Lachlan Shaw- Resources & Energy Symposium 2012

Living In Interesting Times Commodity Outlook : Resource & Energy Symposium

Broken Hill, May 2012

Prepared by: Lachlan Shaw – Senior Analyst, Commodities

Date: 23 May 2012

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2

Living In Interesting Times : RES Broken Hill, May 2012

3

Is the best behind us?

Will the Euro-zone survive to the next Olympiad in Rio De Janeiro in 2016?

What does China’s GDP moderation mean for resources?

Has China’s steel intensity peaked?

What challenges face Australian resource developers?

Commodity views

Questions

Outlook: Differing prospects by commodity

Commodity prices to mostly remain historically high over next 1-2 years. Costs still rising, which will pressure margins

lower. The Super Cycle is becoming more “cycle” than “super”

World GDP slows to about trend this year and next. Euro-zone remains in tact in our central case.

— US avoids recession (EU already close to / in recession)

— 1/3rd chance of Greece (and other periphery) departure – all bets are off…

— Strong growth continues in emerging markets, policy easing due to lower inflation

Consistent with ongoing commodity demand growth

Supply continues to be challenged – escalating capital costs, labour shortages/strikes, increasing project complexity,

deteriorating geology, financing, regulatory/environmental burden, etc

Prefer low-cost long-life assets with astute managers that optimise cash margins

— Positive bias towards: Copper, iron ore, premium coking coal, oil, LNG

— Negative bias towards: Aluminium, thermal coal, uranium

4

Macro: World growth about trend

Central case is Euro-zone survives => EU recession, ongoing recovery in US, robust growth in emerging markets

— 1/3rd chance of Greece (and other periphery) leaving the Euro – all bets are off…

Around trend world growth is consistent with ongoing commodity demand growth

The medium term outlook is positive – a larger share of world growth driven by emerging, commodity intensive economies

5

Figure 1: Annual world GDP growth, and contributions by major country/region (developed and developing)

Source: IMF, UN, Penn World Tables, The Conference Board, CBA

-3%

-2%

-1%

0%

1%

2%

3%

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5%

6%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Japan Korea China India Russia Brazil US EU27 Other World

EU: Grexit and financial spill overs to real activity

Dysfunctional financial markets in the GFC bred distrust and stopped banks lending to each other, firms and households,

causing trade and activity to stop

— This is the risk of a Greece exit (Grexit) and/or Euro-zone break up

– A Grexit would severely impact European (and global) banking systems.

– Policy (eg: Central Bank QE and liquidity operations) is helping but would need to step up

Developing Asia would be less impacted due to fewer financial linkages but would not escape

6

Figure 2: Selected global interbank spreads and world trade, industrial production volumes

Source: Netherlands Bureau of Economic Policy Analysis, Bloomberg, CBA

85

90

95

100

105

110

115

120

0.0%

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May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12

US (3m bill / OIS spread) Europe (3m bill / OIS spread) World trade volumes (indexed: 18-May-07 = 100, rhs) World IP volumes (indexed: 18-May-07 = 100, rhs)

EU: Debt doldrums => austerity, default or inflate?

The developed economies of Europe and the United States now a huge debt load with limited scope for repayment

Through history, excess indebtedness at the country level has usually been resolved by i) gradual debt repayment, ii) default, or

iii) inflation

Option i) is hardest (politically – see Europe currently!) and the most drawn out. Option ii) can be very disruptive to real activity,

and option iii) may also undermine stable prices and real economic performance – but if managed closely, might present best

option over the longer term.

7

Figure 3: Historical perspective - % countries in default and % countries with inflation greater than 20% pa

Source: Reinheart & Rogoff, “This Time Its Different”

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

% of countries in external default

% of countries with inflation >20%

China: Who’s who in the zoo?

