Commodity Price Outlook

How long can the high prices be sustained?

Goldman Sachs JBWere Commodities Team

Melbourne Malcolm Southwood malcolm.southwood@gsjbw.com
London Paul Gray paul.gray@gsjbw.com

ME320_3120_METALS Page 1 09/04/23

Commodity Price Trends: the start of a new era, or top of
the (super) cycle?
GSCI - Spot Index, Daily, from January 1970
Source: Bloomberg

600

500

400 A Five Year

Bull Run in
Commodities!
300

200

100

0
Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan-
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06

ME320_3120_METALS Page 2 09/04/23

 Positive Structural Themes – Still Very Much Intact!
Chinese demand growth:
• The world’s biggest raw
materials consumer (China) is
also the world’s fastest growing.
• We believe that this situation
could continue for many years.
• In the longer term, this will be
supplemented by Brazil, India,
Russia ( the Goldman Sachs
“BRIC” idea).
• Bumps in the road will occur, but
in the longer term, it’s the trend
rate of growth that matters.
Global demand growth:
• We envisage moderate (trend)
growth in OECD raw materials
offtake.
ME320_3120_METALS
Supply constraints: Currency:
• Reduced exploration and • Weak US dollar environment.
development spending over the
past decade.
• Too few greenfield projects Investment Flows:
available, and reduced • Dominance of “long-only”
discovery rates. investment style (Index Funds).
• Long lead-times from discovery • Hedge funds and CTAs.
to commercial production.
• Infrastructure bottlenecks (oil;
bulk commodities).
• Skills shortages, and long lead-
times for equipment orders.
We believe this environment will sustain strong
commodities prices and improved growth opportunities.
Resources company valuations should continue to rise.
We recommend an overweight resources position.
Page 3 09/04/23
 The World and the BRICs dream

The Largest Economies in 2005 (US$ bn) The Largest Economies in 2050 (US$ bn)
Source: Goldman Sachs Source: Goldman Sachs
14000 80000

12000 70000

60000
10000
50000
8000
40000
6000
30000
4000
20000
2000 10000

0 0
Germany

Brazil

Brazil

Germany
UK

UK
Russia

India

Russia
US

Italy
US

China

China
Italy
Japan

Japan
Canada
France

France
ME320_3120_METALS Page 4 09/04/23
 The World and the BRICS dream

Cars indicate when BRICs US$GDP exceeds US$GDP in the G6

Brazil
Italy France/UK* Germany

Russia
Italy France/UK Germany

India
Germany Japan USA

China
USA
Germany Japan

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Source: Goldman

ME320_3120_METALS Page 5 09/04/23

 China: the dominant force in global commodity markets
China's Share of Global Consumption (%)

60

1st
50
1st
40
1st
1st
30 1st
1st

20

2nd
10

0
Iron Ore* Coal Steel Al Cu Ni Oil
*seaborne trade

ME320_3120_METALS Page 6 09/04/23

 How long can it last?
“saturation point” is typically $15,000 – $20,000 real GDP/capita (PPP adjusted) –
China is still < $7,000!
Per capita consumption of steel and copper
Source: IMF World Economic Outlook

ME320_3120_METALS Page 7 09/04/23

The China (and India) growth story has many years to run

Commodity Consumption per Capita (2006)

Oil Copper Aluminium

barrels per person pounds per person kg per person
USA 25.2 16.0 23.3
Japan 15.0 22.0 16.5
Korea 16.1 38.0 25.0
China 2.0 6.2 6.4
India 0.9 0.9 0.8
Source: Company data, GSJBW Research estimates.
ME320_3120_METALS Page 8 09/04/23
 Challenges to supply growth (1)

Quality and availability of projects: location; size; depth; grade etc.

Infrastructure: availability; cost; lead-time.

Personnel: Labour availability; skills shortages.

Capital equipment: extended lead-times.

Capital costs: have risen dramatically.

Financing and decision-making: What is an appropriate long-term price?

