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IHS Executive Report Q1 2013 B u s i n e s s

E v a l u a t i o n

IHS Executive Report

AGENDA Economic Outlook Saudi Arabia Energy Overview Nonferrous Metal Overview Metal Mining Mining (U.S.) Natural Gas (US)

IHS Executive Report


Economic Outlook


IHS Executive Report

Q1 2013

Top-10 predictions for 2013 World growth will stabilize in 2013. After having slowed down from 4.2% in 2010 to 3.0% in 2011 and around 2.5% in 2012, the growth rate of the world economy will hold steady at 2.6% in 2013. Moreover, the stage will be set for a modest acceleration of growth in the latter part of the year and during 2014. The US recovery will gradually pick up steam— unless it falls off a cliff. The dynamics for a gradually accelerating US recovery are already in place. The balance of forces affecting US consumer spending have turned positive. Housing is—finally—showing signs of life, and can be expected to keep improving over the next year. As global growth begins to reaccelerate, exports will follow suit. Also, as the uncertainty about the fiscal cliff and deficit/debt reduction is resolved, US businesses are likely to spend and hire more. This means growth will average around 2% next year. In the unlikely event that the United States falls off the fiscal cliff for an extended period of time, a recession will probably be unavoidable. European growth will be weak in the north and negative in the south. Despite some easing of the Eurozone debt crisis, during the coming year, the economies in Southern Europe will remain deep in recession territory, mostly because of tough austerity programs and very high unemployment rates. Unfortunately, this will drag down the economies in Northern Europe as well. Some (including Germany) will see positive but weak growth. In others (including Belgium, France, and the Netherlands), growth will be fl at to slightly down. On balance, this means a contraction of around 0.2% for the Eurozone economy in 2013. The China’s economy will slowly gain momentum. Since 2010, the Chinese economy has decelerated significantly, with growth falling from more than 10.0% to around 7.5%. Fortunately, there are already signs that growth has bottomed out and that a gradual pickup in momentum is in the offing. Modest stimulus seems to have been effective in limiting the depth and duration of the domestic demand downturn. Furthermore, export growth can be expected to rebound, thanks to continuing (and improving) growth in Asia and the United States. All this will translate into growth of around 8% for China in 2013. Other emerging markets will also show signs of life. Weakness in the global economy took a toll on growth in other emerging markets last year. This was compounded by the tight money

policies that many of these economies had in place through the fall of 2011. With monetary conditions now easier than a year ago, and with prospects for the world economy looking a little brighter, the outlook for emerging markets in 2013 is also looking sunnier. This is especially true in Asia, where domestic demand growth has been fairly strong and where there is scope for more stimulus, if needed. Commodity prices will move sideways again. Despite a good deal of volatility during the past 12 months, commodity prices are roughly at the same levels they were a year ago. Chances are good that 2013 will see a repeat performance. There are mild downward pressures from soft growth and relatively high inventories in some markets (especially oil). On the other hand, stronger growth in China and the rest of Asia could push in the opposite direction as the year progresses. Meanwhile, tensions in the Middle East and North Africa could be a wild card in oil markets, driving prices up if the instability in the region gets worse or pulling them down if there is a de-escalation. Inflation will remain tame. Soft growth, large output gaps, and high unemployment rates in the past couple of years have significantly reduced price pressures. This benign state of affairs is likely to continue through 2013, despite worries about the inflationary potential of the massive amounts of liquidity sloshing around the global economy, and despite the recent rise in food prices (which is likely to be temporary). In fact, in the developed world and some emerging regions, inflation will continue to drift down over the coming year. Central banks will mostly be in wait-and-see mode. As growth prospects in many of the world’s key economies start to look better, central banks will begin to take a more neutral stance, putting monetary policy on hold. While a little more easing (interest-rate cuts and/or quantitative easing) by the Federal Reserve, the European Central Bank, the Bank of England, and the Reserve Bank of India is probably in the cards, other central banks are likely to take a more cautious approach to any further stimulus, while still keeping a lookout for any signs of renewed weakness in the coming year. Fiscal policy will stay tight or become tighter. This is mainly true of the United States, the Eurozone, and Japan, all of which face large and growing government debt ratios. US fiscal policy will tighten, whether or not the economy goes off the fiscal cliff. The mostly likely scenario calls for a gradual further reduction in the deficit,

which will help to stabilize the US debt ratio, without hurting growth unduly. In Southern Europe, austerity is damaging growth prospects; but this will not deter further tightening. The US dollar will be stronger against the euro and flat against the rest. During the coming year, economic fundamentals (e.g., growth differentials and current account balances) will tend to favor the dollar, especially relative to other developed economy currencies. On the other hand, as the growth outlook in the emerging world improves and capital flows into these economies ramp up once again, the upward pressure on these currencies could intensify, balancing out some of the positive forces working on the dollar. Meanwhile, enduring worries about the Eurozone debt crisis will tend to favor the dollar over the euro and other risky currencies. The risks facing the global economy will be more balanced. Over the past year, the risks facing the global economy were skewed to the downside. In the coming year, not only will some of the big threats become less menacing, but there could be some upside surprises as well. Chief among these is pent-up demand from consumers and businesses. In the wake of the Great Recession and subsequent Great Stagnation, households and companies have been very cautious about their spending, preferring to save more and reduce their debts. There is some evidence that this process maybe winding down—especially in the United States and parts of Asia. ᗒᗒ Economic Summary: United States—Conditions look poised for faster growth in the United States. Fears of going over the “fiscal cliff” are softening the growth outlook for the fourth quarter of 2012 and the first quarter of 2013. That said, fundamentals are improving and traditional drivers of the recovery, including the housing market and light-vehicle purchases are showing some strength. We expect GDP growth to accelerate through 2013. Europe—The Eurozone is officially in recession, while the United Kingdom is officially out of recession. IHS expects the mild Eurozone recession to continue into 2013, before a weak rebound in 2014. Unfortunately, economic weakness in Southern Europe has begun to infect Northern Europe. In particular, we expect Germany to grow around 1% both this year and next. China—Things are starting to look up in China,