China dominates global consumption of early and mid cycle commodities – particularly iron ore, steel, coking coal

Developed economies account for larger consumption shares of mid to late cycle commodities such as zinc, nickel, copper, oil,

natural gas and LNG

While the US and Europe are relevant for global demand of early and mid-cycle commodities, China is the most important

8

Figure 4: Share of global commodity consumption by major country bloc (2010)

Source: BP SRWE 2010, AME, BREE, WSA, WBMS, Bloomberg, CBA. * Shares of traded coal, NOT total world consumption

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Iron ore Steel Aluminium Copper Nickel Zinc Coking coal * Thermal coal* Oil Natural Gas LNG

China Japan Eurozone US India Other

China: Growth is investment heavy…

9

One risk to China’s outlook is elevated investment share of GDP and unbalanced GDP composition

The ramifications of any potential over-investment are, seen through a Western capitalist lens, significant:

— Excess capacity (good for users, bad for owners of these assets)

— Very low returns to capital and poor resource allocation

We would not entirely disagree…

Figure 5: Global perspective – gross fixed capital formation and GDP per capita for selected countries (1970-2010)

Source: United Nations National Accounts database, Penn World Tables, IMF, CBA

0%

5%

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25%

30%

35%

40%

45%

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000

GF

CF

as %

of G

DP

GDP per capita, 1990 international dollars

China Japan South Korea India United States Germany

China: …but the economy is also saving heavy!

But China has more savings than investment (as a share of GDP)

Implication? To rebalance China’s economy away from high investment share of GDP and towards higher consumption share

of GDP, saving share of GDP needs to fall

— Convince households to save less, eg: higher wages, better social security, better healthcare and education; lower savings

=> increased return to capital => lower investment

This requires extensive economic / political reforms in China, which will occur gradually, meaning that consumption share of

GDP will lift slowly. Investment share will remain significant; it needs to; and so will commodity demand

10

Figure 6: Global perspective – national savings and GDP per capita for selected countries (1980-2010)

Source: United Nations National Accounts database, Penn World Tables, IMF, CBA

0%

10%

20%

30%

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60%

0 5000 10000 15000 20000 25000 30000 35000 40000 45000 50000

Nati

on

al s

avin

g, %

of G

DP

GDP per capita, 1990 international dollars

China Japan South Korea India United States Germany

China: Rebalancing will slow growth…

China’s growth will rebalance away from investment and exports and towards domestic consumption and services. This is likely

to see GDP growth slow over time – consistent with other countries’ – as incomes keep rising

Investment is re-balancing from developed coastal provinces to less developed, poorer inland provinces.

— Recent insights: Henan / Zhongzhou ; Sichuan / Chengdu / Chongqing

— This theme will persist for the next decade at least, keeping commodity demand high and growing

11

Figure 8: GDP growth vs GDP per capita

Source: IMF, CBA

-10%

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0%

5%

10%

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20%

0 5000 10000 15000 20000 25000 30000 35000 40000 45000 50000

GD

P g

row

th %

y/y

GDP per capita, 2005 international dollar

India Japan South Korea Taiwan US China

China: …but still large incremental demand

Lower annual GDP growth will still translate through to large year on year demand growth, due to the sheer size of China’s

economy

— Baseline: Incremental annual GDP 40% higher in 2015 than in 2010

— Bear scenario (2% lower GDP growth): incremental annual GDP lower => lower commodity demand / prices

12

Figure 9: China incremental GDP – base and bear case

Source: IMF, CBA

$ 0.0 trn

$ 0.2 trn

$ 0.4 trn

$ 0.6 trn

$ 0.8 trn

$ 1.0 trn

$ 1.2 trn

$ 1.4 trn

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2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Millions

China GDP (base case)

China GDP (2% less growth than base case, from 2013)

Incremental GDP (lhs)

Incremental GDP (2% less growth than base case, lhs)

China: Growth to recover as cycle/policy eases

China’s liquidity cycle is easing as inflation has cooled

Fiscal policy is now shifting to a more accommodative / pro-growth stance (ref: Premier Wen Jiabao’s comments)

We expect continued policy easing to support growth stabilisation / recovery through 2H12 and into 2013:

— This will support commodity demand (eg: new construction starts, crude steel output) and pricing

13

Figure 10: China real money supply and copper price

Source: China NBS, Bloomberg, CBA

Figure 11: China excess liquidity vs S&P/ASX200 resources

Source: China NBS, PBoC, Bloomberg, CBA

-40%

-20%

0%

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0%

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25%

Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12

Excess liquidity (M2 %chg y/y less Nominal GDP %chg y/y)

S&P/ASX 200 Resources (%chg, y/y, lagged 6 mths, rhs)

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Apr-98 Apr-00 Apr-02 Apr-04 Apr-06 Apr-08 Apr-10 Apr-12

Real money supply (%chg, y/y) Copper price (%chg, y/y, 8mth lag, rhs)

Supply issue: Cost inflation

14

Figure 13: Average EBITDA margins, by commodity type, for CBA Equities research universe

Source: CBA Eqiuities

Figure 12: Change in unit costs & EBITDA margin by commodity for CBA Equities research universe

Source: CBA Equities

Sector issues: Where is the cost support?

