Metal Price Outlook 2013-14, presented by Patricia Mohr at 2013 CMIC Signature Event
- 1. Metal Price Outlook 2013-14 Innovation and Cost Control Key to Profitability Patricia M. Mohr Vice-President, Economics & Commodity Market Specialist, Scotiabank 2nd Annual Signature Event ―Collaboration & Innovation: The Future of Canadian Mining‖ Canada Mining Innovation Council Delta Chelsea Hotel, Toronto February 12, 2013
- 2. Scotiabank‘s Commodity Price Index – Declines 19.7% From Near-Term Peak in April 2011 Scotiabank Commodity Price Index1 240 240 Scotiabank‘s Commodity Price Index Index: Jan 2007=100 rose to a near-term peak in April 2011 220 220 – just prior to financial market New record high 200 in July 2008 April 200 concern over excessive Eurozone 180 2011 180 sovereign debt and the negative Decline From April 2011 impact on global economic growth. 160 Near-Term Peak -19.7%, 160 140 140 The subsequent correction in December -4.6%m/m commodity prices from April 2011 to 120 120 December 2012 at 19.7% has been 100 100 less than half the slide during the 2008 Arab Oil All Items1 80 80 recession. Embargo -46% in 60 2008: July 60 Prices rallied strongly in August 40 to Dec. 40 (+3.1%) and in September October 2001 20 Bottom 20 (+3.6%), before losing ground again late in the year alongside another bout 0 0 of concern over global growth and the 72 76 80 84 88 92 96 00 04 08 12 U.S. ‗Fiscal Cliff‘. 1. A trade-weighted U.S. dollar-based index of principal Canadian commodity exports, including Metals & Minerals, Oil & Gas, Forest Products and Agricultural commodities. – Shaded areas represent U.S. recession periods. Data to December 2012. 2
- 3. After a Sharp Correction, Commodity Prices Rally Back in August/September The rally in Scotiabank‘s Commodity Price Index in August reflected a number of supply developments – 1) strong global oil prices linked to ‗geopolitical supply risks‘ in the Middle East and North Sea maintenance, 2) the beginning of a rally in lumber & panel board prices alongside a nascent recovery in U.S. housing -- in the face of tight Canadian & U.S. building material supplies -- and 3) historically high grain & oil seed prices due to drought in the U.S. Midwest and parts of Russia. In September, this improvement was followed by easier monetary policy from central banks and government policy measures -- to shore up the Eurozone financial system, to lift sub-par U.S. growth and to curb the slowdown in China & India -- bolstering business & investor ‗confidence‘ and boosting demand for ‗riskier assets‘ such as commodities and equities. More specifically: The positive surprise at the June 28-29 EU Summit—the European Commission proposal for a single banking supervisor (not likely in place until 2014), after which Eurozone banks will have direct access to the European Stability Mechanism (ESM) rather than having to borrow through sovereigns, raising their debt-to-GDP ratios; triggered the beginning of a rally in commodity prices; 3
- 4. Weaker U.S. Dollar, After QE3, Lifts Commodity Prices The proposed ECB bond purchase program (‗Outright Monetary Transactions‘ in the secondary market, Sept 6), under which the ECB will buy the short-term debt of countries seeking help (under strict conditionality); A third round of ‗quantitative easing‘ from the Fed (purchasing additional agency mortgage-backed securities -- US$40 bn per month); FOMC minutes stated that an exceptionally accommodative monetary policy would remain appropriate for a considerable time after the economic recovery strengthens; A RMB1 trillion (US$160 bn) infrastructure investment program unveiled by China‘s National Development and Reform Commission to boost growth. A broadly weaker U.S. dollar, following announcement of QE3, was also quite supportive of higher dollar- denominated commodity prices in September. In late 2012, the FOMC then announced that it would replace ‗Operation Twist‘ with open-ended purchases of longer-dated Treasury securities totalling US$45 bn per month – intended to keep long-term interest rates low. In 2013, commodity prices will receive a lift from slightly stronger – though still slow – world economic growth (especially in the second half of the year) and re-stocking of raw materials after liquidation or deferred orders in 2012; Medium-term, recent announcements of new mine delays will underpin base metal prices and eventually boost uranium prices. 4
- 5. Global Purchasing Manager Indices Lost Momentum Over The Summer, But Have Rebounded in China Global Purchasing Manager Indices 65 65 Values over 50 indicate expansion (PMIs) lost considerable momentum last summer, reflecting declining business 60 60 ‗confidence‘ worldwide, with buyers deferring orders and liquidating U.S. inventories. 55 China 55 However, the PMI for manufacturing in 50 50 China moved back over the 50 mark in October – indicating an end to inventory 45 Euro zone 45 reduction and moderately stronger growth in 2012:Q4. China‘s GDP growth Germany China PMI in January : 50.4 picked up to 7.9% yr/yr in 2012:Q4 from 40 40 7.4% in Q3, yielding a ‗soft-landing‘ of 7.8% for 2012 as a whole. 35 35 In 2013, commodity prices will receive a modest lift from re-stocking of raw 30 30 materials, after liquidation or deferred 09 10 11 12 13 orders in 2012. Source: Markit, Scotiabank Economics. Data to January 2013. 5
