Copper Market

and Industry Outlook

Juan Carlos Guajardo B.Executive Director

25 May 2016

13th Shanghai Derivatives Market ForumNonferrous Metals Subforum

Shanghai Futures Exchange (SHFE)

Content

I. Introduction

II. Demand side

• China

• The dollar

• The oil price

III. Supply side

• Market cap

• Debts

• Cost and production cuts

• New supply

• Preference for copper

Content

I. Introduction

II. Demand side

• China

• The dollar

• The oil price

III. Supply side

• Market cap

• Debts

• Cost and production cuts

• New supply

• Preference for copper

4

Copper‘s super cycles

• Cyclic behavior as all commodities

• Steep rise in the early 2000s

• Increasing volatility

• Last peak in 2011

Source: Plusmining based on data from Cochilco

0

50

100

150

200

250

300

350

400

450

19

35

19

38

19

41

19

44

19

47

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01

20

04

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07

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10

20

13

20

16

US$

cen

ts/l

b (

LME)

Evolution of the copper price 1935-2016, real

5

• Peak of growthbased on „OldNormal“

• Unregulated financial marketsfostering growth

• Low interest rate• Falling dollar

• Difficulties to increase production

• Long and steady GDP growthled to historical higherincome

China

Emerging economies

Main drivers of the last upward supercycle

SupplyUSA

Headwind:Europe

Tail wind:• Financial markets “in

love” with commodities

Source: Plusmining

6

• “New Normal”• Less commodities as collateral

• Modest economicgrowth

• Rise in interest rate –Turning point?

• Rising production• Little production cuts

• Structural weaknessesemerge, particularlylarge imbalancesgenerated during thebooming period

What has changed? USA

Supply

Emerging economies

China

Source: Plusmining

Content

I. Introduction

II. Demand side

• China

• The dollar

• The oil price

III. Supply side

• Market cap

• Debts

• Cost and production cuts

• New supply

• Preference for copper

8

Chinese demand pattern is changing

• Declining demand growth rate

• Still increasing demand

532 13

130

552

791

5%

15%

6%

15%

14%

9%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0

100

200

300

400

500

600

700

800

900

% c

han

ge

Tho

usa

nd

to

ns

Additional annual demand Average annual change

Average annual Chinese copper demand change per decade(in % and absolute numbers, 1960-2015)

Additional copper demand (in ‘000 tons) forevery 1% increase in copper consumption

1960 1990 2010 2014

United

States12,2 21,5 17,7 17,8

China 0,8 5,8 73,9 109,9

India 0,6 1,3 4,1 4,4

Source: Plusmining based on ICSG

Content

I. Introduction

II. Demand side

• China

• The dollar

• The oil price

III. Supply side

• Market cap

• Debts

• Cost and production cuts

• New supply

• Preference for copper

10

80

85

90

95

100

105

110

115

120

125

130

0

50

100

150

200

250

300

350

400

450

500

JAN 1973

Mar-74

May-75

Jul-76

Sept-77

Nov-78

JAN 1980

Mar-81

May-82

Jul-83

Sept-84

Nov-85

JAN 1987

Mar-88

May-89

Jul-90

Sept-91

Nov-92

JAN 1994

Mar-95

May-96

Jul-97

Sept-98

Nov-99

JAN 2001

Mar-02

May-03

Jul-04

Sept-05

Nov-06

JAN 2008

Mar-09

May-10

Jul-11

Sept-12

Nov-13

JAN 2015

Dollarindex

USȼ/lb (real)

Dollar index and copper Price, 1973-2016

Precio del Cobre Dólar

Inverse relationship

Strong US growth

Higher interest rates

Stronger dollar

More capital inflow in US

Less capital inflow in emerging economies

which account for mostcommodity demand

growth

Falling commodity prices

Source: Plusmining based on data from the Federal Reserve and LME

Relationship between the US dollar and the copper price

Copper price Dollar index

11

The dollar’s performance• The turning point of the last bear market occurred in 2011

• The dollar bull market accelerated around mid-2014 and seems to be coming to an end nowadays

• A dollar bear market still not to be expected, rather stabilization over the next two years

