Whats next for the commodities stories? Joanne Warner Head of - PowerPoint PPT Presentation

What’s next for the commodities stories? Joanne Warner Head of Global Resources Renzo Casarotto Senior Portfolio Manager

What’s happened in resources

Is it over for resources? Source: http://www.theaustralian.com.au/business/markets/stocks-down-as-resources-companies-tumble/story-e6frg916-1226623371985 http://money.msn.com/investing/commodities-crash-recession-looms http://finance.ninemsn.com.au/newsbusiness/motley/8644071/asx-climbs-but-leaves-resources-behind http://www.news.com.au/business/markets/resources-companies-to-weigh-on-asx/story-e6frfm30-1226620458088 3 http://economictimes.indiatimes.com/markets/commodities/copper-weakens-in-futures-trade-global-cues-subdued-demand/articleshow/19675158.cms

Is this the GFC - Mark II? MSCI sector performance YTD (Rebased to 100) 120 110 100 90 80 70 Dec 12 Jan 13 Jan 13 Feb 13 Feb 13 Mar 13 Mar 13 Apr 13 Apr 13 May 13 May 13 MSCI World Index MSCI World Energy Sector Index MSCI World Metals & Mining Index MSCI World Health Care Index MSCI World Financials Index MSCI World Information Technology Index MSCI World Consumer Discretionary Index MSCI World Consumer Staples Index MSCI World Telecom Service Sector Index Source: Bloomberg. 31 May 2013. 4

Chinese GDP - it’s the absolute numbers that count GDP growth year on year 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 GDP ($US bn) 9,000 8,000 7,000 6,000 $Usbn 5,000 4,000 3,000 2,000 1,000 - 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Bloomberg , May 2013 & CLSA April 2013. 5

It’s the absolute numbers that count Chinese oil consumption (million bbls/d) 12.0 11.0 10.0 9.0 8.0 7.0 6.0 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Crude oil processed + net product imports m bpd 11.0 Note the continual 10.0 increase y-y, 9.0 8.0 despite a notional 7.0 slow down in 6.0 growth rates 5.0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2009 2010 2011 2012 2013 Source: CLSA April 2013. 6

China’s current five year plan requires more infrastructure 80 70 60 50 40 30 20 10 0 Railway Highway Oil/Gas Pipe Airports (thousand km) (ten of thousand km) (thousand km) (number of) Previous five year plan Current five year plan Source: Standard Chartered Resources, April 2013. 7

US Housing construction ‘upside’ Listed for sale homes per house hold • Housing inventories at long term lows • Vacancy rates nearing 2003 levels • Construction jobs steady but hours up Homeowner vacancy rate (%) US rental vacancy rate (%) Source: Bloomberg; US Census Bureau; Stifel Nicolaus report, financial institutions, housing economics market commentary. As at December 19, 2012. 8

A progressive dividend policy, scope to increase BHP - Annual dividend (1990-2012), 11.4% CAGR BHP - Dividend Payout Ratio (1990-2012) 1.4 3.0 1.2 2.5 1.0 2.0 0.8 1.5 0.6 1.0 0.4 0.2 0.5 0.0 0.0 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 DPS average payout RIO - Annual dividend (1996-2012), 7.4% CAGR RIO - Dividend Payout Ratio (1996-2012) 2.5 0.7 0.6 2.0 0.5 1.5 0.4 0.3 1.0 0.2 0.5 0.1 0 0.0 Dec-96 Oct-97 Aug-98 Jun-99 Apr-00 Feb-01 Dec-01 Oct-02 Aug-03 Jun-04 Apr-05 Feb-06 Dec-06 Oct-07 Aug-08 Jun-09 Apr-10 Feb-11 Dec-11 Oct-12 Dec-96 Nov-97 Oct-98 Sep-99 Aug-00 Jul-01 Jun-02 May-03 Apr-04 Mar-05 Feb-06 Jan-07 Dec-07 Nov-08 Oct-09 Sep-10 Aug-11 Jul-12 ave payout payout DPS Prior to 1995, Rio was operating as two independent businesses CRA and RTZ. In 2005 a $1.45ps ($1.15ps adjusted) special dividend was declared. In 2009 no interim dividend was declared. Source; Goldman Sachs. 9

Where to from here?

