Global economy on track for solid recovery World real GDP grew by 5 percent in 20 Real GDP growth, percent 8 6 4 2 0-2 -4 Emerging and developing economies Advanced economies World -6 1980 1985 1990 1995 2000 2005 20 2015 Source: World Economic Outlook, International Monetary Fund, April 2011 update.
Inflation risk ahead? Percent change of consumer prices (year-to-year) Percent 9 8 7 6 5 4 3 2 1 0 2002 2003 2004 2005 2006 2007 2008 2009 20 2011 2012 2013 2014 2015 2016 Source: World Economic Outlook, International Monetary Fund, April 20 update. Emerging and developing economies Advanced economies World
Inflation pressure rising in emerging countries % change in consumer price index, 3-month rolling average 18 Russia 16 India 14 12 8 Brazil 6 4 China 2 0-2 2007 2008 2009 20 2011 Source: OECD, Milken Institute.
End of the era of cheap capital? Consensus forecasts: Central bank rates will increase in the next 12 months Percent Percent 2.5 Eurozone 14.0 Brazil 2.0 12.0 1.5 U.K..0 Russia 1.0 8.0 6.0 China 0.5 U.S. 4.0 India 0.0 Q1 Q2 Q3 Q4 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 2.0 Q1 Q2 Q3 Q4 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Source: Bloomberg.
Investment returns for selected asset classes As of March 2011, a $0 investment made in December 2000 gives you: 500 $446 400 300 200 $237 $191 $169 $133 $122 0 0 Emerging markets Sources: Bloomberg, Milken Institute. U.S. high-yield bonds U.S. AAA corporates U.S. Treasuries Commodities S&P 500
Returns on commodities December 2007 December 20 Best-performing commodities Worst-performing commodities Sugar Cotton Silver Coffee Gold Tin Lean hogs Copper Cocoa Corn 70.4 65.0 50.5 42.5 42.0 37.7 119.0 9.0 2.8 176.9-40.9-41.1-3.1-4.8 16.2 16.0 14.7 6.4 4.8 0.7 Soybean yellow Platinum Cattle Steel Aluminum Soy oil Nickel Crude oil Natural gas Wheat Sources: Bloomberg, Milken Institute.
Oil prices in real terms nearly at historic high 1861 to Q1 2011 Average crude oil price in 2009 dollars, US$ per barrel 120 0 80 60 40 20 0 1860 1870 1880 1890 1900 19 1920 1930 1940 1950 1960 1970 1980 1990 2000 20 Sources: BP Amoco, Bloomberg, Bureau of Labor Statistics, Milken Institute. Note: 1861-1944 U.S. average.1945-1983 Arabian Light posted at Ras Tanura.1984 onward Brent dated. 1861-2009 figures calculated by BP. 20 and 2011 figures calculated by MI staff using data from Bloomberg and Bureau of Labor Statistics.
Recent run-up in gold price Gold price, US$ per ounce $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 1900 19 1920 1930 1940 1950 1960 1970 1980 1990 2000 20 Source: World Gold Council.
Real commodities prices Index 1995=0 450 400 350 Oil 300 Gold 250 200 Metals 150 0 50 0 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 Sources: International Monetary Fund.
Outlook for commodity prices Monthly, 2003 2012 Commodity prices, Jan. 2003 = 0 Forecast 500 450 400 Oil 350 Metals 300 250 200 150 Food 0 50 2003 2004 2005 2006 2007 2008 2009 20 2011 2012 Sources: International Monetary Fund, Milken Institute.
Outlook for commodity prices Monthly, 2003 2012 Commodity prices, Jan. 2003 = 0 500 450 400 350 300 Forecast Metals Energy 250 Beverage 200 150 Food 0 Agricultural raw materials 50 2003 2004 2005 2006 2007 2008 2009 20 2011 2012 Sources: International Monetary Fund, Milken Institute.
