Metals Outlook: The Good, The Middling & The Unlucky November 21, 217 Rory Johnston Commodity Economist Scotiabank Economics
A Tale of Two Growth Stories: World Picks Up Slack of Slowing China 5 4 G OECD & Related EM Countries Growing in Sync number of countries Contraction Slowing Growth Accelerating Growth 2% 15% 1% China's Receeding Credit Wave China Credit Impulse, 12mma y/y % China 7-City Avg House Price, y/y % 3 5% 2 % 1-5% 7 8 9 1 11 12 13 14 15 16 17f 18f Sources: Scotiabank Economics, OECD. -1% Oct-7 Apr-1 Oct-12 Apr-15 Oct-17 Sources: Scotiabank Economics, NBS, Bloomberg. 2
Base Metals & Bulks Parting Ways, Precious Metals Rangebound Industrial Metals Price Forecast The Good: Base Metals To Outperform 3 25 Iron Ore (LHS) Aluminium (RHS) Nickel (RHS) Zinc (RHS) Copper (RHS) Gold (RHS) 25 21 Emptying mine investment pipeline running up against strong demand Differentiation happening on the supply side Zinc furthest along its cycle, followed by copper and nickel; aluminium a wild card. 2 15 1 5 Index Index 21 212 214 216 218f 22f Sources: Scotiabank Economics, Bloomberg. 17 13 9 5 The Middling: Precious Rangebound Weaker USD, geopolitical risks will maintain upside pressure on gold prices, balancing the headwinds of rising rates. The Unlucky: Bulks Taking A Breather Bulk commodities like iron ore are particularly leveraged against Chinese construction activity, which is slowing in line with more restrictive lending policies. Supply coming off a period of high capacity growth in Australia and Brazil. 3
The Good: Base Metals Outperform but See Supply-Side Differentiation 5 History of Base Metals Prices Copper (LHS) 25 4 Zinc (LHS) 2 Aluminium (LHS) 3 Nickel (RHS) 15 2 1 1 5 USD/lb USD/lb '92 '97 '2 '7 '12 '17 Source: Scotiabank Economics, LME, Bloomberg. 4
Copper: Red Metal s Time Will Come, but Rally is Too Far Too Fast 3.5 Scotiabank Copper Price Outlook 3.25 3. 2.75 2.5 2.25 2. Scotiabank Forecast 1.75 Forward Curve LME Cash Copper Price USD/lb 1.5 '15 '16 '17 '18 '19 Sources: Scotiabank Economics, LME, Bloomberg. 5
Copper: Gains are Speculative & Likely Temporary, but Future Brighter Managed Money Copper Positioning 4 (Combined Futures & Options) 7 65 Copper Term Structure 8 6 3 2 1-1 Long Short (Inverted) Net -2 ' lots Nov-15 May-16 Nov-16 May-17 Nov-17 Sources: Scotiabank Economics, LME, Comex, CFTC. 6 55 5 45-2 3-Month Basis (RHS) 4-4 USD/t LME Copper Cash Price (LHS) USD/t 35-6 Oct-14 Oct-15 Oct-16 Oct-17 Sources: Scotiabank Economics, LME. 8 kt 7 6 5 4 3 2 1 Inventory by exchange (LHS): Copper Inventories COMEX SHFE LME Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Sources: Scotiabank Economics, LME, SHFE, COMEX. 4 2 6
Nickel: A Good News, Bad News Outlook 7 Scotiabank Nickel Price Outlook 6 5 4 Scotiabank Forecast Foreward Curve USD/lb LME Cash Nickel Price 3 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Source: Scotiabank Economics, LME, Bloomberg. 7
Nickel: Good News Deficits; Bad News Inventories 25 2 15 Nickel Supply, Demand, & Market Balance Supply, y/y Demand, y/y (inverted) Market Balance 12 1 Nickel's Inventory Challenge Exchange-listed inventories, days of forward demand 1 8 5 6-5 4-1 Nickel Copper Zinc Aluminium -15-2 -25 kt '92 '97 '2 '7 '12 '17f '22f Source: Scotiabank Economics, Wood Mackenzie. 2 Oct-12 Apr-15 Oct-17 Sources: Scotiabank Economics, WBMS, LME, SHFE, COMEX. 8