ME320_3120_METALS Page 9 09/04/23

 Challenges to Supply Growth (2)

Green-field projects take at least 7 years to bring on line!

Discovery

Drilling

Evaluation

Feasibility Study

Approval

Funding

Construction

0 1 2 3 4 5 6 7 8
Years
Source: Company data, GSJBW Research

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 Challenges to Supply Growth (3):
Extended lead-times for equipment
a constraint to supply-side growth

Normal Mid-2007
Grinding mills 20 44
Draglines 18 36
Locomotives 12 26
Generators 12 24
Wagons 12 24
Reclaimers 18 24
Haul Trucks <6 24
Crushers 16 24
Source: Company Data
ME320_3120_METALS Page 11 09/04/23
 Iron Ore

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 Iron Ore: Seaborne trade - it’s all about China!

Source: TEX Report, GSJBW research estimates.

Seaborne Trade in Iron Ore
(million tonnes)
1000

900

800

700

600

500
China

400

300 RoW

200

100

0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
(f) (f) (f)

ME320_3120_METALS Page 13 09/04/23

 Iron Ore: Chinese Imports.

Chinese Imports of Iron Ore

million tonnes Source: TEX Report, Reuters, GSJBW Research estimates.
40

35

30

25

20

15

10

2007: GSJBW
5 F'cast: 380mt

1999: 55mt 2000: 70mt 2001: 93mt 2002: 112mt 2003: 148mt 2004: 208mt 2005: 275mt 2006: 326mt
-
Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07

ME320_3120_METALS Page 14 09/04/23

 Iron Ore: where are the Chinese imports coming from?

Source: TEX Report, China Customs

Chinese Imports of Iron Ore: by Source
% share by volume (tonnes) Other
100%
6% 5% 4% 5% 7%
9% 11% 11% 11% 11%
90% 10% 9% 6%
11%
13% 5% 4% 4% 3%
11%

80%
S.Africa
16% 18% 22%
20% 23% 23%
13% 16% 25%
24%
70%

60% India
17% 21%
21% 27%
27% 26% 20%
50% 23% 24%
22%

40% Brazil

30%
49% 47%
44% 41%
20% 38% 39% 41% 39%
38% 38% Australia

10%

0%
1998 1999 2000 2001 2002 2003 2004 2005 2006 Jan-Jul
07

ME320_3120_METALS Page 15 09/04/23

 Iron Ore: Beware the Chinese supply response!
Domestic mine production rises to fill gap created by shortage of imports but
Av. Fe grade is declining.
Source: China Customs/Government Data, GSJBW Research estimates
Chinese Consumption of Iron Ore
(million tonnes) Import
70 Ratio 70%

60 60%

50 50%
Domestic Ore*

40 40%
Imported Ore

30 30% Import Ratio (RHS)

*converted to
20 20% "Western equivalent".

10 10%

0 0%

Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul-
02 02 03 03 04 04 05 05 06 06 07 07

ME320_3120_METALS Page 16 09/04/23

 Iron ore: Capesize freight rates – remain high and volatile.

Source: Clarksons
Capesize Freight Rates for Iron Ore
US$/tonne
80

70 Tubarao (Brazil)
to Baoshan

60

50 Freight
Differential =
$40/t
(Sep 2007)
40

30

20
Dampier (WA) to
Baoshan
10

0
Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul-
02 02 03 03 04 04 05 05 06 06 07 07

ME320_3120_METALS Page 17 09/04/23

 Iron ore: Spot prices at record levels
Iron Ore: Chinese Spot Price (63.5% Fe)

US$/t, CIF China

150
140
130
120
110
100
90
80
70
60
50
Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07

Source: GSJBW Research Estimates, CRU International

ME320_3120_METALS Page 18 09/04/23

 Iron Ore Price Cycle

Iron Ore Contract Price (USc/dmtu) Iron Ore: Contract Price (% Ch. y/y)
140 75
Lump Premium
Hamersley High Grade Fines 65
120
GSJBW long term pric e for fines (52c /dmtu)
55
100 GSJBW F'c asts
45
from 2008