The effect of economic growth and population growth: Food markets to grow by 9% in ten years Size of food market, US$ billions 3,500 3,000 2,500 Growth 2020 Food markets 20 2,000 1,500 1,000 500 0 Africa China India EU-11 Oceania S. America Indonesia U.S. + Canada Russia Other Sources: Rabobank, based on KEO, Economist Intelligence Unit and FAO.
Commodities prices pushed up by boosted risk appetite Index, 09/30/20=0 125 120 115 Global financial stability map risk appetite indicator (IMF) 1 5 GSCI commodities total return index 0 95 9/30/20 /31/20 11/30/20 12/31/20 1/31/2011 Sources: International Monetary Fund, Milken Institute.
Commodities: low correlation with other asset classes Return correlation with commodities (Q1 1986-Q1 2011) 0.30 0.20 0. 0.00-0. -0.20-0.30-0.40 0.04 U.S. equity 0.11 Global equity 0.19 U.S. high yield -0.32 U.S. government bond Sources: Bloomberg, Milken Institute. Note: Measured quarterly from Q1 1986 to Q1 2011.
Net financial flows into commodities Index swaps US$ billions 50 40 30 20 0 - -20 2000 2002 2004 2006 2008 20 ETFs and medium-term notes US$ billions 45 40 35 30 25 20 15 5 0 2000 2002 2004 2006 2008 20 Source: International Monetary Fund.
Aggregate metal consumption: China s path mirrors the exponential growth in its manufacturing sector Consumption per capita (kilograms) 16 14 12 8 6 4 2 0 China Japan Euro area 0 5 15 20 25 30 35 40 45 Real GDP per capita (US$ thousands) U.S. Source: International Monetary Fund.
Global grain inventories remain low 1965 2011 (est.) Percentage 40 35 Global inventories-to-consumption ratio 30 Average, 1965-20 25 20 15 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009
Kip Smith slides
Back in year 2000, China consumed 2.6 kg/capita of aluminum Primary aluminum demand per capita in 2000 (Kg per capita vs GDP per capita) 35 30 26.1 Canada Bubble indicates size of population 25 20 15 Source: HARBOR intelligence. 5 0 China -5 0 5 3.0 15 20 25 30 35 40 45-5 0.5 GDP per capita ($ thousands; PPP 2007 basis) India 2.6 Agricultural Brazil Russia Urbanizing & Industrializing 4.7 Taiwan 22.5 17.5 South Korea Mature- Service/Tech Germany 19.0 Japan 17.5 USA 22.5
which tripled by 20 along with India (followed by other emerging markets) Primary aluminum demand per capita, 20 (Kg per capita vs GDP per capita) 30 25 25.9 20 15 12.7 China South Korea 23.4 Germany 17.7 Japan 15.7 USA Bubble indicates size of population 5 4.9 Brazil 7.3 Russia Source: HARBOR intelligence. India1.5 Agricultural 20 30 40 50 60 Urbanizing & Industrializing GDP per capita ($ thousands; PPP 2007 basis) Mature- Service/Tech
Higher electricity prices have impacted aluminum prices via costs There is a 90% historical correlation between oil and aluminum costs as higher energy prices * impacts electricity costs in the industry. LME Cash aluminum prices vs. WTI oil prices ($/mton) 2800 2500 ALUMINUM PRICE ($/bbl) 0 Avg energy tariff in aluminum industry vs. WTI oil prices ($/bbl) 120 0 ENERGY TARIFF ($/MWH) 45 40 2200 80 80 35 1900 OIL PRICES 60 60 OIL PRICE 30 1600 40 40 25 1300 20 20 20 00 0 90 92 94 96 98 00 02 04 06 08 11 0 90 92 94 96 98 00 02 04 06 08 11 15 Source: HARBOR intelligence.
Joshua Harris slides
Adding commodities to a portfolio improves risk/return Source: Ibbotson Associates. Efficient frontier created using treasury bills, US bonds, International bonds, TIPS, US Stocks & International Stocks from 1970 2004.
