Commodities Comment. An update on steel capital stock GLOBAL. Feature article. Latest news

Transcription

1 GLOBAL LME cash price % change US$/tonne day on day Aluminium 1, Copper 5, Lead 2, Nickel 11, Tin 19, Zinc 2, Cobalt 43, Molybdenum 14, Other prices % change day on day Gold (US$/oz) 1, Silver (US$/oz) Platinum (US$/oz) 1, Palladium (US$/oz) Oil WTI USD:EUR exchange rate AUD:USD exchange rate LME/COMEX stocks Tonnes Change Aluminium 2,208,050-3,950 LME copper 236, Comex copper 103,121 1,625 Lead 189, Nickel 380, Tin 5, Zinc 393,925-1,800 Source: LME, Comex, Nymex, SHFE, Metal Bulletin, Reuters, LBMA, Macquarie Research, February February 2017 An update on steel capital stock Feature article The longer-term questions around commodities demand, particularly around where China is in its development cycle and how much potential India has, remain as pertinent as ever. There are many ways of judging such metrics, but on a longer-term commodities perspective we feel steel capital stock the cumulative steel installed in the economy is a useful sanity check. This piece follows on from a report we wrote on this subject in February last year. Since then, China has surpassed 50% of the installed steel per capita of the USA, although we are past the peak pace of catch-up. At current rates, China will become developed for steel (ie, catching up on US/Japan at less than 1% per annum) by Meanwhile, it will take until 2030 for India to have reached the same level of capital stock per capita as China had in Despite passing peak consumption rates, China is still set to be the largest cumulative steel consumer over the coming three decades. Latest news Base metals generally sold on Thursday with the exception of nickel, which moved above $11,000/t for the first time since mid-december on persistent hopes of mines closing in the Philippines. Copper fell back to oscillate around the $6,000/t line towards the end of the London day, on a lack of further supply excitement, it seems, and some weakness at the front of the curve, while zinc and lead have both also seen their near-dated spreads collapse this week around third Wednesday, which has softened the flat price. The zinc cash-3 flared out sharply to $16/t back on Tuesday, sparking ~15kt of warehouse load-ins and reverse cancellations on Tuesday and Wednesday, which promptly crushed the spread to a contango. Of the big copper mine disruption stories, at Escondida accusations of unhelpful behaviour are flying between the two sides (operator and striking workers), which is about what we would expect at this media-intensive stage of the dispute, while at Grasberg the labour force is beginning to weigh in on the operator/government export permit impasse. A union spokesperson has said that thousands of workers plan to demonstrate in West Papua tomorrow to demand that the government make a wise decision, according to Reuters, as the individual confirmed that operations are fully shuttered at the site. First Quantum Minerals has confirmed that access to its Ravensthorpe nickel mine in Australia has resumed after flash floods over the weekend, and no force majeure declaration was eventually required. The mine and pressure acid leaching facilities produces around 25kt of contained nickel per year. Peru s mining ministry (Minem) released full-year mine and metal production data for 2016 on Wednesday, which showed (as expected) copper mine output reaching a record high, at 2.35Mt of contained copper. The 38% YoY boost has been largely thanks to the greenfield entrant, Las Bambas, and the major brownfield expansion at Cerro Verde, besides continued ramp-up at others, including Constancia and Antapaccay. Meanwhile, we note that refined ER output also recovered after lower numbers in October/November, implying that maintenance at SCC s Ilo smelter/refinery has been successfully completed. Mined zinc output was down 6.0% as Antamina s shift to lower zinc/higher copper grades last year meant that the big polymetallic mine saw a 12.3% slide in output of this metal. Please refer to page 5 for important disclosures and analyst certification, or on our website

