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1 The Goldman Sachs Group, Inc. Goldman Sachs Research 中国金属需求之 硬着陆 China s metals hard landing 转型 - 需求 - 展望 Transition-Demand-Outlook November 2015 Yubin Fu Goldman Sachs International+ 44(20) yubin.fu@gs.com The Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to Analysts employed by non-us affiliates are not registered/qualified as research analysts with FINRA in the U.S.

2 The bearish 3Ds of macro and China s metals hard landing Economy transition and metal demand re-balancing Copper demand outlook Goldman Sachs Global Investment Research 2

3 The bearish 3Ds of macro --- Deleveraging, Divergence, Deflation

4 Divergence after nearly a decade since the last interest rate hike in the US Real GDP (index, 2008Q4 = 100) US Euro zone Source: Haver Analytics, Goldman Sachs Global Investment Research See: FX Views: While you were Greeking June Goldman Sachs Global Investment Research 4

5 E 2016E 2017E 2018E 2019E 2020E Mining cost deflation owing to Divergence (strong dollar) and Deflation (lower energy prices, mining services costs etc.) are key to our bear thesis $/t Falling cost support (dollar strength and mining cost deflation) and a surplus market is forecast to result in a major surprise relative to consensus forecasts Copper price Copper marginal cost (90%ile of cost curve) Copper marginal cost (95%ile of cost curve) BBG consensus Source: Goldman Sachs Global Investment Research, Wood Mackenzie, Bloomberg, LME. Goldman Sachs Global Investment Research 5

6 GS China Metals Consumption Index (GS China MCI) We use data on more than 120 of the 310 available industrial production series, seasonally adjust and equally weight the components. As the components of MCI are related to metals and mining commodity consumption, our measure differs from industrial production (IP) in that it does not include value add weights reflecting technological improvements in the efficiency of production or the value-per-unit of output. Source: Goldman Sachs Global Investment Research, Wood Mackenzie. Goldman Sachs Global Investment Research 6

7 China metals consumption index (GS MCI) points to demand hard landing in 2015 % change yoy GS China Metals Consumption Index China Industrial Production Growth Source: Goldman Sachs Global Investment Research, CEIC. Goldman Sachs Global Investment Research 7

8 EM ex-china copper consumption vs. EM ex-china industrial output % change yoy EM ex China IP Copper demand Source: Goldman Sachs Global Investment Research, Wood Mackenzie. Goldman Sachs Global Investment Research 8

9 Economy transition and China s metals demand re-balancing

10 Copper and steel demand has slowed considerably, while gasoline demand has been rising Historical China commodity consumption growth (%yoy) 35% 30% 25% Motor Gasoline Copper Steel 20% 15% 10% 5% 0% -5% -10% Source: CEIC, Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research 10

11 CapEx commodities OpEx commodities China s metal demand re-balancing: Strong demand for Opex commodities ( 消费型商品 ) Slowing demand for Capex commodities ( 投资型商品 ) China consumption growth 2015 (%yoy, 2015 ytd) Gasoline Kerosene Zinc*** Aluminium Soybean* Coffee* Nickel** Oil (total) Naptha Diesel Sugar* Corn* Copper Cotton* Wheat* Met Coal Iron Ore Steel Thermal Coal Cement Source: CEIC, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 11

12 What s happening in China?

13 China s debt burden and the impossible trinity ( 经济三元悖论 )limit stimulating the old economy % change yoy, 3mma Nominal GDP Debt (Total Social Financing) New Chinese government Source: Goldman Sachs Investment Research, CEIC. Goldman Sachs Global Investment Research 13

14 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 GS China Metals Consumption Index pointed to a sequential decline in October, and year-on-year growth remains negative % change yoy (lhs), % change mom, 3mma, sa (rhs) 40% 8% 7% 30% 6% 5% 20% 4% 3% 10% 2% 1% 0% 0% -1% -10% -2% -3% -20% -4% GS China MCI yoy (lhs) GS China MCI mom, 3mma, sa (rhs) Source: Goldman Sachs Global Investment Research, CEIC. Goldman Sachs Global Investment Research 14

15 Jan 13 Feb 13 Mar 13 Apr 13 May 13 Jun 13 Jul 13 Aug 13 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14 Jan 15 Feb 15 Mar 15 Apr 15 May 15 Jun 15 Jul 15 Aug 15 Sep 15 Oct 15 The recent slight pick-up in demand is unlikely to have caught up with supply, explaining sustained metals price weakness GS China MCI level, seasonally adjusted, stylized supply growth Illustration of metals demand - GS China MCI level Illustration of trend supply A surplus created by demand weakness requires either a major pick up in demand and / or major supply cuts to rebalance the market Source: CEIC, Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research 15

