Session3 Sunder
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NCDEX
Base Metals – A Global Perspective June 08, 2006
Major Non Ferrous Metals
2
Copper
Aluminum
Zinc
Nickel
Lead
Tin
Major Exchanges LME COMMEX SHFE KTE
All Copper* Copper* Tin
LME is synonym for Non Ferrous Metals More than 90 % of physical trade is based on LME prices *Aluminium Contract not liquid 3
Key Drivers
4
Commodity fundamentals Demand-Supply (growth) Gap Inventory China!
Economic factors GDP Growth IP Growth OECD leading indicators Purchasing Manager’s Index
Others Funds Currency
Base metals supply/demand summary '000 tonnes 2005 2006
2003
2004
Copper Production 15306 Consumption 15608 Balance -302
15936 17061 -1126
16670 16942 -272
Aluminium Production 28040 Consumption 27876 Balance 164
30013 30246 -233
Zinc Production Consumption Balance
10116 10334 -217
% Change Y-o-Y 2005 2006
2007
2008
2003
2004
18064 17915 148
18981 18692 289
19916 19634 282
-0.4% 3.8%
4.1% 9.3%
4.6% -0.7%
31947 31738 209
33653 33758 -105
35100 35160 -60
37730 37603 127
7.8% 9.0%
7.0% 8.5%
10133 10420 -287
10677 11095 -418
11442 11575 -133
12432 12369 63
1.9% 3.3%
Nickel Production 1203 1260 Source: Macquarie Research, February 2006 Consumption 1243 1264 Balance -40 -4
1292 1260 32
1341 1342 -1
1408 1406 2
1529 1496 33
Lead Production Consumption Balance
7237 7382 -144
7631 7668 -37
8023 7945 78
8337 8228 109
5
9821 9668 153
6782 6829 -47
6833 7067 -234
2007
2008
8.4% 5.7%
5.1% 4.3%
4.9% 5.0%
6.4% 4.9%
5.3% 6.4%
4.3% 4.2%
7.5% 6.9%
3.0% 6.9%
0.2% 0.8%
5.4% 6.5%
7.2% 4.3%
8.7% 6.9%
2.6% 6.2%
4.8% 1.7%
2.5% -0.4%
3.8% 6.5%
5.0% 4.8%
8.6% 6.4%
2.0% 2.8%
0.7% 3.5%
5.9% 4.5%
5.4% 3.9%
5.1% 3.6%
3.9% 3.6%
IMF Metal Price Index - Nominal Terms
160 140 120 100 80 60
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
20
1955
40
1950
IM F M e tal Price Inde x - nominal te rms
How big is this bull market?
Source: IMF, Macquarie Research
6
This is only the fourth major bull market for the metals in the past 40 years.
In terms of scale, it is similar to the late 80s bull market.
The IMF metal price index: Cu, Al, Zn, Ni, Sn, Pb Fe and uranium.
2800
Base metal stocks and prices (nominal)
17 15
LMEX Price Index
2300 13
1800
11 9
1300
7 800
300
1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
5
Nominal Prices
Exchange/Producer Stocks (Cu/Al/Zn/Pb/Ni)
exchange/producer stocks: weeks of demand
Market inventories extremely low
3
Stocks Trend
Source: Macquarie Research April 2006,
In the late 1980s, market inventories stayed at critically tight levels despite slowing economic growth – this is what supported prices then…and now. 7
Demand growth has accelerated Copper Demand Growth by Decade 7000
Aluminium Demand Growth by Decade 20000
6231
Other E.Bloc
Other E.Bloc
China
6000
West 4014
Total
5000
16386
China
West 15000
Total
4000 10000
2000
2430
5878
2269
'000t
'000t
3000
1566
1795
5921
5191 3759
5000 2535
1000 0
0
-1000 -2000
-5000 19501960
19601970
19701980
19801990
19902000
20002010
19501960
19601970
19701980
Source: Macquarie Research April 2006,
8
Chinese demand growth has caused a massive acceleration in world metals demand growth.
19801990
19902000
20002010
China eating up huge amounts of metal
9
Industrial growth bottomed out 12%
8%
10% 8%
6%
6% 4%
4%
2%
2%
0%
0% -2%
-2%
-4% -4%
-6%
-6%
Change)
10%
Leading Indicator (6-Month Rate of
Western World IP (% Change Y-o-Y)
OECD Leading Indicator and W. World Industrial Production
-8%
W. World IP
-8% 80
Source: Macquarie88 Research, 82 OECD, 84 LME, 86 90
Leading Indicator - Forward 6 Months 92
94
96
98
00
02
04
-10% 06
Source: Macquarie Research April 2006,
OECD leading indicator points to an acceleration in growth rates in late 2005 and early 2006.
10
Although the relationship between the OECD LI and metals prices is not as strong as previously (due to the influence of China on prices), this is still a positive sign for 1H06.