IHS Executive Report


Q1 2013

as incoming data reveal a more upbeat picture. Export growth has strengthened steadily since July, and industrial production and retail sales have also shown promising strength in the third quarter. Based on the incoming data, IHS revised up China’s growth from 7.4% in 2012 to 7.6%, and from 7.6% to 7.8% in 2013. The global recovery: The data over the past two months point to a pickup in the pace of recovery in the United States and China, the end of recession in the United Kingdom, and a slightly milder recession in the Eurozone. Nevertheless, the outlook for Japan has darkened considerably. One potential leading indicator of a global recovery is the recent, strong acceleration of China’s exports from July through October, suggesting demand in its key export markets is picking up. The IHS forecast of global growth is essentially unchanged from last month, with real GDP now projected to rise 2.5% in 2012, 2.6% in 2013, and 3.5% in 2014. For 2013, small, upward revisions to forecasts for the United States, United Kingdom, Eurozone, Brazil, and China are offset by a large downward revision to the economic outlook for Japan. Barring any major shocks, global growth is expected to gradually accelerate during 2013, with the pace of expansion in the second half being stronger than in the first. Risks to global growth A hard landing in China (GDP growth around 5%), triggered by a collapse in the real estate bubble, would weigh on the rest of Asia and commodity-exporting emerging markets, weighing on global growth prospects. The odds of this are no more than 25%. European meltdown poses another downside risk to global growth. The coll apse of the Eurozone triggered by a periphery state leaving the euro or a messy default by one of the bigger economies could create another “Lehman” moment for Europe, pushing the global economy into recession. Our current forecast assumes that Greece will leave the Eurozone at some point in 2013. After this event Eurozone leaders will band together to stabilize the currency union. A chaotic Greek exit and a failure to commit to stabilizing the currency union could result in a major banking crisis and credit crunch with reverberations felt through the global economy. The probability of this occurring falls within the 20–25% range. High oil prices also may create a headwind for global growth as strong prices filter down to


IHS Executive Report

consumer products, eroding consumer spending on non-energy products. Weak demand has finally outweighed concerns over Iran, bringing prices lower. That said, the situation between Iran and the West is not resolved and negotiations have reached a stalemate. While an “accidental” war is always possible, chances of any kind of conflict are no more than 20%. Leaders of global growth United States—In the tug of war between consumers and businesses, consumers seem to be winning. There is an apparent disconnect between how US consumers are feeling, on the one hand, and how American businesses are feeling, on the other. Consumers are not worried about events outside the United States and are, puzzlingly, not spooked by the impending fiscal cliff. This is evident in consumer confidence surveys, discretionary spending, and the recent, long-awaited rebound in housing. Businesses, on the other hand, are extremely worried about Europe, China, and the potential for a policy blunder in Washington. While the election reduced uncertainty about some policies, it did little to shed light on how the president and Congress will avoid the fiscal cliff and resolve the longer term fiscal challenge. The pattern of growth in the near term is likely to be jagged, in part because of Hurricane Sandy—weaker in the fourth quarter and stronger in the first quarter. As the housing market recovery gains momentum, export markets strengthen, and fiscal policy uncertainties are resolved, growth should pick up from about 2% this year and next to around 3% in 2014 and 2015. China—Finally, some signs of strength. In welcome contrast to Europe and Japan, China’s data in the past two months have been much more upbeat. Export growth has strengthened steadily since July—the October reading was a robust 11.6% year on year (y/y), compared with a paltry 1.0% in July. Last month, industrial production rose 9.6%, factory orders were at a five-month high, and retails sales jumped 14.5%. Most indicators of the property market are also rebounding, after the long slide that began in 2010. Even though the 7.4% y/y growth in the third quarter was the weakest since early 2010, the quarterly annualized growth rates are more encouraging—9.1% growth in the third quarter compared with 6.1% in the first quarter—implying growth bottomed out at the beginning of this year. Based on the incoming data, IHS has revised up China’s growth from 7.4% to 7.6% for this year and from 7.6% to 7.8% for next year. At the same time, the probability of a hard

landing has been revised down from 20–25% to 15–20%. Emerging markets—Still a mixed bag. Recent data show only marginal improvement in India’s economic momentum. Manufacturing indicators have revived slightly and auto sales are above expectations, but exports and fiscal balances remain weak. Reform initiatives are moving forward, albeit slowly. After downward revisions last month, our India forecast is unchanged. Real GDP growth is projected to pick up from 5.1% in the fiscal year that started 1 April to 5.8% in fiscal 2013 and 6.9% in fiscal 2014. Data on Brazil’s economy have also been mixed, with industrial indicators showing more weakness but business sentiment improving. Excise tax cuts for automobiles, appliances, and construction materials, which have helped to boost retail sales, were extended through yearend. The government has also increased spending on infrastructure and welfare programs. Brazil’s real GDP growth is projected to pick up from 1.5% this year to 3.8% in 2013 and 4.7% in 2014, led by strengthening growth in fixed investment. Russia’s real GDP growth slowed from a quarterly rate of 0.6% in the first quarter to just 0.1% in the second quarter. Consumer spending is the only significant driver of growth. Trade surpluses in July and August were the smallest since early 2010. Real GDP growth is projected to slow from 4.3% in 2011 to 3.6% this year and 3.5% in 2013 before picking up to 4.0% in 2014. Laggards of global growth Europe—In and out of recession. The incoming GDP data show the Eurozone officially in recession (something that has been obvious in other data for some time) and the United Kingdom is officially out of recession. The fourth-quarter data so far also indicate the Eurozone economy could contract again in the fourth quarter and the strong third-quarter UK performance (1% quarter-on-quarter) is unlikely to be repeated. IHS expects the mild Eurozone recession to continue into 2013, before a weak rebound in 2014. Meanwhile, the UK economy can be expected to accelerate gradually over the next two years. Greece, Italy, Portugal, and Spain will remain deep in contraction. Unfortunately, economic collapses in Southern Europe have begun to infect Northern Europe. In particular, Germany is not expected to grow any faster than 1% this year or next. Against this backdrop, the Eurozone debt crisis drags on. Greece has been given more time, but no further aid yet and no hope of debt restructuring, at least not

Q1 2013

until after the September 2013 German elections. Meanwhile, everyone is waiting for Spain to ask for a bailout. Japan—Triple-dip? Recent economic news from Japan has been dire. Third-quarter real GDP fell at a 3.5% annual rate after a rise of only 0.3% in the second quarter. Collapsing exports to China (in large part because of the ongoing territorial dispute between the two countries) and falling consumer spending are the major culprits. Other economic indicators paint an

equally bleak picture. Industrial production has dropped for the last three months, and auto sales are falling at a double-digit rate. If real GDP shrinks in the fourth quarter, then this will be Japan’s third recession since 2008—the first was the Great Recession, while the second was the earthquake and tsunami-induced recession of 2011. Because of deteriorating conditions in the Japanese economy, IHS has revised down growth this year from 2.3% to 1.7% and next year from 1.1% to 0.3%.

