the structural vs. cyclical metals debate
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7/29/2019 The Structural vs. Cyclical Metals Debate
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abcGlobal Research
Slowing Western GDP growth will hit
metals demand, but continued
urbanisation trends in China should
cushion the effect Our ‘Metal in Use’ analysis indicates
Chinese demand has significant upside We continue to like mining equities; we
are OW on Rio Tinto, BHP Billiton and
Anglo American Expectations for economic growth in developedmarkets have deteriorated, causing equity markets and
miners to de-rate in response. Investors have two concerns –
how short-term economic weakness might affect
commodities and whether there is there enough long-term
structural demand to absorb the production growth being
pursued by the industry. We discuss both of these issues in
this report.
Short-term risks have grown, but need to be seen in context.
“Stall Speed” in developed markets isn’t good enough for
metals markets, which need 2% economic growth to just keep
metals demand static, and we will see a metal demand
contraction in the West in 2012. But it matters less now that
China accounts for 40%+ of global metals demand and the net
impact of HSBC Economics’ revised economic assumptions is
likely to be of the order of 1 percentage point, not insignificant
in commodity markets but unlikely to be exacerbated by the
industrial deleveraging seen in 2008.
In terms of long-term structural trends, demand is now
driven by an urbanisation process that is far more
structural than consensus generally believes. Our analysis of
urbanisation and demand intensity concludes that the very
bearish view of metals in China (eg urbanisation reversal,
massive overcapacity of infrastructure) is misreading the
underlying structural trends in a developing economy. On our
analysis, China is only 20-25% along the path towards being a
mature materials market and it may take at least 6-9 years
before demand intensity peaks.
This research note includes the analysis behind a presentation to be made
by Andrew Keen at HSBC’s Global Natural Resources Conference, to be
held in Singapore on 26-27 September 2011.
Natural Resources & Energy
Global Metals & Mining
The structural vs.cyclical metalsdebateWill China offset a western slowdown?
20 September 2011
Andrew Keen*
Analyst
HSBC Bank Plc
+44 20 7991 6835 [email protected]
Thorsten Zimmermann*
Analyst
HSBC Bank Plc
+44 20 7991 6764 [email protected]
Lourina Pretorius*
Analyst
HSBC Bank Plc
+44 20 7992 3686 [email protected]
View HSBC Global Research at: http://www.research.hsbc.com *Employed by a non-US affiliate of HSBC Securities (USA) Inc,and is not registered/qualified pursuant to FINRA regulations
Issuer of report: HSBC Bank plc
Disclaimer & DisclosuresThis report must be read with thedisclosures and the analyst certificationsin the Disclosure appendix, and with theDisclaimer, which forms part of it
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HSBC Metals & Mining Equities CoverageHSBC Global coverage overview
Company RIC Curr. Price Target Rating Marketcap
HSBC EPS _ __ EV/ EBITDA__
HSBC PE Price/ NAV
ROE Covering analyst
16 Sep price (USDm) 2011e 2012e 2011e 2012e 2011e 2012e 2011e 2012e
Global Base metals & Diversifieds
