, only about two-thirds of this expansion can, we think, be
met from non-OPEC producers. The US should continue to deliver near-record
per annum growth, but the best we can project for non-OPEC outside North
America is net no decline.
So all else being equal, s/d fundamentals should tighten modestly next year and prices
should rise marginally for the tenth time in the 11 years since 2002. From then on,
however, we now think that a longer run, relatively modest price decline will set in.
Longer term, the more important new feature in our price-deck is the introduction of
a downturn in oil price trends beginning in 2014. Timing is necessarily quite tentative.
We note the fairly recent emergence of four broad themes that should turn the uptrend of
oil prices into a long cyclical downturn. Our supply/demand model now features modestly
growing spare capacity beginning in 2014, see Exhibit 26. It includes the following:
“Optimistic” volume growth for “unconventional” oil production – principally in the US.
Optimistic projections of deep water contributions.
Accelerating demand erosion via substitution (by natural gas and coal and renewables).
Aggressive estimates of efficiency gains further cut oil use (e.g., China and US car
fleets).
Until now we were confident of projections of looming scarcity of oil. The biggest
contributor to our new view has been high confidence of large-scale production
growth in the US. We recently introduced as the basis for this view a very granular US oil
production model: US Oil Production Outlook.
Base case and scenarios
“…we feel that the preconditions for a stronger 2013 are progressively falling into place.”
Even over the course of this year, oil market supply and demand fundamentals have
improved. The marked surplus of the early part of the year appears to have shifted into a
deficit in July/August, Exhibit 22. This turn in fundamentals is clearer still in a momentum
chart, see Exhibit 23, while supply grew fast earlier this year, it began to decelerate in
March and fell steeply in July, thanks in no small part to the full impact of import sanctions
on Iran’s crude oil exports, as well as seasonal non-OPEC declines. Demand growth, in
contrast, re-emerged in February and accelerated by May to a quite respectable pace ~2%
annualized, see Exhibit 23. That pace may have waned a little in July/August, but did not
collapse, despite the fears that depressed market sentiment in May/June.
Not coincidentally, oil prices have recovered 25% since their 21 June trough and have
traded much of Q3 in the upper half of our forecast range of $100/b Brent +/- $10.
Commodity Forecasts: The Best of Times, The Worst of Times 21
12 October 2012
Exhibit 22: In Q3 a supply deficit opened up Exhibit 23: Demand growth momentum is still iffy
Million barrels per day (Mb/d), sa Annualized mom trend of sa monthly data
92 Global Demand Global Supply 8.0% Global Demand, ann trend mom Global Supply, ann trend mom
6.0%
91
4.0%
90
2.0%
89
0.0%
88
-2.0%
87
-4.0%
86 -6.0%
Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12
Source: Credit Suisse Source: Credit Suisse
Looking out into 2013, we see the pieces of a moderately firmer year in oil s/d as well.
Once again our view contrasts with that of the consensus, as exemplified by the oil
balances of the International Energy Agency in Paris, see Exhibit 24 and Exhibit 25.
For 2013, we are forecasting a modest acceleration of oil demand growth driven by the
following:
A halt in the decline of OECD oil consumption – while the IEA sees a contraction.
Oil consumption in North America, we believe, will bounce as a US recovery
gains more traction. That rebound more than compensates for a small net-decline
in Europe.
Oil use in Japan should fall by about 3%, yoy, or a little more than 100,000
barrels per day (kb/d), as both natural gas and coal gain more share of the
power-generation market. We also assume that by year’s end ~25% of Japan’s
52 idle nuclear units are back on.
Oil demand in Emerging Markets should grow a little faster next year, as China’s oil use
recovers moderately (from +3% in 2012 to +5%), but stays below trend.
Exhibit 24: Our 2012 oil demand growth vs. IEA Exhibit 25: … and how we differ on the supply side
Mb/d Mb/d
1.7 Credit Suisse Consensus (IEA) 1.0 Credit Suisse Consensus (IEA)
0.8
1.2
0.6
0.7 0.4
0.2
0.2
0.0
(0.3) (0.2)
(0.4)
(0.8) Non-OPEC Call on OPEC Crude and Stocks
2013 Global OECD Non-OECD
Source: IEA, Credit Suisse Source: IEA, Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 22
12 October 2012
On the supply side we’re projecting more growth coming from non-OPEC than the IEA,
which is unusual. The big difference is our expectation of much faster expanding oil
production across the US (see below).
In all, the “call on OPEC plus inventories” rises in 2013 by about 600 kb/d, which is a
roughly similar increment to that of this year. Of course, more important than the arithmetic
is how Saudi oil policy responds. In our view, Saudi Arabia will most likely have to cede
some of the gains it made this year (not all) to accommodate increases from Iraq and Iran,
as smaller gains and losses among other OPEC members roughly balance out.
Exhibit 26: Our s/d balance includes modestly higher spare capacity in 2014-2015
Mb/d
Demand 2011 2012E 2013E 2014E 2015E
Global 89.6 90.7 92.2 93.2 94.2
YoY Grow th, % 1.2% 1.2% 1.6% 1.1% 1.1%
OECD 46.6 46.4 46.4 46.0 45.5
YoY Grow th, % -0.8% -0.4% 0.0% -0.8% -1.1%
Non-OECD 43.0 44.3 45.8 47.2 48.7
YoY Grow th, % 3.3% 2.9% 3.4% 3.0% 3.2%
Supply 2011 2012E 2013E 2014E 2015E
Global 88.6 90.6 92.2 93.3 94.3
YoY Grow th, net mb/d 0.8 2.0 1.6 1.1 1.0
Non OPEC 50.5 50.9 51.8 53.1 54.7
YoY Grow th, net mb/d 0.1 0.4 0.9 1.4 1.5
North America 15.5 16.6 17.4 18.3 19.2
YoY Grow th, net mb/d 0.5 1.1 0.8 0.9 0.9
Non OPEC less NA 35.0 34.3 34.4 34.9 35.5
YoY Grow th, net mb/d -0.5 -0.7 0.0 0.5 0.6
Processing gain 2.4 2.5 2.5 2.6 2.6
OPEC 35.7 37.2 37.9 37.5 37.0
YoY Grow th, net mb/d 0.6 1.6 0.7 -0.4 -0.6
Opec Crude Oil 30.3 31.6 32.4 31.9 31.3
YoY Grow th, net mb/d 0.3 1.4 0.7 -0.4 -0.6
Balance, stocks
Implied inventory change -1.0 -0.1 0.0 0.0 0.0
Spare Capacity
(All Saudi Arabia) 2.4 1.9 1.9 2.5 2.9
% of total supply 2.7% 2.1% 2.1% 2.7% 3.1%
Source: IEA, JODI, Credit Suisse
Medium-term outlook loses a structural bias toward higher prices
For much of the last ten years it has seemed obvious to us that the global spare capacity
of oil supply would continue to shrink. Indeed, scarcity pricing, we figured, would remain
part of the oil price dynamic for a few more years at least; no longer.
In this summary of our quite detailed supply demand model, it is clear that global spare
capacity begins to grow again after next year, see Exhibit 26.
We make some big assumptions here, but broadly speaking the fact that a very large and
growing piece of oil supply, namely that in the US and Canada, can grow materially faster
or slower in response to price, to us means that effectively oil prices are capped or will
soon be capped, until something significantly changes to capacity elsewhere and/or oil
demand growth re-accelerates much faster than we think.
Price paths
In our view, oil prices will continue to move in a range rather than trending up or down
through 2015. Within that range we project a few distinct patterns:
Near term, we see downside risk as, broadly speaking, commodity prices (oil included)
appear to have overshot their mark. Through end year, physical crude oil markets
should be vulnerable to a late, but otherwise normal seasonal loosening of s/d balances.
Commodity Forecasts: The Best of Times, The Worst of Times 23
12 October 2012
We pegged the Q4 Brent average at $105/b, down 5% qoq. This year’s average price of
$110.50/b would be less than 1% higher than that of 2011.
Next year, as balances generally tighten, benchmark crude oil prices should move
into the upper half of the range. In our base case, more or less normal seasonal
quarterly patterns yield a 2013 average of $115/b, up nearly 5% on this year.
Starting in 2014, we foresee rising spare capacity as demand growth underperforms
the trends seen last decade, while non-OPEC production ramps higher. Consequently,
Brent prices begin to slip structurally, for the first time since 2002. We forecast Brent
averages of $110/b in 2014, and $100/b in 2015.
We’re leaving unchanged our long-range target of $90/b (real 2011 dollars). We need
greater confidence in the rising tide of non-OPEC oil production being sustainable at
lower oil prices before moving this target – which for now also straddles a rough median
of Mideast producer government budget break-even prices.
Exhibit 27: CSBMI vs. global PMI Exhibit 28: New base case vs. scenarios
Index levels $/b
2 CSBMI peaked Jan12 $160
PMI peaked Apr12 (supply shock)
62
1 $140
57
(a)
0 $120
52
(Base)
$100
-1 47
$80 (b)
42
-2
CSBMI troughed Jun12 $60
PMI troughed Aug12? 37
-3 (credit crunch)
CSBMI, 3m ma $40
32
Global PMI Mfg. New Orders, rhs
-4 $20
27
-5 22 $0
01/00 01/01 01/02 01/03 01/04 01/05 01/06 01/07 01/08 01/09 01/10 01/11 01/12 12/1/2006 12/1/2008 12/1/2010 12/1/2012 12/1/2014
Source: Credit Suisse Source: Credit Suisse
Brent-WTI differentials
One more market surprise this year has been the generally much wider-than-anticipated
discount of WTI (the land-locked US crude oil benchmark) to Brent (which is normally
more reflective of internationally traded oil and global s/d balances).
We expect to see this differential narrow very significantly: to $7 and lower next year.
First, this quarter should be less extreme. As most of the weakness has been
flagged and priced already, Q4 averages should shrink to $13, from $17/b in Q3.
The resulting annual average of ~$15/b would be more than 20% narrower than
that of 2011.
Next year, the completion of significant pipeline infrastructure between Cushing,
West Texas, and the Gulf Coast refiners should reduce WTI/LLS differentials to
approximately the pipeline tariff, or ~ $5/b from Q2 onward, or earlier.
We’re assuming that imports will still be required more often than not and that
therefore LLS averages Brent parity through the balance of 2013.
By 2014 and beyond, however, US appetite for imported low-sulfur, light
feedstock should be zero, and its domestic price will link to global markets via
other benchmarks.
Commodity Forecasts: The Best of Times, The Worst of Times 24
12 October 2012
Scenarios
We have written previously this year about large tail risks, uncertainty, and the fragile
state of both the global economy and political stability across a long list of significant oil-
producing countries. We obviously cannot stop doing this, but we will be brief.
Exhibit 29: Brent and WTI forecast decks, our base case and two scenarios to either side
Units as indicated below
'Proposed new CS Base Case --Range of $100-120. No high conviction fundam entals direction dow n or up from that. Avg annual price rises one m ore year, 2013 and com pletes 11-year uptrend; then sets in decline
2012 2013 2014 2015 Long term
Oil Actuals & Forecasts ($US/b) 2010* 2011*
Q1* Q2* Q3* Q4 (f) Yr Avg (f) Q1 (f) Q2 (f) Q3 (f) Q4 (f) Yr Avg (f) Q1 (f) Q2 (f) Q3 (f) Q4 (f) Yr Avg (f) Yr Avg (f) (real)
Brent 83.13 109.97 118.28 108.95 109.62 105.00 110.46 110.00 115.00 115.00 120.00 115.00 115.00 110.00 110.00 105.00 110.00 100.00 90.0
previous 95.00 95.00 104.35 100.00 100.00 105.00 105.00 102.50 110.00 115.00 115.00 120.00 115.00 100.00 90.00
Net Change 14.60 10.00 6 .10 10.00 15.00 10.00 15.00 12 .5 0 5.00 -5.00 -5.00 -15.00 - 5 .0 0 0 .0 0 0.00
% Change 15% 1
1% 6% 10% 15% 10% 14% 12 % 5% -4% -4% -13% -4% 0% 0%
Consensus* 108.30 111.3 109.60 108.00 110.40 109.30 110.20 113.2 111.00
Net Difference -3.30 - 0 .8 0 0.40 7.00 4.60 10.70 4 .8 - 3 .2 - 11.0
% Difference -3% - 1% 0% 6% 4% 10% 4% -3% - 10 %
Fw d Curve* 112.63 112.37 105.12 109.67 108.10 106.52 107.35 99.74 103.61 102.24 100.90 101.62 96.98
Net Difference -7.60 - 1.9 0 4.90 5.30 6.90 13.50 7 .6 0 15.30 6.40 7.80 4.10 8 .4 0 3 .0 0
% Difference -7% -2% 5% 5% 6% 13% 7% 15% 6% 8% 4% 8% 3%
WTI 79.61 90.70 102.91 93.43 92.51 89.00 94.46 97.00 106.00 108.00 113.00 106.00 107.00 102.00 102.00 97.00 102.00 93.50 83.5
previous 84.00 82.00 90.58 91.00 95.00 101.00 101.00 97.00 106.00 111.00 111.00 1 6.00
1 111.00 94.00 84.0
Net Change 8.50 7.00 3 .9 0 6.00 1 .00
1 7.00 12.00 9 .0 0 1.00 -9.00 -9.00 -19.00 - 9 .0 0 - 0 .5 0 -0.50
% Change 10% 9% 4% 7% 12% 7% 12% 9% 1 % -8% -8% -16% -8% - 1% -1%
Consensus* 93.80 95.66 97.70 97.80 101.00 100.80 101.50 102.80 104.50
Net Difference 1
1 .20 - 1.2 0 -0.70 8.20 7.00 12.20 4 .5 0 - 0 .8 0 - 11.0 0
% Difference 12% - 1% -1% 8% 7% 12% 4% - 1% - 11%
Fw d Curve* 95.33 96.04 94.72 96.83 96.46 95.58 95.90 99.74 93.73 92.80 97.86 96.03 97.19
Net Difference -6.30 - 1.6 0 2.30 9.20 1
1 .50 17.40 10 .10 7.30 8.30 9.20 -0.90 6 .0 0 - 3 .7 0
% Difference -7% -2% 2% 10% 12% 18% 11% 7% 9% 10% -1% 6% -4%
WTI - Brent Spread -3.52 -19.27 -15.37 -15.51 -17.11 -16.00 -16.00 -13.00 -9.00 -7.00 -7.00 -9.00 -8.00 -8.00 -8.00 -8.00 -8.00 -6.50 -6.50
Disaster scenario. Big assum ption: Policy error and/or other catalysts m elt dow n confidence. A true credit crunch ratchets activity dow n fast. Dem and plum m ets. Also, next recovery takes longer to achieve.
2012 2013 2014 2015 Long term
Oil Actuals & Crisis bear-case ($US/b) 2010* 2011*
Q1* Q2* Q3* Q4 (f) Yr Avg (f) Q1 (f) Q2 (f) Q3 (f) Q4 (f) Yr Avg (f) Q1 (f) Q2 (f) Q3 (f) Q4 (f) Yr Avg (f) Yr Avg (f) (real)
Brent 83.13 109.97 118.28 108.95 109.62 55.00 98.00 55.00 70.00 70.00 80.00 69.00 80.00 80.00 90.00 90.00 85.00 90.00 90.00
WTI 79.61 90.70 102.91 93.43 92.51 45.00 83.00 50.00 61.00 63.00 73.00 62.00 72.00 72.00 82.00 82.00 77.00 83.50 83.50
WTI - Brent Spread -3.52 -19.27 -15.37 -15.51 -17.11 -10.00 -15.00 -5.00 -9.00 -7.00 -7.00 -7.00 -8.00 -8.00 -8.00 -8.00 -8.00 -6.50 -6.50
Econom ic crisis is not averted entirely. Dem and grow th erodes further. Supply side grow th, m eanw hile, accelerates. Much like w ith US natgas, m arket underestim ates upstream efficiency gains and potential.
2012 2013 2014 2015 Long term
Oil Actuals & Forecasts ($US/b) 2010* 2011*
Q1* Q2* Q3* Q4 (f) Yr Avg (f) Q1 (f) Q2 (f) Q3 (f) Q4 (f) Yr Avg (f) Q1 (f) Q2 (f) Q3 (f) Q4 (f) Yr Avg (f) Yr Avg (f) (real)
Brent 83.13 109.97 118.28 108.95 109.62 75.00 103.00 70.00 75.00 85.00 90.00 80.00 85.00 90.00 90.00 80.00 86.00 80.00 75.00
Scarcity is not dead. Global grow th resum es a little quicker to a pace nearer that of 2002-2008. And on the supply side declines of the base keep upw ard pressure on the right side of the cost-curve.
2012 2013 2014 2015 Long term
Oil Actuals & Forecasts ($US/b) 2010* 2011*
Q1* Q2* Q3* Q4 (f) Yr Avg (f) Q1 (f) Q2 (f) Q3 (f) Q4 (f) Yr Avg (f) Q1 (f) Q2 (f) Q3 (f) Q4 (f) Yr Avg (f) Yr Avg (f) (real)
Brent 83.13 109.97 118.28 108.95 109.62 115.00 113.00 115.00 120.00 120.00 120.00 119.00 125.00 125.00 125.00 125.00 125.00 140.00 110.00
Mideast supply shock. Markets price for accute scarcity, as 2m b/d is offline for 2 m onths. SPR et al released m oderates prices. Dem and plunge does dam age too. Prices recover, only for intense supply respond to underm ine
things along the lines of our base case.
2012 2013 2014 2015 Long term
Oil Actuals & Forecasts ($US/b) 2010* 2011*
Q1* Q2* Q3* Q4 (f) Yr Avg (f) Q1 (f) Q2 (f) Q3 (f) Q4 (f) Yr Avg (f) Q1 (f) Q2 (f) Q3 (f) Q4 (f) Yr Avg (f) Yr Avg (f) (real)
Brent 83.13 109.97 118.28 108.95 109.62 150.00 122.00 130.00 100.00 90.00 90.00 103.00 110.00 125.00 125.00 120.00 120.00 100.00 90.00
Source: Credit Suisse
The key characteristics in the headers above the alternative paths speak for themselves.
On the bullish cases we show the difference between a relatively benign “return to strong
growth” case, involving ongoing price appreciation flowing from mild scarcity, and a
“supply shock” case with associated capacity loss. The more “benign” case does involve
rising long-run prices. On the bearish side we have a milder scenario, involving a “benign,
growth recession” and associated cost deflation, which would also lower the long-run price.
The extreme case, of course, is disaster pricing around a global depression/financial
meltdown.
Fundamentals – Demand growth remains unconvincing
The good news from the data on oil demand this year is that growth remains on track for
something north of 1% yoy (i.e., more than 1 Mb/d). The bad news is that not much of that
2012 expansion is structural or otherwise something on which to pin a bullish trend. As
noted earlier in this report, greater global economic growth can accelerate rising demand-
trends for commodities, but without that we cannot turn very bullish, even on oil.
Commodity Forecasts: The Best of Times, The Worst of Times 25
12 October 2012
Exhibit 30: Oil demand yoy deltas: data for 2012 through July, forecast for 2013
kb/d
500
400
2012 ytd 2013E
300
200
100
0
-100
-200
-300
-400
Argentina
USA
Italy
India
Iran
Mexico
Australia
Canada
Germany
Other Europe
Japan
China
Brazil
Saudi Arabia
South Africa
UK
Other Asia
Other Africa
Venezuela
Chile
Egypt
Other ME
Thailand
South Korea
France
Source: Credit Suisse Securities Research
There are several significant developments visible in the demand data that have come in
over the summer – as illustrated in the eight charts of seasonally adjusted data that break
down the relatively pronounced upturn in level oil demand from its first quarter trough.
Trough to peak, seasonally adjusted oil demand grew across both mature and emerging
economies, but given the depth of the trough this expansion was not very large
(~1Mb/d), or consistent; and the July/August data suggest a leveling off.
Somewhat ironically, the mature economies of the OECD contributed significantly to this
year’s increase – though only after contributing the most to the earlier downturn.
Within that OECD category, Japan’s gain trumps all else, but is a one-year only
step.
US and European contributions may prove rather short-lived as well, if the
July/August data portend a new trend. That, or a pending rebound in IP/GDP
growth, flagged by the lazy turn in the CSBMI, brings about a sustained rise, see
Exhibit 27.
Across Emerging Markets oil use is growing slower than trend, especially in China. And
we see no reason to adjust our more cautious take on future growth, which we
introduced in early July Commodities Forecast Update: The Danger Zone.
Weakness in China has everything to do with sideways-trending middle distillate
demand from 2H 2011 through much of the first half of this year. Only in the
August data is consumption of diesel, which accounts for more than 40% of
China’s oil demand, beginning to grow at more than 5% yoy. That said, gasoline
and jet fuel use is expanding at near 10% trend growth rates this year.
Oil use has risen about normally in the Mideast, Latin America and to a lesser
extent Africa. Even though, evidently, economic growth plays a role in these
economies demand growth as well. Another reason includes the lack of
substitution with natural gas in the power-generation, desalination and heavy
industrial sectors. Finally, conflicts and/or government instability also promotes
the use of diesel for power generation.
Commodity Forecasts: The Best of Times, The Worst of Times 26
12 October 2012
Exhibit 31: Global demand (Mb/d) Exhibit 32: EM demand (Mb/d)
92 monthly SA SA 3mth MA
45 monthly SA 3mth Avg SA
91 44
90 43
89 42
88 41
Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12
Exhibit 33: … OECD Exhibit 34: … China
48 monthly SA 3mth Avg SA 10.5 monthly SA 3mth Avg SA
47
10.0
46
9.5
45
44
Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12
9.0
Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12
Exhibit 35: … US Exhibit 36: … EM Asia (ex. China)
19.5 monthly SA 3mth Avg SA 12.0 monthly SA 3mth Avg SA
11.5
19.0
11.0
18.5
10.5
18.0 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12
Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12
Exhibit 37: … Europe Exhibit 38: … Middle East
16.0 monthly SA 3mth Avg SA monthly SA 3mth Avg SA
8.0
15.5
7.5
15.0
7.0
14.5 6.5
Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12
Source: IEA, Credit Suisse Commodities Research Source: IEA, Credit Suisse Commodities Research
Commodity Forecasts: The Best of Times, The Worst of Times 27
12 October 2012
Country-specific contributions/losses to oil demand in 2012 and 2013
Oil demand growth this year remains heavily tilted toward the eastern hemisphere. Oil
demand around the Atlantic Basin began the year in full retreat – aided by the dampening
effect of a much milder-than-normal winter. That said, this year is an odd one.
By country yoy deltas show that Japan is the biggest gainer, adding nearly twice as much
as China to average oil demand in the year to date, with complete data through July, see
Exhibit 30. Oil use in the US has fallen the most, while unsurprisingly the rest of the right-
hand side of that chart is populated by European economies.
Note as well that Saudi Arabia’s oil consumption is on track for another 5%, or ~150 kb/d,
gain, despite having significantly more domestic natural gas available. The smaller GCC
economies add some 100 b/d again as well.
In the chart and the table below (see Exhibit 39) we detail forecast tracks by country.
Among the bigger year-to-year shifts we see the following:
Oil consumption in Japan should moderate next year. We forecast a loss of nearly a
third of this year’s 400 kb/d power-generation-driven increment. Though we assume that
very few nuclear plants restart (about 25% in operation at end 2013), both LNG and
coal-fired power generation should capture share from more expensive oil next year.
More growth in China and the export economies surrounding it.
A modest bounce in US oil consumption.
Exhibit 39: Oil demand by economy and region
(% yoy Growth)
1,0 0 0 b/ d Base by quarter (2012) by year (2010-14) Trend
2 0 11 1Q 12 2 Q 12 3 Q 12 E 4 Q 12 E 2 0 10 2 0 11 2 0 12 E 2 0 13 E 2 0 14 E 2 0 0 7 - 11
G lo ba l 8 9 ,6 0 0 0 .4 % 1.6 % 1.0 % 1.8 % 3 .7 % 1.2 % 1.2 % 1.6 % 1.1% 1.0 %
OECD 46,560 -1.7% 0.5% -0.7% 0.3% 1.2% -0.8% -0.4% 0.0% -0.8% -1.5%
Emerging M arkets 43,040 2.8% 2.8% 2.8% 3.4% 6.7% 3.3% 2.9% 3.4% 3.0% 4.2%
O E C D A m e ric a s 2 4 ,0 7 0 - 3 .2 % - 0 .2 % - 0 .7 % 0 .7 % 1.9 % - 0 .2 % - 0 .8 % 0 .8 % - 0 .4 % - 1.3 %
Canada 2,290 -4.7% 2.5% 0.4% 1%
.1 3.9% 2.5% -0.2% 0.7% 0.7% 0.6%
M exico 2,130 0.4% 1.0% 0.8% 1.3% 0.5% 2.5% 0.9% 1.3% 0.2% 0.1%
USA 9,01
1 0 -3.5% -0.7% .1
-1 % 0.7% 2.2% -0.9% .1
-1 % 0.7% -0.6% -1.6%
S o ut h A m e ric a 6 ,2 8 0 3 .2 % 3 .3 % 1.5 % 1.6 % 6 .4 % 2 .5 % 2 .4 % 1.9 % 1.6 % 3 .6 %
B razil 3,020 4.8% 5.0% 1.8% 1.8% 9.7% 3.8% 3.3% 2.3% 2.2% 5.7%
Venezuela 710 5.1% 5.0% 2.1% 2.1% -2.0% 2.6% 3.4% 2.1% 2.0% 0.7%
A rgentina 630 2.8% 2.2% 2.6% 1.5% 8.1% -9.2% 2.2% 2.5% -0.4% 1.3%
E uro pe 15 ,3 3 0 - 3 .0 % - 2 .1% - 2 .1% - 0 .7 % - 0 .1% - 2 .0 % - 1.9 % - 0 .5 % - 1.8 % - 1.7 %
France 1,790 .1
-1 % -2.5% 2.0% 0.8% -2.0% -2.2% -0.2% 0.0% -1.6% -2.1%
Germany 2,400 -3.2% 1.0% 0.4% 3.0% 0.7% -2.8% 0.3% 2.1% -0.5% -1.8%
Italy 1,450 -10.5% -9.8% -5.9% -3.5% 0.0% -5.9% -7.4% -0.9% -4.3% -3.9%
UK ,61
1 0 -5.5% -4.5% -3.4% -3.7% -0.7% -1.4% -4.3% -1.3% -2.5% -2.3%
Oth Euro pe 8,080 -1.4% -1.0% -2.7% .1
-1 % 0.2% -1 %
.1 -1.6% .1
-1 % -1.7% -1.0%
F SU 4 ,3 2 0 2 .9 % 2 .6 % 2 .7 % 2 .2 % 3 .1% 4 .1% 2 .6 % 2 .2 % 1.5 % 2 .1%
M ide a s t 7 ,2 10 2 .3 % 5 .7 % 2 .0 % 4 .3 % 5 .8 % 2 .3 % 3 .6 % 3 .9 % 2 .7 % 3 .8 %
Saudi A rabia 2,900 3.4% 5.9% 3.2% 7.5% 7.8% 5.0% 5.0% 5.7% 3.4% 6.5%
Iran 1,750 -0.2% 3.7% -3.0% -1.0% -1.4% -2.4% -0.1% 0.0% 1.0% -0.6%
A f ric a 3 ,4 3 0 2 .9 % 2 .0 % 3 .1% 3 .0 % 6 .6 % - 1.7 % 2 .7 % 2 .6 % 2 .1% 3 .7 %
A s ia - P a c 2 8 ,9 6 0 3 .4 % 3 .4 % 3 .2 % 3 .1% 6 .1% 3 .4 % 3 .3 % 2 .6 % 3 .1% 3 .1%
China 9,730 2.8% 1.2% 3.6% 4.6% 1 %
2.1 5.8% 3.0% 4.9% 5.4% 6.6%
India 3,470 5.3% 4.7% 5.6% 3.7% 1.2% 4.5% 4.8% 3.7% 3.8% 4.4%
Japan 4,460 9.4% 10.0% 2.5% 0.1% 0.7% 0.6% 5.3% -2.6% -0.8% -2.9%
So uth Ko rea 2,230 -2.2% 7.2% 2.3% 2.0% 3.7% -1.7% 2.2% -0.3% 1.2% 0.5%
Source: Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 28
12 October 2012
Supply: Non-OPEC ex-US disappoints still more
Global oil supplies grew meaningfully late last year and through the first quarter of 2012,
but have since then roughly tracked sideways, see Exhibit 22.
Exhibit 40: Monthly crude oil production from non- Exhibit 41: … though flows from North America are
OPEC showed promise after the GFC growing fast, declines elsewhere undermine total
Historical data of all crude oil (excludes ngls and biofuels) in kb/d Yoy delta for non-OPEC oil production by quarter in kb/d
43
1800 1800
Non-OPEC ex. North America North America Non-Opec
42 1400 1400
41 1000 1000
40 600 600
39 200 200
38 -200 -200
37 -600 -600
36 -1000 -1000
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12
Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11
Source: Credit Suisse Source: Credit Suisse
To date, our rather skeptical take on the large additions forecast by others has mostly
found support, see Exhibit 40.
Exhibit 42: Oil supply by region
kb/d
Base Y-o-Y Grow th by quarter ('000 b/d) Y-o-Y Grow th Q-o-Q Grow th
2011 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12E 4Q12E 2010 2011 2012E 2013E 2Q12
Global Oil 88,610 1,710 30 170 1,140 1,950 2,960 1,950 1,070 2,480 760 1,980 1,600 -40
Opec all oil 35,680 1,040 240 110 1,080 1,380 2,230 1,590 1,030 1,220 615 1,555 675 630
Non Opec 50,510 580 -310 -30 -30 520 680 310 -10 1,160 50 375 875 -720
North Am erica 16,090 470 380 510 880 1,240 1,280 1,180 730 665 560 1,105 845 -50
US 9,040 240 430 300 650 980 830 1,000 590 505 405 850 825 0
Canada 3,510 220 -60 220 220 310 460 200 180 155 150 285 160 -80
Mexico 2,930 -20 -10 -30 -10 -50 -30 -30 -60 -20 -20 -45 -155 10
South Am erica 8,080 180 -160 -150 20 -80 -140 -150 -310 220 -30 -170 30 -210
Venezuela 2,740 -40 -140 -160 -100 -150 -130 -110 -140 -15 -110 -130 -140 -30
Brazil 2,570 100 -70 -80 -30 60 -50 -30 -190 120 -20 -55 80 -170
Argentina 690 -20 -100 -40 20 -30 30 -30 20 -15 -35 -5 20 -20
Europe 4,670 -430 -370 -190 -370 -180 -100 -340 -300 -310 -335 -230 -185 -190
Norw ay 2,020 -210 -150 60 -120 -20 20 -190 -130 -220 -105 -80 -35 -110
United Kingdom 1,090 -230 -220 -270 -230 -160 -140 -130 -150 -105 -240 -145 -125 -90
FSU 13,900 230 100 60 20 110 60 130 190 260 100 125 200 -90
Russia 10,670 170 150 190 140 180 110 100 90 245 160 120 -35 -30
Kazakhstan 1,640 50 40 -30 -20 -40 -20 20 -30 60 10 -15 245 -50
Azerbaijan 920 -20 -110 -140 -130 -70 -70 -30 110 -20 -100 -15 -5 -30
Middle East 28,040 1,880 2,190 2,080 2,330 1,100 550 -40 210 1,095 2,120 450 600 500
Saudi Arabia 11,080 860 970 600 1,210 770 730 440 110 660 910 505 -250 560
Iran 4,280 0 -70 80 130 -160 -770 -1,200 -740 15 35 -720 320 -520
UAE 3,250 460 480 370 170 70 10 190 200 95 370 120 130 70
Kuw ait 2,870 150 250 430 530 500 420 220 90 45 340 305 25 30
Iraq 2,820 240 430 420 290 50 230 480 530 20 345 325 310 300
Africa 8,970 -780 -2,000 -1,840 -1,450 -170 1,340 1,180 630 185 -1,520 745 205 70
Nigeria 2,370 -10 -70 -60 -270 -210 -40 30 90 240 -105 -35 70 50
Algeria 1,750 110 80 0 -90 -70 10 -120 -80 -95 25 -65 -115 10
Libya 480 -670 -1,670 -1,700 -1,090 230 1,470 1,520 940 60 -1,285 1,045 225 190
Angola 1,690 -220 -240 -90 50 90 140 60 -10 -35 -125 70 15 -40
Asia 8,870 150 -120 -310 -280 -70 -30 0 -80 365 -140 -45 -90 -70
Indonesia 930 -50 -70 -40 -20 -30 -50 -90 -80 -5 -40 -65 -10 -30
China 4,100 200 100 -90 -210 -70 -100 50 100 285 -5 -5 35 -50
India 890 50 50 0 -30 0 -10 0 -20 80 15 -10 -10 10
Source: Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 29
12 October 2012
The fact remains that the industry is singularly unimpressive at adding meaningful growth
from Europe, Latin America, Africa, Asia, or the FSU, see Exhibit 41. In the above table,
Exhibit 42, we detail data, by significant oil producer, on a quarterly basis. Through August,
non-OPEC oil production, from outside North America, is down nearly 700 kb/d on
average daily levels achieved through August last year.
Though seasonal patterns and modest year-end capacity additions should add to flows,
going into 2013 we expect no large upside surprise in the shorter term, see Exhibit 52.
Further out into 2013 and 2014, we again give the benefit of the doubt to the case for
industry and new project-driven crude oil production growth. Standing out in this regard
are Kashagan in the Caspian, the string of new sub-salt additions waiting in the wings
offshore Brazil, and a slew of deep water projects elsewhere around the world. In addition,
we expect to see Russia continue to add incrementally every year, while producers
including Oman, Colombia, and others should also, at the very least, be able to sustain
current flow levels. However, the risk is clearly to the downside, as base decline rates are
accelerating, while options to redevelop aging fields also take time and effort (read money)
to make much of a difference.
US supply growth potential is very large
The big exception to the latest down-cycle in non-OPEC performance is, for now, the US
upstream. Regulatory and fiscal stability here have combined with super-normal high oil
prices and a collapse in the value of natural gas to spur an enormous upturn in
investments across frontier oil plays across the US. Even the Gulf of Mexico is again
benefiting and ramping up activity But the hottest are the “oily” unconventional and outright
shale plays onshore. The Eagle Ford, Bakken, and Permian and to a lesser degree the
Nobrara, Mississippian, and Granite Wash are all basins to watch.
Based on a conservative set of assumptions, including continued high oil prices, 27%
growth in the oil well count by 2016, and a 25% improvement in the 30-day initial
production (IP) rate per well, our new and extremely granular well-by-well model of US oil
production says crude oil and condensate production in the US could reach ~10 Mb/d by
2020, compared with 5.7 Mb/d in 2011.
At current costs, shale project economics suggest a breakeven price around US $60-75/b.
However, over the near term, in order to sustain ~27% growth in the oil well count, and
reach ~10 Mb/d of production, the US oil industry needs ~$95/b Brent, or ~$88 WTI, for
self-generated cash flow to fund the required capex. This could be lowered by external
funding, but we have already seen some companies reduce capex when WTI recently fell
below $90/b. As volumes rise, required prices could drift down toward $75/b WTI.
But it is important to remember that the average recovery of a shale gas well is 3x-5x the
recovery of the typical shale oil well on a BTU basis. And once gas prices recover, oil wells
need to remain attractive enough to attract investment. In the short term, growth can be
maintained. However, we don’t yet know the terminal decline rates from new oil shale
plays and physics suggests that the oil shale decline rate could be higher than that of its
gas counterparts.
In North America, accommodating an additional 600 kb/d p.a. of growth from the US and
300 kb/d p.a. from Canada will require new trunk-line pipes and gathering systems. Our
short-term model suggests WTI-LLS will remain wide through 4Q12, but narrow as
Seaway, the southern leg of the Keystone XL and Permian pipes are built out through
2013. Even as WTI-LLS spreads narrow, it is likely that a wider discount will remain for
Bakken and Canadian Heavy crude through 2014, again see US Oil Production Outlook.
Commodity Forecasts: The Best of Times, The Worst of Times 30
12 October 2012
Exhibit 43: Total US oil production (excluding NGL) Exhibit 44: Shale rig count and total wells drilled
Left axis: (kb/d); Right axis (oil rigs) Left axis: (wells drilled); Right axis (oil rigs)
12,000 US Oil Production Oil Shale Rig Count 1400 18,000 1,400
10,000 1200 16,000 1,200
1000 1,000
8,000 14,000
800 800
6,000 12,000
600
600
4,000 Wells Drilled
400 10,000
US Shale Oil Rig
400
2,000 200 Count
8,000 200
0 0
2000 2004 2008 2012E 2016E 2020E 6,000 0
2011 2013 2015 2017 2019 2021
Source: Credit Suisse Source: Credit Suisse
Globally, North American production growth helps to increase spare capacity from 2% to
3%, but markets will likely remain stressed until the next wave of global offshore growth or
global shale starts to kick in, which we anticipate for the second half of the decade.
Inventories: downstream tightness holds upside price risk
Thanks to a multi-month supply surplus in the first half, crude oil inventory is adequate at
worst across Europe and much of Asia, and plentiful if not depressingly full in the US.
Aside from reported totals across the OECD and in independent tanks, see Exhibit 46,
producer inventory is rich as well (e.g., Saudi); China has grabbed the opportunity to
squirrel away nearly 69 Mb of oil to replenish commercial tanks and begin filling the
second stage of its multi-decade built up of a strategic reserve.
Exhibit 45: Key product remains in short supply Exhibit 46: Reported OECD on-land crude oil stocks
Reported inventory of middle distillates relative to their five-year average (Mb) US, ARA, Japan, Singapore
Surplus onland floating storage
1060
220 5y Max Min 5yr avg 2012 2011
180 1030
140 1000
100
970
60
940
20
910
-20
880
-60 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12
Source: Credit Suisse Source: Credit Suisse
That picture of plenty does not apply downstream. Critically, inventories of middle
distillates (diesel, heating oil, and kerosene) have fallen well below their five-year norms,
see Exhibit 45. Playing the implied structural tightness in middle distillates remains one of
our favorite short-term trading strategies, Commodities Advantage: Spanish impedimenta.
We expect that only the slew of new refiner capacity additions can begin to unwind this
multi-year tightening. That unwind will probably begin after the coming winter.
Commodity Forecasts: The Best of Times, The Worst of Times 31
12 October 2012
Longer term
The most expensive industry projects are unconventional (those costs, all-in, come down
over time). Moreover, costs deflate as activity deflates and/or services are commoditized.
Add in wobbles in global economic growth and dimmer prospects for a return to the
“normal pace” of the pre-GFC years and it’s understandable that long-dated futures prices
fall well short of their 2008 highs and instead have gravitated to ~$100/b (Exhibit 47).
That said, decline rates in the existing base run from 2%-3% per annum in the better run
OPEC provinces to the low teens p.a. for deep water and shale oil developments.
Exhibit 47: Long-dated Brent price clears ~$100
$/b; two-year out Brent futures prices with two standard deviations around the 2011/2012 mean
$130
$120
$110
$100
$90
$80
$70
J-11 A-11 J-11 O-11 J-12 A-12 J-12 O-12
Source: Credit Suisse
And in the broader picture, marginal producers remain the sovereigns. Running big oil-
exporting countries generally involves rising costs and thus rising budget break-even oil
prices. So long as Saudi Arabia remains the sole swing-producer, considerations of
budget break-even oil prices retain some relevance, we think.
However, should prices really begin to fall and spare capacity blow out, a different problem
arises. It has proved notoriously difficult for OPEC to manage markets once spare capacity
needs to be shared. And that ultimate prop under prices could prove fragile again.
For now, we’re keeping our own long-run prices unchanged at $90/b Brent (2011 dollars).
Commodity Forecasts: The Best of Times, The Worst of Times 32
12 October 2012
Positioning/risk
Near term a modest oil price retreat could be driven by fading risk-on momentum (China
news, euro policy execution risk, and US policy risk) combined with fading supply-risk (e.g.,
timing of a potential Israeli first-strike has again shifted six months down the line).
Exhibit 48: Non-commercial net length appears to Exhibit 49: We like looking at Managed Money’s
be near previous highs, but this measure is fuzzy position in Brent, where there is room to maneuver
$120 WTI Px ($/b) WTI Non-Commercial Net Length 300 $140 Brent Px ($/b) Brent MM Net Length as a percentage of OI 16%
d
$135 14%
$110 250
$130
Th
12%
$125
$100 200
$120 10%
$90 150 $115 8%
$110 6%
$80 100
$105
4%
$100
$70 50
$95 2%
$60 0 $90 0%
Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12
Source: CFTC, Credit Suisse Source: CFTC, Credit Suisse
Positioning is seen as a negative, as speculative net length is already “extremely high,”
limiting the upside of recent policy easing and positive macro news in the US.
At first blush it appears that asset managers’ net long positions in oil are near their
record highs. For example, non-commercial net length in WTI is already close to the
levels reached in March 2011, ~271,887 contracts, see Exhibit 48.
However, dig deeper and it becomes clear that the category we care about most,
Managed Money in Brent, is still well below previous highs. Currently, Managed Money’s
net length in Brent, as a percentage of total OI, is just ~8.5%, close to the two-year
average and ~30% below its March peak YTD, Exhibit 49.
Exhibit 50: Brent futures curve-shape and flat price Exhibit 51: Gasoil curve illustrates tightness
Shows that transitions between episodes of fundamental weakness and ICE gasoil contract month one-month 6, $/Mt
strength (as reflected in curve shape) coincide with big moves in flat price, $/b.
$130 $10 $60
2011 2012
Brent front $50
month price ($/b) $40
Backwardation: Bullish
$120 $5 $30
$20
$10
$110 $0 $0
-$10
Brent futures contracts 1-6: -$20
$100 positive means -$5 Contango: Bearish
-$30
backwardation, negative
means contango -$40
Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12
$90 -$10
Jan-12 Feb-12Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12
Source: Credit Suisse Source: Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 33
12 October 2012
We’d also point out that fundamentals do still matter as well. And in the near term they
limit downside risk.
Near term s/d drives the shape of futures curves. Big changes in the shape of Brent
curves, in turn, coincide neatly with big swings in flat price, even this year, see Exhibit
50. We expect that the underlying downstream strength in middle distillates will keep in
place a bid for the marginal Brent barrel through the remainder of the year, probably well
into next year, see Exhibit 51. And therefore we expect the Brent curve to stay in
backwardation at least through winter.
Difficult to capture, of course, is the risk of supply disruptions and/or longer-term capacity
degradation in any of the sovereign producers of North Africa and the Mideast.
Exhibit 52: Iraq and Saudi make up for Iran’s loss … Exhibit 53: Iran’s currency collapses, what’s next?
