Published on April 17, 2008
Slide1: Robin Bhar, Base Metals Strategist firstname.lastname@example.org +44 20 7567 7850 April 2006 Aluminium market outlook: Going from strength to strength ISRI 2006 Annual Convention & Exposition: Spotlight on Aluminium, 4 April 2006 Commodities traded at UBS: Commodities traded at UBS Growing interest in commodity indices: Growing interest in commodity indices Fundamentals continue to improve: Fundamentals continue to improve Underlying consumption growth strong on back of robust global economy Impact of power and alumina shortages on aluminium production – the re-rating of energy values is supportive in the longer- term and prices should reflect this China not exporting as much metal following abolishment of toll smelting and strong domestic consumption growth Late-cycle credentials intact Market to remain roughly balanced but risks are to the upside given higher energy prices Inventories are not excessive Investment funds active in commodities - aluminium has good risk:reward Price forecast: 2005 (actual): 86c/lb 2006: 110c/lb 2007: 95c/lb LME 3m Aluminium Prices Stocks:Consumption Ratio Aluminium: market details - forecasts: Aluminium: market details - forecasts Source: LME, AME, Brook Hunt, CRU, UBS estimates Zinc and aluminium are the laggards: Zinc and aluminium are the laggards Base Metals Prices: Relative Performance Key themes: Key themes ‘Stronger for longer’ on energy, China and asset class momentum Energy prices lead the commodity price rises The most significant change in global commodities in the past six months has been the sustained rise in energy values and the strong correlation that has developed between oil and other commodities. The common drivers of commodity prices have been supply tightness induced by underinvestment, continuing growth in China’s demand, cost inflation, and speculator involvement. Demand: China and the world China remains critical to our case for a secular uplift in materials-friendly demand growth rates. Nevertheless, we point out the potential improvement in Indian, Japanese and European economic activity.. Commodities still an under-invested asset class It is our view that the emerging 'commodity asset class' could be significantly under-invested by a factor of 4-5x. We believe that the total exposure of many institutional investors to commodities is well below 5%, compared with the 10-15% weighting recommended by portfolio consultants. `Stronger for longer` - key drivers in 2006: `Stronger for longer` - key drivers in 2006 European and Japanese indicators suggest synchronous growth: European and Japanese indicators suggest synchronous growth Source: Datastream US ISM manufacturing and German IFO business conditions US ISM at 56.7 in Feb German IFO at recent record highs 105.4 Japan Tankan remains positive US ISM and Japan Tankan manufacturing Secular theme #1: Costs are rising rapidly: Secular theme #1: Costs are rising rapidly Source: Brook Hunt Most extreme for aluminium: re-rating of energy values expected to impact aluminium prices – floor Labour, equipment, feedstock, royalty costs rising as well C$, A$, Real, Rand Operations, across sub-sectors experiencing costs increases between 20% to 50% Aluminium: illustrating cost pressures: Aluminium: illustrating cost pressures Relationship between oil price, power and smelter costs (Europe) Source: AME, Datastream, Brook Hunt, UBS estimates Energy increasing marginal capacity 750kt capacity in Europe threatened High power – CO2 costs Aluminium cost split (2004) Aluminium smelter cost curve Aluminium: ‘power hungry’, prices revised up on power costs: Aluminium: ‘power hungry’, prices revised up on power costs Source: China Custom Statistics, Datastream, UBS estimates Impact of emissions trading on coal plant op cost €/MWh Aluminium price revisions China net import/exports from 2001 in mt Energy driving aluminium prices Alumina: market details - forecasts: Alumina: market details - forecasts Source: LME, AME, Brook Hunt, CRU, UBS estimates Secular theme #2: China: Secular theme #2: China China’s share of global demand Source: AFPA, AME, BP, Brook Hunt, CEMBureau, CMAI, CRU, GFMS, IISI, RISI, SRI, WBMS, WGC, UBS estimates China’s share of global supply Copper Zinc Nickel Iron ore Platinum Gold Power – Aluminium (?) Power – Thermal Coal (?) China influences commodity preferences Aluminium and China - long of the metal: Aluminium and China - long of the metal Alumina realised prices Source: Chinese Customs Statistics, Datastream, Brook Hunt, UBS estimates Toll abolishment to decelerate aluminium exports Alumina imports to be impacted, but quality and growth rates important High power and alumina costs continue to pressure China Future