2. 15 October 2009 MF Global Conference 2
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Cautionary Statement
3. 15 October 2009 MF Global Conference 3
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Global financial crisis has been the biggest shock to the world
economy since the Second World War
The Great
Depression
WW2
Note: Data prior to 1950 excludes Africa, Asia and Former Soviet Union
Source: IMF, Rio Tinto
4.8%
2.5%
3.3%
Clash of
ideologies
Post War
OECD Growth
Emergence of
Developing
Countries
Maturing
OECD
Growth in global GDP (percent a year on purchasing power parity basis)
Financial
crisis
Oil price shocks
4. 15 October 2009 MF Global Conference 4
0
10
20
30
40
50
60
1990 2000 2008
Copper
Aluminium
Traded iron ore
-20
-15
-10
-5
0
5
10
15
75 80 85 90 95 00 05
In a “metals weighted” world the downturn is comparable
to the early 1980’s and “dot-com” downturns
Growth in industrial production (percent a year)
OECD
Global, weighted by share of
metals consumption(1)
Source: IMF, WBMS, CRU, Brook Hunt, Rio Tinto
China’s share of world consumption (percent)
5. 15 October 2009 MF Global Conference 5
We are now seeing a cyclical upturn in the developed
world but underlying recovery may not be strong
20
25
30
35
40
45
50
55
60
Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09
US
Japan
Eurozone
Source: ISM Factory (US), Nomura JM (Japan), Markit (Eurozone)
Purchasing manager indicators suggest recovery …
• Release of ‘pent up’ demand,
government stimulus and end to
destocking is driving current
‘normalisation’ in demand
• Excess capacity is still holding
back investment and producers
are not restocking
• Structural fiscal deficits will
eventually need rebalancing
• Western consumers unlikely to
go back to previous levels of
borrowing
.. but a number of ‘headwinds’
6. 15 October 2009 MF Global Conference 6
0
2
4
6
8
10
12
14
16
18
20
Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10
20
25
30
35
40
45
50
55
60
65
percent yoy, index
Rapid pick up in Chinese economic activity
Chinese industrial production and
Purchasing Managers Index
Industrial
production*
(LHS)
PMI**
(RHS)
This may not matter for commodities if the strong Chinese
recovery continues; but a longer term shift in the balance
of its growth is required
Source: Reuters Ecowin, Consensus Economics
* 3 month moving average
** NBS series. Forward 1 month
Chinese GDP growth
0
2
4
6
8
10
12
14
2005 2006 2007 2008 2009f 2010f
percent yoy
7. 15 October 2009 MF Global Conference 7
Production Volume Index
Inland Chinese provinces have been the focus of Chinese
infrastructure spending
Acceleration in investment growth in China
Increase in fixed asset investment Jan-Aug 2009
Per cent yoy (bars denote relative growth)
Source: Chinese National Bureau of Statistics
Urban fixed asset investment
15
20
25
30
35
40
45
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
Jan
09
Jan
10
percent yoy, 3 month moving average
8. 15 October 2009 MF Global Conference 8
Surge in Chinese imports during 2009 have been the
driving force behind commodity markets offsetting fall in
demand in other regions
0
10
20
30
40
50
60
70
Jan-05Jan-06Jan-07Jan-08Jan-09Jan-10
Source: Chinese trade statistics
Iron ore Aluminum
0
100
200
300
400
500
Jan-05Jan-06Jan-07Jan-08Jan-09Jan-10
Copper
Chinese net unwrought copper
imports
thousand tonnes a month
Chinese iron ore imports
million tonnes a month
-300
-200
-100
0
100
200
300
400
Jan-05Jan-06Jan-07Jan-08Jan-09Jan-10
Chinese net unwrought aluminium
imports
thousand tonnes a month
9. 15 October 2009 MF Global Conference 9
0