Using recent cost curves, we find that:

— Most spot commodity prices are now below marginal costs

— Copper, gold, iron ore and premium coking coal spot prices remain well above the 95th percentile

– These commodities also have steep cost curves, meaning a large fall in price is needed to ration a given amount of supply

The climate over the next 1-2 years will likely favour low cost, long life, high grade assets; rather than leveraged assets

15

Figure 14: Spot price and cost curve figures

Source: AME, CBA

P95 P90 P85 P80

Aluminium -39% -17% -15% -14% -13%

Alumina -28% -24% -15% -12% -10%

Copper -59% 68% 88% 94% 96%

Nickel -36% -13% -4% 5% 9%

Gold -3% 41% 67% 82% 99%

Iron ore (fob) -6% 57% 77% 82% 89%

Coking coal 31% 62% 72% 75% 78%

Thermal coal -40% 0% 7% 13% 19%

Note: Cost curves include by-product credits

Marginal cost

Commodity insights

16

Iron ore & coking coal: Long demand drivers

Iron ore and coking coal demand is driven by growth in steel output (pig iron)

Over the long term, economies tend to consume more steel as incomes rise, development progresses and countries deepen

infrastructure capital stock

We see global crude steel production surpassing 2 billion tonnes by 2017, from about 1.5 billion tonnes this year

— China’s production will peak around 960 million tonnes in 2023, India’s steel production will peak decades later

— Decline of developed economy steel output will be more than offset by growth in emerging markets

17

Figure 15: Long term steel growth prospects – driven by emerging market development (history and CBA forecast)

Source: WSA, IMF, AME, ABARES, UN, The Conference Board, CBA

0

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el o

utp

ut (k

g/c

ap

ita)

GDP per capita, USD, 1990 real terms, PPP basis

US Japan South Korea China India

Iron ore: Prices to recover relatively quickly…

We forecast iron ore spot prices (delivered China port) to recover quite quickly and rally through 2012-13 towards USD 150/t,

before easing into mid-decade

— Prices in the range USD 120-130/t are at substantive Chinese domestic cost support

— Current spot price volatility (eg: cargo delays/defaults) vs record high crude steel output

18

Figure 16: Iron ore forward curve

Source: NYMEX, Bloomberg, CBA

Figure 17: Iron ore prices, forward curve and CBA forecast

Source: Metal Bulletin, Platts, SSY, NYMEX, Bloomberg, CBA

USD100/t

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USD150/t

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Spot 2 mth 4 mth 6 mth 8 mth 10 mth 12 mth 14 mth 16 mth 18 mth 20 mth 22 mth 24 mth

21-May 07-May 23-Apr 09-Apr

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May-07 May-08 May-09 May-10 May-11 May-12 May-13 May-14 May-15 May-16 May-17

Iron ore price (MB 63.5% Fe, CFR China)

Iron ore price (TSI 62% Fe CFR China)

Forward curve (TSI 62% Fe CFR China) as at 21-May-12

CBA forecast

Coking coal: Prices easing but remaining high

Positive medium term demand prospects for premium coking coal

— China blast furnace modernization, India

Spot coking coal prices drifted lower through 2011 due to recovering Queensland supply and moderating demand

Protracted industrial action at BMA’s mines in the Bowen Basin are now supporting better pricing, probably temporarily?

We see prices supported above USD 200/t for the next few years before trailing lower from mid-decade as supply growth

exceeds demand growth. Our real long run price is USD 167/t, effective in 2020

19

Figure 18: Coking coal spot prices

Source: Platts, CBA

Figure 19: CBA coking coal forecasts – FOB Australia

Source: CBA

US$0/t

US$50/t

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1975 1980 1985 1990 1995 2000 2005 2010 2015

Nominal Real (2010)

Real average CBA real long run

USD 150/t

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Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12

Premium coking coal (fob Qld)

Premium coking coal (cfr China)

Premium coking coal (cfr India)

Premium coking coal, contract (fob Qld)

Aluminium: Cost support ebbing

A large portion of global capacity is estimated to be losing money

The outlook is muted:

— We identified 13Mt of new cheap capacity in China’s Xinjiang province that will undermine global cost support further