Bottom line: The good news is growth in the global economy seems to have stabilized, despite the ongoing recession in the Eurozone and the apparent triple-dip in Japan. Assuming the US economy does not go off the fiscal cliff (or at least not for very long) and assuming no other major shocks (e.g., a major conflict in the Persian Gulf), then the stage seems to be set for a gradual rebound in global growth, driven by the United States and China. This means growth in the second half of 2013 could be as much as

IHS Executive Report


Saudi Arabia

Q1 2013


IHS Executive Report

Q1 2013

Economic Structure and Context: Key Sectors Revision in Macro Forecasts: Saudi Arabia 2013Q1 Growth in 2012

Growth in 2013

Near Term CAGR - 2014-16

Medium Term CAGR - 2017-20

Long Term CAGR - 2021-32







Current Forecast Previous Forecast Delta (Change)

4.8 4.8 0.0

7.5 7.6 -0.1

4.6 4.6 0.1

7.2 7.2 0.0

12.7 11.5 1.2

12.1 11.4 0.7

Current Forecast Previous Forecast Delta (Change)

2.6 2.5 0.1

4.0 4.0 0.0

4.0 3.7 0.3

5.4 5.4 0.0

-4.8 -5.8 1.0

1.4 0.3 1.1

Current Forecast Previous Forecast Delta (Change)

4.2 4.3 -0.1

4.1 4.1 0.0

4.7 4.7 0.0

4.6 4.8 -0.2

2.5 2.7 -0.1

3.6 3.8 -0.1

Current Forecast Previous Forecast Delta (Change)

4.3 4.4 0.0

3.6 3.6 0.0

4.9 5.0 -0.1

3.5 3.5 0.0

4.5 4.5 0.1

4.0 4.0 0.0

Current Forecast Previous Forecast Delta (Change)

3.8 4.1 -0.2

3.3 3.5 -0.2

4.3 4.7 -0.4

3.1 3.2 -0.2

3.7 3.7 0.1

3.5 3.6 -0.1

GDP - Gross Domestic Product; IF - Fixed Investments; CE - Consumption Expenditures (Private); CG - Government or Public Consumption; EXGS - Exports of Good & Services; IMGS - Imports of Goods &Services

IHS Executive Report


Energy Overview

Q1 2013

Buying Strategy The buying environment for energy products over the near term will remain mixed. The purchasing environment for coal and petroleum products will improve, as our price outlook continues to call for lower prices ahead.. The pricing environment for natural gas will be soft for the coming quarter, even with the seasonal uptick in winter gas demand. Electricity will move higher over the next three months as

seasonal demand pushes prices up compared with the same period in 2011. Coal prices will remain stagnant in the closing months of 2012 as rock-bottom natural gas prices depress the alternative—coal. Industrial electricity prices will be driven largely on expectations for heating degree-days. Demand is expected to fall comfortably within reserve margins for the remainder of 2012. Natural gas prices will maintain positive momentum

supported by increasing coal displacement. However, inventories are at record highs and a more robust price recovery will have to wait until 2013 as supply fundamentals gradually improve. Crude oil will move lower over the next few months as we now expect the oil market to refocus on the outlook for weaker fundamentals. Bottom line: Overall, expect a mixed outlook for energy products.

This information was last updated on 19 OCT 2012, 1:43 PM EDT (17:43 GMT)


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Forecast Highlights Our oil price outlook continues to call for lower prices ahead. Brent will average $100/ barrel in the fourth quarter of 2012 and $93/ barrel in 2013. Looking beyond the next 12 months, Brent will move down to an $85/barrel average in 2015 based on improving supply fundamentals. Similarly, West Texas Intermediate (WTI) will average $90/barrel in the fourth quarter of 2012, $90/barrel in 2013, and $86/ barrel in 2014. Henry Hub natural gas prices will maintain positive momentum and will average under $3.00 per million Btu in the second half of 2012. Inventories are forecast to reach record levels by the end of 2012. However, coal displacement and decelerating gas rig counts support higher natural gas prices. Coal prices will advance more weakly in the rest of 2012 than in past years. Price growth for coal in the United States was negatively affected by weaker-than-expected natural gas prices in the first half of 2012 and will spend the second half of the year trying to recover from that hit. The price outlook for electricity in the fourth quarter will be driven largely on expectations for heating degree-days. Heating degree-days in the fourth quarter are projected to be 10.5% higher in 2012 than in 2011, spurring a 2% yearover-year increase in industrial electricity prices in the fourth quarter. Assuming normal weather patterns as we enter the fourth quarter, supply will not be a concern, nor will higher-thanexpected economic growth.

IHS Executive Report


Nonferrous Metal

Q1 2013


IHS Executive Report

Q1 2013

the relatively modest projected pace of global growth in 2013.