80 35

25
60
15
40
5

20 GSJBW F'c asts -5

from 2008
-15
0 1981 1986 1991 1996 2001 2006 2011(f)
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008(f)2010(f)
Source: GSJBW Research Estimates, Company Data Source: GSJBW Research Estimates, CRU International

ME320_3120_METALS Page 19 09/04/23

 Alumina & Aluminium

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Aluminium: Short-term Caution; Medium Term Optimism

Aluminium: Monthly Average Prices from 1950, (Real and Nominal)

USc /lb
250

Nominal Price Series -1 Standard Deviation

+1 Standard Deviation Mean
200 -2 Standard Deviation +2 Standard Deviation
Real price series

150

100

50

0
Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan-
50 53 56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07

Source: Global Financial Data.com; IRESS, GSJBW Research

ME320_3120_METALS Page 21 09/04/23

 Aluminium: China’s Aluminium Industry Policy

China: Aluminium Production Forecast and Smelter Utilisation Rates GSJBW Investment Research

'000 tonnes Percent

18000 100.0%

16000 95.0%

14000
90.0%

12000
85.0%
10000
80.0%
8000
75.0%
6000

70.0%
4000 China's Aluminium Production (LHS)
China's Smelter Utilisation (RHS)
2000 65.0%

0 60.0%
2003 2004 2005 2006 2007f 2008f 2009f 2010f 2011f
Source: CRU International; China Metals; GSJBW Research estimates

ME320_3120_METALS Page 22 09/04/23

 Aluminium: Bauxite imports - mainly from Indonesia

China's Imports of Alumina and Bauxite, Monthly

Bauxite Imports; 12mth moving total ('000t; LHS) Alumina Imports; 12mth moving total ('000t; RHS)
20000 7500

18000

16000 7000

14000

12000 6500

10000

8000 6000

6000

4000 5500

2000

0 5000
Jan-04 Jan-05 Jan-06 Jan-07
Source: China Customs; Reuters

ME320_3120_METALS Page 23 09/04/23

Aluminium: Industry Cost Curve, 2006 (US$/t; Business Operating Cost)
GSJBW Investment Research
US$/tonne
2500

Alcan Smelters
Rio Tinto Smelters
2000

1500

1000
Chinese smelters dominate the top
500
end of the cost curve

0
0 5 10 15 20 25 30 35
Cumulative Production (000 t)
Source: CRU International

Aluminium: Industry Cost Curve, 2006 (US$/t; Business Operating Cost)

US$/tonne
GSJBW Investment Research
2500

Chinese Smelters
2000

1500

1000

500

0
0 5 10 15 20 25 30 35
Cumulative Production (000 t)
Source: CRU International

ME320_3120_METALS Page 24 09/04/23

 Aluminium: longer term, we see China as a net importer

Primary Aluminum: China's Net Trade, through 2011

GSJBW Investment Research
'000 tonnes
3000

2500
2183
2000

1500 1251

1000
705
500 327 281
135 133
0

-500 -206 -312

-369
-546
-708 -651
-1000
-1013
-1500
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007f 2008f 2009f 2010f 2011f
Source: C RU International; C hina Metals; GSJBW Research estimates
Note: We expect low value-add semis to constitute a high proportion of 2007 exports.