- 6. China Industrial Production: China -- Vital to Global Jan-Feb 2009 3.8% yr/yr Commodity Markets (a bottom) 30 30 yr/yr % change Mar 2009 8.3% China – Industrial *3 mth moving avg. July 2009 10.8% 20 Production* 20 Dec 2009 18.5% 10 10 2010 14.4% China tightens monetary policy. 0 0 2011 13.7% G7 Industrial Production -10 -10 Q1 2012 11.9% Q2 2012 9.5% -20 -20 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 Q3 2012 9.1% Q4 2012 10.0% China‘s Share of Global Consumption in 2012e Compared with United States (in brackets) December 2012 10.3% Copper 41.3% Nickel* 41.5% (9.0%) (8.2%) G7 Industrial Production -0.1% (Oct) Zinc 43.3% Aluminium 45.1% U.S. +2.2% (Dec) (8.2%) (10.9%) Japan -9.1% (Dec) Four Base Metals: China 43.8%, USA 9.9%. Germany -1.1% (Dec) *Japan 9.6%; excluding inventory accumulation in China Source: Scotiabank Commodity Price Index. 6
- 7. GDP (% per annum) Global Growth Will Edge Up in 2013, But Stay In the Slow Lane 2008 2009 2010 2012e 2013f 2014f 14 yr/yr % change WORLD* 2.8 -0.6 5.2 3.1 3.2 3.8 12 A ‗seismic‘ shift in global growth has MEXICO 1.2 -6.2 5.5 4.0 3.6 3.9 occurred from the G7 to ‗emerging 10 markets‘ (especially in Asia). CANADA 0.5 -2.5 3.2 1.9 1.7 2.4 8 2010 UNITED 2011 0.0 -2.6 3.0 2.2 1.9 2.7 6 STATES 2012e 4 CHINA 9.6 9.2 10.4 7.8 8.1 8.3 2 INDIA 5.2 7.7 9.0 5.5 6.0 6.5 0 BRAZIL 5.1 -0.2 7.5 1.0 3.3 4.0 -2 JAPAN -1.1 -5.5 4.5 1.9 0.8 1.2 World China United Japan Euro Zone States EURO In 2014, world growth should strengthen to 3.8% – ZONE 0.5 -4.1 1.8 -0.5 -0.2** 1.0 moderately supportive of stronger commodity prices. U.S. GDP 2.7%, China 8.3%. *Scotiabank estimates. Average 1988-1997: 3.4% p.a. prior to the U.S. Federal Gov‘t Deficit: FY2012 US$1.089 tr; “economic take-off” in China and India. ** Systemic risks are easing and sentiment improving for positive economic growth in some Euro zone 2013F US$950 bn. countries by 2014. 7
- 8. CHINA -- Shifted To Pro-Growth Monetary & Fiscal Policy in 2012 To Shore Up Its Economy, Though Easing Was Cautious Due To Ongoing Concern Over Inflation & Still High Municipal Debt 10 25 yr/yr % change % 8 Required Reserve Ratios for 20 Big Banks (RHS) 6 15 Consumer Price Index 4 (LHS) 10 2 5 One-Year Lending Rate (RHS) 0 0 -2 -5 07 08 09 10 11 12 13 CPI +2% yr/yr in January 2013. The People‘s Bank of China reduced the required bank reserve ratio for large banks by 50 basis points to 21.0% on Dec 5/11, by 50 basis points on Feb 24/12 to 20.50%, and by 50 basis points on May 18/12 to 20.00%. One-Year Lending Rates have been reduced in two steps by 53 bps to 6.00%, with more for ‗preferred‘ commercial bank customers. Local Government Debt is still about 23% of GDP, only down slightly from a peak of 27% in 2010; ratio was 18% in 2008. 8
- 9. China‘s Economic Growth Has Been Led By Investment Spending Second-largest economy in the world, with a nominal GDP in 2012 at US$8.254 trillion compared with U.S. GDP at US$15.704 tr. The share of investment spending in China‘s GDP at 48.7% is much higher than in the United States (12.3%), given China‘s ongoing ‗industrialization, urbanization and technological upgrading‘ – a feature which has tremendously boosted global demand for base metals, iron ore and steel over the past decade. Consumer spending on goods & services garners a much lower share of GDP in China at 35% compared with 71% in the United States. STRUCTURE OF CHINA‘S ECONOMY, EXPENDITURE AS PER CENT OF GDP (2011 nominal GDP, % of Total) CHINA UNITED STATES Consumer Spending 34.6%+ 71.2% Fixed Capital Formation* 48.7% 12.3%** Net exports of goods & services 2.7% -3.8% * Business machinery & equipment, Non-residential construction, part of Residential construction, Government investment and inventory change. ** Excludes Government investment. + Includes some property investment; the overall comparison was similar in 2012. 9
- 10. ONCE IN A DECADE CHANGE IN LEADERSHIP IN CHINA – As Important To The Global Growth Outlook As The U.S. Presidential Election November 8-15, 2012 – date of the 18th National Congress of the Communist Party of China, where a new leadership was established for only the fifth time since Mao Zedong – to be followed by the National People‘s Congress (parliament) in March 2013. A large number of officials will be changed. New Fifth Generation Leadership: President (Head of State and Secretary-General of the Communist Party of China): Mr. Xi Jinping; previously Mr. Hu Jintao Prime Minister (Head of Government): Mr. Li Keqiang, previously Mr. Wen Jiabao. 10