Summary Our expectation of a choppy pattern to prices over the fourth quarter is being confirmed. October’s sell-off was replaced by a more upbeat tone in November following the US election. It was not the US election results that buoyed the market, but rather the steady stream of positive incoming data in the United States and China. Commodity markets are pricing in the belief that some sort of political compromise will be reached in the United States, avoiding the fiscal cliff. Markets are also feeding off of global manufacturing data, which shows conditions stabilizing. Commodity markets seem particularly excited about prospects for China, where hopes for stronger growth and restocking have markets anticipating relatively good demand growth in 2013. Finally, recent central bank announcements make it clear that policy will remain accommodative into 2015, an environment generally supportive of commodity prices. While we think the market may be moving into a slightly overbought condition, there is no doubt that the outlook for 2013 has improved. Our old assumption of a Greek exit in 2013 was expected to generate a period of volatility and selling, triggering price corrections across the metals complex in the third quarter. The

copper is starting a transition from deficit to surplus, with the first hints of the long-promised supply-side build-out appearing in the September mine production data. But the market still reads tight with inventory low. Without a triggering event that would create selling

one-year shift in a Greek exit to the middle of 2014 means prices will drift higher in much of 2013 as growth slowly improves. We still see a market generally well supplied in 2013, however. Hence we do not have a breakout in prices. Rather we see a more modest upward move quarter to quarter that matches

pressure—like the kind of volatility in financial markets associated with a Greek withdrawal from the Eurozone—there is no compelling factor that will push prices lower. The key to 2013 in copper markets will be the kind of recovery seen in Chinese growth and the size of the restocking cycle there. Our fore-

Aluminum: Prices range between $2,100/ metric ton and $2,200/metric ton in 2013, about $100/metric ton higher than in our thirdquarter forecast. Fundamentals still look poor with the market projected to remain in surplus. Even though aluminum’s surplus is expected to shrink across 2013 and 2014, a huge inventory overhang will act as a check on any strong price moves. Regional premiums will remain elevated, however. We do not expect the financing deals that have locked up London Metal Exchange (LME) inventory—and have caused the widening in premiums—to begin to break down until late 2014 when market interest rates (not policy rates) begin to inch higher. Copper: The forecast has been raised in 2013, chiefly because of the shift in our assumption of a Greek exit from 2013 to 2014. Fundamentally,

cast sees a relatively modest uptick in growth with much of the restocking coming from hidden inventory built up over the past year during China’s soft landing. Hence, we do not see prices breaking much above $8,400, with quarterly averages staying below $8,300/metric ton. Prices do fall in 2014 as copper’s surplus condition becomes evident. Nickel: The market has come to life in recent weeks with optimism bolstering spot prices. As expected, prices have pushed above $17,500/ metric ton as 2012 draws to a close; they will stay in that vicinity of $18,000/metric ton during the first half of 2013. Although there remains a healthy glut of supply, encouraging news out of China should allow prices to move out of the cost curve for all nickel producers. A second consecutive year of oversupply conditions will keep prices from moving dramatically higher, but we are generally more upbeat for 2013 than we were for 2012. Zinc: There is no change to the 12-month outlook. LME prices continue to hold around $2,000/metric ton, with weak fundamentals continuing to weigh on the market. Prices face some downside risk in the coming quarter as debate on US fiscal policy can inadvertently harm economic activity and affect physical zinc

demand. Stronger prices can materialize by the second half of 2013 from declining supply growth and improving economic activity. Look for signs of greater producer discipline such as mine closure announcements and fiscal policy guidance from Europe and the United States.

IHS Executive Report


Q1 2013

Bottom line: Collectively, nonferrous markets look better in 2013 relative to 2012. Non Ferrous Overview Price Forecast Drivers (Percent change) Aluminum Price Copper Price Nickel Price Zinc Price Forecast Drivers China Industrial Production NAFTA Industrial Production

Source: IHS Global Insight, 2012Q4 Forecast

2007 2.7 5.9 53.5 -1.0

2008 -2.5 -2.3 -43.3 -42.2

2009 -35.3 -26.0 -30.6 -11.7

2010 30.5 46.3 48.8 30.5

2011 10.4 17.1 5.0 1.5

2012F -17.0 -10.8 -24.6 -14.0

2013F 1.7 -7.6 -4.4 -8.2

2014F 8.5 -8.4 7.7 10.4

17.9 2.2

12.5 -3.3

11.6 -11.0

15.3 5.4

13.7 4.0

9.8 3.8

9.9 2.6

11.0 3.4

Non Ferrous Overview Global Price Comparisons (Percent change) PPI, Primary Refined Non-Ferrous

2007 9.8

2008 -10.1

2009 -4.2

2010 16.6

2011 22.1

2012F -6.4

2013F -4.5

2014F -3.0

Metals, Canada PPI, Non-Ferrous Metal Materials and









Electric Wire, China PPI, Basic Precious and Other Non-









Ferrous Metals, EU-27 WPI, Non-Ferrous Metals, India Corp. Goods Price Index, Nonferrous

9.9 8.9

1.3 -5.8

-6.8 -22.4

7.0 14.0

2.3 5.3

2.4 -6.2

-7.6 -0.5

-6.5 0.5

Metals, Japan

Source: IHS Global Insight, 2012Q4 Forecast


IHS Executive Report

Q1 2013

Long-term forecast assumptions • Emerging economies dominate growth. Development in the big emerging market economies—Brazil, India, China, and Indonesia—will drive long-term consumption growth. In China, however, the start of a transition away from investment and toward consumption signals slower commodity consumption growth compared with the last 10 years. European consumption will grow by less than 1.0% per year between 2012 and 2022, with EU consumption basically flat; Japanese consumption is likely to decline slightly. North America sees slightly better growth, with annual increases averaging 2.0%; the 10-year decline in US consumption comes to an end. • Exploration and development will focus on Central Africa, Central Asia, and the Arctic. All three regions remain largely untapped and will garner the lion’s share of exploration and development expenditures over the long term, with Africa and Central Asia seeing strong increases in production after 2015. Another area of interest will be offshore exploration. Although this segment of the mining industry is in its infancy, initial production from a few identified sites in the Pacific is possible by 2022. Growing economic nationalism. The policy environment for the global industry has become less supportive during the past decade. The attractiveness of state-managed market models (i.e. China) and relatively high prices means conditions are not likely to improve. We view resource nationalism as the principal threat to adequate supply-side expansion in the mediumto-long term. Growing political tensions in South African are of concern because of the potential for disruptions to a significant portion of global production for platinum, chrome, and gold. • Environmental regulations push production abroad. Increasingly stringent mining and CO2 emission regulations will are shifting production away from Europe, Australia, and North America. Base metal mine production in the US lower-48 states looks to be stable at best, in spite of a reasonably attractive resource base. We see little investment in Western Europe over the long term, with a decline in production. Primary aluminum smelting in the Eurozone may cease entirely by 2021

(Norway and Iceland will remain producers). Bottom line Our belief that markets will remain in long-run equilibrium points to prices roughly in line with costs (with a margin sufficient to ensure capital flows for investment). Real prices by 2021 will be only slightly higher than in 1950.