16 Copper demand outlook

17 E 2016E 2017E 2018E 2019E 2020E China s renewable power generation and new energy vehicles (NEVs) will grow strongly in ,000 China s installed power generation capacity GW 100,000 China NEVs sales 000 units 1,800 1,600 1,400 Coal 90,000 80,000 70,000 New energy CV PHEV car 1,200 New Energy 60,000 EV car 1,000 50, , , , , Source: Goldman Sachs Global Investment Research, CEIC. Goldman Sachs Global Investment Research 17

18 Maximum potential copper consumption growth contribution from new energy is 0.63% per annum in , 1/5 of our 3% China Cu demand growth % grow th contribution Tonnage growth in t New energy vehicles 0.13% 80 New energy vehicle charging equipm ent 0.21% 120 Pow er generation shift to renew ables 0.29% 180 Total cu consumption grow th 0.63% 380 Source: Goldman Sachs Global Investment Research, CEIC. Goldman Sachs Global Investment Research 18

19 New starts are still falling and point to weakness in late-cycle copper-intensive construction completions over the coming years 12mma new starts (lhs) lead 22mths, 12mma completions (rhs) NS 12mma (lead 22 months, lhs) Completions 12mma (rhs) Source: CEIC, Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research 19

20 China s grid investment is shifting towards rural which is copper light % E 2016E 2017E 2018E 2019E 2020E Urban Rural Source: State Grid, NEA, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 20

21 Copper consumption growth from grid distribution % 12% Scenario 1: same average annual growth 10% Scenario 2: ajusted annual growth based on estimate 8% 6% 4% 2% 0% 2015E 2016E 2017E 2018E 2019E 2020E Source: State Grid, NEA, Goldman Sachs Global Investment Research Goldman Sachs Global Investment Research 21

22 Copper balances, price outlook

23 Copper s bear cycle still has years to run Global refined copper supply and demand balance, 000t E 2016E 2017E 2018E 2019E 2020E Global m ine supply % change Including disruption allow. (%) % 6% 9% 11% 14% 18% Including disruption allow. (level) Global ref ined supply % change Global refined consumption % change Of w hich China % change Of w hich World ex-china % change Balance LM E Price ($/t) Source: Goldman Sachs Global Investment Research, Wood Mackenzie, ICSG, Goldman Sachs Global Investment Research 23

24 Disclosure Appendix October 23, 2015

25 Disclosure Appendix We, Max Layton and Yubin Fu, hereby certify that all of the views expressed in this report accurately reflect our personal views, which have not been influenced by considerations of the firm's business or client relationships. Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division. Disclosures Global product; distributing entities Sachs offices around the world produce equity research on industries and companies, and research on macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs Australia Pty Ltd (ABN ); in Brazil by Goldman Sachs do Brasil Corretora de Títulos e Valores Mobiliários S.A.; in Canada by either Goldman Sachs Canada Inc. or Goldman, Sachs & Co.; in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs (India) Securities Private Ltd.; in Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs New Zealand Limited; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: W); and in the United States of America by Goldman, Sachs & Co. Goldman Sachs International has approved this research in connection with its distribution in the United Kingdom and European Union. European Union: Goldman Sachs International authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, has approved this research in connection with its distribution in the European Union and United Kingdom; Goldman Sachs AG and Goldman Sachs International Zweigniederlassung Frankfurt, regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht, may also distribute research in Germany. General disclosures This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's judgment. Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have investment banking and other business relationships with a substantial percentage of the companies covered by our Global Investment Research Division. Goldman, Sachs & Co., the United States broker dealer, is a member of SIPC ( Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and principal trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, principal trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research. The analysts named in this report may have from time to time discussed with our clients, including Goldman Sachs salespersons and traders, or may discuss in this report, trading strategies that reference catalysts or events that may have a near-term impact on the market price of the equity securities discussed in this report, which impact may be directionally counter to the analysts published price target expectations for such stocks. Any such trading strategies are distinct from and do not affect the analysts fundamental equity rating for such stocks, which rating reflects a stock s return potential relative to its coverage group as described herein. We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, will from time to time have long or short positions in, act as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research. The views attributed to third party presenters at Goldman Sachs arranged conferences, including individuals from other parts of Goldman Sachs, do not necessarily reflect those of Global Investment Research and are not an official view of Goldman Sachs. Any third party referenced herein, including any salespeople, traders and other professionals or members of their household, may have positions in the products mentioned that are inconsistent with the views expressed by analysts named in this report. This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Investors should review current options disclosure documents which are available from Goldman Sachs sales representatives or at Transaction costs may be significant in option strategies calling for multiple purchase and sales of options such as spreads. Supporting documentation will be supplied upon request. All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client websites. Not all research content is redistributed to our clients or available to third-party aggregators, nor is Goldman Sachs responsible for the redistribution of our research by third party aggregators. For research, models or other data available on a particular security, please contact your sales representative or go to Disclosure information is also available at or from Research Compliance, 200 West Street, New York, NY Goldman Sachs. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of The Goldman Sachs Group, Inc Goldman Sachs Global Investment Research 25

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