May 21 Date Commodities Metals Outlook 1 192453
China is the most important metal consumer China, % of global metals demand 4% 35% 3% 25% 2% 15% 1% 5% % 196 1965 197 1975 198 1985 199 1995 2 25 Aluminium Copper Lead Nickel Zinc Source: Woodmac, BofA Merrill Lynch Commodity Research 2
Sri Lanka Vietnam India Thailand Pakistan Asia ex-japan Africa China Indonesia World Philippines Malaysia Japan Europe Latin America USA Korea Hong Kong Singapore Solid source of future growth 1 Urban Population as a Percentage of Total 9 8 7 6 5 4 3 2 Source: UN, CEIC, BAS-ML estimates Urbanisation drives infrastructure development; increased economic development drives wealth which drives consumption this will be a commodity demand driver for several decades to come 3
Finished steel demand, mt Capacity utilisation (%) Steel: supply vs demand BAS-ML global supply and demand estimates (central case) OECD Steel demand 13 125 12 115 11 15 1 95 27 28 29f 21f 211f 212f 9% 86% 82% 78% 74% 7% 66% 62% 58% 54% 5% Finished Steel Demand Capacity Utilization Source: Banc of America Securities-Merrill Lynch Research Steel Consumption per capita in China China Steel demand Home Other 6% Appliances 1% Auto & Ship 5% Metal Goods 6% Machinery 2% Construction 48% Infrastructure 14% Source: BAS-ML estimates 4
2 years of Yuan (9-99) 5
2 years of Yuan (1-1) 6
Copper Consumption (kg/capita) Share of world consumption China: Remains Short, Medium and Long Term Driver China s World Consumption Share of Metals 1995-27 5% 45% 45% 4% 35% 32% 29% 3% 27% 22% 23% 24% 25% 2% 16% 13% 14% 15% 15% 11% 9% 9% 1% 4% 5% 5% % 1995 2 25 27 Source: WBMS, BAS-ML Estimates Steel Copper Aluminium Nickel US Historical Copper Consumption Pattern vs. China 16 14 12 1 8 6 4 China - NOW 2 5, 1, 15, 2, 25, 3, 35, 4, GDP/Capita US$ (Real Year 2) 5 4 3 2 1-1 -2-3 -4 44 16-29 Iron Ore* Chinese Shortfalls in Selected Commodities 24 China is short resources. 15 7 8 4 4-2 Mined Copper Fewer barriers to entry in downstream industries. Share of global consumption doubled/tripled in last decade. Consumption per capita still lags US. -8 Economic growth = greater marginal propensity to consume metals. -4 Nickel Oil Refined Copper 22 23 25 23 15 13-6 2 Aluminium -1 Alumina Demand Supply Balance Source: USGS, BAS-ML estimates US - Kg/cap China - GDP/capita China already the dominant consumer of metals but massive growth potential remains 7
India: Emerging source of demand Chinese and Indian Consumption Relative to the US 28 % of US Consumption 28 % of World Compound Growth 95-8 Growth 5-8 1995 2 25 26 27 28 Copper (kt) US 2,517.4 3,25.5 2,256.8 2,96. 2,14. 1,933. - 1.7% -2.% -14.3% China 1,143.4 1,928.1 3,656.1 3,613.8 4,863.4 5,133.6 266% 28.5% 12.2% 4.4% India 116.4 24.2 397.2 46.7 516.1 511.3 26% 2.8% 12.1% 28.7% Copper Per Capita (kg/person) US 9.3 1.6 7.6 7. 7.1 6.4 - - -2.9% -15.9% China.9 1.5 2.8 2.7 3.7 3.9 61% - 11.5% 38.9% India.1.2.36.36.46.45 7% - 1.3% 23.7% 28 % of US Consumption 28 % of World Compound Growth 95-8 Growth 5-8 1995 2 25 26 27 28 Zinc (kt) US 1,22.1 1,314.6 1,17.9 1,122.1 1,5. 984.9-8.6% -1.5% -3.2% China 99.4 1,195.5 2,989. 3,155.5 3,631.5 4,18.6 48% 35.3% 12.1% 34.4% India 2. 224.3 388.8 444.1 48. 46.1 47% 4.% 6.6% 18.3% Zinc per Capita (kg/person) US 4.5 4.6 3.4 3.7 3.5 3.2 - - -2.4% -5.% China.7.9 2.3 2.4 2.7 3. 