Risks to the forecast Unexploited resources are increasingly found in areas of elevated political risk. Although we believe physical reserves are sufficient to meet projected demand, supply disruptions (or delayed development because of political uncertainty) could well lead to periods of physical tightness with high prices. For base metals, Central Africa, Central Asia, and the Arctic (because of global warming) stand out as regions offering great promise. An intriguing possibility for the long term will be the possible development of seabed deposits even though political opposition is high. The growing concentration of end-market demand growth in emerging markets also has possible risks. The relative lack of transparency in these markets, and in particular the difficulty in tracking consumption or inventory, is likely to keep price volatility high.

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Metal Mining

Q1 2013


IHS Executive Report

Q1 2013

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Mining U.S.

Q1 2013


IHS Executive Report

Q1 2013

Forecast Summary

Forecast highlights

US mining demand will continue on the path to recovery along with the overall economy. Growth in the manufacturing sector is slowing, however, to just 2.1% in 2013. Mining output in the United States will not be able to repeat the strong performance of 2012 in 2013, but growth will persist. Base metals have the strongest outlook, followed by iron ore and then coal. Commodity prices will move sideways in 2013, although periods of volatility during the year will continue. Although all eyes are always on China from a commodity standpoint, this time it will be for supply reasons as much as demand reasons for base metals and iron ore. Base metal inventories are flush at exchanges and in most unofficial tallies. Iron ore production in China is falling as prices fluctuate around $120/metric ton.

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Natural Gas-U.S.

Q1 2013


IHS Executive Report

Q1 2013

Forecast Summary

Gas-directed rig counts currently stand just above 400 units. Producer discipline through reduced activity and operation consolidation remain essential to stronger prices over the next 12 months. • North American inventories will stop

setting record levels and lend support to prices. For December, we expect North American storage withdrawals to average 21.2 billion cubic feet per day. The decline in gas-directed rig counts in the past year will cause overall gas inventories to diminish in 2013.

• Market fundamentals will improve over the next 12 months, as improving manufacturing activity along with investments in ammonia and methanol facilities boost demand for natural gas. We see stronger demand by the latter half of 2013 supporting a $4/mmBtu price

IHS Executive Report


Q1 2013

Purchasing Environment


IHS Executive Report

Q1 2013

Buying Strategy Inflation expectations In one 2013Q1


Sector industry

(2013Q4) Petroleum products: Prices will move below $100/barrel in the first quarter of 2013 and continue to decline over the next six quarters. Conditions in the Middle East remain a significant risk to our current profile. Fundamentally, however, the market continues to look oversupplied, which ultimately will lead prices lower. A significant macroeconomic shock (caused by either the US fiscal cliff or a sudden Greek departure from the Eurozone) would bring prices lower more quickly than our current outlook Natural gas: The seasonal rise in winter gas demand will balance against rising production from the Marcellus and Eagle Ford shales. Pockets of supply growth will delay the overall decline, but product discipline will persist through 2013. Moderating coal displacement demand places downside risk on prices in the first quarter, but improving market fundamentals support a $3.93/MMBtu price average for 2013. We see higher prices by the second half of 2013 as the decline in gas rig counts helps long-term production stability and prices. Wages: US wage growth is beginning to increase ahead of inflation, but this is more indicative of low inflation rather than stronger wage growth. We expect real wage growth to pick up as the economy gains steam. Globally, emerging markets are experiencing much stronger wage growth, with Asia emerging as a high wage growth region. Benefits: Healthcare costs continue to drive benefits escalation, the pace of which slowed slightly over 2012 because of lower utilization rates. Expect benefits growth to resume as the economy improves. As household incomes increase so too will medical utilization rates as workers resume elective health services that were deferred. Steel: Steel prices are mostly rising, although some exceptions are creating a neutral average for the United States. Sheet, plate, and select long products are rising from the normal cyclical floor of the fourth quarter. However, there is weakness for rebar, rod, and some other long products as well as flat for stainless. Prices rise through to mid-2013 then the cycle creates falling prices again for the second half of the year Nonferrous metals: We have raised our base metals price outlook because of generally positive incoming data, especially in China, and a shift in our assumption of a Greek exit from 2013 to 2014. Demand growth looks healthy, although markets still look adequately supplied, limiting the upside.

Chemicals: Some positive economic developments in China and the United States are, to a degree, offsetting signs that the Eurozone economy may get worse before it gets better. A combination of factors should keep prices in an elevated but narrow range in 2013—barring any unforeseen extended production outages. Building materials: In the United States, construction markets are improving at an uneven pace as residential activity accelerates and nonresidential markets move sideways. As a result, prices for materials used intensively in residential construction, such as lumber, will start to see upward pressure in 2013. Materials used in nonresidential construction will for the most part move sideways in 2013. Overall, building materials will be marginally higher next year. Larger increases are expected in 2014 and 2015. In Europe, building material prices will struggle as construction spending continues to contract and Eastern Europe show signs of weakening.

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Electronic components: Consumer and business spending on information processing equipment and software has decelerated in the last year. Consequently, inventories for semiconductors and electronic components have grown oversized. There are nascent signs that supply at original equipment manufacturers and distributors are approaching a more balanced position as manufacturers scale back utilization. Overall, there will be continued significant downward pressure on electronic components over the next 12 months. Electrical machinery and equipment: End markets are improving, albeit more slowly than expected, and production for Western producers is unlikely to match pre-recession levels for several more years. To date, commodity prices have placed a floor under production costs, but at this point there is little upward pressure. Next year should bring modest-to-minimal price increases in selected product categories. Nonelectrical machinery and equipment: Prices have been tame throughout 2012 and are likely to remain subdued as we enter 2013. Corporate America has become more cautious and export demand has slowed. We do expect machinery prices to move higher in the near term but with little in the way of forward momentum. Looking further out, domestic and export demand for machinery and equipment should begin to pick up some steam. This combined with rising input costs should put some additional upward pressure on machinery and equipment prices. Transportation equipment: Look for light vehicle prices to inch up in the near term unless we go over the fiscal cliff. GM took a battering in November on its big pickups and is now practically giving them away. The luxury model guys will fight it out in December. Sandy will help sales particularly in the first quarter of 2013. Prices should continue to head higher as we move through 2013, but at a modest pace. Transportation and logistics: With both energy costs and demand moderating in the near term, transportation rate growth will be slower. Loose capacity also undermines price increases in some modes. There is some disparity between modes. Trucking is modestly stronger. Rail, meanwhile, is undermined by weak coal traffic. Water and air will need more prolonged strength in demand or higher energy costs to see any significant rate increases. Paper and packaging: Paper-based packaging demand remains weak and little, if any, growth is anticipated in 2013. Operating rates have softened and are likely to remain just above the 90% threshold over the next 12 months. Regardless, producers managed to push through a linerboard price increase during the fall. It is unlikely this increase and any other attempts to raise paper based packaging will hold during the first half of 2013. The second half of the year should see some moderate price growth.