rationalisation? Aluminium net imports & production Alumina net imports & production China to impact global intensity of use trends: China to impact global intensity of use trends Source: AME, Brook Hunt, USGS, World Bank, UBS estimates Note: Intensity of use defined as materials consumption per unit of GDP Aluminium consumption/capita growth in major economic takeoffs, year 1-25 Aluminium Intensity of Use China’s growth to offset any US slowdown : China’s growth to offset any US slowdown Growth rates for regional metal demand, 2002-05 Source: AME, BP, Brook Hunt, CRU, UBS estimates Weaker Chinese demand offset by stronger US Re-accelerating China enough to offset US slowdown? Probably China’s growth enough to offset weak US materials demand growth in 2003 US demand has actually been weak over most of 2005 with no noticeable downward impact on prices Would China’s re-acceleration in 2006E be enough to offset a weaker US? We believe so % of world materials demand, 2005E China could average 8% pa materials dmd growth for 15-20 yrs: China could average 8% pa materials dmd growth for 15-20 yrs Steel consumption per capita Copper consumption per capita Source: IISI, AME, Brook Hunt, United Nations, USGS, US Census Bureau, UBS estimates Modelling China’s consumption/capita vs US, Japan Implied Chinese steel consumption growth Urbanisation a key secular driver of materials demand: Urbanisation a key secular driver of materials demand Steel and urbanisation in US Source: Japanese Iron & Steel Institute, United Nations, US Census Bureau, UBS Urbanisation rates % of total Steel and urbanisation in Japan Urbanisation rates, people Using Japan, Korea and the US to forecast China’s demand: Using Japan, Korea and the US to forecast China’s demand US, Japanese, Korean and Chinese steel consumption per capita, 1900-2005 Source: AME, Brook Hunt, IISI, Japanese I&S Fed’n, UN, USGS, World Bank, UBS estimates Per capita consumption for countries with lower populations peak at higher levels All countries follow a similar growth trend NOTE: this is not a straight line trend – there are cycles Aluminium consumption/capita growth in major economic takeoffs, year 1-25 Secular theme #3: Capital flows to hard assets: Secular theme #3: Capital flows to hard assets Oil vs. other commodities… drivers converging: Oil vs. other commodities… drivers converging Source: Thomson Financial Datastream, UBS estimates Oil price & LME copper Apparent convergence of price performance between oil and many other commodities, including copper and aluminium Share similar drivers particularly for copper; Chinese demand, supply constraints, rising production costs, speculator involvement and downstream bottleneck Firms are consolidating, management focus on returns; cyclical mentality resulting in slow response to an arguably secular environment Increased harmony in performance may be a function of convergence of global drivers Fund flows into commodities – asset diversification, etc.: Fund flows into commodities – asset diversification, etc. Source: Goldman Sachs, Dow Jones, UBS estimates Fund flows are fundamentally supported Asset diversification benefits Momentum to reach a maximum this year (?) Combined dollar value and metal equivalent of GSCI and DJ indices Fund flows into commodities – asset diversification, etc.: Fund flows into commodities – asset diversification, etc. Source: BME, UBS estimates Fund flows through indices could grow by 50% this year Decelerate in 2007E, but fundamental underpin should remain in place Potential impact of additional future funds flows in terms of volume Supercycle?… yes and no: Supercycle?… yes and no Yes. We expect an extended period of commodity price strength based on two fundamental secular factors 1. Higher global consumption growth and 2. High cost inflation No. This is not new, extended commodity cycles have been witnessed historically Copper price trend (real) Source: Brook Hunt, USGS, UBS estimates Forward curves: expectations of stronger for longer: Forward curves: expectations of stronger for longer Source: Reuters, UBS estimates What could go wrong? – Downside risks: What could go wrong? – Downside risks Disclaimer: Layout Box: Select this box and use it to: Insert text - type text and apply a style Insert a Table or MS Graph Resize an object Layout Box: Select this box and use it to: Insert text - type text and apply a style Insert a Table or MS Graph Resize an object Layout Box: Select this box and use it to: Insert text - type text and apply a style Insert a Table or MS Graph Resize an object [Name] Tel: [+XX-XXX-XXX XXXX] [email@XXXX] Disclaimer A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A ABC corp. A A
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