- 11. China – Policy Continuity Expected Under New Leadership China is expected to continue pursuing the economic initiatives in the 12th Five-Year Plan, unveiled in March 2011, though the new leadership is expected to seek more market-related solutions (less central planning), be more ‗populist‘ and emphasize government over party interests. The 12th Five Year Plan (2011-15) seeks more ‗balanced‘ economic growth – with less emphasis on export expansion & investment and greater focus on domestic consumer spending, development of the ‗service‘ industries including the financial sector and ‗New Economy‘ growth; other key objectives -- productivity gains through ‗economic restructuring‘ – e.g. closure of smaller, less efficient plant & rationalization into larger, lower-cost entities (the steel & coal industries); reducing industrial energy intensity; a focus on developing the Western & Central parts of China, away from the heavily industrialized Eastern & Coastal areas, as initiated by President Hu Jintao; raising household incomes & living standards and building an environment-friendly society. In practice, progress on ‗rebalancing‘ China‘s economy towards domestically-led growth (e.g. via consumer spending) was not significant in 2012. Retail sales slowed to 14.3% in 2012 from 17.1% in 2011. What is evident is that China is no longer pursuing ‗economic growth at any cost‘. A subtle shift is underway, with China comfortable with a slower, more ‗market- determined‘ advance (official target was 7.5% for 2012 – likely to remain at 7.5% in 2013). 11
- 12. Infrastructure Spending Program Announced Last September To Spur Growth However, noticeably weaker economic indicators in China in August 2012 triggered a RMB1 trillion (US$160 bn) infrastructure spending program – approved by the National Development and Reform Commission (NDRC) – 60 infrastructure projects including 25 urban rail transit projects in 19 cities (subway systems), 13 road construction projects, 10 civil projects and 7 port & navigation channel projects. Will boost GDP by 2% (0.5% p.a. over four years). The stimulus package was about ¼ of the massive RMB4 trillion announced in November 2008 in the face of the ‗Great Recession‖. In addition, local governments have increased the pace of ‗land supply‘ to support residential construction. After reducing inventories of raw materials and consumer goods last summer and early Fall, China‘s economy picked up moderately in late 2012, bolstered by stronger infrastructure spending as well as consumer incentives to buy power or fuel-efficient household appliances and small cars. Home sales have picked up again and ‗floor space under construction‘ rose 15.4% in October, with residential construction up 10.6%. Rising confidence in the new ‗leadership‘ will likely be reflected in strong business investment and consumer spending in early 2013. 12
- 13. Medium-Term, The ‗Emerging‘ Markets Will Remain Supportive for Commodity Prices Huge Potential for Oil & Metal-Intensive Motor Vehicle Sales in China China‟s population: 1.354 billion Vehicle Penetration – 2011 (Vehicles per 1,000 people) China 70 United States 793 Western Europe 588 Japan 580 India 20 Aluminium usage in automobiles in China has recently been an average of 127.5kg per vehicle compared with 145kg in the USA. As such, there is good potential to increase aluminium usage in China. China‘s potential GDP growth is slowing -- in 2012: 8.5%, 2015-20: 7.0%p.a., 2025-30: 5% p.a. with less under-utilized labour and slower capital formation. 13
- 14. The Fed Is Determined to Strengthen U.S. Employment Recovery – Signals Accommodative Monetary Policy Until Unemployment Falls to Normal Federal Funds – ―Real‖ Federal Funds Rate Effective Rates (Adjusted for Inflation)* 20 20 15 15 per cent per cent December 2012 = -1.09% Average = 2.00% 15 15 10 10 Average 10 10 5 5 5 5 0 0 0 0 -5 -5 60 65 70 75 80 85 90 95 00 05 10 15 60 65 70 75 80 85 90 95 00 05 10 15 Federal Funds Target Rate is 0-25 bps in February 2013. * Inflation-adjusted with the U.S. Personal Consumption Exceptionally low funds rate will be warranted until U.S. Deflator (PCE) and the core PCE. Shaded areas represent unemployment rate falls below 6.5% (currently at 7.8%), U.S. recession periods. Fed intends to keep inflation unlikely until late 2014-2015. expectations 1-2 years ahead anchored at 2.5%. 14
