Whats next for the commodities stories? Joanne Warner Head of - - PowerPoint PPT Presentation

Joanne Warner Head of Global Resources Renzo Casarotto Senior Portfolio Manager

What’s next for the commodities stories?

What’s happened in resources

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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

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Is this the GFC - Mark II?

Source: Bloomberg. 31 May 2013.

MSCI sector performance YTD (Rebased to 100)

70 80 90 100 110 120 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

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Chinese GDP - it’s the absolute numbers that count

GDP growth year on year

5.0% 6.0% 7.0% 8.0% 9.0% 10.0% 11.0% 12.0% 13.0%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

GDP ($US bn)

• 1,000

2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

$Usbn

Source: Bloomberg , May 2013 & CLSA April 2013.

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It’s the absolute numbers that count

Source: CLSA April 2013.

Chinese oil consumption (million bbls/d) Note the continual increase y-y, despite a notional slow down in growth rates

6.0 7.0 8.0 9.0 10.0 11.0 12.0 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 5.0 6.0 7.0 8.0 9.0 10.0 11.0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec m bpd 2009 2010 2011 2012 2013

Crude oil processed + net product imports

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China’s current five year plan requires more infrastructure

Source: Standard Chartered Resources, April 2013.

10 20 30 40 50 60 70 80 Railway (thousand km) Highway (ten of thousand km) Oil/Gas Pipe (thousand km) Airports (number of) Previous five year plan Current five year plan

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Source: Bloomberg; US Census Bureau; Stifel Nicolaus report, financial institutions, housing economics market commentary. As at December 19, 2012.

• Housing inventories at long term lows
• Vacancy rates nearing 2003 levels
• Construction jobs steady but hours up

Homeowner vacancy rate (%) US rental vacancy rate (%) Listed for sale homes per house hold

US Housing construction ‘upside’

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A progressive dividend policy, scope to increase

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 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 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 average payout

BHP - Dividend Payout Ratio (1990-2012) BHP - Annual dividend (1990-2012), 11.4% CAGR

0.0 0.5 1.0 1.5 2.0 2.5 Dec-96 Nov-97 Oct-98 Sep-99 Aug-00 Jul-01 Jun-02 May-03 Apr-04 Mar-05 Feb-06 Jan-07 Dec-07 Nov-08 Oct-09 Sep-10 Aug-11 Jul-12 DPS

RIO - Annual dividend (1996-2012), 7.4% CAGR

0.1 0.2 0.3 0.4 0.5 0.6 0.7 Dec-96 Oct-97 Aug-98 Jun-99 Apr-00 Feb-01 Dec-01 Oct-02 Aug-03 Jun-04 Apr-05 Feb-06 Dec-06 Oct-07 Aug-08 Jun-09 Apr-10 Feb-11 Dec-11 Oct-12 ave payout payout

RIO - Dividend Payout Ratio (1996-2012)

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.

Where to from here?

11

Iron ore – is the world too bearish?

Source: Morgan Stanley Research, CRU. February 2013.

50 100 150 200 250 10 20 30 40 50 60 70 80 2006 2007 2008 2009 2010 2011 2012 2013 US$/tonne Million tonnes

China's Iron Ore Imports vs Spot Iron Ore Price

China's Iron Ore Imports, Mt Spot Iron Ore, US$/t (RHS)

Source: Source: Bloomberg. May 2013.

12

Iron ore – why would BHP and RIO talk the price down?

Source: Metalytics. June 2013.

20 40 60 80 100 120 140 300 600 900 1,200 1,500 1,800 cash cost of production (US$/t fob) cumulative production (Mt) 2013 cash cost curve 50th centile 75th centile 90th centile spot (fines) 3-Jun-13 LT (incentive) price Australia Brazil China

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So where’s the supply?

• 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

Exploration spend by commodity: 1998-2012 Number of deposits found – by quality Copper: most of the metal in a handful of deposits

Source: MinEx Consulting – presentation to BBY Resources Conference, November 2012.

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Copper: Bingham Canyon – before the pit-wall failure…

Source: First State Investment, as at September 2012.

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And after the pit wall failure April 10, 2013

Source: First State Investments. Rio Tinto May 2013.

• Still unknown how much production will be

lost, but early estimates are 100-150kt Cu

• NB: pre-incident estimates were for an
• ver-supply in the Cu market of ~150kt

this year

• Cost? Equipment alone could be $100m

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Valuations – but is it cheap?

Mining vs MSCI World (P/E 2013 F1)

0.0 5.0 10.0 15.0 20.0 25.0 30.0 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 HSBC Mining MSCI World (MXWO Index)

P/E FY1

0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 1.80 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

Source: Nomura Custom Products Group – data to 31 May 2013.