93% - 11.4% 33.% India.2.2.4.4.4.4 12% - 5.% 13.7% 28 % of US Consumption 28 % of World Compound Growth 95-8 Growth 5-8 1995 2 25 26 27 28 Aluminium (kt) US 5,54.8 6,161.3 6,114.4 6,15. 5,579.8 5,614.7-14.7%.8% -8.2% China 1,941.6 3,499.1 7,118.6 8,648.1 12,347. 12,412.5 221% 32.5% 15.3% 74.4% India 581. 62.4 957.9 1,79.5 1,27.1 1,34.8 23% 3.4% 6.4% 36.2% Aluminium Per Capita (kg/person) US 18.7 21.7 2.5 2.4 18.5 18.5 - - -.1% -9.9% China 1.6 2.7 5.4 6.5 9.3 9.3 5% - 14.6% 72.5% India.6.6.9 1. 1.1 1.1 6% - 4.8% 3.9% Source: WBMS, UN Population Statistics, BAS-ML estimates Indian metals demand story in its early infancy but already showing up as a key positive driver 8
Date Prices have recovered, but uncertainties remain Prices collapsed towards the end of 28 as industrial activity decelerated, which was driven by the meltdown on financial markets. The collapse in end-user demand was exacerbated by de-stocking through the supply chain. Manufacturers, for instance, cut output in excess of the declines in end-user demand to reduce excess inventories. De-stocking driven by production cuts has been fading out. This should support metals demand and prices in 21. The improvement of metal demand was driven by fiscal stimuli. Private sector activity has generally still been subdued in many countries, although there are signs of a pick-up. There are concerns over the strength of metal consumption once governments tighten the belt, especially in China. There are also uncertainties over sovereign debt in Europe. Nevertheless, a likely slowdown of China s metals demand should be offset by higher consumption in World ex-china. Metals producers pushed through significant output cuts. Reported inventories of some metals, notable copper and zinc, remain low, suggesting little buffer has been built. Meanwhile, excess capacities on the aluminium market are substantial. We believe that smelters need to show production discipline in the coming years to restore a degree of normality on the aluminium market. 9
Global imbalances (I) imbalances have been a key driver of metals China s economy has been geared towards buying raw materials and re-exporting manufactured goods This is reflective of the global growth model, which contributed to the crisis US$ bn 6 4 2-2 -4 Commodities Consumer goods Capital goods Exports Imports Exports - Imports Intermediate Inputs US$ bn 6 4 2-2 -4-6 -8-1 Current account balances 198 1983 1986 1989 1992 1995 1998 21 24 27 China US Source: CEIC, UN, BofAML Global Research calculations. Source: IMF, BofAML Global Commodity Research 1
Global imbalances (II) - China s processing economy boosted metals demand China exports a substantial part of its copper containing products to the US Product exports to the US of total Chinese production, year-to-date 6% 5% 4% 3% 2% 1% % AC Washing Refrigerators machine and and freezers dryers Computers 27 28 29 Cars and trucks In 26 and 27, exports to the US made a positive contribution to Chinese copper demand Growth contribution of copper containing exports to the US, year-to-date 4% 3% 2% 1% % -1% -2% -3% -4% 26 27 28 29 Source: USIT, CEIC, Reuters Ecowin Pro, BofA Merrill Lynch Global Commodity Research Source: USIT, CEIC, Reuters Ecowin Pro, BofA Merrill Lynch Global Commodity Research 11