Monthly production data through August, indicators for Sept and forecast, kb/d Iran’s rial to the US dollar
4,000 Iran Iraq Saudi Arabia 10,000
37,000
Riots in Tehran as
3,750 9,750 Rial plunges Oct 2,3
33,000
3,500 9,500 Official Bank Rate Unofficial Market Rate
29,000
3,250 9,250 EU and US sanctions
25,000
fully implementated
on July 1
EU import embargo
3,000 9,000 21,000
U.S. CBI Sanctions
2,750 8,750 17,000
2,500 8,500 13,000
J F M A M J J A S O N D
9,000
Sep-11 Oct-11 Nov-11Dec-11 Jan-12 Feb-12Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12
Source: Credit Suisse Source: FT, Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 34
12 October 2012
Forecasts
Exhibit 54: Brent crude forecast comparison Exhibit 55: Brent crude historical price and forecast
US$/b US$/b
Credit Suisse Forecast Forward Curve Bloomberg Forecast Mean $160
Brent front month Quarterly avg forecasts
$125
$140
$120
$115 $120
$110
$100
$105
$100 $80
$95
$60
$90
$40
$85
$80 $20
Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Exhibit 56: WTI crude forecast comparison Exhibit 57: WTI crude historical price and forecast
US$/b US$/b
Credit Suisse Forecast Forward Curve Bloomberg Forecast Mean $160 WTI front month Quarterly avg forecasts
$120
$115 $140
$110
$120
$105
$100 $100
$95
$80
$90
$85 $60
$80
$40
$75
$70 $20
Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 35
Commodity Forecasts: The Best of Times, The Worst of Times
Exhibit 58: Global oil demand estimates
Mb/d, unless otherwise specified
Demand 2010 Q1-'11 Q2-'11 Q3-'11 Q4-'11 2011 Q1-'12 Q2-'12 Q3-'12E Q4-'12E 2012E Q1-'13E Q2-'13E Q3-'13E Q4-'13E 2013E Q1-'14E Q2-'14E Q3-'14E Q4-'14E 2014E 2015E
Global 88.6 89.4 88.6 90.1 90.3 89.6 89.7 90.0 91.0 91.9 90.7 91.4 91.4 92.5 93.3 92.2 92.4 92.4 93.5 94.4 93.2 94.2
YoY Grow th, net mb/d 3.2 2.4 0.5 0.8 0.4 1.0 0.4 1.4 0.9 1.6 1.1 1.7 1.4 1.5 1.5 1.5 1.0 1.0 1.0 1.1 1.0 1.0
YoY Grow th, % 3.7% 2.7% 0.6% 0.9% 0.4% 1.2% 0.4% 1.6% 1.0% 1.8% 1.2% 1.9% 1.5% 1.6% 1.6% 1.6% 1.1% 1.1% 1.1% 1.2% 1.1% 1.1%
OECD 46.9 47.1 45.4 47.0 46.8 46.6 46.3 45.6 46.6 46.9 46.4 46.6 45.5 46.6 46.8 46.4 46.2 45.1 46.2 46.5 46.0 45.5
YoY Grow th, net mb/d 0.6 0.4 -0.7 -0.4 -0.7 -0.4 -0.8 0.2 -0.3 0.1 -0.2 0.3 -0.1 -0.1 -0.1 0.0 -0.3 -0.3 -0.4 -0.3 -0.3 -0.5
YoY Grow th, % 1.2% 0.9% -1.4% -0.9% -1.5% -0.8% -1.7% 0.5% -0.7% 0.3% -0.4% 0.5% -0.3% -0.2% -0.2% 0.0% -0.7% -0.8% -0.8% -0.7% -0.8% -1.1%
Americas 24.1 24.2 23.8 24.2 24.0 24.1 23.5 23.8 24.0 24.2 23.9 23.9 23.9 24.1 24.3 24.0 23.8 23.8 24.0 24.2 24.0 23.5
YoY Grow th, net mb/d 0.5 0.5 -0.2 -0.3 -0.2 -0.1 -0.8 0.0 -0.2 0.2 -0.2 0.4 0.1 0.1 0.1 0.2 -0.1 -0.1 -0.1 -0.1 -0.1 -0.5
YoY Grow th, % 1.9% 2.0% -1.0% -1.1% -0.8% -0.2% -3.2% -0.2% -0.7% 0.7% -0.8% 1.8% 0.4% 0.3% 0.6% 0.8% -0.4% -0.4% -0.4% -0.4% -0.4% -2.0%
Europe 15.0 14.5 14.4 15.1 14.4 14.6 14.1 14.1 14.7 14.3 14.3 13.9 14.0 14.7 14.3 14.2 13.7 13.7 14.4 14.1 14.0 13.9
YoY Grow th, net mb/d 0.0 -0.1 -0.2 -0.2 -0.7 -0.3 -0.5 -0.3 -0.3 -0.1 -0.3 -0.2 -0.1 0.0 0.0 -0.1 -0.3 -0.3 -0.3 -0.3 -0.3 -0.1
YoY Grow th, % -0.1% -1.0% -1.2% -1.5% -4.8% -2.2% -3.2% -2.2% -2.2% -0.8% -2.1% -1.2% -0.8% -0.2% -0.1% -0.6% -1.9% -1.9% -1.9% -1.9% -1.9% -0.6%
Asia Pacific 7.8 8.3 7.1 7.7 8.3 7.9 8.8 7.7 7.9 8.4 8.2 8.8 7.6 7.7 8.2 8.1 8.8 7.6 7.8 8.2 8.1 8.1
YoY Grow th, net mb/d 0.1 0.1 -0.2 0.0 0.2 0.0 0.4 0.6 0.2 0.1 0.3 0.0 -0.1 -0.1 -0.2 -0.1 0.0 0.0 0.0 0.0 0.0 0.0
YoY Grow th, % 1.6% 0.7% -3.4% 0.6% 2.7% 0.2% 5.1% 8.0% 2.3% 0.8% 4.0% 0.0% -1.4% -1.6% -2.5% -1.4% 0.0% 0.1% 0.1% 0.1% 0.1% 0.6%
Non-OECD 41.7 42.2 43.2 43.2 43.5 43.0 43.4 44.5 44.4 45.0 44.3 44.8 45.9 45.9 46.5 45.8 46.2 47.3 47.3 48.0 47.2 48.7
YoY Grow th, net mb/d 2.6 2.0 1.2 1.3 1.1 1.4 1.2 1.2 1.2 1.5 1.3 1.4 1.5 1.5 1.5 1.5 1.4 1.4 1.4 1.4 1.4 1.5
YoY Grow th, % 6.7% 4.9% 2.8% 3.0% 2.5% 3.3% 2.8% 2.8% 2.8% 3.4% 2.9% 3.3% 3.3% 3.5% 3.4% 3.4% 3.0% 3.0% 3.0% 3.1% 3.0% 3.2%
Former Soviet Union 4.2 4.2 4.4 4.6 4.1 4.3 4.3 4.5 4.7 4.2 4.4 4.4 4.6 4.8 4.3 4.5 4.5 4.6 4.9 4.4 4.6 4.7
YoY Grow th, net mb/d 0.1 0.1 0.3 0.3 -0.1 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
YoY Grow th, % 3.1% 3.4% 8.5% 7.5% -2.7% 4.1% 2.9% 2.6% 2.7% 2.2% 2.6% 2.1% 2.2% 2.2% 2.2% 2.2% 1.5% 1.5% 1.5% 1.5% 1.5% 2.7%
China 9.2 9.6 9.8 9.7 9.9 9.7 9.9 9.9 10.0 10.3 10.0 10.3 10.4 10.5 10.8 10.5 10.9 10.9 11.1 11.4 11.1 11.7
YoY Grow th, net mb/d 1.0 0.9 0.4 0.6 0.3 0.5 0.3 0.1 0.3 0.5 0.3 0.5 0.5 0.5 0.5 0.5 0.6 0.6 0.6 0.6 0.6 0.6
YoY Grow th, % 12.1% 10.4% 4.3% 6.1% 2.9% 5.8% 2.8% 1.2% 3.6% 4.6% 3.0% 4.8% 4.9% 5.1% 4.9% 4.9% 5.4% 5.4% 5.4% 5.4% 5.4% 5.1%
Other emerging Asia 11.0 11.4 11.6 10.9 11.6 11.4 11.7 11.9 11.3 12.0 11.7 12.1 12.3 11.7 12.4 12.1 12.4 12.6 12.0 12.8 12.5 12.9
YoY Grow th, net mb/d 0.5 0.4 0.3 0.3 0.6 0.4 0.3 0.3 0.4 0.4 0.3 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4
YoY Grow th, % 4.8% 4.0% 2.8% 3.0% 5.1% 3.7% 2.7% 2.5% 3.6% 3.4% 3.0% 3.4% 3.4% 3.5% 3.5% 3.4% 3.1% 3.1% 3.0% 3.1% 3.1% 2.9%
South America 6.1 6.0 6.2 6.5 6.4 6.3 6.2 6.4 6.6 6.5 6.4 6.3 6.5 6.7 6.7 6.5 6.4 6.6 6.9 6.8 6.7 6.8
YoY Grow th, net mb/d 0.4 0.2 0.1 0.2 0.2 0.2 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
YoY Grow th, % 6.4% 3.0% 1.6% 2.4% 2.9% 2.5% 3.2% 3.3% 1.5% 1.6% 2.4% 1.7% 1.8% 2.0% 1.9% 1.9% 1.6% 1.6% 1.6% 1.6% 1.6% 2.0%
Mideast 7.1 6.8 7.2 7.6 7.2 7.2 7.0 7.6 7.7 7.6 7.5 7.2 7.9 8.0 7.9 7.8 7.4 8.1 8.2 8.1 8.0 8.2
YoY Grow th, net mb/d 0.4 0.2 0.1 0.1 0.2 0.2 0.2 0.4 0.2 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.2 0.2 0.2 0.2 0.2 0.2
YoY Grow th, % 5.8% 3.3% 1.7% 1.0% 3.3% 2.3% 2.3% 5.7% 2.0% 4.3% 3.6% 3.9% 3.7% 4.0% 3.9% 3.9% 2.7% 2.6% 2.8% 2.9% 2.7% 2.6%
Africa 3.5 3.6 3.4 3.3 3.5 3.4 3.7 3.5 3.4 3.6 3.5 3.8 3.6 3.4 3.7 3.6 3.8 3.7 3.5 3.8 3.7 3.8
YoY Grow th, net mb/d 0.2 0.1 -0.1 -0.2 -0.1 -0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
YoY Grow th, % 6.6% 2.8% -2.7% -4.9% -1.8% -1.7% 2.9% 2.0% 3.1% 3.0% 2.7% 2.5% 2.6% 2.7% 2.6% 2.6% 2.1% 2.1% 2.1% 2.1% 2.1% 3.1%
Exhibit 59: Global oil stock balance estimates
Mb/d, unless otherwise specified
Balance, stocks 2010 Q1-'11 Q2-'11 Q3-'11 Q4-'11 2011 Q1-'12 Q2-'12 Q3-'12E Q4-'12E 2012E Q1-'13E Q2-'13E Q3-'13E Q4-'13E 2013E Q1-'14E Q2-'14E Q3-'14E Q4-'14E 2014E 2015E
Implied inventory change -0.7 -0.7 -1.0 -1.9 -0.3 -1.0 0.9 0.5 -0.8 -0.9 -0.1 0.3 0.7 -0.4 -0.4 0.0 0.3 0.7 -0.3 -0.4 0.0 0.0
Reported oil inventory:
OECD stock change 0.1 -0.4 0.5 -0.2 -0.7 -0.2 0.4 0.5 -0.1 -0.6 0.0 0.2 0.3 -0.1 -0.5 0.0
OECD inv entory (billion barrels) 2.68 2.64 2.69 2.67 2.61 2.61 2.65 2.69 2.69 2.63 2.63
Cov er, day s demand 56.9 58.3 57.2 57.1 56.3 56.3 58.1 57.8 57.3 56.4 56.4 58.1 57.3 56.8 56.6 56.6
'Call on Opec & stocks" 30.7 30.8 30.9 32.1 31.2 31.3 30.3 31.2 32.5 32.7 31.7 31.8 31.6 32.8 33.1 32.3 31.3 31.1 32.4 32.6 31.9 31.3
12 October 2012
YoY Grow th, net mb/d 1.5 1.3 0.4 0.6 0.1 0.6 -0.4 0.4 0.4 1.5 0.5 1.4 0.4 0.3 0.3 0.6 -0.5 -0.5 -0.5 -0.4 -0.5 -0.6
YoY Grow th, % 5.0% 4.5% 1.3% 1.8% 0.3% 2.0% -1.5% 1.3% 1.1% 4.8% 1.4% 4.7% 1.1% 1.0% 1.1% 1.9% -1.5% -1.5% -1.4% -1.3% -1.4% -1.8%
Source: Credit Suisse
36
Commodity Forecasts: The Best of Times, The Worst of Times
Exhibit 60: Global oil supply estimates
Mb/d, unless otherwise specified
Supply 2010 Q1-'11 Q2-'11 Q3-'11 Q4-'11 2011 Q1-'12 Q2-'12 Q3-'12E Q4-'12E 2012E Q1-'13E Q2-'13E Q3-'13E Q4-'13E 2013E Q1-'14E Q2-'14E Q3-'14E Q4-'14E 2014E 2015E
Global 87.9 88.7 87.6 88.2 89.9 88.6 90.6 90.6 90.2 91.0 90.6 91.7 92.1 92.1 92.9 92.2 92.7 93.1 93.2 94.0 93.3 94.3
YoY Grow th, net mb/d 2.5 1.7 0.0 0.2 1.1 0.8 1.9 3.0 1.9 1.1 2.0 1.1 1.5 1.9 1.9 1.6 1.0 1.0 1.1 1.1 1.1 1.0
YoY Grow th, % 2.9% 2.0% 0.0% 0.2% 1.3% 0.9% 2.2% 3.4% 2.2% 1.2% 2.2% 1.2% 1.7% 2.1% 2.1% 1.8% 1.1% 1.1% 1.2% 1.2% 1.1% 1.1%
Non OPEC 50.5 50.9 50.0 50.1 51.1 50.5 51.4 50.7 50.4 51.1 50.9 51.6 51.7 51.6 52.2 51.8 53.0 53.1 52.9 53.6 53.1 54.7
YoY Grow th, net mb/d 1.2 0.6 -0.3 0.0 0.0 0.1 0.5 0.7 0.3 0.0 0.4 0.2 1.0 1.1 1.1 0.9 1.4 1.4 1.4 1.4 1.4 1.5
YoY Grow th, % 2.4% 1.2% -0.6% -0.1% -0.1% 0.1% 1.0% 1.4% 0.6% 0.0% 0.7% 0.4% 2.1% 2.2% 2.2% 1.7% 2.7% 2.7% 2.7% 2.7% 2.7% 2.9%
North America 14.9 15.2 15.1 15.4 16.2 15.5 16.5 16.4 16.5 16.9 16.6 17.2 17.3 17.4 17.7 17.4 18.0 18.1 18.3 18.6 18.3 19.2
YoY Grow th, net mb/d 0.6 0.4 0.4 0.5 0.9 0.5 1.2 1.3 1.2 0.7 1.1 0.7 0.9 0.9 0.8 0.8 0.8 0.9 0.9 0.9 0.9 0.9
YoY Grow th, % 4.5% 3.0% 2.4% 3.3% 5.6% 3.6% 8.1% 8.3% 7.6% 4.4% 7.1% 4.4% 5.4% 5.3% 5.0% 5.0% 4.9% 4.9% 5.0% 5.0% 4.9% 5.1%
South America 4.5 4.6 4.5 4.6 4.7 4.6 4.7 4.5 4.5 4.5 4.6 4.6 4.7 4.7 4.8 4.7 5.0 5.1 5.1 5.2 5.1 5.6
YoY Grow th, net mb/d 0.2 0.2 0.0 0.0 0.1 0.1 0.1 0.0 -0.1 -0.2 0.0 0.0 0.2 0.2 0.2 0.2 0.4 0.4 0.4 0.4 0.4 0.5
YoY Grow th, % 5.2% 4.0% -1.0% 0.0% 2.4% 1.3% 1.5% -0.5% -1.4% -3.8% -1.1% -0.9% 4.9% 4.4% 5.3% 3.4% 8.4% 8.6% 8.5% 8.3% 8.4% 10.1%
Europe 4.5 4.4 4.2 4.0 4.2 4.2 4.2 4.0 3.6 3.9 3.9 4.0 3.8 3.5 3.7 3.8 3.8 3.6 3.3 3.5 3.6 3.4
YoY Grow th, net mb/d -0.3 -0.4 -0.4 -0.2 -0.4 -0.4 -0.2 -0.1 -0.4 -0.3 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2
YoY Grow th, % -6.8% -9.1% -8.5% -4.9% -8.6% -7.8% -4.2% -2.6% -8.8% -7.3% -5.7% -5.5% -5.8% -4.3% -4.1% -4.9% -4.9% -4.8% -4.6% -4.7% -4.7% -5.7%
FSU 13.6 13.7 13.7 13.6 13.6 13.7 13.8 13.7 13.8 13.8 13.8 13.8 13.9 14.0 14.1 14.0 14.0 14.2 14.3 14.3 14.2 14.5
YoY Grow th, net mb/d 0.3 0.2 0.1 0.1 0.0 0.1 0.1 0.1 0.1 0.2 0.1 0.0 0.2 0.3 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.3
YoY Grow th, % 1.9% 1.6% 0.7% 0.4% 0.1% 0.7% 0.7% 0.4% 0.9% 1.4% 0.9% 0.1% 1.7% 2.0% 1.9% 1.4% 1.5% 1.6% 1.7% 1.7% 1.6% 2.0%
Russia 10.5 10.6 10.6 10.7 10.7 10.7 10.8 10.8 10.8 10.8 10.8 10.8 10.8 10.7 10.7 10.8 10.9 10.9 10.8 10.8 10.9 11.1
YoY Grow th, net mb/d 0.2 0.2 0.2 0.2 0.1 0.2 0.2 0.1 0.1 0.1 0.1 0.0 0.0 -0.1 -0.1 0.0 0.1 0.1 0.1 0.1 0.1 0.2
YoY Grow th, % 2.4% 1.6% 1.5% 1.8% 1.3% 1.5% 1.7% 1.0% 1.0% 0.8% 1.1% 0.4% 0.0% -0.7% -1.1% -0.3% 1.0% 1.0% 1.0% 1.0% 1.0% 2.0%
Africa 2.6 2.7 2.5 2.6 2.6 2.6 2.4 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.4 2.3 2.3 2.3 2.4 2.4 2.3 2.4
YoY Grow th, net mb/d 0.0 0.0 -0.1 0.0 0.0 0.0 -0.2 -0.2 -0.3 -0.3 -0.3 -0.1 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0
YoY Grow th, % 0.5% 0.6% -4.2% 0.6% -1.9% -1.2% -8.3% -9.3% -12.3% -12.1% -10.5% -4.8% 1.8% 2.2% 2.2% 0.3% 0.3% 0.5% 0.7% 1.0% 0.6% 1.2%
Mideast 1.7 1.8 1.7 1.7 1.5 1.6 1.4 1.4 1.5 1.5 1.4 1.4 1.4 1.4 1.4 1.4 1.5 1.4 1.4 1.4 1.4 1.4
YoY Grow th, net mb/d 0.0 0.0 -0.1 0.0 -0.3 -0.1 -0.4 -0.2 -0.2 0.0 -0.2 0.1 0.0 -0.1 -0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0
YoY Grow th, % 1.3% 2.2% -4.4% -2.7% -15.2% -5.1% -22.0% -14.1% -13.7% -1.6% -13.3% 4.8% 0.1% -3.6% -4.9% -1.0% 0.9% 1.2% 1.4% 1.6% 1.3% 0.5%
Asia 8.5 8.5 8.3 8.3 8.3 8.3 8.4 8.3 8.3 8.2 8.3 8.2 8.2 8.2 8.2 8.2 8.2 8.2 8.2 8.2 8.2 8.2
YoY Grow th, net mb/d 0.3 0.1 -0.1 -0.3 -0.3 -0.2 -0.1 0.0 0.0 -0.1 -0.1 -0.2 -0.1 -0.1 0.0 -0.1 0.0 0.0 0.1 0.1 0.0 0.0
YoY Grow th, % 4.2% 1.6% -1.7% -3.8% -3.5% -1.9% -1.0% -0.5% -0.2% -1.1% -0.7% -2.3% -1.4% -0.8% -0.4% -1.2% 0.5% 0.5% 0.6% 0.7% 0.6% -0.5%
Processing gain 2.3 2.4 2.4 2.5 2.4 2.4 2.4 2.5 2.5 2.5 2.5 2.5 2.5 2.6 2.5 2.5 2.5 2.6 2.6 2.6 2.6 2.6
OPEC 35.1 35.4 35.2 35.7 36.4 35.7 36.8 37.4 37.2 37.5 37.2 37.6 37.9 38.0 38.2 37.9 37.3 37.5 37.6 37.8 37.5 37.0
YoY Grow th, net mb/d 1.2 1.0 0.2 0.1 1.1 0.6 1.4 2.2 1.6 1.0 1.6 0.8 0.4 0.8 0.7 0.7 -0.4 -0.4 -0.4 -0.4 -0.4 -0.6
YoY Grow th, % 3.6% 3.0% 0.7% 0.3% 3.0% 1.8% 3.9% 6.3% 4.5% 2.8% 4.4% 2.2% 1.1% 2.0% 1.9% 1.8% -1.0% -1.0% -1.0% -1.0% -1.0% -1.5%
Opec Crude Oil 29.9 30.1 29.9 30.2 30.9 30.3 31.2 31.8 31.7 31.8 31.6 32.1 32.3 32.4 32.6 32.4 31.6 31.9 32.0 32.2 31.9 31.3
YoY Grow th, net mb/d 0.8 0.7 -0.1 -0.1 0.9 0.3 1.1 1.9 1.4 1.0 1.4 0.8 0.5 0.8 0.8 0.7 -0.4 -0.4 -0.4 -0.4 -0.4 -0.6
YoY Grow th, % 2.7% 2.3% -0.3% -0.2% 2.8% 1.1% 3.8% 6.5% 4.7% 3.1% 4.5% 2.6% 1.6% 2.5% 2.5% 2.3% -1.4% -1.4% -1.4% -1.4% -1.4% -1.8%
Opec 11 27.5 27.4 27.0 27.4 28.1 27.5 28.5 28.7 28.4 28.5 28.5 28.7 28.9 29.0 29.1 28.9 28.2 28.4 28.5 28.6 28.4 27.6
YoY Grow th, net mb/d 0.8 0.4 -0.5 -0.5 0.6 0.0 1.1 1.7 1.0 0.4 1.0 0.3 0.2 0.6 0.6 0.4 -0.5 -0.5 -0.5 -0.5 -0.5 -0.8
YoY Grow th, % 2.8% 1.6% -2.0% -1.8% 2.1% 0.0% 4.0% 6.4% 3.5% 1.6% 3.8% 0.9% 0.6% 2.2% 2.1% 1.4% -1.9% -1.9% -1.9% -1.9% -1.9% -2.8%
Opec non-crude 5.1 5.3 5.4 5.4 5.5 5.4 5.6 5.6 5.6 5.6 5.6 5.6 5.6 5.5 5.5 5.6 5.6 5.6 5.6 5.6 5.6 5.6
YoY Grow th, net mb/d 0.4 0.4 0.3 0.2 0.2 0.3 0.2 0.3 0.2 0.1 0.2 0.0 -0.1 0.0 -0.1 -0.1 0.1 0.1 0.1 0.1 0.1 0.0
YoY Grow th, % 9.4% 7.5% 6.9% 3.4% 4.2% 5.4% 4.5% 5.4% 2.9% 1.3% 3.5% 0.1% -1.5% -0.7% -1.4% -0.9% 1.1% 1.1% 1.1% 1.1% 1.1% 0.3%
Source: Credit Suisse
12 October 2012
37
12 October 2012
Commodities Research
Natural Gas
Jan Stuart
jan.stuart@credit-suisse.com
Global LNG remains structurally tight
+1 212 325 1013 Recent signs of relative weakness in global LNG markets do not mean that the tightness
Stefan Revielle
caused by Japan’s early 2011 nuclear disaster will fade altogether. Japan is no closer to
stefan.revielle@credit-suisse.com resolving its power-generation dilemma, and its utilities also have to renegotiate long-term
+1 212 538 6802 supply deals that are rolling off. In addition, new consumers for long-term deals are waiting
in the wings. On the supply side promising new discoveries are years away from FID,
Equity Research
Edward Westlake while the next batch of new developments still remains years away from first gas. We don’t
edward.westlake@credit-suisse.com think that incremental additions to existing supply terminals and the two new 2012 plants
+1 212 325 6751 can tip the LNG balance back into oversupply in the next few years, (see Global LNG
David Hewitt
Sector - update. 'Tighter then looser').
david.hewitt.2@credit-suisse.com
+65 6212 3064 Exhibit 61: Global gas benchmarks
Andrey Ovchinnikov $/MMbtu
andrey.ovchinnikov@credit-
suisse.com $20
+7 495 967 8360 $18
Arun Jayaram $16
arun.jayaram@credit-suisse.com
$14
+1 212 538 8428
$12
Mark Lear
mark.lear@credit-suisse.com $10
+1 212 538 0239
$8
Dan Eggers $6
dan.eggers@credit-suisse.com
+1 212 538 8430 $4
$2
Kim Fustier Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
kim.fustier@credit-suisse.com
JKM HH Prompt NBP Prompt Jap LNG Imp Price
+44 20 7883 0384
Source: the BLOOMBERG PROFESSIONAL™ service, Platts, Credit Suisse
Mark Freshney
mark.freshney@credit-suisse.com
+44 20 7888 0887 What’s new?
True, since reaching a peak in May of ~$18/Mmbtu, Asia Pacific LNG spot prices have
fallen by a third and well below oil parity. Mild summer weather and high inventories in
Japan pushed demand in the largest global importer below year-ago levels for the first
time in 16 months in August. But the coming winter’s demand pull should help Asia spot
prices rebound within months – leaving only the odd shoulder season spot-LNG cargo
headed for Europe. In addition, summer demand from Latin America should help shore
up LNG markets at the margin as well.
Supply side support – Angola had hoped to add 5 Mt/y (0.66 Bcf/d) of new capacity
much sooner than the currently targeted “end-Q4.” Incremental spot cargoes from
Nigeria LNG (NLNG), Trinidad and Abu Dhabi’s Adgas, meanwhile, have been tendered
for, partly assisted by maintenance shutdowns at Qatargas and Indonesia’s Tangguh.
Earlier, the start-up of regular deliveries to Japanese utilities from Australia’s Pluto LNG
reduced tension on spot LNG markets as well.
Demand
Despite a strong start to the year, Japanese summer demand weakness drove APAC spot
prices lower beginning in July. Japanese LNG imports still reached record levels,
averaging 12.1 Bcf/d (versus 10.6 Bcf/d in 2011 Jan-Aug). However, latest monthly
customs statistics show the absence of the normal seasonal bump-up in deliveries from
May to July. Instead, relatively mild weather extreme power conservation efforts and
ample coal and oil burning pushed August LNG deliveries 3% or 360 Mcf/d below August
2011 levels (Exhibit 62).
Commodity Forecasts: The Best of Times, The Worst of Times 38
12 October 2012
Exhibit 62: Japanese LNG imports
Bcf/d
14
13
12
11
10
9
8
7
6
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2009 2010 2011 2012
Source :GTIS, Credit Suisse
Short-term and long-term nuclear outlook remains uncertain. The Nuclear Regulatory
Authority, which is legally bound to review and redraft nuclear plant safety measures by
next summer, plans to release an outline of the new standards by March. The
announcement is likely to keep the additional 48 of 50 reactors 3 offline until summer of
2013 at the earliest. Adding to the ambiguity, following the September 14 announcement
for plans to phase out nuclear power entirely, the Japanese cabinet dropped the 2040
target date a few weeks later, buckling under pro-business domestic opposition. And
general elections later this year further cloud Japan’s energy future.
Shifting fortunes of large-scale new supplies
Australia has overtaken Qatar as the largest exporter of LNG to Japan. The start-up of
Pluto LNG sent Australian exports to 2.6 Bcf/d in August, a growth of 0.3 Bcf/d or 14% yoy
(Exhibit 63) . The major Japanese off takers of Pluto LNG include Kansai Electric Power
and Tokyo Gas; both received their first shipments under long-term contracts this summer.
In addition, according to Wood Mackenzie, an additional 36 Mcf/d (8%) of Pluto’s current
capacity is available as spot cargoes, likely targeting Asian buyers.
A chart of Qatar’s LNG exports by destination makes clear that flows from the world’s
largest exporter were adjusted to accommodate both Pluto and the absence of a summer
lift in Japan’s imports. Qatari LNG exports to South Korea, China, and India remained
strong, while exports to Japan have slipped from their March peak (Exhibit 64).
Going forward much of the tenor in spot markets will be determined by the following:
How quickly (if at all) Japan’s nukes come back on line.
When and with whom Japan’s utilities will sign new batches of long-term contracts.
And when other buyers (S Korea, India, China) will follow suit.
And of course, on the supply side producers have choices to make with regard to the
mix of term and spot supplies and how firmly to hold on to oil-indexation.
3 Kansai Electric restarted the No. 3 and No. 4 nuclear reactors at its Ooi nuclear plant on July 1 and July 18, respectively, which
accounted for 2.32 GW of the country's 46.15 GW of nuclear capacity.
Commodity Forecasts: The Best of Times, The Worst of Times 39
12 October 2012
Exhibit 63: Japanese supply by country Exhibit 64: Qatari exports by major country
Bcf/d Bcf/d
14 6
12
5
10
8 4
6
3
4
2 2
0
8/11 9/11 10/11 11/11 12/11 1/12 2/12 3/12 4/12 5/12 6/12 7/12 8/12 1
Australia Qatar Malaysia Russia
0
Indonesia UAE Brunei Equatorial Guinea
Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12
Nigeria Oman Total South Korea China EU Japan India
Source: GTIS, Credit Suisse Source: GTIS, Credit Suisse
Among the nearer term unknowns in the procurement of long-term contracts are looming
decisions about US and Canadian exports.
In the US, the Department of Energy delayed its long-awaited report on the economic
implications of US LNG exports until year-end.
Until then we do not expect approvals of export schemes targeting non-Free
Trade Agreement (non-FTA), leaving a string of projects in limbo, see Exhibit 65.
Aside from Sabine Pass, which was fully approved earlier this year, so far only
Golden Pass (also on the Gulf Coast) has been given clearance.
To date, there are a total of 16 US greenfield and brownfield projects that have applied for
FTA or non-FTA LNG export approval. Aggregate capacity would be 21 Bcf/d with the
15bcf/d for non-FTA projects added to that for Golden Pass and Sabine Pass. We agree
with our colleagues in Equities Research that a 6 Bcf/d export cap (in line with EIA’s low
modeled case), seems a reasonable outcome to what promises to be a hard-fought
political lobbying exercise in the coming months (or years).
Of course, exports from the US make sense economically. Based on industry cost
estimates, shipments from the US Gulf Coast to Asia are competitive using the current
2015 US futures strip (Exhibit 66). Even with the late summer drop in prompt JKM prices,
from their peak in May of $18/MMbtu to September’s $13-$14/MMbtu, all-in cost for
delivered LNG prices to Asia in the $9-$11 range look attractive.
Exhibit 65: Non-FTA application status Exhibit 66: Sabine pass delivered cost to Asia
Bcf/d $/MMbtu
High cost fuel case
Export Project Capacity Status $12.0
$0.65
Sabine Pass 2.1 Approved
$10.0 $2.80
Freeport 1.5 DOE Review $0.40
Lake Charles 2.1 DOE Review $8.0
Cove Point 1.0 DOE Review $2.50 Low cost fuel case
Freeport Expansion 1.5 DOE Review $6.0 Cal 15
Cameron 1.6 DOE Review $4.19
$4.0
Gulf Coast 2.9 DOE Review
Jordan Cove 0.8 DOE Review
$2.0
Oregon LNG 1.3 DOE Review
Total 14.8 $-
Henry Hub Capacity Shipping Fuel Delivered Cost
Charge
Source: FERC, Credit Suisse Source: Cheniere Energy, Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 40
12 October 2012
North America – The good, the bad, and the ugly
In our July quarterly outlook, we noted that the enhanced sensitivity of coal-to-gas
switching to natural gas price levels would keep summer gas prices range bound. Our
view was at least partly supported, as yoy power demand growth ebbed and flowed with
gas prices above and below $3/MMbtu in the third quarter. By that same dynamic,
however, recent strength in Q4 2012 futures prices could reverse parts of the yoy upside
in winter 2012-2013 power demand. Add surprisingly strong supply, and we remain
worried.
We generally think gas prices modestly improve into 2013 as storage levels push toward
more normal levels. But we cannot turn bullish relative to the forward curve in the short to
medium term (i.e., before 2015) until we see pronounced declines in US gas supply. And
so, despite the recent upturn in US gas prices and despite having undershot actual prices
in the third quarter of $2.81/MMbtu by 30cts (12%) in Q3, we are leaving our relatively
subdued forecast through 2014 unchanged and note further downside risk. Here is a
summary of the major moving parts; see Exhibit 85 for our full S&D.
We revise up our supply estimates for Q4 2012 and 2013. More well completions in
the Haynesville and Barnett shale plays have pushed up annual average total dry gas
production forecasts by 0.4 Bcf/d and 0.7 Bcf/d in 2012 and 2013, respectively. That
said, we do expect to see production begin to fall this quarter as shrinking flows from the
Haynesville should outweigh the effect of added supply infrastructure unlocking still
more gas from the Marcellus. Risk factors, in this context, are rising associated gas
production from oil drilling and ethane rejection raising the BTU content of pipeline gas.
Demand forecasts for 2012 were revised up due to power demand, but 2013
should see lower switching as prices gradually increase. Record levels of coal-to-
gas switching were seen during the summer of 2012, helping to tighten the balance
following the mild 2011-2012 winter. However, if coal prices stay weak, gas prices need
to stay low to hold on to market share until more structural factors (coal-plant
retirements, industrial demand, natural gas vehicles) increase base-load gas demand.
Weather will also have an impact on 2013 switching dynamics, but we cannot trade it.
Storage avoided a disaster scenario this summer while winter 2012-2013 risks are
clear on both sides. A slightly tighter yoy balance for winter 2012-2013 should leave
1.76 Tcf of gas in storage at end winter, nearly 30% less than at the end of last winter,
though still above five-year average levels. More material production declines from key
shale plays and conventional resources should help end-summer 2013 storage levels
reset back to five-year normal levels at 3.7 Tcf.
2012 prices will likely average over $1 less than 2011, but 2013 sees a $1 increase
as the supply/demand balance gradually improves over the next 14 months.
Exhibit 67: US natural gas price forecasts
$/MMbtu
2012 2013 2014 2015 Long term
US Henry Hub (US$/MmBtu) 2010* 2011*
Q1* Q2* Q3* Q4 (f) Yr Avg (f) Q1 (f) Q2 (f) Q3 (f) Q4 (f) Yr Avg (f) Q1 (f) Q2 (f) Q3 (f) Q4 (f) Yr Avg (f) Yr Avg (f) (real)
Actuals and Forecasts 4.32 4.04 2.77 2.26 2.81 3.10 2.74 3.60 3.40 3.80 4.00 3.70 4.40 4.20 4.20 4.40 4.30 4.50 4.50
Previous 2.50 3.10 2.66 3.60 3.40 3.80 4.00 3.70 4.40 4.20 4.20 4.40 4.30 4.50 4.50
Net Change 0.30 0.00 0.10 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
% Change 12.0% 0.0% 3.8% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Consensus* 2.90 2.60 3.20 3.20 3.30 3.60 3.40 4.00 4.90
Net Difference 0.20 0.10 0.40 0.20 0.50 0.40 0.30 0.30 -0.40
% Difference 6.9% 3.8% 12.5% 6.3% 15.2% 11.1% 8.8% 7.5% -8.2%
Fwd Curve* 3.26 2.76 3.86 3.82 3.90 4.07 3.91 4.29 4.10 4.16 4.32 4.21 4.39
Net Difference -0.20 0.00 -0.30 -0.40 -0.10 -0.10 -0.20 0.10 0.10 0.00 0.10 0.10 0.10
% Difference -6.1% 0.0% -7.8% -10.5% -2.6% -2.5% -5.1% 2.3% 2.4% 0.0% 2.3% 2.4% 2.3%
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 41
12 October 2012
Upward revisions on supply – unconventionals outperform (again)
Latest production data show gas supply has remained essentially flat despite another 50%
decline in the number of rigs drilling for gas this year. In July, dry gas production averaged
65.3 Bcf/d in the lower 48, flat with both June and last year. More recent pipeline scrapes
suggest that level was quickly reached again after hurricane disruptions in the Gulf of
Mexico. And we’ve delayed the onset of declines by another quarter.
Exhibit 68: Dry gas production vs. rig counts Exhibit 69: Yoy change in dry gas supply
Rigs and Bcf/d Bcf/d
1800 68 6
Forecast Actual
1600 66
5
No supply growth in 2012,
1400 but no declines either 64
4
1200 62
1000 60 3
800 58 2
600 56
1
400 54
0
200 52
0 50 -1
Jan-08 Sep-08 May-09 Jan-10 Sep-10 May-11 Jan-12
-2
dry gas production Gas Rigs oil rigs Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13
Source: Smith Bits, EIA, Credit Suisse Source: EIA, Credit Suisse
Marcellus debottlenecking in Q4 should bring untapped supply to market. The
Northeast Marcellus shale stands out as the larger engine of growth. We model Q3 2012
exit rates of 6 Bcf/d (+2.5 Bcf/d yoy) and a further increase of 400 Mcf/d by year-end,
thanks to over 3 Bcf/d of gathering and pipeline projects due to come on-line during Q4
(Exhibit 71). As further constraints on getting supply to major interstate pipelines will still
remain4, we see the build-out in supply in the Marcellus as more of an infrastructure story
than one about a growing number of drilled but uncompleted wells.
Exhibit 71: Unconventional shale supply and
Exhibit 70: Marcellus infrastructure project slate forecast
Bcf/d Capacity in Mcf/d
Project Name Sponsor ISD Capacity (mmcfd) 8
PA- Marcellus - Empire State-Millenium lateral National Fuel Jan-12 300
NY- Marcellus - National Fuel Northern Access National Fuel Oct-12 320 7
NY- Marcellus - Northeast Supply Diversification (NSD) El Paso Tennessee Gas Nov-12 150
6
NY/PA- Marcellus - Millenium Mainline Expansion Millenium Pipeline Nov-12 225
PA- Marcellus - Dominion Appalachian Gateway Dominion Nov-12 484 5
PA- Marcellus - Dominion Ellisburg to Craigs Dominion Nov-12 150
PA- Marcellus - Dominion Marcellus Northeast Dominion Nov-12 200 4
PA- Marcellus - Tennessee Z4 300 Line (National Fuel Line N Ph 2) National Fuel Nov-12 150
PA- Marcellus - TETCO market Zone 3 (TEAM) Spectra/TETCO Nov-12 200 3
PA- Marcellus - Transco - Leidy STO hub Transco Nov-12 300
2
WV- Marcellus - Dominion Appalachian Gateway Dominion Nov-12 484
WV/PA- Marcellus - EQT Midstream Project 2012 EQT Midstream Nov-12 230 1
2012 total 3,193
NY- Marcellus - Northeast Upgrade El Paso Tennessee Gas Nov-13 636 0
PA- Marcellus - Empire North to Chippawa National Fuel Empire Nov-13 275 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13
PA- Marcellus - Tennessee Z4 (Generic) El Paso Nov-13 900 Series12 Barnett Cana-Woodford Eagle Ford
PA- Marcellus - Transco - Leidy STO hub (National Fuel W-E Ph 2) National Fuel Nov-13 225 Fayetteville Haynesville Marcellus Missippian
WV- Marcellus - Dominion Marcellus 404 Dominion Nov-13 300
Niobrara - Vertical Niobrara- Horizontal Permian Granite Wash
2013 total 2,336
Source: Wood Mackenzie, Credit Suisse Source: HPDI, Smith Bits STATS, Credit Suisse
4 Entry onto Transco via the Leidy Line still looks limited with only approximately 500 Mmcf/d of unsubscribed capacity available
for new supply.
Commodity Forecasts: The Best of Times, The Worst of Times 42
12 October 2012
Ethane rejection: Richer BTUs increase gas supply
Continued weakness in NGL markets, particularly for ethane, has increased the likelihood
of ethane rejection, which could have important implications for natural gas supply.
Specifically, we think low ethane frack spreads and ethane prices, particularly within the
Conway market, are causing processors to reject as much ethane as pipeline
specifications will allow (Exhibits 72 and 73). We estimate the higher BTU content is
equivalent to increases of 350-500 Mcf/d of additional gas supply.
Typically, negative or near-negative ethane fractionation spreads have caused processors
to reject ethane, electing to keep it within the gas stream rather than processing them into
marketable products. Generally, ethane supply temporarily falls, which typically helps to
correct NGL prices in the short term. However, before NGL markets improve, rejections
are likely, leaving natural gas with a higher BTU content. Rejecting ethane does come with
its downfalls, as it can inadvertently reject propane as well (hurting rejection economics)
as well as threatening pipeline BTU specifications which average ~1.9 gallons per Mcf
(GPM) within the US.
Exhibit 72: Ethane contribution to total NGL frack Exhibit 73: Conway – ethane to natural gas price
spread differentials – rejection likely ongoing at Conway
$/MMbtu $/MMbtu
$14
$25
$12
$20
$10 Positive Spread: Processors frack ethane
$8 $15
$6 $10
$4
$5
$2
$0
$0
Negative Spread: Processors reject ethane
-$2 -$5
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Spread Ethane - Conway ($/Mmbtu) Natural Gas ($/Mmbtu)
NGL Frac Spread ($/MMBtu) Ethane Contr. ($/MMBtu)
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
So what does it all mean for natural gas supply? In 2013 ethane rejection could range
between 125,000 and 250,000 barrels per day. That is equivalent to dry gas supplies of
250-500 Mcf/d. We think ethane markets remain oversupplied through 2014 5. Risks to this
outlook include further reductions in rig counts and production output altogether.
Demand
Demand forecasts for 2012 revised up on coal-to-gas-switching trends this summer,
but higher prices in 2013 should return parts of that incremental demand to coal.
Record levels of coal-to-gas switching were seen during the summer of 2012, helping to
tighten the storage balance and causing us to revise our 2012 power demand up by 1
Bcf/d. Into 2013, given our expectations for supply, there is a severe lack of fundamental
factors (outside of a cold winter) available to help balance the market. As such, gas will
need to continue to price at levels to hold onto a portion of the coal-to-gas switching gains
seen this year. Based on our sensitivity analysis between switching and spot gas prices,
spot prices much above current trading levels near $3.50 for any length of time may hinder
a repeat of 2012 power demand. Weather will also have an impact on 2013 switching
dynamics, but significant uncertainty on any long-range forecasts gives us little conviction
either way right now.
5 Periods of rejection are assumed to be sporadic depending on processing economics and are unlikely to be sustained through
the year.
Commodity Forecasts: The Best of Times, The Worst of Times 43
12 October 2012
Latest governmental power generation data confirm a record summer for gas. In the
latest Electric Power Monthly for July, EIA showed that already record total consumption
for natural gas in June increased by 1.5% or 23,583 thousand MWh, meeting 33.6% of
total generation needs for the month (versus 28.7% in 2011). Meanwhile, after bottoming
in April coal also increased market share for the third consecutive month, indicating a
partial switch back to coal during the peak summer demand months (Exhibit 74).
Exhibit 75: 2012 vs. five-year average and 2011
Exhibit 74:Total generation by fuel type power demand
% of total generation Bcf/d
14
50%
2012 vs 2011 2012 vs 5yr Avg
Coal
12
40% 38.7%
10
33.6%
NG
30% 8
6
20% Nuke 16.6%
4
10% Hydro
6.5% 2
Other Renew
3.7%
0% 0
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12
Jan Mar May Jul Sep
Source: EIA, Credit Suisse Source: EIA, Credit Suisse
Seasonal downturn in power demand and higher prices lowering yoy switching. We
continue to highlight falling power demand levels in the US, partly due to slightly higher
gas prices, but mostly attributable to lower total electricity loads and cooler weather in the
months leading into winter. As shown in Exhibit 75, after peaking at a year-over-year
growth rate of ~10 Bcf/d in July, September averaged just 3 Bcf/d over 2011 and 4 Bcf/d
above five-year average demand levels.
Switching sensitivities to gas prices should hold into next year. In 2012, spot prices
and cost break-even prices have had meaningful correlations to coal-to-gas switching
dynamics. Using the coal generation regression market share versus prices approach, at $3
for the balance of 2012 we see switching tail off into next year. Then, based on our price
assumptions for H1 2013, as much as 3.6 Bcf/d could be lost during single months next year
as gas would become too expensive relative to coal to warrant the generation switch.
Exhibit 76: Monthly gas switching under various price scenarios
Scenario Bcf/d
$/mmbtu 12-Aug 12-Sep 12-Oct 12-Nov 12-Dec 13-Jan 13-Feb 13-Mar 13-Apr 13-May 13-Jun
$ 1.5 7.2 7.0 5.4 5.0 4.9 4.1 3.0 0.6 0.9 2.6 4.2
$ 2.0 5.8 5.8 4.4 3.9 3.8 2.9 1.8 -0.5 -0.1 1.4 2.9
$ 2.5 4.5 4.7 3.4 2.8 2.6 1.7 0.6 -1.5 -1.1 0.3 1.7
$ 3.0 3.2 3.5 2.3 1.8 1.5 0.5 -0.6 -2.6 -2.2 -0.9 0.4
$ 3.5 1.9 2.4 1.3 0.7 0.4 -0.7 -1.8 -3.6 -3.2 -2.0 -0.9
$ 4.0 0.6 1.2 0.3 -0.4 -0.8 -1.9 -3.0 -4.7 -4.2 -3.2 -2.2
$ 4.5 -0.8 0.1 -0.8 -1.5 -1.9 -3.2 -4.2 -5.7 -5.3 -4.3 -3.5
$ 5.0 -2.1 -1.1 -1.8 -2.5 -3.1 -4.4 -5.4 -6.7 -6.3 -5.5 -4.7
Base Case Cold Winter Warm Winter
Source: Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 44
12 October 2012
While our modeling suggests that we should see less power demand in 2013, the overall
impact of this depends highly on weather. Regressing against 30-year normal
temperatures, we estimate that ~4 Bcf/d of gas residential/commercial gas demand could
return during the winter months. Netting against what may be lost due to higher prices and
the result is nearly a zero sum game disregarding regional weather sensitivities. To better
exemplify how weather risks may play out, we ran the following analysis.
We estimate that in our most extreme warm weather scenario, 381 Bcf or 2.5 Bcf/d of
less residential/commercial demand would allow for power demand to hold year-over-
year gains but would push prices lower. Exhibit 76 shows the price in red this is required
to replace the lost heating demand with power demand. Under this scenario winter
prices would be materially lower, needing to average in the low $2/MMbtu range.
Under our coldest winter scenario, an additional 348 Bcf or ~2.3 Bcf/d of additional
residential commercial demand would reduce the needed power demand closer to the
path outlined by blue in Exhibit 76. Prices would move higher under this winter weather
scenario and require prices to average in the $4/MMbtu range, edging close to
$4.5/MMbtu in Q1 2013.
Exhibit 77: Nov-Dec-Jan 2012-2013 outlook Exhibit 78: Jan-Feb-March 2013
Source: NOAA, Credit Suisse Source: NOAA, Credit Suisse
2012 winter storage is higher than normal; summer is back to balance
Combining our baseline outlooks for supply and demand and running our weather-
adjusted seasonal storage inventory paths, we expect winter 2013-2013 to finish 1.7 Tcf or
777 Bcf below winter 2011 exit levels and 198 Bcf above previous ten-year average levels.
Given the large variability in weather and its more pronounced impacts on winter
withdrawals, we see it as the major risk factor to our estimates (Exhibit 80).
The beginnings of material production declines during 2013 help our summer 2013 base-
case storage to finish at 3.6 Tcf, 330 Bcf below 2012 ending forecasts and 167 above
previous ten-year averages. While unconventional gas supply is expected to hold growth
trends through 2013, declining production in conventional gas plays is forecast to help bring
storage back to near-balanced levels by summer 2013 and is reflected in our pricing profile.
