What's next for the commodities stories? - First State Investments
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What’s next for the commodities stories?
Joanne Warner Head of Global Resources
Renzo Casarotto Senior Portfolio Manager
What’s happened in resources
Is it over for resources? Source: http://www.theaustralian.com.au/business/markets/stocks-down-as-resources-companies-tumble/story-e6frg916-1226623371985 http://money.msn.com/investing/commodities-crash-recession-looms http://finance.ninemsn.com.au/newsbusiness/motley/8644071/asx-climbs-but-leaves-resources-behind http://www.news.com.au/business/markets/resources-companies-to-weigh-on-asx/story-e6frfm30-1226620458088 http://economictimes.indiatimes.com/markets/commodities/copper-weakens-in-futures-trade-global-cues-subdued-demand/articleshow/19675158.cms 3
Is this the GFC - Mark II?
MSCI sector performance YTD (Rebased to 100)
120
110
100
90
80
70
Dec 12 Jan 13 Jan 13 Feb 13 Feb 13 Mar 13 Mar 13 Apr 13 Apr 13 May 13 May 13
MSCI World Index MSCI World Energy Sector Index
MSCI World Metals & Mining Index MSCI World Health Care Index
MSCI World Financials Index MSCI World Information Technology Index
MSCI World Consumer Discretionary Index MSCI World Consumer Staples Index
MSCI World Telecom Service Sector Index
Source: Bloomberg. 31 May 2013. 4
Chinese GDP - it’s the absolute numbers that count
GDP growth year on year
13.0%
12.0%
11.0%
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
GDP ($US bn)
9,000
8,000
7,000
6,000
$Usbn
5,000
4,000
3,000
2,000
1,000
-
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Bloomberg , May 2013 & CLSA April 2013. 5
It’s the absolute numbers that count
Chinese oil consumption (million bbls/d)
12.0
11.0
10.0
9.0
8.0
7.0
6.0
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Crude oil processed + net product imports
m bpd
11.0
10.0 Note the continual
9.0 increase y-y,
8.0 despite a notional
7.0 slow down in
6.0 growth rates
5.0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2009 2010 2011 2012 2013
Source: CLSA April 2013. 6
China’s current five year plan requires more infrastructure
80
70
60
50
40
30
20
10
0
Railway Highway Oil/Gas Pipe Airports
(thousand km) (ten of thousand km) (thousand km) (number of)
Previous five year plan Current five year plan
Source: Standard Chartered Resources, April 2013. 7
US Housing construction ‘upside’
Listed for sale homes per house hold
• Housing inventories at long term lows
• Vacancy rates nearing 2003 levels
• Construction jobs steady but hours up
Homeowner vacancy rate (%) US rental vacancy rate (%)
Source: Bloomberg; US Census Bureau; Stifel Nicolaus report, financial institutions, housing economics
market commentary. As at December 19, 2012. 8
A progressive dividend policy, scope to increase
BHP - Annual dividend (1990-2012), 11.4% CAGR BHP - Dividend Payout Ratio (1990-2012)
1.4
3.0
1.2
2.5
1.0
2.0
0.8
0.6 1.5
0.4 1.0
0.2 0.5
0.0 0.0
Jan-90
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Jan-90
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
DPS average payout
RIO - Annual dividend (1996-2012), 7.4% CAGR RIO - Dividend Payout Ratio (1996-2012)
2.5 0.7
2.0 0.6
0.5
1.5 0.4
1.0 0.3
0.2
0.5 0.1
0.0 0
Apr-00
Apr-05
Apr-10
Oct-97
Feb-01
Oct-02
Feb-06
Oct-07
Feb-11
Oct-12
Dec-96
Aug-98
Dec-01
Aug-03
Dec-06
Aug-08
Dec-11
Jun-99
Jun-04
Jun-09
Oct-98
Apr-04
Oct-09
May-03
Jul-01
Mar-05
Feb-06
Jul-12
Dec-96
Nov-97
Sep-99
Aug-00
Dec-07
Nov-08
Sep-10
Aug-11
Jun-02
Jan-07
ave payout payout
DPS
Prior to 1995, Rio was operating as two independent businesses CRA and RTZ.
In 2005 a $1.45ps ($1.15ps adjusted) special dividend was declared.
In 2009 no interim dividend was declared.
Source; Goldman Sachs. 9
Where to from here?
Iron ore – is the world too bearish?