- 15. Strong Auto Assemblies Buoy U.S. Industrial Activity In 2012-13, But Employment Gains Have Been Sub-Par U.S. Industrial Activity Revives U.S. Employment Growth 10 15 2.0 yr/yr % change 2.0 yr/yr % change million units, quarterly 8 14 U.S. Industrial 6 13 1.0 1.0 Production 4 12 2 11 0.0 U.S. 0.0 0 10 Payrolls -1.0 -1.0 -2 9 U.S. U.S. -4 8 Consumers -2.0 employment -2.0 -6 U.S. Motor 7 Replace Latest Data: recovery has Vehicle been 5-times -8 Aging Fleet, 6 Advance in Assemblies -3.0 less than -3.0 Japanese Payrolls -10 5 normal. Assemblers Jan/13 +157,000 -12 re-stock in 4 -4.0 -4.0 Early 2012 Gain in +2,016,000 -14 3 Past Year -16 2 -5.0 -5.0 06 07 08 09 10 11 12 13 06 07 08 09 10 11 12 North American motor vehicle assemblies strengthened to 15.8 million units in 2012 (+17%) and are forecast to climb to 16.4 million in 2013 (+4%). Output in Mexico reached a record 3.0 million in 2012 – lifted by Mexico‟s free trade agreements with Japan, the EU and the USA. 15
- 16. Currency Trends U.S. Dollar Trends Canadian Dollar Expected to Remain Above Par 17 March 1973=100 US cents US cents US cents 110 160 160 Canadian dollar likely to euro: peak US$1.60 remain around par to U.S. 16 July 15, 2008 currency in 2013 due to 100 Canada‘s Triple-A credit 140 140 rating, low federal government debt-to-GDP 15 euro 90 ratio and relatively tight monetary policy 120 120 14 80 Canadian Dollar 100 100 13 70 80 80 60 Chinese Yuan 12 U.S. Dollar Trade-Weighted 60 60 50 11 98 00 02 04 06 08 10 12 14 98 00 02 04 06 08 10 12 14 Data to February 11, 2013: euro US$1.3422; Cdn$= US$0.9935 1US$ = 6.2324 Rmb. 16
- 17. Technical Challenges in Mining Exploration & Development Requiring Innovation Shortage of experienced geologists and replacement with ‗Black Boxes‖, which provide a good indication of resources, but sometimes yield inaccurate and ‗risky‘ assessments (e.g. scanning machines often lack good calibration). Basic drilling equipment has not been developed as well as in the Oil & Gas industry; 3-dimensional modelling needs to be further developed. Exploration and reserve estimates are being pushed, less depth in analyzing economic, financial market and engineering/supply side ‗risks‘ when conducting ‗feasibility‘ studies. Junior mining company equity valuations are under pressure due to uncertain economic outlook; equity listings under threat, if share value falls below 10 cents; high regulatory burden. 17
- 18. Gold Prices May Be Consolidating Price Outlook (US$) The Re-Monetization of Gold 2007 697 2,000 2,000 US$ per ounce + 2008 872 1,800 New Record: 1,800 2009 973 1,600 Sept 9, 2011 spot US$1,921.15 1,600 2010 1,225 March 17, 2008 2011 1,569 1,400 US$1,032.70, 1,400 2012F 1,672 following collapse 1,200 of Bear Stearns * 1,200 2013F 1,700 Jan. 21, 1980 1,000 1,000 Gold prices have been on a ‗Bull Run‘ since 2001 – peak US$850 with high government debt and deficits triggering a 800 800 loss of investor confidence in paper currencies Gold Prices (especially the two reserve currencies – the U.S. dollar and euro). 600 London PM Fix 600 Gold prices drifted lower through most of 2012, with 400 400 traders awaiting QE3. However, announcement of a third round of quantitative easing by the Fed 200 200 (QE3), combined with the ECB‘s proposed bond purchase program, propelled gold back to a high of 0 0 US$1,791.75 on October 4 in London. 75 80 85 90 95 00 05 10 15 Gold languished again in early January following release of the December 2012 FOMC minutes ,with London PM Fix on February 11, 2013: US$1,652. observers noting that half of the participants The recent disconnect between historically high gold prices and low thought the Fed might have to begin withdrawing its equity valuations may reflect rapid operating and capital cost current Quantitative Easing sooner than expected. – escalation in recent years, linked to declining ore grades and fewer Scotia‘s view: not until late 2014 at the earliest. super-giant discoveries than in the 1980s and 1990s. Technical innovation is needed to cut exploration, mining & processing costs. 18
- 19. Price Outlook 2009 US$2.34 Copper Prices Remain Lucrative 2010 US$3.42 5.00 5.00 US$ per pound New Record High: US$4.60 2011 US$4.00 * 4.50 on February 14, 2011 4.50 2012 US$3.61 4.00 4.00 2013F US$3.50 Global supply & demand conditions for copper were in ‗deficit‘ in 2011 + 2014F US$3.30 3.50 3.50 and were roughly in balance in 2012, Extraordinary recovery in copper prices in early 3.00 with a small surplus late in the year. 3.00 2009 reflected buying by China‘s State Reserve Bureau, massive credit expansion and a rapid rebound in China‘s industrial activity. 2.50 Low During 2.50 Credit Squeeze The strength of copper prices in the past five 2.00 (Dec. 24, 2008) 2.00 years has reflected only limited global mine development -- up 1.7% per annum from 2008-2012 1.50 1.50 ++ -- in the face of strong demand growth from China and the rest of the ‗emerging‘ world. 1.00 1.00 0.50 0.50 China‘s refined copper consumption: LME Copper Prices 0.00 0.00 2009 2010 2011 2012e 2013F 2014F 72 76 80 84 88 92 96 00 04 08 12 +25% +13% +8% +5% +8.5% +6.0% LME cash settlement prices. + Latest data: February 11, 2013: US$3.73, yielding a 46% profit margin over average world breakeven costs including depreciation, interest & indirect costs. ++ Dec. 24, 2008: US$1.26. 19