Commodity Forecasts: The Best of Times, The Worst of Times 45
12 October 2012
Exhibit 79: Winter 2012-2013 and ten-year weather- Exhibit 80: Summer 2013 and ten-year weather-
adjusted injection range adjusted injection range
Bcf Bcf
4,100
(In Bcf/d) CS Base Case
3,750 Production -1.50
3,800
Imports
LNG 0.00
3,500 Canada -0.30
3,250
Demand
3,200 Power Gen -1.70
Industrial 0.10
2,750 (In Bcf/d) CS Base Case "Residual" -0.20
Production -1.00 2,900
Imports/ (Exports)
LNG -0.10 2,600
2,250 Canada -0.30
Mexico -0.60
Demand 2,300
Power Gen 0.10
1,750
Industrial 0.10 2,000
"Residual" -2.20
1,700
1,250
Nov Dec Jan Jan Mar Apr May Jun Jul Aug Sep Oct
weather range 2012-2013 Fcst
Summer range summer 2013 Fcst
Source: EIA, NOAA, Credit Suisse Source: EIA, NOAA, Credit Suisse
Exhibit 81: Natural gas prices and CS forecast Exhibit 82: Winter storage sensitivity to HDDs
$/MMbtu
NG Actual NG Quarterly Current Futures Forecast
$4.5
10% HDD % dev from norm (lhs) Drawdown Extreme winter Warm winter 8,000
7,000
$4.0 0%
6,000
-10%
5,000
$3.5
Starting Stock (Oct)
-20% 4,000
$3.0 3,000
-30%
2,000
$2.5 -40%
1,000
Ending Stock (March)
-50% 0
$2.0 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13
12/1/2011 12/1/2012 12/1/2013 12/1/2014 Fcst
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: EIA, NOAA, Credit Suisse
Exhibit 83: Henry Hub forecast comparison Exhibit 84: Henry Hub historical price and forecast
US$/MMbtu US$/MMbtu
Credit Suisse Forecast Forward Curve Bloomberg Forecast Mean $18 NYMEX Henry Hub Quarterly Avg Forecast
$5.00
$16
$4.50
$14
$4.00 $12
$3.50 $10
$8
$3.00
$6
$2.50
$4
$2.00
$2
$1.50 $0
Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 46
12 October 2012
Exhibit 85: US natural gas supply/demand model
Bcf/d
(Bcfd) 2010 2011 Q1/2012 Q2/2012 Q3/2012 Q4/2012 2012 Q1/2013 Q2/2013 Q3/2013 Q4/2013 2013 2014 2015
Marketed Gas Production 61.4 66.2 68.9 68.9 68.5 67.9 68.5 67.5 67.1 67.1 67.4 67.3 68.2 69.6
Y-o-Y 2.1 4.8 5.1 2.9 2.2 -0.8 2.4 -1.4 -1.8 -1.4 -0.5 -1.3 0.9 1.4
Y-o-Y% 3.5% 7.9% 8.0% 4.4% 3.3% -1.2% 3.6% -2.0% -2.6% -2.1% -0.7% -1.9% 1.4% 2.0%
Dry Gas Production 58.4 63.0 65.3 65.4 65.1 64.6 65.1 64.1 63.8 63.8 64.1 64.0 64.9 66.2
Y-o-Y 1.9 4.6 4.5 2.7 2.0 -0.7 2.1 -1.2 -1.7 -1.3 -0.5 -1.2 0.9 1.3
Y-o-Y% 3.4% 7.8% 7.5% 4.2% 3.1% -1.1% 3.4% -1.8% -2.5% -2.0% -0.7% -1.8% 1.4% 2.0%
Conventional 33.5 32.6 32.5 32.3 31.3 30.7 31.7 30.2 29.5 29.2 29.1 29.5 28.5 27.3
Y-o-Y -2.1 -0.9 0.8 -0.2 -1.2 -3.0 -0.9 -2.4 -2.8 -2.1 -1.6 -2.2 -1.0 -1.2
Y-o-Y% -5.8% -2.6% 2.5% -0.7% -3.7% -8.9% -2.8% -7.3% -8.6% -6.8% -5.1% -7.0% -3.4% -4.3%
Offshore (GOM) 6.3 5.1 3.8 3.7 3.6 3.5 3.7 3.4 3.3 3.2 3.1 3.3 2.9 2.6
Y-o-Y -0.6 -1.2 -1.9 -1.6 -1.1 -1.2 -1.4 -0.4 -0.4 -0.4 -0.4 -0.4 -0.4 -0.3
Y-o-Y% -8.1% -19.0% -32.8% -29.5% -23.4% -25.4% -28.1% -11.4% -11.4% -11.4% -11.4% -11.4% -11.4% -11.4%
Unconventional 21.1 28.1 30.9 32.2 32.6 32.5 32.0 32.6 32.9 33.4 33.9 33.2 35.5 38.5
Y-o-Y 4.1 7.0 4.9 4.5 3.8 2.5 3.9 1.7 0.8 0.8 1.5 1.2 2.3 2.9
Y-o-Y% 24.2% 33.1% 19.0% 16.3% 13.2% 8.5% 14.0% 5.7% 2.4% 2.3% 4.5% 3.7% 7.0% 8.3%
Barnett 5.1 5.9 6.1 6.1 5.9 5.7 5.9 5.5 5.4 5.4 5.3 5.4 5.2 5.2
Y-o-Y 0.2 0.9 0.4 0.2 -0.1 -0.5 0.0 -0.5 -0.6 -0.5 -0.4 -0.5 -0.2 -0.1
Y-o-Y% 3.5% 17.4% 7.6% 2.7% -1.5% -8.4% -0.1% -8.9% -10.6% -8.4% -6.2% -8.6% -3.6% -1.4%
Cana-Woodford 1.0 1.0 1.0 1.0 1.0 1.0 1.0 0.9 0.9 0.9 0.9 0.9 0.8 0.8
Y-o-Y 0.1 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 0.0
Y-o-Y% 7.6% 2.7% -1.4% -0.8% 1.1% -4.6% -1.4% -8.7% -9.5% -8.9% -8.5% -8.9% -6.4% -4.4%
Eagle Ford 0.3 1.1 1.8 2.2 2.5 2.7 2.3 2.9 3.0 3.2 3.4 3.1 3.8 4.4
Y-o-Y 0.2 0.8 1.1 1.2 1.3 1.1 1.2 1.0 0.9 0.7 0.7 0.8 0.7 0.6
Y-o-Y% 498.5% 296.4% 145.9% 136.2% 110.8% 75.7% 109.9% 57.5% 40.0% 29.6% 27.5% 37.0% 22.3% 15.0%
Fayetteville 2.1 2.6 2.7 2.8 2.6 2.6 2.7 2.6 2.6 2.5 2.5 2.6 2.5 2.6
Y-o-Y 0.7 0.5 0.3 0.2 0.0 -0.1 0.1 -0.1 -0.2 -0.1 -0.1 -0.1 -0.1 0.1
Y-o-Y% 48.1% 24.5% 10.2% 5.8% 0.6% -3.7% 3.1% -4.0% -5.8% -3.2% -2.0% -3.8% -2.0% 2.6%
Haynesville 3.8 6.7 6.8 6.8 6.5 5.9 6.5 5.6 5.4 5.4 5.4 5.5 5.6 6.1
Y-o-Y 2.5 2.9 0.5 0.0 -0.5 -0.9 -0.2 -1.2 -1.4 -1.1 -0.5 -1.1 0.2 0.4
Y-o-Y% 196.2% 77.3% 8.1% 0.1% -7.6% -12.7% -3.3% -17.6% -20.0% -17.5% -8.7% -16.2% 3.2% 7.8%
Marcellus 1.0 2.8 4.3 5.1 5.7 6.1 5.3 6.5 6.8 7.1 7.4 6.9 8.2 9.8
Y-o-Y 0.7 1.8 2.4 2.6 2.7 2.3 2.5 2.1 1.7 1.4 1.3 1.6 1.3 1.6
Y-o-Y% 270.0% 172.6% 129.9% 106.5% 90.9% 61.9% 91.1% 49.4% 33.7% 23.9% 20.8% 30.5% 18.7% 19.4%
Missippian 0.2 0.2 0.3 0.4 0.4 0.5 0.4 0.5 0.6 0.6 0.7 0.6 0.8 0.9
Y-o-Y 0.0 0.0 0.1 0.2 0.2 0.3 0.2 0.3 0.2 0.2 0.2 0.2 0.2 0.1
Y-o-Y% 6.0% 13.6% 54.6% 94.1% 111.6% 124.0% 98.0% 97.0% 64.9% 48.0% 38.3% 57.5% 25.9% 15.5%
Niobrara - Vertical 0.8 0.8 0.9 1.0 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9 0.9
Y-o-Y 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Y-o-Y% 0.6% 10.3% 17.9% 14.9% 10.9% 6.1% 12.3% 0.2% -1.7% -1.6% -1.4% -1.1% -0.6% 0.1%
Niobrara- Horizontal 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1
Y-o-Y 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Y-o-Y% #DIV/0! 550.0% 508.6% 323.5% 241.4% 110.4% 223.2% 73.8% 81.7% 73.9% 67.0% 73.6% 50.3% 38.0%
Permian 4.5 4.3 4.2 4.3 4.4 4.5 4.4 4.5 4.6 4.7 4.7 4.6 4.8 5.0
Y-o-Y -0.4 -0.2 -0.1 0.0 0.1 0.2 0.1 0.3 0.2 0.3 0.2 0.3 0.2 0.2
Y-o-Y% -8.3% -4.8% -1.4% 1.1% 2.3% 5.6% 1.9% 6.2% 5.7% 5.8% 5.5% 5.8% 4.6% 3.5%
Granite Wash 2.5 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.7 2.7
Y-o-Y 0.1 0.2 0.0 0.0 -0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1
Y-o-Y% 4.6% 6.8% 1.6% -1.2% -2.5% -0.1% -0.6% -1.4% -1.5% -0.3% 1.0% -0.5% 2.9% 2.5%
Canadian Imports (Net) 7.0 5.9 5.5 5.6 5.7 5.3 5.5 5.1 5.1 5.6 5.0 5.2 4.9 4.6
Y-o-Y -0.1 -1.0 -1.4 0.2 -0.3 -0.3 -0.5 -0.3 -0.5 0.0 -0.2 -0.3 -0.3 -0.3
Y-o-Y% -1.2% -14.7% -20.0% 2.8% -4.4% -5.9% -7.6% -5.9% -8.3% -0.9% -4.6% -4.9% -6.0% -6.0%
Mexican Exports (Net) -0.8 -1.4 -1.4 -1.7 -1.7 -2.4 -1.7 -2.2 -1.8 -1.8 -2.3 -2.0 -2.2 -2.4
Y-o-Y 0.0 -0.5 -0.2 -0.3 -0.4 -1.0 -0.4 -0.8 -0.1 -0.1 0.1 -0.2 -0.2 -0.2
Y-o-Y% -2.3% 63.6% 12.0% 17.6% 25.9% 77.5% 27.6% 59.9% 6.8% 5.7% -4.5% 13.7% 9.3% 9.3%
LNG Imports (Net) 1.0 0.8 0.5 0.3 0.4 0.4 0.4 0.4 0.3 0.4 0.4 0.4 0.3 0.2
Y-o-Y -0.1 -0.2 -0.5 -0.6 -0.2 -0.2 -0.3 -0.1 0.0 0.0 0.0 0.0 -0.1 -0.1
Y-o-Y% -12.3% -24.4% -48.2% -65.4% -26.3% -30.5% -44.9% -10.2% 3.7% -8.2% -7.8% -6.6% -30.5% -30.5%
Total Supply 68.5 71.5 73.4 73.0 72.9 71.3 72.7 70.8 70.6 71.3 70.6 70.9 71.2 72.1
Y-o-Y 1.8 3.0 3.1 2.3 1.4 -2.4 1.2 -2.6 -2.4 -1.6 -0.7 -1.8 0.3 0.8
Y-o-Y% 2.8% 4.4% 4.4% 3.2% 2.0% -3.2% 1.7% -3.5% -3.3% -2.2% -0.9% -2.5% 0.5% 1.2%
Industrial 17.9 18.4 19.7 17.8 17.4 19.1 18.5 19.8 17.6 17.9 19.5 18.7 19.1 19.4
Y-o-Y 1.0 0.6 -0.3 0.2 0.3 0.2 0.1 0.1 -0.2 0.4 0.4 0.2 0.4 0.3
Y-o-Y% 5.7% 3.1% -1.5% 1.3% 1.6% 1.2% 0.6% 0.3% -1.2% 2.4% 2.1% 0.9% 2.0% 1.8%
Electric Power 20.2 20.8 21.8 26.7 31.5 20.7 25.2 19.7 24.6 30.0 19.8 23.5 24.6 25.3
Y-o-Y 1.4 0.6 5.0 6.8 3.8 1.9 4.4 -2.1 -2.0 -1.5 -0.9 -1.6 1.1 0.7
Y-o-Y% 7.5% 2.9% 29.9% 34.1% 13.8% 9.9% 21.0% -9.5% -7.6% -4.6% -4.4% -6.4% 4.5% 2.8%
Res/Comm 21.7 21.7 32.8 11.7 8.1 28.7 20.3 37.1 13.9 7.9 29.0 22.0 21.9 21.8
Y-o-Y 0.0 0.0 -8.1 -1.7 -0.1 4.3 -1.4 4.3 2.2 -0.2 0.4 1.7 -0.1 -0.1
Y-o-Y% 0.0% 0.0% -19.8% -13.0% -1.2% 17.8% -6.5% 13.0% 18.8% -2.3% 1.3% 8.2% -0.5% -0.5%
Other (Lease Fuel, Pipeline Distribution) 5.4 5.8 6.3 5.8 5.7 6.1 6.0 6.5 6.0 5.9 6.3 6.2 6.3 6.5
Y-o-Y 0.0 0.3 0.2 0.3 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2
Y-o-Y% 0.4% 6.0% 3.3% 6.0% 3.9% 3.0% 4.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Total Demand 65.2 66.7 80.6 62.0 62.7 74.6 70.0 83.1 62.1 61.7 74.7 70.4 71.9 73.0
Y-o-Y 2.4 1.5 -3.2 5.6 4.2 6.6 3.3 2.5 0.1 -1.1 0.0 0.4 1.5 1.1
Y-o-Y% 3.8% 2.3% -3.8% 9.9% 7.2% 9.7% 4.9% 3.0% 0.2% -1.7% 0.0% 0.6% 2.2% 1.6%
Source: Bentek Energy, EIA, HPDI, Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 47
12 October 2012
UK NBP – Anemic demand, balancing supply
Prices at the UK’s National Balancing Point have fallen over the last year, but in our view
they remain high, propped up by tight post-Fukushima LNG markets. A combination of
poor economic growth, power-generation economics favoring coal over gas, and efficiency
gains is consistently moving natural gas demand lower in Northwest Europe. But with
lower supply from LNG, the market is more easily balanced by variable pipeline imports
from Norway. In fact, recent contract negotiations between Russia’s Gazprom and
European consumers resulted in price reductions for pipeline imports into continental
Europe, leaving increased volumes of Norwegian gas to be sent to Great Britain.
From our viewpoint, without resolution from the nuclear situation in Japan, which as
previously noted is not expected until summer 2013 at the earliest, prices at NBP should
stay supported. We leave our forecasts unchanged.
Exhibit 86: NBP forward curve
P/therm
80
75
70
65
60
55
Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15
Current Last month 6 mo ago
Source: Credit Suisse
Marking to market our Q3 2012 forecast, prices finished 4 p/therm or 8% higher than our
forecast. We expect 2012 prices to average 58.88 p/therm, 1.4% higher than current
forwards would suggest, led by our 65 p/therm forecast for Q4 2012. Into 2013 we expect
prices to average slightly higher, at 62.25 p/therm or 1.7% below where the current futures
market is pricing.
Exhibit 87: UK natural gas price forecasts
(P/therm)
2012 2013 2014 2015 Long term
UK NBP (GBp/Therm ) 2010* 2011*
Q1* Q2* Q3* Q4 (f) Yr Avg (f) Q1 (f) Q2 (f) Q3 (f) Q4 (f) Yr Avg (f) Q1 (f) Q2 (f) Q3 (f) Q4 (f) Yr Avg (f) Yr Avg (f) (real)
Actuals and Forecasts 56.40 57.50 56.00 57.00 65.00 58.88 65.00 58.00 58.00 68.00 62.25 73.00 63.00 63.00 73.00 68.00 66.00 50.60
Previous 53.00 65.00 57.88 65.00 58.00 58.00 68.00 62.25 73.00 63.00 63.00 73.00 68.00 66.00 50.60
Net Difference 4.00 0.00 1.0 0 0.00 0.00 0.00 0.00 0 .0 0 0 .0 0 0 .0 0 0 .0 0 0 .0 0 0 .0 0 0 .0 0 0 .0 0
% Difference 7.5% 0.0% 1.7 % 0.0% 0.0% 0.0% 0.0% 0 .0 % 0 .0 % 0 .0 % 0 .0 % 0 .0 % 0 .0 % 0 .0 % 0 .0 %
Consensus* 64.00 59.20 65.20 56.90 56.30 69.20 64.60 64.90 75.50
Net Difference 1.00 - 0 .3 0 -0.20 .1
10 1.70 -1.20 - 2 .3 0 3 .10 - 9 .5 0
% Difference 1.6% - 0 .5 % -0.3% 1.9% 3.0% -1.7% - 3 .6 % 4 .8 % - 12 .6 %
Fw d Curve* 61.90 58.10 66.10 61.60 59.80 65.20 63.20 71.50 63.70 61.90 65.50 65.60 65.30
Net Difference 3.10 0 .8 0 .1
-1 0 -3.60 -1.80 2.80 - 1.0 0 1.5 0 - 0 .7 0 1.10 7 .5 0 2 .4 0 0 .7 0
% Difference 5.0% 1.4 % -1.7% -5.8% -3.0% 4.3% - 1.6 % 2 .1% - 1.1% 1.8 % 11.5 % 3 .7 % 1.1%
2012 2013 2014 2015 Long term
UK NBP ($/m Btu) 2010* 2011*
Q1* Q2* Q3* Q4 (f) Yr Avg (f) Q1 (f) Q2 (f) Q3 (f) Q4 (f) Yr Avg (f) Q1 (f) Q2 (f) Q3 (f) Q4 (f) Yr Avg (f) Yr Avg (f) (real)
Actuals and Forecasts 0 8.97 8.81 8.69 8.45 10.08 9.00 10.08 8.94 8.83 10.35 9.55 10.96 9.46 9.46 10.96 10.21 9.85 8.00
USD/GBP 1.55 1.61 1.55 1.57 1.50 1.57 1.55 1.57 1.56 1.54 1.54 1.55 1.52 1.52 1.52 1.52 1.52 1.51 1.50
Source: Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 48
12 October 2012
Demand still lags, but coal plant closures could help
In our previous quarterly update we reduced our outlook for 2012 and 2013 NBP prices
due to lagging seasonal demand. UK gas consumption has averaged 227.2 Mcm/d
through the end of September, an 11% or 28 Mcm/d drop from five-year lows in 2011. UK
demand declines flow from both secular trends (e.g., energy efficiency gains) and cyclical
headwinds (e.g., the economic recession and low coal prices), and have put in doubt the
widely adopted forecasts of ever-rising gas demand.
Generation economics favor coal at the largest margin YTD. Shown in Exhibit 89,
higher dark spreads (the margin for generating power from coal) and collapsed spark
spreads (power margin for natural gas) have sharply curtailed power-sector demand for
gas this year. And already announced are 1.2 GW of gas generation plant closures, while
another 4.1 GW is slated to be mothballed.
However, these recent generation trends could change over the coming months thanks to
coal plant closures and a progressively higher CO2 floor price. According to Credit Suisse
Analyst Mark Freshney (CS European Utilities Daily - Plugged In! 28 Sep 2012), the
recently released “quarterly energy trends” publication from the DECC (the UK Energy
Ministry) noted ~5 GW of coal-fired plants are due to close in the next six months.
Exhibit 88: UK gas demand continues to lag Exhibit 89: UK clean dark vs. clean spark spreads
Mcm GBp/MWh
21 UK Clean Dark UK Clean Spark
450
18 Coal favored
400
15
350
12
300
9
250
6
200
3
150
0
100
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Gas unfavored
-3
Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12
5 yr range Avg 2011 2012
Source: National Grid, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Supply – Lower LNG supply but higher Norwegian imports to balance
UK gas supply continues to respond to price signals: North Sea production remains in full
decline, while LNG imports into the UK were cut in half to 36 Mcm/d. Meanwhile, pipeline
imports from Norway have partly offset LNG declines, increasing 3.7 Mcm/d yoy through
September (Exhibits 90 and 91).
Looking ahead, recent adjustments to Russian oil-indexed gas prices should eventually
lead to increased Norwegian imports to the UK to help further balance in the absence of
LNG. However, strategic purchases by Russian-gas-consuming, Continental European
countries, may delay these effects Q4 2012/Q1 2013 or until summer oil price weakness
catches up with oil-indexed prices out of Russia.
Commodity Forecasts: The Best of Times, The Worst of Times 49
12 October 2012
Exhibit 90: Norwegian pipeline flows to UK Exhibit 91: UK LNG imports
Mcm/d Mcm/d
70 100
90
60
80
50 70
60
40
50
30 40
30
20
20
10 10
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
0
5 yr range Avg 2011 2012 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: National Grid, Credit Suisse
Gazprom 2012 export volumes will likely disappoint according to Credit Suisse Analyst
Andrey Ovchinnikov (see GAZP.MM: Gazprom - Rerating is unlikely due to lack of
catalysts). It is expected that export volumes to Western Europe will hardly reach 140 Bcm
given the volumes YTD (Exhibit 92). The overall export including FSU countries should be
near 200 Bcm, on our estimates, versus 220 Bcm guided by Gazprom. We expect Ukraine
to buy significantly lower minimum take-or-pay volume of 40 Bcm.
The reasons for lower export volumes are weak demand for gas in Europe, as previously
described, and some Gazprom-specific causes. First, Gazprom's price is still the
highest among other European suppliers that significantly increased the share of spot
element in the price (Statoil, according to our estimates, may have up to 60% of the
volumes of gas sold to Germany linked to spot prices). Second, Gazprom's price
generally tracks oil price with nine months’ delay, which gives European customers
price visibility for the next three quarters and allows them to schedule deliveries in the
most cost efficient way.
Exhibit 93: Gazprom’s monthly export volumes to
Exhibit 92: Gazprom’s export to Western Europe Europe
Bcm Bcm
Source: Company Data, Credit Suisse Equity Research Source: Company Data, Credit Suisse Equity Research
Commodity Forecasts: The Best of Times, The Worst of Times 50
12 October 2012
That said, given the relative weakness in summer oil prices, we expect Gazprom's price to
go down at the end of the year or beginning next year (depending on each contract’s
terms). It therefore makes sense for the European customers to reduce off-takes till Q4
2012/Q1 2013.
Recent European gas storage figures may be confirming these trends. While NBP
storage has, until recently, held roughly flat to 2011 levels, falling levels of Baumgartner
and Germany storage levels (both of which are Gazprom’s main European customers)
indicate the decision to pull from storage now in anticipation for a fall in winter oil-indexed
pricing (Exhibit 95). This should, over the coming months, cause imports from Norway to
the UK to increase, as there will be a smaller market for Norwegian gas on Continental
Europe
Exhibit 94: NBP recently fell below 2011 level Exhibit 95: European gas storage levels
Mcm Mcm
5,000 Storage Region Mcm % full % full last yr Yoy % Change
Baumgartem (Austria) 13,196 88.9 87.9 1.0
4,500
4,000 Germany 18,229 99.6 98.2 1.4
3,500
Iberian Gas 7,121 89.6 97.8 -8.1
3,000
NBP (UK) 4,233 89.0 98.9 -9.9
2,500
2,000 PEG (France) 5,851 85.8 98.7 -13.0
1,500
PSV (Italy) 14,479 97.0 94.5 2.5
1,000
TTF (Netherland) 1,803 87.7 92.1 -4.5
500
- Zeebrugge (Belgium) 640 97.7 99.6 -1.9
Jan Mar May Jul Sep Nov
5-yr Range 2012 2011 Aggregate total 65,552 93.3 95.2 -1.9
Source: GIE, Credit Suisse Source: GIE, Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 51
12 October 2012
Equity Research
Steel
Michael Shillaker
michael.shillaker@credit-suisse.com Caught between a rock and a hard place
+44 20 7888 1344
Excess capacity caps pricing power
Commodities Research
Andrew Shaw A simple fact: the global steel industry remains saddled with severe overcapacity.
andrew.shaw@credit-suisse.com Capacity was built during the boom years, fuelled by China’s insatiable appetite to
+65 6212 4244
accelerate accumulating its “capital stock” of buildings, infrastructure, and capital goods.
Marcus Garvey The pace of this “flow” of annual steel use reached its pinnacle in 2002-2008, following an
marcus.garvey@credit-suisse.com era of limited steel demand growth and a slow rate of adding new production capacity.
+44 20 7883 4787
The China flow is now ebbing (although in absolute terms steel demand has not “peaked”
Martin Yu
martin. yu@credit-suisse.com – China’s capital stock remains far from complete). In the period since Lehman’s collapse,
+44 20 7883 2150 steel demand has fallen back sharply in developed economies too and is yet to recover.
New capacity has continued to be built in China and in other key regions such as South
Korea and Latin America.
Globally, there is currently almost 1.9 Bt/y of capacity, compared to the 1.5 Bt we expect to
be produced in 2012. With capacity utilization therefore at about 80%, the near to mid-
term outlook for the industry is one of sustained overcapacity, and pricing power therefore
on a structural basis will remain absent, unless demand can recover or supply be cut.
The latter is, in our view, happening in markets that are not forecast to recover (such as
southern Europe), but on a global scale these reductions remain insufficient to support
stronger prices. Believers in a return to structural pricing power for steelmakers would
have to hold considerable faith in a major surge in demand growth.
However, demand growth looks likely to remain muted in the next few years, given the
problems in the developed economies and a likely slowdown in demand growth rates.
This is not to say there is no growth – our forecasts assume an increase to a little over 4%
p.a. in world steel demand (and output) for the next few years, as the global economy
rebounds and inventories are rebuilt, but this is too low to eliminate excess capacity very
quickly. In the very near term, though, demand remains soft.
Exhibit 96: World crude steel production – cutbacks Exhibit 97: Europe remains the weakest region –
start to weigh, but are they enough? China crawling sideways
Mt, monthly, saar Mt, monthly, saar
140 60 China JKT (rhs) USA (rhs) Europe (rhs) 20
130 50 17
120 40 14
110 30 11
100 20 8
90 10 5
80 0 2
2005 2006 2007 2008 2009 2010 2011 2012 2005 2006 2007 2008 2009 2010 2011 2012
Source: Credit Suisse, WSA Source: Credit Suisse, WSA
Commodity Forecasts: The Best of Times, The Worst of Times 52
12 October 2012
A “prisoner’s dilemma” for steel
What we think is clear is that, cyclically, steel output growth rates are running below trend
(which gives us some hope of a cyclical upturn at some stage) but that trend growth rates
have slowed significantly since the pre-2008 growth rate of 7% p.a. This provides little
chance of a return to a structurally tight market, meaning permanent closures are
necessary (Exhibit 98).
In 2002 the OECD began a global steel capacity closure programme aimed at removing
some 200-300 Mt/y of excess capacity that the OECD had identified at the time. After
more than a year of talks and reports, the plan was shelved as the 2003-2004 steel market
recovery (and subsequent boom) put paid to any thoughts that excess capacity was a
hindrance to future returns.
Producers may be prompted to revisit these former plans, especially in Europe and China.
The removal of about 180 Mt/y should bring utilization rates up to the 90% level required to
prop up prices at levels sufficient to provide adequate returns for replacing old plants with
more efficient facilities. This price lies near US$150/t above today’s HRC spot price of
US$600/t for example (CIS export price).
However, as became clear in 2002, the problem remains one of a “prisoner’s dilemma” in
that all participants would gain from the outcome of capacity closure, but deciding which
should close capacity and then agreeing on sharing the burden of the costs of closure
would likely not be possible.
Shelve new capacity plans or face even weaker prices?
At a minimum we believe the industry should shelve any new capacity plans. Steel
companies still often appear to see steel as feeding regional markets, and it is that pursuit
of regional market share that perpetuates investment in markets where demand may be
regional, but supply, and hence returns, are driven by global, not regional, factors.
Much of the capacity still coming on-stream in regions such as South Korea, Latin America,
and Russia is being driven by legacy decisions taken before the financial crisis. In the
long term, the fact that new steel-making capacity (notably outside of China) will not meet
expected investment returns and that some capacity (notably in Europe) should be
removed, suggests that at some stage the dynamic of the mid-2000s could return, i.e.,
demand growth ultimately catches up with capacity, in sharp contrast to the iron ore
market today, which is facing the opposite pattern.
Exhibit 98: Global crude steel production and forecast
Natural log
7.7
Global Steel Output Forecast 2012-16
7.5 CAGR: 4.1%
7.3
7.1
1999-07: 2007-12:
6.9 1970-99: CAGR: 6.9% CAGR: 2.2%
CAGR: 1%
6.7
6.5
6.3
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Source: Credit Suisse, WSA
Commodity Forecasts: The Best of Times, The Worst of Times 53
12 October 2012
While the maths may be simple, the reality is not. China is unlikely in our view to freeze
new capacities and debottlenecking constantly adds 1%-2% p.a. to capacity at a much
lower capital expenditure per tonne than new plant. Such challenges explain why, after
the peak of the 1950-1973 boom, the steel industry took some 30 years to enter a phase
of supply constraint again, which lasted briefly from mid-2004 to September 2008.
Unless action is taken either to close capacity or at least curb new capacity, then we
believe industry returns could be structurally deficient for many years to come. However,
even under a moderated pace of expansion in China, the main growth engine, this
prospect seems some years off.
Ultimately, the dynamic of inadequate returns on new build and ongoing demand growth
globally should see the steel industry return to a period of tighter supply/demand
fundamentals, but across two plausible scenarios – an optimistic and a pessimistic case –
which could take a decade to rebalance.
Exhibit 99: China’s steel output moderating, but exit Exhibit 100: Monthly steel production in China –
barriers are high holding steady
Log, sa Mt, annualized monthly production
Chinese Steel Production SA (Natural 750
12.0
Log)
700 Raw Annualised SAAR
11.5 Trend '87-'00
650
11.0 Trend '01-'06 600
10.5 Trend '07-'11 550
10.0 500
Forecast
450
9.5
400
9.0
CAGR CAGR CAGR CAGR 350
8.5 6.6% 22.2% 10.2% 5.3%
300
8.0 250
1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2005 2006 2007 2008 2009 2010 2011 2012
Source: Credit Suisse, China NBS Source: Credit Suisse, China NBS, CISA
Steel prices and costs – on the wane
At a global level steel prices have, with the odd blip, been on a downward trend since the
post-crisis peak in early 2011 and have converged near US$600/t for HRC. This is now
penetrating well into the global steel cash cost curve and has recently been a decisive
factor in steel output cuts and hence falling raw materials prices.
Steel prices of late have rallied in the US, stabilized in Europe, and continued to fall in Asia
(notably China). This is a normal pattern; looking at the last ten years or so, the US tends
to recover first, then Europe, then Asia.
The global steel cost curve for HRC is relatively flat, with the steeper lower end dominated
by backward-integrated producers with raw materials. The change in raw materials pricing
had a significant influence on flattening the curve, as all buyers in effect moved to the
same methodology for purchasing raw materials.
In Q4 2011 the 75th percentile (roughly global utilization in that period) saw an operating
cost of HRC of about US$750/t. Since then steel costs have fallen by some US$160/t as
ore and coal prices have dropped, leading to a 75th percentile operating cost of about
US$600/t, which is broadly where the global steel price is currently trading.
Commodity Forecasts: The Best of Times, The Worst of Times 54
12 October 2012
Costs appear to have peaked and look set to decline. We expect iron ore prices to drift
down over coming years, with risks skewed to the downside in the event of an
undershooting to clear excessive supply capacity in the years to come.
Exhibit 101: Regional steel prices in 2005-12 – Exhibit 102: Steel prices, costs, and implied
volatile and under pressure today margins
US$/t US$/t
1250 1400 EBITDA/t -rhs Steel price U$/t Steel implied cost (U$/t)820
US HRC
1150
1200 720
N.Europe HRC
1050
1000 620
950 China HRC
520
800
850
420
750 600
320
650
400
220
550
200 120
450
350 0 20
2005 2006 2007 2008 2009 2010 2011 2012 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse, Thomson Reuters DataStream
Price fluctuations driven by apparent demand
We believe the steel industry will not experience structural pricing power until excess
capacity is removed through closure or demand outstrips supply for a sustained period.
Structural pricing power in effect (like copper and iron ore) would see the steel price move
to a “premium” above the cash cost curve covering the costs of building new mills (at
about US$750/t for HRC, outside China).
Steel prices therefore seem set to rise and fall with the apparent demand cycle (which is
largely driven by macro events), similar to the cycles of the 1990s. It is likely to be this
dynamic only that drives the broad sector for the foreseeable future.
Raw materials pricing has changed the game
Steel margins are, however, likely to be far more constrained than they were in the pre-
2010 period given the structural change in the nature of raw material pricing, which on the
upside no longer allows steelmakers windfall profits (higher prices, with stable raw material
costs) but on the downside should also help to protect steel margins to some extent
against squeezes that back-dated fixed raw materials prices inevitably trigger.
Since the emergence of spot market and index-based pricing for ore and coal since 2010,
the inputs into steelmaking have converged. This has in effect brought the raw material
cost for electric-arc furnaces (predominantly iron and steel scrap) into line with blast
furnace producers (predominantly iron ore and coke/coal inputs). BFs used to have a
relative advantage.
From a variable cost perspective margin differentiation between producers will be
dependent on access to cheaper-than-market sources of raw materials and fixed cost
advantages such as labor (and this can include currency).
Excess capacity shows up in global export market liquidity
Although steel prices differentiate from region to region for short periods of time, it is
ultimately the global export price that sets domestic steel prices in the long run (plus or
minus any differentials from tariffs or transportation costs). Exhibit 103 shows the CIS
Commodity Forecasts: The Best of Times, The Worst of Times 55
12 October 2012
export price versus the variable cost equivalent (ore coal and scrap) for a BF/BOF
producer. This suggests that, other than in periods where the industry is temporarily short
of supply (such as the second half of 2009 and early 2010), in a steady state market the
global HRC price is in effect priced at a US$100-200/t margin above raw materials prices,
with the average spread around US$160/t broadly covering fixed costs and transportation.
This dynamic will likely be the driver of the long term steel price until ultimately we see
excess capacity eliminated.
Exhibit 104: Exhibit 105: China’s steel trade – to Exhibit 106: Steel exports by market destination –
persist at above net 30 Mt/y of exports Asia dominates
Mt, monthly, sa Mt, monthly, sa
100
8 China's net steel exports - SA Exports SA Imports SA Asia Africa Europe S America N America Oceania
90
7
80
6
70
5
60
4
50
3 40
2 30
1 20
0 10
2005 2006 2007 2008 2009 2010 2011 2012
0
-1
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Source: Credit Suisse, Customs data Source: Credit Suisse, Customs data
The nature of the cycle
Against a backdrop of muted, but volatile, demand growth and relativity constant supply,
cycles are likely to be short and sharp. With mills operating below full utilization the
supply-side response is likely to be swift on a global scale but regionally, at least, there will
likely be periods of oversupply and undersupply. While the structural outlook for pricing is
weak, it will be these mini-cycles that allow prices in certain locations to move out of line
with global prices.
We acknowledge there will be brief periods where regional pricing falls out of kilter – this is
a normal part of the steel cycle, given steel pricing is locally priced but globally arbitrage-
able. Mini-cycles in local markets can force prices up above the long-term global export
price for a period of time.
Furthermore if we do see a sustained global IP recovery such as in 2010, then it is likely
steel markets will appear “short of steel” for a spell, driving prices off the global cost curve
for a while. Cycles such as the boom of 2000, or the recovery of 2009-2010 forced steel
prices far above the cost curve for some time.
Apparent demand for steel is a function of the global IP cycle, with the inventory changes
in steel being significant enough to leave apparent steel demand oscillating at around 2x
the IP growth trend. The current cycle is looking similar to that of 2001-2003, and not the
crises of 1998 and 2008, but a slow crawl of little or no growth. The problem is there
remains the specter of an Asian/Russian-type crisis overhead if Europe suffers major
setbacks.
In 2001-2003 we saw trend growth of about 3% p.a. and in the recession-hit years growth
averaged zero, 300 basis points below trend for the best part of two years before
rebounding sharply in 2004.
Commodity Forecasts: The Best of Times, The Worst of Times 56
12 October 2012
Since the 2009 recovery, growth rates have been running at about 4% p.a. globally, with
the apparent demand growth average of the last 12 months near 1% or about 300 basis
points below that trend. In principle therefore, and barring a crisis scenario, we should at
some stage see a repeat of the 2003-2004 recovery period, which is postulated by Credit
Suisse’s IP forecasts. Extrapolating current output, we would see a rebound in growth
rates similar to 2004 commencing in the final stages of 2012. However a large influence
on this cycle will be a lift in demand, and an inventory adjustment phase in China and this
appears slow in coming in Q4.
10-15 years on – does history repeat itself?
The years 1997 and 1998 saw two major crises hit the steel market hard. We saw a
rebound commence in 1999 and peak in 2000 and then a recession in 2001-2003 before
the recovery in 2004 took hold. A decade later, we saw the US/UK move into crisis in
2007, a global crisis in late 2008 and a rebound in 2010 and a recession thereafter.
Based on history, this suggests the recovery should only commence from mid-2013 and
should show its true strength in 2014 and early 2015.
As outlined in the macro-economic section, we believe that both GDP and IP will
accelerate in 2013, leading to a similar acceleration in apparent steel consumption through
2013 and into 2014. This in turn should see steel prices higher and the underlying
margins of the steel industry expand closer to 2010-2011 levels.
This macro dynamic is reflected in our supply/demand forecasts as shown at the end of
this section.
China – the waiting game continues
At the time of our last quarterly update in July, we emphasized the hope that measures
taken to loosen brakes on China’s economy would take a hold within Q3, lifting steel
demand and month-on-month mill production run rates. However, the stronger advance in
demand has proved elusive. Moreover, with growth within the realms of Beijing’s targets,
we do not believe measures to stimulate will be deepened materially.
That said, despite re-emergence of greater market pessimism, China’s steel output has
held up relatively well in an environment where destocking generally continues to take
place, at least at the consumer level of the chain. Although mill stocks may not have taken
the same course – there is evidence to show these have built through to the summer
months – it is a potential end to this destocking phase and a sharper lift in apparent
demand that underpins our growth forecast in a 5%-6% p.a. range for steel
demand/production in 2013-2015, before a gradual trend-line fade:
We have retained our forecast of 700 Mt for CY 2012 for China as a whole, representing
an increase of less than 2.5% year on year. This contrasts with advances of about 9%
in each of 2010 and 20116.
Revisions have been made to our projections for subsequent years downwards, albeit
allowing for what we feel will be an inevitable kick from the commencement of a
restocking phase. We now forecast crude output at 740 Mt for 2013, a rise to 780 Mt in
2014, to 820 Mt in 2015 and 860 Mt in 2016, consistent with a 5%-6% p.a. trend7.
6 It is worth commenting here that CISA recently appears to acknowledge a degree of under-reporting of crude steel production in
China, possibly by about 15-20 Mt/y (some believe this could be higher). CISA stated that the China Steel Industry Statistics
Annual Report put 2011 crude steel output nationally at 702 Mt (versus 684 Mt in NBS time series).Although it is not clear why
the 2011 is higher than the NBS data that feeds through to WSA tallies, experts point to mismatches in calculating implied crude
steel output from production of finished steel products. Some mills may also have gone unreported.
7 In September CISA also reiterated its view that China's crude steel production capacity now stands at 900 Mt/y, but that efforts to
remove 38 Mt/y of "backdated" capacity would speed up under the current 5Y Plan. This compares with forecasts of 780 Mt/y of
steel production in 2015 and 880 Mt/y by 2020 (revealed by CMMA). The 5Y Plan envisages a major thrust on efficiency
improvement, quality control and better logistics chain management.
Commodity Forecasts: The Best of Times, The Worst of Times 57
12 October 2012
This increment of about 40 Mt/y dominates expansion in global steel output, but falls
short of the 60-70 Mt/y climb in the few years prior to 2008. The impact on iron ore and
metallurgical coal demand of this shift is plain to see.
Our forecast remains consistent with our view that trend growth rates of China’s steel
production (effectively demand) are structurally moderating, but that steel demand in
China is still some years yet away from its final peak.
Steel price outlook – modest gains ahead
Looking at global pricing we take the following into account in drawing up our forecast:
Sustained overcapacity and hence cost-curve-driven pricing.
Some cyclical pricing power could return as steel output recovers in line with GDP/IP
forecast acceleration, driving improved apparent steel demand.
Changes to the cost curve, primarily based on our longer-term forecasts for iron ore and
metallurgical coal (i.e., structurally lower input prices than in recent years).
Structural differentials in regional markets; for example the US is a natural net importer
of steel and as such has a cushion of transportation costs for domestic producers.
At the local market level, quality differentials and buyers’ willingness to pay a premium
for local higher-grade steels than basic export market equivalents. In general, for
example, European domestic HRC trades some €50/t higher-than-imported material for
(perceived) quality and service reasons.
On this basis we derive the global mid-range HRC export price as US$593/t in 2012 and a
modest recovery to US$617/t in 2013. We expect margins to improve steadily over the
next few years, in line with improving demand, but margins are still likely to be well below
2010 levels.
We then forecast local market HRC prices based on historical differentials versus the
derived HRC export price. Although our steel price forecasts are lower in 2014 than in
2013, the actual return to the steel industry (non-integrated producers) should be higher
given lower raw material prices.
Exhibit 107: World steel production in 2004-2016
Mt
2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E
EU 27 202 196 207 210 198 139 173 177 170 175 181 185 188
NAFTA 131 125 130 131 123 81 110 119 123 127 129 130 130
China 280 354 424 493 499 574 624 679 700 740 780 820 860
India 33 38 46 53 58 63 68 74 76 80 88 93 98
Japan 113 112 116 120 119 88 110 108 109 115 116 116 117
S Korea 48 48 49 51 54 49 58 69 68 69 71 72 74
Taiwan 19 19 20 21 20 16 20 23 21 22 22 23 24
Russia 66 66 71 72 69 60 67 69 70 72 74 76 77
Ukraine 39 39 41 43 37 30 33 35 30 32 33 34 36
Turkey 20 21 23 26 27 25 29 34 34 35 37 39 41
Brazil 33 32 31 34 34 27 33 35 33 35 37 38 39
ROW 88 96 90 92 93 61 66 66 66 69 71 73 75
Global total 1,072 1,144 1,247 1,346 1,329 1,211 1,392 1,487 1,500 1,570 1,639 1,699 1,758
Growth y/y % 10% 7% 9% 8% -1% -9% 15% 7% 1% 5% 4% 4% 4%
ex-China 791 791 824 853 830 638 767 808 800 830 859 879 898
Growth ex-China 6% 0% 4% 4% -3% -23% 20% 5% -1% 4% 3% 2% 2%
Growth China 27% 26% 20% 16% 1% 15% 9% 9% 3% 6% 5% 5% 5%
Source: Credit Suisse, World Steel Association
Commodity Forecasts: The Best of Times, The Worst of Times 58
12 October 2012
Exhibit 108: World HRC price forecasts
US$/t
2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E
CIS export 444 504 566 858 451 608 675 560 525 514 520
US 600 641 585 946 531 665 814 660 625 614 620
diff 155 138 19 89 80 58 139 100 100 100 100
Germany 562 585 666 926 569 691 773 650 600 589 595
diff 118 81 100 68 118 83 97 90 75 75 75
China 530 490 565 727 528 633 736 640 540 529 535
diff 85.6 -13.2 -1.9 -130.7 76.6 25.6 60.4 80.0 15.0 15.0 15.0
Source: Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 59
12 October 2012
Bulks
Commodities Research Iron Ore – End of an era
Andrew Shaw
andrew.shaw@credit-suisse.com Three months is a long time under punishing market conditions. However, while
+65 6212 4244 considerable uncertainty remains, in our view the events of Q3 have signaled a clear
Marcus Garvey
turning point for iron ore and, with it, major revisions to our price forecasts. Further, we
marcus.garvey@credit-suisse.com now see ingredients for a more severe shake-up of prices as excessive new supply enters
+44 20 7883 4787 the market, especially beyond 2013-2014.
Martin Yu Such a turn sits outside of our base case, which entails dramatic (but finite) cuts in
martin. yu@credit-suisse.com
+44 20 7883 2150
Chinese supply to accommodate rising imports. However, it should be recognized that
the potential for a deep price plunge, albeit temporarily, within the next 3-4 years is now
Equity Research a major risk. A number of the major producers are clearly preparing for it.
Paul McTaggart
paul.mctaggart@credit-suisse.com Paradoxically, in the near term, we expect prices to remain around $120 on average in Q1,
+61 429 328 247
as the restock currently underway is underpinned by a modest improvement in Chinese
Matthew Hope demand and a return to relative stability in Europe. Perversely, however, this rebound
matthew.hope@credit-suisse.com could keep in place sufficient expansion momentum to precipitate a fiercer price war later.
+61 2 8205 4669
Under these conditions, the clearance of substantial surpluses would necessitate rapid
liquidation of production beyond China’s shores to restore market balances.
At its extreme this could see prices invade deeply into a flattening global supply
cash cost curve, with the risk of prices trading in a range far below current levels
for a short period of time.
In the shorter term, while the potential for a recovery still exists ahead, we now
believe this will be a much more muted affair than at the time of our last forecast.
This softer run-up should hold back sufficient volumes to avoid a calamitous fall in 2013,
but our peak quarterly price projection now lies at a relatively modest US$120/t
CFR China in Q1 2013, supported by the restock. While the market is expected to
tighten, it will not do so to the extent of needing a stronger price signal to maintain
adequate supply.
Exhibit 109: Prices have rebounded over the past week as the restock has
gained traction…
Average days inventory of imported iron ore at sample mills (lhs), US$/t (rhs)
48 Avg Stock Days TSI Price (rhs) 200
43 180
56% restock
38 160
??% restock,
33 35% price 140
increase
28 22% price increase 120
23 100
18 80
Mar-11 Jun-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service, MySteel
Commodity Forecasts: The Best of Times, The Worst of Times 60
12 October 2012
The dramatic change in our outlook is a function of both demand and supply, as well as a
dramatic change in all-important market sentiment. It should be recognized that, unlike
equities (where it is possible to estimate a theoretical value based on likely future dividend
streams), for commodities, multiple equilibriums are possible, with markets often moving
rapidly from a state where the concern is a lack of supply for any given demand level, to
one where overarching discussion is about how all of the supply can be accommodated.
Weak Atlantic For iron ore, the catalyst for the change has been weakness on the demand side. While
economies sap much of the focus (and the incremental tonnage) remains on China, the straw that broke the
proverbial camel’s back over recent months was actually weakness elsewhere, with the
global demand for
threat of more tonnes initially destined for Europe being pushed into a weakening Chinese
iron ore … spot market (even if this switch is proportionately small compared to Chinese off-take). With
concerns about the pace of longer-term growth in China building (we now think that growth
over coming years will be at a still healthy, but substantially slower rate), the market was
simply not able to accommodate the “surplus” from a clearly weakening Europe.
In addition to soft demand, supply has continued to surprise to the upside (with the notable
exception of Brazil). In the near term the major producers have been able to squeeze
unexpected efficiencies out of existing production schedules, thereby running consistently
above previous estimates of capacity. In addition, it has become very clear that softer
expected global demand will now easily be met from current expansion plans, with the risk
of large surpluses beginning to emerge within the next 12 months.
China’s growth momentum eludes
China’s long- While Europe was the catalyst, one of the key structural reasons for the change in outlook
awaited recovery has been a moderation in Chinese steel production, with demand for steel from most of
has not materialized the key sectors (construction, infrastructure development, and capital goods) being revised
down over recent months as the rebound has failed to materialize. In each of these major
applications, which account for almost 80% of steel’s use in China, demand growth
persists, but far below the pace of the middle part of the 2000s. As we approach year-end,
the portents do not bode well for an imminent surge in steel demand and hence a sharp
acceleration in month-on-month steel production run rates.
The caveat here is the potential for a restocking phase – initially at the consumer end of
the chain in steel, and at the mill level for iron ore where destocking has run its course.
A sharp destocking phase helped precipitate iron ore’s slide to US$87/t in the first
week of September. Working off of these iron ore stocks has reduced the risks of
deeper price slippage in the next few months, with import volumes stable at about
60 Mt/month and domestic supply under pressure (a mild, opportunistic restock
commenced in late September according to physical traders, and a stronger, seasonal
restock drawn from imports is likely in late Q4 and into Q1).
As we expected in our August report (see Curtain Falls on Era of Windfall Prices),
prices have settled in a trading bracket between US$100/t and $110 and we believe
this is where they will generally stay through Q4.
Iron ore prices are still not low
While a spot price near US$100 feels very low relative to recent history, there has been a
substantial change in the pricing dynamics in the iron ore market, with the spot price only a
very small part of the total market as recently as 2009. Current prices being paid remain
well above the levels seen during the “boom” in early 2008, when Australian miners were
on average receiving about US$80 FOB.
Although the shift to shorter-term index-based pricing is overwhelming fixed pricing in
transactions today, lags in lower prices flowing through to receipts will continue to prop
up expansion plans for longer.
Commodity Forecasts: The Best of Times, The Worst of Times 61
12 October 2012
Exhibit 110: Iron ore prices have averaged close to
US$80/t in real terms in the past century – the Exhibit 111: Received prices have still been above
pronounced price boom is probably fading 2008’s “peak” levels
Real 2010 US$ log US$/t, Price received by Australian iron ore exporters, last data point – July
2012
6.1 price hptrend average 180
Overshoot? 160
5.6 140
120
5.1
100
Return 80
4.6
ing to
long 60
Stable prices
around long run run
4.1 40
Historical outlier
20
3.6 0
1885 1895 1905 1915 1925 1935 1945 1955 1965 1975 1985 1995 2005 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse, customs data
Supply growth is overwhelming moderated demand
In trend terms, global steel production has grown at 2.2% p.a. in 2007-2012, while
seaborne exports of iron ore continue to grow at a pace of more than 8% p.a. With global
growth momentum weak, and China’s steel demand having moderated, we now believe
that the opportunity for a return to a market in shortfall has diminished.
Importantly, however, we also consider it most unlikely that prices settle anywhere near
the historically low levels seen in the early 2000s, which we feel will prove to be the
historical outlier.
While a moderate bounce has taken place as expected, continued shorter-term stability
will need a substantial reduction in Chinese iron ore production, as well as some recovery
in steel production as the effects of stimuli feed through.
The benefit of the latter has been slow in arriving, but domestic mine supply does appear
to have been reined back, although the price sensitivity of remaining production may
be much lower and we are not convinced Chinese supply will give way readily to
additional import volumes, despite theoretical cost levels.
Fortunately for exporters, other factors and likely seasonal curtailments have also kept
Chinese concentrate supply at bay below peak levels in recent months and may hold
production back through the winter months (see below).
Increases in demand for iron ore outside China, almost the sole growth engine, are likely
to remain modest and well below the pace of expansion earmarked by a broad range of
iron ore miners and developers. It is hard to envisage strong trend growth in the
developed world, or a replacement in the emerging market world for the 2000s’ steel-
consuming juggernaut.
With this in mind, we are now of the view that not all of this planned new supply will
be needed and that many unfinanced projects are under threat. Even those projects
already under way may face financing challenges in the event of a further retreat in prices
– more than a passing possibility.
Commodity Forecasts: The Best of Times, The Worst of Times 62
12 October 2012
Exhibit 112: Global steel production growth has Exhibit 113: China’s steel demand, and hence
“normalized” at lower rates since 2007 production, has also moderated
Mt, monthly, sa, natural log Mt, monthly, sa, natural log
12.0 11.5
Global China World Ex-China
CAGR = 2.2%
11.8 11.0
CAGR = 2.5%
10.5
11.6 CAGR = 7.4%
CAGR = 6.9% 10.0
11.4 CAGR = 21.8%
9.5
11.2 CAGR = 2.4%
9.0
11.0
8.5
CAGR = 8.5%
10.8 8.0
1990 1993 1996 1999 2002 2005 2008 2011 1990 1993 1996 1999 2002 2005 2008 2011
Source: Credit Suisse, WSA, the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse, WSA, the BLOOMBERG PROFESSIONAL™ service
Exhibit 114: Iron ore supply has outpaced Exhibit 115: Australia has contributed consistently
moderated steel output to this persistent growth
Seaborne iron ore supply proxy, natural log, SA Seaborne iron ore supply proxy, natural log, SA
18.5 18.0
Australia World Ex-Australia
CAGR = 5.7%
17.8
18.3
17.6
CAGR = 15.6%
18.1
CAGR 01/02-06/08 = 17.4
17.9 15.2%
17.2
17.7 CAGR 06/08-05/12 = 17.0
8.0%
16.8
17.5 CAGR = 12.2%
16.6
17.3
16.4
17.1 16.2
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Credit Suisse, Customs Data Source: Credit Suisse, Customs Data
“Big Three” will likely dominate supply growth as the years roll by
A major share of required growth in iron ore supply will likely stem from those programs
already in train at BHP Billiton, Rio Tinto, and Vale – potentially these major mining
companies can increase their market share later this decade if other producers are forced
to curtail expansions, although longer-dated capital programs may also be pared back.