— Markets will be in excess supply for the rest of the decade – the inventory finance trade will roll on

Only stronger demand growth, or supply discipline (in contrast with most of the last 2 decades) will tighten the market in the

medium term

20

Figure 20: Aluminium cost curve and important price points

Source: AME, CBA

Figure 21: Global cost curve with new cheap Chinese capacity

Source: AME, CBA

USc 70/lb

USc 75/lb

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USc 105/lb

USc 110/lb

USc 115/lb

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0 Mt 6 Mt 12 Mt 18 Mt 24 Mt 30 Mt 36 Mt 42 Mt

Cost curve (2012) P95 : USc 99/lb (2012)

P90 : USc 98/lb (2012) P85 : USc 97/lb (2012)

P80 : USc 95/lb (2012) Spot : USc 92/lb as of 18-Apr-12

USc 60/lb

USc 100/lb

USc 140/lb

0 kt 8,000 kt 16,000 kt 24,000 kt 32,000 kt 40,000 kt 48,000 kt 56,000 kt 64,000 kt

Demand (CBA) Original New

Alumina/Bauxite: China arbitrage lifts imports

A better seaborne to domestic price arbitrage has lifted imports (domestic output cuts help as well)

China’s demand for imported bauxite remains, thanks to high silica (high cost) domestic bauxite

— Indonesian export bans – to the extent they work – may see bauxite & alumina imports & prices rise in coming months

21

Figure 22: China domestic & seaborne alumina price & imports

Source: Metal Bulletin, China Customs, Bloomberg, CBA

Figure 23: China’s bauxite imports and import dependence ratio

Source: China Customs, China NBS, Antaike, IAI, Bloomberg, CBA

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0 ktpm

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Apr-08 Apr-09 Apr-10 Apr-11 Apr-12

Net importsAlumina price (spot, China, rhs)Alumina price (spot, fob Australia, rhs)

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Mar-08 Mar-09 Mar-10 Mar-11 Mar-12

India Indonesia Malaysia Australia Import dependence (rhs)

Copper: Don’t lose sight of the big picture

Copper prices have come back in recent weeks due to high Chinese stocks and demand worries; and the resurgence of

concerns surrounding the stability of the Eurozone

But demand and supply remains fundamentally tight. We expect a copper deficit this year.

— Chinese demand will pick up as the liquidity cycle eases and policy becomes more accommodative

— Supply remains fragile and sensitive to shocks – seismic (eg: Chile, Peru), grade, cost, etc. Having said that, new supply in

coming years will see prices ease

We remain confident in the longer term copper demand outlook given its status as a mid-cycle commodity

22

0.0 Mt

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2000 2003 2006 2009 2012 2015

Copper demand growth - China and rest of world

China

World_ex_China

Copper: China inventories up, imports to ease

Inventories: Low on LME, high in China (official plus bonded warehouse)

— Due to the import finance trade – perhaps 550kt-600kt copper in unbonded warehouses on LCs up to 360 days

— Banks (usually Chinese) who extended the trade finance ultimately carry default risk

This will unwind as liquidity cycle eases and SFE-LME arbitrage remains unfavourable for imports

Expect China’s copper imports to trend lower in coming months

23

Figure 24: Rising SFE but falling LME copper inventories

Source: SFE, LME, Bloomberg, CBA

Figure 25: SFE to LME price arbitrage and China copper import

Source: CBA

USc100/lb

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May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12

Americas (LME) Europe (LME) Asia (LME)

Shanghai (SFE) Copper price

500 kt

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May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12

Copper 3 month arbitrage Imports (rhs)

Nickel: Demand / supply drivers

Nickel demand is driven by stainless steel production, and stainless steel consumption is increasingly being driven out of Asia,

and especially China

Nickel in pig iron production in China has grown dramatically in recent years, relying in large part on nickel in concentrate

supplies from Indonesia and Philippines

— Indonesian export bans threaten this trade, although local nickel in concentrate suppliers are pragmatic about investing in

refineries. Expect less nickel concentrate flow into China and more semi-refined nickel over the medium term