Economic indicators looking strong! Purchasing Managers' Indices and OECD Lead Indicator
60
60
Purchasing Managers' Indices and Base Metal 60% Prices
58
50%
56
40%
54
30%
4%
52
20%
2%
50
10%
48
0%
46
-10%
44
-20%
42
-30%
40
-40%
10%
58
8%
56 6% 54 52 50 48
0%
46
Average EU/US/Japan PMI (lhs) OECD lead indicaor (rhs)
Source: OECD, Reuters, LME, Macquarie Research,6 Source: Macquarie Research April 2006,
2006
2005
2005
2004
2004
2003
2003
2002
2002
2001
2001
2000
2000
-6%
1999
2006
2005
2005
2004
2004
2003
2003
2002
2002
2001
2001
2000
2000
1999
1999
1998
1998
40
1999
-4%
42
1998
44
1998
-2%
Average EU/US/Japan PMI (lhs) LMEX, % change yoy (rhs)
Purchasing managers’ indices and OECD leading indicator telling the same story – industrial growth in the Western world is accelerating again. In terms of year on year changes, there is still a relationship between these indicators and metals prices. 11
Non-fundamental drivers: Investment fund inflows Total Commodity Index Funds
80 70 60
$USbn
50 40 30
20
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
10
Source: Industry estimates, February 2006
12
Around $80bn estimated to be invested in commodity index funds at end 2005 up from around $55bn at end 2004 and less than $30bn at end 2003. Industrial metals 7– 20% of the total (depending on the index). Prediction of fund growth to $110– 120bn by end 2006.
Commodity index funds weightings in each commodity Average Commodity Sector Weightings of Index funds
Industrial Metals Weightings of Index funds Lead 0.7%
Nickel 1.3% Agriculture 29%
Precious metals 5%
Industrial metals 12% Energy 54%
Source: Macquarie Research, February 2006
13
Zinc 1.4% Copper 3.7%
100% 90% 80% 70% 60% 50% 40% 30%
Aluminum 4.2%
20% 10% 0%
Impact of index funds – share of nearby LME open interest 40% 35%
Index funds - share of cash-three month open interest on LME 2001
2002
2003
2004
2005
% of total
30% 25% 20% 15% 10% 5% 0% copper
Aluminium
Source: Macquarie Research estimates, February 2006
Zinc
Nickel
Lead
Ignores impact of OTC (over the counter business) which could be substantial…nevertheless fund influence is obvious. 14
Interest rates……. What does rising US rates mean for prices? 190
10
Metal Prices $US 170
US Fed Funds Rate
9 8 7
130 110 90
6 5 4 3
70 2
50 30 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: Macquarie Research April 2006,
Measured in constant 2005 dollars, prices are not that high 15
1 0
Rate: %
Prices: LMEX Level
150
Current Scenario
16
We are in the midst of a massive bull market in base metals (midst or around the peak???)
The main drivers have been: An acceleration in demand growth – largely due to China
A delayed supply response
More recently huge inflow of investment fund money into base metals.
Scenario Change
17
What could end the bull market?
A substantial slowdown/downturn in demand growth – driven by weaker economic growth
A strong supply response – looking less likely and farther
A slowdown or reversal of fund flows – driven by a fundamental change?
Commodity Bubble?
18
Commodity Bubble?
19
Commodity Bubble?
20
Commodity Bubble?
21
Commodity Bubble?
22
Opportunity NCDEX
Localized Contract Specification,
Trading locally in INR prices.
Small lots
Reflection of Realistic Domestic Demand
Arbitrage Opportunities
Encourage value-chain participants for hedging
23
Specifications Aluminum
Copper
Basis
Ex- Bhiwandi*
Ex- Mumbai*
Trading Unit
2000 Kg (2MT)
1000 Kg (1 MT)
Quotation
Rs Per Kg
Rs Per Kg
Delivery unit
2000 Kg +/- 2%
1000 Kg +/- 2%
Tick size
Rs.0. 100/- per KG
Rs.0. 100/- per KG
Delivery Center
Bhiwandi
Bhiwandi
Additional Delivery Center
Delhi
Delhi
* Excl of Excise /CVD, Cess & Sales tax) 24
Specifications Nickel
Zinc
Basis
Ex- Bhiwandi*
Ex- Bhiwandi*
Trading Unit
250 Kg
2000 Kg (2MT)
Quotation
Rs Per Kg
Rs Per Kg
Delivery unit
250 Kg +/- 2%
2000 Kg +/- 2%
Tick size
Rs.0. 100/- per KG
Rs.0. 100/- per KG
Delivery Center
Bhiwandi
Bhiwandi
Additional Delivery Center
Delhi
Delhi
* Excl of Excise /CVD, Cess & Sales tax) 25
Thank You
26
Base Metals – A Global Perspective June 08, 2006
Major Non Ferrous Metals
2
Copper
Aluminum
Zinc
Nickel
Lead
Tin
Major Exchanges LME COMMEX SHFE KTE
All Copper* Copper* Tin
LME is synonym for Non Ferrous Metals More than 90 % of physical trade is based on LME prices *Aluminium Contract not liquid 3
Key Drivers
4
Commodity fundamentals Demand-Supply (growth) Gap Inventory China!