The juggling act here is the fact that the expansion profile of these programs already
funded and approved steps up more prominently in the latter part of our forecast time
horizon, as opposed to 2013. Despite considerable growth potential, this gradual phasing
in leaves room for rival volumes to gain traction in the market, at least for a short while.
Commodity Forecasts: The Best of Times, The Worst of Times 63
12 October 2012
IO supply likely to Even allowing for deferral or suspension of some advanced programs, growth in
run far ahead of Australian iron ore exports looks set to rise by about 11% p.a. in 2012-2016, if
plans continue, representing net growth of about 260 Mt/y by 2016.
incremental demand
for use in Brazil’s net production increases by then may also amount to more than 160 Mt/y, and
steelmaking by 2016 steadily grow from there.
The largest three producers are expected to install sufficient capacity to
overwhelm world incremental iron ore demand (Exhibit 116). Making room for larger
volume growth depends on displacement of rival supply, including China’s.
At the global level, iron ore supply available for export is expected to grow by
about 10% p.a. in the next few years, in comparison to global steel production
growth of just over 4% p.a. in 2013-2016. Such a mismatch between supply and
underlying needs is ultimately unsustainable and we believe growth ambitions will be
drawn back. For this to happen, prices will have to fall, to pull back surpluses; the key
question is, how far?8.
As highlighted in Exhibit 117, on our base-line scenario of 4% p.a. global steel
production growth, we think the major three iron ore mining companies will put in
place the capacity to supply almost all of the needed incremental iron ore
demanded by 2014.
If the modest rebound we anticipate does not eventuate, and steel growth
continues at the recent 2.2% p.a. global trend, the “Big Three” will provide most
of the incremental ore needed in 2013 and more than needed in 2014.
Progressive expansions are set to swamp incremental demand further ahead,
under our 4% p.a. global steel output case, requiring much greater reductions in
supply elsewhere if these volumes are to be absorbed by the market.
Exhibit 117: The “Big Three” can readily supply the Exhibit 118: Continuation of the current global steel
world’s iron ore needs by 2016 production trend would lead to huge surpluses
Global steel production at 4.1% p.a.; net of scrap etc. (Mt) Global steel production at 2.2% p.a.; net of scrap etc. (Mt)
Base Case 2.2% Case
80 Incremental Iron Ore Demand Increase in "Big 3" Iron Ore Supply 80 Incremental Iron Ore Demand Increase in "Big 3" Iron Ore Supply
70 70
60 60
50 50
40 40
30 30
20 20
10 10
0 0
2013f 2014f 2015f 2016f 2013f 2014f 2015f 2016f
Source: Credit Suisse Source: Credit Suisse
8 In a supply sector where fixed costs for single-mine entities are relatively high (i.e., low short-run avoidable costs), significant
"swing supply" may lie in the hands of larger producers with multiple mines, especially as these operators will remain unhedged.
This market-clearing characteristic was typical of the nickel industry where the largest producer suspended hauling from higher
cost shafts when demand weakened to reduce costs and preserve profitability. Every mine has its marginal tonne and, under
conditions of severe oversupply, prices could fall close to the average cost of the major producers for a period of time, prompting
cuts at higher-cost units within these production bases. Today this is almost US$50-55/t delivered to China. The extent of any
subsequent rebound would then be determined by the steepness of the higher-cost part of the supply curve, resetting prices
higher. In this regard, the "stickiness" of Chinese supply is critical.
Commodity Forecasts: The Best of Times, The Worst of Times 64
12 October 2012
Room for this, and other sources of, additional supply, in either of these scenarios, is only
therefore created by displacement of existing production. Recreating Exhibit 117 but
including total “firmly committed” supply growth, adjusted for what we think are likely
delays or slippage, the potential for the market to move into heavy surplus becomes very
clear (Exhibit 119).
Our forecasts have Annual additions to the existing supply base exceed 100 Mt/y each year, throughout our
factored in a strong forecasting time frame, with 2016 marking the start of a greater potential phase of mine
supply growth. The gap between this new committed supply and incremental demand
trim to promoter’s
grows progressively from next year – inevitably prices must fall to displace contestable
targets tonnage elsewhere. This projection excludes many programs promoters deem
“advanced,” but that we think will not reach fruition.
Exhibit 119: Plenty of planned supply growth Exhibit 120: Change in IO supply on 2011 level
Global steel production at 4.1% p.a.; net of scrap etc. (Mt) Forecast increase from 2011 level; Mt/y of exports (China – domestic supply)
Seaborne Supply Growth Chinese + Seaborne ex-China Demand Growth 400
Australia
120
300 Brazil
China (Domestic Supply)
100
200
80
100
60 0
40 -100
20 -200
0 -300
2013f 2014f 2015f 2016f 2012 2013 2014 2015 2016
Source: Credit Suisse Source: Credit Suisse
India’s exports slip back further
India’s supply Our projections also take into account reduced flows out of India. There appears to be
unlikely to come little real chance of reversing very soon the restriction on mining in India’s western
back quickly provinces (the traditional source of most exports) or quickly removing barriers to new mine
development in the prospective eastern states.
Despite press speculation of reduced export taxes (unlikely in our opinion), paving the way
for bolstered shipments of (low grade) stockpiled fines, we are forecasting exports of no
more than 45 Mt/y in 2013-2015. Should conditions improve, local steelmakers are
expected to mop up greater volumes before exporters. Shortages of lump ore, vital for
many of India’s steelmakers, are prompting moderate imports.
The implications of broader expansion seem clear
In the longer term Supply abundance is likely to cap price rises even when China’s recovery gathers greater
growth in demand speed beyond 2012. As we approach the 2020s we will see further moderation of China’s
for iron ore should steel demand growth, as well as a steady rise in the rate of recycling of scrapped steel,
stall pinching out the demand for virgin iron units. In other words, the best years for iron ore
pricing appear to be behind us.
Of course, cycles will persist, but the mean about which shorter run prices move is now
harder to see, and depends on time horizons. We have not changed our long-run real
price forecast of US$90/t (CFR China), but the ability of the major players to grow
production volumes incrementally in the next few years (leveraging sunk infrastructure
costs) raises questions about the need for very costly – and now more risky – new supply
dependent on large capital expenditure on port and rail facilities.
Commodity Forecasts: The Best of Times, The Worst of Times 65
12 October 2012
Marginal Chinese supply is falling away; the rest could be “stickier”
There is another feature that has moderated our outlook for iron ore prices – the resiliance
of China’s domestic supply. Prices are now sufficiently low to prompt deeper supply cuts
among China’s mines and concentrators, although others remain profitable or, as we have
indicated previously, are supported by other factors.
Some Chinese For example, 66% Fe concentrate was trading (spot) in Tangshan at close to RMB1,000/t
supply is (US$156/t) at the end of September, a noticeable premium to imported ore, even
equilibrating for transport costs, iron content, and other value-in-use factors. This may not
“strategically”
be representative of broader pricing, but reflects that, for a variety of reasons, local mills
important and are willing to pay a premium for domestic feed. The progressive displacement of Chinese
attracting a higher-cost supply is a core element in our modeling, but this assumption too is not without
premium its risks. Chinese mines are not all simple swing suppliers.
According to China’s Metallurgical Mines Association (CMMA), plans are in motion to
replace higher-cost production with larger (by China’s standards) mines. In other words,
as mines are depleted or closed due to cost pressures, others may in part take their place,
although the extent to which this occurs is difficult to predict. However, with about 25% of
supply essentially captive to mills (a proportion that is growing), the price elasticity of
supply in the portion of the cost curve below current price levels is clearly much reduced.
Exhibit 121: Short-run marginal costs of supply are setting prices, but not all
China’s mines are sensitive to price movements
China iron ore production costs – US$/t at 62% Fe equivalent (left scale); percentage cumulative supply (lower scale)
US$/t delivered to mill
Peak production @ approx. 415 Mt/y
Forecast 2012 domestic demand (340 Mt)
42% of China’s
mines are loss-
making at prices
below US$100/t,
according to CMMA
Cumulative Supply (%)
Source: Credit Suisse estimates, CMMA, Steelease
Here we highlight that there is no single level at which cost support emerges. Not all
mines have the same cost structure and prices are set by the changing dynamics of both
supply and demand; immediate responses from suppliers are rarely achievable given the
levels of fixed costs and other considerations in the very short term. Equally, as markets
weaken, costs also eventually fall back.
As we show in Exhibit 121, we estimate the median cost of iron ore concentrate production
in China is now above RMB600/t, equating to just under US$100/t at today’s exchange
rates. According to cost surveys undertaken by local consultant, Steelease, average costs
of production at mines in Hebei, China’s main producing region, have risen from RMB523/t
in 2010 to RMB630/t in the first half of 2012 and similar patterns apply to neighboring iron-
ore-producing regions, although “average” costs mask a wide spread.
Commodity Forecasts: The Best of Times, The Worst of Times 66
12 October 2012
However, there are still considerable volumes with cost structures below today’s prices.
Also, not all those mines with costs above current price levels will cut back immediately in
response to theoretical losses. Decisions to lay off workers are not always straightforward.
From a strategic point of view, China has an incentive in preserving some domestic supply,
as well as offshore ventures, and this is laid out in the 12th 5-Year Plan9.
At the global level, prices would need to fall back further to prompt major reductions in
supply outside China. Cash operating costs of supply from the main Australian and
Brazilian operations are less than US$55/t (CFR China) 10 .Nevertheless, cuts have
deepened over the summer months in China, mainly at small and medium-sized private,
“township village enterprises” (TVEs). Exhibit 122 indicates that operating rates in the four
major producing provinces of northern China have fallen below 60%. However, there are
other factors behind these closures.
Heavy rainfall associated with tropical storms has badly affected northeast China,
hampering mining operations and trucking activity.
Restrictions on the use of explosives have intensified as we approach the November
Party Congress (in a similar move to the Beijing Olympic Games in 2008).
Although operating rates are beginning to recover at mines and plants hit by bad
weather, the slide in prices and the lack of explosives are likely to see operating rates
held back well into Q4 and possibly through Q1 of next year when seasonal stoppages
reach their peak.
A monthly production run rate of just below 59 Mt of crude steel points to monthly demand
for iron ore of about 87 Mt, at an equivalent grade of 62% Fe and allowing for use of scrap
(mainly through EAF production). Monthly imports look to have stabilized at about 60 Mt
in 2012, implying a reliance of close to 30 Mt/month from domestic sources and what can
be drawn from stockpiles, in the remainder of 2012 and into 2013.
Exhibit 123: Operating rates at concentrators in Exhibit 124: Steel mills’ stocks of iron ore have
northeast China have fallen below 60% declined – domestic volumes are depleted
Operating rates at surveyed plants (%) Chinese mills’ inventories by source (kt)
90
700
Imported Stocks Domestic Stocks
650
80
600
70 550
500
60 450
400
50
350
300
40
250
30 200
Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Mar-11 Jul-11 Oct-11 Feb-12 Jun-12
Source: Steelease, Credit Suisse Source: Credit Suisse, Mysteel
9 Almost US$20 billion was spent in 2011 alone on iron ore mine development in China. For example, CMMA cites 66 "large and
medium" mines (by China standards) under construction or planning, entailing expenditure of US$40 billion. CISA also
commented last month that 16 key mines were approved in the last 5Y Plan, with new ones also getting approval in the current
Plan. CISA's statement points to 30 Mt/y of new capacity in 2013 and 80 Mt/y by 2016, defined in concentrate terms.
10 There are a number of service providers constructing cost curves for iron ore, but there are pitfalls in the value of these analytical
tools for a number of reasons: Firstly, prices of iron ore products vary, and supply curves often ignore the effect of price
differentials (e.g., for pellets and lump). Secondly, costs vary over time, as do prices - input costs, for example for consumables
and labor, change with demand, as do exchange rates and other factors, albeit with lags.
Commodity Forecasts: The Best of Times, The Worst of Times 67
12 October 2012
Exhibit 125: China’s IO imports at around 60 Mt/m Exhibit 126: … Displacing domestic concentrate
Mt, monthly sa Share of domestic iron ore in sinter feed (%)
70 50
2011 2012
45
60
40
50 35
40 30
25
30
20
20 15
10
10
5
0 0
2005 2006 2007 2008 2009 2010 2011 2012 Jan Mar May Jul Sep Nov
Source: Credit Suisse, Customs data Source: Mysteel – 55 mill survey, Credit Suisse
Exhibit 127: Iron ore stocks at port – slowly falling Exhibit 128: Domestic concentrate at a premium
Weeks of import cover RMB/t, Hebei province
8.5
8.0
7.5
7.0
6.5
6.0
5.5
5.0
2006 2007 2008 2009 2010 2011 2012
Source: Credit Suisse, Mysteel, Customs Data Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
Operating rates This signals room for rising imports, up to a point, without collapsing prices back
have fallen sharply again, and an advance in prices as restocking takes stronger hold. However, these
in northeast China imports will have to displace further domestic supplies and higher-cost exporters.
Destocking cycle a strong influence
This continued proportional reliance on imports, once the destocking phase has ended,
depends on maintaining a production run rate close to 700 Mt/y in September-December.
While spot market prices would suggest that supply is more than sufficient to meet current
levels of demand, destocking of iron ore at mills (and a gradual accumulation of finished
steel stocks held at plants) clearly played a strong hand in allowing mills to defer fresh
Restocking phase purchases, contributing to the aggressive driving down of spot prices in August and
for iron ore could September.
support prices in The converse should be true when destocking has run its course, which we believe is the
the shorter term case for Q4. Stocks of domestic concentrate are largely depleted. Steelease surveys at
48 beneficiation plants in northeast China point to ore stocks declining to almost one-third
of their May levels, sufficient for just three days’ production. Concentrate supplies to mills
are now very tight, partly explaining the price premium over imports.
Commodity Forecasts: The Best of Times, The Worst of Times 68
12 October 2012
Local concentrate supply has therefore contracted and, with blast furnace operators
reluctant to switch blends quickly, competition for local material has intensified. To a
degree, mills are also prepared to subsidize local operations to keep options open for the
future – it is this strategic consideration which will continue to influence the broader market
– but the elements could fall into place for a modest run up in prices as we enter the New
Year. Unless, of course, the macro news continues to be disappointing.
A steady ebbing of spot prices from a quarterly peak average of US$120/t in Q1 2013
seems likely, providing an opportunity to take out fresh insurance against the risk of major
storm damage further ahead.
Exhibit 129: Iron ore forward and CS forecasts Exhibit 130: Iron ore historical price and forecast
US$/t US$/t
$125 Credit Suisse Forecast CS Forward Curve $210 Iron Ore (62% Fe CFR Tianjin spot) Quarterly avg forecasts
$190
$120
$170
$115
$150
$110
$130
$105
$110
$100
$90
$95 $70
$90 $50
Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 2009 2010 2011 2012 2013
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Exhibit 131: Forecast iron ore prices
Units as indicated below, long-term prices based on 2011 real prices
2011 1Q-12 2Q-12 3Q-12 4Q-12f 2012 1Q-13f 2Q-13f 3Q-13f 4Q-13f 2013f 2014f 2015 LT
Iron ore fines – 62% (China CFR) US$/t, dry 168 142 140 112 110 126 120 115 110 100 111 95 90 90
Iron ore fines - (China CFR) US$/dmtu 271 229 225 181 177 203 194 185 177 161 179 153 145 145
Source: Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 69
12 October 2012
Exhibit 132: Global iron ore supply/demand estimates and forecasts
In millions of tonnes unless otherwise specified
2008 2009 2010 2011 2012e 2013f 2014f 2015f
Global Crude Steel Output 1329 1232 1417 1487 1500 1570 1639 1699
Total Chinese Demand 750.8 860.0 932.9 1037.2 1062.6 1123.3 1184.0 1244.8
% Change 1.2% 14.6% 8.5% 11.2% 2.4% 5.7% 5.4% 5.1%
Domestic Production (62%) 414.4 348.5 305.9 410.0 342.9 326.5 284.2 249.5
% Change 4.1% -15.9% -12.2% 34.0% -16.4% -4.8% -12.9% -12.2%
Iron Ore Inventories at Port 60.0 65.9 71.6 98.1 93.3 98.7 104.0 109.3
% Change 20.6% 9.9% 8.6% 37.0% -4.8% 5.7% 5.4% 5.1%
Imports 2008 2009 2010 2011 2012 2013 2014 2015
China 444.1 628.3 619.1 687.0 714.9 802.2 905.1 1000.6
% change 15.8% 41.5% -1.5% 11.0% 4.1% 12.2% 12.8% 10.5%
Japan 140.4 105.5 134.3 128.5 133.5 140.8 142.0 142.0
% change 1.1% -24.9% 27.3% -4.3% 3.9% 5.5% 0.9% 0.0%
South Korea 49.5 42.1 56.3 64.9 64.2 65.1 67.0 68.0
% change 7.3% -15.1% 33.8% 15.2% -1.0% 1.5% 2.9% 1.4%
Taiwan 15.6 11.9 18.9 20.5 19.0 19.9 20.8 20.8
% change -2.9% -23.5% 58.9% 8.3% -7.3% 4.8% 4.5% 0.0%
EU 27 151.9 80.1 120.7 116.0 118.1 121.6 125.8 128.5
% change 0.0% -47.3% 50.7% -3.9% 1.8% 2.9% 3.4% 2.2%
World ex-China 405.8 306.2 416.3 413.9 412.3 427.8 438.2 443.3
% change 11.0% -24.5% 35.9% -0.6% -0.4% 3.8% 2.4% 1.1%
World 850.0 934.6 1035.3 1100.9 1127.2 1230.0 1343.4 1443.9
% change 13.4% 10.0% 10.8% 6.3% 2.4% 9.1% 9.2% 7.5%
Exports 2008 2009 2010 2011 2012 2013 2014 2015
Australia 309.5 362.9 401.9 438.8 487.9 548.2 617.8 671.7
% change 16.0% 17.3% 10.7% 9.2% 11.2% 12.4% 12.7% 8.7%
Brazil 281.7 266.0 310.9 330.8 330.7 351.5 395.9 446.9
% change 4.5% -5.6% 16.9% 6.4% 0.0% 6.3% 12.7% 12.9%
India 101.2 119.4 107.5 81.4 45.0 45.0 45.0 45.0
% change 14.5% 18.0% -10.0% -24.3% -44.7% 0.0% 0.0% 0.0%
Other LatAm 18.6 18.8 24.5 26.2 25.0 30.0 32.0 32.0
% change - 1.2% 30.1% 7.1% -4.6% 20.0% 6.7% 0.0%
South Africa 31.6 44.6 48.0 53.3 57.1 60.2 61.2 61.2
% change 4.1% 41.0% 7.7% 11.2% 7.0% 5.5% 1.7% 0.0%
Other Africa 2.8 6.3 4.4 13.6 21.7 37.1 43.9 51.4
% change 49.1% 124.5% -29.3% 206.4% 59.6% 71.0% 18.3% 17.1%
North America 24.5 28.8 30.0 34.0 36.0 36.8 33.2 30.3
% change -1.4% 17.7% 4.2% 13.0% 6.0% 2.2% -9.7% -8.8%
EU27 6.5 7.0 8.7 8.8 8.9 11.0 11.4 11.8
% change 5.2% 7.4% 24.3% 1.1% 1.7% 22.7% 3.7% 3.6%
RUK 60.0 62.5 67.0 73.0 73.6 77.9 80.2 82.0
% change -2.2% 4.2% 7.1% 9.0% 0.8% 5.8% 2.9% 2.3%
Other 13.6 18.1 32.4 40.9 44.3 46.8 49.8 49.8
% change 0.0% 33.2% 78.7% 26.1% 8.2% 5.6% 6.4% 0.0%
World 850.0 934.6 1035.3 1100.9 1130.2 1244.4 1370.3 1482.0
% change 13.4% 10.0% 10.8% 6.3% 2.7% 10.1% 10.1% 8.2%
Notional Surplus 2.93 14.35 26.95 38.12
With 10% Slippage 1127.2 1230.0 1343.4 1443.9
Source: Credit Suisse, Customs Data, Company Reports, WSA
Commodity Forecasts: The Best of Times, The Worst of Times 70
12 October 2012
Metallurgical Coal – Fault lines widen
Pricing settlements see sharp reduction
Equity Research
Paul McTaggart In September, metallurgical coal prices for Q4 2012 delivery were settled by BHP Billiton
Paul.mctaggart@credit-suisse.com and Nippon Steel. While BHPB/BMA had been happy to let others take the lead in price
+61 2 8205 4698
negotiations in the last two years, this settlement saw the biggest producer and the biggest
James Redfern consumer set the coking coal benchmarks.
james.redfern@credit-suisse.com
+61 2 8205 4779 According to McCloskey, hard coking coal (HCC) was settled at US$170/t for premium
Peak Downs brand (US$165/t for Goonyella) – down 24% on the US$225/t settled last
Commodities Research
quarter by Anglo American and POSCO. Reportedly, Anglo American had started
Andrew Shaw
andrew.shaw@credit-suisse.com discussions at $190/t but had been unable to settle prior to BHPB/Nippon. The
+65 6212 4244 settlements compare with a current spot FOB price of US$142/t for Peak Downs, so no
doubt BHPB was keen to lock in pricing at what looks to be a reasonable level with respect
Marcus Garvey
marcus.garvey@credit-suisse.com to spot pricing. Gregory brand BMA coal was settled at US$145-146/t down from $190/t.
+44 20 7883 4787
Semi-hard coking coal (SHCC) pricing has not been finalized, but it is worth noting that
last quarter Dawson brand semi-hard was settled at US$175/t, or 77.8% of the HCC price.
On this same pricing ratio, semi-hard would be at US$132/t. Early reports suggest Anglo
has settled Dawson at just under $140/t for Q4. Certainly BHPB’s Gregory settlement will
provide a ceiling for SHCC, and we look for a settlement near US$138/t for Q4 2012.
Anglo has reportedly settled ultra-low volatility PCI (Foxleigh) at US$125/t (73.5% of
HCC and down 22.8%) compared with US$162 for Q3 2012 (72% of HCC). McCloskey
states that producers pushed for prices above US$130/t. PCI coal remains under
pressure with spot prices at US$105/t and with substantial tonnage being sold in this
market. McCloskey reports that recent deals into China have seen prices ranging from
US$90-105/t on an FOB netback basis.
Semi-soft coking coal (SCCC) contract settlements have begun, with both Xstrata and
Rio Tinto settling with Asian steel mills at US$117/t for six-month deliveries beginning in
October 2012. This represents a $30/t reduction (20%) on the previous six-month price to
end-September and a ratio of 69% of the HCC price compared with 70% previously. Many
would regard this as a pretty reasonable outcome given that Anglo’s lower quality PCI
brand Capricorn looks to have been settled at about US$110/t (representing 65% of the
HCC price).
Exhibit 133: Australian metallurgical coal exports Exhibit 134: US metallurgical coal exports
Mt, monthly, sa Mt, monthly, sa
16 7
14 6
12
5
10
4
8
3
6
2
4
2 1
0 0
2005 2006 2007 2008 2009 2010 2011 2012 2005 2006 2007 2008 2009 2010 2011 2012
Source: Credit Suisse, Customs Data Source: Credit Suisse, Customs Data
Commodity Forecasts: The Best of Times, The Worst of Times 71
12 October 2012
Australian supply constraints persist, US exports up ... but global
volumes being cut
As we noted in the last quarterly, industrial action at BMA has been impacting exports of
Australian met coal and things have not greatly improved. Australian exports of met coal
have been running at a rate of roughly 140 Mt/y compared to a H1 2010 rate of 170 Mt/y.
Exports returned to normal levels in February 2012, but subsequent industrial action has
limited output.
Conversely, US met coal exports have expanded and have been running at near to 80
Mt/y in the last two months – a doubling of the pre-financial crisis levels. July seaborne
exports of US coking coal were 5.7 Mt, up 32% on July last year. In the seven months to
end-July, seaborne exports were 40 Mt – an annualized 68 Mt and up 11% year to date.
Production cuts announced, oversupply continues for now
Lower prices are certainly having an impact, as BMA (BHPB) has announced the closure
of the Gregory open cut and Norwich Park mines which together add to about 4 Mt/y of
production. Rio Tinto, Xstrata, and Anglo American have also announced they are
reducing staff (mostly contractors) across their Australian coal operations but no tonnage
cuts as yet.
In the US, Alpha Natural Resources has announced aggregate production cuts of
20 million short tons (20%). The latest 16 Mst/y in cuts follows on from an earlier
announced 4 Mst/y. The majority of this is thermal coal, with 1.6 Mst/y being met coal cuts
from lower-quality mines (high volatiles met coal). Peabody has reaffirmed that its Codrilla
(Queensland, 2-3 Mt/y, PCI) mine will be deferred.
Although Q4 2012 prices may have been agreed with Asian steel mills, in reality there is
significant price discounting being seen in the market, and the European steel mills are yet
to agree pricing. McCloskey reports that BHPB is discussing FOB price levels as low as
US$155/t FOB for monthly price deliveries of Peak Downs product; $15/t or 9% below the
quarterly contract level. China is also reported to have been buying spot volumes at a
discount of up to $30/t on the benchmark, with BHPB said to have placed significant
tonnage into this market.
Chinese imports of met coal have weakened further but are likely to lift,
given current prices
With Chinese steel production rates moderating, imports have fallen further. For the eight
months to the end of August, China’s imports of coking coal were 35.2 Mt, up 33% year on
year for an annualized 53 Mt. However, imports in August were just 2.6 Mt, an annualized
rate of 31 Mt.
China’s imports of Mongolian met coal have also fallen sharply. In January China
imported 3.1Mt of Mongolian met coal but, by July, this had fallen to 1.4 Mt.
The price of premium Shanxi met coal has fallen to US$181/t from US$252/t in June 2012
and the key suppliers such as BHPB look to have been willing to match domestic prices in
order to shift tonnes.
While China imports have weakened, met coal imports into traditional markets like Europe
and Japan have stabilized. Year to date, the EU27 has imported 20.6 Mt of coking coal,
down 6% on last year. Year to date, Japan has imported 27.2 Mt of coking coal, also down
6% on last year.
Commodity Forecasts: The Best of Times, The Worst of Times 72
12 October 2012
Exhibit 135: Chinese metallurgical coal imports Exhibit 136: Chinese imports of Mongolian met coal
Mt, monthly, sa Mt, monthly, sa
8 3.5
7 3.0
6
2.5
5
2.0
4
1.5
3
1.0
2
1 0.5
0 0.0
2005 2006 2007 2008 2009 2010 2011 2012 2005 2006 2007 2008 2009 2010 2011 2012
Source: Credit Suisse, Customs Data Source: Credit Suisse, Customs Data
Exhibit 137: EU27 metallurgical coal imports Exhibit 138: Japanese metallurgical coal imports
Mt, monthly, sa Mt, monthly, sa
6 7
5 6
5
4
4
3
3
2
2
1 1
0 0
2005 2006 2007 2008 2009 2010 2011 2012 2005 2006 2007 2008 2009 2010 2011 2012
Source: Credit Suisse, Customs Data Source: Credit Suisse, Customs Data
China price arbitrage remains broadly constant
Export prices continue to be priced at a modest discount to China’s domestic coking coal
prices based on spot prices. Last quarter we wrote that in H2 2012 the risk would be that
moderating Chinese steel production would encourage China’s steelmakers to substitute a
portion of higher-quality Australian coking coal.
This scenario certainly seems to have played out, with key Australian met coal producers
needing to offer substantial discounts to the contract prices to increase import penetration
into China. We expect that in the current quarter, China’s coking imports will be materially
higher than in the previous quarter.
Cutting back our supply estimates on lower prices
With our global steel production forecasts trimmed, our import demand has moderated
over the forecast period. While import demand for 2012 is unchanged at 3% (to 279 Mt,
we had been expecting 2013 to be a year of robust demand growth at about 8% with
China an important factor. We now assume an “ordinary” 3.5% of demand growth in 2013
with China imports flat. 2014 and 2015 are expected to be improved as China looks to lift
imports again with demand growth lifting to 6%-7%.
Commodity Forecasts: The Best of Times, The Worst of Times 73
12 October 2012
Exhibit 139: China arbitrage for metallurgical coal
US$/t
500
450
400
350
300
US$/t
250
200
150
100
50
0
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Australia (FOB) China Domestic (ex. VAT)
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
Exhibit 140: Major contributors to seaborne demand Exhibit 141: Major contributors to seaborne supply
Mt, Monthly, SA Mt, Monthly, SA
14 India RoW China 30 Australia RoW
12
20
10
8 10
6
0
4
2 -10
0
-20
-2
-4 -30
2011 2012 2013 2014 2015 2011 2012 2013 2014 2015
Source: Credit Suisse, Customs Data, Company Data Source: Credit Suisse, Customs Data, Company Data
Of course, lower demand growth would mean significant oversupply without a
corresponding reduction in supply, and lower price forecasts make this inevitable. The
combination of current spot Australian dollar and US dollar coal prices will render many
Australian projects either uneconomic or unable to attract funding. We also know that
many high cost US met coal producers are already under pressure.
We have pulled back both Australian and US export growth estimates.
We expect North American coking coal exports to decline from an anticipated 94 Mt in
2012 to about 88 Mt as production cuts take effect. With prices expected to remain
below US$200/t over our forecast period, we expect US exports to remain below the 90
Mt/y level.
In 2010, Australian coking coal exports totaled 159 Mt and we had expected to reach
this plus an additional 10 Mt in 2013, building to 207 Mt/y in 2015. Announced
production cuts suggest Australia production can do no better than 158 Mt in 2013 with
risks to the downside. Looking to 2015, we are still assuming production growth to
189 Mt – and even that might prove to be too optimistic if the Australian dollar remains at
elevated levels.
Commodity Forecasts: The Best of Times, The Worst of Times 74
12 October 2012
Our revised forecasts envisage a continuation of modest met coal surpluses – 14 Mt this
year and building to 27 Mt in 2015.
Reducing price forecasts
In the lead up to the last commodity quarterly, it was not apparent that global growth would
fall short of the expectations that we and others had built. With reduced growth forecasts,
HCC prices are not (without supply-side interventions) expected to match our previous
US$200/t expectations.
We expect HCC prices to remain near the US$170/t level until H2 CY 2013, at which
point improved demand should see prices back towards the US$180-190/t level. If the
Australian dollar moves back towards the mid US90c range (as expected) this will be
sufficient to improve the economics for met coal expansion projects. If it does not, then
the economics of many Australian projects will continue to be challenged.
Our long-run HCC price forecast is unchanged at US$170/t. We have adjusted our
assumed long-run SSCC and PCI prices to US$125/t and US$130/t, respectively, from
US$132/t and US$134/t.
Exhibit 142: Metallurgical coal forecast comparison Exhibit 143: Met coal historical price and forecast
US$/t US$/t
$190 $450 Hard coking coal spot Quarterly avg forecasts
Hard coking coal Semi soft coal PCI coal
$180
$400
$170
$350
$160
$300
$150
$250
$140
$200
$130
$150
$120
$110 $100
$100 $50
Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Exhibit 144: Forecast metallurgical coal contract prices, FOB Australia
Units as indicated below, long-term prices based on 2011 real prices
2011 1Q-12 2Q-12 3Q-12 4Q-12f 2012 1Q-13f 2Q-13f 3Q-13f 4Q-13f 2013f 2014f 2015f LT
Hard coking coal US$/t 289 235 210 225 170 210 170 170 175 175 173 183 190 170
Semi soft coal US$/t 212 157 141 141 117 139 119 119 123 123 121 128 133 125
PCI coal US$/t 223 172 153 164 125 154 125 125 128 128 127 133 139 130
Source: Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 75
12 October 2012
Exhibit 145: Global metallurgical coal supply and demand estimates
Mt, Surpluses or deficits show market capacity but actual imports/exports should balance at the time
Importing Country 2008 2009 2010 2011 2012e 2013f 2014f 2015f
China 6.9 34.5 47.3 44.7 49.1 49.2 57.1 70.0
% change 10.2% 403.0% 37.0% -5.5% 9.9% 0.2% 16.1% 22.6%
India 26.7 28.8 35.1 33.1 35.7 37.6 41.4 43.7
% change 16.8% 7.7% 21.9% -5.8% 8.1% 5.3% 10.0% 5.7%
JKT 79.4 63.9 81.2 80.6 83.2 86.9 88.0 88.7
% change -0.2% -19.5% 27.2% -0.7% 3.2% 4.4% 1.3% 0.9%
EU 27 48.9 30.7 40.5 39.1 38.7 39.8 41.2 42.1
% change -1.3% -37.1% 31.9% -3.5% -1.1% 2.9% 3.4% 2.2%
Turkey 5.7 3.4 4.4 4.1 4.6 4.7 5.0 5.2
% change 39.9% -41.6% 30.9% -7.6% 12.7% 2.9% 5.7% 5.4%
North America 6.8 4.2 5.9 6.5 6.0 6.0 6.1 6.1
% change 0.4% -39.0% 42.7% 9.2% -7.6% 0.8% 0.4% 0.2%
Brazil 12.1 11.3 12.4 12.1 12.5 13.3 14.0 14.4
% change 12.5% -6.4% 9.3% -2.5% 3.6% 6.1% 5.7% 2.7%
Chile 0.9 0.7 0.5 1.1 1.2 1.5 1.7 1.9
% change -10.9% -28.1% -22.8% 116.3% 8.7% 25.0% 13.3% 11.8%
RoW 38.3 34.7 48.9 50.0 48.4 50.2 53.8 58.4
% Change 2.3% -9.4% 41.0% 2.3% -3.2% 3.7% 7.1% 8.6%
World 225.7 212.1 276.2 271.2 279.4 289.2 308.1 330.6
% change -6.0% 30.3% -1.8% 3.0% 3.5% 6.6% 7.3%
Exporting Country 2008 2009 2010 2011 2012e 2013f 2014f 2015f
Indonesia 1.4 1.0 3.2 4.5 6.3 6.7 7.2 7.8
% change -15.4% -27.2% 217.3% 41.6% 39.1% 6.4% 8.0% 7.5%
Australia 134.8 135.0 159.0 133.0 146.0 157.9 174.1 188.7
% change -2.5% 0.2% 17.7% -16.3% 9.8% 8.1% 10.3% 8.4%
Russia 13.6 13.2 18.2 14.2 15.4 16.6 17.7 19.0
% change 2.4% -2.9% 37.4% -22.0% 9.0% 7.1% 7.1% 12.8%
South Africa 2.3 1.9 2.2 2.5 2.5 2.5 2.5 2.5
% change -5.6% -15.4% 16.0% 13.3% 0.0% 0.0% 0.0% 0.0%
Mozambique - - - 1.6 3.1 4.8 10.3 18.3
% change - - - - 90.8% 55.6% 114.3% 76.5%
Colombia 1.0 1.0 1.0 1.0 1.0 1.5 2.0 2.0
% change 0.0% 0.0% 0.0% 0.0% 0.0% 50.0% 33.3% 0.0%
North America 65.6 55.3 76.5 90.7 94.0 88.0 86.0 88.0
% change 17.0% -15.7% 38.4% 18.6% 3.6% -6.4% -2.3% 2.3%
China 3.5 0.6 1.1 3.6 2.0 1.0 1.0 1.0
% change 35.9% -81.6% 79.1% 215.5% -44.4% -50.0% 0.0% 0.0%
Mongolia 3.6 4.0 15.0 20.0 23.0 25.0 27.0 30.0
% change 16.5% 9.5% 278.1% 33.2% 14.8% 8.7% 8.0% 11.1%
World 225.7 212.1 276.2 271.2 293.4 303.9 327.9 357.2
% change 3.4% -6.0% 30.3% -1.8% 8.2% 3.6% 7.9% 8.9%
Surplus / Deficit - - - - 14.0 14.8 19.8 26.6
As a % of exports - - - - 4.8% 4.9% 6.0% 7.4%
Source: Credit Suisse, World Steel, Customs Data, Company Reports
Commodity Forecasts: The Best of Times, The Worst of Times 76
12 October 2012
Thermal Coal – A dim and distant light
Commodities Research Production cuts insufficient to yet balance the market
Marcus Garvey
marcus.garvey@credit-suisse.com Thermal coal markets should continue their lackluster performance for the remainder of
+44 20 7883 4787 2012 and into 2013. The combination of fairly robust demand and improved supply
discipline has created some light at the end of the tunnel but, for now, it is merely a dim
Andrew Shaw
andrew.shaw@credit-suisse.com and distant glow.
+65 6212 4244
In line with our previous forecast update (see – The Danger Zone), the physical thermal
market has spent the last three months trapped in a depressed state, with paper
Equity Research
Paul McTaggart consequently treading a range-bound path (Exhibits 146 and 147).
Paul.mctaggart@credit-suisse.com
+61 2 8205 4698 We expect further supply cuts and project deferrals/cancellations to emerge over the
coming months. The speed at which these play out will be a key determinant in the length
James Redfern
of time it takes for the thermal market to reach a more balanced state.
james.redfern@credit-suisse.com
+61 2 8205 4779
To date, the market has witnessed a war of attrition, with miners holding on as best as
possible, while looking for any means of cost reduction. This trend should continue, as
prices are neither low enough to force tonnage out of the market in short fashion nor high
enough to offer attractive margins for any but the lowest cost producers.
Thermal markets would be closer to recovery if prices had fallen further and faster,
causing acute financial pain to and forcing the closure of the most marginal mines.
Exhibit 146: A depressed physical market Exhibit 147: … creating range-bound paper trading
US$/t, spot US$/t, front calendar swap
150 140
Newc RBCT ARA API#2 Y1 Swap API#4 Y1 Swap Newc Y1 Swap
135
140
130
130 125
120
120
115
110
110
100 105
100
90
95
80
90
Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12
Source: Credit Suisse, McCloskey Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
Our nominal price forecasts are revised modestly lower from last quarter, looking for the
Newcastle benchmark to average US$90/t in Q4 and $98/t through calendar 2013. We
also cut our real (2011 prices) long-term forecast from $120/t to $110/t due to a further
reduction in required capacity additions.
In the near term, prices should have little room to rally as demand is being met by ample
levels of supply. Moreover, any uptick in demand would need to burn through a significant
inventory buffer before it resulted in consumers being forced to bid seaborne markets
materially higher. Nevertheless, gradual price improvements should emerge, as existing
production cuts begin to feed through and demand growth picks up with better macro
fundamentals, in 2013. Xstrata’s recent agreement for slightly higher annual Japanese
utility contracts ($96.90/t versus $95/t in July) is also in line with this expected dynamic.
Commodity Forecasts: The Best of Times, The Worst of Times 77
12 October 2012
Competition for market share has created a prisoner’s dilemma
Despite an announced 82 Mt of production cuts by US thermal coal mines, the
combination of coal-to-gas switching, high utility inventories, and sluggish economic
activity has left the country with a significant surplus of coal. Moreover, as our US Metals
and Mining team has highlighted (September Coal), actual production run-rates suggest
not all cutback announcements have been followed through on, with some companies
trying to take advantage of the market by maintaining output. Import and export volumes
have consequently continued to diverge, with year-to-date exports now annualizing at
The US is now a 56 Mt/y (seasonally adjusted).
structural seaborne
We continue to see this as a structural shift rather than a cyclical phenomenon. The US
supplier
shale gas glut has moved the US into a position of fuel surplus, consequently making it a
significant energy exporter. Given the constraints on LNG exports, increased coal exports
have been, and will continue to be, a natural outlet for surplus domestic energy production.
Moreover, Credit Suisse’s US Utilities team notes that 9.5GW of coal-fired generation
capacity has been retired over the course of 2011 and 2012 year to date, with a further
22 GW of capacity earmarked for closure by 2015. In fact, the final figure will likely be
even larger, with an estimated aggregate of 60GW at risk, but firm commitments have yet
to be made with regards to other existing facilities.
That said, while US thermal shipments should thus continue to grow, relatively high all-in
FOB costs, limited infrastructure capacity, and competition with metallurgical coal for that
infrastructure capacity, will all act as constraints, keeping further export growth incremental
rather than dramatic.
Exhibit 148: US thermal imports Exhibit 149: US thermal exports
Mt, monthly sa Mt, monthly sa
3.5 7
3.0 6
2.5 5
2.0 4
1.5 3
1.0 2
0.5 1
0.0 0
2005 2006 2007 2008 2009 2010 2011 2012 2005 2006 2007 2008 2009 2010 2011 2012
Source: Credit Suisse, Customs Data Source: Credit Suisse, Customs Data
This, in combination with strong supply from more traditional sources, has been a key
factor in pushing the market into a state of oversupply. For example, after totaling 148 Mt
last year, Australian exports have annualized at 163 Mt/y (sa) through 2012 to date, while
Indonesian producers have managed to ship at an annualized rate of 342 Mt/y (sa)
through the first half of this year.
Traditional Indeed, the most notable aspect of the thermal market’s supply side over the last 12
exporters also months has been the dearth of disruptions. Colombian strikes aside, the seemingly
delivering strong uninterrupted march of supply-side expansions has pushed prices below marginal costs of
production, Russian material struggling to price into Europe below $95/t for example, and
volumes
trapped the market in its currently depressed state.
Commodity Forecasts: The Best of Times, The Worst of Times 78
12 October 2012
As we argued last quarter – No pain, no gain: Cutbacks are needed to balance the market
– producer discipline rather than increased demand has been the change most capable of
rebalancing the market and, in addition to the aforementioned US cuts, this has now
begun to emerge.
Exhibit 150: Indonesian thermal exports Exhibit 151: Australian thermal exports
Mt, monthly sa Mt, monthly sa
35 15
30
13
25
20 11
15 9
10
7
5
0 5
2005 2006 2007 2008 2009 2010 2011 2012 2005 2006 2007 2008 2009 2010 2011 2012
Source: Credit Suisse, Customs Data Source: Credit Suisse, Customs Data
More specifically, weak mining capital goods sales and a 30 Mt/y reduction in production
targets by the country’s coal mining association have been clear indicators that Indonesian
volumes should be lower for the second half of the year and that, further out, capacity
expansions will slow – current prices offering little or no incentive for additional capital
Though still expenditures.
insufficient, With the lion’s share of these cuts coming from small operators, putting an exact number
cutbacks are now on how much material has been taken off-line is extremely difficult. Based on our
beginning to come estimates, however, we reduce expected Indonesian volumes from 343 Mt to 334 Mt for
CY 2012 – as is beginning to come through in the data (Exhibit 150).
through
In Australia also, following the early closure of Blair Athol, announcements of job cuts
across the major miners and continued concerns about the viability of some projected
capacity additions, we reduce 2012 exports from 162 Mt to 159 Mt and 2013 from 187 Mt
to 178 Mt. We flag that these numbers, particularly for farther-dated years, come with
downside risks, especially if the Australian dollar continues to hold firm in a world with few
low-risk assets (for a discussion of the divergence between the Australian dollar and bulk
commodities’ prices see – Commodities Advantage: In the ECB we trust…).
Additional to this temperance of seaborne supply, Chinese production has fallen by more
than 4% (SA) for three consecutive months, as domestic miners have been outcompeted
into southern China by imported material taking advantage of the open “arb.” Moreover,
though high in absolute terms – major IPPs have been burning an average of 3.5 Mt/day
between them – coal consumption has been relatively low. Within the power mix, coal has
been squeezed from both sides as strong rainfall pushed hydro-electric power to a record
market share of 22% while, at the same time, overall generation has remained subdued in
the face of weak industrial production growth, rising a mere 0.7% mom (sa) in August.
Other regions, led by Colombia, South Africa, Russia, and, as discussed, the US have
continued to increase their export volumes this year but, over the course of our current
forecast horizon, Indonesia and Australia look set to further cement their market-leading
positions (Exhibit 154). That said, global market growth is set to slow to a more modest
pace around 5% p.a., down from recent highs closer to 10% p.a.
Commodity Forecasts: The Best of Times, The Worst of Times 79
12 October 2012
Exhibit 152: China’s raw coal production Exhibit 153: China’s electricity generation
Mt, monthly sa TWh, sa
400 350 70
thermal hydro (rhs)
330 65
350
310 60
290
300 55
270
50
250 250
45
230
200 40
210
190 35
150
170 30
100 150 25
2006 2007 2008 2009 2010 2011 2012 2005 2006 2007 2008 2009 2010 2011 2012
Source: Credit Suisse, SxCoal Source: Credit Suisse, China NBS
Exhibit 154: Major thermal coal exporters
Mt
35 Australia RoW Indonesia
30
25
Australia and 20
Indonesia should
15
further cement their
market-leading 10
positions 5
0
2011 2012 2013 2014 2015
Source: Credit Suisse, Customs Data, Company Data
Demand growth dependent on the usual suspects
India and China have continued to step up to the plate on the import side of the seaborne
market this year, running respectively at 105 Mt/y and 180 Mt/y for 2012 to date (Exhibits
155 and 156).
Though other regions have also put in strong performances for 2012, much of this has
been supply creating its own demand. Taking Europe for example, coal’s relative
cheapness – a direct result of such abundant supply – has seen dark spreads, particularly
of the clean variety, dramatically outperform spark spreads and trigger an initially
unexpected 6% jump in (estimated) 2012 imports over 2011 levels.
The fact that this demand, even in India and China to a certain extent, has been more
driven by coal’s relative cheapness than any structural increase in coal demand does,
however, remain a relatively bearish factor. Furthermore, in the immediate future, we think
risks for any shift in coal demand lie to the downside, after seasonal adjustment, as, taking
advantage of cheap prices, consumers have purchased more coal than they have
consumed, creating comfortable inventory buffers almost across the board.
Commodity Forecasts: The Best of Times, The Worst of Times 80
12 October 2012
Exhibit 155: Indian thermal imports Exhibit 156: Chinese thermal imports
Mt, monthly sa Mt, monthly sa
10 21
18
8
15
6 12
9
4
6
2
3
0 0
2005 2006 2007 2008 2009 2010 2011 2012 2005 2006 2007 2008 2009 2010 2011 2012
Source: Credit Suisse, Customs Data Source: Credit Suisse, Customs Data
Exhibit 157: Japanese thermal imports Exhibit 158: EU27 thermal imports
Mt, monthly sa Mt, monthly sa
14 18
16
12
14
10 12
10
8
8
6 6
2005 2006 2007 2008 2009 2010 2011 2012 2005 2006 2007 2008 2009 2010 2011 2012
Source: Credit Suisse, Customs Data Source: Credit Suisse, Customs Data
Further ahead however, we continue to expect strong structural Pacific market growth
from the two largest emerging nations.
In the case of India, ongoing difficulties in gaining environmental permits – particularly for
forest clearance – and, further out, the knock-on effects from the current coal block
allocation scandal, all point to continued weak domestic supply growth. In contrast,
though power demand growth is almost certain to miss current targets, we see the scope
for a theoretical thermal coal deficit above 250 Mt/y by 2015. As is always the case,
judging how much of this deficit will be filled by imports and how much of it will be
managed through demand destruction is far more art than science, but we estimate
imports to reach 162 Mt/y in 2015.
As for China, in many respects the country retains the potential to be self sufficient in coal
supply. This is something that should be even more true, as rail capacity expansions
come on-line over the next three years and there is a continuation of the drive for new
thermal-generating capacity to be sited at the mine-head, in order to facilitate “coal-by-
wire.” However, the narrative of 2012 has further confirmed our view that China will
continue to be a significant importer of seaborne tonnage.