24

Figure 26: Nickel demand by first use

Source: ISSF, AME, CBA

Figure 27: World stainless steel demand

Source: ISSF, CBA

Stainless steel

66%

Low alloy steels

5%

Non ferrous alloys

12%

Foundry castings

3%

Electroplating

7%

Other

7%

0 Kt

5,000 Kt

10,000 Kt

15,000 Kt

20,000 Kt

25,000 Kt

30,000 Kt

35,000 Kt

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 p

Americas EUAfrica

Asia w/o China China

Central & Eastern Europe World

Nickel: Laterite (& NPI) the key swing factor

Laterite nickel will be a more important new source of supply over the medium term, but faces significant challenges

— The complexity of processes such as high pressure acid leach (HPAL) can give rise to large upfront costs

— No two laterite deposits are the same and the chemistry involved in processing ores can be very sensitive to natural

variations in ore feedstock, thereby causing problems with the processing plant

We adopt a sanguine approach to new laterite supply, treating each project on its merits.

— Figs 28 & 29 show the sensitivity of overall nickel supply to scenarios around the major laterite projects.

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Figure 28: HPAL impact on nickel supply

Source: AME, ABARES, Bloomberg, company reports, CBA

Figure 29: HPAL impact on total nickel supply


0%

2%

4%

6%

8%

10%

12%

2012 2013 2014 2015 2016

100% of nameplate capacity 50% of nameplate capacity 30% of nameplate capacity2012 2013 2014 2015 2016

Total refined supply 1671 1794 1894 1960 1997

Base case HPAL production 16 40 60 70 78

% of refined supply 1% 2% 3% 4% 4%

Increase in refined supply

100% of nameplate capacity 55 121 186 221 221



% Increase in refined supply

100% of nameplate capacity 3% 7% 10% 11% 11%



Zinc: Supply challenge looms…

Demand outlook positive, GDP growth the main driver, China ~40%-45% of demand.

— Transportation (especially automotive via galvanised steel) and construction are the main demand drivers

Supply outlook challenged in the medium term due to some large well known closures (eg: Century)

— Positive price drivers: Average ore grades are expected to fall 0.5% over the rest of the decade. Meanwhile, current new

projects will only replace 10%-15% of lost output this decade, leading to a concentrate shortage in the medium term

— Negative price drivers: Higher rates of zinc recycling in medium term, and China’s artisanal producers

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Figure 30: Zinc supply & demand outlook


Figure 31: CBA zinc price forecasts (nominal)

Source: AME, Bloomberg, CBA

13,000 kt

13,500 kt

14,000 kt

14,500 kt

15,000 kt

15,500 kt

16,000 kt

16,500 kt

17,000 kt

17,500 kt

18,000 kt

2012 2013 2014 2015 2016 2017 2018 2019 2020

Supply Demand

USc95/lb

USc105/lb

USc115/lb

USc125/lb

USc135/lb

2012 2013 2014 2015 2016 2017 2018 2019 2020

Lead: In transition

Demand outlook is positive, driven in large part by transport eg: battery production ~70% of lead demand, and transport ~80%

of battery demand

— Positive demand driver: still low vehicle and e-bike penetration in developing economies

— Demand risk: Lighter weight vehicles globally mean less lead needed per vehicle

Supply outlook is more balanced than Zinc. Grade decline and older, inefficient and more polluting smelter closures in China

will pressure costs higher. But lead is not scarce and can be regarded as a pollutant in some polymetallic concentrates.

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Figure 32: Lead supply & demand outlook


Figure 33: CBA lead price forecasts (nominal)

Source: AME, Bloomberg, CBA

10,000 kt

11,000 kt

12,000 kt

13,000 kt

14,000 kt

15,000 kt

2012 2013 2014 2015 2016 2017 2018 2019 2020

Supply Demand

USc96/lb

USc100/lb

USc104/lb

USc108/lb

USc112/lb

USc116/lb

2012 2013 2014 2015 2016 2017 2018 2019 2020

Gold: The currency of choice?

The higher gold price reflects both a structurally and cyclically weaker US dollar