- 20. China Dominates World Copper Consumption % of total (% of Total) "Emerging" "Industrialized" Markets = 66.8% Markets = 27.6% China 41.3% USA 9.0% Western Europe 13.5% Other Asia + Middle East + Japan Russia Latin America 5.1% + CIS + Other 5.6% 25.5% 2012 estimates of world consumption. China's consumption = 1.5 times USA + Japan + Western Europe. Source: Scotiabank Commodity Price Index. 20
- 21. LME Copper Prices Likely To Remain High In 2013 LME copper prices are currently US$3.73 per pound – yielding a 46% profit margin over average world break-even costs including depreciation, interest, indirect & cash costs. World demand only increased by about 0.2% in 2012 – with higher consumption in China (up 5%), the Middle East including Turkey (5.7%) and the United States (up 1%), just offsetting a 6.6% decline in Europe & Russia. However, the anticipated increase in copper mine production in 2012 again failed to meet expectations (up only 3.8%). Technical problems and lower ore grades at a number of major mines have been substantial – especially in Chile (Collahuasi, Los Bronces), Zambia and Indonesia (Grasberg) – keeping global supply & demand conditions balanced. World mine production should finally increase more substantially in 2013 (+5.5%). However, global demand will also pick up (+5.0%), with some restocking of copper, after inventory liquidation in 2012. The net result, copper prices are likely to remain high at US$3.50. Market observers remain skeptical about the extent of new mine output, with a risk that actual production could again turn out lower. A number of mines in the Democratic Republic of Congo may not start as quickly as planned. Longer-term, copper prices are expected to remain relatively high at US$3 per pound, given high capital costs. 21
- 22. Nickel Prices 25 25 US$ per pound LME official cash 20 settlement price 20 15 15 10 10 5 5 0 0 00 02 04 06 08 10 12 14 February 11, 2013: US$8.28 – still modestly profitable for existing Canadian mines, but yielding slim margins worldwide. 22
- 23. Lucrative Grain Prices Canola Prices Corn Prices Soybean Prices Remain Lucrative 9 9 20 20 8 8 US$ per bushel US$ per bushel US$ per tonne 8 8 18 18 7 Canola No. 1 7 CBOT Yellow CBOT Soybean (In Store Vancouver) Corn 16 Futures 16 7 7 6 6 U.S. Corn Ending 14 14 6 Stocks-To-Use Ratio: 6 5 Canola: No. 1 5 12 12 5 5 „seeded‟ crop in 2008/09 13.9% 10 10 4 Canada in 2012 4 2011/12 7.9% 4 2012/13f 5.4% 4 8 8 3 3 3 New 3 Record 6 6 US$8.31 2 2 2 2 4 4 August 21, 2012 New Record US$17.70 1 Canola emerged as a $10 billion crop 1 1 1 2 August 30, 2012 2 for Canadian farmers in 2012/13, amid record prices. 0 0 0 0 0 0 00 02 04 06 08 10 12 14 00 02 04 06 08 10 12 14 00 02 04 06 08 10 12 14 Data to February 8, 2013. Data to February 8, 2013. Data to January 2013. 23
- 24. Potash Prices Current Overseas Market Conditions – Potash 1,000 1,000 World potash deliveries totalled about 51.9 million tonnes US$ per tonne of KCL in 2012 – 8.1% from 56.5 million in 2011. While 900 Offshore Sales 900 China‘s MOP imports rose during the first ten months of Spot Potash Prices 2012 (+10% yr/yr), China delayed signing new contracts for 800 (FOB Vancouver) 800 seaborne shipments in 2012:H2. India also deferred new contract orders following completion of its 2011:H2 700 Spot Prices 700 contract shipment with Canpotex in first-half 2012. Indian potash demand has been weak since 2011 – the result of a reduction in government subsidies – due to government 600 2008-09 US$633 600 budgetary challenges as well as an increase in urea 2010 US$351 subsidies at the expense of potash and phosphates (to 500 2011 US$459 500 assist domestic urea manufacturers and guarantee a 12% return on equity); most of the urea consumed in India 2012 US$476 comes from domestic production, while potash and 400 2013:Jan US$424 400 phosphate rock must be imported; a 25% depreciation of New spot pricing in the Rupee from mid-2011 to mid-2012 also lifted potash 300 300 prices in local currency terms, though the rupee has SE Asia at US$450 cfr edged up in the past six months. = US$410-415 FOB Forecast 200 200 VCR 2013 US$453 Delays in new contract volumes to China and -- particularly India -- have encouraged other buyers (e.g. in 100 2014 US$475 100 Malaysia & Southeast Asia) to delay orders, expecting lower prices. The slowdown in global growth and weak 0 0 business confidence in 2012 caused order delays for many raw materials in the summer and early fall. 00 02 04 06 08 10 12 14 The net result, Canpotex on December 31, 2012 Recent signs point to an improvement in market conditions in China. announced that it reached agreement with ‗Sinochem Domestic prices for potash (the equivalent of US$413-429) are improving Fertilizer Macao Commercial Offshore‘ to supply 1 million on the back of a tighter market. tonnes of potash from Jan-to-June 2013 at about US$400 per tonne cfr China (-US$70 from the previous US$470 Russian rail shipments are curtailed in January due to weather; Uralkali contract price established in March 2012). Canpotex will also cut its output by 50% from Dec to March 2013 to shore up world agreed to a significant price decline (though less than market conditions. asked for by buyers), in return for a substantial pick-up in shipments. 24