Iron ore – is the world too bearish? China's Iron Ore Imports vs Spot Iron Ore Price 80 250 70 200 60 Million tonnes US$/tonne 50 150 40 100 30 20 50 10 0 0 2006 2007 2008 2009 2010 2011 2012 2013 China's Iron Ore Imports, Mt Spot Iron Ore, US$/t (RHS) Source: Morgan Stanley Research, CRU. February 2013. Source: Source: Bloomberg. May 2013. 11

Iron ore – why would BHP and RIO talk the price down? 140 120 cash cost of production (US$/t fob) 100 China 80 Australia Brazil 60 40 20 0 0 300 600 900 1,200 1,500 1,800 cumulative production (Mt) 2013 cash cost curve 50th centile 75th centile 90th centile spot (fines) 3-Jun-13 LT (incentive) price Source: Metalytics. June 2013. 12

So where’s the supply? Number of deposits found – by quality Exploration spend by commodity: 1998-2012 Copper: most of the metal in a handful of deposits • Exploration spend has increased dramatically • But why do we keep looking for gold?? • Success rates have declined • More than half of deposits are being found in high- political risk locations • On average it takes 12-18 years from discovery to first production Source: MinEx Consulting – presentation to BBY Resources Conference, November 2012. 13

Copper: Bingham Canyon – before the pit- wall failure… Source: First State Investment, as at September 2012. 14

And after the pit wall failure April 10, 2013 • Still unknown how much production will be lost, but early estimates are 100-150kt Cu • NB: pre-incident estimates were for an over-supply in the Cu market of ~150kt this year • Cost? Equipment alone could be $100m Source: First State Investments. Rio Tinto May 2013. 15

Valuations – but is it cheap? Mining vs MSCI World (P/E 2013 F1) P/E FY1 30.0 HSBC Mining MSCI World (MXWO Index) 25.0 20.0 15.0 10.0 5.0 0.0 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Historical and Mean P/E FY1 Ratio (Index 1/Index 2) Relative Valuation Mean +/- 1.96 Standard Deviations 1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Source: Nomura Custom Products Group – data to 31 May 2013. 16

Valuations – but is it cheap? Energy vs MSCI World (P/E 2013 F1) P/E FY1 25.0 MSCI Energy (MXWO0EN Index) MSCI World (MXWO Index) 20.0 15.0 10.0 5.0 0.0 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Historical and Mean P/E FY1 Ratio (Index 1/Index 2) Relative Valuation Mean +/- 1.96 Standard Deviations 1.20 1.00 0.80 0.60 0.40 0.20 0.00 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Source: Nomura Custom Products Group – data to 31 May 2013. 17

The resources cycle Phase 1 Demand rises Inventories decline Supply response lags = higher prices Governments attempt to raise taxes Phase 2 High prices encourage new projects Phase 3 Supply response = demand Supply is curtailed Inventories rise = prices fall Demand normalises Capital expenditure is reduced Producers benefit from recovery 18

What about agribusiness?

Agriculture: hitting the headlines http://news.nationalgeographic.com/news/2013/13/130412-drought-great-plains-weather-environment/ http://www.reuters.com/article/2012/11/29/usa-drought-idUSL1E8MT5H220121129 http://www.merredinmercury.com.au/story/1433588/hundreds-of-people-gather-for-agriculture-crisis-meeting-in-merredin/?cs=1478 http://www.treehugger.com/climate-change/us-drought-going-get-worse.html 20 http://www.agriculture.com/news/crops/wld-crop-wear-wries-abound_2-ar31103

Strong EM wages growth to drive consumption China wages growth Brazil wages growth Brazil average monthly wage (BRL) 45,000 40,000 China average wage (RMB) 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Source: Ministry of Human Resources and Social Security, Nomura, data to Dec 2011. Bloomberg, CEIC, Nomura, data to 31 May 2012. 21

Growing demand for soft commodities GROWING POPULATION & CONVERGING DIETS INCREASED MEAT + = URBANISATION CONSUMPTION 40kg to 52kg by 2050 6.5bn to 9bn by 2050 260mt to 470mt by 2050 70% urbanised by 2050 Source: FAO How to feed the world in 2050 report, UN World Urbanization Prospects 2009 revision. 22

What does this mean for grain demand? In 2050 Mt meat required Conversion ratio Mt grain required Chicken 274 2 549 Beef 70 7 487 Pork 101 4 402 Sheep 25 4 102 TOTAL 470 1,540 mt +85% Source: OECD-FAO Agricultural Outlook 2012-2021, FAO how to feed the world in 2050 report. Consumption split is 58% chicken, 15% beef, 22% pork, 5% sheep. 23

Middle East, Africa, and Asia consumption rising rapidly World’s Food Surpluses and Deficits Net trade (Million tonnes) Source: The Economist, * Cereals, rice, meals, oils and fed equivalent of meat. 24

The global food challenge… The task: • Increase global food production by 70% • Which requires $US80 billion per annum of investment The challenges: • Resource constraints (land/water) • Environmental pressures • Natural disasters • Productivity growth declining Source: FAO, How to feed the world 2050 Report. 25