ME320_3120_METALS Page 25 09/04/23

 GSJBW Aluminium Price Outlook to 2011

Aluminium: Stocks and Prices, through 2011

USc/lb 116 118 Stocks (days)

120 150
112
110 Forecast range (LHS) 130
Stoc k Ratio (RHS) 95 102
98
100 110
Nominal Price (LHS)

86
90 90

78
80 70
73
70 65
66
70 61 50
62 62
49
47 49
42
60 56 62 62 30
54 60 46 46 32
53 44 41
50 10
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007f 2008f 2009f 2010f 2011f

Source: CRU International; GSJBW Research estimates

ME320_3120_METALS Page 26 09/04/23

 Copper

ME320_3120_METALS Page 27 09/04/23

 Copper: historical price series

Copper: Monthly Average Prices from 1950, (Real and Nominal)

USc /lb
700.00

Nominal Price Series -1 Standard Deviation

600.00 +1 Standard Deviation Mean
-2 Standard Deviation +2 Standard Deviation
Real Series

500.00

400.00

300.00

200.00

100.00

0.00
Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan-
50 53 56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07
-100.00
Source: Global Financial Data.com; IRESS, GSJBW Research

ME320_3120_METALS Page 28 09/04/23

 Copper: the need for new supply

Global Reserves of Copper, and Average Mined Head Grades

Global Reserves (years of consumption) Average Mined Head Grade (% Cu)
40.0 1.5

35.0 1.45

30.0 1.4

25.0 1.35

20.0 1.3

15.0 1.25

10.0 1.2

Years of Consumption in Identified Global Reserves (LHS)

5.0 1.15
Average Head Grade (% Cu; RHS)

0.0 1.1
1990 1992 1994 1996 1998 2000 2002 2004 2006

Source: USBM; US Geological Survey; CRU International; Xstrata (CESCO Presentation)

ME320_3120_METALS Page 29 09/04/23

 Copper: Assessing the impact of a slowdown in the US
housing market
US Housing Starts, Monthly

Single Unit Dwellings ('000) Multi-Unit Dwellings ('000)

250.0

200.0

150.0

100.0

50.0

0.0
Jan-03 Jan-04 Jan-05 Jan-06 Jan-07

Source: US Census Bureau

ME320_3120_METALS Page 30 09/04/23

 Copper: Costs and Margins

Copper: Cost and Price Evolution Copper: Median Cash Margin

Median Cash Cost (USc/lb) Median Cash Margin (USc/lb; LHS) Median % margin (RHS)
9th Decile (USc/lb)
350.0 300.0 120.0
Average LME Cash Price (USc/lb)
300.0 250.0 100.0

250.0
200.0 80.0
200.0
150.0 60.0
150.0
100.0 40.0
100.0
50.0 20.0
50.0

0.0 0.0 0.0

1990 1992 1994 1996 1998 2000 2002 2004 2006 1990 1992 1994 1996 1998 2000 2002 2004 2006
Source: GSJBW Research Estimates, CRU International; www.minecost.com Source: GSJBW Research Estimates, CRU International; www.minecost.com
Note: Normal costing. Note: Normal costing.

ME320_3120_METALS Page 31 09/04/23

 We Expect Six Years with the Average Copper Price
above US$3.00/lb!
Copper: Inventories, GSJBW Price Forecast, and the LME Forward Curve
Stock:Consumption Ratio (RHS) GSJBW price forecast (LHS) LME Forward Curve (as of mid-Sep, 2007)

USc/lb Weeks of Consumption

420.0 30.0

380.0 348 355 27.0

332 333 340
340.0 24.0
305
330
300.0 21.0
304
260.0 279 18.0
255
220.0 15.0
167
180.0 12.0
130 Note that we do not envisage a major re-build in the
140.0 stocks-to-consumption ratio during this period. 9.0
103 75 82 72 71 81
100.0 71 6.0

60.0 4.7 4.3 3.0

6.1 6.4 6.7 2.8 3.0 3.4
7.8 8.1 2.5 2.4 2.4 2.5 2.2
20.0 0.0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007f 2008f 2009f 2010f 2011f

Source: CRU International; LME; GSJBW Research estimates

ME320_3120_METALS Page 32 09/04/23

 Nickel

ME320_3120_METALS Page 33 09/04/23

 Historical Nickel Price Series

Nickel: Monthly Average Prices from 1950; (Real and Nominal)

US$/lb
25.00

Nominal Price Series

-1 Standard Deviation
+1 Standard Deviation
20.00 Mean
-2 Standard Deviation
+2 Standard Deviation
Real price series
15.00

