Commodities Through 2013: Buying Opportunities, or Buyer Beware?

Commodities Through 2013
Buying Opportunities, or Buyer Beware?

John Anton
Director, IHS Steel Service

john.anton@ihs.com
(202) 481-9231

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Value Prop: Quantifying price changes
A simple but powerful way to look at prices:
Machinery
Consumer
and Facility Costs
Goods
Equipment

The Stages of Processing Model Components for
Durable
Manufacturing
Components for
Construction

Model highlights flows from the bottom up Ferrous
Metals
Nonferrous
Metals

(scrap to hot rolled bars)
Wages
Raw
Materials

Macroeconomic
Energy Models
Models

Figure 1
The General Interaction of Prices and Wages
Through the Stages of Processing

Explains price movements by examining: production costs - labor, materials,
equipment, energy, -- along with market activity, seasonal patterns

Advantages: Model resembles production process; provides
framework to analyze sources of price change

3

Buying Opportunity? Or Sit on Your Wallet?

• Steel
• Buy now, or sit on your wallet until July or August 2013
• Organic Chemicals
• Mixed. Ethylene is flat, but for Propylene buy now
• Copper
• Live hand to mouth; waiting is to your benefit
• Aluminum
• Buy on the dips, wait for 2013H2

Copyright © 2012 IHS Inc. All Rights Reserved. 4


Recovery Struggling To Gain Traction

(Real GDP, annualized real rate of growth, Q/Q, percent)
5

4

3

2

1

0
2010 2011 2012 2013 2014



Credit Conditions Gradually Loosening,
Except For Home Mortgage Credit
(Percent of banks reporting tightening credit conditions)

Comm. & Ind. Credit Commercial Mortgage Credit
100 100
75 Large 80
& Med.
50 Firms 60
40
25
20
0 Small
Firms 0
-25 -20
2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012

Consumer Loans Home Mortgage Credit
80 80
60 60
Credit
40 Cards 40
20 Prime Loans
0 20
-20 Autos 0
-40 -20
2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012
Source: Diffusion Indexes from Fed Senior Loan Officer Survey


Housing Starts
(Millions of Units)

Permanent Mobile Homes
2.1 0.25
1.8
0.20
1.5
1.2 0.15
0.9
0.6 0.10

0.3
0.05
0.0
0.00

Fixed Multi



North America - Light Vehicle Production
(Units in millions) (Share of NA Prod.)
18 24%
Millions

17 22%
16
20%
15
14 18%

13 16%
12 ` 14%
11
12%
10
9 10%

8 8%
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Volume - L Canada- R Mexico - R


China Synopsis
• Growing strongly but not as great as recent years
• 2010 10.5%
• 2011 9.2%
• 2012 7.4%
• 2013 7.6%

• Risk of hard landing
• Balanced against government stimulus

• CANNOT CONSUME ALL STEEL BEING MADE
• Boom/Bust like the USA did from 1995 thru 2003



Greece Leaves the Euro

• Eurozone Sovereign Debt Crisis
• Eurozone recession deepening, euro expected to weaken

• Greece Exit
• In early 2013 Greece finds it impossible to meet obligations
• By mid-2013 (Q3 forecast) Greece leaves the euro, returns to
drachma
• ECB must get serious within a week, must act within a month

• If decisive action not taken, -4% to -6% European recession
• -1% to -2% in USA, Japan
• Hard landing in China


Steel Overview:
Meet the New Cycle, Same as the Old Cycle

• Output finally declining in China, several months too late

• Falling output tightens supply by late 2012/early 2013

• Tighter supply rallies prices late this year or early 2013

• Unfortunately, China (and probably USA) will react by
• Boosting prices too much (2013Q1)
• Restarting every ounce of idle capacity (2013H1)

• The increase in output causes prices to crash next summer

• Followed by production cuts once again in late 2013


Steel Fundamentals Lower Because of Iron Ore

• Miners were profitable when ore was $80-$90 per metric
tonne (mt)
• Prices moved above $150/mt in 2008 and stayed there
except for the recession
• Based on extraction cost, prices should be in $80-$100 range
• But we did not think it would happen

• Ore companies all bought the myth that Chinese steel
production would grow forever
• Now they have excess capacity and excess production

12


Hot Rolled Carbon Sheet
(Dollars per metric tonne)

1100

• Demand is good from autos, soft
1000 from appliances

• China gross over-production
900
overwhelms restraint in USA

800 • Persistent import bargains
through 2013, assume
700 convergence beyond

600
1/1/2010 1/1/2012 1/1/2014 1/1/2016
USA Europe China

13


Petrochemicals
(cents per pound)

90
• Low priced natural gas (ethane)
80
makes ethylene family cheap

70
• Recovering export demand keeps
PE prices from plummeting
60
• Propylene prices remain higher
50 and more volatile than ethylene
due to natural gas cracking
40
• More “on purpose” propylene
30 projects expected longer term
2010:1 2011:1 2012:1 2013:1 2014:1
Ethylene Propylene



Aluminum
2,750
• Prices already bounced
• Below production costs
• Economic stimulus impacted
2,500 investor psychology

• Choppy through the first half of
2,250 2013
• Little overall trend for six months
• Buy on the dips
2,000
• Prices tumble when Greece
leaves the euro

1,750 • Longer trend is up, but limited
2010:1 2011:1 2012:1 2013:1 2014:1



Copper
10,000
• Bounced when stimulus announced

• Fundamentals point down
9,000
• New mines
• Extreme profit margins
8,000 • Choppy through early 2013

• Large downward move as Greece
exits
7,000
• Longer term points down as new
mines cause profit erosion
6,000
2010:1 2011:1 2012:1 2013:1 2014:1



So, What Are the Risks?
• Steel – Buy now
• Large upside rise from Australian flooding

• Nonferrous - Neutral
• Speculators can always distort the market
• Long pushes prices up
• Short pushes prices down

• Stainless Steel, Platinum, Palladium, Gold – Buy now
• Platinum, palladium, gold, and ferrochrome depend on South Africa

• South Africa is not dependable
• Mine strikes
• Very bad power grid


Thank you!
John Anton
Director, IHS Steel Service
john.anton@ihs.com



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