Commodity Forecasts: The Best of Times, The Worst of Times 81
12 October 2012
Seaborne volumes Specifically, China’s coal market in 2012 has been characterized by ample domestic
have remained supply – Qinhuangdao has maintained robust inventory levels through much of the year
and power plants have had little difficulty in doing the same. Despite this, imports have
competitive into
surged by 49% over last year’s equivalent total for the first eight months of the year. This
Southern China is due to the lower cost of imported material for buyers in many southern destinations and
the fact that seaborne tonnes have, in many cases, therefore been able to outcompete
equivalent domestic material.
We believe China’s import levels will continue to be driven by commercial considerations,
as, while still above 90% self-sufficiency, there is little in the way of energy security risk for
China to import such volumes.
Outside of these two, we expect European demand to begin its slow decline in 2013 as the
growth of renewables generation, implementation of the large combustion plant directive
and continued substitution of biomass for coal, not to mention the UK’s introduction of a
carbon price floor, all take their toll on thermal consumption.
Japan’s energy path Demand growth in much of the rest of the world continues to be dependent on the state of
uncertain, but industrial production more than anything else but, while this is also true of Japan, the lack
of clarity around its post-Fukushima energy mix makes it something of an unknown. The
should benefit coal
government now appears to have retreated from its recently announced target of retiring
and gas all nuclear capacity before 2040, and the role that nuclear will play over the coming years
remains extremely unclear. Whatever the outcome, it should have a material impact on
coal demand, as coal is the natural alternative to nuclear for base-load generation
requirements.
Exhibit 159: Major thermal coal importers
Mt
30 India RoW China
25
20
15
10
5
0
2011 2012 2013 2014 2015
Source: Credit Suisse, Customs Data, Company Data
Due to the environmental downside of coal burn, no new coal capacity is expected to be
built, but barring a near full and immediate restart of nuclear capacity, we see existing coal
plants running at utilization rates near 80% and thus ensuring strong ongoing demand for
seaborne volumes. Gas (with inherently high thermal efficiency and environmental
pedigree) and fuel oil, with further room for increased utilization, should continue to be the
greater gainers from reduced nuclear usage, albeit at high cost.
Global demand should therefore grow at a CAGR of 5.8%, requiring significant additional
supply to be brought on-line but at a slower pace than coal producers had collectively
planned for. Prices will need to rise over the forecast period for this growth tonnage to see
the light of day but, for now, it should remain a relatively drawn out process.
Commodity Forecasts: The Best of Times, The Worst of Times 82
12 October 2012
Volatility has been notable by its absence
As Exhibits 146 and 147 demonstrate, front calendar API #2 swaps, the coal market’s
most liquid paper contract, have essentially traded three distinct ranges over the course of
the last 18 months. Outside of the price falls between these different ranges, there have
consequently been few attractive opportunities for people to trade paper coal.
Marginal costs a Since moving to current levels, not only have prices been depressed but the scope for
prop, ample supply price movement has also become extremely narrow. In particular, prices have been
supported from below by marginal costs of production and robust demand, while capped
a cap
from above by the ample supply that would come to market were prices to rise materially.
With market participants well aware of these dynamics, thermal coal, outside of the Cal13
contracts being somewhat buffeted by macro sentiment and price moves across the
broader energy complex, has traded heavily on fundamentals. A good indicator of this
came from the fact that, unlike almost all other industrial commodities, coal prices failed to
receive any kind of fillip from the announcement of QE3 (Exhibit 160).
Consequently, one of this year’s most beneficial coal trades has been to sell volatility –
selling either call or put options on the expectation that actual volatility will realize below
implied volatility at the time of trading (Exhibit 161). While there is limited scope for any
significant price shifts in the physical market, sentiment is likely to reinforce relatively
range-bound trading in the paper swaps.
Exhibit 160: Coal unmoved by QE3 Exhibit 161: Realized volatility vs. implied volatility
Index, 13/09/12 = 100 Price volatility
120 25% Realised Implied
Copper 3-Month API2 Front Cal Iron Ore Front Q
115 20%
110 15%
105 10%
100 5%
95 0%
13/09/2012 20/09/2012 27/09/2012 04/10/2012 Jan-12 Mar-12 May-12 Jul-12 Sep-12
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse Locus
It is therefore worth considering what would need to change to create more room for prices
to move. The candidate that could open the market to a truly precipitous fall is a broader
global macro deterioration, triggered, for example, by a hard landing in China or a
disorderly euro breakup. Such events would rapidly remove the robust demand element
of market support but neither of these is a scenario we expect to play out, as we outline in
our macro summary.
In contrast, we think that rather than price volatility being created by the rug being pulled
out from under the market, it will be a case of waiting for the fundamentals to have
reached a more balanced position. Absent significantly faster supply-side discipline, that
is not something we expect to see within the remainder of 2012 or even in the first half of
2013. Rather, we now believe the market will have entered a more balanced state by late
2013 or early 2014.
Commodity Forecasts: The Best of Times, The Worst of Times 83
12 October 2012
No price recovery until then
At present, we continue to doubt the likelihood of any demand-side kicker. In particular, it
is worth noting the diminished potential for a substantial Chinese power plant restock, as
the utilities effectively never destocked this year (Exhibit 162) and, despite a minor recent
recovery, the impact of a weak rupee on seaborne coal prices for Indian buyers.
Exhibit 162: China’s major IPPs’ coal inventories Exhibit 163: Seaborne coal still expensive for some
Days burn cover, sa Richards Bay FOB thermal coal in US$/t (lhs), INR/t (rhs)
30 130 6000
USD INR (rhs)
25 120 5500
20
110 5000
15
100 4500
10
90 4000
5
80 3500
0 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
2008 2009 2010 2011 2012
Source: Credit Suisse, SxCoal Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
Exhibit 164: China coal arb Exhibit 165: Chinese IP has been soft in 2012
US$/t (lhs), percent (rhs) Percent
Seaborne South China CFR QHD South China CFR Discount (rhs) MoM Annualized YoY (lhs) Jan 02 - Dec 07 Avg
150 16% 25%
140 14%
20%
12%
130
10% 15%
120
8%
110 10%
6%
100
4% 5%
90 2%
0%
80 0% 2006 2007 2008 2009 2010 2011 2012
Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12
Source: Credit Suisse, McCloskey Source: Credit Suisse, China NBS
Additionally, as detailed in The Danger Zone, we now see the Chinese arb for seaborne coal
as an effective cap on prices. In short, when China accounted for ~5% of global imports, if
prices moved lower and opened up the China arb, then increased Chinese buying would
tighten the market – the China arb was more like a floor. Now, however, with China
accounting for ~20% of imports, were the arb to close, the market would likely move into
substantial surplus as Chinese buyers chose to procure domestic material instead.
On imperfect estimates, this currently leaves 6% of upside for seaborne prices, were the
ex-China market to tighten up (Exhibit 164).
Commodity Forecasts: The Best of Times, The Worst of Times 84
12 October 2012
Further upside would require a domestic price recovery which, in turn, is essentially
dependent on stronger industrial production (IP) growth, as the industrial sector accounts
for 75% of electricity demand.
Our current base case is for a gradual improvement in IP through 2013. This should
support the domestic Chinese market, creating more headroom for increased seaborne
prices and coincide with a move to more balanced supply-demand fundamentals. Against
this backdrop, prices will have more room to run.
If demand exceeded expectations or supply was disrupted, with weather the most likely
candidate here, then in a more balanced market we would expect to see prices diverge
significantly from our current forecasts. Price volatility would return.
If, however, either of these came about in the immediate future, absent a dramatic turn of
events, they would be unlikely to have any substantial impact on coal prices, as made
evident by the Fenoco strikes. Inventories remain ample, consumers, in the main, are
extremely price sensitive and the surfeit of supply is yet to be sufficiently trimmed.
The level of existing and projected supply still prohibits us from detailing a structurally
bullish story for thermal coal, but in a more balanced market, as should develop from late
2013, prices should settle at a level back around $100/t and maintain greater scope for
short-term moves.
Exhibit 166: Thermal coal price and CS forecasts Exhibit 167: Thermal coal history and forecasts
US$/t, forecasts based on CIF ARA (API2) US$/t
$110 Newcastle coal front month Quarterly avg forecasts
Credit Suisse Forecast Forward Curve
$190
$105
$170
$150
$100
$130
$95
$110
$90 $90
$70
$85
$50
$80 $30
Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
Exhibit 168: Forecast thermal coal prices
US$/t, long-term prices based on 2011 real prices
2011 1Q-12 2Q-12 3Q-12 4Q-12f 2012f 1Q-13f 2Q-13f 3Q-13f 4Q-13f 2013f 2014f 2015f LT
Newcastle FOB New US$/t 123 113 95 86 90 96 95 95 100 100 98 108 118 110
ARA CIF New US$/t 122 100 90 91 90 93 95 95 100 100 98 108 118 110
RBCT FOB New US$/t 117 105 94 87 89 94 94 94 99 99 97 107 117 110
Source: Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 85
12 October 2012
Exhibit 169: Global thermal coal supply and demand estimates
Mt, Surpluses or deficits show expected market balance but actual imports/exports should net out at the time
Importing Country 2008 2009 2010 2011 2012e 2013f 2014f 2015f
China 34.0 92.1 119.0 138.6 157.5 178.5 204.1 229.8
% change -24.1% 171.2% 29.1% 16.5% 13.7% 13.3% 14.4% 12.6%
India 36.6 60.3 75.5 92.4 107.0 117.9 144.1 162.2
% change 3.6% 64.9% 25.2% 22.4% 15.8% 10.2% 22.2% 12.6%
JKT 277.0 260.5 290.4 292.0 294.0 303.6 311.1 316.3
% Chagne 5.8% -6.0% 11.5% 0.6% 0.7% 3.3% 2.5% 1.7%
EU 27 163.8 148.6 123.1 141.2 149.6 141.3 134.4 131.6
% change 0.9% -9.3% -17.2% 14.7% 5.9% -5.5% -4.9% -2.1%
Turkey 15.2 17.0 17.2 19.7 21.2 22.8 24.5 26.4
% change -19.1% 11.7% 1.0% 14.4% 8.0% 7.5% 7.5% 7.5%
North America 49.3 35.1 31.8 22.2 16.3 15.0 15.5 16.0
% change -1.2% -28.7% -9.5% -30.1% -26.6% -8.0% 3.3% 3.2%
Brazil 6.4 2.7 5.3 8.0 8.0 10.3 10.3 10.3
% change 6.3% -56.7% 93.1% 49.8% 0.6% 28.2% 0.0% 0.0%
Chile 5.8 5.3 6.6 7.9 10.5 12.0 13.5 15.0
% change 17.0% -7.9% 24.8% 19.1% 32.7% 14.3% 12.5% 11.1%
RoW 53.1 50.6 68.4 62.0 64.3 67.5 72.2 76.4
% change 9.5% -4.6% 35.1% -9.4% 3.7% 4.9% 7.0% 5.8%
World 641.1 672.4 737.3 784.0 828.4 868.9 929.8 984.0
% change 1.4% 4.9% 9.7% 6.3% 5.7% 4.9% 7.0% 5.8%
Exporting Country 2008 2009 2010 2011 2012e 2013f 2014f 2015f
Indonesia 199.7 233.2 288.0 319.1 333.7 345.4 363.7 379.8
% change 2.7% 16.8% 23.5% 10.8% 4.6% 3.5% 5.3% 4.4%
Australia 126.4 139.5 142.1 148.2 159.1 177.5 184.8 199.6
% change 12.3% 10.4% 1.8% 4.3% 7.4% 11.6% 4.1% 8.0%
Russia 83.8 91.7 98.6 95.4 99.9 100.0 107.7 111.8
% change -1.1% 9.4% 7.5% -3.2% 4.8% 0.1% 7.7% 6.8%
South Africa 66.8 65.1 68.8 68.6 74.5 75.5 79.5 83.5
% change 2.3% -2.6% 5.7% -0.4% 8.7% 1.3% 5.3% 5.0%
Mozambique - - - 1.6 2.9 3.9 6.9 14.2
% change - - - - 79.0% 36.9% 75.6% 105.9%
Colombia 60.1 66.9 69.5 76.7 82.0 89.6 96.6 103.7
% change -9.9% 11.3% 4.0% 10.3% 6.8% 9.3% 7.8% 7.4%
North America 40.3 27.6 30.8 40.0 61.0 61.0 66.0 66.0
% change 43.8% -31.5% 11.4% 30.0% 52.5% 0.0% 8.2% 0.0%
Other 63.9 48.3 39.6 34.5 31.5 29.5 27.5 25.5
% change -20.7% -24.4% -18.1% -12.9% -8.6% -6.3% -6.8% -7.3%
World 641.1 672.4 737.3 784.0 844.6 882.5 932.6 984.2
% change 1.4% 4.9% 9.7% 6.3% 7.7% 4.5% 5.7% 5.5%
Surplus / Deficit - - - - 16.1 13.5 2.8 0.2
As a % of exports - - - - 1.9% 1.5% 0.3% 0.0%
Source: Credit Suisse, Customs Data, Company Data
Commodity Forecasts: The Best of Times, The Worst of Times 86
12 October 2012
Commodities Research
Base Metals
Andrew Shaw
andrew.shaw@credit-suisse.com
Copper – Vulnerable without real demand improvement
+65 6212 4244
Copper prices have rallied on the back of emphatic moves by the Fed and ECB, as well as
Ivan Szpakowski generally improving macro sentiment. However, with mine supply volumes rising, a
ivan.szpakowski@credit-suisse.com notable improvement in still weak real demand is needed to see prices hold on to recent
+65 6212 3534
gains, let alone move higher.
Equity Research
Paul McTaggart
The risk is that prices move lower as economic activity does not pick up as strongly or
paul.mctaggart@credit-suisse.com quickly as the rally is now pricing in, particularly given that the copper market is shifting
+61 429 328 247 from several years of market deficits into increasing surplus (for an example of the risks
Matthew Hope
involved, see nickel’s price reaction to a shift from deficit in the first half of 2011 to
matthew.hope@credit-suisse.com increasing surplus through Q2 2012).
+61 2 8205 4669
With respect to the physical market, the Western world is likely to remain tighter than
Neelkanth Mishra China as, while inventories are ample in the latter, available metal is scarce in the West.
neelkanth.mishra@credit-suisse.com
+91 22 6777 3716
This is leading to higher premiums and leaves the LME vulnerable to squeezes.
While our forecast is for increasing market surpluses and a decline in prices, we do
believe that copper is in a price a bubble that will deflate, as some in the market believe.
However, new supply remains difficult to bring on-line, and the cost to do so continues to
escalate at an alarming rate. As a result, we estimate that required medium-term real
incentive prices for investment decisions are now about US$6,500/t.
Mined supply – is growth finally upon us?
While mined supply has once again been weak year to date, the question is whether the
Mined supply has story is now changing.
once again been
The prime example is Chile, where Q1 production was anemic, and output was hit by
weak … major maintenance and technical problems in July. As a result, production through July
was 4% lower than the average over 2006-2010. However, August saw a significant
improvement in output, and as the early part of 2011 was even worse than this year,
production through August was up a full 3% year on year.
Exhibit 170: Chilean production is up only 2.5% yoy, Exhibit 171: Chinese mined production seeing
but likely to improve in Q4 strong growth according to government data
kt kt
2012 2011 2004-2010 Avg 2012 Days Adjusted 2008 2009 2010 2011 2012
530 170
510
150
490
470 130
450
110
430
410 90
390
70
370
350 50
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: CEIC, Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 87
12 October 2012
..But that may be Moreover, maintenance at Escondida, Chuquicamata, and Los Colorados has ended, the
strike at the Antofagasta port has been resolved, and the completion of adjustments at
changing
Esperanza (pre-crusher and adjustment to tailings processing) should see volumes
improve from that mine.
Outside of Chile, while Zambian production has disappointed, mined production from
China and Peru (the world’s second and third largest producers) has grown strongly.
Reported output from Chinese mines has been the biggest surprise in this regard, with
government data showing truly remarkable growth (22% yoy). While it is likely that actual
growth in China is somewhat less than these numbers, improving reported copper
production around the world suggests that concentrate volumes are once again rising.
Looking forward, there is no arguing that a huge amount of new mined copper supply is
coming, as these expansions and new mines are already under construction, with many
near completion. However, the question is how long it will take for the volumes promised
by these projects to actually hit the market?
Large volumes set Delays have been rampant in recent years, especially in the final stages during which
production is bedded in (optimizing the supply chain, calibrating equipment, etc.). While
to hit the market;
such problems do not change the ultimate volumes delivered by projects, they do push
timing is key back the timing and therefore their impact on the market, as demand continues to grow.
question
Our forecast calls for only modest growth in 2012 due to the widespread disruptions and
delays experienced earlier in the year, but we expect the succeeding three years to see
much more substantial growth, with a notable increase in volumes in Q4.
Though our supply forecasts are more cautious than the consensus, we believe the risks
are nevertheless skewed to the downside, as we are still calling for historical growth
volumes.
Exhibit 172: Expectations are for a huge increase in mine supply, but how long
will this supply take?
Year-on-year mined supply growth, kt
1,600 1,600
1,400 1,400
Brook Hunt
1,200 forecasts 1,200
1,000 1,000
800 Credit Suisse 800
forecasts
600 600
400 400
200 200
0 0
-200 -200
-400 -400
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012f
2013f
2014f
2015f
Source: Brook Hunt, Credit Suisse
Drilling down into near-term growth, additional volumes in Q4 2012 and in 2013 are
expected to be driven in large part by several key mines. We look at the progress of each
of these.
Escondida has completed its ore access project and is mining higher-grade ore.
Production is expected to return above the 1 Mt/y mark in 2012 and continue to increase
from there.
Commodity Forecasts: The Best of Times, The Worst of Times 88
12 October 2012
Los Bronces has fallen short of expectations so far, with Anglo American attributing the
underperformance to lower-than-expected grades, as well as adverse weather, and a
safety incident. However, we believe that production rates will improve and expect run-
rates over the coming six months to be around 150 kt/y higher than that seen in 2011.
Antapaccay is on-track, with Xstrata expecting first production in October. We expect to
see notable increasing production through 2013.
KOV has experienced problems with power availability and insufficient pumping capacity
to remove water from the open pit. Ramp-up has thus been slower than expected, but still
saw 20% yoy growth in Q2 and production is expected to accelerate over the coming year.
Antamina experienced a sizeable slurry pipeline spill, which reportedly exposed dozens
of residents to harmful chemicals. However, production has not been impacted and
production at higher run-rates continues from the recently completed expansion. We are
expecting 2012 production over 100 kt higher than in 2011.
Oyu Tolgoi is nearly completely built (Rio Tinto put the figure at 94% in August). The
final major hurdle is negotiation of power tariffs between the Mongolian and Chinese
governments. However, we expect a workable agreement to be reached in time for
production to begin a long, massive ramp-up in 2013.
Esperanza continues to experience challenges, with Antofagasta reporting that it will
install a pre-crusher and conduct additional adjustments to its thickened tailings process
(a new technology to reduce water requirements). Production rates have nevertheless
improved, and we expect 2012 production of 160 kt, up over 60 kt yoy.
Salobo is essentially fully built (Vale reported 99% built at mid-year) and began
production from two copper lines in June. We expect continued volume growth over the
coming year.
Exhibit 174: Capex escalation has been intense –
Exhibit 173: Key expansions and ramp-ups the lowest annual rate has been 13%!
kt Percent
2012 2013 35%
Mine Country Operator Growth Growth Cumulative
Escondida Chile BHP Billiton 216 90 306 30%
Los Bronces Chile Anglo American 136 17 153
25%
Antapaccay Peru Xstrata 40 110 150
KOV DRC Gecamines 42 80 122 20%
Antamina Peru BHP/Xstrata 106 0 106 15%
Oyu Tolgoi Mongolia Ivanhoe 0 100 100
10%
Esperanza Chile Antofagasta 66 24 90
Salobo Brazil Vale 50 40 90 5%
0%
2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Credit Suisse Source: Brook Hunt, Credit Suisse
Project development increasingly expensive
While copper mines remain almost universally profitable on a cash operating basis, capex
costs to develop new mines have soared, and the theoretical incentive price required to
Capex costs have bring on board new marginal supply has thus risen substantially. Thus, while operating
ballooned costs do not provide cost support in the manner we have seen with aluminium and nickel,
project economics are likely to influence medium-term copper prices.
Commodity Forecasts: The Best of Times, The Worst of Times 89
12 October 2012
Capital intensities for brownfield and greenfield copper projects since 2005 have averaged
about US$6,700 per annual tonne of capacity and US$6,300/t, respectively, only slightly
higher than for projects over 2000-2005. However, capital intensities for projects currently
under development for the 2012-2019 period are expected to increase to about
US$11,000/t for brownfield projects and US$15,000/t for greenfield mines – increases of
around 70% and 140%, respectively.
Exhibit 175: Capex intensity is rising alarmingly
US$ per tonne of annual capacity
Brownfield (historic) Brownfield Greenfield (historic) Greenfield
50,000
45,000 Brownfield (2005-2011 $6,713/t
Brownfield (future) $11,264/t
40,000 Greenfield (2005-2011) $6,348/t
Greenfield (future) $15,476/t
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
2004 2006 2008 2010 2012 2014 2016 2018 2020
Source: Brook Hunt, Credit Suisse
As a result, we estimate that the required copper price, in real 2012 US$, to incentivize
Mid-term incentive new copper mines in the medium term is now around US$6,500/t. This calculation is
price at US$6,500/t based on an assumed 12% IRR hurdle rate, as well as our estimates for global demand
growth, production profiles for mines under construction, and Brook Hunt’s project cost
estimates. For perspective, decreasing the hurdle rate to 10% would lower the incentive
price to US$6,000/t, while hiking it to 15% would yield US$7,200.
These estimates are consistent with the emerging industry consensus that incentive prices
have risen to the US$6,000-7,500/t range.
Exhibit 176: Chinese copper demand has stagnated
Chinese copper semis (cathode + direct melt scrap) consumption, kt
Apparent Consumption Underlying Demand
12,500
11,500
10,500
9,500
8,500
7,500
6,500
5,500
4,500
2006 2007 2008 2009 2010 2011 2012
Source: Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 90
12 October 2012
Chinese demand, trade, and inventories
Chinese refined Chinese copper demand remains undeniably weak. In fact, our estimates show underlying
demand growth at demand having moved effectively sideways for the past six months. We now estimate
copper semis demand growth for the year at only 3% and refined copper demand growth
about 4%
at about 4%. With the recent rally in prices having been driven by developments in the
West (see Anatomy of a Metals Rally: Great Expectations), neither Chinese demand nor
prices have kept pace, with Chinese demand remaining muted and domestic prices
increasing, but not to the extent seen on the LME.
As a result, the import arb has moved significantly downward, with the cash arb moving
from neutral in mid-August to about -US$200/t currently. Chinese cash prices have also
fallen materially below SHFE futures prices for the first time in four months.
Exhibit 177: The Chinese import arbitrage has Exhibit 178: … And Shanghai cash prices have not
turned downwards in response to the LME rally kept pace with futures
US$/t RMB/t
400 600
200 LME Cheap
400
0
200
-200
0
-400
-200
-600
LME Expensive
-800 -400
Jan 11 Mar 11May 11 Jul 11 Sep 11 Nov 11 Jan 12 Mar 12May 12 Jul 12 Sep 12 Jan 11Mar 11May 11 Jul 11 Sep 11Nov 11 Jan 12 Mar 12May 12 Jul 12 Sep 12
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Exhibit 179: Chinese copper exports have fallen Exhibit 180: And net cathode imports are well below
back dramatically … Q1 2012 and Q4 2011 levels
kt Kt, seasonally adjusted (includes small quantities of alloy imports & exports)
120
450
400
100
350
80 300
250
60
200
40 150
100
20
50
0 0
2004 2004 2005 2006 2006 2007 2008 2008 2009 2010 2010 2011 2012 2006 2007 2008 2009 2010 2011 2012
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 91
12 October 2012
With respect to Chinese copper trade, refined exports have retreated from the record
100 kt seen in May, with August exports all the way back to 2 kt. The 100 kt was partly
driven by one-time factors, but the moderation was also due to a diminished incentive to
export as the Chinese import arbitrage moved towards parity and the backwardation on
the LME receded. These two trends have since reversed, but neither has shifted back to
the degree that we would expect material export volumes, although some domestic
smelters opportunistically take advantage of this swing.
Chinese imports Net cathode imports have leveled off in recent months at a steady 300-310 kt/month on a
have remained seasonally adjusted basis, significantly below the 370 kt/month average seen in Q4 2011
and Q1 2012, but still relatively robust on a historical basis. In fact, net cathode imports
steady …
are on track to reach 3.8 Mt, surpassing the 3.4 Mt high seen in 2009 (2011 saw 3.1 Mt).
Looking at overall Chinese copper trade (including also scrap, concentrate, blister, and
products), net imports have remained high, thanks to cathode, concentrate, blister, and
scrap imports, while product imports have been lower and cathode exports higher.
Exhibit 181: Total Chinese copper trade
Copper content, kt/month
800 Scrap Exports
700 Conc Exports
Blister
600 Exports
Product
500 Exports
Alloy Exports
400
Cathode
Exports
300 Scrap Imports
200 Conc Imports
Blister
100
Imports
Product
0 Imports
Alloy Imports
-100
Cathode
Imports
-200 Total Net
2008 2009 2010 2011 2012
Source: CEIC, the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Exhibit 182: Chinese restocking early in the year has faded, with inventories
relatively flat in recent months
kt
China Off-Exchange SHFE LME & COMEX Reported Commercial Stocks
400
300
200
100
0
-100
-200
2006 2007 2008 2009 2010 2011 2012
Source: the BLOOMBERG PROFESSIONAL™ service, Brook Hunt, Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 92
12 October 2012
… keeping The result of the surge in imports in Q4 2011 and Q1 2012 was a significant build-up of
inventories elevated Chinese inventories, both domestically, and especially in bonded warehouses in Shanghai,
where stocks are now estimated at about 700 kt. With the continued weakness of the
Chinese economy and imports having only declined moderately, inventories have
remained abundant. Q2 saw a mild destock (on the SHFE, bonded warehouses, etc.),
while Q3 saw a moderate restocking. This is a typical seasonal pattern and was aided by
movements in the import arb, with the net impact being no significant change in inventory
levels. This contrasts starkly with 2011, when large inventories at the beginning of the year
were subsequently run down through Q2 and Q3, with imports plummeting.
Exhibit 184: Premiums have risen in Europe and the
Exhibit 183: Visible inventories are heavily US, but remain low for Shanghai metal, reflecting
concentrated in China the distribution of inventories
kt US$/t
LME On Warrant LME Cancelled COMEX SHFE Shanghai Bonded
Shanghai Europe US
1,200 200
1,000
150
800
600 100
400
50
200
0
0
2009 2010 2011 2012
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Exhibit 185: LME on warrant inventories have Exhibit 186: Both the LME and COMEX have shown
plunged, and even less is accessible/desirable tightness in the front of the curve
kt Cash – 3M for LME; 1M – 3M for COMEX
Other US Other Europe Other Asia New Orleans St. Louis Vlissingen Johor LME (US$/t, lhs) COMEX (USc/lb,rhs)
150 Backwardation 2
600
1
500
100
0
400
-1
50
300
-2
200 -3
0
100 -4
Contango
-50 -5
0
2009 2010 2011 2012
2009 2010 2011 2012
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 93
12 October 2012
Western physical market tight
While China remains flush with metal, particularly with the 700 kt or so stored in bonded
warehouses in Shanghai, as well as 160 kt on the SHFE and much more in domestic off-
exchange warehouses, copper in the West remains much scarcer.
Inventories There was 265 kt in LME and COMEX warehouses as of the end of September, down
concentrated in from 560 kt a year ago. Moreover, significantly less of this metal is accessible or desirable.
Aside from the 35 kt of cancelled LME warrants, 48 kt is stuck behind long queues in
China, with little
Vlissingen, New Orleans, and Johor, and 42 kt is in St. Louis and believed to be less
available in the West desirable quality material for consumers. This leaves only 89 kt of other on warrant LME
stocks and 46 kt of COMEX inventories.
With consumer and producer inventories also at historically low levels as a result of
tightened credit conditions and caution towards weak demand prospects, metal availability
in the West is quite limited. It is therefore not surprising to see that physical premiums
have risen in Europe and the US, moving to about $100 in Europe and $130-$140 in the
US – up from $70 and $110-$120, respectively, in May. In contrast, premiums for metal in
Shanghai-bonded warehouses have remained low, about $40-60/t, compared to the highs
of about $150-$160 reached in Q4 of last year.
Moreover, the shortage of available metal in the West has seen the front of the curve for
both the LME and COMEX trading much stronger than typical for recent years. It has also
made the markets vulnerable to being squeezed, as was the case in Q2.
Exhibit 187: Copper forecast comparison Exhibit 188: Copper historical price and forecast
US$/t US$/t
$9,000 Credit Suisse Forecast Forward Curve Bloomberg Forecast Mean $11,000
Copper 3M Quarterly Avg Forecast
$10,000
$8,500 $9,000
$8,000
$8,000
$7,000
$6,000
$7,500
$5,000
$4,000
$7,000
$3,000
$6,500 $2,000
Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Exhibit 189: Forecast copper prices
US$/t; long-term prices based on 2011 real prices, conversion to US¢/lb rounded to nearest 0.05
1Q-12 2Q-12 3Q-12 4Q-12f 2012f 1Q-13f 2Q-13f 3Q-13f 4Q-13f 2013f 2014f 2015f LT
LME copper 3M New US$/t 8,329 7,860 7,720 7,800 7,927 8,000 8,300 8,000 7,700 8,000 7,500 7,000 5,500
New US¢/lb 3.80 3.55 3.50 3.55 3.60 3.65 3.75 3.65 3.50 3.65 3.40 3.20 2.50
Old US$/t 8,329 7,860 7,300 7,500 7,747 7,800 8,300 8,000 7,700 7,950 7,500 7,000 5,500
Source: Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 94
Commodity Forecasts: The Best of Times, The Worst of Times
Exhibit 190: Global copper supply and demand estimates
Thousands of metric tonnes (kt)
2008 2009 2010 2011 2012f 2013f 2014f 2015f 2008 2009 2010 2011 2012f 2013f 2014f 2015f
MINE PRODUCTION STOCKS
North America 1,952 1,695 1,646 1,732 1,831 2,043 2,159 2,194 LME + COMEX Stocks 371 592 437 459
Western Europe 198 205 253 285 334 364 367 383 SHFE Stocks 18 96 132 93
CIS & other E Europe 1,788 1,798 1,759 1,775 1,744 1,786 1,816 1,836 Total Ex change Stocks 389 688 569 552
China 1,157 1,056 1,258 1,375 1,600 1,657 1,702 1,756 Weeks Cons (Exch Stks) 1.1 2.1 1.5 1.4
Chile 5,402 5,453 5,480 5,291 5,527 5,869 6,132 6,215 Commercial Stocks 417 388 407 417
Australia 875 845 861 943 948 1,000 999 983 Total Reported Stocks 806 1,076 976 969
Indonesia 650 995 871 543 427 654 635 785 Price (US$/t) 6,932 5,149 7,547 8,813 7,927 8,000 7,500 7,000
ROW 3,683 3,891 4,057 4,298 4,577 5,343 6,003 6,402 TC (US$/t) 45 75 47 56 64 68 73 85
World Mine Production 15,706 15,940 16,184 16,241 16,989 18,715 19,813 20,554 RC (¢/lb) 4.5 7.5 4.7 5.6 6.4 6.8 7.3 8.5
Highly Probable Grow th - - - - - 31 104 245
Probable & Possible Grow th - - - - - - 40 137 COPPER CONSUMPTION BY COUNTRY (Mt)
Disruption Allowance - - - - (255) (1,125) (1,198) (1,256) North America 2.19 1.78 1.90 1.90 2.00 2.04 2.10 2.16
SX/EW 3,071 3,274 3,335 3,469 3,635 3,667 4,093 4,215 Western Europe 3.37 2.77 3.03 2.90 2.73 2.69 2.67 2.67
Concentrate 12,638 12,670 12,853 12,776 13,103 13,959 14,670 15,469 Eastern Europe 1.11 0.77 0.85 1.11 1.10 1.12 1.15 1.19
World Mined Copper 15,706 15,940 16,184 16,241 16,734 17,622 18,759 19,680 China 5.10 6.38 7.20 7.93 8.22 8.72 9.24 9.72
% Change 3.5% 1.5% 1.5% 0.3% 3.0% 5.3% 6.5% 4.9% India 0.53 0.55 0.58 0.59 0.62 0.67 0.71 0.73
Conc. avail after direct use 12,622 12,649 12,831 12,754 13,081 13,937 14,648 15,447 Japan 1.20 0.88 1.06 1.01 1.05 1.06 1.07 1.09
Smelter Capacity 16,597 17,074 17,554 17,986 18,861 19,730 20,710 21,181 Middle East 0.74 0.76 0.92 0.95 0.96 1.01 1.06 1.12
Smelter Production 14,292 14,178 14,786 15,421 16,335 17,965 19,175 19,771 Other Asia 2.35 2.23 2.43 2.23 2.21 2.28 2.37 2.47
Required Adjustment - - - - (700) (1,300) (2,000) (2,000) Oceania 0.15 0.13 0.13 0.12 0.12 0.12 0.13 0.13
Scrap/Remelted Blister (2,067) (1,933) (2,623) (2,857) (2,971) (3,083) (3,111) (3,245) Africa 0.30 0.31 0.30 0.28 0.28 0.30 0.31 0.33
Smelter loss 482 443 475 462 453 483 484 505 Latin America (inc Mex ico) 0.89 0.77 0.92 0.88 0.90 0.93 0.97 1.02
Primary Feed Required 12,707 12,688 12,638 13,027 13,117 14,066 14,657 15,287 World Consumption 17.93 17.32 19.33 19.89 20.20 20.94 21.79 22.61
SURPLUS/(DEFICIT) CONC (85) (39) 193 (273) (36) (129) (9) 159 % Change -0.3% -3.4% 11.6% 2.9% 1.6% 3.7% 4.0% 3.8%
China 9.2% 25.0% 13.0% 10.0% 3.8% 6.0% 6.0% 5.2%
REFINED COPPER PRODUCTION World ex China -3.6% -14.7% 10.7% -1.3% 0.1% 2.1% 2.6% 2.8%
North America 1,710 1,496 1,405 1,291 1,302 1,405 1,469 1,473 COPPER CONSUMPTION BY SECTOR (Mt)
Western Europe 1,932 1,812 1,904 1,964 2,050 2,167 2,185 2,184 Building & Construction 6.03 5.47 5.57 5.66 5.77 5.93 6.15 6.35
Eastern Europe 1,558 1,567 1,692 1,734 1,743 1,785 1,827 1,833 % Change -1.6% -9.4% 1.9% 1.6% 1.9% 2.8% 3.7% 3.2%
China 3,795 4,109 4,534 5,197 6,186 7,483 8,650 9,336 Transport 2.01 2.34 1.94 1.93 2.02 2.15 2.32 2.50
Other Asia & Oceania 4,593 4,383 4,424 4,375 4,577 4,836 4,956 4,977 % Change -0.1% 16.5% -17.0% -0.8% 4.9% 6.4% 7.7% 7.8%
Africa 608 727 883 965 1,106 1,471 1,721 1,793 Electrical 5.84 5.80 6.71 6.94 7.09 7.32 7.61 7.87
Latin America (inc Mex ico) 4,064 4,197 4,135 4,158 4,083 4,205 4,412 4,393 % Change 0.9% -0.7% 15.7% 3.4% 2.1% 3.3% 3.9% 3.5%
Probable Grow th - - - - - - 108.75 256.25 Consumer Goods 1.80 1.69 2.44 2.55 2.49 2.61 2.71 2.81
Adjustments to refined prod - - - - (948) (2,120) (3,000) (2,993) % Change 0.6% -6.1% 44.8% 4.5% -2.5% 5.0% 3.6% 3.7%
Scrap/Blister 897 840 856 794 829 900 951 1,010 Machinery & Equipment 2.25 2.02 2.65 2.80 2.83 2.92 3.00 3.08
Electro Refined 15,189 15,018 15,642 16,215 16,463 17,565 18,235 19,037 % Change -0.7% -9.9% 31.0% 5.7% 1.0% 3.2% 2.8% 2.8%
Net SX/EW 3,071 3,274 3,335 3,469 3,635 3,667 4,093 4,215 Total 17.93 17.32 19.33 19.89 20.20 20.94 21.79 22.61
World Production 18,260 18,291 18,977 19,684 20,098 21,232 22,328 23,252 Annual Substitution (468) (394) (450) (550) (500) (500) (400) (400)
% Change 5.6% 0.2% 3.8% 3.7% 2.1% 5.6% 5.2% 4.1% SURPLUS/(DEFICIT) 332 968 (349) (204) (102) 293 541 638
Source: Brook Hunt, Credit Suisse
12 October 2012
95
12 October 2012
Aluminum – High premiums, vulnerable prices
After languishing over the course of the northern summer and testing cost support levels,
aluminum prices have rallied strongly in the past month. At current prices and premiums,
we do not expect further production cutbacks. Moreover, the impact of several important
smelter disruptions is fading, and net exports from China are likely to increase further as
the arb has shifted and domestic surpluses rise.
Nevertheless, financing deals continue to absorb large volumes and availability of LME
material is extremely limited. Premiums therefore appear likely to remain elevated.
However, this is not positive for LME prices, which appear vulnerable should the recent
central bank action and improvement in macro sentiment not translate into stronger
underlying demand in the near term.
Supply outlook improving
It is aluminium’s supply growth profile and “affordability,” which have bolstered the metal’s
Smelters generally underlying demand trend, and this characteristic looks set to persist. While smelter costs
no longer under and potential for cost support for aluminium prices have been a hot topic in the market this
year, the recent rally, combined with record high premiums, have lifted smelters almost
pressure
universally back into the black on a cash basis. As a result, we are unlikely to see further
production curtailments at current prices. Conversely, it means that prices and/or
premiums could fall from here without prompting any meaningful supply-side response.
Exhibit 191: Smelters are not under pressure at Exhibit 192: … Making additions to announced
these prices and premiums production curtailments unlikely
US$/t, ex-China smelter cash cost curve
3,000
Production Share Production
Smelter Operator Location (kt/y) Disrupted Affected (kt/y)
Lynemouth Rio Tinto United Kingdom 170 65% 111
90%:
Vlissingen Zeeland Aluminium Netherlands 230 100% 230
$2,183
2,500
Portovesme Alcoa Italy 150 100% 150
$250/t Premium Added 94%
La Coruna Alcoa Spain 87 50% 44
80% Aviles Alcoa Spain 93 50% 47
2,000 Current LME Kurri Kurri Norsk Hydro Australia 180 33% 60
Cash: $2079.50
Alro-Slatina Vimetco Romania 200 50% 100
Mostar Aluminij Mostar Bosnia 135 13% 17
Tiwai Point Rio Tinto New Zealand 355 15% 53
1,500
Hannibal Ormet United States 270 33% 90
Unspecified Rusal Russia N/A N/A 150
Total 1,051
1,000 Share of World Production 2.2%
Source: Brook Hunt, Credit Suisse Source: Company Reports, Credit Suisse
In addition to the price-induced cutbacks seen this year, there have also been an
unusually large number of production disruptions due to accidents, technical problems,
and other factors. These problems have affected a number of large smelters, but most
have now resolved their issues, with production returning to normal levels.
Technical A fire on 21 August at Egyptalum’s 320 kt/y smelter caused the closure of one of the
anode block lines, which is expected to take one-and-a-half months to repair.
disruptions mostly
resolved Rio Tinto declared force majeure on 19 July on aluminium shipments to its Asia Pacific
customers following problems at its 360 kt/y Sohar smelter in Oman. It lifted force
majeure at the beginning of September.
A Q1 shutdown at BHP Billiton’s Hillside smelter (~700 kt/y) resulted in prolonged
reduced production rates (Q2 production was 117 kt, compared to normal production of
175 kt), but should now be back to normal run-rates.
Commodity Forecasts: The Best of Times, The Worst of Times 96
12 October 2012
Production was restarted at one of the potlines at Rio Tinto’s Alma smelter (434 kt/y) in
Canada on 10 August, with full production at the entire smelter expected to resume by
mid-November.
Production at Alcoa’s Massena West smelter (135 kt/y) in New York has now returned
to full production after a fire on 29 March damaged the cast-house.
Rio Tinto’s Shawinigan smelter (100 kt/y) is operating at full capacity after two potlines
that were damaged last December were brought back on-line in Q2.
Financing deals, premiums, and LME tightness
Aluminium financing yields remain attractive given the ongoing extraordinarily low rate
environment. However, yields have fallen back significantly from the June peak. For
example, annualized yields from rolling 12-month/3-month contracts have declined from
6.7% to 4.3%. Nevertheless, the backwardation seen with the September LME contract
has not carried over to October, allowing financiers to continue to earn a healthy spread.
Financing deals Financing deals continue to absorb aluminium’s large market surpluses, and we estimate
such deals now account for over half of the 12 Mt of global aluminium inventories
continue to tie up
(including LME, SHFE, producer, consumer, trade, and speculative off-exchange stocks).
metal Within the LME system, the proportion is even larger, and while it is impossible to pinpoint
an exact figure (which in any case is variable), we believe that financing deals represent
about 70%-80% of the 5 Mt of LME inventories.
Exhibit 193: Aluminium financing rates remain
relatively attractive, but have declined notably since Exhibit 194: The backwardation seen with the
June September contract has not carried over
Annualized yield Cash – three-month
3 month/1 month 12 month/3 month 30
15%
20
Backwardation
10
10%
0
-10
5%
-20
0% -30
-40
-5% -50 Contango
2008 2009 2010 2011 2012 2009 2010 2011 2012
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
While both global and LME inventories are quite ample (at roughly 12 Mt and 5 Mt,
respectively, as stated before), most of this metal is not readily accessible. In addition to
the large quantity of metal tied up in financing, several LME warehouses have become
virtually inaccessible due to massive volumes of canceled warrants.
Long warehouse There is currently over 750 kt of cancelled metal at Vlissingen, over 600 kt at Detroit, and
nearly 500 kt at New Orleans. At current minimum load-out rates, these represent queues
queues prevent
of 200 days or more (Johor also has a 45-day queue). Warehouse operators continue to
access as well purchase material directly in order to maintain inventories, and affiliated traders have
jammed load-out queues.
As a result, of the 5 Mt of LME aluminium stocks, only 2 Mt is on warrant metal outside of
Detroit or Vlissingen (or New Orleans), and thus of any realistic possible accessibility.
Commodity Forecasts: The Best of Times, The Worst of Times 97
12 October 2012
Exhibit 196: LME inventories are ample at over 5 Mt,
Exhibit 195: Global aluminium inventories are large, but less than 2 Mt of this is on warrant outside
but much is tied up in financing deals Detroit or Vlissingen
kt kt
LME SHFE Japanese Port Stocks IAI Unreported Other Cancelled Other On-Warrant
14,000 6,000 Vlissingen Cancelled Vlissingen On-Warrant
Detroit Cancelled Detroit On-Warrant
12,000 5,000
10,000
4,000
8,000
3,000
6,000
2,000
4,000
1,000
2,000
0
0 2008 2009 2010 2011 2012
2008 2009 2010 2011 Aug 2012
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Note:: “Unreported” includes producer, consumer, trader, and speculative stocks
However, even this number exaggerates availability, as it does not account for metal
locked up in financing deals at other locations (such as Rotterdam, where nearly 600 kt of
the 2 Mt is located).
Record high The result of the difficulty in accessing inventories has been record high premiums, which
have rocketed from around $160/t in Europe and the US to start the year to over $250 at
premiums changing
present (Japanese premiums have seen an even steeper climb from about $110-$250).
market dynamics Consumers are being forced to compete with warehouse operators buying metal directly,
as well as the previously mentioned shortage of metal outside of financing deals or
jammed LME warehouses.
Exhibit 197: Queues have been jammed at certain
LME warehouses (Johor is at 45 days as well) Exhibit 198: And premiums remain at all-time highs
US$/t
Cancelled warrants (lhs, kt) Days to clear queue (rhs) 300 US Europe Japan
800 300
700 250
250
600
200
200
500
150
400 150
300 100
100
200
50
50
100
0
0 0 2004 2005 2006 2007 2008 2009 2010 2011 2012
Vlissingen Detroit New Orleans
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Moreover, the roughly $100 rise in premiums has mitigated the impact of lower LME prices,
allowing more smelters to remain in operation, thereby reducing cost support for LME
prices, which fell further as a result (we examined the phenomenon in more depth in:
Commodities Advantage: Grinding Lower). Similarly, this means that prices currently being
received by smelters are more favorable than would be the case at similar LME price
levels in the past.
Commodity Forecasts: The Best of Times, The Worst of Times 98
12 October 2012
Looking forward, given the current combination of LME prices + premiums is now
significantly above cost support levels, its sustainability is dependent on sufficiently
positive macro sentiment and real demand. Moreover, the resolution of production
dislocations at several smelters, particularly in North America (see supply section above),
should provide a noticeable easing to physical market tightness.
However, a potential unknown in the short term is the next move from the party that
orchestrated the recent LME squeeze and subsequently took delivery of sufficient metal
upon September expiration to build its stake to 40%-49% of global warrants. Given the
already scarce availability of LME metal, this party may successfully keep premiums
elevated despite the easing of supply issues or even push premiums slightly higher in the
near term.
Nevertheless, the failure of underlying demand to improve in line with the recent sentiment
and central-bank-driven rally would see prices move downward from here.
China: Large domestic surplus
As we examined in our recent report on Chinese aluminium production (Chinese
Aluminium Production: Resilient & Adapting), Chinese smelters have not followed rest-of-
world smelters in curtailing production as prices fell. This resilience has been driven by
several factors:
Chinese production Power subsidies once again being granted by local governments.
unaffected by low Vertical integration, both at the downstream fabrication level and upstream with captive
prices power generation.
Falling coal prices, which have improved margins for producers with captive thermal
power plants.
Surging hydro-electric power generation, which has aided smelters in China’s
southwest.
Local political pressure to maintain production in order to support employment, GDP
growth, etc.
Exhibit 199: Chinese aluminum production Exhibit 200: … Primarily on the back of new
continues to increase capacity in northwestern provinces
kt kt
2008 2009 2010 2011 2012 30 Xinjiang Other Northwest Southwest Henan Shandong Other
1,800
1,700 25
1,600
1,500 20
1,400
1,300 15
1,200
10
1,100
1,000
5
900
800
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: NBS, CEIC, Credit Suisse Source: Brook Hunt, Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 99
12 October 2012
In fact, Chinese aluminium production has actually continued to increase on the back of
large new smelters being opened in Xinjiang and other northwestern provinces, with NBS
data showing year-to-date production up 10% yoy. This trend is set to continue, and we
expect Chinese aluminium production to grow by roughly 2 Mt in 2013 and in the 1-2 Mt/y
range in 2014 and 2015.
Exhibit 201: Demand remains soft, with premiums Exhibit 202: SHFE inventories continue to build in
for spot material falling response to domestic market surpluses
RMB/t, Changjiang spot – SHFE one month kt
300
500
250
450
200 400
150 350
100 300
250
50
200
0
150
-50
100
-100 50
-150 0
Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
The combination of this strong supply growth and weak underlying demand has resulted in
a large internal market surplus.
Smelter capacity This has led to strong exports of aluminium and products, despite an arbitrage very
growth leading to favorable to imports, with export volumes at the highest ever levels aside from mid-2011
when exporters took advantage of a huge premium of LME relative to domestic prices. As
larger net exports
for imports, they have risen somewhat in response to the favorable arb, but to nowhere
near the surge seen in 2009. Moreover, import volumes are likely to fade in the coming
months as the positive import arbitrage has collapsed in response to the LME-led rally.