The rebound of the economy was driven by the public sector; private sector spending has gradually been picking up The private sector does not make use of cheap money US consumers are unlikely to be the main growth driver in the medium-term QoQ change annualised 4 35 3 25 2 15 1 5-5 US, debt growth by sector 22 23 24 25 26 27 28 29 Household Business State and local government Federal government Percent Personal saving rate 14 12 1 8 6 4 2 47 5 53 56 59 62 65 68 71 74 77 8 83 86 89 92 95 98 1 4 7 1 Source: Reuters Ecowin Pro, BofA Merrill Lynch Global Commodity Research Source: Reuters Ecowin Pro, BofA Merrill Lynch Global Commodity Research 12
Stock draws exacerbated the crisis; restocking has added to demand Four stages of stocking cycles Inventories have remained low Phase 1 (downturn) Phase 2 (recession) Shipments decline and inventories rise. Metal demand falls. Shipments decline and inventories decline. Accelerated decline in metals demand. 12 1 8 6 Carbon (US) and coated flat product (RoW) inventories and shipments 4 3 2 Phase 3 (recovery) Phase 4 (boom) Shipments rise and inventories decline. Metal demand rises Shipments rise and inventories rise. Accelerated rise in metal demand. 4 2 1 91 92 93 94 95 96 97 98 99 1 2 3 4 5 6 7 8 9 Stocks, m tonnes (lhs) Inventory/shipment ratio (rhs) Trendline, inventory/shipment ratio (rhs) Source: BofA Merrill Lynch Global Commodity Research Source: CRU, BofA Merrill Lynch Global Commodity Research 13
Re-stocking plays out through medium-term cycles Business confidence in the US tends to be a good leading indicator for changes to inventories MoM change, 6mMA, US$bn 4 3 2 1-1 -2-3 -4-5 93 94 95 96 97 98 99 1 2 3 4 5 6 7 8 9 Inventories, durable goods (lhs) Conference Board, expectations for manufacturing (rhs) 3mMA 8 7 6 5 4 3 2 1 Shipments move ahead of inventories in the US MoM change, 12mMA, US$ bn 4 3 2 1-1 -2-3 -4-5 US, durable goods 93 94 95 96 97 98 99 1 2 3 4 5 6 7 8 9 Shipments Inventories Source: Reuters Ecowin Pro, BofA Merrill Lynch Global Commodity Research 14
The economic recovery is uneven; residential construction in the US is underperforming Net worth of households has been hit US$b Net assets of households and nonprofit organizations 7 6 5 4 3 2 1 99 1 2 3 4 5 6 7 8 9 Real estate can have an impact on PCE Holding losses on housing were significant US$bn 4 3 2 1-1 -2-3 -4-5 -6 99 1 2 3 4 5 6 7 8 9 Change in net worth, gains/losses on real estate Change in net worth, total The housing market is stabilising at a low level US$bn 4 2-2 -4-6 QoQ change 98 99 1 2 3 4 5 6 7 8 9 Change in net-worth, holding gains/losses on real estate (lhs) Personal consumption expenditure (rhs) 8 6 4 2-2 -4-6 YoY change 12% 1% 8% 6% 4% 2% % -2% -4% -6% -8% Source: Reuters Ecowin Pro, BofA Merrill Lynch Global Commodity Research Copper demand implied by US housing starts 68 7 72 74 76 78 8 82 84 86 88 9 92 94 96 98 2 4 6 8 15