Aluminum Corp of China 2600.HK HKD 4.5 9.5 Overweight (V) 15,213 0.33 0.40 10.2 9.3 10.9 9.2 0.9 9% Sarah MakAnglo American AAL.L GBP 25.2 34.0 Overweight 52,732 5.19 5.89 3.9 3.5 7.8 6.9 1.2 18% Andrew KeenAntofagasta ANTO.L GBP 13.0 13.7 Neut ral (V) 20,239 1.48 1.59 4.4 4.3 13.9 12.9 3.1 22% Andrew KeenAurubis NAFG.DE EUR 42.4 46.2 Neutral 2,628 4.32 4.67 5.8 5.2 9.7 9.1 1.0 10% Thorsten ZimmermannBHP Billiton BLT.L GBP 20.0 27.6 Overweight 194,097 4.68 4.89 4.6 4.2 6.8 6.5 2.7 38% Andrew KeenBoliden BOL.ST SEK 83.1 125.0 Neutral 3,418 15.53 15.42 3.5 3.5 5.7 5.5 1.1 18% Thorsten ZimmermannChina Zhongwang 1333.HK HKD 3.2 4.3 Neutral (V) 2,198 0.20 0.29 2.6 1.9 12.9 8.9 0.9 10% Sarah Mak
Coal India Limited COAL.BO INR 379.2 472.0 Overweight (V) 50,652 26 31 8.5 6.3 15.5 12.3 7.2 45% Arun SinghHindalco HALC.NS INR 144.7 220.0 Overweight (V) 5,859 21 24 4.7 4.2 7.1 6.0 1.0 14% Jigar MistryHindustan Zinc Ltd HZNC.BO I NR 133.4 150.0 Overweight 11,922 12 14 6.3 4.5 11.0 9.3 2.4 20% Jigar MistryHochschild Mining HOCM.L GBP 5.2 5.1 Neutral (V) 2,784 0.67 0.66 3.8 4.2 12.3 12.5 2.5 19% Lucia MarquezJiangxi Copper Co 0358.HK HKD 18.7 25.0 Neutral (V) 13,378 1.98 1.79 8.5 8.9 7.7 8.6 1.3 14% Sarah MakNational Aluminium Co NALU.BO INR 65.7 90.0 Underweight 3,579 6 7 5.0 3.9 11.3 9.3 1.5 14% Jigar MistryNMDC Ltd NMDC.BO INR 250.2 250.0 Underweight (V) 20,981 17 17 8.8 8.4 14.9 14.8 5.2 31% Jigar MistryNorilsk Nickel GMKN.RTS USD 253.0 309.0 Overweight 48,229 38.49 36.41 5.3 5.1 6.6 6.9 2.4 31% Vladimir ZhukovNorsk Hydro NHY.OL NOK 30.3 56.0 Overweight 11,204 2.82 4.51 5.1 4.8 10.7 7.8 0.7 9% Thorsten Z immermannNyrstar NYR.BR EUR 7.8 14.0 Overweight 1,837 1.02 1.63 3.8 2.4 7.7 4.8 0.9 19% Thorsten ZimmermannRio Tinto RIO.L GBP 36.3 56.0 Overweight 116,123 10.04 9.13 3.4 3.6 5.7 6.3 1.9 30% Andrew KeenRusal 0486.HK HKD 8.1 13.9 Overweight 15,860 0.17 0.18 4.5 3.4 6.0 5.7 1.1 18% Vladimir ZhukovSesa Goa Ltd SESA.BO INR 223.9 220.0 Neutral 4,116 40 35 3.7 4.1 5.7 6.3 1.5 23% Jigar MistrySterlite STRL.NS INR 134.9 220.0 Overweight 9,585 16 21 5.0 3.5 8.9 6.5 1.0 12% Jigar MistryVALE VALE.N USD 27 35.5 Overweight (V) 141,123 5.17 4.34 4.1 4.1 5.3 6.3 1.5 22 % Jonathan BrandtVedanta VED.L GBP 14.2 24.6 Overweight (V) 5,968 5 6 4.7 3.9 4.8 3.5 1.1 27% Thorsten Zimmermann
Xstrata XTA.L GBP 1 0.4 15.0 Neutral (V) 48,738 2.20 2.56 4.0 3.3 7.5 6.4 1.1 16% Andrew KeenAverage (market cap weighted) 4.8 4.5 7.7 7.4 2.3 28%
Steel - Developed markets
ArcelorMittal MT.N USD 18.5 30.33 Overweight (V) 28,877 1.99 1.99 4.6 4.5 7.6 8.6 0.5 5% Thorsten Z immermannKloeckner & Co KCOGn.DE EUR 10.9 20.00 Overweight 1,503 0.73 1.61 5.1 3.4 14.9 6.8 0.6 10% Juergen SiebrechtPOSCO 005490.KS KRW 424,500 600,000 Overweight (V) 28,870 63,134 64,944 4.7 4.2 6.7 6.5 0.8 12% Brian ChoSalzgitter SZGG.DE EUR 39.0 52.0 Overweight 3,227 2.82 4.14 4.2 3.4 13.8 9.4 0.5 6% Juergen SiebrechtThyssenKrupp TKAG.DE EUR 21.5 31.6 Overweight 14,750 2.06 2.96 5.6 4.5 10.8 7.6 1.0 13% Thorsten Z immermannVoestalpine VOES.VI EUR 24.7 33.0 Overweight 5,754 4.05 4.49 4.0 3.6 6.6 5.7 0.9 15% Thorsten Zimmermann
Average (market cap weighted) 4.7 4.2 8.2 7.5 0.7 10%Steel - Emerging markets
Angang Steel 0347.HK HKD 5.4 12.5 Neutral (V) 5,994 0.60 0.62 5.6 5.4 7.3 7.2 0.6 8% Sarah MakBaoshan Iron & Steel 600019.SS CNY 5.1 8.5 Overweight (V) 14,090 0.89 0.96 3.1 2.7 5.8 5.3 0.8 14% Sarah MakChina Steel Corp 2002.TW TWD 30.3 35.2 Overweight (V) 15,391 2.94 3.11 10.2 9.8 10.3 9.8 1.5 15% Sarah MakCSN CSNA3.SA BRL 16.4 24.5 Overweight 13,897 2.41 2.17 3.7 4.2 6.8 7.5 2.2 27% Jonathan Brandt