50
100
150
200
250
300
Jul-
06
Oct-
06
Jan-
07
Apr-
07
Jul-
07
Oct-
07
Jan-
08
Apr-
08
Jul-
08
Oct-
08
Jan-
09
Apr-
09
Jul-
09
Oct-
09
Jan-
10
Spot iron ore (62% Fe, fob)
Aluminium
Copper
Gold
Thermal coal (NEWC)
9
Daily spot price index (2 October 2009 = 100)
Minus60-70%
Plus40-120%
After a record decline in 2008H2 commodity prices have
staged a strong recovery
Source: Metal Bulletin, Reuters Ecowin
US dollar has
declined 11%
10. 15 October 2009 MF Global Conference 10
0.5
0.8
1.0
1.3
1.5
1.8
2.0
-12 -8 -4 0 4 8 12 16 20 24
Lag from economic trough (quarters)
Current metals price cycle has been much more severe
than in previous periods but prices have risen more
quickly off lows
Aluminium price as ratio of 5 year trailing average(2)
(1) Average of cycles centred around 1978, 1982, 1992 and 2001
(2) Real terms
Source: LME, Rio Tinto
Copper price as ratio of 5 year trailing average(2)
0.5
1.0
1.5
2.0
2.5
3.0
-12 -8 -4 0 4 8 12 16 20 24
Lag from economic trough (quarters)
Average of
previous
cycles(1)
Current cycle
Average of
previous
cycles(1)
Current
cycle
11. 15 October 2009 MF Global Conference 11
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Jan-90 Jan-95 Jan-00 Jan-05
Aluminium: Prices in Q1 reflected excessive risk but large
stock overhangs have developed
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
90 92 94 96 98 00 02 04 06 08 10
World aluminium production and price-cost relationship
Source: IAI, CRU, LME
Western aluminium stocks Aluminium prices and costs
million tonnes $ per tonne in real 2009 terms
Median industry costs
Spot aluminium price
Exchange
Producers
12. 15 October 2009 MF Global Conference 12
Consumption is now starting to recover but remains well
below previous levels outside China
1.00
1.20
1.40
1.60
1.80
2.00
2.20
2.40
Jan
02
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
Jan
09
Jan
10
World aluminium shipments
Source Rio Tinto estimates
Non-China
monthly, million tonnes
China
monthly, million tonnes
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
Jan
02
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
Jan
09
Jan
10
Year-to-date
-29%
Year-to-date
+9%
13. 15 October 2009 MF Global Conference 13
Large smelter capacity overhangs remain both inside and
outside China
17
18
19
20
21
22
23
Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10
World aluminium production and capacity
Source: IAI, WBMS, Rio Tinto estimates
Western world
monthly, annualised million tonnes
Capacity
Production
China
monthly, annualised million tonnes
5
7
9
11
13
15
17
19
21
Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10
Capacity
Production
14. 15 October 2009 MF Global Conference 14
Copper: Constrained supply and record Chinese imports
pushed market back into deficit in H1 but destocking may
be a short run negative
Low copper stocks and constrained supply growth
Source: WBMS, LME, NYMEX, WBMS, Chinese trade statistics
Western copper stocks Western world copper mine production
monthly, annualised million tonnesthousand tonnes
8
9
10
11
12
13
14
15
Jan
00
Jan
02
Jan
04
Jan
06
Jan
08
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
Jan
02
Jan
04
Jan
06
Jan
08
Exchange
Producers and consumers
1.1 percent per annum growth in
mine production between 2005-9
15. 15 October 2009 MF Global Conference 15
(20)
(10)
0
10
20
30
40
Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10
Iron ore spot price and domestic Chinese
mine production
Chinese steel production is responding to recovery in construction activity and infrastructure
spending and driving spot iron ore prices