The cyclical weakness of the US dollar looks to be reverting somewhat, with better macro trends in the US and safe haven

demand due to the Euro-zone sovereign debt crisis

The structural drivers for a weaker USD remain broadly in place

— The caveat to this is that the US dollar remains an asset safe haven of last resort – extreme volatility and risk aversion does

result in US dollar support, but we view these events as relatively transitory

28

Figure 34: Gold price history and forecasts

Source: Bloomberg, CBA

Figure 35: US General Government Gross Debt

Source: IMF WEO April 2012, CBA

-8%

-4%

0%

4%

8%

12%

16%

20%

24%

-USD 8 Trillion

-USD 4 Trillion

USD 0 Trillion

USD 4 Trillion

USD 8 Trillion

USD 12 Trillion

USD 16 Trillion

USD 20 Trillion

USD 24 Trillion

1981 1985 1989 1993 1997 2001 2005 2009 2013 2017

General government gross debt %chg, y/y

USD0/oz

USD200/oz

USD400/oz

USD600/oz

USD800/oz

USD1,000/oz

USD1,200/oz

USD1,400/oz

USD1,600/oz

USD1,800/oz

USD2,000/oz

Mar-86 Mar-89 Mar-92 Mar-95 Mar-98 Mar-01 Mar-04 Mar-07 Mar-10 Mar-13 Mar-16

Nominal (USD/oz)

Real (USD/oz, Indexed: 30-Mar-12 = 100)

CBA forecast (nominal, USD/oz)

Real average (1980-2010 = USD 706/oz)

Gold: Yield correlation gives way to FX

The gold price has recorded a strong negative correlation with the US real long bond yield in recent years

But it also trades – at various points in time – with a strongly negative correlation to the US dollar

The recent firming of the US dollar, due to a i) better outlook for the US economy, and ii) increased safe haven demand thanks

to the ongoing European sovereign debt crisis; has dominated the gold price in recent months, even as real long yields have

continued to drift lower

— A departure from the Euro-zone by Greece (and other periphery states) would see gold supported out of safe haven flows

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Figure 36: Gold price and US real long yields - correlation


Figure 37: Gold price and US dollar index


-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%USD0/oz

USD200/oz

USD400/oz

USD600/oz

USD800/oz

USD1,000/oz

USD1,200/oz

USD1,400/oz

USD1,600/oz

USD1,800/oz

USD2,000/oz

May-06 May-07 May-08 May-09 May-10 May-11 May-12

Gold price

US 10 yr real yields (inverted, rhs)

65

70

75

80

85

90

95USD0/oz

USD200/oz

USD400/oz

USD600/oz

USD800/oz

USD1,000/oz

USD1,200/oz

USD1,400/oz

USD1,600/oz

USD1,800/oz

USD2,000/oz

May-05 May-06 May-07 May-08 May-09 May-10 May-11 May-12

Gold price US dollar index (inverted, rhs)

Gold: Central bank net buying

Central banks have for decades been net sellers of gold out of reserves

But more recently, this has shifted towards being net buyers, thanks to efforts to diversify reserve holdings away from US

treasuries and US dollars

The impact has been to switch an annual supply source of 400-500 tonnes to a demand source of 400-500 tonnes per annum.

This is significant in a global market of only ~4000 tonnes per annum

30

Figure 38: Central bank net gold sales - annual

Source: GFMS, Bloomberg, CBA

Figure 39: Central bank net gold sales - quarterly

Source: GFMS, Bloomberg, CBA

-200 t

-150 t

-100 t

-50 t

0 t

50 t

100 t

150 t

200 t

Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11

Purchases Sales Net Sales

-600 t

-400 t

-200 t

0 t

200 t

400 t

600 t

800 t

Dec-90 Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11

Purchases Sales Net Sales

Silver: Demand & supply trends

Since the 1990’s, fabrication demand has constituted the largest component of overall demand. Of fabrication demand,

industrial demand is the largest segment (55% in 2010 vs 38% in 1990); jewellery demand has averaged ~25% while implied

net investment demand has picked up in lock step with gold investment demand in recent years

Silver supply is dominated by mine supply, which has ranged between 59% to 78% of total supply. Old scrap has consistently

contributed ~20% to total supply, while disinvestment ceased in the 1990s

— Mine supply is highly dependent on copper, lead and zinc mine economics, given the occurrence of polymetallic deposits

entailing significant by-product credits

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Figure 40: World silver demand by major component

Source: Silver Institute, Bloomberg, CBA

Figure 41: World silver supply by major component

Source: Silver Institute, Bloomberg, CBA

0 kt

200 kt

400 kt

600 kt

800 kt

1000 kt

1200 kt

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Total Fabrication Net Government Purchases

Producer Hedging Implied Net Invesment

Other Total

0 kt

200 kt

400 kt

600 kt

800 kt

1000 kt

1200 kt

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Mine Production Net Government Sales Old ScrapProducer Hedging Disinvestment OtherTotal