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Valuations – but is it cheap?

Energy vs MSCI World (P/E 2013 F1)

0.0 5.0 10.0 15.0 20.0 25.0 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 MSCI Energy (MXWO0EN Index) MSCI World (MXWO Index) P/E FY1 0.00 0.20 0.40 0.60 0.80 1.00 1.20 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 Source: Nomura Custom Products Group – data to 31 May 2013.

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The resources cycle

Phase 2

High prices encourage new projects Supply response = demand Inventories rise = prices fall Capital expenditure is reduced

Phase 3

Supply is curtailed Demand normalises Producers benefit from recovery

Phase 1

Demand rises Inventories decline Supply response lags = higher prices Governments attempt to raise taxes

What about agribusiness?

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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

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Strong EM wages growth to drive consumption

5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000

Source: Ministry of Human Resources and Social Security, Nomura, data to Dec 2011. Bloomberg, CEIC, Nomura, data to 31 May 2012.

China average wage (RMB)

China wages growth Brazil wages growth

Brazil average monthly wage (BRL)

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Growing demand for soft commodities

GROWING POPULATION & URBANISATION 6.5bn to 9bn by 2050 70% urbanised by 2050

+

CONVERGING DIETS 40kg to 52kg by 2050

=

INCREASED MEAT CONSUMPTION 260mt to 470mt by 2050

Source: FAO How to feed the world in 2050 report, UN World Urbanization Prospects 2009 revision.

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What 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

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.

+85%

mt

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Middle East, Africa, and Asia consumption rising rapidly

Source: The Economist, * Cereals, rice, meals, oils and fed equivalent of meat.

World’s Food Surpluses and Deficits Net trade (Million tonnes)

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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.

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How can investors participate in the solution?

The solution:

• Increased yields
• Increased crop intensity
• Increased animal intensity
• Added acreage

Better agronomic practises Balanced fertilizer application Improvements in innovation (i.e. seeds) Infrastructure investment Farm economies of scale

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• We invest in the upstream and midstream portion of the agricultural value chain
• Upstream resource owners tend to make the highest margins

Upstream Downstream Midstream

Inputs

• seed
• fertiliser
• machinery

Farming/ plantation

• farm
• forestry/pulp
• palm oil

Handling/ traders

• storage
• handling
• trading
• marketing

Processors

• ilseed

crushing

• biofuels
• livestock
• paper

Food companies

• Nestle
• Kellogg’s
• Kraft

Supermarkets/ consumers

• Tesco
• Walmart
• Sainsbury
• Waitrose

Agricultural value chain

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.

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Agricultural equity returns versus agricultural commodity price returns

Source: First State Investments, Bloomberg, USD from June 2005 to 30 April 2013; standardised as at 30 June 2005.

50 100 150 200 250 300 DAXglobal Agribusiness Index Rogers International Commodity Agriculture Index +125%

• 18%

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Valuations – agriculture

Agriculture vs MSCI World (P/E 2013 F1)

Source: Nomura Custom Products Group – data to 30 April 2013.

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Valuations – forestry

Forestry vs MSCI World (P/E 2013 F1)

Source: Nomura Custom Products Group – data to 31 May 2013. 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 S&P Timber MSCI World (MXWO Index) 0.00 0.50 1.00 1.50 2.00 2.50 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12

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Returns and volatility by equity sector

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

• 2.0%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 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.

Return Risk

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Look 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 http://economictimes.indiatimes.com/markets/commodities/copper-weakens-in-futures-trade-global-cues-subdued-demand/articleshow/19675158.cms

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Disclaimer

Before making any investment decision based upon the information contained in this presentation, you should assess your own position, and if appropriate, seek the assistance of a financial adviser. The information contained within this presentation has been obtained from sources that First State Investments (“FSI”) believes to be reliable and accurate at the time of issue but no representation or warranty, expressed or implied, is made as to the fairness, accuracy, completeness or correctness of the information. Neither FSI, nor any of its associates, nor any director, officer or employee accepts any liability whatsoever for any loss arising directly or indirectly from any use of this. It does not constitute investment advice and should not be used as the basis of any investment decision, nor should it be treated as a recommendation for any investment. The information in this presentation may not be reproduced in whole or in part without the prior consent of FSI. This document shall only be used and/or received in accordance with the applicable laws in the relevant jurisdiction. 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 back your original investment. Investment involves risks, past performance is not necessarily a guide to future performance. Due to the nature of the funds, short-term volatility is expected and your investment should be viewed as long-term. Please refer to the

• ffering 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.