The current cycle is young, but a correction is possible Fund managers believe the global economy is in early cycle Feb-1 Apr-1 Mar-1 Jan-1 Dec-9 Nov-9 Oct-9 Sep-9 Feb-4 Early Cycle (27 ) Aug-9 (36 / ) Source: Reuters Ecowin Pro, BofA Merrill Lynch Global Commodity Research R e c e s s i o n May-4 M i d C y c l e (18 ) Jul-4 Jun-9 Feb-9 Oct-8 Jul-9 Mar-9 Jan-9 May-9 Apr-9 Dec-8 Nov-8 Feb-5 Apr-5 Late Cycle (9 ) Feb-6 Jun-6 Jul-7 May-7 Dec-6 Apr-7 Aug-7 Nov-7 Sep-8 Dec-7 Jan-8 Feb-8 May-8 Jun-8 Mar-8 Apr-8 Jul-8 Aug-8 Price rises may be less pronounced as the economy moves into mid-cycle YoY change 12% 1% 8% 6% 4% 2% % -2% -4% -6% -8% LMEX, YoY 12% 1% 8% 6% 4% 2% % -2% -4% -6% -8% Mid cycle London Metal Exchange price index Late cycle Recession Early cycle Feb-4 Feb-5 Feb-6 Feb-7 Feb-8 Feb-9 Feb-1 A global PMI above 45-5 suggests metal prices are supported R 2 =.6727 3 35 4 45 5 55 6 65 Global PMI 16
We expect a sharp rebound of the economy this year Global GDP growth is set to rebound this year YoY change Global GDP 6% 5% 4% 3% 2% 1% % -1% -2% 8 82 84 86 88 9 92 94 96 98 2 4 6 8 1E YoY change 1% 8% 6% 4% 2% % -2% -4% Our econometric model suggests that global copper demand will recover Global copper demand 86 88 9 92 94 96 98 2 4 6 8 1E Actual Fitted Source: BofA Merrill Lynch Global Commodity Research Source: BofA Merrill Lynch Global Commodity Research 17
Although the outlook for commodities is positive, there is a negative feedback loop With the drop in prices, the energy sector is back down to a more sustainable level as a share of global GDP Given the more stable demand outlook and the supply reduction, we see crude oil prices moving a lot higher in 2H21 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Primary energy to nominal GDP ratio 65 69 73 77 81 85 89 93 97 1 5 9 Oil Gas Coal Nuclear Hydro 15 95 85 75 65 55 45 $/bbl Brent crude oil Brent crude oil Forward Forecast 35 Oct-8 Feb-9 Jun-9 Oct-9 Feb-1 Jun-1 Oct-1 Source: BP, BofA Merrill Lynch Global Commodity Research Source: Bloomberg, BofA Merrill Lynch Global Commodity Research 18
Base metal market balances and price forecasts ' tonnes 27 28 29 21E 211E 28 29 21E 211E Aluminium Production 37,68 39,48 37,446 4,784 44,342 4.6% -5.% 8.9% 8.7% Consumption 37,98 37,837 34,448 38,943 42,847 -.4% -9.% 13.% 1.% Balance -3 1,571 2,998 1,841 1,495 Stocks in weeks' consumption 3.8 6.3 11.4 12.6 13.2 Price ($/t) 2,641 2,621 1,72 2,275 2,1 Price (c/lb) 12 119 77 13 95 Copper Production 17,952 18,294 18,471 18,381 19,146 1.9% 1.% -.5% 4.2% Consumption 17,977 18,19 17,57 18,314 19,328.2% -2.8% 4.6% 5.5% Balance -26 275 964 67-181 Stocks in weeks' consumption 1.6 2.1 2.9 3. 2.3 Price ($/t) 7,144 6,884 5,184 7,275 8, Price (c/lb) 324 312 235 33 363 Lead Production 8,139 8,389 8,224 8,82 9,13 3.1% -2.% 7.% 3.7% Consumption 8,29 8,57 8,238 8,749 9,149 2.6% -3.2% 6.2% 4.6% Balance -151-118 -14 52-19 Stocks in weeks' consumption 1.7 1.9 2.4 2.6 2.3 Price ($/t) 2,59 2,97 1,71 2,3 2,65 Price (c/lb) 117 95 78 14 12 Nickel Production 1,429 1,392 1,289 1,372 1,474-2.5% -7.4% 6.4% 7.5% Consumption 1,371 1,284 1,295 1,392 1,477-6.4%.9% 7.5% 6.1% Balance 57 19-6 -2-3 Stocks in weeks' consumption 8.4 11.1 12.6 11. 1.2 Price ($/t) 37,167 21,291 14,735 2,95 2, Price (c/lb) 1686 966 668 95 97 Zinc Production 11,192 11,592 11,336 11,46 11,794 3.6% -2.2%.6% 3.4% Consumption 11,436 11,29 1,31 11,282 11,98-2.% -8.% 9.4% 5.6% Balance -244 384 1,26 124-114 Stocks in weeks' consumption 2.6 3.4 5.3 5.4 4.6 Price ($/t) 3,394 1,95 1,686 2,325 2,75 Price (c/lb) 154 86 76 15 125 Source: Woodmac, company reports, Reuters, Bloomberg, Metal Bulletin, BofA Merrill Lynch Commodity Research 19
Iron ore: prices at US$11/mt in 21/11 2
Iron ore: demand in China remains strong 21