- 25. Potash Outlook for 2013 – Strong Spring Application in North America and Restocking by Buyers While CBOT corn & soybean prices have eased from spectacular record highs last August, prices remain historically high for U.S. & Canadian farmers – pointing to strong Spring fertilizer application, after good application last Fall. However, U.S. dealers point to U.S./global economic uncertainty and wish to keep inventories low. In December, PCS Sales dropped its U.S. warehouse prices to US$470 per short ton (US$518 per tonne) to incentivize dealers to buy sooner rather than wait until the spring planting season – the practice in recent years. The recent contract between Canpotex and China is expected to set a floor on potash prices in first-half 2013 and should spur the resumption of spot orders from Southeast Asian buyers. Strong prices for soybeans & corn should keep application strong in Brazil. India has been seriously under-applying potassium -- leading to an imbalance in nutrient application of growing concern to India‘s fertilizer association and contributing to low crop yields. N:K ratio is now 9:1 down from a peak of 4:1 (optimal is 2:1). If India is to improve its yields —important to food security – it must step up potash application again. Based on the 2011-12 crop year, India produced 15 tonnes of grain per tonne of fertilizer used compared with about 32 tonnes in the United States and the world average of 25 tonnes (also dependent upon good farm practice and machinery & equipment). 25
- 26. World Potash Deliveries* 60 60 India is expected to increase its million tonnes KCI potash demand in 2013, after Growth Markets: applying a mere 3 mt in 2012 50 China & Brazil 50 (previous peak in consumption in India was 6.3 mt in 2010). 40 40 In February 2013, India signed a new contract with Canpotex for 1.1 mt at US$427 per tonne cfr India 30 30 (significantly lower than the US$470/530 previous contract price), but higher than expected. 20 20 India also signed a 1.0 mt contract with BPC at the same price. 10 10 World potash deliveries should rebound to about 56 mt in 2013, as buyers restock. 0 0 00 02 04 06 08 10 12e * Imports & domestic shipments. • 1993- 2012 about 3% p.a.; 2001-07 4% p.a. • Potash demand in China and Brazil has more than doubled from 2000-12. 26
- 27. Uranium Prices 160 160 Soft Uranium Prices US$ per pound 140 140 Spot uranium prices remain at a low ebb in Price improvement early 2013 – at US$43.65 per pound – well expected in late below the US$66 just prior to the 120 2013/2014 120 Fukushima-Daiichi incident in Japan. Fukushima- 100 Daiichi 100 The pullback in prices in late 2012 to quite Incident low levels partly reflected a slower re-start 80 Spot Uranium 80 of Japan‘s nuclear reactors than initially Prices expected (only 2 of 50 reactors are operating, after safety checks following 60 60 Fukushima Daiichi). Japanese utilities now have large stocks on hand (100 40 40 million lbs.) and have deferred some contract deliveries. The level of uncovered 20 20 utility requirements is currently low. February 4, 2013: US$43.65 Long-term base contract prices (prior to 0 0 escalation at time of delivery) have also 00 02 04 06 08 10 12 14 lost ground – falling from US$60 to US$56 per pound in late 2012. Spot price forecast: 2012 US$48.77 per pound; 2013F US$45; 2014F US$52; 2015-16F US$60- 65. 27
- 28. Uranium Prices Should Start to Rebound by late 2013-2014 Global supply & demand conditions for uranium were in slight surplus in 2012, with U3O8 demand at about 184 million pounds just under total supply of 191 m lbs. (about 151-152 m lbs. of mine production plus ‗secondary‘ supplies of 39 m lbs.). U.S. Department of Energy sales at roughly 10 m lbs p. a. add to secondary supplies. DOE had inventory of 111 m lbs equivalent in 2012 and will likely continue to sell off stock to pay for environmental cleanups. However, the following developments point to a medium-term price recovery: The landslide election of an LPD government in Japan, which is pro-nuclear, though the timing of re- starts will depend upon Japan‘s new ‗Nuclear Regulatory Authority‘ and local government approval; assumptions on operating reactors in Japan -- late 2012: 2 reactors; late 2013: 6 in areas away from fault lines; late 2014: 14; late 2015: 22 or 56% of capability; China‘s resumption of nuclear growth, with the State Council announcing in October a new target of 58 GWe by 2020 (moderately lower than previous expectations of 60-65 GWe, but still large, and 95 GWe by 2025; Construction of 5 reactors is expected in each of 2013 through 2015, with start-up in 2018-20 = 17 GWe; While Kazakhstan will likely continue to ramp up production in 2013-14 (from 54 m lbs in 2012 to 65 in 2015) and Cigar Lake should start in late 2013, delays to new mine development elsewhere (BHP Billiton‘s deferral of Olympic Dam expansion, seeking lower-cost technology; Cameco‘s deferral of the feasibility study for Kintyre) and industry consolidation through M&A activity point to eventually tighter supplies; 9 producers already account for 87% of world mine production; and Most importantly, the end of the U.S.