Erdemir EREGL.IS TRY 3.3 5.3 Overweight 3,958 0.44 0.53 5.5 4.9 7.4 6.2 1.0 16% Bulent YurdagülEzz Steel Rebars ESRS.CA EGP 7.8 11.5 Overweight (V) 712 0.75 3.33 5.9 2.6 10.3 2.3 0 .9 32% Patrick GaffneyGerdau GGBR4.SA BRL 14.8 18.0 Neut ral 13,924 1.28 1.42 6.1 5.0 11.5 10.4 1.0 10% Jonathan BrandtJsw Steel JSTL.BO INR 686 720 Neutral (V) 3,239 72 111 6.9 6.0 9.6 6.5 0.9 9% Jigar MistryJindal Steel & Power JNSP.BO INR 545 710 Overweight 10,781 44 42 8.7 8.5 12.4 12.9 3.4 24% Jigar MistryKardemir KRDMD.IS TRY 0.9 1.25 O verweight 472 0.09 0.13 5.5 3.9 9.2 6.6 0.9 12% Bulent YurdagülMaanshan 0323.HK HKD 2.0 4.7 Neutral (V) 3,198 0.28 0.31 3.8 3.4 5.9 5.4 0.4 8% Sarah MakMetalurgica Gerdau GOAU4.SA BRL 18.4 23.0 Neutral 4,202 2.21 2.39 6.8 5.7 8.3 7.7 1.0 12 % Jonathan BrandtSAIL SAIL.BO INR 109 Restricted Jigar MistryTata Steel TISC.BO INR 461 710 Overweight 9,350 63 79 5.3 4.7 7.3 6.0 1.3 18% Jigar MistryUsiminas USIM5.SA BRL 12.3 17.5 Neut ral 10,629 0.69 1.42 12.0 7.7 17.7 8.6 0.7 8% Jonathan Brandt
Average (market cap weighted) 6.1 5.7 8.7 8.2 1.4 16%
Source: HSBC estimates
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HSBC Global coverage overview (continued)
Company RIC Curr. Price Target Rating Marketcap
HSBC EPS __ EV/ EBITDA__
_HSBC PE _ Price/ NAV
ROE Covering analyst
16 Sep Price (USDm) 2011e 2012e 2011e 2012e 2011e 2012e 2011e 2012e
Coal
China Coal Energy 1898.HK HKD 9.9 10.8 Neutral (V) 18,969 0.74 0.83 5.9 5.3 11.0 9.8 1.3 13% Sarah MakChina Shenhua Energy 1088.HK HKD 34.2 47.0 Overweight (V) 81,328 2.35 2.75 6.3 5.2 11.9 10.2 2.4 21% Sarah MakCoal India Limited COAL.BO INR 379.2 472.0 Overweight (V) 50,652 26 31 8.5 6.3 15.5 12.3 7.2 45% Arun SinghHidili Industry Int 1393.HK HKD 3.5 4.7 Neutral (V) 927 0.35 0.41 7.1 6.4 8.2 6.9 0.7 10% Sarah MakYanzhou Coal Mining 1171.HK HKD 20.7 26.2 Neutral (V) 18,136 1.93 1.79 8.1 8.6 8.8 9.5 1.9 19% Sarah Mak
Average (market cap weighted) 7.1 5.9 12.5 10.7 3.6 27%Global Gold & PGM
African Barrick ABGL.L GBP 5.9 10.0 Overweight 3,834 0.83 1.54 4.9 2.1 11.2 6.1 20% Patrick ChidleyAngloGold Ashant i AU.N USD 47.6 76.0 Overweight 18,176 4.88 8.61 5.1 2.6 9.7 5.5 3 .2 44% Sabrina Grandchamps
Barrick Gold Corp ABX.N USD 53.6 97.0 Overweight 53,550 5.43 7.64 6.6 4.5 9.9 7.0 2.2 27% Pat rick ChidleyCenterra Gold CG.TO CAD 21.2 27.0 Overweight (V) 5,081 1.84 2.61 9.0 5.5 11.7 8.2 3.2 33% Sabrina GrandchampsGoldcorp Inc. GG.N USD 51.5 79.0 Overweight 41,598 2.99 3.82 11.6 7.9 17.2 13.5 1.9 14% Patrick ChidleyGold Fields GFI.N USD 17.1 30.0 Overweight 12,372 3.04 3.68 3.3 2.3 6.4 4.7 1.7 36% Sabrina GrandchampsIamgold Corporation IAG.N USD 22.1 30.0 Overweight (V) 8,294 1.62 1.92 6.9 5.4 13.6 11.5 2.2 18% Sabrina GrandchampsHarmony Gold Mining HMY.N USD 13.1 17.0 Overweight 5,652 0.61 1.23 13.2 4.4 39.2 11.0 1.3 9% Sabrina GrandchampsKinross Gold KGC.N USD 17.4 30.0 Overweight 19,809 1.26 1.48 6.9 5.7 14.9 11.9 1.3 11% Pat rick ChidleyNewmont Mining NEM.N USD 65.7 116.0 Overweight 32,043 5.54 8.96 5.4 3.6 11.9 7.3 2 .0 26% Patrick ChidleyPetropav lovsk Plc POG.L GBP 8.4 15.0 Overweight (V) 2,480 1.88 2.05 4.8 4.1 7.0 6.5 1.4 20% Sabrina GrandchampsPolymetal OJSC PMTLq.L USD 19.3 30.0 Overweight (V) 7,704 1.96 2.87 7.9 4.9 9.9 6.7 3.6 42% Sabrina GrandchampsRoyal Gold Inc RGLD.O USD 80.4 76.0 Overweight 4,383 1.55 2.01 21.3 16.3 53.3 40.4 3.0 7% Patrick ChidleyRandgold Resources GOLD.O USD 108.8 165.0 Overweight 9,958 4.90 9.04 13.7 6.6 22.2 12.0 4.4 31% Patr ick Chid leyYamana Gold AUY.N USD 16.1 20.0 Overweight 12,033 1.15 1.51 7.6 5.6 14.1 10.7 1.5 14% Patrick Chidley
Average (market cap weighted) 7.9 5.2 14.1 9.6 2.2 24%
Source: HSBC estimates
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Structural and cyclicaldemand concernsThis report centres on two major concerns we find
among investors at present. Our impression of
these can be summarised as follows:
Mining companies are directing all of their
excess cash flow towards organic growth at
present, which will come on in 2012-15,
creating oversupply as Chinese growth slows.