Silver: Pricing has eased…gold preferred…

The gold to silver price ratio provides an indication of how these two precious metals trade relative to each other

— Currently, the gold to silver price ratio is below its 35 year long run average, indicating either a low gold price, high silver price

or combination of the two (relative to historical norms). This seems a little odd to us, as we would characterise gold

fundamentals as tighter than silver. As such, we expect this ratio to continue normalising to long run levels over time

We see silver pricing being determined in large part by gold pricing in the short to medium term. Silver tends to be traded more

aggressively as a ‘safe haven’ asset than gold – a pattern that we argue may not be sustainable, given its relative abundance

and consumer preference for gold as a store of wealth. We see silver prices easing in coming years.

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Figure 42: Gold to silver price ratio


Figure 43: Silver price forecasts (real and nominal)


USD 0/oz

USD 5/oz

USD 10/oz

USD 15/oz

USD 20/oz

USD 25/oz

USD 30/oz

USD 35/oz

USD 40/oz

USD 45/oz

Mar-90 Mar-95 Mar-00 Mar-05 Mar-10 Mar-15 Mar-20

Nominal Real (Indexed: Dec-11)

0x

20x

40x

60x

80x

100x

120x

May-76 May-80 May-84 May-88 May-92 May-96 May-00 May-04 May-08 May-12

Gold-Silver price ratio

Average (35 year)

Oil: Geopolitics and (still) muted US demand

UK Brent crude has traded at a premium to US WTI for over a year now, reflecting:

— Middle East and North Africa geopolitical tensions, and

— Infrastructure bottlenecks in the US onshore energy market restricting shale oil from reaching the Gulf Coast (the Seaway

pipeline reversal starts to address this)

Weaker demand in the US and EU continues to offset by strong demand in emerging markets

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Figure 44: UK Brent and US WTI crude oil prices


Figure 45: US crude oil stocks – days of consumption

Source: US DoE, Bloomberg, CBA

USD0/bbl

USD20/bbl

USD40/bbl

USD60/bbl

USD80/bbl

USD100/bbl

USD120/bbl

USD140/bbl

USD160/bbl

May-92 May-96 May-00 May-04 May-08 May-12

UK Brent US WTI

15 days

17 days

19 days

21 days

23 days

25 days

27 days

Week 1 Week 11 Week 21 Week 31 Week 41 Week 51

Average '06-'11 2010 2011 2012

Oil: US oil market to remain well supplied

Record high numbers of drilling rigs have been deployed into US liquids rich shale plays reflecting the recent record high US oil

to gas price ratio. This will drive US onshore liquids output growth into the medium term

Still, US onshore gas supply will grow too, thanks to large numbers of wells drilled in recent years, and significant gas by-

products from liquids rich wells under development now. US gas prices are likely to remain under pressure

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Figure 46: US oil to gas price and rig count ratios

Source: Baker Hughes, Bloomberg, CBA

Figure 47: US crude oil, gas; and thermal coal prices

Source: globalCOAL, Bloomberg, CBA

0.0 x

2.0 x

4.0 x

6.0 x

8.0 x

10.0 x

12.0 x

0.0 x

0.5 x

1.0 x

1.5 x

2.0 x

2.5 x

May-04 May-05 May-06 May-07 May-08 May-09 May-10 May-11 May-12

Oil to gas rig ratio (LHS) Oil to gas price ratio (RHS)

0 mmbtu

4 mmbtu

8 mmbtu

12 mmbtu

16 mmbtu

20 mmbtu

24 mmbtu

28 mmbtu

Apr-00 Apr-02 Apr-04 Apr-06 Apr-08 Apr-10 Apr-12

WTI Oil Newcastle coal Richards Bay coal Henry Hub gas

RECAP: Living In Interesting Times

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Is the best behind us? Less “super”, more “cycle” => tier 1 assets and operators

Will the Euro-zone survive to the next Olympiad in Rio De Janeiro in 2016? ???!

What does China’s GDP moderation mean for resources? Growth continues…

Has China’s steel intensity peaked? NO. Nor for most (all?) metals and energy

What challenges face Australian resource developers? Cost, cost and cost

Commodity views

Questions

THANK YOU AND SEE YOU IN 2013 !

CBA commodity price deck – calendar year

36

Lachlan Shaw- Resources & Energy Symposium 2012

Economy & Finance

Transcript of Lachlan Shaw- Resources & Energy Symposium 2012