-Russia HEU Agreement in late 2013 (reducing supplies in the West by 24 million lbs. U3O8 equivalent). 28
- 29. Price Outlook ‗Geopolitical Supply Risks‘ Will Keep International Oil Prices High in 2013 WTI Oil Brent Oil 150 150 2008 US$99.62 US$97.95 140 US$ per barrel * 140 2009 US$62 US$62 Scotiabank Commodity Price Index 130 130 2012 US$94 US$112 120 Record High: 120 2013F US$94 US$112 July 11, 2008: US$147.90 2014F US$96 US$112 110 110 Despite slow growth in petroleum 100 100 demand (+1%), international oil + Saudi Arabia stepped-up its oil production above the 90 90 ‗call‘ for OPEC crude in 2012:H1 to offset the loss of prices will remain high in 2013 – Iranian oil due to sanctions and prevent high oil 80 underpinned by ‗geopolitical 80 prices from derailing an already fragile world 70 supply risks‘ in the Middle East 70 economy; this move accounts for the significant & Africa. decline in oil prices in 2012:Q2. 60 60 Iranian Iraq 50 50 However, prices rebounded in early July alongside Revolution Gulf War the EU embargo on Iran, U.S. banking measures 40 War 40 aimed at curbing oil exports from Iran and positive 30 Arab Oil 30 investor reaction to proposals at the EU Summit to steady Eurozone financial markets. 20 Embargo 20 10 10 Global oil market conditions genuinely tightened in + Feb 11, 2013: US$97.01 2012:Q3, with the ‗call‘ on OPEC oil rising by 0.7 0 0 mb/d due to a seasonal pick-up in demand and 60 64 68 72 76 80 84 88 92 96 00 04 08 12 supply outages in the North Sea from strikes & maintenance. Oil prices have been boosted in early 2013 by a pick-up in demand in China, a temporary outage at the Cormorant Alpha Iranian oil exports have fallen by 1 mb/d yr/yr. The production platform in the Brent North Sea, tensions in Algeria & IAEA has made little progress in curbing Iran‘s Mali and recognition that actual supply & demand conditions in uranium enrichment or inspecting its nuclear Q4 remained fairly tight. facilities. 29
- 30. The Most Critical Economic Issue Facing Canada – Inadequate Export Pipeline Infrastructure Wide Discounts on Western Canadian Select Oil 160 160 Three Ways to Address US$ per barrel Challenges: Building 140 140 1) To guarantee ‗world‘ prices export pipeline capability to Brent for Western Canada‘s oil – B.C. coast is as well as volume growth – 120 120 key priority for there is a critical need to Canada expand pipeline or rail 100 WTI 100 infrastructure to the B.C. Oil Coast to tap Asia/Pacific 80 80 markets; 60 60 2) Reverse pipelines in Eastern Canada to allow WCS Heavy Oil Western Canada‘s crude to 40 40 Risk that light crudes could be reach refineries in Montreal discounted due to rising U.S. & Atlantic Canada, currently 20 20 dependent upon more supplies from North Dakota Bakken & Eagle Ford. expensive imported crude; 0 0 and 06 07 08 09 10 11 12 13 14 Oil Price Differentials (US$/bbl) 3) With refined products sold at ‗world‘ prices, integrate Brent - WTI WTI - WCS forward into refining to 2006-10 Avg. $0.06 $17.43 capture the full value of the 2011 $15.87 $17.09* crude. 2012 $17.09 $21.00* U.S. approval of northern leg of Keystone XL? Jan 2013 $17.55 $32.84* 300,000 b/d of West. Can. crude is now being railed to higher value markets across North Source:* TMX/Shorcan Energy Brokers America. 30
- 31. High LNG Prices in Japan & Asia Nymex Natural Gas Prices Favour Canadian & U.S. LNG Exports (US$ per mmbtu) 20 20 2008 8.90 US$ per mmbtu LNG Prices 2009 4.15 in Japan* 2011 4.03 * Avg. LNG import price into Japan 2012E 2.85 15 15 Japan turns to imported 2013F 3.75 LNG and oil in wake of Fukushima-Daiichi 2014F 4.00 incident; Korean demand Natural gas is the fuel of choice for North also picks up due to American manufacturers, recently rejuvenating 10 nuclear safety checks. 10 the U.S. petrochemical and fertilizer industries. Development of 20 new U.S. natural gas ‗shale‘ basins – made economic by new multi-stage fracture drilling technology – has lowered the industry cost curve. 