Digging for Victory

An overview of mining and metals

PwC London School of Mines
Paul Robinson
Director, CRU Group
www.crugroup.com

Disclaimer
This presentation is private and confidential. It must not be disclosed in whole or
in part, directly or indirectly or in any other format without the prior written
permission of CRU International Limited.
CRU International Limiteds responsibility is solely to its clients and its liability is
limited to the amount of the fees actually paid for professional services.
Although reasonable care and diligence has been used in the preparation of this
presentation, we do not guarantee the accuracy of any data, assumptions,
forecasts or other forward-looking statements.
We accept no liability to third parties, howsoever arising.

CRU International Limited 2016. All rights reserved.

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About CRU

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CRU offices in London, Sydney, Tokyo, Beijing, Shanghai , Hong Kong, Mumbai, Pittsburgh, New York, Toronto, Santiago, Sao Paulo

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In 2015, CRUs heat chart fell by an average of 16%*

CRU basket of 36 mining, metals and fertilizer commodities

Source: CRU, *2015 annual average price over 2014

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Prices are at multi-year lows despite healthy demand

Most prices are at pre-GFC levels whilst most consumption hits all time highs
Global commodity prices, various

Global commodity demand, various

nominal, index 2000=100

nominal, index 2000=100

600

250
Iron Ore
Thermal Coal
Copper
Aluminium
Nickel
Zinc

500

Iron Ore
Thermal Coal
Copper
Aluminium
Nickel
Zinc

200

400

300

150

200
100
100

50
2000

Source: CRU

2002

2004

2006

2008

2010

2012

2014

2016

2000

2002

2004

2006

2008

2010

2012

2014

2016

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as global demand expectations have changed dramatically

Short and long term assumptions for commodity demand are being challenged
Demand Indicators

Iron Ore

Thermal Coal

Copper

Aluminium

Nickel

Zinc

Global consumption estimates

2014/2013

2.6%

0.1%

3.5%

7.8%

5.0%

2.3%

2015/2014

-2.0%

0.2%

1.3%

4.0%

0.8%

-0.2%

2016/2015

-1.1%

0.7%

1.1%

4.4%

2.3%

2.1%

CAGR 2000-2015

5.7%

3.9%

2.5%

5.6%

3.5%

2.7%

CAGR 2015-2020

0.7%

0.3%

1.8%

3.6%

3.1%

2.7%

Chinese consumption estimates

% global demand

61%

50%

46%

52%

51%

47%

CAGR 2000-2015

13.7%

7.8%

11.8%

16.7%

20.0%

10.7%

CAGR 2015-2020

-0.5%

-2.0%

1.5%

4.3%

1.7%

3.5%

Source: CRU, note pre-2006 thermal coal data source EIA

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Costs have declined across the commodity complex

Cost cutting now widespread, aggressive for bulks and less extensive for base metals
HCC Business Costs reduction, 2015,

Copper net of by-product cash costs

nominal, $/t, FOB

$/lb (lhs) / $/tonne (rhs)

2.5

By-product revenues
Cash Costs (excluding by-product)
Cash Costs (net of by-product)

World
Currency

US

5,500

2.0

4,400

1.5

3,300

1.0

2,200

0.5

1,100

Energy
Consumables
Sus Capital

China

Other*

Canada

Australia

Russia
0.0
0%

5%

10%

15%

20%

25%

0
11 11 12 12 13 13 14 14 15 15
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3

Note: *Other includes controllable cutting/productivity and reductions from high-cost mine closures

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and miners are focused on protecting margins

Chinese Nickel NPI costs have fallen by over 25% and margins were positive until 2016
NPI margins Jan15 - Apr16

NPI production 2006-2017

Margin, $/tonne

000s tonnes

2,000

600

1,500

500

1,000

400

500

300

200

100

-500
1.5% Jiangsu
1.5% Shandong
-1,000

Source: CRU Beijing Office

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but costs will increase if energy and forex reverse

Selected Iron Ore cost reductions Q1 2014 - Q1 2016
Cost reduction, by category

Cost reduction, by category

US$/tonne

% breakdown

60

100%
Other

50

Other
Directly Controllable

Directly Controllable
80%

40
60%
30
40%
20
10
0

Source: CRU, company reports

20%

0%

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Market prospects for

the next 12 months?