Source: Plusmining based on LME and FED

112

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01

.Mai

.15

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.Mai

.15

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.Mai

.15

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.Ju

n.1

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n.1

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n.1

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l.15

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.Ju

l.15

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g.1

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g.1

5

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g.1

5

10

.Sep

.15

21

.Sep

.15

30

.Sep

.15

09

.Okt

.15

21

.Okt

.15

30

.Okt

.15

10

.No

v.1

5

20

.No

v.1

5

02

.Dez

.15

11

.Dez

.15

22

.Dez

.15

04

.Jän

.16

13

.Jän

.16

25

.Jän

.16

03

.Feb

.16

12

.Feb

.16

24

.Feb

.16

04

.Mär

.16

15

.Mär

.16

24

.Mär

.16

04

.Ap

r.1

6

13

.Ap

r.1

6

22

.Ap

r.1

6

03

.May

16

12

. May

16

190

210

230

250

270

290

FED

Bro

ad D

olla

r In

dex

Co

pp

erP

rice

(U

S ce

nts

/t)

Dollar index vs. copper price(May 2015 to date)

Copper price Fed Dollar Index

Content

I. Introduction

II. Demand side

• China

• The dollar

• The oil price

III. Supply side

• Market cap

• Debts

• Cost and production cuts

• New supply

• Preference for copper

13

Relationship between the oil and the copper price• Oil price were plummeting because of record production

• Oil price usually drags other commodity prices along

Source: Plusmining

190

210

230

250

270

290

25

30

35

40

45

50

55

60

65

Co

pp

erP

rice

(U

S ce

nts

/lb

)

Oil

Pri

ce (

US$

/bar

rel)

Oil and copper price(2015-today)

Oil price Copper price

Content

I. Introduction

II. Demand side

• China

• The dollar

• The oil price

III. Supply side

• Market cap

• Debts

• Cost and production cuts

• New supply

• Preference for copper

15

Mining companies‘ market value has been affected

Source: Plusmining based on data from Ycharts, 12.05.2016

GlencoreBHP Billiton

Anglo AmericanRio Tinto

ValeFreeport-McMoRan

47.2B

131.1B

247.5B

63.4B

164.4B

54.8B

• Since the peak of the boom in 2011, major mining companies have lost up to 86% (Vale) of their market value

Content

I. Introduction

II. Demand side

• China

• The dollar

• The oil price

III. Supply side

• Market cap

• Debts

• Cost and production cuts

• New supply

• Preference for copper

17

Will we see a wave of defaults in the mining industry?

• Debt maturity peaks in 2018 for most major mining companies (except Glencore and BHP)

• In case prices do not recover within the next 2-3 years, some mining companies may be under pressure in 2018

$2,000 $3,000 $3,800$2,100

$3,800$1,900 $1,900

$1,500$1,750

$3,000

$1,500

$1,983

$2,150 $2,000$200

$1,800

$3,400

$1,900

$2,900

$900$2,500$2,000

$3,100

$3,500

$2,800

$3,600

$1,100

$4,832

$4,754

$3,945

$4,623

$3,643

$3,115 $2,576

$906

$56

$1,256

$1,039

$1,032

$1,182 $1,266

$1,330

$1,610

$570

$2,000

$707

$2,000$1,120

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000

2016 2017 2018 2019 2020 2021 2022

Mill

ion

US$

Debt Maturity Profile of major miningcompanies, accumulated

Anglo American Rio Tinto Freeport Vale

Glencore Codelco BHP* *) BHP‘s debt maturity is estimated for each yearThere are no data for Vale for the year 2022

Source: Plusmining based on information from the respective companies

$0

$1,000

$2,000

$3,000

$4,000

$5,000

2016 2017 2018 2019 2020 2021 2022M

illio

nU

S$

Debt Maturity Profile of major miningcompanies, individual

Anglo American Rio Tinto Freeport

Vale Glencore Codelco

18

Debt in the mining industry

• Large investments during boom generated some cases of highly indebted companies

• Major mining companies divided into two groups

Source: Plusmining based on Bloomberg and the respective companies‘ financial reports

0.32 0.28

0.84

0.330.55

0.04

0.430.17

3.13 3.04 2.95 2.952.78

2.54

1.06 1.00 0.88 0.80

0

1

2

3

4

Debt- Market cap ratio of major mining companies

2011 (30.06) 2015 (31.12.)

18

Content

I. Introduction

II. Demand side

• China

• The dollar

• The oil price

III. Supply side

• Market cap

• Debts

• Cost and production cuts

• New supply

• Preference for copper

20

Cost evolution in copper mining• Cash cost rose sharply during the last boom

• First effects of cost reductions to be seen

Source: Cochilco and Wood Mackenzie

1st quartile 2nd quartile 3rd quartile Chile Peru USA Australia

21

Measurements to preserve cash

Operational

cost

Investments

Dividends

Costreduction

plans

• So far, measurements to preserve cash in the copper industry mainly consist in cost reduction plans

• Low oil price and strong dollar helped

Renegotiation of contracts, layoffs, optimization plans

Investment plans under scrutiny, Capex reductions

Reductions orcancellations

22

Measurements to preserve cash [cont.]