Nickel: Battery Connection A Long-Term Strength 14 12 Global Light-Duty Vehicle Sales Mn Vehicles ICE Sales (LHS) EV Sales (LHS) EV Share (RHS) 7% 6% 35% 3% 235 EV Additional Metals Demand Relative to 215 Global Demand 7% 6% 1 5% 25% 5% 8 4% 2% 4% 6 3% 15% 3% 4 2% 1% 2% 2 1% 5% 1% % 215 22 225 23 235 24 Source: Scotiabank Economics. % Copper Nickel Lithium Cobalt Source: Scotiabank Economics. % 9
Zinc: Concentrate Deficit Tightens Refined Supply, Rally Not Over Yet 1.75 Scotiabank Zinc Price Outlook 1.5 1.25 1. Forward Curve.75 Scotiabank Forecast LME Cash Zinc Price USD/lb.5 '15 '16 '17 '18 '19 Source: Scotiabank Economics, LME, Bloomberg. 1
Zinc: Inventories at 1-Year Low, Spot Market Extremely Tight 2.4 2. 1.6 Zinc Inventories Plunging USD/lb Zinc Inventory (RHS) Zinc Price (LHS) Demand Days 5 45 4 35 35 3 25 Zinc Term Structure 3-Month Basis (RHS) Zinc Cash Price (LHS) 8 6 4 3 2 1.2 25 2.8 2 15 15 1.4 1 5-2 5. USD/t USD/t -4 Oct-97 Oct-7 Oct-17 Nov-14 Nov-15 Nov-16 Nov-17 Sources: Scotiabank Economics, LME, SHFE. Sources: Scotiabank Economics, LME. 11
Zinc: Supply Deficit to Drive Price Higher, Incent New Mines to Market Zinc's False Mine Start Turns Scarce China (LHS) RoW (LHS) 3% World (LHS) Price (RHS) 1.4 2 Zinc Treatment Charges Indicate Acute Concentrate Tightness $/t concentrate 1.3 2% 15 1.2 1% % 1.1 1. 1-1%.9.8 5-2%.7 y/y change -3% 3mma USD/lb.6 Sep-13 Sep-15 Sep-17 Sources: Scotiabank Economics, WBMS. 213 214 215 216 YTD '17October Sources: Scotiabank Economics,Wood Mackenzie. 12
Aluminium: All Eyes on China s Blue Skies Scotiabank Aluminium Price Outlook 1.1 Scotiabank Forecast Forward Curve LME Cash Aluminium Price 1..9.8.7 USD/lb.6 '15 '16 '17 '18 '19 Source: Scotiabank Economics, LME, Bloomberg. 13
Aluminium: Chinese Policy Distorted Price Signals, Bifurcating Market 5 Aluminium Supply, Demand, & Market Balance Bifurcated Market: China vs the Rest 27 4 3 18 China RoW 2 Global 1 9-1 -2-3 -4-5 Mt '92 Demand, y/y (inverted) Supply, y/y Market Balance '97 '2 '7 '12 '17f '22f Source: Scotiabank Economics, Wood Mackenzie. -9-18 kt '92 '97 '2 '7 '12 '17f '22f Source: Scotiabank Economics, Wood Mackenzie. 14
Aluminium: Chinese Glut Pushes Metal Overseas, Into Inventory 5 4 3 LME-SHFE Arb To Drive Chinese Aluminium Semis Exports USD/t, 6mma 5 4 3 5 4 Aluminium Inventories Falling, But China's Stocks at All-Time Highs Inventory by exchange (LHS): SHFE LME Price (RHS) 1..9 2 2 3 1 1.8 2-1 China aluminium-1 semis net -2 exports (LHS) -2 kt, LME-SHFE -3 6mma Arbitrage (RHS) -3 Oct-11 Oct-13 Oct-15 Oct-17 Source: Scotiabank Economics, LME, SHFE, China Customs. 1.7 kt USD/lb.6 Nov-14 Nov-15 Nov-16 Nov-17 Source: Scotiabank Economics, LME, SHFE. 15
The Middling: Precious Metals Look Rangebound Over Coming Years History of Precious Metals Prices 5 USD/oz 25 Silver (LHS) 4 3 Platinum (RHS) Palladium (RHS) Gold (RHS) 2 15 2 1 1 5 USD/oz '92 '97 '2 '7 '12 '17 Source: Scotiabank Economics, LME, Bloomberg. 16
Gold: Rangebound Outlook, Balanced by Falling Dollar & Rising Rates 1,4 Scotiabank Gold Price Outlook 1,3 1,2 1,1 Scotiabank Forecast Forward Curve Gold Price History USD/oz 1, '15 '16 '17 '18 '19 Sources: Scotiabank Economics, CME, Bloomberg. 17