China's Iron Ore Imports vs Spot Iron Ore Price
80 250
70
200
60
Million tonnes
US$/tonne
50 150
40
30 100
20
50
10
0 0
2006 2007 2008 2009 2010 2011 2012 2013
China's Iron Ore Imports, Mt Spot Iron Ore, US$/t (RHS)
Source: Morgan Stanley Research, CRU. February 2013. Source: Source: Bloomberg. May 2013. 11Iron ore – why would BHP and RIO talk the price down?
140
120
cash cost of production (US$/t fob)
100
China
80
Australia
Brazil
60
40
20
0
0 300 600 900 1,200 1,500 1,800
cumulative production (Mt)
2013 cash cost curve 50th centile 75th centile
90th centile spot (fines) 3-Jun-13 LT (incentive) price
Source: Metalytics. June 2013. 12So where’s the supply?
Exploration spend by commodity: 1998-2012 Number of deposits found – by quality
Copper: most of the metal in a handful of deposits
• Exploration spend has increased dramatically
• But why do we keep looking for gold??
• Success rates have declined
• More than half of deposits are being found in high-
political risk locations
• On average it takes 12-18 years from discovery to
first production
Source: MinEx Consulting – presentation to BBY Resources Conference, November 2012. 13Copper: Bingham Canyon – before the pit-wall failure… Source: First State Investment, as at September 2012. 14
And after the pit wall failure April 10, 2013
• Still unknown how much production will be
lost, but early estimates are 100-150kt Cu
• NB: pre-incident estimates were for an
over-supply in the Cu market of ~150kt
this year
• Cost? Equipment alone could be $100m
Source: First State Investments. Rio Tinto May 2013. 15Valuations – but is it cheap?
Mining vs MSCI World (P/E 2013 F1)
P/E FY1
30.0
HSBC Mining MSCI World (MXWO Index)
25.0
20.0
15.0
10.0
5.0
0.0
Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12
Historical and Mean P/E FY1 Ratio (Index 1/Index 2) Relative Valuation
1.80 Mean +/- 1.96 Standard Deviations
1.60
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12
Source: Nomura Custom Products Group – data to 31 May 2013. 16Valuations – but is it cheap?
Energy vs MSCI World (P/E 2013 F1)
P/E FY1
25.0
MSCI Energy (MXWO0EN Index) MSCI World (MXWO Index)
20.0
15.0
10.0
5.0
0.0
Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12
Historical and Mean P/E FY1 Ratio (Index 1/Index 2) Relative Valuation
Mean +/- 1.96 Standard Deviations
1.20
1.00
0.80
0.60
0.40
0.20
0.00
Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12
Source: Nomura Custom Products Group – data to 31 May 2013. 17The resources cycle
Phase 1
Demand rises
Inventories decline
Supply response lags = higher prices
Governments attempt to raise taxes
Phase 2
Phase 3 High prices encourage new projects
Supply response = demand
Supply is curtailed
Inventories rise = prices fall
Demand normalises
Capital expenditure is reduced
Producers benefit from recovery
18What about agribusiness?
Agriculture: hitting the headlines http://news.nationalgeographic.com/news/2013/13/130412-drought-great-plains-weather-environment/ http://www.reuters.com/article/2012/11/29/usa-drought-idUSL1E8MT5H220121129 http://www.merredinmercury.com.au/story/1433588/hundreds-of-people-gather-for-agriculture-crisis-meeting-in-merredin/?cs=1478 http://www.treehugger.com/climate-change/us-drought-going-get-worse.html http://www.agriculture.com/news/crops/wld-crop-wear-wries-abound_2-ar31103 20
Strong EM wages growth to drive consumption
China wages growth Brazil wages growth
Brazil average monthly wage (BRL)
45,000
40,000
China average wage (RMB)
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
Source: Ministry of Human Resources and Social Security, Nomura, data to Dec 2011.
Bloomberg, CEIC, Nomura, data to 31 May 2012. 21Growing demand for soft commodities
GROWING POPULATION & CONVERGING DIETS INCREASED MEAT
URBANISATION
6.5bn to 9bn by 2050
+ 40kg to 52kg by 2050
= CONSUMPTION
260mt to 470mt by 2050
70% urbanised by 2050
Source: FAO How to feed the world in 2050 report, UN World Urbanization Prospects 2009 revision. 22What does this mean for grain demand?