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We assume that China avoids an economic hard landing

The challenge is to predict economic transition and impact on commodity demand
Fixed asset investment by sector
y/y% 3 month moving average

Slower headline IP growth was largely due

to the extractive industries and utilities.
Manufacturing output growth was little
changed.

Auto value added is growing faster than

unit output, which in part reflects changing
output mix. Underlying volume sales will
strengthen in 2016.

We believe that slower April FAI growth is

noise and an unwinding of March's New
Year effect.

Real estate sales growth accelerated, to a

38-month high, but may be reaching a peak.

Retail sales growth, particularly furniture

and appliances, remain firm, supported by
the property market.

25%
20%
15%
10%
5%
0%
-5%

Inf rastructure
Real estate
Heavy industry
Light industry
Other

-10%

Source: CEIC, CRU Economic Service. Note: Infrastructure includes utilities

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but our disorderly transition scenario would be catastrophic

What if China experienced a Japanese style crisis experienced between 1991 - 2005?
China investment share of GDP

Chinese industrial production level

2010 US$ trillions

50%

7.0
Base Case
Disorderly Transition
17%
Boom
Decline

6.0

40%

5.0

12%

30%
4.0
Base Case
Disorderly Transition
20%

3.0
2003 2007 2011 2015 2019 2023 2027

Source: CRU Economic Service

2015 2017 2019 2021 2023 2025 2027 2029

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We also assume more cost reductions and too few closures

There remain too many reasons to assume significant mine closures

Source: CRU

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Iron Ore, unfortunately, is a great case in point

Global cuts and displacement requirements (2014-2019)
Actual iron ore displacement

Required iron ore displacement

Million tonnes, 2014 & 2015

Million tonnes, 2014-2020

200

-20
150
-40
100

-60

-80
50
-100
0
China

Juniors

Non-traditional
exporters

-120
2014 2015 2016 2017 2018 2019 2020

Source: CRU, includes estimates of a lag time lags from announcement to ending of shipments

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2016 will be another difficult year for commodities

Zinc is at the front of the fundamental pack but where is the finishing post?

Source: CRU, Notes: (1) Over and above announced. (2) Average price in 2016 versus Q4-2015

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In the medium term it all comes down to asset value

How well does your portfolio match your Risk Appetite and Risk Tolerance?

Source: CRU

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Next 12 months? Challenging for China, miners & commodities

A lack of demand confidence & oversupply are keeping prices low
CRU assumes flat global IP growth in 2016 with China avoiding an
economy-wide, hard landing
Demand: The world waits for stronger evidence of an orderly Chinese
economic transition
Supply: Miners continue digging for victory focusing on lowering
costs, cash conservation and portfolio rationalisation
There will not be enough supply cuts, further asset divestments will
extend fundamental pain
Prospects for commodities and assets need to be assessed on an case
by case basis
Source: CRU

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For more information

Paul Robinson

Director
paul.robinson@crugroup.com
Tel. +44 20 7903 2221
Mob. +44 7962 432 303

@BaseMetals

Rod Cave

Regional Director
Russia, Eastern Europe & Central Asia
rod.cave@crugroup.com
Tel. +44 20 7903 2251
Mob. +44 7915 476063

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Appendix: CRU analysts expect 2016 YoY price declines*

CRU basket of 37 mining, metals and fertilizer commodities to decline by over 10%

Source: CRU, *2016 annual average price forecast over 2015 annual prices (3rd Jun 2016). Tin forecast ITRI

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