Therefore this growth should have little value
placed on it by the market.
The world appears to be ending again – 2008
was not pleasant for commodities and the
risks now are significant.
We discuss these two concerns in turn in this report.
In terms of long-run demand trends, we conclude
that China’s urbanisation process is driving metal
demand. Our analysis of peak commodity demand
intensity and “metal in use” shows that the rate of
metal demand is unlikely to have peaked and the
cumulative level of demand is still very low in
comparison to historical precedents. As long as
this persists, demand rates are likely to stay above
historical rates.
In terms of short-run risks, we conclude the net risk
to metal demand from a slowing West is around 1
percentage point, but the industry supply response is
still slow. Also, we do not believe the aggressive
destocking seen at the end of 2008 is likely to
reappear, as we are entering a period of poor growthwith a manufacturing chain much emptier than in
2009. Weakness in 2012 in the West is likely to ease
commodity prices, but we had already factored this
in, and do not see a reason at present to adjust our
commodity price estimates.
Although this report centres on the industry rather
than stock specifics (which we plan to return to),
we highlight that the sector contains little of the
balance sheet risk of 2008. We believe the
industry would slow capex in response to anaggressive downturn, as it did in 2009.
Long-term structural trendsWe are getting some specific investor pushback
on mining equities at present, not dissimilar to
those aired at the end of 2008 – namely materials
demand is levered, rather than immune, to
slowing developed market growth as China has
over-invested in infrastructure and housing. But
before we delve into some of the data on
urbanisation and materials demand to disprove
this common misconception, we also want to
provide a more prosaic sense check.
A long way to go
Long-term demand growth is key to the value of production growth
currently being pursued by the industry
Recent downward revision of global growth forecasts by HSBC
Economics only shifts global metal demand by 1 percentage point
Unlike 2008, industrial deleveraging is unlikely to be repeated
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A visitor landing in Manhattan 80 years ago could
arguably have concluded that the US looked built
back then (see Chart 1); and a modern-day visitor to
Beijing or Shanghai (admittedly transport has
moved on from the airship pictured) could conclude
that China looks similarly developed today.
The reason we highlight the US 80-90 years ago is
because its urbanisation rate was roughly
equivalent to current urbanisation in China (on
our estimates China will approach the 50%
urbanised level in 2014, a level reached around
1920 in the US).
Although we acknowledge upfront that there are
all kinds of problems with both official
urbanisation data in many countries and long-run
income comparisons, there is a reasonably
consistent pattern of urbanisation rising as wealth
increases (see Chart 2 below). China in 2010
looks not dissimilar to Japan in 1967 and is less
urbanised than the US in 1920 and Korea in 1976.
Chart 1: Manhattan in the early 1930s
Sour ce: U.S. Naval Historical Centre
Development paths are somewhat idiosyncratic,
and, as we discuss below, the nature of
urbanisation and materials intensity even more so
– for example, the US urban landscape is
generally much less dense and suburban than the
Asian landscape, which involves high-rise
apartments that are very steel intensive. But, it is
fair to generalise, humans tend to reach a certain
level of wealth and urbanise.
Chart 2: China, US, South Korea & Japan – official urbanisation rates versus per capita income
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0 5 10 15 20 25 30
Real GDP per Capita
(Thousands of 1990 USD in Geary Khamis PPPs)
U r b a n i s a t i o n R a t e
China United States South Korea Japan
China in 2010
US in 1920
Japan in 1967
Korea in 1976
China in 2025*
Source: United Nations, GDDC and HSBC analysis * Based on scenario in HSBC Economics’ “The world in 2050 ” report, published 4 January 2011.
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The reasons for this can fill an entire research
report on its own, but include access to
opportunity (wages in Chinese cities can be three
times those in rural areas), better education and
government policy (some studies suggest that
dense urban centres accelerate economic
development and minimise the loss of arable land
during development), to name but a few. The
government has also progressively relaxed
restrictions on where people live, which has
promoted urbanisation (although the formal
classification of urban versus rural, or Hukou, has
probably lagged the actual trend).
It is also important to note that these trends also
appear irreversible. Although some of the trends
below show horizontal fluctuation in per-capita
income, the trend in urbanisation is irrevocably up
– even during the Great Recession, urbanisation
did not reverse in the US. Good times or bad,
humans like to live with one another. In the wordsof the song penned by Lewis and Donaldson in
1918, just as the US crossed the 50% urbanisation
barrier, “How ‘ya gonna keep 'em down on the
farm, after they've seen Paree”. Maybe we should
insert Shanghai?
An unsustainable rate?
Not really, at least according to historical trends. As
Charts 3 and 4 show, urbanisation in China has been
increasing at an average 10 percentage points per
decade over the past 20 years, while rates have been
maintained in South Korea and Japan for several
decades – only slowing once absolute urbanisation
reaches 60-70%, 10-20 years away for China at
current rates. It is also hard to argue that countries
have a natural limit to urbanisation. Certainly, in
countries highly constrained by space (Singapore)
there is a logic, but even where space is not
remotely an issue (eg Australia), urbanisation rates
can be high (see Chart 5).
