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Commodity Price Outlook How long can the high prices be sustained?

Commodity Price Outlook How long can the high prices be sustained?. Goldman Sachs JBWere Commodities Team Melbourne Malcolm Southwood malcolm.southwood@gsjbw.com London Paul Gray paul.gray@gsjbw.com. Commodity Price Trends: the start of a new era, or top of the (super) cycle?.

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Commodity Price Outlook How long can the high prices be sustained?

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  1. Commodity Price OutlookHow long can the high prices be sustained? Goldman Sachs JBWere Commodities TeamMelbourne Malcolm Southwood malcolm.southwood@gsjbw.com London Paul Gray paul.gray@gsjbw.com

  2. Commodity Price Trends: the start of a new era, or top of the (super) cycle?

  3. The World and the BRICs dream

  4. The World and the BRICS dream

  5. China: the dominant force in global commodity markets

  6. How long can it last? “saturation point” is typically $15,000 – $20,000 real GDP/capita (PPP adjusted) – China is still < $7,000! Per capita consumption of steel and copper Source: IMF World Economic Outlook

  7. The China (and India) growth story has many years to run

  8. Challenges to supply growth (1) • Quality and availability of projects: location; size; depth; grade etc. • Infrastructure: availability; cost; lead-time. • Personnel: Labour availability; skills shortages. • Capital equipment: extended lead-times. • Capital costs: have risen dramatically. • Financing and decision-making: What is an appropriate long-term price?

  9. Challenges to Supply Growth (2)

  10. Challenges to Supply Growth (3):

  11. Iron Ore

  12. Iron Ore: Seaborne trade - it’s all about China!

  13. Iron Ore: Chinese Imports.

  14. Iron Ore: where are the Chinese imports coming from?

  15. Iron Ore: Beware the Chinese supply response!Domesticmine production rises to fill gap created by shortage of imports but Av. Fe grade is declining.

  16. Iron ore: Capesize freight rates – remain high and volatile.

  17. Iron ore: Spot prices at record levels

  18. Iron Ore Price Cycle

  19. Alumina & Aluminium

  20. Aluminium: Short-term Caution; Medium Term Optimism

  21. Aluminium: China’s Aluminium Industry Policy

  22. Aluminium: Bauxite imports - mainly from Indonesia

  23. Chinese smelters dominate the top end of the cost curve

  24. Aluminium: longer term, we see China as a net importer

  25. GSJBW Aluminium Price Outlook to 2011

  26. Copper

  27. Copper: historical price series

  28. Copper: the need for new supply

  29. Copper: Assessing the impact of a slowdown in the US housing market

  30. Copper: Costs and Margins

  31. We Expect Six Years with the Average Copper Price above US$3.00/lb!

  32. Nickel

  33. Historical Nickel Price Series

  34. Nickel: China is Driving Short-term Supply Growth

  35. Nickel: Chinese ferronickel production outlook

  36. Nickel: Costs and Margins

  37. Nickel: we expect prices to continue falling

  38. Summary/Conclusions • A powerful combination of BRIC’s related demand growth and supply side constraints means that commodity prices will remain high relative to historical levels. The secular decline in real commodity prices has ended. • We prefer commodities for which we see a weak or delayed supply response. • We prefer commodities that China cannot provide for itself. • We prefer upstream (mining) to downstream (smelting/refining/fabricating). • China can build smelters, but cannot create ore bodies! • Resource company share prices have not displayed the same frothiness as the underlying commodities and many still offer good long-run investment potential.

  39. Muito obrigado e boa sorte!Paul Gray

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