Exhibit 203: Aluminium and product exports have Exhibit 204: While imports have reacted relatively
remained strong despite an unfavorable arb modestly to a positive arb and are now likely to fade
2004 2006 2007
2005 Arbitrage (lhs, US$/t) 2008 2009 product exports (rhs,2012
Al & 2010 2011 kt) Arbitrage (lhs, US$/t) Imports (rhs, kt)
-1000 400 600 400
LME Expensive
-800 350 400 LME Cheap 350
-600 300 200 300
-400 250 0 250
-200 200 -200 200
0 150 -400 150
LME Expensive
200 100 -600 100
400 50 -800 50
LME Cheap
600 0 -1000 0
2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: CEIC, the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: CEIC, the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 100
12 October 2012
The net impact has been an increase in metal flowing out of China, but not to a sufficient
degree to absorb the growing domestic surplus. As a result, there has also been a large
increase in domestic inventories. SHFE stocks have rebounded from around 100 kt a year
ago to over 400 kt, with estimates for inventories at off-exchange port warehouses
showing a similarly large increase.
Exhibit 205: Aluminium forecast comparison Exhibit 206: Aluminium historical price and forecast
US$/t US$/t
$2,400 Credit Suisse Forecast Forward Curve Bloomberg Forecast Mean $3,700 Aluminium 3M Quarterly Avg Forecast
$2,300
$3,200
$2,200
$2,100
$2,700
$2,000
$1,900
$2,200
$1,800
$1,700
$1,700
$1,600
$1,500 $1,200
Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Exhibit 207: Forecast aluminium prices
US$/t; long-term prices based on 2011 real prices, conversion to US¢/lb rounded to nearest 0.05
1Q-12 2Q-12 3Q-12 4Q-12f 2012f 1Q-13f 2Q-13f 3Q-13f 4Q-13f 2013f 2014f 2015f LT
LME aluminium 3M New US$/t 2,188 1,987 1,929 2,020 2,031 2,100 2,150 2,200 2,250 2,175 2,350 2,400 2,250
New US¢/lb 1.00 0.90 0.85 0.90 0.90 0.95 1.00 1.00 1.00 1.00 1.05 1.10 1.00
Old US$/t 2,188 1,987 1,920 2,000 2,024 2,050 2,150 2,200 2,250 2,163 2,350 2,400 2,250
Source: Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 101
12 October 2012
Alumina – Indonesian ban creates change
China’s imports for June, July, and August show the effect of Indonesia’s raw material
restrictions on bauxite imports. It is clear that the ban has crimped bauxite exports by
China, and we now believe this will ultimately raise the alumina price. The spot alumina
price has crept up from US$308/t in July to $324/t, and we expect it will continue to move
higher as the restrictions continue. We have increased our alumina price assumptions.
Exhibit 208: Spot alumina price forecast
2011 1Q-12 2Q-12 3Q-12 4Q-12 2012E 1Q-13 2Q-13 3Q-13 4Q-13 2013E 2014E 2015E LT
Alumina (spot) New US$/t 378 317 317 316 330 320 350 350 375 375 363 400 415 400
Old US$/t 378 317 317 310 315 315 325 340 340 340 330 400 415 400
Change % increase 0% 0% 0% 2% 5% 3% 8% 10% 10% 10% 10% 0% 0% 0%
Source: Credit Suisse
Bauxite exported from Indonesia goes to China to feed alumina refineries, mainly located
in Shandong Province. The effect of the restrictions that were imposed in May are shown
below (Exhibit 209).
Exhibit 209: China’s monthly imports of bauxite
Mt/month
Australian bauxite Indonesian bauxite other
7.0
6.0
China bauxite imports (Mtpm)
5.0
4.0
3.0
2.0
1.0
0.0
Sep-11
Sep-08
Sep-09
Sep-10
Mar-10
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Mar-08
Mar-09
Mar-11
Mar-12
Jan-08
Nov-08
Jan-09
Nov-09
Jan-10
Nov-10
Jan-11
Nov-11
Jan-12
May-08
May-09
May-10
May-11
May-12
Source: China customs, Credit Suisse
There was a surge of exports ahead of the ban as Chinese companies scrambled for
bauxite, then imports collapsed to about 200 kt in June and July, recovering to about 950
kt in August as the government agencies caught up in approving processing proposals.
Given the intent of the restrictions was to stimulate development of refineries and smelters
within Indonesia, and the government’s findings – that bauxite reserves would be depleted
within five to six years at the previous rate of exploitation – we do not expect that exports
will increase a great deal further. While the government has said they are targeting exports
across commodities at 2010-2011 levels, we expect early-2010 rates will be more likely for
bauxite to retain sufficient reserves for refineries to be established.
Bauxite cost push
At the same time as implementing the restrictions on raw material exports, Indonesia has
enacted a 20% export tax. The immediate effect has been to push up the price of
Indonesian bauxite for importers (Exhibit 210). The price gap between Australian and
Commodity Forecasts: The Best of Times, The Worst of Times 102
12 October 2012
Indonesian bauxite imported by China is closing from the typical US$10-13/t of recent
years, which largely reflected higher freight costs for the more distant Australian supply.
We expect the 20% export tax in Indonesia, combined with a margin increase for scarcity,
will ultimately cause the landed cost of bauxite in Shandong to rise by at least US$10/t.
With around 2.5 tonnes of bauxite needed to produce 1 tonne of alumina (Weipa available
alumina is 42%), alumina costs will rise by $25/t.
Exhibit 210: Landed prices of imported bauxite in China
US$/t
80
70
60
50
US$/t
40
30
20
10
0
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
Jan-08
Oct-08
Jan-09
Oct-09
Jan-10
Oct-10
Jan-11
Oct-11
Jan-12
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Import value Australian bauxite Import value Indonesian bauxite
Source: China customs, Credit Suisse
Indonesian bauxite tap turned off tightens alumina supply in China
Mysteel reported that the big Shandong producers, Chalco, Bosai, Weiqiao, Shandong
Nanshan, and Xinfa reduced alumina production in June after the Indonesian move
reduced imports. Indeed Chalco very publicly announced a 1.7 Mt/y curtailment and called
on others to do likewise, attributing it to the ban. Nanshan, Xinfa, and Weiqiao announced
a reduction of 1.4 Mt/y or 10%.
Thus, at the same time that China’s aluminium production has been rising inexorably, the
cut in bauxite supply has driven its domestic alumina production into a steep decline since
the May peak (Exhibit 211). This has caused an alumina deficit to open up to 15 kt/d, the
largest since 2007.
China’s imports must rise
The Chinese alumina deficit will cause imports to rise. China’s alumina imports have
averaged 405 kt/m in CY2012, including the 715 kt spike in May that appears to have
represented a precautionary measure against supply difficulties arising from the
Indonesian ban (Exhibit 212). The 15 kt/d deficit that we calculate for domestic supply
represents 465 kt/m so the remaining months of 2012 should see imports rise from the
315 kt in August, a solid lift from the depressed imports of 2011, and closer to the bullish
days of 2006-2007.
Our analysis suggests that spot alumina prices should rise imminently. We have noted that
the alumina price has climbed from the July lows of $308/t and was $324/t at time or
writing. We expect the price to creep up in the final months of this year and push higher
again in 2013.
Commodity Forecasts: The Best of Times, The Worst of Times 103
12 October 2012
Exhibit 211: China SGA output and deficit/(surplus)
kt
China Alumina output shortfall/(surplus)
120 35
110 30
China domestic SGA shortfall (kt)
100 25
90 20
Daily Prod Rate (kt)
80
15
70
10
60
5
50
-
40
30 -5
20 -10
10 -15
0 -20
Jul-07
Jul-08
Jan-09
Jul-09
Jul-10
Jul-11
Jul-12
Jan-07
Jan-08
Oct-07
Oct-08
Jan-10
Jan-11
Jan-12
Oct-09
Oct-10
Oct-11
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
Source: Company data, Credit Suisse
Exhibit 212: China’s monthly alumina imports
kt
Alumina imports from Australia Other net imports
800
700
China alumina imports (kt)
600
500
400
300
200
100
0
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jan-12
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Source: China customs, Credit Suisse
Our supply-demand model is shown in Exhibit 213. This shows that if Indonesia’s future
bauxite exports to Shandong reduce to say 1 Mt/m, then we see China’s required smelter-
grade alumina (SGA) imports rising to levels on a par with historical highs of over 8 Mt in
2013.
Commodity Forecasts: The Best of Times, The Worst of Times 104
12 October 2012
Exhibit 213: China alumina supply-demand calculations
kt
2005 2006 2007 2008 2009 2010 2011 2012f 2013f 2014f 2015f
Bauxite Imports
- Indonesia 17,221 14,358 23,213 36,108 27,000 12,000 12,000 12,000
- Australia (Weipa) 4,988 5,111 6,587 8,400 8,750 9,000 10,000 13,000
- Australia increase 0 0 0 0 0 0 2,000 4,000
- Fiji 0 0 0 150 800 1,000 1,500 2,000
- Other 3,581 221 278 187 500 500 1,000 1,000
Bauxite for Shandong 25,790 19,690 30,078 44,845 37,050 22,500 26,500 32,000
Potential Shandong SGA output 10,316 7,876 12,031 17,938 14,820 9,000 10,600 12,800
China Aluminium Supply 7,806 9,349 12,588 13,600 13,500 17,300 19,100 21,353 23,399 24,695 26,194
China Alumina Production
- Shandong 1,746 3,744 7,095 7,652 6,543 9,500 13,134 14,820 9,000 10,600 12,800
- Other China (base case) 6,790 9,996 13,805 17,718 17,307 21,500 24,866 27,641 29,793 31,589 35,162
- Other China (capacity increase) 2,000 4,000 5,000
Alumina Production 8,536 13,740 20,900 25,370 23,850 31,000 38,000 42,461 40,793 46,189 52,962
Alumina Capacity 8,802 13,751 23,855 32,752 34,430 38,850 43,525 48,448 51,971 53,095 54,393
Capacity Utilization 97.0% 99.9% 87.6% 77.5% 69.3% 79.8% 87.3% 87.6% 78.5% 87.0% 97.4%
Est. NMA Production (IAI) 937 1,099 1,114 1,309 1,265 1,367 1,467 1,575 1,693 1,694 1,695
Alumina Supply for Smelting 7,599 12,641 19,786 24,061 22,585 29,633 36,533 40,886 39,100 44,496 51,268
SGA Requirement (Brook Hunt) 15,300 18,324 25,805 27,880 27,675 35,465 39,155 43,773 47,969 50,625 53,698
Required SGA Net (7,701) (5,683) (6,019) (3,819) (5,090) (5,832) (2,622) (2,887) (8,869) (6,129) (2,430)
(Imports)/Exports
Actual SGA Net (Imports)/Exports (7,000) (6,912) (5,099) (4,586) (5,141) (4,312) (1,881)
Source: Company data, Credit Suisse
Aluminium premiums undermining linkage
The spot prices we are forecasting represent a break with the price implied by linkage.
We believe the recent change in pricing in the aluminium industry is likely to hasten the
demise of the linkage system. A large proportion of the price received by aluminium smelters
is now in the regional premium, rather than the LME price. The alumina linkage only uses the
LME price, so the linkage is unfairly disadvantaging alumina producers. Third-party alumina
producers are aware of this and we believe will now undoubtedly follow Alcoa’s lead in
pricing on spot indices.
Implied linkage of the spot price has broken down in 2012
From mid-2010 when the spot pricing indexes were created through to the end of 2011, the
spot price merely tracked a 15.5% linkage to the aluminium price. However, in 2012 the
relationship has broken down, with spot pricing remaining relatively steady while the linkage
has swung to highs and lows above and below spot. The recovery of Chinese imports in
2012 may have assisted this change. The apparent breakdown of the implied linkage
increases our confidence that the spot alumina price can now forge its own future relatively
independent of aluminium.
Few other bauxite options for China in the short term
We cannot see how China can readily replace the loss of bauxite from Indonesia. Chinese
bauxite is not suitable and will require development of more sophisticated process flow-
sheets to harvest large potential resources. The Shandong refineries that import the
Indonesian bauxite are designed to use the Bayer process and are not set up for high
temperature operation. Typical Chinese bauxite is composed of diaspore with high reactive
silica. Diaspore requires high temperature treatment to dissolve. To eliminate the high
reactive silica, some Chinese refineries pre-roast bauxite in furnaces. If Indonesian bauxite is
no longer available, Shandong refineries could not use this typical Chinese bauxite without
wholesale re-engineering and installment of new equipment such as furnaces.
Commodity Forecasts: The Best of Times, The Worst of Times 105
12 October 2012
Exhibit 214: Prices for spot prices for Australian, Chinese, and Chalco alumina
US$/t
FOB Australia spot price Other China spot SGA less VAT
Chalco spot SGA less VAT 15.5% of spot aluminium
420
400
380
US$/t 360
340
320
300
280
Jul-10
Jul-11
Jul-12
Jan-11
Jun-11
Jan-12
Jun-12
Oct-10
Nov-10
Dec-10
Aug-11
Oct-11
Nov-11
Dec-11
Oct-12
Aug-10
Sep-10
Sep-11
Aug-12
Sep-12
Feb-11
Mar-11
Feb-12
Apr-11
Mar-12
May-11
Apr-12
May-12
Source: Company data, Credit Suisse
We understand there is lateritic bauxite similar to imported material located in southern
China, closer to Vietnam. However, this is thousands of kilometers from Shandong so
transport would be problematical. We doubt the refineries would be able to access this
material. Shandong refineries need imported lateritic bauxite from somewhere.
Rio Tinto has increased its exports to China from Weipa in recent years, but having put its
US$1.5B major South of Embly bauxite expansion on ice while capex is focused on iron ore
projects, we believe it will not have the capability to expand exports greatly in the short term.
China’s Xinfa began importing bauxite from Bua in Fiji in 2011, but we believe the mine is
relatively small in scale and does not have sufficient reserves to increase its mining rate greatly.
Other projects: Chalco in Laos, Bosai Minerals in Guyana, and extraction of alumina from
fly ash generated by coal-fired power stations in China are all early-stage projects with any
significant production several years away at best.
Huge untapped bauxite reserves are available in Guinea, but the new mines to feed China
demand have not been created, and freight from the Atlantic would raise the landed cost.
Vietnam has large resources in its highlands, but has created a pair of small alumina
refineries and has shown no intention of wanting to export the material to China.
India was a previous exporter to China, but land-use conflicts have recently seen domestic
aluminium producers struggling to obtain sufficient feed for their own operations let alone
China’s.
Longer-term risks
However, beyond 2015, the situation is less clear. Many of the opportunities we noted
above could reach fruition. In addition there are a number of bauxite explorers in Australia
that plan to enter production and ship material China. Perhaps the most advanced is Cape
Alumina working along the margins of Rio Tinto Weipa leases in Cape York Peninsula,
which plans to enter production by 2015.
There is the possibility that Shandong production may resume in force after 2015.
Nevertheless, our position is that alumina will ultimately rise to deliver a commercial return
for refiners. The necessary return is provided by a price over US$400/t.
Commodity Forecasts: The Best of Times, The Worst of Times 106
12 October 2012
Western China and ex-China refinery plans not such a threat to the
alumina price
China’s aluminium industry is gradually migrating to Western provinces where stranded
coal deposits offer cheap power. Many of these plants intend to use alumina from more
proximal refineries using domestic bauxite. In general, we are not concerned with these
plans because alumina produced using these resources is expensive as Chalco has
shown. It tends to price its production at a $25/t premium to Shandong producers because
it must. Additional high cost plants coming on-line to feed expanding aluminium production
should be supportive of the alumina price.
Indonesia appears to have succeeded in attracting Chinese investment in alumina
refineries through its restrictions. On 14 August Mysteel reported Bosai Minerals is
planning to invest about $1B in an Indonesian project that would include a bauxite mine, a
2 Mt/y alumina refinery, a power plant and a port and will seek to retain a majority stake. It
is talking with potential Indonesian partners. Chalco and Weiqiao have said they are also
considering separate investments in Indonesian alumina projects.
Even in an emerging market country, we estimate that the likely capital intensity of a major
project that Bosai is planning would be $1,500/t (double that if built in Australia). A 2 Mt/y
refinery would therefore cost $3B, and would take at least two years even with energetic
Chinese companies involved. To invest in Indonesia, these Chinese companies would
have to be taking a long-term view that Shandong production will never regain its heights.
Exhibit 215: Estimated IRRs for alumina refineries at various alumina prices – updated for 2011
Units as indicated below
Theoretical Wagerup Worseley Yarwun Chalco Xing Nanchuan Nanshan Weiqiao
median
Capex intensity US$/t capacity 1,150 1,000 2,000 900 1,000 1,034 360 500
Operating cost US$/t 221 187 170 180 194 181 306 265
270 -2% 3% -1% 5% 2% 4% -13%
290 1% 5% 1% 6% 4% 5% -3%
310 3% 7% 2% 8% 6% 7% -13% 2%
330 4% 8% 3% 10% 8% 8% -1% 6%
Alumina price US$/t 350 6% 9% 4% 11% 9% 10% 5% 9%
370 7% 11% 5% 12% 10% 11% 10% 12%
390 8% 12% 6% 14% 12% 12% 13% 15%
410 10% 13% 6% 15% 13% 14% 17% 17%
430 11% 14% 7% 16% 14% 15% 20% 19%
450 12% 16% 8% 18% 15% 16% 23% 21%
Source: Credit Suisse
The capital intensities of the most recent alumina developments seem to have sky-
rocketed towards $3,000/t, but even at a bargain basement $1,000/t in China, our
calculations suggest that an alumina price of +$400/t is needed to make the investment
commercial (Exhibit 215).
While China – in many instances – may have ignored the cost of capital domestically in
favor of employment and other aims, it will not do the same for Indonesia. However, if
Chinese companies do invest in Indonesia, it could well be quite favorable for the global
industry, as they would need to push for a higher price to make the developments
commercial.
Domestic bauxite producers in Indonesia tend to have been small-scale affairs, with
traders buying up the output and exporting to China. These firms, even in conjunction, do
not have the capital or technical ability to build and operate alumina refineries. The only
firm we are aware of that is involved in alumina in Indonesia is PT Antam. Antam has
Commodity Forecasts: The Best of Times, The Worst of Times 107
12 October 2012
268 Mt of bauxite resources in Kalimantan and is building a small 300 kt/y alumina
chemicals plant known as Tayan at a capital cost of $450M. It has also commissioned an
engineering firm to do a feasibility study on a 1.2 Mt/y smelter-grade alumina refinery.
Even at an early stage, the capex looks to be about US$1bn and we have no doubt it
would rise to exceed US$1,000/t capacity as studies progress. We expect the feasibility to
deliver a negative outcome unless Antam ties up with Bosai, but in any event, such a
facility would not begin operation until 2016 at the earliest.
The Indonesian ban
We have referred to it previously, but it is worth reviewing what has actually occurred with
the Indonesian ban.
Since 2009, Indonesia has had in place a law that unprocessed material exports will be
banned by 2014. The objective is to stimulate value-adding inside Indonesia, in order to
increase industrial production and employment within the country, rather than just stripping
raw materials and shipping them off for the benefit of industries elsewhere. Traders and
companies widely ignored the impending law and raw material exports rapidly increased,
particularly bauxite and nickel laterite to satisfy China’s insatiable appetite.
This year, the law was stepped forward. Mysteel reported that the Indonesian government
estimated that its bauxite reserves could be exhausted within four to five years at the
current rate of exports. Accordingly, the government decided to ban raw material exports
from 6 May on miners with post 2009 permits (exempting Contracts of Work) unless the
exporters have provided the government with plans as to how those raw materials will be
processed in Indonesia from 2014. A second initiative was to place a 20% export tax on
materials that are exported. The tax has been in effect since May.
Conditions to gain export approval to export bauxite
To obtain Indonesian export approval between now and 2014, mining permits must be
clean and clear (by following 2009 Minerals and Coal Law); companies must have paid all
tax and non-tax financial obligations; and companies must have submitted a
comprehensive proposal on whether they want to build their own smelters, establish a
consortium to build a smelter or sell their raw material to another smelter in the country.
With respect to bauxite, the law actually says that the raw material must be processed as
far as alumina, so refineries are required rather than aluminium smelters.
Indonesian officials seem pleased with the effect of the ban
On 4 August 2012, the Jakarta Post reported that the Trade Minister said that more than
100 proposals had been received from mining companies to build smelting plants since
the regulation came into force in May: “Before the regulation was introduced, there were
no more than 12 companies that had proposed building smelting plants.”
We imagine that there could not be 100 realistic proposals for processing facilities. We
believe a majority of the proposals may be used as a way to gain an extra two years of
exports before they really are shut down. So, the effect of the ban would depend on how
thoroughly the authorities are vetting the proposals.
Commodity Forecasts: The Best of Times, The Worst of Times 108
12 October 2012
Proposals seem to be vetted – “only a few have been granted permits to
export”
According to Reuters and the Jakarta Post, on 3 August, the Trade Ministry’s Director
General of Foreign Trade told reporters that Indonesia had awarded export permits to 55
companies since the start of the ban, of which only ten were for bauxite. According to
Reuters, the number of export permits had increased from 22 in early July with
bureaucratic delays causing a licensing backlog for firms to have refining plans approved
by the Ministry of Energy and Minerals. However, the Jakarta Post noted an important
comment that the Director General added: “these data show us that out of the hundreds of
mining companies in the country, only a few of them have been granted permits to export
their products.” This suggests to us that the government is satisfied with the export cuts,
may be taking the law seriously, and is not accepting just any proposal.
Minister takes a hard line with a long-term view
Reuters estimated that the cut in exports is costing Indonesia $164mn per month in lost
sales and has led to mass lay-offs across the country. “So be it,” said Indonesia’s Trade
Minister in an interview with Reuters on 26 July that articulates what the government is
thinking. “I don’t want my kids to be just coal exporters. I want them to be able to make
something,” the Minister told Reuters. “My trade policies are geared towards being able to
climb up the value chain…Everyone around you in ASEAN, everyone around you in Asia-
Pacific knows how to make Blackberries, hand-phones, plasma TVs. We can’t even make
stuff like that,” said the Minister, adding that tech graduates could do it with capital and the
right policies. "It's not like we're happy taking a hit on exports of metals and minerals...if
this were to further encourage more investment in the downstream, it would be good for
the future of Indonesia."
Miners are complaining that even when the backlog of refinery proposals is cleared, it will
be impossible to build enough smelters within two years to process all the ore. The
government is now indicating that 2014 will not be a hard line, and companies building
processing facilities will be allowed time to build the facilities. However, the government
indicates it would prefer to halt mining rather than run down its ore reserves in four to five
years at the previous rate of exports. "We sent out a message very clearly at the end of
2009 with the mining law...and now you call me a protectionist? There's a lot of hypocrisy
out there,” said the Minister, referring to criticism that his policies have been nationalistic.
In relation to many small miners that have given up because they do not want to build
multi-million dollar smelters and believe the new 20% tax on raw ore exports will kill their
margins, the Minister said: "Perhaps they are not the kind of miners we want in
Indonesia…We want people who are willing to take the long-term view.”
Commodity Forecasts: The Best of Times, The Worst of Times 109
Commodity Forecasts: The Best of Times, The Worst of Times
Exhibit 216: Global aluminium and alumina supply and demand estimates
Millions of metric tonnes (Mt)
2008 2009 2010 2011 2012f 2013f 2014f 2015f 2008 2009 2010 2011 2012f 2013f 2014f 2015f
ALUMINA PRODUCTION STOCKS
North America 6.16 4.28 5.34 5.71 6.11 6.41 6.61 6.64 LME + COMEX Stocks 2.37 4.63 4.28 4.97
Western Europe 6.95 4.66 5.64 5.85 5.62 5.59 5.65 6.00 SHFE Stocks 0.20 0.30 0.44 0.21
Eastern Europe 5.63 4.75 5.39 5.56 5.26 5.58 5.70 5.89 IAI Stocks 2.96 2.23 2.52 2.39
China 25.37 23.85 31.00 38.00 42.32 44.23 46.49 49.26 Japanese Port Stocks 0.32 0.18 0.22 0.25
Kazakhstan & Azerbaijan 2.05 1.74 1.64 1.67 1.89 2.10 2.13 2.13 Estimated Unreported Stocks 1.75 2.75 4.47 5.40
India 3.62 3.69 3.62 3.83 3.94 5.46 7.26 7.96 Total stocks 7.60 10.09 11.93 13.22 14.44 15.47 17.02 19.47
Other Asia 1.00 1.00 1.21 1.22 1.33 1.84 2.40 3.64 Weeks Consumption 10.5 15.0 15.3 15.5 16.3 16.5 17.1 18.5
Australia 19.73 20.26 20.12 19.64 21.20 23.33 23.84 23.88 Al Price (US$/t) 2,567 1,665 2,173 2,398 2,031 2,175 2,350 2,400
Africa 0.59 0.53 0.60 0.56 0.16 - - 0.44 Alumina Linkage 13.5% 14.5% 15.3% 15.8% 15.8% 16.7% 17.0% 17.3%
Jamaica 4.16 1.77 1.78 1.96 1.73 1.70 1.91 2.57 Alumina Price (US$/t) 341 230 332 378 320 363 400 415
Brazil 7.86 8.65 9.52 10.55 10.53 10.73 10.83 10.94 ALUMINIUM CONSUMPTION BY COUNTRY
Other Latin America 3.75 2.85 2.51 2.59 2.22 2.35 2.45 2.50 North America 6.09 4.71 5.23 5.53 5.87 6.15 6.42 6.71
Highly Probable Grow th - - - - - - 1.17 2.83 Western Europe 6.59 5.24 5.88 5.97 5.79 5.81 5.86 5.92
Disruption Allowance - - - - (0.8) (3.3) (3.4) (3.5) Eastern Europe 2.13 1.55 1.77 2.00 2.02 2.10 2.19 2.29
Required Cuts - - - - - - - - China 12.56 13.88 16.47 19.17 20.18 21.92 23.69 25.38
World Alumina Production 86.9 78.0 88.4 97.1 101.5 106.1 113.0 121.2 India 1.28 1.48 1.71 1.84 1.94 2.08 2.22 2.39
% Change 7.6% -10.2% 13.2% 9.9% 4.5% 4.4% 6.6% 7.2% Japan 2.25 1.71 1.79 1.70 1.99 2.07 2.14 2.18
Capacity Utilisation (%) 89.5% 77.3% 82.4% 83.3% 83.2% 81.3% 83.4% 87.5% Other Asia 3.99 3.97 4.74 4.97 5.11 5.40 5.77 6.19
NMA Consumption 5.62 4.74 5.98 6.48 6.67 7.07 7.50 7.95 Oceania 0.46 0.44 0.47 0.46 0.48 0.49 0.51 0.52
% Change 1.4% -15.6% 26.0% 8.4% 3.0% 6.0% 6.0% 6.0% Africa 0.47 0.42 0.53 0.54 0.56 0.59 0.63 0.66
SGA Av ailable 81.26 73.30 82.39 90.66 94.87 98.98 105.54 113.24 Latin America (inc Mex ico) 1.69 1.59 1.83 2.00 2.08 2.20 2.32 2.45
SGA Requirement 77.45 73.88 83.31 89.64 93.10 98.22 105.05 112.60 World Consumption 37.5 35.0 40.5 44.2 46.0 48.8 51.8 54.7
SURPLUS/(DEFICIT) SGA 3.80 (0.59) (0.92) 1.01 1.77 0.77 0.49 0.64 % Change -1.6% -6.7% 15.5% 9.3% 4.1% 6.1% 6.0% 5.7%
China 1.7% 10.5% 18.7% 16.4% 5.3% 8.6% 8.1% 7.1%
ALUMINIUM PRODUCTION World ex China -3.2% -15.4% 13.5% 4.4% 3.2% 4.1% 4.4% 4.4%
North America 5.79 4.759 4.69 4.98 4.79 5.04 5.08 5.17 ALUMINIUM CONSUMPTION BY SECTOR
Western Europe 4.63 3.722 3.80 4.03 3.60 3.59 3.64 3.79 Building & Construction 9.80 9.74 11.50 13.13 13.77 14.58 15.43 16.14
Eastern Europe 5.12 4.422 4.58 4.65 4.60 4.66 5.07 5.37 % Change -0.7% -0.6% 18.0% 14.2% 4.9% 5.9% 5.8% 4.6%
China 13.60 13.500 17.30 19.10 21.68 23.87 25.11 26.93 Transport 9.62 8.28 10.55 11.00 11.74 12.65 13.73 14.92
Other Asia & Oceania 6.53 6.91 7.87 8.77 8.99 9.79 11.00 11.80 % Change -6.7% -13.9% 27.4% 4.3% 6.8% 7.7% 8.6% 8.6%
Africa 1.71 1.682 1.75 1.80 1.82 1.93 2.02 2.10 Electrical 4.79 5.00 5.36 5.94 6.17 6.50 6.87 7.23
Latin America (inc Mex ico) 2.66 2.507 2.31 2.18 2.08 2.26 2.42 2.50 % Change 18.8% 4.4% 7.2% 10.7% 3.8% 5.4% 5.6% 5.3%
Highly Probable Grow th - - - - - - 0.36 1.00 Packaging 5.82 5.27 5.45 5.71 5.85 6.08 6.32 6.56
Disruption Allowance - - - - (0.30) (1.29) (1.38) (1.50) % Change 2.5% -9.5% 3.4% 4.9% 2.5% 3.8% 3.9% 3.8%
Required Cuts - - - - - - - - Consumer Goods 2.68 2.52 3.06 3.45 3.40 3.66 3.85 4.07
World Production 40.0 37.5 42.3 45.5 47.3 49.9 53.3 57.2 % Change -0.1% -5.9% 21.1% 12.8% -1.5% 7.7% 5.4% 5.5%
% Change 5.0% -6.3% 12.8% 7.6% 3.9% 5.5% 7.0% 7.2% Machinery & Equipment 3.05 2.64 2.87 3.22 3.29 3.45 3.59 3.73
Capacity Utilisation (%) 100.0% 100.0% 100.0% 99.8% 99.5% 99.3% 99.2% 98.1% % Change -18.6% -13.3% 8.7% 12.0% 2.0% 5.0% 4.1% 4.0%
World Consumption 37.5 35.0 40.5 44.2 46.0 48.8 51.8 54.7 Other 1.80 1.56 1.66 1.77 1.83 1.91 1.99 2.07
Restocking - - - - - - - - % Change -3.3% -13.2% 6.7% 6.2% 3.3% 4.4% 4.2% 3.9%
SURPLUS/(DEFICIT) ALUMINIUM 2.50 2.49 1.84 1.29 1.22 1.03 1.55 2.45 Total 37.6 35.0 40.5 44.2 46.0 48.8 51.8 54.7
Source: Credit Suisse
12 October 2012
110
12 October 2012
Nickel – Short window for higher prices
Nickel has been worst performing LME metal year to date, and despite rallying over 20%
since early August, remains the only LME metal still in the red on the year. The
fundamental drivers behind nickel’s decline have been clear with weak demand and a
large increase in supply from major project ramp-ups and new NPI refineries.
Q3 saw a sharp reversal of this supply story, as NPI producers cut production in response
to plunging prices, and as several major ramp-ups encountered difficulties. This has
returned nickel to a more balanced market and we do not expect a return to sub-
US$17,000/t prices anytime soon.
However, at current prices, NPI production is likely to return in force, and project difficulties
should be resolved by the end of the year. The prospect for substantially higher prices
thus depends on a material improvement in underlying demand, something we are
cautious about in the near term.
2013 and 2014 is likely to see the market remain in significant surplus, with prices tracking
the marginal cost of high-cost NPI producers, and risks to the downturn should global
growth not improve materially.
Demand weakest of any base metal
While demand across industrial commodities has been soft this year, nowhere has the
Stainless steel weakness been more apparent than with nickel. Stainless steel production – which
production has accounts for roughly two-thirds of nickel demand – has been extremely weak, with the
contracted ISSF estimating that global stainless steel production contracted by -0.5% during the first
six months of the year.
In China, which accounts for 40% of global demand, stainless steel production growth has
slowed significantly to the low single digits (ISSF estimates H1 growth at 1.1%, Antaike
2.5%, and China Stainless Steel Council 5.25%). Moreover, nickel consumption has been
even weaker than stainless steel production growth, as there has been a notable
substitution away from 300 series stainless towards cheaper, lower nickel content or nickel
free 200 and 400 series material, reversing a trend seen over the past few years.
Exhibit 217: Stainless steel production was
extremely weak in the first half of the year Exhibit 218: And nickel premiums have remained low
H1 yoy change US$/t
4% 1,400 EU Uncut Cathodes 3,500
Premium (lhs)
EU 4x4 Cathodes
2% 1,200 Premium (lhs) 3,000
US Melting Premium
0% (rhs)
1,000 US Plating Premium 2,500
-2% (rhs)
800 2,000
-4%
600 1,500
-6%
-8% 400 1,000
-10% 200 500
-12%
Western Eastern Americas China Asia, ex- World Total 0 0
Europe Europe China 2007 2008 2009 2010 2011 2012
Source: International Stainless Steel Forum, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 111
12 October 2012
Ramp-up difficulties
After exceeding expectations early in the year, major nickel project ramp-ups have
encountered a host of difficulties in recent months.
Exhibit 219: Major nickel projects have encountered difficulties
Capacity
Project Country Operator Type (kt) Start-up Comments
Barro Alto Brazil Anglo FeNi 40 Mar-2011 Full capacity targeted by end of 2012. Maintenance on line
2 scheduled for H2; 5.4 kt produced in Q2 after mainenance
on line 1 in June; 6.6 kt produced in Q1
Onca Puma Brazil Vale FeNi 53 Mar-2011 Production halted following breakdowns in 2 furnaces; 2nd
line began production in January; 2 kt produced in Q2 after
4 kt in Q1; legal troubles
Taguang Myanmar Taguang FeNi 22 Apr-2011 Refinery difficulties
Taung Nickel
Ravensthorpe Australia First Quantum HPAL 39 Oct-2011 First Quantum forecasting 33-36 kt in 2012; 8.1 kt produced
in Q2, 8.6 kt in Q1
Ramu Papua New MCC HPAL 31 Mar-2012 First production achieved in early March; full capacity
Guinea targeted in mid-2013
VNC (Goro) New Caledonia Vale HPAL 60 Q1 2012 Force majeure with acid plant repairs expected to take
months; 1.1 kt nickel oxide and 2.3 kt nickel hydroxide cake
in Q1
Ambatovy Madagascar Sherritt HPAL 60 Sep-2012 Obtained 6 month operating permit in September;
commercial production targeted for H1 2013
Koniambo New Caledonia Xstrata FeNi 60 H2 2012 Full capacity targeted by 2014
Source: Credit Suisse, Company Reports
Onca Puma (ramping up to 40 kt/y) suffered breakdowns in two furnaces, on 28 May
and 22 June, and was forced to halt operations. The plant is expected to be remain
closed for several months.
VNC, which had been ramping up following first refined production (60 kt/y target
capacity), declared force majeure on nickel shipments on 11 May after a water leak at its
sulfuric acid plant. Repairs are expected to last several months, with production not
returning until Q4. As a result of problems at Onca Puma and VNC, Vale announced that
it will not reach its 2012 nickel production target of 400 kt.
Exhibit 220: Forecast nickel production from eight Exhibit 221: Nickel is moving into greater market
major projects surpluses
kt kt
350 80
60
300
40
250
20
200 0
150 -20
-40
100
-60
50
-80
0 -100
2010 2011 2012 2013 2014 2015 2016 2009 2010 2011 2012 2013 2014
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: Brook Hunt, Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 112
12 October 2012
Sherritt’s Ambatovy project (60 kt/y target capacity) was delayed in obtaining an
operating permit from the Madagascar government. It finally managed to obtain a six-
month permit in September in exchange for conducting further studies before the
granting of a longer-term permit. First production had been anticipated in Q2, with the
company’s guidance for 2012 production lowered to 8 kt from 8-13 kt (even the former
now appears optimistic), and for commercial production moved back to H1 2013 from
previous guidance of late 2012/early 2013.
Ramp-up difficulties As a result, the market now appears closer to balance and the disruptions have arrested
the market’s cyclical move into greater surpluses. An improvement in demand could thus
have brought the
see nickel move higher. However, this window is likely to be fairly short-lived, and a failure
market closer to to see notable macro improvement would likely see a resumption of growing surpluses as
balance we move into 2013.
Indonesia and Chinese NPI
Chinese nickel ore imports from Indonesia have fallen considerably as a result of export
restrictions. In response, Chinese consumers have turned to ore from the Philippines,
where Chinese imports have reached a new record high. As a result, total imports in raw
volume terms have barely moved, remaining at elevated levels.
However, the grades of Philippine ore are generally lower (often substantially) than
Indonesian ore, and the contained nickel content of Chinese imports has thus declined to
a greater degree than implied by raw volume figures. The lower-grade ore being imported
from the Philippines is also less suitable for the production of higher-grade NPI, which has
been a focus of China’s nickel industry (the so-called rotary kiln-EAF configured plants
require higher-grade saprolite ore with lower Fe:Ni ratios if they are to yield higher nickel
content NPI).
Nevertheless, the impact of the Indonesian export regime change on the Chinese NPI
industry has been far less than many in the market anticipated.
Exhibit 222: Chinese nickel ore imports from Exhibit 223: But volumes from the Philippines have
Indonesia have fallen increased in response
kt (raw ore) kt (raw ore)
4,500 5,000
4,000 4,500
4,000
3,500
3,500
3,000
3,000
2,500
2,500
2,000
2,000
1,500
1,500
1,000 1,000
500 500
0 0
2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Instead Chinese nickel production has declined significantly in response to lower prices,
with NBS production data for the May through August period down -18% yoy.
Most notably, NPI producers have been unable to maintain production volumes in the face
of low prices. In fact, NPI traded at a consistent premium to domestic refined metal over
the first eight months of the year, underlining producers’ lack of competitiveness.
Commodity Forecasts: The Best of Times, The Worst of Times 113
12 October 2012
NPI production However, the recent price increase is likely to not only prevent further curtailments, but
likely to rebound also to prompt some producers to increase volumes and resume production, and we have
in fact heard the first reports of refineries resuming production in recent weeks.
Exhibit 224: Chinese nickel production has fallen in Exhibit 225: NPI prices have plummeted, but NPI has
response to low prices become competitive vs. refined nickel once again
kt RMB/t
2008 2009 2010 2011 2012 NPI Premium (rhs) Refined Nickel NPI (10-15%)
35
180,000 15,000
30 170,000 10,000
25 160,000 5,000
20
150,000 0
140,000 -5,000
15
130,000 -10,000
10
120,000 -15,000
5
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 110,000 -20,000
Jun 11 Aug 11 Oct 11 Dec 11 Feb 12 Apr 12 Jun 12 Aug 12
Source: CEIC, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Zhijin Steel, Credit Suisse
Moving forward, we do not expect nickel ore availability from Indonesia to decline further,
as the government has expressed a goal to keep export volumes in line with those of 2010
and 2011. Moreover, the government revealed publicly for the first time in September that
it would not fully implement a hard ban on natural resource exports in 2014 (in line with our
guidance over the past two years), with the country’s Deputy Minister for Energy and
Mineral Resources stating: “It won’t be fully enforced in 2014 as it won’t be fair to the
companies.”
Nonetheless, we believe that the increased difficulty and cost of sourcing ore from
Indonesia will continue to see companies focus on supply from the Philippines and
alternate sources (such as Ramu in Papua New Guinea). This, along with the nickel
market’s expected increasing market surplus, should limit the continued growth of China’s
NPI industry.
NPI expansion Increased export restrictions have successfully prompted metals companies to look more
expected in seriously at developing processing facilities in Indonesia, and while there have not been
the series of public announcements in nickel as we have seen for alumina (or even
Indonesia and
copper), our conversations have shown that Chinese companies are taking a closer look
Philippines at previously dormant plans to develop NPI and other nickel-processing facilities in
Indonesia. However, capital costs are steep and process configurations for accessing
different ore types are likely to be complex.
The Philippines is further ahead than Indonesia in terms of NPI, but with less medium-term
promise. This year saw the first NPI production from the Illigan refinery in the Philippines,
and capacity exists to increase volumes. However, companies are prioritizing Indonesia
for investment of new NPI refineries due to higher ore grades, and it is unlikely that
significant NPI capacity will be built within the next four years.
Commodity Forecasts: The Best of Times, The Worst of Times 114
12 October 2012
Exhibit 226: Nickel forecast comparison Exhibit 227: Nickel historical price and forecast
US$/t US$/t
$20,000 $55,000
Credit Suisse Forecast Forward Curve Bloomberg Forecast Mean Nickel 3M Quarterly Avg Forecast
$50,000
$19,500
$45,000
$19,000
$40,000
$18,500 $35,000
$18,000 $30,000
$25,000
$17,500
$20,000
$17,000
$15,000
$16,500 $10,000
$16,000 $5,000
Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Exhibit 228: Forecast nickel prices
US$/t; long-term prices based on 2011 real prices, conversion to US¢/lb rounded to nearest 0.05
1Q-12 2Q-12 3Q-12 4Q-12f 2012f 1Q-13f 2Q-13f 3Q-13f 4Q-13f 2013f 2014f 2015f LT
LME nickel 3M New US$/t 19,654 17,157 16,354 18,000 17,791 18,500 19,000 19,000 19,000 18,875 20,000 21,000 20,000
New US¢/lb 8.90 7.80 7.40 8.15 8.05 8.40 8.60 8.60 8.60 8.55 9.00 10.00 9.05
Old US$/t 19,654 17,157 17,000 18,000 17,953 18,500 19,000 19,000 19,000 18,875 20,000 21,000 20,000
Source: Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 115
Commodity Forecasts: The Best of Times, The Worst of Times
Exhibit 229: Global nickel supply and demand estimates
Thousands of metric tonnes (kt)
2008 2009 2010 2011 2012F 2013F 2014F 2015F kt 2008 2009 2010 2011 2012F 2013F 2014F 2015F
Mine Production 1,597 1,437 1,643 1,935 1,939 2,056 2,232 2,321 Stainless production by Country
Disruption allow ance (15) (62) (67) (70) Europe 8,079 6,113 7,756 7,870 7,817 7,868 7,969 8,070
Mine Output 1,597 1,437 1,643 1,935 1,925 1,994 2,165 2,251 % change -4% -24% 27% 1% -1% 1% 1% 1%
REFINED Ni AND FeNi PRODUCTION China 7,200 9,158 12,415 14,000 14,420 15,718 16,975 18,163
Canada 164 117 107 148 150 132 137 122 % change -8% 27% 36% 13% 3% 9% 8% 7%
Western Europe 234 187 222 246 252 257 261 261 Japan 3,566 2,607 3,427 3,256 3,256 3,354 3,387 3,421
CIS 279 269 281 280 286 288 289 287 % change -8% -27% 31% -5% 0% 3% 1% 1%
Japan 157 144 166 157 170 183 197 207 South Korea 1,743 1,644 2,022 2,116 2,137 2,201 2,267 2,324
China 205 250 334 453 449 495 519 540 % change -21% -6% 23% 5% 1% 3% 3% 3%
Australia 109 131 101 110 122 122 125 125 Taiw an 1,313 1,357 1,526 1,191 1,132 1,200 1,248 1,279
Other 232 235 240 258 267 354 420 479 % change -12% 3% 12% -22% -5% 6% 4% 3%
Highly Probable Grow th 0 1 7 10 India 1,550 1,690 2,170 2,365 2,507 2,682 2,897 3,129
Disruption Allowance (13) (55) (59) (61) % change -13% 9% 28% 9% 6% 7% 8% 8%
Required Adjustment - - - - USA 1,925 1,618 2,201 2,074 2,033 2,236 2,325 2,418
Total Production 1,380 1,333 1,451 1,652 1,684 1,777 1,896 1,969 % change -11% -16% 36% -6% -2% 10% 4% 4%
% change -2.4% -3.4% 8.8% 13.9% 1.9% 5.5% 6.7% 3.8% Brazil 450 339 464 499 509 529 551 573
Capacity Utilisation % 73% 66% 68% 65% 63% 65% 68% 70% % change -8% -25% 37% 8% 2% 4% 4% 4%
NPI 77 96 167 265 250 270 280 280 Other 809 625 467 410 469 515 535 551
CONSUMPTION Total World 26,635 25,151 32,448 33,781 34,279 36,303 38,155 39,928
Nth America 132 109 132 134 139 149 154 158 % change -8% -6% 29% 4% 1% 6% 5% 5%
Europe 422 361 408 414 413 422 429 436 Austenitic ratio 70.7% 73.7% 72.0% 71.5% 72.7% 73.0% 73.1% 73.3%
China 298 443 541 666 665 706 754 799 Scrap ratio 47.0% 40.9% 41.3% 38.4% 38.7% 39.5% 39.6% 39.8%
Japan 176 154 170 167 170 178 180 182
Nickel Production (bars) versus Consumption (kt Ni)
India 34 42 50 56 58 63 69 75
2,000
Other Asia 142 142 155 137 139 145 148 152
Other World 71 69 67 61 78 83 86 90
Total consumption 1,275 1,317 1,521 1,636 1,664 1,746 1,820 1,892 1,500
% change -7.1% 3.3% 15.5% 7.5% 1.7% 4.9% 4.3% 3.9%
For Stainless 764 826 1,002 1,089 1,107 1,160 1,212 1,261
% change -12.2% 8.1% 21.2% 8.7% 1.7% 4.8% 4.5% 4.0% 1,000
For Non-Stainless 511 491 519 540 557 586 608 631
% change 1.7% -4.0% 5.8% 4.1% 3.1% 5.2% 3.8% 3.8% 500
Restocking 0 0 0 0 0 0 0
SURPLUS/(DEFICIT) 104 16 (70) 17 20 31 76 77
LME stocks 79 158 136 90 0
2008 2009 2010 2011 2012F 2013F
Producer Stocks 103 89 91 98
Estimated Total Stocks 389 402 331 329 349 381 457 533 Nth America Europe Chin a Japan In dia Other Asi a Othe r World
Weeks Consumption 15.9 15.9 11.3 10.5 10.9 11.3 13.0 14.7 Can ada We stern Europe CIS Japan Chi na Austra lia Other
Price (US$/t) 21,204 14,651 21,806 22,843 17,791 18,875 20,000 21,000
Source: Credit Suisse
12 October 2012
116
12 October 2012
Zinc – Squeezed today, but more surpluses tomorrow
Zinc has been the best performing LME metal year to date and one of the best over the
course of the recent rally. We attribute this outperformance to two primary factors. The first
is weaker production from China, notably from smaller smelters in response to low prices.
The second has been the increasing physical tightness of Western markets, including
large financing deals and poor availability of LME warrants despite large inventories. This
has been exacerbated over the past month by huge warrant cancelations.
However, fundamentally the zinc market remains oversupplied, and prospects for mine
closures moving the market into deficit have been delayed. We thus look for an
improvement in real demand to provide real support prices, which otherwise look
vulnerable. The outlook for premiums appears much stronger, but this could lead to
weaker flat prices, with smelters relying more on premium revenue, as has been the case
with aluminium.
Financing deals, inventories, and LME tightness II
The reader can be forgiven for feeling a sense of déjà vu, for the zinc market has
increasingly grown to resemble that of aluminium.
Zinc financing has Financing rates for zinc have improved in recent months, at the same time that contango
become more has moderated for aluminium. The result is that the gap in yields received for financing
aluminium compared to zinc, which had ballooned earlier in the year, has now been
attractive
effectively closed. While aluminium still holds certain advantages, including being a
significantly larger market, zinc financing deals are likely to see an increase in response to
the better yields.
Exhibit 231: LME on warrant inventories have seen
Exhibit 230: The attractiveness of zinc relative to a large fall, primarily in response to cancelations in
aluminium financing has improved New Orleans
Annualized yield rolling 12-month to 3-month contracts kt
Zinc Aluminium 1000
12%
900
10%
800
8% 700
6% 600
500
4%
400
2%
300
0%
200
-2% 100
-4% 0
2008 2009 2010 2011 2012 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
At the same time, there has been a huge fall in on warrant LME inventories, primarily as a
result of roughly 250 kt of warrant cancelations in New Orleans in mid-September. Last
month also saw 36 kt of cancelations in Johor, where there have also been large lead, tin,
and aluminium cancelations over the past two months.