Gold: Long-Term Price Driven by Savings Demand & Available Supply Household investment and available supply drives long-term prices 18 New Gold Comes to Market Through Mines and Sales by Central Banks 35 Tonnes 16 14 12 1 8 6 4 Modeled: global savings invested in gold, adjusted for available supply (newly mined + central bank sales) 3 25 2 15 1 5 2 Gold Price History Modeled (Mine/Official) USD/oz Modeled (Mine/ex-Official) 1992 1997 22 27 212 217 Sources: Scotiabank Econoimcs, WGC, IMF WEO. Mine Supply Official Sales -5 Total Available 1992 1997 22 27 212 217 Sources: Scotiabank Econoimcs, WGC. 18
Gold: Supported by Currency Effects as the USD Comes Off Cycle Highs 2 175 15 125 Gold vs US Dollar y = -2225ln(x) + 1836 R² =.3327 17 16 15 14 13 The US Dollar's History of Ups... and Downs DXY Index 1 75 5 25 Real gold price, USD/oz USD DXY Index 7 95 Sources: Scotiabank Economics, Bloomberg. 12 12 11 1 9 8 7 Oct-77 Oct-87 Oct-97 Oct-7 Oct-17 Source: Scotiabank Economics, Bloomberg. 19
Gold: Facing Headwinds as the US Fed Leads Global Rates Higher 2 Gold vs Real Rates Real gold price, USD/oz 1.4 US 3m T-bill, % Rates Rising 175 15 y = 15.5e -.37x R² =.847 1.2 1. 125.8 1.6 75.4 5.2 25 US 1-Year TIPS Yield, % 5 3 1-1 Source: Scotiabank Economics, Bloomberg.. -.2 Nov-14 Nov-15 Nov-16 Nov-17 Sources: Scotiabank Economics, Bloomberg. 2
The Unlucky: Bulk Commodities and the Steel Complex History of Bulk Commodities Prices 35 USD/t USD/t 9 3 75 25 2 15 1 Iron Ore (LHS) 5 Met Coal (LHS) Steel, HRC China (RHS) '7 '9 '11 '13 '15 '17 Source: Scotiabank Economics, Bloomberg. 6 45 3 15 21
Iron Ore: Prices Fall to Push out High-Cost Supply as Demand Fades 15 Scotiabank Iron Ore Price Outlook Scotiabank Forecast 12 Iron Ore 62% Fe Fines Spot Price, Qingdao, China 9 6 3 USD/t '14 '15 '16 '17 '18 Source: Scotiabank Economics, Bloomberg. 22
Iron Ore Led Lower By Cooling Chinese Real Estate, Imports 35 Chinese Housing Prices vs Steel Tier 1 14 Chinese Real Estate Activity Slowing 4% 3 25 2 Tier 2 Tier 3 Steel Rebar Price (RHS) 12 1 8 3% 2% 15 6 1% 1 4 % 5 2-2% Building Sales -5-2 Building Starts y/y % y/y % Iron Ore Imports -1 change change -4-3% y/y change, 6mma '7 '9 '11 '13 '15 '17 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Sources: Scotiabank Economics, NBS. Sources: Scotiabank Economics, NBS. -1% 23
Iron Ore Coming Off A Supply Surge Amid Slowing Seaborne Demand 3% 2% Iron Ore Supply By Major Source Australia Exports Brazil Exports China Domestic 2% 15% 1% Iron Prices Need to Fall To Force Out Marginal Chinese Supply Chinese Iron Ore Production (LHS) Iron Ore Price (62% fines) 1% 75% 5% 1% 5% 25% % % % -1% -5% -1% -25% -5% -2% y/y 3mma Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Sources: Scotiabank Economics, National Statistical Agencies. y/y 3mma -15% y/y 3mma -75% Oct-13 Oct-15 Oct-17 Sources: Scotiabank Economics, NBS, Bloomberg. 24
Conclusion, Questions, & Metals Price Forecasts 216 217f 218f 219f 22f 221f Long Term Metals & Minerals Base Metals Copper USD/lb 2.21 2.73 2.85 3. 3.25 3.5 3. Nickel USD/lb 4.36 4.65 5. 5.5 6. 6.5 7.5 Zinc USD/lb.95 1.29 1.5 1.6 1.5 1.35 1. Aluminium USD/lb.73.88.9.9.9.9 1. Bulk Commodities Iron Ore USD/t 58 7 6 6 6 6 6 Met Coal USD/t 143 26 15 13 13 13 13 Precious Metals Gold USD/oz 1249 1265 13 13 13 13 13 Silver USD/oz 17.11 17.15 18.5 2. 2. 2. 2. Platinum USD/oz 989 976 165 115 1245 1245 1245 Palladium USD/oz 614 812 81 83 85 85 85 25
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