10.00

5.00

0.00
Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan-
50 53 56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07

Source: Global Financial Data.com, IRESS, GSJBW Research

ME320_3120_METALS Page 34 09/04/23

 Nickel: China is Driving Short-term Supply Growth

China's Imports of Nickel Ore and Estimated Metal Content

Ore Imports ('000t) Est. Recoverable Ni ('000t)

2400 24.0

Imports ex Other ('000t; LHS)

2000 20.0

Imports ex New Caledonia ('000t; LHS)

1600 16.0
Imports ex Indonesia ('000t; LHS)

1200 Imports ex Philippines ('000t; LHS) 12.0

Estimated Recoverable Nickel ('000t; RHS)

800 8.0

400 4.0

0 0.0
Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07
Source: GSJBW Research Estimates, China Customs

ME320_3120_METALS Page 35 09/04/23

 Nickel: Chinese ferronickel production outlook

Chinese Ferronickel Production, and Nickel Price: GSJBW Base Case Assumptions
'000 tonnes US$/lb
100 20.00

90 China's Ni Production in Low 18.00

Grade Ferronickel ('000t; LHS)
80 16.00
Nickel Price (US$/lb; RHS)
70 14.00

60 12.00

50 10.00

40 8.00

30 6.00

20 4.00

10 2.00

0 0.00
2004 2005 2006 2007f 2008f 2009f 2010f 2011f
Source: China Customs; Antaike; GSJBW Research estimates

ME320_3120_METALS Page 36 09/04/23

 Nickel: Costs and Margins

Nickel: Cost and Price Evolution Nickel: Median Cash Margin

Median Cash Cost (USc/lb)

Median Cash Margin (USc/lb) Median % margin (RHS)
Average LME Cash Price (USc/lb)
1200.0 800.0 80.0
9th Decile (USc/lb)
700.0 70.0
1000.0
600.0 60.0
800.0
500.0 50.0

600.0 400.0 40.0

300.0 30.0
400.0
200.0 20.0
200.0
100.0 10.0

0.0 0.0 0.0

1990 1992 1994 1996 1998 2000 2002 2004 2006 1990 1992 1994 1996 1998 2000 2002 2004 2006
Source: GSJBW Research Estimates, CRU International; www.minecost.com Source: GSJBW Research Estimates, CRU International; www.minecost.com
Note: Pro-rata costing Note: Pro-rata costing

ME320_3120_METALS Page 37 09/04/23

 Nickel: we expect prices to continue falling

Nickel: Inventories, GSJBW Price Forecast, and the Forward Curve, through 2011
Weeks Inventory (RHS) GSJBW Price Forecast (LHS) LME Forward Curve, basis mid-Sept 2007 (LHS)

USc/lb Weeks Inventory

2000 40
1800 1700 36
1600 32

1400 28
1100
1200 24
1250
1000 815 20
669
800 628 615 16
600 500 12
392 437
314 273 307
400 270 8
210 11.5 11.6
11.0
200 10.4 11.0 8.9 11.7 4
12.7 13.6 9.4 11.8 8.6 7.9
10.2 8.4
0 0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007f 2008f 2009f 2010f 2011f

Source: CRU International; GSJBW Research estimates

ME320_3120_METALS Page 38 09/04/23

 Summary/Conclusions
• A powerful combination of BRIC’s related demand growth and supply side constraints
means that commodity prices will remain high relative to historical levels.
The secular decline in real commodity prices has ended.

• We prefer commodities for which we see a weak or delayed supply response.

• We prefer commodities that China cannot provide for itself.
• We prefer upstream (mining) to downstream (smelting/refining/fabricating).
• China can build smelters, but cannot create ore bodies!

• Resource company share prices have not displayed the same frothiness as the
underlying commodities and many still offer good long-run investment potential.

ME320_3120_METALS Page 39 09/04/23

 Muito obrigado e boa sorte!

Paul Gray

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