Commodities as % of Market Index Investing in commodities: Public equities Seeking exposure to commodities through public equities provides investors with a liquid investment option, but also has drawbacks with respect to optimizing operations Commodities Represent Significant Percentage of Global Public Markets 60% 50% 40% 30% 20% % Bovespa $1.0 43% TSX $1.4 42% Hang Seng $2.2 22% FTSE $2.6 37% $.7 13% 0% $0 $3 $6 $9 $12 $15 Index Market Cap ($ in trillions) S&P 500 Considerations of Public Equities Dominated by some of the largest companies in the world Volatile exposure Relatively unhedged commodity price risk Focus on higher ROI projects; undermanage smaller, non-core assets Benefit from going concerns, operational enhancements Ability for current income via dividends Liquid investment
Investing in commodities: ETFs Commodity ETFs have underperformed spot commodity prices due to the inefficiencies of owning futures contracts versus the physical commodity Oil WTI/USO Natural Gas NYMEX/NGO 150% NYSE: UNG Nat Gas Spot 0% 50% 0% Apr-07 Dec-07 Aug-08 Apr-09 Dec-09 Aug- Commodities 500% 400% 300% S&P GSCI Total Return S&P GSCI Spot 200% 0% 0% Dec-01 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan- Source: Bloomberg, USU and UNG from inception.
Investing in commodities: Private equity Ability to Actively Create Value Process and control Customized structuring Embedded optionality In-depth knowledge of assets Implement strategic initiatives and operational enhancements Hedging mitigates downside risk, supports leverage Proactive capital structure enhancements Embedded Optionality Upside potential from rising commodity prices New technologies unlock resources and reduce costs Illustrative example: Private equity investment process in commodities Process Driven Commodity Discount Acquisition Price Acquisition Asset Accretive Capital Multiple Value Level Acquisitions Structure Expansion Enhancements Management Exit Value Commodity Upside Tech. Upside Total Value
Investing in commodities: Private equity Ability to Buy Right Private asset purchases Distressed environments Nimble and opportunistic Direct ownership of physical assets at discount to the prices in the financial markets Requires operating capabilities $1.27/lbs (1) Commodities are cyclical and volatile by nature Recurring periods of distress Public Financial Market Value vs. Private Market Value (2) $74. Major companies continue to dispose non-core, under-managed assets Complex transactions hide potential value (4) 1.35x Cost Aluminum Company A $0.75/lbs E&P Company A $34.68 (3) $50.83 E&P Company B $32.73 Shipping Company A 1.00x Cost Aluminum Oil & Gas Financial Market Price Physical Market Price Note: Investment examples selected on non-performance criteria and represent instances in which Apollo was able to acquire physical natural resources assets at a discount to where those assets traded in the financials market. (1) May 2007 spot price, which was the month Apollo bought Aluminum Company A. (2) Weighted-average oil/gas 12-month forward price as of December 6, 20, which was the date E&P Company A signed its definitive agreement to purchase first acquisition. Weighted average based on oil/gas composition of acquisition portfolio. (3) Weighted-average oil/gas 12-month forward price as of September 2009, which was the month Apollo bought E&P Company B. Weighted average based on E&P Company B. (4) Represents the average ratio of market capitalization to net asset value ("Price / NAV") for a comparable set of publicly traded companies across the tanker, dry bulk and container segments of the shipping industry, both currently and at the time of Apollo's establishment of Shipping Company A in Q2 20. Shipping
Lourenco Goncalves slides
Global crude steel production MM tonnes Rest of world China 770 734 720 728 725 752 750 799 777 789 847 851 904 970 1,414 1,3511,329 1,251 1,069 1,146 1,211 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20 China % of total 9% % 11% 12% 13% 13% 14% 14% 15% 16% 15% 18% 20% 23% 26% 31% 34% 36% 38% 47% 44% Source: World Steel Association.
Vale iron ore price history $ per metric tonne $(50) $200 $(51) $180 $160 $140 $120 $0 $80 $60 $40 $20 $- 1974 1978 1982 1986 1990 1994 1998 2002 2006 20 Source: World Steel Dynamics.