2 Macquarie Wealth Management An update on steel capital stock The longer-term questions around commodities demand, particularly around where China is in its development cycle and how much potential India has, remain as pertinent as ever. There are many ways of judging such metrics, but on a longer-term commodities perspective we feel steel capital stock the cumulative steel installed in the economy is a useful sanity check. Capital stock calculations always involve some estimates, particularly around the recovery rate for obsolete scrap (ie, scrap coming out the economy), as consumption rates and trade flows are relatively easy to calculate. Of course, not all scrap is recovered to be re-used, with much lost to landfill. This steel would still be counted as capital stock but, of course, is adding little value in the real economy. However, it is still a reasonable barometer of a country s stage of development. There is only one periodical data release in this area. Every year Japan s Ferrous Raw Materials Association publishes their estimate of installed steel in the domestic economy on an annual basis. This showed an increase of 8.15mt over 2016 (compared with 9.23mt in 2015), to bring the total to 1.357bn tonnes, or 10.7 tonnes per capita. The main contributor to the gain was lower steel production, which dropped 5.2mt YoY in 2016, although scrap consumption also dropped 2.76mt YoY. With data going back over time, the association notes that Japan s rate of steel accumulation was 11.6% per annum in the 1960s, 6.8%pa in the s (when Japanese per capita consumption peaked), 3.8%pa in the 1980s, 2.5%pa in the s and 0.8%pa in the 2000s. The past five years have seen just 0.5%pa CAGR, essentially pointing to capital stock saturation. This is a similar pattern to that of the US, where capital stock per capita hit saturation around the mid-s roughly the same time the US last spent money on infrastructure in a major way. While consumption per capita has been trending lower from this point, the capital stock has stayed relatively constant. On our calculations, the capital stock is around 13.6t/person. This is a reasonable premium to Japan, perhaps reflecting poorer scrap recovery over time more than anything else. In terms of global steel, the trend on Chinese consumption is still the most important question, given China is ~45% of global steel demand. Until 2000, China s capital stock of steel per capita barely registered. However, since then the rapid growth in demand has seen a build of stock at a rapid level. Our calculations show China has now accumulated 6.9t/person of steel in the economy. This is double that seen in 2009, and capital stock has risen at more than a 9% CAGR over the past decade. China is now roughly where Japan was in On our numbers, China has now passed peak rates of steel consumption. However, the rate of consumption remains elevated relative to history. This, when coupled with the fact that scrap generation in China is still in its infancy (owing to the youthfulness of the steel economy), means capital stock is still on the rise, a trend that will continue in the coming years. This year China will surpass 50% of the US in terms of installed steel and even with lower consumption will continue to catch up over the coming years. We are now past the peak pace of Chinese catch-up (which occurred in 2003, the same year Chinese steel consumption peaked); however, even this year China will add ~3% of US steel capital stock to its economy. We expect this catch-up to continue at more than 1% per annum through 2026, by which point China may well be generating more than 400mt of scrap per annum (almost six times that of the US). This is the point at which we would consider China to be a developed steel economy. Of course, China is not the only story in town. India, given its large and expanding population, remains a country of great potential. Indian capital stock of steel exceeded 1t/person for the first time in 2016 but has only grown at a 4.6% CAGR over the past decade. India is now where China was in 1993 and Japan was in For both of these precedents, capital stock started to accelerate once they hit 2t/person, a level we expect from India around Ahead of India in this curve is the ASEAN region, where capital stock is now ~1.9t/person. This region is, thus, at the stage at which capital stock could accelerate quickly. We see ASEAN capital stock per capita rising more than 50% over the next decade, with the key question for this perhaps being whether these countries make the steel themselves or rely on China exporting overcapacity as they have done over recent years. 16 February

3 f 2022f 2026f 2034f f 2025f 2035f 2040f 2045f 2050f f 2022f 2026f 2034f 2038f 2042f 2046f 2050f Macquarie Wealth Management Fig 1 Steel capital stock data US and Japan now mature economies, China getting there fast 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 - Steel capital stock, kg/capita USA Japan China ASEAN India Fig 2 On a per capita basis, China now has half the installed steel of the US 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% China's per capita steel capital stock as % of USA Source: NBS, worldsteel, Macquarie Research, February 2017 Source: NBS, worldsteel, Macquarie Research, February 2017 While a per capita basis analysis gives a more comparable indication of development, in commodity markets absolute volumes tend to matter more for the supply chain. From , our base case sees China consuming 18.6 billion tonnes of steel, India 9.7bn tonnes, ASEAN 7.6bn tonnes, the US 3.4bn tonnes and Japan 2bn tonnes. To put this in context, on our estimates China has consumed 10.2bn tonnes since 1900, India 1.8bn tonnes, ASEAN 1.6bn tonnes, the US 8.9bn tonnes and Japan 4.2bn tonnes. China thus remains the most important country for steel and raw materials. We have also looked at an alternate scenario in which all these countries normalise at 12t/person capital stock (roughly the average of US and Japan) by Under this scenario, India would become the largest steel driver, consuming ~20bn tonnes over the period. However, this seems an unlikely scenario for a number of reasons. Firstly, steel end product use is becoming more efficient over time (hence, why Japan has matured at a higher level than the US, so 12/t person seems a stretch. Secondly, India is not set up to be an industrial powerhouse, which both the US and Japan were in their time. And finally, India does not have the same expanse of land to cover with steel-bearing infrastructure that the US and China does. India is clearly important for steel over the coming decades but is not the core driver yet. Fig 3 We are past the peak China catch-up, but China is still catching the US at ~3% per annum Fig 4 On our base case, China remains the biggest absolute delta in steel consumption through % 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% China's gain in capital stock relative to US values 25,000 20,000 15,000 10,000 5,000 - Total steel consumption , million tonnes US China Japan India ASEAN Base Case To hit 12t/capita Source: NBS, worldsteel, Macquarie Research, February 2017 Source: NBS, worldsteel, Macquarie Research, February February