Chart 3: China, US, South Korea & Japan – decades’ changein urbanisation rates (1840-2010)
0
5
10
15
20
1 8 4 0
1 8 7 0
1 9 0 0
1 9 3 0
1 9 6 0
1 9 9 0
P e r c e n t a g e P o i n t s
China United States
South Korea Japan
Source: United Nations and HSBC calculations
Chart 4: China, US, South Korea & Japan – urbanisation rate(1830-2010)
0%
20%
40%
60%
80%
100%
1 8 3 0
1 8 6 0
1 8 9 0
1 9 2 0
1 9 5 0
1 9 8 0
2 0 1 0
China United States
South Korea Japan
Source: United Nations and HSBC calculations
Another problem with urbanisation data (and a
pushback we get occasionally from clients) is that
China is a large and diverse country and all of the
per-capita trends are distorted by this. It is true,
there are distinct differences between urban and
rural populations, and this has an impact on
materials demand (steel demand intensity, which
we discuss in more detail below, is much higher
in urban areas – see Chart 6).
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The chart below separates the aggregate Chinese
data into these two separate categories. Here
consumption in the urban centres is much higher,
although it should not be read that these look
excessive in comparison to historical trends. We
do not have an equivalent breakdown betweenurban and rural demand intensity for other
countries historically, but it is highly likely that
urban intensity was, naturally, much higher than
the national aggregate in developed urban centres
in the US as it was urbanising.
Chart 6: Steel Intensity of Use – China Urban versus ChinaOverall (1974-2010)
0
200
400
600
800
1,000
0 4,000 8,000 12,000 16,000
Real GPD per Capita
C o n s u m p t i o n p e r C a p
i t a ( k g )
Overal l China Urban China
Source: GGDC, National Bureau of Statistics China and HSBC calculations
It is the spread of development from the more
developed coastal areas of China to smaller cities
inland that is likely to provide an ongoing source of
demand. China has 4 Tier 1 cities (populations 8-
20m), 16 Tier 2 cities, (3-7m) and 24 Tier 3 cities
(2m and less). We believe expecting economicdevelopment to stop at the coast is wrong.
Chart 5: Global urbanisation rates by country (2010)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
S i n g a p o r e
B e l g i u m Q a t a r
I c e l a n
d
I s r e a l
A u s t r a l
i a
L e b a n o
n
N e w
F r a n c
e
K o r e
a
U S
C a n a d
a
U K
P e r
u
G e r m a n y
R u s s i a
M a l a y s i a
I t a l y
J a p a
n
A r m e n i a
I r e l a n
d
G r e e c
e
K a z a k h s t a
n
S y r i a n
A l b a n i a
P h i l i p p i n e
s
C h i n
a
I n d o n e s i a
S e n e g a l
Z i m b a b w
e
P a k i s t a
n
T h a i l a n
d
Y e m a
n
I n d
i a
B a n g l a d e s
h
T a j i k i s t a
n
A f g h a n i s t a
n
K e n y a
C a m b o d i a
Source: United Nations and HSBC calculations
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Materials-specific trendsSome investors are concerned that materials
intensity in China may have reached that of a
mature market. Global demand growth for metal
may therefore begin to slow. We disagree.
Certainly simplistically, demand looks incredibly
high – we focus on copper, due to its importance
to mining generally, and steel, which is the driver
for iron ore, coking coal, ferrochrome, zinc and
nickel demand. China consumed 577Mt of steel in2010, a massive amount of material and 6.3 times
US steel demand in the same year (91Mt). Even in
its peak year of 1973, the US only managed
141Mt of steel consumption, one-quarter of
current Chinese demand. Even considering the
relative population size, it looks too large, at
426kg/head of population, 50% higher than US
levels of 265Kg/capita. At first glance, this is
pretty scary stuff.
But a developing economy should not be confused
with another that is, in commodity intensity terms,
over the hill. Chart 8 shows per capita consumption
against per capita income (log scale at purchasing
power parity), known by various names, including
an S- or kuznet curve – and increasingly commonly
known in materials analysis. Here it shows that
Chinese per capita demand is not unusual for its
point in economic development.
To understand ‘over the hill’, it is worth looking
at China versus the US in more detail (Chart 8
again). China has just breached the 400kg/head
barrier, a level reached in the US at the end of the
1930s. It should be highlighted that US demand
intensity did not fall below this level until the
1982 recession, some 43 years later, and in the
interim hovered between 500 and 600kg/head, 25-
50% higher than current intensity in China.
Chart 8: US and China – Steel demand intensity curves
0
100
200
300
400
500
600
700
0 5 10 15 20 25 30 35
Income per Capita (000 PPP)
C o n s u m p t i o n p e r C a p i t a ( k g )
USA China
US in 1939
US in 1982
China in 2010
Source: USGS, GGDC and HSBC calculations
But even this may not represent peak intensity and
maturity for China, where urbanisation may be
more materially intensive – as Chart 9 shows, per
capita demand in Japan peaked around
750kg/head, and Taiwan and Korea have reached
over 1,000kg/head.
The difficulty is that these curves are heavily
country-specific, and dependent on factors such as
urbanisation patterns and reliance on export
industries (some of Taiwan/Korean production is
re-exported in cars/ships, and this could not be
achieved in China given the relative scale).