The result is that already relatively poor availability of LME metal – 223 kt of on warrant
metal outside of New Orleans and Detroit to start the year – has become dramatically
worse, with only 54 kt of metal on warrant outside of the large queues at New Orleans,
Detroit, Vlissingen, and Johor.
Commodity Forecasts: The Best of Times, The Worst of Times 117
12 October 2012
Exhibit 232: And LME metal availability is very poor
kt
1,200
Johor Canceled
1,000
Johor On Warrant
Vlissingen Canceled
800
Vlissingen On Warrant
600 Detroit Canceled
Detroit On Warrant
400 New Orleans Canceled
New Orleans On Warrant
200
ROW Canceled
ROW On Warrant
0
2009 2010 2011 2012
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
LME metal very The tightness of the physical market is unlikely to diminish in the near term, particularly
difficult to access with 2013 premium negotiations under way. However, the zinc market remains
oversupplied, and an improvement in underlying demand is likely necessary to sustain
current prices.
China – demand weak, but so too is production
While demand in China has been weaker than expected, so too has smelter production.
Government data for refined zinc production show a consistent year-on-year decline
through August. With prices languishing below RMB15,000/t many of China’s smaller
smelters, which represent the majority of Chinese zinc smelting capacity, face negative
cash margins, resulting in production curtailments.
There has also been specific difficulties at two larger smelters. Huludao Zinc, China’s
second largest smelter, has fallen into an acute debt crisis. The company’s latest
statement put its overdue bank loans at RMB712M, six times the company’s net assets in
2011 and the company has reportedly cut refined zinc production to only one-tenth of its
390 kt/y capacity.
The Shaoguang smelter (75 kt/y) was also shut earlier in the year as a result of a lead
poisoning incident in the area, but has since resumed production.
Chinese refined Largely as a result of this weaker production, SHFE inventories, which had built
imports are likely to significantly over the course of 2009-2011, have drawn steadily, declining by about 120 kt
since the peak last August (when prices first fell off). China has also imported significantly
fall back
more refined zinc this year than in 2010 or 2011. This was aided by a lowering of import
tariffs on 1 July of last year, from 3% to 1% (in addition to normal 17% VAT). Import
volumes since have tracked movements in the import arbitrage, at a roughly two-month
lag (this is typical for copper and other metals as well), with a very possible arb in Q4 2011
leading to strong imports, a weaker arb seeing lower imports in Q2, followed by a
resurgence in both. However, the recent LME rally has seen the import arb decline
significantly, and we expect Chinese imports to fall back as a result.
Commodity Forecasts: The Best of Times, The Worst of Times 118
12 October 2012
Exhibit 233: Chinese refined zinc production has
been weak year to date Exhibit 234: … And SHFE inventories have drawn
kt kt
2008 2009 2010 2011 2012 450
550
400
500
350
450 300
400 250
200
350
150
300
100
250
50
200 0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2007 2008 2009 2010 2011 2012
Source: CEIC, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
In another price-induced move, Yunnan province announced that it would purchase 50 kt
of zinc for its stockpiles (as well as 200 kt of aluminium and 20 kt of copper). Luoping Zinc
subsequently declared that it had sold 25 kt to the government as part of the program. The
stockpiling represents just under 1% of China’s annual production and should provide
modest short-term support for the domestic market. The province had undertaken a similar
program in 2008-2009 in the wake of the financial crisis.
Looking forward, Chinese refined zinc output should rebound as current prices are
But demand should sufficient to incentivize small smelters to resume production. The focus thus shifts to
demand. Here, prospects look better for 2013, though Q4 is unlikely to see a large
improve in 2013
improvement. The real estate market has already seen signs of improvement though, and
should be significantly more positive for demand moving forward than the weakness seen
early in the year.
Exhibit 235: The Chinese import arbitrage has fallen Exhibit 236: Expectations of mine closures have
back, suggesting a fall in refined imports is likely been pushed back significantly
kt
Import Arb (US$/t, lhs) Imports (kt, rhs) Start of Year Current
400 60
0
LME Cheap
-100
300 50
-200
200 40
-300
-400
100 30
-500
0 20 -600
Jul 1, 2011: -700
-100 Import tariff LME Expensive 10
lowered
-800
-200 0 -900
Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 2012 2013 2014 2015 2016 2017
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: Brook Hunt, Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 119
12 October 2012
Moreover, the infrastructure approvals made over the past six months are likely more
important for zinc than any other LME metal. There is typically a several month lag
between approval and the project’s impact on real demand, but the latter should be felt
increasingly in 2013.
Mine closures delayed
Looking at the next few years, the prospect for tighter zinc market balances stemming
from large mine closures has significantly diminished over recent months. Several mines
that had been scheduled to shut within the next three years have now pushed back their
timelines. These include the following:
Century (510 kt/y) has been pushed back from 2014 to 2016.
Perseverance (135 kt/y) has been pushed to 2013 from 2012.
Zinc to remain in The result of these mine life extensions has been to push back the expectation for zinc
surplus for longer supply pressure from mine closures. Comparing current estimates with those at the
beginning of the year, expectations for mine closures during the 2013-2015 period have
diminished by 1 Mt.
The zinc market is now unlikely to face significant supply-side pressure from mine closures
within our forecast horizon, and we thus expect the market to remain in surplus through
2015 (though near-balanced by 2015).
Exhibit 237: Zinc forecast comparison Exhibit 238: Zinc historical price and forecast
US$/t US$/t
$2,400 $4,800 Zinc 3M Quarterly Avg Forecast
Credit Suisse Forecast Forward Curve Bloomberg Forecast Mean
$2,300 $4,300
$2,200 $3,800
$2,100 $3,300
$2,000 $2,800
$1,900 $2,300
$1,800 $1,800
$1,700 $1,300
$1,600 $800
Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Exhibit 239: Forecast zinc prices
US$/t, long-term prices based on 2011 real prices, conversion to US¢/lb rounded to nearest 0.05
1Q-12 2Q-12 3Q-12 4Q-12f 2012f 1Q-13f 2Q-13f 3Q-13f 4Q-13f 2013f 2014f 2015f LT
LME zinc 3M New US$/t 2,031 1,930 1,892 2,000 1,963 2,100 2,150 2,200 2,250 2,175 2,425 2,800 1,900
New US¢/lb 0.90 0.90 0.85 0.90 0.90 0.95 1.00 1.00 1.00 1.00 1.10 1.25 0.85
Old US$/t 2,031 1,930 1,800 1,850 1,903 1,900 2,000 2,050 2,100 2,013 2,400 2,800 1,900
Source: Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 120
Commodity Forecasts: The Best of Times, The Worst of Times
Exhibit 240: Global zinc supply and demand estimates
In thousands of metric tonnes (kt)
2008 2009 2010 2011f 2012f 2013f 2014f 2015f 2008 2009 2010 2011f 2012f 2013f 2014f 2015f
MINED ZINC SUPPLY STOCKS
North America (inc Mex ico) 1,927 1,868 1,876 2,024 2,131 2,057 2,072 2,068 LME 253 457 701 822
C & S America 615 689 688 689 704 698 719 688 SHFE Stocks 63 172 311 364
Europe 838 787 783 803 870 963 930 873 Weeks Cons. (Exch. Stks) 1.5 3.2 4.5 4.9
CIS 657 612 657 630 711 866 928 875 Producer Stocks 365 317 313 366
China 3,160 3,198 3,701 4,307 4,942 5,076 5,221 5,296 Consumer Stocks 128 105 97 204
India 626 688 719 745 781 878 886 904 Merchant & US strategic 25 21 19 42
Other Asia 398 434 495 516 566 630 702 727 Reported stocks 834 1,072 1,441 1,798
Australia 1,508 1,316 1,481 1,483 1,452 1,613 1,649 1,555 Weeks Consumption 3.9 5.5 6.4 7.4
Africa 289 295 309 324 330 418 423 420 Price (US$/t) 1,874 1,543 2,094 2,193 2,075 2,363 2,800 3,000
Peru 1,550 1,430 1,403 1,185 1,235 1,420 1,520 1,570 ZINC CONSUMPTION BY COUNTRY
Highly Probable Projects - - - - - - - - USA 981 902 948 1,012 1,057 1,099 1,132 1,163
Probable Projects - - - - - 15 258 624 % Change -10.6% -8.0% 5.1% 6.7% 4.5% 4.0% 3.0% 2.7%
Disruption Allowance - - - - (103) (439) (451) (449) Other North America 356 279 298 311 321 335 347 358
World Mined Zinc Production 11,567 11,317 12,112 12,706 13,618 14,194 14,854 15,149 % Change -10.7% -21.7% 7.0% 4.4% 3.2% 4.2% 3.6% 3.3%
% Change 5.8% -2.2% 7.0% 4.9% 7.2% 4.2% 4.6% 2.0% C & S America 466 381 433 456 471 494 515 515
REFINED ZINC SUPPLY % Change 2.8% -18.2% 13.6% 5.5% 3.2% 4.8% 4.3% 0.0%
North America (inc Mex ico) 1,334 1,224 1,266 1,236 1,269 1,284 1,389 1,398 Western Europe 1,931 1,466 1,838 2,040 1,999 2,009 2,020 2,030
C & S America 470 417 536 630 654 698 698 708 % Change -17.8% -24.1% 25.4% 11.0% -2.0% 0.5% 0.5% 0.5%
Europe 2,197 1,809 2,090 2,164 2,124 2,213 2,243 2,273 Eastern Europe 467 326 385 446 455 476 496 496
CIS 655 543 600 620 664 675 675 695 % Change -11.0% -30.1% 17.8% 15.9% 2.0% 4.6% 4.4% 0.0%
China 3,905 4,246 5,100 5,209 5,569 6,358 6,608 6,833 China 3,795 4,100 4,705 5,257 5,531 6,000 6,444 6,891
India 595 646 727 821 788 933 933 933 % Change 7.5% 8.0% 14.8% 11.7% 5.2% 8.5% 7.4% 6.9%
Japan 622 541 593 546 587 625 625 635 India 479 495 561 597 627 671 721 775
South Korea 738 722 779 859 920 960 1,010 1,010 % Change 2.1% 3.3% 13.5% 6.3% 5.0% 7.0% 7.5% 7.5%
Other Asia 204 223 247 252 283 283 283 283 Japan 562 421 538 497 512 525 530 535
Oceania 498 525 499 517 507 539 539 539 % Change -6.2% -25.0% 27.8% -7.6% 3.0% 2.5% 1.0% 1.0%
Africa 268 279 275 256 183 185 185 185 South Korea 528 426 522 547 563 583 598 613
Highly Probable Grow th - - - - - - - - % Change -1.3% -19.3% 22.3% 4.9% 3.0% 3.5% 2.5% 2.5%
Disruption Allowance - - - - (102) (443) (456) (465) Other Asia 1,085 820 956 1,045 1,072 1,128 1,184 1,195
Adjustments to refined zinc - - - - - - - - % Change 7.8% -24.4% 16.6% 9.2% 2.6% 5.2% 4.9% 0.9%
World Refined Production 11,487 11,174 12,712 13,108 13,446 14,309 14,731 15,026 Oceania 284 217 223 226 232 241 249 249
% Change 2.9% -2.7% 13.8% 3.1% 2.6% 6.4% 2.9% 2.0% Africa 181 150 165 173 178 187 196 196
Incl. Scrap/secondary 888 773 886 938 948 998 1,048 1,098 China SRB & Prov inces - 494 (50) 100 - - - -
Process losses/pipeline stocks 647 637 705 711 726 773 795 811 Restocking - - 200 50 - - - -
Required mined zinc 11,246 11,038 12,532 12,880 13,223 14,084 14,478 14,739 World Consumption 11,114 10,136 11,681 12,608 13,018 13,748 14,432 15,016
Concentrate Balance 321 278 (420) (174) 395 110 375 409 % Change -2.9% -8.8% 15.2% 7.9% 3.3% 5.6% 5.0% 4.0%
World Consumption 11,114 10,136 11,681 12,608 13,018 13,748 14,432 15,016 World Refining Capacity 14,270 15,264 15,362 15,546 15,762 15,877 16,062 15,830
REFINED SURPLUS/(DEFICIT) 372 1,038 1,031 500 428 561 299 10 Capacity Utilisation (%) 80.5% 73.2% 82.7% 84.3% 85.3% 90.1% 91.7% 94.9%
Source: Credit Suisse
12 October 2012
121
12 October 2012
Lead – Moving into the spotlight
Lead has been among the best performing LME metals over the course of the recent rally,
as well as year to date, up 25% from mid-August lows, and over 30% from late June.
Lead’s outperformance has been driven by a tight physical market resulting from the
strongest demand growth of any metal, combined with tight scrap availability and lack of
refined production growth outside of China. This has been accentuated by the difficulty in
obtaining metal from LME warehouses due both to long queues and tightly held warrants.
We do not expect these influences to change, either in the near or medium term. Rather,
the supply situation is likely to become more acute with the shutdown of the Herculaneum
smelter and closures of key mines. Chinese environmental policies will represent a key
swing factor on the supply side, and global economic growth on the demand side, but the
lead market looks poised to enter an era of tighter markets and higher prices.
Squeeze emanating from the US
The lead market has been increasingly squeezed over the past few months by a chain of
events emanating from the US.
1) A mild winter and a fall in battery scrap prices (down 30% from July to November
last year) led to weaker scrap availability in the US.
2) 400 kt/y of new US secondary smelting capacity significantly increased demand
for lead scrap. The combination of supply weakness and significantly increased
demand pushed scrap prices higher.
Tight US scrap 3) Improving end-use demand growth, particularly from strong auto sector demand,
market prompted and a fire at the 130 kt/y Herculaneum smelter, tightened the refined market in the
US.
global squeeze
4) US refined lead premiums rose to compensate smelters for higher scrap prices,
pushing premiums far above the levels seen in the rest of the world.
5) Consumers and traders began looking to source lead from the rest of the world to
supply the tight US market and take advantage of high premiums.
6) Major traders took advantage of this pick-up in physical demand to lock up more
LME material and limit access to LME metal.
The result of this chain of events has been an increasingly tight physical market, driving up
premiums around the world, and creating upwards pressure on lead prices.
Exhibit 241: US secondary prices plummeted in Q4 Exhibit 242: Resulting in strong premiums in the US,
2011, but have rocketed back on scrap shortages which have attracted metal from around the world
US used battery prices; USc/lb US$/t
50
350 US Europe Singapore
45
300
40
35 250
30
200
25
150
20
15 100
10
50
5
0
0 2004 2005 2006 2007 2008 2009 2010 2011 2012
2009 2010 2011 2012
Source: Metal Bulletin, Credit Suisse Source: Metal Bulletin, Reuters, the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 122
12 October 2012
Exhibit 244: … With less than half of this in
Exhibit 243: LME on warrant stocks have warehouses without long queues, let alone actually
plummeted available to the market
kt kt
400 Other Asia Other Europe Other US Johor Vlissingen Detroit
400
350
350
300
300
250
250
200
200
150
150
100
100
50
50
0 0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2009 2010 2011 2012
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: Credit Suisse
Moreover, the current trend could extend even further. While a return to higher scrap
prices and more normal weather should improve scrap availability marginally, there is
insufficient domestic scrap in the US to supply the large additional secondary capacity.
The US will thus be forced to meet incremental end-use demand via imports or stock
drawdowns, with any improvement in end-use demand thus likely to have a direct flow-
through to inventory draws (whether in the US or abroad).
LME metal In fact, as a result of the squeeze outlined above, LME stocks have plummeted, with on
availability very warrant inventories down nearly 50% from the April peak. Moreover, half of the remaining
on warrant material is held in Vlissingen, Detroit, and Johor where long queues have
poor
rendered the metal virtually inaccessible.
Of the remaining 88 kt (down more than 220 kt, or 70%, from the April peak), a significant
portion is tightly held by major traders. It has thus become extremely difficult to source
metal from the LME, with customers and traders scouring alternate sources of supply. This
has led to a rise in premiums outside the US, as well as attempts by traders to source
metal around the world to ship to the US.
US likely to import Looking further ahead, the impending closure of Doe Run’s 130 kt/y Herculaneum smelter
increasing volumes at the end of 2013 will further tighten the US domestic market. The US is likely to export
more concentrate, and import additional refined metal. The natural destination for the
of refined lead
concentrate from Doe Run would be La Oroya in Peru, but that complex has been beset
by problems and it is uncertain when or whether it will return to operation, and capacity at
La Oroya is below that of Herculaneum. The US is thus likely to provide an increasing call
on existing ROW refined lead supply going forward.
Supply and Demand
Lead supply in the near term is being driven by three main factors: Chinese environmental
closures, scrap availability, and mine closures.
1) Chinese environmental closures have waned since the beginning of the year as
the government has prioritized support for economic growth above environmental
objectives. Thus, after the flurry of smelter closures in late 2011 and early 2012 in
response to lead poisoning incidents and other environmental accidents, there
has been little in the way of additional closures over the past six months.
Commodity Forecasts: The Best of Times, The Worst of Times 123
12 October 2012
However, this has not changed the government’s underlying attitude towards the
lead industry. In fact, China’s Ministry of Industry and Informational Technology
published two lists (in July and September) of specific smelters that were ordered
closed as part of an effort to shut outdated production. While these lists covered a
Chinese wide array of industries, lead was targeted far more than any other base metal,
environmental with over 1.1 Mt/y of capacity listed – roughly 17% of the entire country’s capacity.
closures a key
Some of the smelters listed were already being idled and others had plans
swing variable already on the table to shut down, and China does enjoy a surplus of refining
capacity. Nevertheless, delivering on these closures could noticeably tighten the
Chinese market. However, local officials are likely to delay implementation in
order to protect local jobs, GDP, etc. The extent of such delays will be very
significant, as the longer implementation is delayed, the more leeway exists for
new modern capacity to be brought on-line.
2) Scrap availability in North America has been poor this year following the mild
winter and low prices in Q4 2011. While rebounding scrap prices and a return to
more normal weather should improve availability somewhat, there is little
additional scrap available in the US market nor in Europe. In contrast, scrap
generation should increase significantly in China as the huge increase in China’s
Mine closures and auto fleet over the past few years translates to higher scrapping volumes. As a
limited scrap in result, we expect Chinese secondary lead production to grow by roughly 250 kt/y
West to push market over the next three years.
into deficit 3) Mine closures in the next few years are expected to remove ~200 kt/y of supply.
This includes closure of major mines such as Century, Brunswick, Lisheen, and
Pomorzany-Olkusz. As for zinc, these closures are expected to create significant
pressure on supply, helping to push the market into deficit starting in 2014.
Exhibit 245: Chinese closures of backwards Exhibit 246: Large mine closures should help move
production could be an important swing factor market into deficit in medium term
kt kt/y
1400 July September % of Capacity 20% 0
18%
1200 -10
16%
-20
1000 14%
-30
12%
800
10% -40
600
8% -50
400 6%
-60
4%
200 -70
2%
-80
0 0% 2013 2014 2015 2016
Copper Lead Zinc Aluminium
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: Credit Suisse
With respect to demand, while sluggish global economic growth has clearly hurt lead,
demand has been more resilient than for any other metal. The number one reason for this
has been the rebound in battery production in China. 2011 was heavily affected by the
environmental-induced closures of hundreds of plants; these have now been resolved,
with production not only returning to previous levels, but also catching up with end-use
growth over the time period, as well as rebuilding inventories that had been run down.
Commodity Forecasts: The Best of Times, The Worst of Times 124
12 October 2012
In addition, Chinese lead demand has benefited from its lack of exposure to real estate
activity, which slowed notably in H1 2012. On the other hand, the rebound we are now
observing in private sector housing (see Chinese Real Estate and Basic Materials
Demand has been
Demand: The Tide Is Turning...) will similarly not help lead as much as other metals.
strongest of any
base metal Lead demand also benefited from a strong global auto industry during the early part of the
year, though this has turned in recent months, with both sales and production data from
across the globe declining. Finally, lead demand has been supported by the structural
increase in demand for backup power systems, including from the power and utilities
sectors.
Exhibit 247: Chinese lead battery production has Exhibit 248: And global demand growth has been
been very strong as impact of 2011 closures fade the best of any base metal
KVAH, sa kt
18,000 5%
16,000 4%
14,000
3%
12,000
2%
10,000
1%
8,000
0%
6,000
4,000 -1%
2,000 -2%
0 -3%
2006 2007 2008 2009 2010 2011 2012 Copper Aluminium Nickel Zinc Lead Tin
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: Credit Suisse
Exhibit 249: Lead forecast comparison Exhibit 250: Lead historical price and forecast
US$/t US$/t
$2,600 $4,000 Lead 3M Quarterly Avg Forecast
Credit Suisse Forecast Forward Curve Bloomberg Forecast Mean
$2,500
$3,500
$2,400
$2,300 $3,000
$2,200
$2,500
$2,100
$2,000
$2,000
$1,900 $1,500
$1,800
$1,000
$1,700
$1,600 $500
Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Exhibit 251: Forecast lead prices
US$/t; long-term prices based on 2011 real prices, conversion to US¢/lb rounded to nearest 0.05
1Q-12 2Q-12 3Q-12 4Q-12f 2012f 1Q-13f 2Q-13f 3Q-13f 4Q-13f 2013f 2014f 2015f LT
LME lead 3M New US$/t 2,097 1,979 1,983 2,130 2,047 2,200 2,300 2,350 2,450 2,325 2,625 3,000 2,000
New US¢/lb 0.95 0.90 0.90 0.95 0.95 1.00 1.05 1.05 1.10 1.05 1.20 1.35 0.90
Old US$/t 2,097 1,979 1,850 1,900 1,957 2,000 2,100 2,200 2,200 2,125 2,500 3,000 2,000
Source: Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 125
Commodity Forecasts: The Best of Times, The Worst of Times
Exhibit 252: Global lead supply and demand estimates
In thousands of metric tonnes (kt)
2008 2009 2010 2011 2012f 2013f 2014f 2015f 2008 2009 2010 2011 2012f 2013f 2014f 2015f
MINED LEAD SUPPLY STOCKS
North America (inc Mex ico) 589 562 549 563 576 586 593 588 LME 45 147 209 353
C & S America 131 128 119 136 126 121 117 110 SHFE 31
Peru 320 270 235 208 238 272 270 279 Days Cons. (Exch. Stks) 6.5 7.7 7.4 8.3
Europe 245 238 215 228 240 242 252 253 Producer Stocks 146 135 129 142
CIS 90 110 139 200 211 257 255 264 Consumer Stocks 114 106 111 95
China 1,231 1,423 1,857 2,358 2,730 2,796 2,900 3,005 Merchant & US strategic 1 1 1 1
Other Asia 133 152 168 187 212 237 303 303 Reported Stocks 306 389 450 622
Australia 605 544 648 574 601 618 614 596 Days Consumption 12.7 16.0 17.1 22.6
Africa 101 103 114 95 90 89 91 90 Price (US$/t) 2,067 1,719 2,151 2,397 2,047 2,313 2,625 3,000
Probable Projects - - - - - 26 116 190 LEAD CONSUMPTION BY COUNTRY
Disruption Allowance - - - - (38) (157) (165) (170) USA 1,560 1,390 1,405 1,550 1,573 1,592 1,600 1,608
World Mined Lead Production 3,443 3,529 4,043 4,549 4,987 5,087 5,345 5,507 Other North America 31 38 22 15 15 15 15 16
% Change 2.7% 2.5% 14.6% 12.5% 9.6% 2.0% 5.1% 3.0% C & S America 619 563 656 634 647 666 686 707
REFINED LEAD SUPPLY Western Europe 1,514 1,254 1,323 1,363 1,336 1,342 1,346 1,350
North America (inc Mex ico) 1,798 1,724 1,844 1,939 1,929 1,983 1,863 1,863 Eastern Europe 315 259 317 274 277 285 294 302
C & S America 391 330 323 335 332 415 435 435 China 3,049 3,662 4,032 4,281 4,710 5,086 5,468 5,851
Europe 1,699 1,545 1,581 1,625 1,648 1,663 1,693 1,723 India 375 433 445 456 474 503 533 570
CIS 196 183 232 228 203 336 336 346 Japan 211 153 190 190 198 200 200 201
China 3,187 3,720 4,056 4,395 4,673 5,378 6,032 6,377 South Korea 318 328 385 405 405 417 425 434
Japan 225 191 219 212 207 212 212 212 Other Asia 696 697 714 762 770 804 832 862
South Korea 276 327 320 423 430 440 440 440 Oceania 26 22 30 25 25 26 26 26
Other Asia 680 718 739 803 855 880 880 880 Africa 108 95 77 98 98 101 105 109
Australia 280 265 217 225 215 270 270 270 World Consumption 8,822 8,894 9,596 10,053 10,527 11,038 11,531 12,036
Africa 110 108 106 118 112 123 123 123 % Change 5.0% 0.8% 7.9% 4.8% 4.7% 4.9% 4.5% 4.4%
Prim. ref. Pb adjustment required - - - - - (450) (600) (600) 14,000
Sec. ref. Pb adjustment required - - - - - - - -
Highly Probable Grow th - - - - - - - - 12,000
Disruption Allowance - - - - (38) (161) (172) (176)
10,000
World Refined Production 8,842 9,110 9,637 10,304 10,566 11,088 11,512 11,893
% Change 5.8% 3.0% 5.8% 6.9% 2.5% 4.9% 3.8% 3.3% 8,000
World Secondary Ref. Production 4,321 4,522 4,979 5,114 5,026 5,220 5,549 5,685
kt
6,000
World Production Primary Ref. 4,521 4,588 4,658 5,191 5,540 5,869 5,963 6,208 77
Residues scrap available 1,305 1,325 1,001 1,046 886 1,056 1,133 1,179 4,000
Metallurgical losses 261 261 266 294 316 332 337 351
2,000
Required mined lead 3,477 3,524 3,923 4,439 4,969 5,144 5,167 5,379
Concentrate Balance (34) 6 120 111 17 (57) 178 128 0
World Consumption 8,822 8,894 9,596 10,053 10,527 11,038 11,531 12,036 200 8 200 9 201 0 201 1 201 2f 201 3f 201 4f 201 5f
DLA Stock Sales - - - - - - - -
North America Europe other Asia China Primary lead recycled lead
SURPLUS/(DEFICIT) LEAD 20 216 41 251 39 50 (20) (143)
12 October 2012
Source: Credit Suisse
126
12 October 2012
Tin – Squeezed, but supply returning
Tin prices have been among the most the most volatile on the LME, rallying 20% within
the month of August and now sitting over 25% above the lows seen in late July and early
August. The rally has been driven by a number of micro factors beyond the improvement
in macro sentiment.
Most importantly, tin producers have demonstrated a greater degree of sensitivity to low
prices reached this year than those of any other LME metal. On the back of this, the small
LME tin market has been effectively squeezed by a dominant player, and LME warrants
are now virtually unavailable.
Looking forward, the tin market is likely to remain in deficit in 2012 and 2013, and the
squeeze on the LME is likely to continue for some time. However, rebounding production
in response to higher prices should alleviate pressure by the end of the year.
Supply discipline
With prices dropping below US$2,000/t for most of the summer and reaching as low as
Supply has fallen in US$17,125 in late July, producers reacted with increasing curtailments. NBS data show
response to low Chinese year-to-date production down -8.4% yoy through August. The WBMS estimates
prices global refined production down -4.2% yoy through July, with notable declines in Peru and
Thailand as well.
However, the biggest swing producer has been Indonesia, the world’s largest exporter
(second largest producer, after China). In early August, with prices falling below
US$18,000/t, the Indonesian Tin Mining Association announced that 14 of 28 smelters in
Bangka – Indonesia’s primary tin-producing region – had halted production. Two weeks
later, the association reported that number had risen to 24. In addition, PT Timah,
Indonesia’s largest producer, announced that it would reduce spot sales, preferring to
stockpile metal rather than sell it at depressed prices.
These indications of a strong supply-side response to low prices helped ignite a rally in tin
prices – bolstered by the improvement in macro sentiment and a squeeze on the LME
(see below) – that has seen tin prices move above US$21,000/t.
Exhibit 253: Refined tin production has declined in Exhibit 254: Chinese refined tin production is down
response to low prices -8.4% yoy
kt kt
36 2008 2009 2010 2011 2012
20
34
18
32
16
30 14
28 12
26 10
24 8
6
22
4
20 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2009 2010 2011 2012
Source: WBMS, the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: NBS, CEIC, Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 127
12 October 2012
However, with prices back at such levels, we expect production volumes to increase
materially, and there has already been evidence that discretionary reductions are being
rolled back. In mid-September, the Indonesian Tin Mining Association revealed that 70%
of smelters in Bangka were producing again, and PT Timah has announced a resumption
of spot sales.
LME Squeeze
The announcements out of Indonesian production cutbacks set in motion a serious
LME market has squeeze on the LME. Following a large rise in canceled warrants, there is currently only
been successfully 5,890 tonnes of on warrant material on the LME, the lowest level since 2008. Moreover,
squeezed 4,880 tonnes of this is located in Johor, where 90 kt of canceled warrants (all metals) have
created a 45-day queue, leaving only 1,010 tonnes of free available metal on the LME
system, a shockingly small quantity.
One party now holds 50%-79% of LME warrants, up from below 30% at expiration of the
September contract. One party is also listed in the maximum 40+% of three-month LME
longs. Given the shortage of LME warrants and the longs’ dominant position, the current
LME squeeze looks likely to continue for some time. However, increased production from
smelters as a result of rising prices, as well as the incentive to sell metal onto the LME as
a result of strong backwardation, should relieve the current extreme tightness by the end
of the year.
Exhibit 255: LME warrant availability is virtually Exhibit 256: … With the front of the LME curve
nonexistent being squeezed as a result
kt US$/t, LME Cash – three-month
40 Other locations Johor 200
35
150 Backwardation
30
100
25
20 50
15
0
10
-50
5
Contango
-100
0 Jan 10 May 10 Sep 10 Jan 11 May 11 Sep 11 Jan 12 May 12 Sep 12
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Other short-term factors
The disturbances at the Colquiri mine (3 kt/y) in Bolivia have also had an impact on
supply, as the mine represents around 1% of global concentrate supply. However, the
dispute appears to be nearing resolution.
Chinese imports of refined tin have remained at elevated levels since Q4 of last year in
response to a positive import arbitrage opportunity, as well as curtailments of domestic
production. However, the arbitrage has turned negative over the past month, and with
prices having risen and domestic production volumes likely to increase as a result, import
volumes are likely to fall back.
Commodity Forecasts: The Best of Times, The Worst of Times 128
12 October 2012
Exhibit 257: The Chinese import arbitrage has
turned negative after four months of positive
readings Exhibit 258: Chinese price arb and tin imports
US$/t
4,000 Import Arbitrage (lhs, US$/t) Imports (rhs, tonnes)
LME Cheap 6,000 6,000
2,000 4,000
5,000
0 2,000
4,000
0
-2,000
-2,000 3,000
-4,000
-4,000
LME Expensive 2,000
-6,000
-6,000
-8,000 1,000
-8,000
-10,000 -10,000 0
Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Exhibit 259: Tin forecast comparison Exhibit 260: Tin historical price and forecast
US$/t US$/t
$24,000 Credit Suisse Forecast Forward Curve Bloomberg Forecast Mean Tin 3M Quarterly Avg Forecast
$35,000
$23,000
$30,000
$22,000
$25,000
$21,000
$20,000
$20,000
$15,000
$19,000
$10,000
$18,000
$17,000 $5,000
Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Exhibit 261: Forecast tin prices
US$/t; long-term prices based on 2011 real prices, conversion to US¢/lb rounded to nearest 0.05
1Q-12 2Q-12 3Q-12 4Q-12f 2012f 1Q-13f 2Q-13f 3Q-13f 4Q-13f 2013f 2014f 2015f LT
LME lead 3M New US$/t 22,953 20,550 19,287 20,000 20,698 21,000 21,000 21,500 22,500 21,500 23,000 24,000 20,000
New US¢/lb 10.40 9.30 8.75 9.05 9.40 9.55 9.55 9.75 10.20 9.75 10.45 10.90 9.00
Old US$/t 22,953 20,550 18,500 19,500 20,376 20,500 21,000 21,500 22,500 21,375 23,000 24,000 20,000
Source: Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 129
Commodity Forecasts: The Best of Times, The Worst of Times
Exhibit 262: Global tin supply and demand estimates
In thousands of metric tonnes (kt)
kt 2008 2009 2010 2011 2012f 2013f 2014f 2015f 2008 2009 2010 2011 2012f 2013f 2014f 2015f
MINE PRODUCTION STOCKS
China 121 128 130 127 115 126 134 140 LME 8 27 16 11
Indonesia 96 84 84 78 78 78 78 78 Producer Stock 12 8 7
Asia ex China, Indonesia 10 9 10 11 11 11 12 12 Consumer/Others 13 12 11
Boliv ia 17 20 20 20 20 21 21 22 Total Reported Stock 32 46 34 18 2 (11) (12) (8)
Brazil 14 10 10 8 8 8 8 8 Weeks Consumption 4.76 7.35 4.84 2.45 0.21 (1.50) (1.55) (0.94)
Peru 39 37 34 29 28 30 31 33 LME Price (US/t) 18,457 13,599 20,441 25,958 20,698 21,500 23,000 24,000
ROW 18 29 31 25 23 27 33 35 KLTM Price (US$/t) 18,511 13,502 20,351 25,955
World Mine Production 316 316 318 299 283 302 318 328 TIN CONSUMPTION BY COUNTRY
Disruption Allow ance - - - - (2) (9) (10) (10) China 145 149 153 181 187 198 210 222
Required Adjustment - - - - - 10 25 35 Japan 32 23 36 27 28 28 29 29
World Mined Tin 316 316 318 299 281 303 333 353 Asia ex China, Japan 66 59 67 59 58 60 62 64
% Change -8.1% 0.0% 0.7% -6.0% -6.1% 8.0% 9.9% 6.1% U.S.A 26 27 32 32 30 31 31 31
Conc avail after direct use 316 316 318 299 281 303 333 353 Germany 21 14 17 20 18 18 18 19
Primary Smelter Production 296 289 297 302 291 304 324 337 Other Europe 46 38 42 46 40 40 40 40
Smelter Loss 7 7 7 8 7 8 8 8 ROW 19 16 22 19 17 18 18 18
Primary feed required 304 297 305 309 298 312 332 345 World Tin Consumption 355 326 369 384 377 393 408 423
SURPLUS/(DEFICIT) CONC 12 19 13 (10) (17) (9) 2 8 % Change -1.0% -8.0% 13.1% 4.1% -1.8% 4.3% 3.8% 3.6%
TIN CONSUMPTION BY USAGE
REFINED TIN PRODUCTION Solder 182 172 194 200 200 212 225 237
China 140 140 149 156 149 157 166 173 % of total 51.4% 52.7% 52.7% 52.0% 53.0% 54.0% 55.0% 56.0%
Indonesia 70 65 64 73 72 71 71 70 Tinplate 57 54 59 64 63 66 68 71
Malay sia 32 36 39 40 45 46 47 48 % of total 16.1% 16.5% 15.9% 16.7% 16.7% 16.7% 16.7% 16.7%
Thailand 22 19 24 24 23 24 25 25 Chemicals 48 43 51 54 53 55 57 59
Other Asia 8 7 7 9 9 10 10 10 % of total 13.5% 13.0% 13.8% 14.0% 14.0% 14.0% 14.0% 14.0%
Boliv ia 12 15 15 15 14 14 16 17 Brass & Bronze 20 18 20 19 19 20 20 21
Peru 38 34 36 30 28 28 28 28 % of total 5.7% 5.6% 5.3% 5.0% 5.0% 5.0% 5.0% 5.0%
Europe 11 10 13 12 12 13 13 13 Float Glass 7 8 7 8 8 8 8 8
ROW 12 9 9 8 7 8 8 8 % of total 1.8% 2.3% 1.9% 2.0% 2.0% 2.0% 2.0% 2.0%
World Refined Production 344 336 357 368 361 371 383 393 Others 41 32 38 40 35 33 30 27
Primary Production 296 289 297 302 291 304 324 337 % of total 11.5% 9.9% 10.4% 10.3% 9.3% 8.3% 7.3% 6.3%
Secondary Production 47 46 59 66 70 76 84 91 Total 355 326 369 384 377 393 408 423
Required Adjustment - - - - - 10 25 35 Required Demand Destruction - - - - - - - -
World Refined Tin 344 336 357 368 361 381 408 428 Final Tin Consumption 355 326 369 384 377 393 408 423
% Change -2.0% -2.3% 6.3% 3.1% -2.0% 5.6% 7.1% 4.9% % Change -1.0% -8.0% 13.1% 4.1% -1.8% 4.3% 3.8% 3.6%
DLA Sales 4 - - - - - - - SURPLUS/(DEFICIT) (7) 9 (12) (16) (17) (13) (1) 5
Source: Credit Suisse
12 October 2012
130
12 October 2012
Gold and Silver
Commodities Research
Tom Kendall
Gold has performed well since our last quarterly update (11 July), rallying ~13% in USD
tom.kendall@credit-suisse.com and posting an average price of $1,653 during Q3, just 1% below our forecast ($1,670).
+44 20 7883 2432 Following that performance we are cautious about the potential for further rapid gains
Equity Research
during the remainder of the year. A period of consolidation would seem likely but we retain
Anita Soni our Q4 average forecast of $1,760 and, as that implies, believe gold is likely to trade up
anita.soni@credit-suisse.com into the mid-$1,800s before year-end.
+1 416 352 4587
Michael Slifirski Key points: Further QE more likely than not
michael.slifirski@credit-suisse.com
+61 3 9280 1845 The relationship between the USD gold price and the yield on inflation-protected
Treasuries (particularly five-year tenor rather than ten years) has remained highly
Ralph Profiti
ralph.profiti@credit-suisse.com
inversely correlated, see Exhibit 263. Our US interest rate strategists currently believe a
+1 416 352 4563 short-term bounce in US yields is probable given the post-QE3 surge in Treasuries (Credit
Suisse Global Weekly Snapshot, 28 September) – a period of consolidation, if not profit
Liam Fitzpatrick
liam.fitzpatrick@credit-suisse.com
taking, in that market also appears likely. Consequently, that contributes to our belief that
+44 20 7883 8350 gold may need to consolidate in the $1,720-$1,760 area in the short term.
Nihal Shah
nihal.shah@credit-suisse.com Exhibit 263: Gold versus yield on five-year inflation-protected Treasuries
+44 20 7888 3270
2,000 -2.0
Gold, $/oz (LHS)
1,750 -1.0
US 5 year TIPS, % (scale inverted)
1,500
0.0
1,250
1.0
1,000
2.0
750
500 3.0
250 4.0
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Over the medium term, however, our rate strategists retain their longer-term bullish view
on Treasuries for a number of reasons.
“The Fed is not finished”: QE 3.5 is likely, possibly as soon as December in the form of
ongoing purchases of Treasuries after Operation Twist expires.
Conceptually $45bn/month of Treasury purchases is their baseline expectation.
That would balance MBS purchases in the middle of the curve, and there is still
adequate liquidity for Fed to buy more at the back end.
There is likely to be further adjustments to the forward rate guidance: there is
increasingly a sense that the Fed will move to a more explicit linking of rates to the
unemployment rate and inflation.
Supporting that view was the recent shift in view of a former hawk, Minnesota Fed
President Kocherlakota, who proposed maintaining ultra-low rates guidance until
unemployment reaches 5.5%, as long as the two-year forward inflation forecast remains
below 2.25%. Chicago Fed President Evans made similar comments earlier this month,
albeit he highlighted 7% as a potential unemployment rate hurdle.
Commodity Forecasts: The Best of Times, The Worst of Times 131
12 October 2012
The Federal Reserve appears prepared to accept the political risks of further balance
sheet expansion.
On that basis, it seems probable that real yields can fall further into negative territory,
which should be positive for gold. We note that a move back into the $1,830 area would
simply place it back on the long-term trend.
Exhibit 264: Gold has bounced back towards the long-term trend at $1,830
$2,250
Gold Price
$2,000 Expected Value
$1,750 Upper 3 Std Dev.
$1,500 Lower 3 Std Dev.
$1,250
$1,000
$750
$500
$250
2006 2007 2008 2009 2010 2011 2012
Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
In addition, in Q1 2013 the gold market will be highly tuned to any suggestion that one or
more of the major ratings agencies might cut the US credit rating if Congress fails to
adequately address the various fiscal cliff issues. Although our public policy and
economics analysts believe deals will be done to avert the worst effects of the expiry of tax
rebates and automatic sequestration of spending, those deals may well be temporary and
deep structural issues will remain unresolved.
So the investment environment likely to remain gold friendly for a little longer than we
forecast at the start of this year. Indeed exchange-traded products backed by physical
gold have attracted net inflows of 6.1 Moz year to date, with the pace of accumulation
picking up significantly from late August onwards.
Exhibit 265: Gold, Comex net non-commercial
position Exhibit 266: Gold held by ETFs versus price
Moz, futures+options
85 $2,000
Millions oz
40
30 80
$1,750
20
75
10
$1,500
70
0 Physical ETF/ETC gold held
Gold price (RHS)
-10 65 $1,250
00 02 04 06 08 10 12 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12
Source: the BLOOMBERG PROFESSIONAL™ service, CFTC, Credit Suisse Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
Commodity Forecasts: The Best of Times, The Worst of Times 132
12 October 2012
In addition, it appears that central banks will remain a sizeable presence on the buy-side
of the gold market: Russia, South Korea, Kazakhstan, Sri Lanka, and Paraguay were all
active buyers at times during the first seven months of the year, according to IMF data.
And finally on the positive side of the gold balance sheet, we note that the geopolitical
situation in the Middle East has the potential to provide the kind of shock that could see
gold spike higher. We think the risks of that happening are small, but it appears to us that
the pressure on Iran, both externally and internally (from the collapse in the value of the
Rial) has increased over the last month or so.
That said, physical demand remains uninspiring in the key Indian market. On the positive
side the rupee has rallied over the last couple of weeks but the benefit of that to importers
has largely been offset by higher USD gold prices. Domestic demand is being satisfied in
part by a sharply higher rate of recycling compared with 2011 – the World Gold Council
estimates scrap accounted for 57 tonnes of demand last year, we would not be surprised if
that figure jumps to more like 250 tonnes this year.
Elements of government and the Reserve Bank of India have also continued to “talk down”
the appeal of gold as an investment (footnote: RBI advises against gold investment). We
think another increase in gold import duties in the current fiscal year is unlikely but don’t
rule it out for FY 2013. More immediately, the concern is that Indian buying from the
international markets has not yet picked up consistently, despite the fact that we are
around half-way through the festival season, which traditionally sees strong demand from
the Indian sub-continent. The benefit of a sharp reversal (strengthening) of the rupee
versus the dollar since the US Federal Reserve’s announcement of QE3 has been almost
entirely offset by the rise in the USD gold price (Exhibit 267).
The festival season concludes with Diwali, which this year begins relatively late on 13
November. There is, therefore, only about three weeks left during which time Indian
dealers could be expected to buy in size on price corrections. The question is, what price
might entice those buyers back? We think local prices would have to fall close to Rs30,000
per 10 grams for that to happen – at the current exchange rate(INR 52) that equates to
approximately $1,720 oz, accounting for 4% import duty.
Beyond Diwali, a degree of restocking might be apparent, but activity in general from the
Indian market tends to subside from then on into year-end.
The Chinese market demand we would characterize as solid rather than spectacular, as it
was in 2011. The import arbitrage for Chinese banks has remained positive, but far less so,
and the cumulative volume traded across the Shanghai Gold Exchange has slipped behind
both 2011 and 2010’s figures. As with India, however, a correction near 5% in the USD gold
price would likely attract an upturn in demand of sufficient size to then provide support.
Exhibit 267: Indian buyers still await lower rupee price Exhibit 268: Smaller arbitrage reduces Chinese buying
Weekly volume traded in Shanghai Gold Exchange T+1 contract
Rs35 60
Thousands
2008 2009
Millions oz
4
2010 2011
Rs30 55
2012
3
Rs25 50
2
Rs20 Gold, Rs/10g 45
1
INR Curncy
Rs15 40 0
Jan-11 Jul-11 Jan-12 Jul-12 1 5 9 13 17 21 25 29 33 37 41 45 49
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: Credit Suisse, the BLOOMBERG PROFESSIONAL™ service
Commodity Forecasts: The Best of Times, The Worst of Times 133
12 October 2012
Silver
Silver outperformed gold substantially between mid-August and mid-September as
anticipation of fresh monetary stimulus in the US and Europe drove the price of most asset
classes higher. Since then, however, the two metals have traded more or less in tandem
and a reversal of at least part of that previous period of outperformance relative to gold is
likely in the short term if risk appetite fades. In particular, our equity strategists have
warned that net long positions of hedge funds are now close to a one-year high; that US
corporate and insider selling has accelerated; and that this has been the fourth longest
S&P 500 rally without a 5% correction since 2002. They also note that credit spreads in
Europe appear “optimistic,” at least in the short term (see Global Equity Strategy: A
consolidation phase).
Extrapolating a potential reduction in investor flows into equity and credit markets to a
directional move in the price of silver may be a bit of a stretch but there has been a fairly good
inverse correlation between risk indicators and the gold: silver ratio over the last five years.
The counter argument is that there is still a very sizeable sub-set of the investor community
that failed to participate fully (and some not at all) in the Q3 rally and who face considerable
pressure to generate positive returns before year-end. The same argument was prevalent at
this time two years ago, and markets reacted very positively throughout Q4 2010, thanks in
no small part to the Fed’s QE2. Today, however, the macro environment has shifted and
more importantly valuations are substantially higher than they were two years ago (SPX up
almost 27%, for example). Consequently, we think it will require a meaningful improvement
in economic data (the focus being on China and the US) and/or a further advancement of EU
policy and politics (namely a formal request by Spain for ESM assistance) for risk assets
generally to run much further than they already have.
Exhibit 269: Silver’s performance relative to gold correlated with risk
90 Gold: silver ratio (lhs) Financial Conditions Index 3.0
80 2.0
70 1.0
0.0
60
-1.0
50
-2.0
40 -3.0
30 -4.0
20 -5.0
J-07 J-08 J-09 J-10 J-11 J-12
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Turning to the detail of the silver market, it is clear that certain investors’ appetite for silver
has fallen markedly compared to 2011. In particular, demand from both Western private
bank accounts and Asian speculators for silver, whether physical bullion or structured
products, appears to have slumped.
Commodity Forecasts: The Best of Times, The Worst of Times 134
12 October 2012
Exhibit 270: Silver – Comex and ETF positioning back near the peak
Comex net long iShares SLV ZKB ZSIL
Others Swiss Global Price
Million oz
900 $50
800
700 $40
600
500
$30
400
300
200 $20
100
0 $10
Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Source: the BLOOMBERG PROFESSIONAL™ service, CFTC, Credit Suisse
However, institutional funds have retained a greater interest in the metal, with open
interest on Comex recovering throughout the year and climbing strongly in September in
anticipation of, and then in reaction to, QE3. And it is also notable that exchange-traded
funds have seen steady inflows of metal during the year to date, particularly throughout
the third quarter.
From a technical perspective, the metal now has very strong support down in the $26.50
area and it seems improbable that that level will be breached in the short to medium term.
Conversely, scrap flows and producer hedging appear to be creating overhead resistance
between $35.00 and $35.50. If gold breaks up through $1,800 then that resistance
capping silver will go also, but we don’t expect to see silver trading into the $40s this year.
Commodity Forecasts: The Best of Times, The Worst of Times 135
12 October 2012
Forecasts
Exhibit 271: Gold forecast comparison Exhibit 272: Gold historical price and forecast
US$/oz US$/oz
$1,900 Credit Suisse Forecast Forward Curve Bloomberg Forecast Mean $2,100 Gold (Spot) Quarterly Avg Forecast
$1,900
$1,850
$1,700
$1,800 $1,500
$1,300
$1,750
$1,100
$1,700 $900
$700
$1,650
$500
$1,600 $300
Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Exhibit 273: Silver forecast comparison Exhibit 274: Silver historical price and forecast
US$/oz US$/oz
$38 Credit Suisse Forecast Forward Curve Bloomberg Forecast Mean $55 Silver (Spot) Quarterly Avg Forecast
$36
$45
$34
$32 $35
$30
$25
$28
$26
$15
$24
$22 $5
Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 136
12 October 2012
PGMs: South African Situation Dominates
Commodities Research
Tom Kendall
The woeful state of labor relations in the South African mining industry continues to be the
tom.kendall@credit-suisse.com primary influence on the platinum price at present, and by association, palladium.