Forecast highlights


IHS Executive Report

Q1 2013

ᗒᗒ Commodity prices have exhibited

a choppy pattern since late in the third quarter. After some selling in October, reassuring incoming data and a certain optimism regarding the US “fiscal cliff” and China have seen prices rally in November and December. We see prices moving sideways over much of 2013. Growth does look to improve across the year, but it still remains relatively modest. With capacity utilization rates still low, this suggests support for rather than pressure on prices.

ᗒᗒ We are holding to our assumption

of a Greek exit from the Eurozone, though the timing has been pushed back to mid-2014. We still assume that Greece’s departure does not trigger a broader crisis involving Spain or Italy, thus limiting the volatility likely to be created in commodity markets.

ᗒᗒ Aggregate inflation continues to look

tame over the near term. Relatively soft growth into 2014, large output gaps, and high unemployment rates will check prices. Worries about the inflationary potential of the massive amounts of liquidity sloshing around the global economy are overblown— at least over the next eight quarters.

ᗒᗒ Wildcards abound. How the

Eurozone breaks apart will determine whether prices fall and by how much. The worst-case scenario, which risks a repeat of 2008, would see a chaotic Greek exit, with other countries also peeling away. The political stalemate in the United States also has the potential to drag markets down. Upside risk centers on oil markets, tensions in the Middle East, and the resulting risk premium placed on prices.

Implications for the buying environmentCommodity markets—Sliding, not falling The price of Brent crude oil remained elevated at around US$110 per barrel in mid-November, supported by tensions related to Iran’s nuclear development, civil war in Syria, and a wave of anti-US riots across the Middle East and North Africa. Oil prices should decrease as the market refocuses on the fundamentals of weak demand growth, ample commercial inventories, and rising spare production capacity. Non-OPEC supply growth is picking up, thanks to rapidly rising North American tight oil production and output gains from the Canadian oil sands, Iraq, Brazil, and Kazakhstan. The Brent price is expected to average US$106 per barrel in the fourth quarter, and then drop to US$94 in 2013, US$90 in 2014, and a low of US$85 in 2015.

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Q1 2013


IHS Executive Report

Q1 2013

through late October on disappointing

rallied. Buying conditions should remain

economic news. The IHS Industrial Materials

favorable into 2013. The index is projected to

After rising from early August to mid-

Price Index fell 5.4% during the seven weeks

drop 10.4% this year and 6.0% in 2013 before

September (mostly in response to monetary

ended 2 November before rebounding a little,

recovering 3.5% in 2014.

easing), industrial commodity prices retreated

as prices of scrap steel and building materials

Expert View

This section provides insights on the agriculture industry in from our sister service IHS Global Insight Agriculture at the end of November 2012.

ᗒᗒ The Australian Bureau of Agricultural


ᗒᗒ Vietnam rice exports in 2012 look to

ᗒᗒ Brazil’s corn exports continue to hit record highs in November.

ᗒᗒ China increased both wheat and corn production estimates for 2012/13, pushing total grain production much higher.

ᗒᗒ The International Grains Council

increased its world soybean forecast for 2012/13.

ᗒᗒ US wheat exports were sold to

Egypt in November, which would point to the United States gaining competitiveness in the world market.

ᗒᗒ World coffee exports were stronger

in October versus a year earlier, according to the International Coffee Organization.

and Resource Economics (ABARE) reduced its estimate for Australian wheat production for 2012/13 down to 22 million metric tons. reach 7.7 million metric tons.

ᗒᗒ Weekly US ethanol production was

quoted at 835,000 barrels for the week ended 30 November, a 4% increase from the previous week and a 3% increase from the previous two weeks.

ᗒᗒ The IHS Global Insight Soft

Commodity Price Index (GISCPI) fell slightly last week, possibly because of the upcoming World Agricultural Supply and Demand Estimates (WASDE) report. The index is back below its 50-day moving average and 100-day average (as of 7 December).

ᗒᗒ The next WASDE report will be

released on 11 December 2012. No major change at this time is expected for US crop production. Southern Hemisphere production should be

revised, since government sources have lowered their own estimates compared with the USDA.

ᗒᗒ Kansas City wheat basis fell

significantly last week and soybean oil basis continues its trend lower. With the strong US exports of soybean oil, soybean oil basis would be expected to tighten, but US crush levels are keeping supplies ample.

ᗒᗒ The US Commodities Futures Trading Commission’s (CFTC) Commitments of Traders report shows funds adding to their net long positions for corn and lean hogs. Positions continued to be liquidated in the feeder cattle market.

ᗒᗒ The CFTC Commitments of Traders

report shows funds adding to their net long positions for corn and lean hogs. Positions continued to be liquidated in the feeder cattle market.

ᗒᗒ US crop condition reports have been

discontinued for the remainder of the year. They will resume in the spring.