There is also a pace of development issue. It has
been known for several decades that materials
demand rises with economic development, but
there has been significant debate around whetherthe path of development is changing over time. It
has been argued that historical rates of materials
intensity should be lower because more newly
developing countries have the ability to leapfrog
technologies. Certainly in developed markets
there is a tendency for materials intensity to
decline over time or in the absence of economic
growth (we discuss this in more detail in our
cyclical forecast section on page 12).
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We include the equivalent chart for copper below,
and show these demand intensity curves in more
detail in the Appendix.
Chart 10: Copper – Demand Intensity curves by country
0
2
4
6
8
10
12
14
1,000 10,000 100,000
Income per Capita (PPP)*
D e m a n d p e r C a p i t a ( k g )
US China India
Europe Japan Em. Asia
China in 2010
Source: USGS, GGDC and HSBC calculations *Logarithmic scale.
Looking for an inflection point?
What is commonly missed in this analysis,
however, is the importance of inflection points.
The metals industry will need to build the
capacity to meet peak demand intensity, but once
this is reached, may need to cope with excess
capacity as intensity eases. This holds for
processing-driven materials such as aluminium
and steel, as well as mined commodities such as
iron ore and copper.
Perhaps one way of identifying this is the peak
value of per capita demand. We have stripped out
the entire trend data in the development curves for
both steel and copper (see Charts 11 and 12), butleft Chinese demand in 2010 in as trend data. In
terms of copper demand, demand per capita is only
46% of the comparative series in this analysis
(Europe, Japanese, emerging Asia and the US). At
current rates of demand growth, it will take nine
years to reach the average of these four series.
The same exercise for steel yields a similar result
– splitting out peak steel intensities for our data
series (we have used Taiwan, Korea, Japan and
the US) indicates demand is 47% of a simple
average of peak values, and 56% of peak values
seen in the US and Japan. This gap, at current
rates of steel demand growth, will take six to eight
years to close. As we discuss earlier, steel
intensity (and hence also iron ore demand) is
more variable than copper due to export
dependency and urbanisation styles but, in any
case, China remains well below all levels.
Chart 9: US, China, India, Korea, Japan & Taiwan – Steel kuznet curves
0
200
400
600
800
1,000
1,200
1,400
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000
Real GPD per Capita
C o n s u m p t i o n p e r C a p i t a ( k g )
US* China India Korea Japan Taiw an
Source: USGS, GGDC and HSBC calculations * US data from 1900; rest of world 1974.
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Chart 11: Steel – Peak demand intensity and China’s currentposition
0
200
400
600
800
1,000
1,200
1,400
1,000 10,000 100,000
Income per capita (PPP) Log Scale
S t e e l c o n s u m p t i o n k g / c a p i t a
USA China Korea
Japan India Taiwan
China in 2010
Intensity is
47% of
average
peak values;
requires 6-
8yrs of
growth at
curent rates
to approach
that level
Source: USGS, IISI, GGDC and HSBC calculations *Log scale.
Chart 12: Copper – Peak demand intensity and China’scurrent position
0
2
4
6
8
10
12
14
1,000 10,000 100,000
Income per Capita (PPP)*
C u d e m a n d p e r C a p i t a ( k g )
US China IndiaEurope Japan Em. Asia
China 46% of
typical peak
intensity;requires 9 yrs
at cu rrent
growth rate to
approach that
level
Source: USGS, GGDC and HSBC calculations *Log scale.
Why does the inflection point matterfor stocks?
Commodity markets struggle to keep up with
structurally high demand, and are likely to
continue to struggle until China reaches an
inflection point in demand intensity. The history
of commodity markets is that supply responses,
on their own, take a very large amount of time to
return a market to long-run prices.
As such, operating profit margins are likely tostay above normal for a period – we discussed this
specifically in our piece “The end of the metals
cycle?” on 27 June. Here we looked at the value
of cash flow above normal long-run operating
profit margins (30%) for a major miner (Rio
Tinto). Assuming this excess cash has value (it
will either be returned, eg buybacks, special
dividends – or grow the business, M&A or
organic growth), it is possible to produce a grid of
the value of this cash. There are two elements tothe value of excess cash – how high margins will
be relative to history and for how long. Table 1
reflects the cumulative NPV of this excess cash as
a percentage of the current stock price for
differing operating profit margins.
Table 1: NPV of excess cash flow at differing operating profitmargins and years to normality
Op. profit margin _________ Years to normality __________1 2 3 4 5
30% 5% 9% 13% 17% 20%35% 7% 13% 19% 24% 29%40% 9% 18% 26% 33% 40%45% 12% 24% 34% 43% 52%50% 16% 30% 43% 55% 66%55% 20% 38% 54% 69% 83%
Source: HSBC estimates
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An analysis of “steel in place”An alternative way of thinking about maturity is
to look at “steel in place”, or effectively the
amount of steel required in total to build a
developed economy. This is far rarer analysis and
the only data that we are aware of has been
produced by the US Geological Survey (USGS).
The last data that we are aware of is for 2002,
where 4.13Bt of steel was “in place”, ie in the
general economy, in the form of cars, bridges,
infrastructure, housing, white goods, etc. Given
the rate of increase from 1995 to 2002, this figure
is likely to stand at approximately 4.6bn tonnes in
2010. In 2002, the steel in place represented 14.4
tonnes per head.
