Industry Trend Analysis - What Our Clients Want To Know: Commodities Of The Future Q&A - NOV 2017

BMI View: In October 2017, we hosted a webinar on how demand patterns for commodities will change over the next few decades, the long-term outlook for mining projects investment as well asthe commodities that will benefit from a low-carbon global future and survive the metals substitution drive.In this analysis, we respond to some of the top client questions posed during the Q&A session that followed the presentation.

Does a reduction in greenfield projects and capital discipline reflect a lack of interest from the big miners (and their shareholders) to suffer another super cycle?

We believe that a reduction in greenfield projects will be mainly motivated by miners looking to weather market volatility better than during the end of the commodities super-cycle. Despite improving operating cash flows across the board, capital expenditures (capex) will remain stringent over the next three years in terms of absolute value, as miners will continue to pursue a strategy of greater capital discipline that will ensure greater free cash flows. Miners will instead focus their investing in technology - all the more so in technology that will help them improve efficiency further - and expand growth assets.

See: ' Miners ' Strategy: Capital & Supply Discipline To Persist Despite Better Performance ' , June 13

Capex To Remain Stringent
Select Mining Companies - Capital Expenditures (USDmn)
Est = Bloomberg estimate. Source: Bloomberg, BMI

How is tin used in electronics?

As a highly malleable and crystalline structure, the largest end-use of tin alloys are in the soldering of electronic appliances, which account for over 50% of global refined tin consumption - considerably ahead of its use in chemicals. We believe that production growth in consumer electronics across emerging markets in Asia will fuel demand for tin in the coming years. Apart from China, we expect India to be a leading global opportunity for medium-term consumer electronics spending growth. Low penetration rates, even compared to other emerging markets, mean there is potential to sell to first-time buyer households, as well as replacement devices to the middle class. We expect this potential to be unlocked over the medium term by a positive transformation of India's household income profile, with the number of USD5,000-plus annual income households expected to increase by over 72mn during the 2017-2021 period.

Strong Consumer Demand To Support Tin Consumption
Global - Sales Of Consumer Electronic Devices (USDmn)
e/f = BMI estimate/forecast. Source: BMI

Could you give us a view on the future demand outlook of cobalt especially with regards to its use in electric vehicles?

We believe that cobalt will witness solid demand growth in the coming years due to its use in lithium-ion batteries, which are increasingly in demand by electric vehicle manufacturers due to its ability to charge and discharge power over long and short timeframes, relatively high energy density and good cycle-efficiency. However, we expect downside risks to this robust demand outlook to emerge as a result of cobalt's limited supply (50% of global reserves are found in the DRC) which may drive prices to uncompetitive levels for battery-makers. Cobalt is used in combination with other metals to form part of the cathode, which allows current to flow through batteries used in electric vehicles. Currently, we are seeing that NCA cathodes, so-called because they contain nickel (80%), aluminium (5%) and cobalt (15%) being increasingly used by EV manufacturers such as Tesla. Moving forward, we expect that rising cobalt prices will prompt battery-makers to reduce the amount of cobalt used in their cathodes in order to be more price competitive. As an example, Battery makers such as SK Innovation and Panasonic are already anticipating this price risk and working to increase the ratio of nickel in their cathodes, in order to minimise their exposure to rising cobalt prices.

See: ' Long-Term Nickel Demand To Rely On EV Growth ' , August 18

DRC To Dominate Global Output
Cobalt Production ('000 tonnes)
f = BMI forecast. Source: BMI, USGS

Will the production cycle of commodities also significantly change in the next years (e.g. due to recycling or more effective use of ores?

Production of commodities is largely dependent on price, and our price outlooks for most minerals and industrial metals over the coming years (except coal, nickel, iron ore and steel) are positive. With regards to recycling, global metals recycling rates will grow steadily over the years, encouraged by increasingly stringent environmental regulation. However, recycling will not necessarily reduce overall metals consumption or production significantly. Commodities that will likely be more affected than others by recycling are iron ore and steel. China is the largest global producer of steel, and unlike producers in other countries, especially those in Europe, most Chinese producers of steel use blast furnaces rather than electric arc furnaces. Blast furnaces require more iron ore than electric arc furnaces, and the latter also recycles steel. As Chinese production of steel slows over the years with falling prices, and the country slowly loses its global market share of production, we believe recycled steel will take greater prominence, and iron ore demand will lose out in the process.

Recycled Steel To Gain Prominence With Chinese Slowdown
China - Steel Production & Production Growth
f = BMI forecast. Source: BMI Calculation/World Steel Association

The main premise upon which the substitution from steel to aluminium by automakers is based on is their relative weights. Is the likelihood of an increase in the number of fatal accidents as a result of very light vehicles also a consideration in place?

The fact that very light vehicles lead to an increase in the number of fatal accidents is a well debated topic without any conclusive answers. While it is conventional belief that heavier cars tend to be safer for their passengers during a crash, a crash between two vehicles is only one type of accident. Larger, taller vehicles also tip over a lot more often than lower and lighter ones. More than 50% of all fatal accidents are single-car-crashes. In that respect, other than vehicle weight, the shape of a car, its level of modern safety content, and its ability to stay upright levels the playing field considerably. Additionally, while making vehicles lighter, automakers also have a strict mandate to make them safer.

Modest Price Gains Henceforth To Significantly Fall Short Of Previous Super Cycle
Global - Industrial Metal Price Growth
e/f = BMI estimate/forecast. Source: Bloomberg/BMI

Is a commodities super cycle imminent? Do you have any thoughts around this?

Our core view is that industrial metal prices will lose steam over 2018 after significant gains since 2016, and only rise gradually in subsequent years. For instance, we forecast average copper prices to only rise by 3.2% annually over 2018-2020. However, with industrial metal prices having performed stronger than we had anticipated in recent months, we highlight upside risks of a continued rally over 2018. In our view, the most likely driver of significantly higher metal prices in the coming quarters would be surprisingly strong economic growth in China including a resilient construction sector, as well as a ramp up in government curbs to China's domestic metals production capacity. These trends would boost China's metal imports and drive global prices higher.

See: ' Scenario: Metal Price Rally Just Getting Started? ' , September 18