Iron ore: Current spot prices are supported by call on high
cost marginal producers required to meet Chinese demand
Source: World Steel Association, Chinese trade statistics, Reuters Ecowin
Floor space under
construction
Apparent steel
consumption
Residential construction and apparent steel
consumption in China
percent yoy (3 month moving average)
(15)
(10)
(5)
0
5
10
15
20
25
30
Jan 08 May 08 Sep 08 Jan 09 May 09 Sep 09
0
20
40
60
80
100
120
140
160
180
200
Domestic iron ore
production (LHS)
Spot iron ore
price (RHS)
$ per tonne
(63.5% Fe, cfr China)
percent yoy
(3 month moving average)
16. 15 October 2009 MF Global Conference 16
0
2
4
6
8
10
12
14
16
18
20
1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Consumption/production
(million tonnes)
0
100
200
300
400
500
600
700
800
900
Price (c/lb in real 2009$)
Long run price levels are the outcome of a continuous tussle
between demand and supply
Refined copper consumption and real copper price
Consumption
Price
Production
Source: LME, Brook Hunt, Rio Tinto
17. 15 October 2009 MF Global Conference 17
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000 60,000
0
2
4
6
8
10
12
GDP per capita
(in 2006 US$ at PPP)
Copper consumption
(kg/capita)
Population distribution
(millions by income group)
Future metals consumption trends will be driven by growth
in population and wealth in developing nations, particularly
China and India
2008 Population Distribution
2025 Population Distribution
Copper Consumption
China 2025
India 2008
Global population distribution and per capita copper consumption
India 2025
China 2008
China 2008 copper
consumption
China est. 2025
copper consumption
India 2025 copper
consumption
India 2008 copper consumption Source: Brook Hunt, Ecowin, World Bank, Rio Tinto estimates
18. 15 October 2009 MF Global Conference 18
0
20
40
60
80
100
0 10,000 20,000 30,000 40,000 50,000
GDP per capita (US$ at PPP rates in 2006 terms)
Urbanisationrate(percent)
National averages
Chinese provinces
Industrialisation and urbanisation within China have
some way to run
Source: Global Insight, CIA Factbook
Urbanisation rates across Asia, the United States and European Union in 2008
Urbanisation rates, income and population
Note: Size of bubble reflects total population
United States
Japan
India
EU15
China
19. 15 October 2009 MF Global Conference 19
Metals consumption could double in next 15-20 years and
implies sustained pressure on capital and people …
10
20
30
40
50
60
70
80
78 82 86 90 94 98 02 06
Capital spending by non-ferrous mining sector
($billion in 2009 terms)
0
10
20
30
40
50
60
70
80
2009-15
Base metals
Steel raw materials
Aluminium
Precious metals
Traded energy
Fertiliser
Other
Note: Base metals consists of cobalt, copper, lead, manganese, molybdenum, nickel, tin and zinc
Steel making consists of seaborne coking coal and seaborne iron ore
Aluminium consists of alumina refining and aluminium smelting
Precious metals consists of gold, silver, PGMs and diamonds
Energy consists of seaborne thermal coal and uranium
Based on current unit capital costs and Rio Tinto demand projections and assuming sustaining capital at 4% of revenue.
Sources: MICA (CRU), Rio Tinto estimates
Estimates for
2009 industry
capex $26-55bn
Future sustaining and new capital spending
requirement ($billion in 2009 terms)
20. 15 October 2009 MF Global Conference 20
… and resources. The location and grade of Copper ore
will create challenges for the industry.
26%
40%
2009 2025
Notes: 1 Existing mines and funded projects
2 Rio Tinto classification
Source: Brook Hunt Q2 2009
Increasing depth . . .