Chart 13: US – Steel stocks in use (1960s-2002)
0.0
0.8
1.5
2.3
3.0
3.8
4.5
Mid
1960s
1975 1985 1995 2001
T o t a l ( B i l l i o n
t o n n e s )
0
4
8
12
16
T o n n e s P e r
C a p i t a
Total Per Capita
Source: USGS, IISI, GGDC and HSBC calculations
Unfortunately we are not aware of similar “steel
in use” data for other nations (particularly where
urbanisation is more Asian in nature), but using
historical steel demand trends, we can make an
approximate estimate.
For Japan, we have annual demand data back to the
early 1970s and some data points to the mid-1960s
and early 1950s, which we have interpolated using
compound growth rates (see Chart 14 on the next
page). This data points to cumulative steel demand
of 3.24bn tonnes since 1950.
Converting this into per-capita demand yields
25t/person, 73% higher than the steel in use in the
US. This is not quite a valid comparison as we are
ignoring a number of factors here, particularly losses
due to scraping and redundancy of previous use.
But if we look at the US as a guide, we do know
both the historical cumulative demand as well.
Steel in place of 4.13bn tonnes in 2002
represented 53% of cumulative demand since
1900 and 71% since 1950. Applying this 71%ratio to Japanese per capita usage (based on
historical cumulative demand) implies steel in
place of 18.3t/head, 26% higher than US levels.
There are potential complicating factors here (eg
technological changes in end-use demand, scrap
recovery and the pace of development), but it does
indicate that the Asian style of urbanisation is
likely to require higher levels of steel in place.
The reasons for this are likely to be more dense
urban areas requiring higher buildings and moregeneral infrastructure, and this is likely to apply
directly to China.
Table 2: China – estimate of steel in place per capita*
___ Steel in place ____ __Cumulative demand__Total
(Bt)Per capita
(t)Since 1950
(Bt)Ratio
US 4.13 14.4 5.82 71%Japan 2.3 18.3 3.24 71%
Since 1990 BtChina 4.66 3.47 5.18 90%
Source: USGS, IISI, GGDC and HSBC calculations *Base reported data is shaded.
So how does China compare? The evidence is
that it is still in its infancy. If we look at
cumulative demand since 1990 (the limit of our
data on steel demand, as pre-1990 demand was
very small) we find that steel consumed (to end of
2011e) totals 5.18bn tonnes. Applying the US rate
of wastage implies around 90% (4.66bn tonnes) of
this cumulative demand would still be in place, or
3.47t/capita (see Table 2).
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Chart 15: US – Cumulative Steel Demand (1900-2002)
0
2
4
6
8
1 9 0 0
1 9 1 0
1 9 2 0
1 9 3 0
1 9 4 0
1 9 5 0
1 9 6 0
1 9 7 0
1 9 8 0
1 9 9 0
2 0 0 0
B i l l i o n T o n n e s
Since 1900 Since 1950
Source: USGS, IISI, GGDC and HSBC calculations
This is 24% of US levels and 19% of Japanese
levels. It will take until 2026 to reach the US
average and until 2029 to reach the Japanese level
of intensity using the CAGR of the past five years
and allowing for losses. It is worth remembering
that in terms of total infrastructure and materialsinvestment, China is nowhere near maturity.
Chart 14: Japanese cumulative steel demand
0
20
40
60
80
100
1 9 5 0
1 9 5 4
1 9 5 8
1 9 6 2
1 9 6 6
1 9 7 0
1 9 7 4
1 9 7 8
1 9 8 2
1 9 8 6
1 9 9 0
1 9 9 4
1 9 9 8
2 0 0 2
2 0 0 6
2 0 1 0
C u m u l a t i v e ( B i l l i o n T o n n e s )
0
500
1,000
1,500
2,000
2,500
3,000
3,500
A n n u a l ( M i l l i o n T o n n e s )
Reported Annual Interpolated Annual Cumulativ e
Source: USGS, IISI, GGDC and HSBC calculations
Chart 16: Japanese cumulative steel demand (absolute and per capita)
0
5
10
15
20
25
30
1 9 5 0
1 9 5 4
1 9 5 8
1 9 6 2
1 9 6 6
1 9 7 0
1 9 7 4
1 9 7 8
1 9 8 2
1 9 8 6
1 9 9 0
1 9 9 4
1 9 9 8
2 0 0 2
2 0 0 6
2 0 1 0
A b s o l u t e ( B i l l i o n T o n n e s )
0
500
1,000
1,500
2,000
2,500
3,000
3,500
P e r C a p i t a ( T o n n e s )
Per Capita Absolute
Source: USGS, IISI, GGDC and HSBC calculations
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But this is not a cyclicalforecast
Knowing that there is plenty of structural
headroom to demand is reassuring at times such
as these (and reassuring when looking at organic
growth plans of the majors), but valid pushback
would be that this structural upside existed at the
end of 2008 and did not prevent a downturn in
global metals demand in 2009 (although we
would strongly argue was the main reason for oneof the shortest commodity recessions on record).
Why should we escape this time?
Slower demand growth in 2012
Firstly, how will demand growth be affected by a
slowing world? The HSBC Economics team
recently (6 September 2011) cut its estimates for
global GDP growth – please see the report “The
New Global Cooling” for full details.