Economic factors GDP Growth IP Growth OECD leading indicators Purchasing Manager’s Index
Others Funds Currency
Base metals supply/demand summary '000 tonnes 2005 2006
2003
2004
Copper Production 15306 Consumption 15608 Balance -302
15936 17061 -1126
16670 16942 -272
Aluminium Production 28040 Consumption 27876 Balance 164
30013 30246 -233
Zinc Production Consumption Balance
10116 10334 -217
% Change Y-o-Y 2005 2006
2007
2008
2003
2004
18064 17915 148
18981 18692 289
19916 19634 282
-0.4% 3.8%
4.1% 9.3%
4.6% -0.7%
31947 31738 209
33653 33758 -105
35100 35160 -60
37730 37603 127
7.8% 9.0%
7.0% 8.5%
10133 10420 -287
10677 11095 -418
11442 11575 -133
12432 12369 63
1.9% 3.3%
Nickel Production 1203 1260 Source: Macquarie Research, February 2006 Consumption 1243 1264 Balance -40 -4
1292 1260 32
1341 1342 -1
1408 1406 2
1529 1496 33
Lead Production Consumption Balance
7237 7382 -144
7631 7668 -37
8023 7945 78
8337 8228 109
5
9821 9668 153
6782 6829 -47
6833 7067 -234
2007
2008
8.4% 5.7%
5.1% 4.3%
4.9% 5.0%
6.4% 4.9%
5.3% 6.4%
4.3% 4.2%
7.5% 6.9%
3.0% 6.9%
0.2% 0.8%
5.4% 6.5%
7.2% 4.3%
8.7% 6.9%
2.6% 6.2%
4.8% 1.7%
2.5% -0.4%
3.8% 6.5%
5.0% 4.8%
8.6% 6.4%
2.0% 2.8%
0.7% 3.5%
5.9% 4.5%
5.4% 3.9%
5.1% 3.6%
3.9% 3.6%
IMF Metal Price Index - Nominal Terms
160 140 120 100 80 60
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
20
1955
40
1950
IM F M e tal Price Inde x - nominal te rms
How big is this bull market?
Source: IMF, Macquarie Research
6
This is only the fourth major bull market for the metals in the past 40 years.
In terms of scale, it is similar to the late 80s bull market.
The IMF metal price index: Cu, Al, Zn, Ni, Sn, Pb Fe and uranium.
2800
Base metal stocks and prices (nominal)
17 15
LMEX Price Index
2300 13
1800
11 9
1300
7 800
300
1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
5
Nominal Prices
Exchange/Producer Stocks (Cu/Al/Zn/Pb/Ni)
exchange/producer stocks: weeks of demand
Market inventories extremely low
3
Stocks Trend
Source: Macquarie Research April 2006,
In the late 1980s, market inventories stayed at critically tight levels despite slowing economic growth – this is what supported prices then…and now. 7
Demand growth has accelerated Copper Demand Growth by Decade 7000
Aluminium Demand Growth by Decade 20000
6231
Other E.Bloc
Other E.Bloc
China
6000
West 4014
Total
5000
16386
China
West 15000
Total
4000 10000
2000
2430
5878
2269
'000t
'000t
3000
1566
1795
5921
5191 3759
5000 2535
1000 0
0
-1000 -2000
-5000 19501960
19601970
19701980
19801990
19902000
20002010
19501960
19601970
19701980
Source: Macquarie Research April 2006,
8
Chinese demand growth has caused a massive acceleration in world metals demand growth.
19801990
19902000
20002010
China eating up huge amounts of metal
9
Industrial growth bottomed out 12%
8%
10% 8%
6%
6% 4%
4%
2%
2%
0%
0% -2%
-2%
-4% -4%
-6%
-6%
Change)
10%
Leading Indicator (6-Month Rate of
Western World IP (% Change Y-o-Y)
OECD Leading Indicator and W. World Industrial Production
-8%
W. World IP
-8% 80
Source: Macquarie88 Research, 82 OECD, 84 LME, 86 90
Leading Indicator - Forward 6 Months 92
94
96
98
00
02
04
-10% 06
Source: Macquarie Research April 2006,
OECD leading indicator points to an acceleration in growth rates in late 2005 and early 2006.
10
Although the relationship between the OECD LI and metals prices is not as strong as previously (due to the influence of China on prices), this is still a positive sign for 1H06.