Underground copper production1
(% of global production)
… and higher risk
Current production and project
capacity in high risk2
regions
1.17%
1.03%
2009 2025
…decreasing grade…
Copper Industry average grade1
(% Cu)
12%
20%
Current New Projects
% Global production % New project capacity
21. 15 October 2009 MF Global Conference 21
21
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
2006 2015 2020 2025 2030
Long run upwards pressure on Chinese costs will support long run aluminium prices
• Chinese smelters will face increasing
competition for access to power
• Renminbi appreciation is expected to
resume once export market conditions
stabilise
• Carbon pricing will lead to upwards
industry cost and price pressure and
benefit low carbon sources of
production
Source: IEA World Energy Outlook (2008)
Chinese electricity generation requirements
TWh
… including energy. Positive long run aluminium outlook
underpinned by rising demand and energy constraints
22. 15 October 2009 MF Global Conference 22
Current market conditions and outlook
• Spot metals prices are 40-120% above Q1 cyclical lows but
remain well under previous peaks
• Stimulus spending, loans growth and stocking activities in
China provided initial basis for recovery
• Could see some ‘pay-back’ for this in coming months but may
be offset by normalisation in developed world consumption
levels
• Strong longer run fundamentals remain intact
Notas del editor
IMF forecasts (% yoy)
2009 2010
World -1.1 +3.3
Developed world -3.5 +1.25
For metals reflect the fact that activity – particularly metals intensive activity is more heavily weighted towards emerging world which has been less exposed to the economic downturn
China’s share of metals consumption:
1990: <5%
2000: 10-15%
2008: 30-50%
Find that chain-linked index of industrial production weighed by shares of base metal consumption is a better proxy for modelling metals prices.
This measure has fallen by 5% yoy – comparable to early 1980s and 2001 recessions.
Compared to 15% fall in production in industrial output in OECD economies.
Latest leading indicators for developed economies returned to expansionary territory although most recent data suggest that pace of recovery may be slowing and US leading indicator has relapsed somewhat.
Metals demand picked up over summer but mostly stimulus related and producers remain cautious over restocking.
Given the size of the downturn should see a significant bounce-back as destocking ends and pent up demand for consumer goods is released.
Latest IP % yoy
US -10.7%
Ezone -16.2%
Japan -22.7%
Rising 1-2 %-pt mom
However a number of reasons to be concern over the sustainability of this growth: The problem with a “dead cat bounce” is that the cat is still dead.
Excess capacity hold back investment: US capacity utilisation remains at 67% compared to 75-80% before crisis and not seeing much of a recovery in investment goods.
Govt fiscal consolidation. IMF forecast major economies to have structural deficits in the order of 5% of GDP. Sweden recovered from such a deficit in the 1990s by cutting back expenditure but lower nominal interest rates, lower currency and export growth.
Weak lending. Not only as banks more cautious over lending but also shift towards greater saving by consumers. Oxford Economics estimates that the “total financial wealth has fallen some $28 trillion, or 14 per cent, from its peak
Whilst poor demand in developed world have seen rapid acceleration in Chinese economy since Q1
On some measures of economic activity economy growing by 16% yoy annualised rate over the summer months
IP up 11.3% yoy in August
PMI index currently at 54.3 - previously consistent with IP growth of around 15% and continuing to climb
Consensus GDP growth forecasts continue to be pushed up:
2009 8.3%
2010 9.4%
There are concerns over the sustainability (investment led nature) of this growth
Longer term China needs to move towards more domestic consumption-led development but a pick up in export demand should begin to take over as positive growth driver in the short run.
Driver behind this acceleration has been fiscal and monetary policy stimulus by the Chinese government
In 2008 undertook quick reduction in interest rates and reserve requirements. Government control over banks allows them to direct bank lending and new bank loans have surged:
2008 = RMB4.91tr
2009 M1-8 = RMB 8.15 tr (+66% over whole of 2008)
Direct central and local government spending, especially on infrastructure projects. China accounts for three-quarters of global stimulus spending on infrastructure.
Focus of this been felt most strongly in inland regions and by some particularly metals intensive sectors
FAI (M1-8, % yoy)
Total 33.7%, East 27.2%, Centre +37.0, West 39.2
Transportation +61.2%, o/w rail 103.5%
After declining in late 2008 / 2009Q1 the impact of this activity has bee growth in apparent demand for metals of 25-50%
Debate as to what degree this reflects stockbuilding but strong rise in net imports has been driving prices during 2009
Jan-Aug
Fe Cu Al
2008 307 1,220 -1,260
2009 405 2,660 +720
% yoy +32% +117%
This has been the main driver behind recovery in prices.
Between peak and Q1/2 trough prices fell 60-70%
Since then 40-120% rise
Another additional factor has been the US dollar – rising whilst prices were falling and declining 11% since then.