+44 20 7883 2432 Unauthorized strikes at Lonmin and Impala have subsided but only at the cost of a further
Equity Research
rise in wages over and above what had previously been agreed for 2012-2013.
Liam Fitzpatrick Meanwhile, a majority of workers at Anglo American Platinum’s (Amplats) Rustenburg
liam.fitzpatrick@credit-suisse.com operations have failed to report for shifts over the last three weeks, and workers at
+44 20 7883 8350
Amplats’ Union mine and Atlatsa Resources’ Bokoni mine also started industrial action in
Nihal Shah early October. The worker unrest spread to gold, chromite and iron ore mines, the trucking
nihal.shah@credit-suisse.com industry, and last week to manufacturing as Toyota South Africa workers were reported to
+44 20 7888 3270
have walked out.
A key issue for investors and end users of platinum is how much future loss of production
and/or increase in costs is the market already pricing in? The answer, in our view, is a
substantial amount. The platinum price has climbed 22% from mid-August ($1,400) to
$1,700 at the time of writing. At the same time, the net speculative position in Nymex
futures and options has surged by more than 1mn oz to a record 2.2mn oz, while ETFs
have pulled in a net 165k oz of platinum (Exhibit 275).
That rate of appreciation is unlikely to be sustained for much longer in our view,
particularly given that the large auto industry buyers are in general well-hedged for the
next three months at least and have shown no inclination to chase prices higher.
Exhibit 275: Platinum ETF holdings and Nymex speculative long positioning
NYMEX futures+options, net non-commercial+non-reportable positions
4.0 Plat. Ldn Bskt Ldn Plat. ZKB
Millions oz
Plat. AUS Pt other Plat. US
3.5 Plat. Swiss Nymex net long - Pt Plat, spot
$2,000
3.0
2.5
$1,500
2.0
1.5
$1,000
1.0
0.5
0.0 $500
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
Source: the BLOOMBERG PROFESSIONAL™ service, CFTC, Credit Suisse
We continue to forecast higher PGM prices over the long term – the South African industry
cannot survive at anything like its current size without that in our view – but in our view a
correction is warranted in the near term given the weakness of auto industry demand and
the degree of speculative length already in the market (we closed our previous long
platinum trade recommendation on 5 October). We have also scaled back the rate of
increase of platinum and, particularly, palladium prices in 2013 in light of sluggish growth
forecasts for light vehicle sales next year.
Commodity Forecasts: The Best of Times, The Worst of Times 137
12 October 2012
South African supply struggles
The second and third largest PGM producers in South Africa, Impala Platinum and
Lonmin, have had to raise wages over and above the annual increases previously agreed
in order to get their workers back into the mines following walk-outs and violent protests in
August and September.
At the time of writing, however, there appears to be little sign that the disruption to
production occurring at Anglo American Platinum (Amplats) will be resolved quickly.
Indeed, headlines on 4 October suggested the problems had spread to the company’s
Tumela and Dishaba mines (collectively formerly known as Amandelbult). The company
had earlier reported attendance at its Rustenburg shafts was at best running at just 20%,
with the majority of workers continuing their unauthorized strike action and the remainder
sent home on 3 October for their own safety.
While the company’s repeated references in its statements to the economic fragility of
some of its Rustenburg operations might be seen by some as a negotiating tactic, we think
the probability that one of the shafts is put on care and maintenance is rising. Taking the
smallest and least economic of its Rustenburg shafts, Thembelani, out of production would
remove a further 100k oz of platinum from the market in 2013. That, of course, would not
come without costs to the company – social and political, as well as financial – and
Amplats would also have to consider the downstream impact on its smelter in terms of
feed composition and unit costs. Nevertheless, the company’s decision to lay off 12,000
workers last week illustrates its willingness to face the political consequences of making
redundancies rather than commit to unsustainable wage increases.
Although the South African police and security services seem to have a tighter control of
public order than they did in August, sporadic acts of violence have continued11. Worker
demands are not always entirely clear, and we think the different unions have agendas
that are colored by politics. Meanwhile, in our opinion government has been reactive
rather than proactive so far in its efforts to contain the disruption and resolve the disputes.
We do not expect to see much change in that situation until the ANC leadership elections
in December (16-20) have been concluded.
The disruption to production in South Africa this year due to strike action, coupled with
decisions by several producers to put operations on care and maintenance (Aquarius
Platinum) and conserve cash by trimming capex, has removed a very substantial 460k oz
of platinum production from the market this calendar year in our estimation (Exhibit 276).
That could grow further if Anglo Platinum operations remain closed for a prolonged period.
Production losses to date have had the effect of shifting the market from a forecast surplus
of >300k oz to one much closer to balance (note that our demand estimates have also
shifted since our previous quarterly update – Exhibit 284).
There has also of course been a concomitant effect on palladium production. We estimate
losses amounting to ~230k oz have been incurred for CY 2012 so far. That has shifted
our palladium s/d balance to a bigger deficit of -222k oz, which rises to -516k oz once we
add on investment demand for physical metal. That assumes only modest sales from
Russian inventory of 200k oz over the year as a whole – to the end of August Swiss
imports of palladium from Russia totaled just 67.5k oz.
11 See for example, Mining bosses take tougher line, 1 October
Commodity Forecasts: The Best of Times, The Worst of Times 138
12 October 2012
Exhibit 276: Estimated CY 2013 platinum production losses to date due to strike
action and mines being placed on care and maintenance
Thousands of ounces Pt
Impala Platinum 150
Amplats/AQP PSAs 121
Lonmin 85
Amplats – own operations 60
Eastern Platinum – Crocodile River 22
Platinum Australia – Smokey Hills 10
Sylvania Resources - tailings 5
Other tailings operations 5
Atlatsa - Bokoni 3
Total to date 461
Source: Credit Suisse estimates, company reports
For both platinum and palladium, talking about deficits for the current calendar year as
static data points is somewhat meaningless – the balance is a moving, not static number.
And for both metals, above-ground inventories of metal have so far been more than
sufficient to prevent the markets’ tightening to the extent that end users become
concerned.
The key now is how much capacity is removed on a semi-permanent basis going forward.
Without further shafts being placed on care and maintenance, our supply/demand model
suggests the industry will remain in surplus over the next three years; again, on the basis
of supply versus demand ex-physical investment. That does not imply that demand will
shrink, rather there are a number of expansion projects that are well advanced (the capex
is largely already spent) and that will ensure South African supply continues to grow
unless there is further rationalization of the sector.
We think it is highly likely that more shafts will close. At current prices converted to rand
around one million ounces of South African production is cash negative on an operating
cost plus maintenance capex basis (Exhibit 277). A further million ounces or so of
production is operating on razor-thin gross margins on the same basis. On an all-in costs
basis, more like two million ounces, or approximately half the industry is cash flow
negative in our estimation. It is important to note just how flat most of the cost curve is:
small changes in price affects a large segment of the industry.
Over recent days, a sharp depreciation in the rand has improved the revenue picture and
gross margins for all of those South African mines that have continued operating.
Nevertheless, multi-year investment decisions cannot be taken on short-term FX
movements. There are, of course, other considerations apart from the bottom line that
have to be taken into account before a decision to put any mine on care and maintenance
is made. But we think the structural issues facing the industry mean that it is not
sustainable over the long term in its current form – in our view more production needs to
be removed from the market from 2013 onwards to rebalance supply with demand and to
drive prices up to a level at which return on investment becomes attractive again.
Commodity Forecasts: The Best of Times, The Worst of Times 139
12 October 2012
Exhibit 277: South African and Zimbabwean PGM production cost curve
ZAR per 6E oz (Pt+Pd+Rh+Au+Ir+Ru). Mining, refining & maintenance capex. Red line = current basket price
30,000
25,000
20,000
ZAR per 6E oz
15,000
10,000
5,000
0
0 1,000 2,000 3,000 4,000 5,000
000 oz Pt production
Source: Company reports, Credit Suisse estimates
Demand: The missing link
If the global economy were now to be in the kind of rude health it was prior to the global
financial crisis, the supply disruption in South Africa would arguably have had a much
greater impact on price. Indeed if the auto industries of North America and Europe were
currently enjoying the level of light vehicle production seen in 2007 (15.1 million and 19.8
million, respectively) then it is not unreasonable to think that PGM prices would be heading
back up towards the kind of levels reached in Q1 2008.
The fact that they are not is indicative of three important factors: much weaker auto
production in Europe and improving but still reduced output in North America; a trend
towards production and sales of more fuel efficient vehicles with smaller engines (which
tend to need smaller catalysts containing less PGM); and higher recovery of PGM from
recycling (particularly for palladium). Other industrial applications for both platinum and
palladium are also yet to recover 2007 levels.
Commodity Forecasts: The Best of Times, The Worst of Times 140
12 October 2012
The outlook for the global automotive sector
remains mixed. The US market has Exhibit 278: US light vehicle
performed above most analysts’ expectations production, % with engines >3 liters
year to date, with the September sales rate of displacement
14.9mn saar continuing a strong trend. For Percentage
the first nine months of the year total US light 70%
vehicle sales had reached 10.86mn, up
14.5% yoy and supported by a substantial
improvement in the rate of new auto loan 60%
issuance and fall in finance interest rates.
Inventory levels of unsold new vehicles were
only slightly above normal at the end of 50%
September (see 14.9M US SAAR is Welcome
Good News… ).
However, we expect a much slower rate of 40%
growth in North American sales and
production in 2013 as the recovery of that
market naturally loses momentum. In 30%
addition the average engine size is 2004 2006 2008 2010 2012
Source: Autofacts, Credit Suisse estimate
continuing to decline as sales of smaller
cars gain in popularity and larger SUVs
and pickup trucks are engineered to produce similar power output from smaller
displacement engines (Exhibit 278). Those trends, driven by fuel economy considerations,
tend to reduce catalyst size and PGM use per vehicle, all else being equal.
Exhibit 279: Global light vehicle production, sa
Thousand units, seasonally adjusted
2,000
thousands
1,800
Crisis Stimulus
1,600
1,400
1,200
1,000 Tsunami
800
600
400
200
Germany China Japan USA
0
2006 2007 2008 2009 2010 2011 2012
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
In Europe, the outlook for light vehicle production remains poor. Sales throughout much of
the EU have continued to decline, and even the previously robust German market showed
signs of weakness in September, slipping almost 11% yoy. Year-to-date sales across the
EU15 countries are down almost 8%. That is important for platinum as Europe remains by
far the largest market for diesel cars, the particulate filters on which are the biggest
catalyst application for the metal.
Commodity Forecasts: The Best of Times, The Worst of Times 141
12 October 2012
We currently assume just 1% growth in EU light vehicle production in 2013.
Japanese vehicle manufacturers had been benefiting from a strong rebound in production
through to September, as output recovered from a disaster-hit 2011. However, the tension
between China and Japan over islands in the South China Sea has had a direct effect on
Japanese brand vehicles produced for the Chinese market. Some of the market share
being lost at present by Japanese manufacturers will be picked up by their competitors we
think, but not all. In addition, in the domestic market sales are likely to slow in Q4 as
government subsidies for the most fuel efficient vehicles expired at the end of September.
We currently forecast an almost 3% contraction in Japanese light vehicle output in 2013.
The bright(er) spot remains China. Despite the slowing rate of economic growth, car sales
have continued to rise, albeit at a sharply reduced rate compared to the preceding two years.
There have also been frequent media reports that Chinese dealers are carrying excessive
inventories of unsold cars, which has led to increased discounting and concerns about the
rate of production for coming months. Empirical data are scarce, but at present we do not
think inventory overhang will be a major drag on the Chinese vehicle market in 2013.
Truck markets vulnerable
The heavy duty diesel (HDD) market and the emissions regulations that are applied in
different regions are important influences on platinum demand (palladium too but to a
lesser extent). The outlook for the key regions of Europe, North America, and Japan in
2013 is positive but growth in the latter is expected to slow sharply after a strong rebound
this year.
The Western European market may return to growth, after a very disappointing 2012
(commercial vehicle sales are expected to drop ~8% this year). However, given the
depressed economic conditions across much of the region and continued difficulty in
accessing credit for businesses, we think many fleet managers will continue to defer new
purchases for as long as possible. Consequently, we think that new Euro 6 HDD
regulations, that will begin to be phased in from January 2013 onwards, will have only a
moderate impact on PGM demand next year, with a greater pull expected in 2014.
The North American truck market posted a weak September, with orders for the largest
Class 8 vehicles below expectations at 15,600 units, down 5% mom and 34% yoy. Our
truck market analysts note that the weakness has been attributed to general uncertainty
ahead of the election and concerns over the potential “fiscal cliff” (see: US Truck Orders –
September). Orders are expected to remain soft until after the presidential election, with
the potential of better sales into year-end.
Commodity Forecasts: The Best of Times, The Worst of Times 142
12 October 2012
Exhibit 280: Palladium forecast comparison Exhibit 281: Palladium historical price and forecast
US$/oz US$/oz
$900 $900
Credit Suisse Forecast Forward Curve Bloomberg Forecast Mean Palladium (Spot) Quarterly Avg Forecast
$850
$800 $700
$750
$700 $500
$650
$600 $300
$550
$500 $100
Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Exhibit 282: Platinum forecast comparison Exhibit 283: Platinum historical price and forecast
US$/oz US$/oz
$1,850 $2,500 Platinum (Spot) Quarterly Avg Forecast
Credit Suisse Forecast Forward Curve Bloomberg Forecast Mean
$1,800 $2,250
$1,750
$2,000
$1,700
$1,750
$1,650
$1,500
$1,600
$1,250
$1,550
$1,000
$1,500
$1,450 $750
$1,400 $500
Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse Source: the BLOOMBERG PROFESSIONAL™ service, Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 143
12 October 2012
Exhibit 284: PGM supply and demand summary table
’000 oz
PLATINUM 2009 2010 2011 2012f 2013f 2014f 2015f
Supply
Mine supply 6,053 6,050 6,396 5,799 6,075 6,400 6,638
Autocat recycling 882 1,090 1,179 1,214 1,254 1,245 1,253
Total supply 6,935 7,140 7,575 7,013 7,329 7,645 7,891
YoY, % -2.2% 3.0% 6.1% -7.4% 4.5% 4.3% 3.2%
Demand
Autocat 2,255 2,964 3,163 3,135 3,246 3,407 3,531
Autocat off-road 0 22 56 87 140 181 190
Industrial 895 1,268 1,367 1,370 1,431 1,461 1,483
Jewellery 2,000 1,700 1,725 1,676 1,659 1,743 1,816
Other 369 438 488 520 534 550 553
Demand, ex-investment 5,519 6,392 6,799 6,788 7,010 7,342 7,572
YoY, % -19.9% 15.8% 6.4% -0.2% 3.3% 4.7% 3.1%
Running balance 1,416 748 776 225 319 303 319
Investment 832 772 201 250 261 286 191
Total Demand 6,351 7,164 7,000 7,038 7,271 7,628 7,763
Final balance 584 -24 575 -25 58 17 128
PALLADIUM
Supply
Mine supply 6,232 6,345 6,613 6,515 6,719 6,962 7,100
State stock sales 850 650 400 200 100 0 0
Autocat recycling 1,000 1,310 1,605 1,616 1,812 2,068 2,125
Total supply 8,082 8,305 8,618 8,331 8,631 9,030 9,225
YoY, % -4.6% 2.8% 3.8% -3.3% 3.6% 4.6% 2.2%
Demand
Autocat 3,999 5,528 5,907 6,220 6,374 6,710 6,998
Autocat off-road 0 6 14 22 35 45 47
Industrial 1,140 1,166 1,222 1,317 1,385 1,410 1,438
Jewellery 715 528 348 372 389 402 403
Dental 597 570 546 528 492 458 398
Other 83 92 90 95 102 106 108
Demand, ex-investment 6,534 7,890 8,127 8,553 8,777 9,131 9,392
YoY, % -13.3% 20.8% 3.0% 5.2% 2.6% 4.0% 2.9%
Running balance 1,548 415 491 -222 -145 -101 -167
Investment 700 1,145 -505 305 315 260 -25
Total Demand 7,234 9,035 7,622 8,858 9,092 9,391 9,367
Final balance 848 -730 996 -527 -460 -361 -142
Source: Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 144
12 October 2012
Mineral Sands
Equity Research
Matthew Hope Surpluses beginning to weigh
matthew.hope@credit-suisse.com
+61 2 8205 4669 So far in 2012, demand rather than pricing has taken the brunt of the downturn, but looking
forward we see continued surpluses, so we now doubt that producers can continue to hold
Paul McTaggart
paul.mctaggart@credit-suisse.com
the line on prices indefinitely. We forecast that prices will ease in 2013 and then begin to roll
+61 429 328 247 over seriously in 2014 as new production starts, moving down towards our LT rates.
Commodities Research While this is broadly the case for both zircon and TiO2 feedstocks, the situation with
Tom Kendall feedstocks is more complex. We expect only a modest easing in the price of chloride slags
tom.kendall@credit-suisse.com
+44 20 7883 2432
in 2013, which have enjoyed firm sales through 2012 through discounted legacy pricing,
but we forecast the price spread between chloride slag and the premium products – rutile
and synthetic rutile – will close, allowing the latter to regain some market share and sales.
Zircon pricing
Zircon prices have held at broadly the $2500/t level through the producers withholding
supply from the market. TZMI statistics to July shows bagged shipments have been
trading above $2500/t and bulk shipments have been just above the $2400/t level. In 4Q
2012, we expect the price will ease a little further as we move into the quieter seasonal
months, so we back off our 4Q price to $2400/t.
All three of the major zircon producers have built up finished inventory, in an attempt to
hold price steady. Iluka, which acts as the major swing producer, has taken extreme
measures to cut production, including continuing to produce heavy mineral concentrate
(HMC) at its Jacinth Ambrosia mine, but ceasing to ship the HMC from the mine.
Exhibit 285: Mineral sands price deck
US$/t
2011 1Q-12 2Q-12 3Q-12 4Q-12 2012E 1Q-13 2Q-13 3Q-13 4Q-13 2013E 2014E 2015E LT
Zircon bulk New US$/t 1,875 2,500 2,500 2,500 2,400 2,475 2,300 2,200 2,200 2,100 2,200 1,900 1,700 1,500
Old US$/t 1,875 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 2,500 1,875 1,500
Chg % 0% 0% 0% 0% -4% -1% -8% -12% -12% -16% -12% -24% -9% 0%
Rutile bulk New US$/t 1,055 2,400 2,400 2,400 2,400 2,400 2,000 2,000 2,000 2,000 2,000 1,575 1,125 1,000
Old US$/t 1,055 2,400 2,400 2,400 2,400 2,400 2,400 2,400 2,400 2,400 2,400 2,400 1,650 1,000
Chg % 0% 0% 0% 0% 0% 0% -17% -17% -17% -17% -17% -34% -32% 0%
Synthetic Rutile New US$/t 858 2,050 2,050 2,050 2,050 2,050 1,850 1,850 1,850 1,850 1,850 1,463 1,025 890
Old US$/t 858 2,050 2,050 2,050 2,050 2,050 2,050 2,050 2,050 2,050 2,050 2,050 1,450 890
Chg % 0% 0% 0% 0% 0% 0% -10% -10% -10% -10% -10% -29% -29% 0%
Ilmenite New US$/t 209 325 325 300 300 313 300 300 300 300 300 250 225 200
(sulfate 54%) Old US$/t 209 325 325 350 350 338 350 350 350 350 350 300 250 200
Chg % 0% 0% 0% -14% -14% -7% -14% -14% -14% -14% -14% -17% -10% 0%
Titanium slag New US$/t 490 1,750 1,750 1,750 1,750 1,750 1,700 1,700 1,700 1,700 1,700 1,350 925 760
(SA Chlor 86%) Old US$/t 490 1,750 1,750 1,750 1,750 1,750 1,750 1,750 1,750 1,750 1,750 1,750 1,225 760
Chg % 0% 0% 0% 0% 0% 0% -3% -3% -3% -3% -3% -23% -24% 0%
Titanium slag New US$/t 415 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,225 825 650
(Sulfate 80%) Old US$/t 415 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,075 650
Chg % 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% -18% -23% 0%
Titanium slag New US$/t 996 2,350 2,350 2,350 2,350 2,350 1,950 1,950 1,950 1,950 1,950 1,525 1,075 960
(UGS 95%) Old US$/t 996 2,350 2,350 2,350 2,350 2,350 2,350 2,350 2,350 2,350 2,350 2,350 1,600 960
Chg % 0% 0% 0% 0% 0% 0% -17% -17% -17% -17% -17% -35% -33% 0%
Source: Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 145
12 October 2012
Zircon trade data to mid-year are now available and if used as a proxy for demand, show
where the demand weakness lies. China demand has remained relatively firm, with
imports in line with 2011, but there has been no growth. The real weakness appears to
have been in Europe. We have backed off our 2012 estimates for consumption further,
particularly in Europe. The result is that despite Iluka’s efforts to match supply to demand,
and our expectation for a cyclical upturn in demand in 2013, we continue to see zircon
surpluses generated (Exhibit 287).
While none of the three major zircon producers seem keen to cut pricing, and they
probably share the view that demand is inelastic and will not return at lower prices, we
cannot see an end to surpluses in our forecasts (Exhibit 287). We expect inventory build of
200kt through the year, with over half of that registered by Iluka in H1 2012. With ongoing
surpluses, and our belief that producers can do little more to trim output further to match
demand, we expect the price will slip to an average of $2200/t in 2013. From 2014,
additional supply starts from new African mines, so we have brought forward the price
slide we expect towards long-term pricing.
Exhibit 286: Zircon production for the three major producers and the ROW
Kt
1,800
1,600
1,400
Thousands tonnes
1,200
1,000
800
600
400
200
-
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012f 2013f 2014f 2015f
Iluka Rio Tinto Exxaro ROW
Source: Company data, TZMI, Credit Suisse
Exhibit 287: Zircon supply and demand summary
Unit as indicated below
2008 2009 2010 2011 2012f 2013f 2014f 2015f 2016f
Production kt 1,242 1,056 1,278 1,541 1,352 1,326 1,488 1,565 1,577
chg yoy % -6% -15% 21% 21% -12% -2% 12% 5% 1%
Consumption kt 1,161 987 1,396 1,385 1,150 1,275 1,345 1,385 1,415
chg yoy % -7.5% -15.0% 38.9% 1.0% -17.0% 10.9% 5.5% 3.0% 2.2%
Balance kt 81 69 - 118 156 202 51 143 180 162
Bulk zircon (FOB) US$/t 765 858 875 1,875 2,475 2,200 1,900 1,700 1,647
Source: Company data, TZMI, Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 146
12 October 2012
Exhibit 288: Global zircon imports to June 2012 Exhibit 289: Global zircon exports to June 2012
Kt Kt
140 140
120 120
100 100
80 80
60 60
40 40
20 20
- -
Jan-08
Jan-09
Sep-08
Jan-10
Jan-12
Jan-11
Sep-09
May-11
Sep-11
Sep-10
May-08
May-09
May-10
May-12
Jan-10
Jan-08
Jan-09
Jan-11
Sep-08
Sep-10
Jan-12
Sep-09
Sep-11
May-08
May-10
May-09
May-11
May-12
China Other Asia W Europe N America Other Europe Australia South Africa Indonesia Ukraine Vietnam Other
Source: TZMI, Credit Suisse Source: TZMI, Credit Suisse
On the demand side, Western Europe has fallen away to a shade of its former imports
(Exhibit 290, Exhibit 288). We now expect slim demand of 180kt from Europe in 2012,
down close to 40% yoy (Exhibit 292). China’s imports for 2012 remain exactly in line with
2010 and 2011 (Exhibit 291) and it seems a relative source of demand strength.
Nevertheless, we have maintained an unchanged forecast for a 12% decline in demand
from 2011 (Exhibit 293).
Exhibit 291: Chinese zircon imports – 2012 in line
Exhibit 290: Europe zircon imports to 30 June with 2011
Kt Kt
60 700
50 600
500
40
Thousand tonnes
400
30
300
20
200
10
100
-
Jul-10
Jan-08
Jul-08
Jul-09
Jul-11
Jan-09
Oct-08
Jan-10
Jan-11
Jan-12
Apr-09
Oct-09
Oct-10
Oct-11
Apr-08
Apr-10
Apr-11
Apr-12
-
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2008 2009 2010
Italy Spain Ger, Neth, Belg France Other Europe 2011 2012
Source: TZMI, Credit Suisse Source: TZMI, Credit Suisse
Australian supply has plummeted due to Iluka cutting production and holding inventory.
South African producers are also holding inventory, but the export drop from the country is
subdued, so Australian producers (chiefly Iluka) seem to be doing the bulk of the efforts to
balance the market (Exhibit 289, Exhibit 294). South Africa shows a gradual slide in zircon
exports from 2009-2011, which appears to be a systemic issue of declining grades in the
major mines of Tronox and Richards Bay Minerals.
Commodity Forecasts: The Best of Times, The Worst of Times 147
12 October 2012
Indonesia lifted supply to 58kt in H1 2012 from 31 in H1 2011, but notably imports for June
fell 56% mom in June. We interpret the high February to May imports – 46kt in four
months as reflecting the Indonesian raw material ban. As we have seen in other
commodities, companies rushed to beat the 6 May raw material export ban and imposition
of a 20% export tax, so exports surge, then collapse after May. Nevertheless, the first half
of the year has been so strong that we are looking for 95kt for the year, the highest from
Indonesia since 2007.
Exhibit 292: European zircon demand
Kt
Unspecified zircon demand tile production (RHS)
450 2.0
400 1.8
Tile production (billions of sq m)
350 1.6
Zircon consumption (kt)
1.4
300
1.2
250
1.0
200
0.8
150
0.6
100 0.4
50 0.2
0 0.0
2008
2002
2003
2004
2005
2006
2007
2009
2010
2011
2012f
2013f
2014f
2015f
Source: TZMI, CWR, Credit Suisse
Exhibit 293: Chinese zircon consumption – our forecast
Kt
Ceramics Refractories
Foundry Zirconia & chemicals
Fused zirconia Unspecified zircon demand
tile production (RHS)
700 4.5
4.0
Tile production (billions of sq m)
600
3.5
Zircon consumption (kt)
500
3.0
400 2.5
300 2.0
1.5
200
1.0
100
0.5
0 0.0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012f
2013f
2014f
2015f
Source: TZMI, CWR, Ruidow, Credit Suisse
Commodity Forecasts: The Best of Times, The Worst of Times 148
12 October 2012
Exhibit 294: Australian and South African zircon exports
Kt
Australia South Africa
3 per. Mov. Avg. (Australia) 3 per. Mov. Avg. (South Africa)
100
90
80
Zircon exports (kt)
70
60
50
40
30
20
10
- Sep 08
Sep 09
Sep 10
Sep 11
Jul 08
May 09
Jul 09
Jul 10
Jul 11
May 12
May 08
May 10
May 11
Mar 08
Mar 09
Mar 10
Nov 10
Mar 11
Mar 12
Jan 08
Jan 09
Jan 10
Jan 11
Jan 12
Nov 08
Nov 09
Nov 11
Source: TZMI, Credit Suisse
Titanium feedstocks
Pigment demand has been flat to negative
For TiO2, the 2012 summer painting season in the Northern Hemisphere was subdued.
China demand has also fallen, so it has been exporting pigment to the Western world,
further increasing pigment surpluses. We are now heading into the colder winter months,
and pigment makers remain overstocked, so 2012 looks to be a write-off for TiO2 demand.
We forecast that pigment consumption has fallen 2.5% in 2012 and will grow by a weak
1% in 2013, before recovering in 2014. Recovery remains speculative of course. It will
require a strong recovery in US housing sales (house repainting), a recovery in
consumption in Europe, and a pickup in exports and construction in China. In short, we
need the world to exit the current economic malaise.
Uncertain that pigment demand will return to long term CAGR of 3.1%
From 1994-2006, pigment demand grew at a CAGR of 3.1%, in line with global GDP. The
subsequent years have been erratic, but from the trough of 2009-2016, our CAGR is 2.7%,
below the LT rate. This period includes our forecast recovery years of 5% and 4% p.a.
growth 2014-2016). Given our forecast CAGR remains below the LT CAGR, it is possible
that recovery will be stronger in these outyears than our forecast, but we remain cautious
as we are concerned that efforts by paint-makers to reduce pigment usage may have had
a structural effect and lower future consumption rates.
Commodity Forecasts: The Best of Times, The Worst of Times 149
12 October 2012
Exhibit 295: Global pigment demand
Kt
7000
6000
Global pigment demand (kt)
5000
4000
3000
2000
1000
0
1996
1994
1995
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012f
2013f
2014f
2015f
2016f
Source: TZMI, Credit Suisse
Exhibit 296: Summary of pigment and titanium dioxide supply and demand
Units as indicated below
2007 2008 2009 2010 2011 2012f 2013f 2014f 2015f 2016f
Pigment production kt 5,130 4,950 4,370 5,330 5,450 5,100 5,210 5,630 6,030 6,220
chg yoy % 2.8% -3.5% -11.7% 22.0% 2.3% -6.4% 2.2% 8.1% 7.1% 3.2%
Pigment consumption kt 5,255 4,990 4,740 5,045 5,117 4,990 5,040 5,290 5,500 5,720
chg yoy % 9.8% -5.0% -5.0% 6.4% 1.4% -2.5% 1.0% 5.0% 4.0% 4.0%
Pigment balance kt -125 -40 -370 285 333 110 170 340 530 500
FEEDSTOCKS
TiO2 units supply 6,482 6,050 5,400 6,300 6,363 6,532 6,630 7,520 7,897 7,870
chg yoy % 10.7% -6.7% -10.7% 16.7% 1.0% 2.7% 1.5% 13.4% 5.0% -0.3%
TiO2 units demand 6,100 5,906 5,200 6,355 6,625 6,290 6,465 6,975 7,465 7,730
chg yoy % 4.6% -3.2% -12.0% 22.2% 4.2% -5.1% 2.8% 7.9% 7.0% 3.5%
TiO2 units balance 382 144 200 -55 -262 242 165 545 432 140
High grade TiO2 balance kt 237 125 40 -24 -91 233 294 433 396 293
Sulfate ilmenite balance kt -193 -25 155 43 -121 7 -101 151 76 -149
Sulfate slag (Ex China) kt -212 -26 -116 -154 -98 1 -30 -40 -40 -6
Source: TZMI, Credit Suisse
Feedstock pricing – premium products bore the brunt of the demand
downturn
Slag makers under long-term legacy contracts have reportedly had no trouble selling their
product in 2012. The demand weakness has been borne by the premium products at
premium prices – rutile and synthetic rutile sold by Iluka. Iluka was pricing rutile at around
$2400/t whereas chloride slag, a competitor, was priced at around $600/t. As pigment
makers found their inventory building on slow demand downstream, they looked to cut
production, which they achieved by cutting out the highest grade feedstocks – rutile and
syn-rutile carrying premium prices. Of the three large western feedstock producers, Iluka
took the brunt of the demand downturn.
Commodity Forecasts: The Best of Times, The Worst of Times 150
12 October 2012
Two-speed pricing to end in 2013
2013 looks to be a complex year for pricing. The two-speed pricing should largely cease,
with Rio Tinto having 75% of its production freed from legacy contracts, up from 25% in
2012. Its slag feedstock prices will likely be increasing as it will be keen to capture some of
the lost pricing territory. In addition, it has indicated that pricing will be very short term from
quarterly to shipment by shipment. It may be hard to pin down where prices are at in 2013,
and we expect increased price and demand volatility in the market.
High grade feedstock for the chloride industry: We see high grade feedstocks for
chloride pigment production being in significant surplus in 2013, and then growing in 2014
as Rio Tinto continues to ramp up production of its QMM slag and a new rutile mine –
Kwale – enters production. We have only a mild decline in high grade products for 2013,
but begin a steeper decline towards LT prices in 2014.
Isolated shipments of chloride slag that are free from legacy contracts have been priced at
over $2000/t in the first half of 2012, but taking into account our forecast surplus, we have
assumed a price of $1700/t for chloride slag in 2013, a $50/t decline on our theoretical
price for 2012. However, for rutile and synthetic rutile we have forecast steeper declines.
These premium products have to some extent been cut out of the feedstock mix in 2012,
so we believe the price spread between these products and competing chloride slag will
need to reduce in 2013. Consequently, the major move in our forecasts for 2013 is borne
by rutile and syn-rutile as we close the gap with chloride slag.
Sulfate slag: Sulfate slag balances continue to appear tight in our forecasts, so we have
also closed the price spread between chloride and sulfate slag.
Ilmenite: Ilmenite supply and demand remains cryptic, depending upon how much is
imported by China. For the first half of 2012, China’s imports had risen a mammoth 50%
on 2011, but according to TZMI, China appears to have built up inventory of 400-450kt of
ilmenite, which is placing pressure on pricing. We assume the high imports and inventory
build was a precautionary measure for Chinese pigment producers given that Vietnam
intended to bring in a ban on ilmenite exports from the middle of 2012. The ban is
supposed to have taken effect from 1 July, but we as yet have no clarity on the impact. We
have included a ban in our forecasts. Ilmenite supply consequently looks reasonably tight
in our forecasts, and we retain reasonably robust prices.
Commodity Forecasts: The Best of Times, The Worst of Times 151
Commodity Forecasts: The Best of Times, The Worst of Times
Exhibit 297: Global zircon supply and demand estimates
Thousands of tons
kt 2008 2009 2010 2011 2012F 2013F 2014F 2015F kt 2008 2009F 2010 2011F 2012F 2013F 2014F 2015F
MINED ZIRCON PRODUCTION CONSUMPTION SECTOR USE
Australia 500 415 530 722 580 595 618 662 Ceramics 628 543 780 795 700 - - -
South Africa 398 352 381 392 420 390 410 440 Refractories 144 113 160 165 170 - - -
Other Africa 8 27 44 52 50 75 152 194 Foundry 133 109 140 145 140 - - -
China 50 40 30 25 25 25 25 25 TV glass 35 27 21 15 10 - - -
India 29 28 35 40 43 53 53 53 Zirconia & chemicals 200 176 245 260 290 - - -
Ukraine 24 27 24 24 25 25 25 25 Other 21 19 25 20 20 - - -
United States 124 57 88 85 83 78 78 45 Total 1,161 987 1,371 1,400 1,330 - - -
Other 161 161 145 198 200 195 192 182 Mkt share
Highly Probable Growth - - - - - - - - Ceramics 54% 55% 57% 57% 53% - - -
Disruption Allowance - - - - -43 -57 -62 -65 Refractories 12% 11% 12% 12% 13% - - -
Total Production 1,294 1,107 1,278 1,538 1,383 1,379 1,491 1,561 Foundry 11% 11% 10% 10% 11% - - -
% change -10.0% -14.5% 15.5% 20.4% -10.1% -0.3% 8.1% 4.7% TV glass 3% 3% 2% 1% 1% - - -
Zirconia & chemicals 17% 18% 18% 19% 22% - - -
ZIRCON CONSUMPTION Other 2% 2% 2% 1% 2% - - -
Nth America 121 86 113 120 125 130 135 140 Total 100% 100% 100% 100% 100% - - -
% change -17.7% -28.9% 31.4% 6.2% 4.2% 4.0% 3.8% 3.7%
Zircon Production (bars) v Consumption (kt) & price (line) US$/t RHS
Europe 300 229 328 300 270 310 310 320
1,800 2,600
% change -21.3% -23.7% 43.2% -8.5% -10.0% 14.8% 0.0% 3.2% 2,500
China 421 398 578 625 550 550 550 560 1,600 2,400
2,300
% change 7.7% -5.5% 45.2% 8.1% -12.0% 0.0% 0.0% 1.8% 2,200
1,400
Japan 45 37 45 45 45 50 50 50 2,100
2,000
% change -21.1% -17.8% 21.6% 0.0% 0.0% 11.1% 0.0% 0.0% 1,200 1,900
1,800
Other Asia 163 140 196 195 205 215 230 245
1,000 1,700
% change -13.8% -14.1% 40.0% -0.5% 5.1% 4.9% 7.0% 6.5% 1,600
1,500
Other World 111 97 111 115 115 120 120 125 800 1,400
% change 23.3% -12.6% 14.4% 3.6% 0.0% 4.3% 0.0% 4.2% 1,300
600 1,200
Total consumption 1,161 987 1,371 1,400 1,310 1,375 1,395 1,440 1,100
% change -7% -15% 39% 2% -6% 5% 1% 3% 400 1,000
900
Restocking - - 25 - - - - - 800
200 700
SURPLUS/(DEFICIT) 133 120 -93 138 73 4 96 121
600
Estimated Total Stocks 81 150 32 170 243 247 343 464 0 500
2008 2009 2010 2011 2012F 2013F 2014F
weeks Consumption 3.6 7.9 1.2 6.3 9.6 9.3 12.8 16.7
Nth America Europe China Japan Other Asia
Other World Australia South Africa Other Africa China
Price (US$/t)
India Ukraine United States Other Bulk from Australia
Bulk from Australia 765 858 875 1,875 2,500 2,500 2,500 1,825
Source: TZMI, Company data, Credit Suisse estimates
12 October 2012
152
Commodity Forecasts: The Best of Times, The Worst of Times
Exhibit 298: Global titanium oxide supply and demand estimates
Thousands of tons
kt 2008 2009 2010 2011F 2012F 2013F 2014F 2015F kt 2008 2009 2010 2011F 2012F 2013F 2014F 2015f
TiO2 UNITS SUPPLY TiO2 CONSUMPTION BY SECTOR
Australia 1,583 1,168 1,223 1,205 1,317 1,343 1,340 1,447 Pigments 5,374 4,732 5,785 5,915 5,910 6,030 6,205 6,540
South Africa 1,090 854 1,126 1,141 1,144 1,172 1,183 1,196 Titanium sponge 360 260 290 400 430 460 490 520
Other Africa 248 340 463 437 518 701 1,207 1,380 Other (Welding rods) 177 208 280 310 330 355 380 405
Canada 896 696 905 956 978 1,023 1,109 1,109 TOTAL TiO2 demand 5,912 5,200 6,355 6,625 6,670 6,845 7,075 7,465
China 619 568 755 1,012 1,109 1,205 1,333 1,453 TiO2 for Pigments 91% 91% 91% 89% 89% 88% 88% 88%
Other Europe 758 737 747 610 696 762 816 821 TiO2 for Titanium sponge 6% 5% 5% 6% 6% 7% 7% 7%
US 187 151 194 217 162 156 156 73 Other 3% 4% 4% 5% 5% 5% 5% 5%
ROW 669 885 887 758 719 727 819 835 PIGMENT BALANCE
Total TiO2 units 6,050 5,400 6,300 6,396 6,702 7,149 8,023 8,381 PIGMENT PRODUCTION 4,950 4,370 5,330 5,450 5,450 5,560 5,720 6,030
Disruption Allowance - - - - - 335 - 357 - 401 - 419 % Chg y-o-y -3.5% -11.7% 22.0% 2.3% 0.0% 2.0% 2.9% 5.4%
Total Production 6,050 5,400 6,300 6,396 6,367 6,791 7,622 7,962 PIGMENT CONSUMPTION 4,990 4,740 5,045 5,117 5,200 5,330 5,540 5,760
% change -6.7% -10.7% 16.7% 1.5% -0.5% 6.7% 12.2% 4.5% % Chg y-o-y -5.0% -5.0% 6.4% 1.4% 1.6% 2.5% 4.0% 4.0%
CONSUMPTION PIGMENT BALANCE - 40 - 370 285 333 250 230 180 270
Total TiO2 consumption 5,906 5,200 6,355 6,625 6,670 6,845 7,075 7,465 TiO2 FEEDSTOCK BALANCES (TiO2 units kt)
% Chg y-o-y -3.2% -12.0% 22.2% 4.2% 0.7% 2.6% 3.4% 5.5% Chloride ilmenite supply 636 458 421 420 574 562 660 811
SURPLUS/(DEFICIT) 144 200 -55 -229 -303 -54 547 497 Disruption allowance - - - - - 29 - 28 - 33 - 41
Estimated Total Stocks 194 394 339 110 -193 -246 300 797 Chloride ilmenite demand 761 697 911 924 914 921 949 997
weeks Consumption 1.7 3.9 2.8 0.9 -1.5 -1.9 2.2 5.6 CHLOR. ILMEN. TiO2 BALANCE - - - - - - - -
FEEDSTOCK SUPPLY High grade supply 2,701 2,293 2,950 3,022 3,082 3,313 3,527 3,606
Ilmenite (Sulphate) 4,060 4,185 4,667 4,493 4,650 5,012 5,904 6,219 Disruption allowance - - - - - 154 - 166 - 176 - 180
Ilmenite (Chloride) 1,053 757 685 681 949 927 1,091 1,182 High grade demand 2,577 2,253 2,974 3,113 2,919 2,960 2,920 2,993
Rutile 621 552 761 810 794 830 926 981 HIGH GRADE TiO2 BALANCE 125 40 -24 -91 9 187 431 433
Leucoxene 181 168 188 159 205 205 253 285 Sulfate slag supply (ex China) 649 428 474 532 592 603 643 659
Synthetic rutile 767 671 635 614 643 752 757 757 Disruption allowance - - - - - 154 - 166 - 176 - 180
Slag (Chloride) 1,430 1,149 1,692 1,769 1,799 1,900 1,995 2,005 Sulfate slag demand (ex China) 675 544 628 630 623 648 658 666
Slag (sulphate) 1,023 830 881 959 1,078 1,152 1,302 1,412 SULFATE SLAG BALANCE - 26 - 116 - 154 - 98 - 61 - 75 - 48 - 40
TiO2 SUPPLY BY FEEDSTOCK PRODUCT Global sulfate ilmenite TiO2 1,891 1,980 2,221 2,183 2,179 2,348 2,790 2,829
Ilmenite (sulphate) TiO2 1,891 1,980 2,221 2,183 2,179 2,348 2,790 2,829 Disruption allowance - - - - - 123 - 134 - 160 - 165
Ilmenite (Chloride) TiO2 636 458 421 420 574 562 660 811 Global sulfate ilmenite demand 1,917 1,824 2,178 2,271 2,308 2,380 2,466 2,560
High grade TiO2 1,442 1,278 1,455 1,460 1,493 1,635 1,763 1,834 SULFATE ILMENITE BALANCE -25 155 43 -88 -251 -166 164 104
Chloride slag TiO2 1,260 1,016 1,494 1,562 1,589 1,678 1,764 1,772
Sulphate slag TiO2 822 669 709 771 867 926 1,046 1,134 PRICES(US$/t)
Sulfate supply TiO2 units 45% 49% 46% 46% 45% 46% 48% 47% Rutile - Bulk Aust FOB 509 537 550 1,055 2,400 2,400 2,400 1,575
Chloride supply TiO2 units 55% 51% 54% 54% 55% 54% 52% 53% Synthetic rutile - Aust FOB 429 424 443 858 2,050 2,050 2,050 1,450
TiO2 PIGMENT SUPPLY BY PROCESS Ilmenite (sulfate) 119 74 84 209 338 350 300 249
Chloride Pigment Supply 2,602 2,243 2,795 2,854 2,817 2,843 2,919 3,141 Slag (Chloride SA 86%) 449 426 431 490 1,750 1,750 1,750 1,256
Sulfate Pigment (ex-China) 1,438 1,097 1,332 1,306 1,283 1,317 1,331 1,329 Slag (Sulphate 80%) 356 294 322 415 1,500 1,500 1,500 1,063
China Pigment Supply 900 1,047 1,200 1,300 1,350 1,400 1,470 1,560 Slag (UGS 95%) - - 524 996 2,350 2,350 2,350 1,619
Source: TZMI, Company data, Credit Suisse estimates
12 October 2012
153
12 October 2012
Equity Research
Uranium: Utilities in a “Wait-and-See” Mood
Ralph Profiti
ralph.profiti@credit-suisse.com
Market well-balanced; uranium prices range-bound in short term
+1 416 352 4563
We are lowering our uranium price forecast slightly to $50/lb in 2012, $56/lb in 2013.
Commodities Research Our long-term and 2014 price forecast of $65/lb remains unchanged. Our forecast
Ric Deverell reductions reflect underperformance in prices in 2012, a balanced market medium term,
ric.deverell@credit-suisse.com
and include a peak price of $70/lb in 2015.
+44 20 7883 2523
In our view, the social and political tolerance for new nuclear build initiatives remains
dynamic and because of the unique technological and environmental challenges facing
uranium/nuclear, industry sentiment continues to be subject to public opinion risks. We
remain constructive on the outlook for new reactor build in China, Russia, and India, where
we forecast 38GWe of new nuclear capacity over the next five years (2012-2016) and total
global new capacity of 49GWe.
In our view, positive uranium price momentum will be driven by stronger evidence of the
following key factors over the next 12 months: (i) clarity surrounding the nuclear outlook
for Japan; (ii) resumption of approvals for new nuclear reactors in China; (iii) clarity over
Russian supplies post expiry of the HEU supply agreement in 2013; and (iv) slower
uranium production growth rates from Kazakhstan.
Current uranium prices a disincentive for new production
The spot uranium price has been range-bound in the $45-55/lb range over the past 16
months, with price leakage in the past three months taking prices below $50/lb, a level we
believe is a disincentive for greenfield development and brownfield expansion.
Exhibit 299: Credit Suisse uranium spot forecast and NYMEX futures prices
US$/lb
UxC Month-end U3O8 spot price (US$/lb) Credit Suisse spot forecast (US$/lb)
NYMEX-UxC Futures (US$/lb) UxC Month-end U3O8 LT price (US$/lb)
80 Historical Forecast
Long-term price
75
70
65
60
55
50
45
40
35
30
2010 2011 2012 2013 2014 2015 2016 2017
Source: Company data, Credit Suisse
Medium and long term, we believe the uranium price will stage a recovery to a level that
reflects the incentive price for production expansion and exploration, averaging between
$65/lb and $70/lb over the next five years. Supporting our view, we estimate the market
will be in a modest structural deficit in 2014-2015, although it is unlikely in our view that
prices will return to the $100+/lb level seen in 2007.
Commodity Forecasts: The Best of Times, The Worst of Times 154
12 October 2012
Uranium demand: China at 60GWe by 2020 a realistic goal
Nuclear power currently provides about 13.5% of the world's electricity, comprised of
roughly 24% share of electricity in OECD countries and a much lower share in developing
economies. According to WNA estimates, 218 nuclear reactors were started up during the
1980s (an average of one every 17 days), including 47 in the US, 42 in France, and 18 in
Japan, so there is a strong precedent for rapid building and commissioning phases for
nuclear power. Our current ten-year forecast (2012-2021) incorporates a more modest
112 nuclear reactors, or one every 33 days.
According to China’s Nuclear Power Mid/Long Term Development Plan issued in 2007,
China planned to have 40GWe of installed nuclear capacity by 2020. The number was
subsequently talked up to 80GWe by 2020; however, the Fukushima nuclear event has
created waves for the development strategy of nuclear power, in our view, particularly
plans for inland nuclear plants where closer scrutiny based on seismic sensitivity has put
approximately 20GWe of growth at risk of delay. Our estimate calls for 60Gwe of installed
capacity by 2020. Domestically, China currently produces about 2-3mn lbs of uranium
annually (versus 15-20mn lbs currently required). The remaining requirements have been
imported or purchased in the open market, and strategically stockpiled for future use.
In Japan, a more aggressive stance towards a “zero-nuclear” energy policy amid public
opposition and upcoming general elections fueled Enecan’s “Innovative Energy and
Environment Strategy” (released in September 2012) to recommend a phase-out of
nuclear power by 2040. The plan was met with strong opposition from industry, with a
consensus that 20%-25% nuclear was necessary to avoid any severe economic impact.
Moreover, the Japanese cabinet backed away from the plan, and leading officials