IHS Executive Report


Q1 2013

GISCPI key drivers (Weekly averages) Component Feed Grains Food Grains Meals and Oils Cotton Sugar Meats and Products Dairy

Last week contribution to GISCPI (2005=1.000) 1.262 0.810 0.224 0.013 0.084 0.147 0.106

Last week contribution to GISCPI (Percent)

Contribution percent change

47.67 30.60 8.46 0.49 3.18 5.57 4.02

-0.65 -0.66 1.47 0.94 1.14 1.19 -4.05

Previous week contribution to GISCPI (2005=1.000) 1.270 0.815 0.221 0.013 0.083 0.146 0.111

Previous week contribution to GISCPI (Percent) 47.77 30.67 8.30 0.49 3.13 5.48 4.17

Weekly GISCPI Average

Feed Grains Barley Supply: World barley production is forecast at 132 million metric tons in 2012/13, increasing to 136 million metric tons in 2013/14. World barley area harvested is expected to decline in 2013/14 over 2012/13 as a result of price competition from other crops. Stronger barley yields will help to offset the loss in planted area for 2013/14. In Canada, barley area harvested is forecast to increase by 140,000 hectares, which reverses the strong downward trend in barley hectares. Russian barley area will remain flat while Ukraine’s area is forecast to grow slightly along with an increase for the EU-27. Demand: World barley for feed use is forecast to decline by 1% from 2011/12 to 2012/13 and to continue to decline by that same level in 2013/14. Major producing countries such as Russia and Ukraine will see lower levels of feed use, given their summer drought. Price ratios also helped to dampen feed use in the United Kingdom as more plentiful feed wheat supplies presented a better pricing opportunity in rations. EU-27 barley feed use in 2012/13 is forecast to be 5% above 2011/12. World barley exports are estimated to fall 19% in 2012/13 over 2011/12, with tighter supplies because of the drought in the former Soviet Union-12 and stronger domestic use in the EU-27. Exports in 2013/14 will be down 1% from 2012/13 as stock rebuilding occurs. Price Risk: German feed grain barley prices are forecast to be strong in 2013/14 as competition remains heated among other feed grains. In the longer term, prices will decline as supplies are rebuilt and corn prices pull back. Corn


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Supply: World corn production has been reduced in the wake of poor growing conditions in the United States and parts of the FSU-12. As the Southern Hemisphere begins to plant its 2012/13 crop, the world corn balance sheet could loosen ever so slightly. So far, planting conditions have been marginal at best, with Argentina and certain areas of Brazil being plagued with wet weather. Argentina remains behind its normal pace, which lowers the probability of above-trend-line yields, but it is very early in the season to be discounting the crop completely. Moreover, competition from soybeans could weigh heavily on the planted area, especially if producers are forced to alternate crops if corn plantings continue to lag due to wet weather. In 2012/13, world corn production is estimated at 835 million metric tons, down 5% from 2011/12. Corn production is forecast to climb much higher in 2013/14, to 955 million metric tons, up 15% from the previous year as average weather returns, allowing a return to trend-line yields. Some fear that this year’s US drought will pressure yields well below trend-line average, but at this point we assume timely rains will be present. Chinese corn production is expected to increase slightly in 2013/14, as the government, and price factors, continue to spur additional plantings. World corn area harvested is forecast at 177 million hectares in 2013/14. Demand: In 2012/13, world corn for feed use is forecast to fall 1% from 2011/12, driven down by higher prices and reduced availability. But with greater supplies and lower prices in 2013/14, feed use is expected to increase by 10%, to 554 million metric tons. World corn for food, seed, and industrial use is forecast at 352 million metric tons in 2012/13, versus

357 million metric tons in 2011/12. World corn exports will again be greatly reduced in 2012/13 as a result of availability and price issues. However, 2013/14 will see a 23% jump in exports. Price risk: Corn prices have moved off their record highs, as end users have shown little interest for imported US corn. South America and the FSU-12 have offered a cheaper product, but in the case of Ukraine, exports are limited. South America faces issues in port loadings, which is discouraging some buyers. Major importing countries are awaiting large South American supplies after the first of the year, although weather issues will extend price volatility. With record-high world prices, producers will be enticed to expand corn harvested area, adding strong downward price pressure next fall. IHS Global Insight expects South American supplies to dampen the price by the second quarter of 2013, but it will take the Northern Hemisphere’s growing season to push prices well below current levels. If South America witnesses less-than-ideal growing conditions, strong planted area will be needed in the Northern Hemisphere to pressure prices. Sorghum Supply: Similar to corn, world sorghum area harvested is expected to rise in 2013/14, with total area increasing to 39.8 million hectares, up 2% from 2012/13. Total sorghum production is estimated at 59.4 million metric tons in 2012/13 and at 62.8 million metric tons in 2013/14. A return to trend-line yields in the United States helps to add momentum to the increase. “Other Africa’s” production in 2012/13 witnessed an increase over the previous year. IHS Global

Q1 2013

Insight is also forecasting that in 2013/14 Other Africa will again see increased production, but this is driven mainly by stronger yields, not area. Demand: World sorghum feed demand is forecast to increase in 2012/13 over 2011/12 to 25 million metric tons. Food seed and industrial will take the brunt of lower supply, declining 6% in 2012/13 over 2011/12. Total world domestic demand will shrink in 2012/13. Total demand is forecast to increase with greater supply abundance and lower prices in 2013/14. World exports are forecast to increase in 2012/13 over 2011/12 but decline again in 2013/14. Other Africa food seed and industrial demand in 2012/13 is estimated 2% above 2011/12, and 2013/14 food seed and industrial use is forecast 1% above 2012/13. Price Risk: The major price risk to the forecast is the overall direction of corn prices. Sorghum prices in major corn-producing regions will need to remain supported in an attempt to compete for plantings in the new marketing year. If corn prices see a major setback versus rallying in the event of good South American weather, then sorghum prices will follow lower. Food Grains Rice

Consumption growth will slow to a 1% increase in 2013/14 over the 2012/13 level. World rice exports are forecast to decline by 4.7 million metric tons in 2012/13 over 2011/12, but increase by 2.7 million metric tons in 2013/14.

Supply: World rice supply continues to be at a much more comfortable level than other food and feed grains. Rice supplies are expected to continue to grow following strong government subsidies aimed toward rice self-sufficiency in the developing world. Nigeria’s government has mentioned that over the next few years it will endeavor to become self-sufficient in rice production, as the country remains a large importer of rice. Thailand’s government has continued its paddy-pledging program, although its leaders are under constant scrutiny for exactly how they will avoid incurring large financial losses for selling rice below their procurement price. IHS Global Insight forecasts world rice production at 465 million metric tons in 2012/13 and 468 million metric tons in 2013/14. Growth in area harvested levels coupled with higher yields are expected. Chinese rice production is forecast to be flat in 2013/14 from the 2012/13 level. India’s rice production is forecast to fall in 2013/14, while Thailand’s increases moderately.