5 5 NYMEX prices fell to a decade low of US$1.91 per mmbtu on April 19, 2012, but rallied back as NYMEX Natural high as US$3.90 on November 21, currently at Gas Prices US$3.28 on Feb 11/13. Traders recognize that 0 0 the vast bulk of North American natural gas 98 00 02 04 06 08 10 12 14 cannot be produced profitably at prices below US$2. Most ‗dry‘ natural gas shale producers *LNG prices delivered to Japan: peak at US$18.07 in July require higher prices of US$3 to generate a 2012, late Nov. US$15.30. Source: LNG Japan Corporation. reasonable rate of return. While steam coal could regain its competitiveness in 2013, if A sharp drop in CDN & U.S. gas drilling activity natural gas climbs back to US$3.50-US$4.00 later in the year, In 2012, a 25% jump in power use, with utilities LNG exports should be the trigger for a large ‗structural‘ shifting from coal to cheaper natural gas, increase in demand and stronger prices by 2016-17. boosted prices at the start of the U.S. heating season last November. 31
- 32. Potential LNG Terminals on B.C. Coast Proposed LNG Terminals • Canadian LNG terminals currently under development: o Kitimat LNG (Apache / Chevron) o Prince Rupert LNG (BG Group) o BC LNG Export Co-Operative (Kitimat) o PETRONAS / Progress LNG o LNG Canada (Shell / PetroChina / Mitsubishi / KOGAS) o Also: o Exxon Mobil / Imperial / Celtic o Nexen / INPEX / JGC o Talisman Chevron 32
- 33. Scotiabank’s Global Presence In Resource Industries Corporate Banking – Global Mining 2012 YTD, Scotiabank is ranked as the No.1 lead arranger (by deal count) in the Canadian and North American mining sectors; the most international of the Canadian banks, with offices in Beijing, Shanghai, Chongqing and Hong Kong, operations across Asia Pacific including India, Malaysia and Thailand and throughout Latin America (including Mexico, Chile, Peru, Brazil and Colombia), London and New York. Investment Banking and M&A Advisory Services #1 Canadian Equity Issuer and a leading mining underwriter January 2011 to present. Landmark Transactions: -- Exclusive Financial Advisor to Red Back Mining’s C$8.0 billion merger with Kinross Gold – Fourth largest M&A transaction ever completed in the gold sector. -- Co-Bookrunner on Barrick’s US$4.0 billion equity offering – the largest equity offering in Canadian history and the largest equity financing ever made in the international gold sector. -- Sole Financial Advisor to China Investment Corporation in their landmark private placement in Teck Resources (US$1.5 billion) -- largest investment in a mining company by a Chinese investor in Canadian history. Scotia Waterous #1 world leader in upstream Oil & Gas M&A and Divestiture mandates from January 2006 through October 2011; with offices in Hong Kong, Singapore, Calgary, Houston, Denver and London; Co-Bookrunner of Gibson Energy Initial Public Offering (C$568 million ) – the largest Canadian IPO in 2011. Advised BHP Billiton on acquisition of Petrohawk Energy and Chesapeake’s Fayetteville assets. 33
- 34. Recent Corporate Banking Mandates US$450,000,000 US$1,200,000,000 US$1,200,000,000 C$350,000,000 US$3,000,000,000 Revolving Revolving Revolving Revolving Revolving Credit Facility Co-Lead Arranger, Joint Credit Facility Joint Lead Arranger, Joint Book- Credit Facility Joint Lead Arranger, Joint Book- Credit Facility Co-Lead Arranger, Joint Book- Credit Facility Co-Syndication Agent Bookrunner & Syndication Agent runner & Admin Agent runner & Admin Agent runner & Syndication Agent August 2012 August 2012 July 2012 June 2012 May 2012 US$350,000,000 US$500,000,000 US$250,000,000 US$200,000,000 US$750,000,000 Revolving Revolving Revolving Revolving Revolving Credit Facility Joint Bookrunner & Syndication Credit Facility Mandated Lead Arranger & CreditArranger, Joint Joint Lead Facility Credit Facility Sole Lead Arranger, Bookrunner & Credit Facility Joint Lead Arranger, Joint Book- Agent Bookrunner Bookrunner & Admin Agent Admin Agent runner & Admin Agent May 2012 April 2012 April 2012 April 2012 February 2012 US$500,000,000 US$2,000,000,000 C$1,250,000,000 US$2,725,000,000 US$1,500,000,000 Revolving Revolving Revolving Revolving Revolving Credit Facility Joint Lead Arranger, Joint Book- Credit Facility Co-Lead Arranger, Joint Book- Credit Facility Co-Lead Arranger & Co- Credit Facility Joint Lead Arranger, Joint Book- Credit Facility Joint Bookrunner runner & Admin Agent runner & Syndication Agent Syndication Agent runner & Syndication Agent February 2012 November 2011 October 2011 April 2011 March 2011 34
- 35. Scotiabank is Canada‘s most international bank Global Operations Scotiabank has operations in 11 Asian countries, the largest network of any Canadian bank. Scotiabank has Canadian banking‟s largest network in mainland China. 35
- 36. Disclaimer TM Trademark of The Bank of Nova Scotia. Used under license, where applicable. This report has been prepared by Scotia Economics as a resource for the clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Scotiabank nor its affiliates accepts any liability whatsoever for any loss arising from any use of this report or its contents. 36