4 Macquarie Wealth Management Thursday 16 February 2017 Prices Closing price * Closing price * 16-Feb Feb Feb Feb-17 % ch. day 2017 YTD Ave 2016 US$/tonne US /lb US$/tonne US /lb on day US$/tonne US$/tonne LME Cash Aluminium 1, , ,530 1,605 Aluminium Alloy 1, , ,351 1,555 NAASAC 1, , ,517 1,704 Copper 5, , ,914 4,863 Lead 2, , ,930 1,872 Nickel 11, , ,597 9,609 Tin 19, , ,170 18,006 Zinc 2, , ,339 2,095 Cobalt 43,250 1,962 43,000 1, ,144 25,655 Molybdenum 14, , ,904 14,453 LME 3 Month Aluminium 1, , ,531 1,610 Aluminium Alloy 1, , ,364 1,577 NAASAC 1, , ,533 1,725 Copper 6, , ,929 4,867 Lead 2, , ,930 1,878 Nickel 11, , ,642 9,657 Tin 19, , ,161 17,912 Zinc 2, , ,347 2,102 Cobalt 43,250 1,962 43,000 1, ,144 25,758 Molybdenum 15, , ,904 14,472 * LME 2nd ring price hrs London time. Year-to-date averages calculated from official fixes. Gold - LBMA Gold Price (US$/oz) Silver - LBMA Silver Price (US$/oz) Platinum - London 3pm price (US$/oz) Palladium - London 3pm price (US$/oz) Oil WTI - NYMEX latest (US$/bbl) EUR : USD exchange rate - latest AUD : USD exchange rate - latest 1,241 1, ,020 1, , Exchange Stocks Change since last report Cancelled End-16 Ch. since (tonnes) 16-Feb Feb-17 Volume Percent warrants stocks end-16 LME Aluminium 2,208,050 2,212,000-3, % 608,325 2,202,175 5,875 Shanghai Aluminium 178, , % 0 100,722 78,182 Total Aluminium 2,386,954 2,390,904-3, % 608,325 2,302,897 84,057 LME Copper 236, , % 106, ,825-75,100 Comex Copper 103, ,496 1, % - 80,112 23,009 Shanghai Copper 277, , % - 146, ,061 Total Copper 617, ,980 2, % 106, ,535 78,970 LME Zinc 393, ,725-1, % 94, ,850-33,925 Shanghai Zinc 191, , % - 152,824 38,202 Total Zinc 584, ,751-1, % 94, ,674 4,277 LME Lead 189, , % 70, ,900-5,775 Shanghai Lead 49,473 49, % - 28,726 20,747 Total Lead 238, , % 70, ,626 14,972 Aluminium Alloy 12,860 12, % 20 12, NASAAC 114, , % ,380 17,120 Nickel 380, , % 104, ,066 8,034 Tin 5,945 5, % 880 3,750 2,195 Source: CME, LBMA, LME, Reuters, SHFE, Macquarie Research 16 February

5 This publication was disseminated on 16 February 2017 at 18:58 UTC. Macquarie Wealth Management Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 December 2016 AU/NZ Asia RSA USA CA EUR Outperform 57.53% 50.72% 45.57% 42.28% 60.58% 52.79% (for global coverage by Macquarie, 8.71% of stocks followed are investment banking clients) Neutral 33.90% 33.97% 43.04% 50.11% 37.23% 35.62% (for global coverage by Macquarie, 8.05% of stocks followed are investment banking clients) Underperform 8.56% 15.30% 11.39% 7.61% 2.19% 11.59% (for global coverage by Macquarie, 4.63% of stocks followed are investment banking clients) Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN , AFSL , a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Wealth Management, a division of Macquarie Equities Limited ABN AFSL ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN , AFSL No ) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act Apart from Macquarie Bank Limited ABN (MBL), any MGL subsidiary noted in this research,, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research contains general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return and delete the document. We do not guarantee the integrity of any s or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at Macquarie Group 16 February