Al $1950
Cu 6270 / 285c
Coal $72
Au $1052
Fe $76 (fob) / $87 (cfr) for 62% Fe)
Oil $73
Notable that current cycle has been much more severe than in the past but that prices have risen more quickly off lows.
In previous cycles prices tended to remain at floors for 4-8 quarters until stock overhangs run off.
See some tendency for prices to respond ahead of stock movements than in the past, perhaps reflecting the influence of stock financing and fund activity.
Global demand fell 25% year-on-year or circa 10 million tonnes on an annualised basis in Q1
Fixed cost of shutting capacity led to sluggish supply response and prices fell towards the bottom quartile of the cost curve
Visible western stocks above 5 million tonnes. Whilst this is higher in absolute terms than in the e1990s it is lower in weeks’s consumption (13 vs 17)
Now seeing an improvement in shipments and slowing pace of visible stock accumulation.
Ytd western shipments down 29% ytd but in July were down around 20% yoy and expect the trend to significantly improve on a yoy basis
Chinese demand expected to rise in double digit rate although yoy comparison less than in other metals markets as consumption levels were especially high in 208H1.
Unfortunately, as well as large stocks a significant excess capacity overhangs the market.
Based on August production levels there was 6.3mtpa of idled capacity in China and 3.7mtpa of spare capacity elsewhere. Further capacity will be added, notably in India next year.
Lower costs and the improvement in prices have allowed some Chinese smelters to restart production. Whilst it is comforting that production costs will provide downside protection they will also limit upside risk.
That is not the case in copper where western stocks remain low at a little over 800kt or under 5 weeks of western consumption
The tightness reflect s the jump in Chinese copper imports seen earlier.
Partly due to lower scrap imports but apparent consumption of copper in Chinese is up almost 50% yoy.
This includes stockbuilding and true demand growth is likely to be close to 20% yoy.
This implies around 800kt of stockbuilding, of which 150-250kt by SRB.
Could seem some reversal of this and seen recent decline in imports but supply growth is highly constrained.
Between 2005-9 only 1% pa growth in mine production in the Western world – stagnant Chilean production and falling output in the US.
(During this period 7-10% of annual production lost due to mine disruptions)
Although large number of new projects this is likely to be an ongoing issue for the industry.
China now accounts for well over half of the seaborne iron ore trade and the rise in it’s iron ore imports has offset a collapse in rest of world demand and led to a gradual recovery in iron ore imports.
Current production rates over 600mtpa but Chinese CSP expect to reach 525mt (+25mt this year) despite net exports falling from 44mt in 2008 to rough balance this year.
There is a debate to which steel production volumes reflect actual demand but highly leverage to construction/investment and see close correlation with floorspace under construction.
Our bottom-up analysis suggests that relatively little stockbuilding has taken place and there is little evidence of steel stockbuilding.
Previously highlighted the role of marginal Chinese costs as driving the spot iron ore price and see strong correlation between call on domestic production and prices.
Current spot price for 62% ore is $85/tonne. fob spot prices are 30% above benchmark levels agreed with Japanese mills earlier this year.
Some new capacity in 2010 but western steel production now ramping up – was still down 23% yoy in August and seeing continued news of restarts. Unlikely to see the same growth in Chinese steel demand in 2010 as stimulus not additional but suggests on-going tight market.
Spike 1, American civil war
Spike 2, end of Franco Prussian war, start of second industrial revolution
Intervening spike related to a number of factors including occasional recessions, then ww1
But as the trend accelerates, a huge wall of the world’s population will move along the horizontal axis as their average wealth increases and with that the commodity intensity of this wall of people, their consumption of raw materials, rises significantly giving rise to sharp upward moves in long run commodity prices over the next fifteen years, and beyond.
.
Demand expected to double over next 15-20 years.
Bottom up calculation of investment (new capex and sustaining) required based on current capital costs suggests need to invest $60 billion a year – not directly comparable as some sustaining capital included as opex and slightly broader coverage but more than in any year apart from 2008.
Additional people and supplier capabilities.