Economic indicators looking strong! Purchasing Managers' Indices and OECD Lead Indicator
60
60
Purchasing Managers' Indices and Base Metal 60% Prices
58
50%
56
40%
54
30%
4%
52
20%
2%
50
10%
48
0%
46
-10%
44
-20%
42
-30%
40
-40%
10%
58
8%
56 6% 54 52 50 48
0%
46
Average EU/US/Japan PMI (lhs) OECD lead indicaor (rhs)
Source: OECD, Reuters, LME, Macquarie Research,6 Source: Macquarie Research April 2006,
2006
2005
2005
2004
2004
2003
2003
2002
2002
2001
2001
2000
2000
-6%
1999
2006
2005
2005
2004
2004
2003
2003
2002
2002
2001
2001
2000
2000
1999
1999
1998
1998
40
1999
-4%
42
1998
44
1998
-2%
Average EU/US/Japan PMI (lhs) LMEX, % change yoy (rhs)
Purchasing managers’ indices and OECD leading indicator telling the same story – industrial growth in the Western world is accelerating again. In terms of year on year changes, there is still a relationship between these indicators and metals prices. 11
Non-fundamental drivers: Investment fund inflows Total Commodity Index Funds
80 70 60
$USbn
50 40 30
20
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
10
Source: Industry estimates, February 2006
12
Around $80bn estimated to be invested in commodity index funds at end 2005 up from around $55bn at end 2004 and less than $30bn at end 2003. Industrial metals 7– 20% of the total (depending on the index). Prediction of fund growth to $110– 120bn by end 2006.
Commodity index funds weightings in each commodity Average Commodity Sector Weightings of Index funds
Industrial Metals Weightings of Index funds Lead 0.7%
Nickel 1.3% Agriculture 29%
Precious metals 5%
Industrial metals 12% Energy 54%
Source: Macquarie Research, February 2006
13
Zinc 1.4% Copper 3.7%
100% 90% 80% 70% 60% 50% 40% 30%
Aluminum 4.2%
20% 10% 0%
Impact of index funds – share of nearby LME open interest 40% 35%
Index funds - share of cash-three month open interest on LME 2001
2002
2003
2004
2005
% of total
30% 25% 20% 15% 10% 5% 0% copper
Aluminium
Source: Macquarie Research estimates, February 2006
Zinc
Nickel
Lead
Ignores impact of OTC (over the counter business) which could be substantial…nevertheless fund influence is obvious. 14
Interest rates……. What does rising US rates mean for prices? 190
10
Metal Prices $US 170
US Fed Funds Rate
9 8 7
130 110 90
6 5 4 3
70 2
50 30 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: Macquarie Research April 2006,
Measured in constant 2005 dollars, prices are not that high 15
1 0
Rate: %
Prices: LMEX Level
150
Current Scenario
16
We are in the midst of a massive bull market in base metals (midst or around the peak???)
The main drivers have been: An acceleration in demand growth – largely due to China
A delayed supply response
More recently huge inflow of investment fund money into base metals.
Scenario Change
17
What could end the bull market?
A substantial slowdown/downturn in demand growth – driven by weaker economic growth
A strong supply response – looking less likely and farther
A slowdown or reversal of fund flows – driven by a fundamental change?
Commodity Bubble?
18
Commodity Bubble?
19
Commodity Bubble?
20
Commodity Bubble?
21
Commodity Bubble?
22
Opportunity NCDEX
Localized Contract Specification,
Trading locally in INR prices.
Small lots
Reflection of Realistic Domestic Demand
Arbitrage Opportunities
Encourage value-chain participants for hedging
23
Specifications Aluminum
Copper
Basis
Ex- Bhiwandi*
Ex- Mumbai*
Trading Unit
2000 Kg (2MT)
1000 Kg (1 MT)
Quotation
Rs Per Kg
Rs Per Kg
Delivery unit
2000 Kg +/- 2%
1000 Kg +/- 2%
Tick size
Rs.0. 100/- per KG
Rs.0. 100/- per KG
Delivery Center
Bhiwandi
Bhiwandi
Additional Delivery Center
Delhi
Delhi
* Excl of Excise /CVD, Cess & Sales tax) 24
Specifications Nickel
Zinc
Basis
Ex- Bhiwandi*
Ex- Bhiwandi*
Trading Unit
250 Kg
2000 Kg (2MT)
Quotation
Rs Per Kg
Rs Per Kg
Delivery unit
250 Kg +/- 2%
2000 Kg +/- 2%
Tick size
Rs.0. 100/- per KG
Rs.0. 100/- per KG
Delivery Center
Bhiwandi
Bhiwandi
Additional Delivery Center
Delhi
Delhi
* Excl of Excise /CVD, Cess & Sales tax) 25
Thank You
26
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