In 2050 Mt meat required Conversion ratio Mt grain required
Chicken 274 2 549
Beef 70 7 487
Pork 101 4 402
Sheep 25 4 102
TOTAL 470 1,540
mt
+85%
Source: OECD-FAO Agricultural Outlook 2012-2021, FAO how to feed the world in 2050
report. Consumption split is 58% chicken, 15% beef, 22% pork, 5% sheep. 23Middle East, Africa, and Asia consumption rising rapidly World’s Food Surpluses and Deficits Net trade (Million tonnes) Source: The Economist, * Cereals, rice, meals, oils and fed equivalent of meat. 24
The global food challenge… The task: • Increase global food production by 70% • Which requires $US80 billion per annum of investment The challenges: • Resource constraints (land/water) • Environmental pressures • Natural disasters • Productivity growth declining Source: FAO, How to feed the world 2050 Report. 25
How can investors participate in the solution?
The solution: Better agronomic practises
• Increased yields Balanced fertilizer application
• Increased crop intensity Improvements in innovation (i.e. seeds)
• Increased animal intensity Infrastructure investment
• Added acreage Farm economies of scale
26Agricultural value chain
Inputs Farming/ Handling/ Food Supermarkets/
Processors
plantation traders companies consumers
• seed • farm • storage • oilseed • Nestle • Tesco
• crushing • Kellogg’s • Walmart
• fertiliser • forestry/pulp handling
• • biofuels • Kraft • Sainsbury
• machinery • palm oil trading
• marketing • livestock • Waitrose
• paper
Upstream Midstream Downstream
• We invest in the upstream and midstream portion of the agricultural value chain
• Upstream resource owners tend to make the highest margins
Reference to specific securities (if any) is included for the purpose of illustration only and should not be
construed as a recommendation to buy or sell the same. 27Agricultural equity returns versus
agricultural commodity price returns
300
250
+125%
200
150
100
-18%
50
0
DAXglobal Agribusiness Index Rogers International Commodity Agriculture Index
Source: First State Investments, Bloomberg, USD from June 2005 to 30 April 2013;
standardised as at 30 June 2005. 28Valuations – agriculture Agriculture vs MSCI World (P/E 2013 F1) Source: Nomura Custom Products Group – data to 30 April 2013. 29
Valuations – forestry
Forestry vs MSCI World (P/E 2013 F1)
40.0
35.0
30.0
25.0
20.0
15.0
10.0
S&P Timber MSCI World (MXWO Index)
5.0
0.0
Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12
2.50
2.00
1.50
1.00
0.50
0.00
Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12
Source: Nomura Custom Products Group – data to 31 May 2013. 30Returns and volatility by equity sector
18.0%
16.0%
14.0% China
Soft Commodity Equities
12.0%
Consumer Staples Emerging Markets
10.0% Global Mining
Return
8.0% Health Care Materials
Consumer Discr
Energy
6.0% Industrials
Utilities Telecom Svc
4.0% Global Bond Information Tech
2.0% Global Equities
0.0% Financials
-2.0%
5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%
Risk
Global Mining Soft Commodity Equities Global Equities Energy
Materials Industrials Consumer Discr Consumer Staples
Health Care Financials Information Tech Telecom Svc
Utilities Emerging Markets China Global Bond
Source: Data used from 01 January 2005 to 31 March 2013 in USD. Rimes; First State Investments; Global Mining: HSBC Global Mining Accumulation Index; Energy: MSCI
AC World Energy Index; Materials: MSCI AC World Materials Index; Global Equities: MSCI AC World Index; Global Agribusiness: 75% DAX Global Agribusiness Index & 25%
S&P Global Forestry & Timber Index; Emerging Markets: MSCI Emerging Markets Index. Past performance is no indication of future performance.
31Look beyond the headlines Source: http://www.theaustralian.com.au/business/markets/stocks-down-as-resources-companies-tumble/story-e6frg916-1226623371985 http://money.msn.com/investing/commodities-crash-recession-looms http://finance.ninemsn.com.au/newsbusiness/motley/8644071/asx-climbs-but-leaves-resources-behind http://www.news.com.au/business/markets/resources-companies-to-weigh-on-asx/story-e6frfm30-1226620458088 32 http://economictimes.indiatimes.com/markets/commodities/copper-weakens-in-futures-trade-global-cues-subdued-demand/articleshow/19675158.cms
Disclaimer
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accuracy, completeness or correctness of the information. Neither FSI, nor any of its associates, nor any director, officer or
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Please remember that the value of investments and the income from them may go down as well as up and that you may not get
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offering documents for details, including the risk factors.
Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a
recommendation to buy or sell the same. All securities mentioned herein may or may not form part of the holdings of First State
Investments’ portfolios at a certain point in time, and the holdings may change over time.
This presentation is issued by First State Investments (Hong Kong) Limited and has not been reviewed by the Securities and
Futures Commission in Hong Kong.
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