Price risk: The major price risk to rice remains a sudden change in Thai rice policy. At this point it seems unlikely that the paddypledging program will be abolished. IHS Global Insight does fear the long-term financial feasibility of the program, with government to government sales still clouded by the skepticism of exporters within the country. Attacks by the opposition party have even pointed to WTO issues with selling rice below government purchased levels. Rhetoric by government officials maintains that Thailand will continue to be the world’s number-one exporter. India and Vietnam continue to export rice well below Thailand’s level. It is expected that India will be historically strong in 2012/13 but will be limited due to weather issues witnessed during its monsoon season. In the United States, rice prices could see continued support as planted area is expected to be below normal, pressured by feed grains and oilseeds.

Demand: World rice demand is forecast to increase to 466 million metric tons in 2012/13, up from 455 million metric tons in 2011/12.

Supply: World wheat production is forecast at 652 million metric tons for the 2012/13

marketing year. Australian wheat production has been reduced from the previous forecast as a result of the dry conditions witnessed in the western regions. At the time of this writing Argentina’s wheat remains plagued by overly wet conditions that will lead to harvest delays and quality issues. Wheat production is forecast to grow by 8% in 2013/14 from stronger planted area and a return to trend-line yields in regions such as the former Soviet Union (FSU)12. Demand: World feed use for wheat is expected to remain historically strong in 2012/13 but pull back from the lofty levels seen in 2011/12. Feed use should continue to benefit from lower corn availability and price. Greater corn stocks are expected to pressure wheat for feed use in 2013/14 but it will remain at 2012/13 levels. Russia, and to a greater extent the FSU-12, will see a decline in feed usage as a result of the drought in 2012/13, but a return of production in 2013/14 will push feed consumption back to 2011/12 levels. World wheat food seed and industrial use will continue on a steady up trend. A lower yearly price forecast will help to return biofuel margins and lower consumer level wheat prices.

Wheat Price Risk: Near-term wheat prices have been stuck in a sideways range but will be supported by corn in 2012/13 as a result of

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Q1 2013

wheat’s feed value. As a result of strong feed grain prices in general, IHS Global Insight expects continued expansion of planted area in 2013/14, which will pressure prices to a larger degree in 2013/14 as world stocks are not deemed as tight as corn. Wheat production in the Southern Hemisphere is being reduced by both wet and dry weather. The Central Plains region of the United States also remains dry, which is concerning for prices for hard red winter wheat. Conditions prior to dormancy in the FSU-12 have been noted as good while areas in the EU-27 are split between dry and adequate. Spring rains will play the determining yield role, but wheat will ultimately follow corn in the event of a major rally or price collapse. Soybeans Supply: Less production in 2011/12 by the top three soybean producers was the primary reason for tighter total soybean supply of 26.5 million metric tons. This decline in production lowered carryover stocks from 2011/12 by 7.1 million metric tons. The tight supply has been extended through the first half of the 2012/13 marketing year by poor growing conditions this summer in the United States, which dropped its production another 6.3 million metric tons versus 2011/12. With production currently pegged at 77.8 million metric tons, this is the lowest US soybean production since 2007/08. At this point we project both Brazil and Argentina to have record soybean production for 2012/13, as elevated soybean prices have incentivized producers to sow record area and, assuming average weather and trend yields, this pushes past the historical soybean production envelope for South America. If Brazil ends up producing up to current projections this will be the first year that Brazil outproduces the United States in soybeans. There is still much uncertainty about South America’s production


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projections, as any weather disruptions will impact sowing and growing conditions, and concerns have risen in Argentina that overly wet-to-flooding conditions have been delaying soybean sowing. For China, we see a continued decline in area harvested again in 2012/13. This tightens its production modestly by 826,000 metric tons year over year (y/y). The tighter soybean domestic production in China continues to extend its dependence on imports of soybeans and derivatives in order to meet expanding domestic demand. Demand: Chinese crush capacity has come online and grown significantly over the last decade. From 2001/02 to 2011/12, China’s domestic soybean crush expanded by more than 39.8 million metric tons. The push in China to crush more domestically, combined with shrinking domestic soybean cultivation, pushed soybean import demand in China to climb 10% in 2011/12 versus the previous year, with another 1.29 million metric tons of growth projected for 2012/13. Global crush demand for soybeans continued to grow in 2011/12, even as production declined, with the demand for soybean derivatives expanding despite the historically strong prices. Look for crush to expand another 5.3 million metric tons for 2012/13 and be the primary demand driver to push down ending stocks in the new marketing year to an even tighter supply position than in 2011/12. Soybean import demand in the European Union dropped by 13% y/y in 2011/12. We see soybean import demand to continue to shrink in 2012/13, but only by a marginal 13,000 metric tons, as soybean prices drive demand to substitutes during the first half of the marketing

year, until South American production can be realized on the market. Price: Northern Hemisphere production projections attributable to drought conditions in the United States affecting soybeans and corn, as well as hot and dry conditions in select EU and FSU countries affecting sunflower seed production, pushed prices to appreciate in the new marketing year. The soybean market had retained some downward price resistance, but has become susceptible to continued macroeconomic concerns and positive sowing conditions in South America. Look for soybean prices to find support until into the first quarter of 2013, when expanded planting intentions and production projections in South America become more realized and can weigh heavier on the market. As the market has been working in expectations for record production in South America, the price risk will shift to adding risk premiums if negative weather news begins to propagate and projected estimates on yields are reduced. Watch for the market focus to switch almost entirely on South American weather despite any macroeconomic concerns, as Chinese soybean demand has remained strong. Livestock Beef Summary Despite declining production in the United States and Europe, global beef supplies will edge slightly higher in 2013 thanks to gains in Asia, Latin America, and Oceana. Total global beef consumption is likely to move slightly higher in 2013, owing to the modest gains in production. On a per capita basis, however, global beef disappearance is expected to decline for the sixth consecutive year, falling to 7.88 kilograms per capita.

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