Source: ICSG at Metall Bulleting conference; Macquarie

• Copper production cuts so far only represent 4% of market size

• Reason: Very costly to shut down mines

• Hence preference for cost reductions

Copper production cut backs as of February 2016

Content

I. Introduction

II. Demand side

• China

• The dollar

• The oil price

III. Supply side

• Market cap

• Debts

• Cost and production cuts

• New supply

• Preference for copper

24

Peru‘s copper production is increasing rapidly• The production growth in the Peruvian mining industry nowadays is comparable to that of Chile in the 90s

1,933 2,055 2,2202,489

3,1163,392

3,687

4,391 4,602

0

1,000

2,000

3,000

4,000

5,000

1992 1993 1994 1995 1996 1997 1998 1999 2000

Chile’s copper production in the 90s

1,247 1,236 1,299 1,376 1,380

1,7011,900

2,3002,500

0

500

1,000

1,500

2,000

2,500

3,000

2010 2011 2012 2013 2014 2015 2016 2017 2018

Peru’s current and near-term future copper production

Source: Plusmining based Cochilco and Banco Central de Reserva de Perú

25

Peru‘s copper production is increasing rapidly [cont.]• Such sharp increases by major producers may momentaneously influence the global copper price

1,933 2,055 2,2202,489

3,1163,392

3,687

4,391 4,602

0

20

40

60

80

100

120

140

0

1,000

2,000

3,000

4,000

5,000

1992 1993 1994 1995 1996 1997 1998 1999 2000

US

cen

ts/l

b

Chile’s copper production in the 90sChile's production

Copper price

1,247 1,236 1,299 1,376 1,380

1,7011,900

2,3002,500

0

100

200

300

400

500

0

500

1,000

1,500

2,000

2,500

3,000

2010 2011 2012 2013 2014 2015 2016 2017 2018

US

cen

ts/l

b

Peru’s current and near-term future copper productionPeru's production

Copper price

Source: Plusmining based Cochilco, Banco Central de Reserva de Perú and Macquarie

26

Greenfield, Brownfield and expansion projects in copper mining

• Many difficulties with new projects

• Investment programs revisions led to the delay or cancellation of many projects

Projects initiating operations: Status January 2015(Projects with planned capacity >100kt/y)

Projects initiating operations: Status March 2016(Projects with planned capacity >100kt/y)

Source: Cochilco

14 Months later

27

Copper projects in Chile

Source: Plusmining based on Cochilco

2013-2014 2014-2015 2015 – 1Q16

Number ofprojects

+4 projects -11 projects -7 projects

Investment-US$7,705

million-US$27,561

million-US$20,341

million

Net changes of the portfolio of projects(Projects within the next 10 years)

The number of copper projects was reducedfrom 31 to only 23. Apart form copper

projects, there are currently 7 gold projects(+1 since 2015) and 5 iron ore projects in the

Chilean project portfolio.

28

Copper supply and demand - outlook

• Deficit to be expected from2019 onwards

• Together with other influencing factors such as USD cycle, will have a positive (upward) impact on price

Source: Plusmining

-200

-150

-100

-50

0

50

100

150

2016 2017 2018 2019 2020

Tho

usa

nd

ton

s

Copper market balance forecast(Supply – demand)

Content

I. Introduction

II. Demand side

• China

• The dollar

• The oil price

III. Supply side

• Market cap

• Debts

• Cost and production cuts

• New supply

• Preference for copper

30

Major mining companies’ preference for copper

• Drastic simplification: Platinum, copper and diamonds

Anglo American

• Clear focus on copper in new strategic plan

Freeport McMoRan

• Elected former chief executive of copper unit, Jean-Sebastién Jacques, as new CEO

• Developing greenfield and brownfield copper project amongst strategic goals

Rio Tinto

• Preference for copper and oil in their potential hunt for assets

BHP Billiton

• Mentioned copper as possible growth opportunity

South32

• Mining companies giving up diversification strategies

• Many decided to focus or to prioritize on copper

• Confirms the advantageous market situation to be expected for copper producers in the medium and long term

• Economy driven more and more by energy and less by fossil fuels

Copper Market

and Industry Outlook

Juan Carlos Guajardo B.Executive Director

25 May 2016

13th Shanghai Derivatives Market ForumNonferrous Metals Subforum

Shanghai Futures Exchange (SHFE)