For metals, the critical elements are the mix of developed and Chinese demand growth. We
include in the appendix the demand-grid analysis
methodology we used in our report of 27 June
“The end of the Metals Cycle?” We expand these
growth/metals demand relationships in Chart 18
on page 16.
The net impact on global metals demand from our
lower growth forecasts is a lowering from 4.8% to
3.9% (we have used the “Developed Market”
GDP number for the World ex China).
Although a drop of the order of 1 percentage point
in demand sounds negligible, commodity markets
do tend to turn on fine margins. However, for a
balanced market, this could generate 3.6 days of
inventory over the course of a year, not overly
significant for the market which holds between 14
and 45 days of exchange inventory (see Chart 19
on page 17), especially given that inventory/price
relationships have become substantially less
reliable than in the past.
Table 3: HSBC growth and Inflation forecasts
______________ An uphill struggle ______________ ______________ Latest forecasts _______________GDP 2011f 2012f 2011f 2012f
World* 3.0 3.4 2.6 2.8Developed 1.8 2.3 1.3 1.6Emerging 6.3 6.2 6.2 6.1US 2.5 2.9 1.6 1.7UK 1.2 1.6 1.1 1.3Eurozone 2.0 1.4 1.6 0.7Japan -0.6 2.4 -0.6 2.4Turkey 5.8 3.7 5.1 3.0Brazil 4.1 4.4 3.5 4.0Russia 5.5 4.0 4.2 3.0India 7.5 8.1 7.4 8.0China 8.9 8.6 8.9 8.6
______________ An uphill struggle ______________ ______________ Latest forecasts _______________Inflation 2011f 2012f 2011f 2012f
World* 3.4 2.5 3.5 2.6Developed 2.5 1.5 2.6 1.6Emerging 6.4 5.8 6.3 5.7US 2.9 1.5 3.1 1.8UK 4.3 2.2 4.4 2.3Eurozone 2.7 1.9 2.7 1.8Japan -0.1 -0.3 -0.1 -0.3Turkey 6.4 7.1 5.9 7.4
Brazil 6.5 5.3 6.5 5.7Russia 9.6 8.5 8.6 7.6India 8.0 7.7 8.6 7.5China 4.8 2.9 4.8 2.9
Source: HSBC estimates, *Nominal GDP weights; An uphill struggle : HSBC previous forecasts published in Global Economics, Q3 2011 (29 June 2011).
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The real risk for metals arguably comes at the
start of economic weakness (and this is again
borne out by the significant upcycles in inventory;
see Chart 19). The underlying reason for this is
the behaviour of physical buyers. When end-use
demand is strong and manufacturing output is
close to full capacity, purchasing managers stock
up on raw materials. These stocks protect them
from any interruptions to the supply chain, and
also reward purchasing managers as prices
increase over time. In an economic downturn,
these concerns reverse, and average inventory
levels are typically cut. In 2008/09, this process
was particularly vicious as credit markets
contracted, requiring working capital to be
liquidated as much as possible.
Even if sentiment along the value chain turns as or
more negative than it did in 2008, we doubt that
the same amount of industrial destocking is likely
to occur. We are entering the current period of
weakness from anaemic growth, not strength, and
we doubt that the industrial manufacturing chain
ever fully restocked.
Therefore our overall impression is that developed
market weakness in 2012 along the lines of our
economic forecast will weigh only lightly onmetals markets. We have already accounted for a
softening of many key commodity prices into
2012, and do not see a reason for any revision on
the current evidence.
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Chart 18: Exchange inventories, days of demand
0
10
20
30
40
50
60
70
S e p
- 9 1
S e p
- 9 2
S e p
- 9 3
S e p
- 9 4
S e p
- 9 5
S e p
- 9 6
S e p
- 9 7
S e p
- 9 8
S e p
- 9 9
S e p
- 0 0
S e p
- 0 1
S e p
- 0 2
S e p
- 0 3
S e p
- 0 4
S e p
- 0 5
S e p
- 0 6
S e p
- 0 7
S e p
- 0 8
S e p
- 0 9
S e p
- 1 0
S e p
- 1 1
I n v e n t o r y ( D a y s o f D e m a n d )
Copper Zinc Nickel Aluminium
Source: Thomson Reuters Datastream, LME, SHFE, Comex and HSBC calculations
Chart 17: Economic growth and metal demand growth in China and the World ex-China
GDP growth -1.00% 0.00% 0.20% 0.40% 0.60% 0.80% 1.00% 1.20% 1.30% 1.40% 1.60% 1.80% 2.00% 3.00% 4.00%
Metal demand -8.1% -5.2% -4.7% -4.1% -3.5% -3.0% -2.4% -1.8% -1.5% -1.2% -0.7% -0.1% 0.5% 3.3% 6.2%
5.00% -1.6% -5.5% -3.8% -3.5% -3.1% -2.8% -2.4% -2.1% -1.7% -1.6% -1.4% -1.1% -0.7% -0.4% 1.4% 3.1%
6.00% 1.9% -4.1% -2.4% -2.0% -1.7% -1.4% -1.0% -0.7% -0.3% -0.2% 0.0% 0.4% 0.7% 1.0% 2.8% 4.5%
7.00% 5.4% -2.7% -1.0% -0.6% -0.3% 0.0% 0.4% 0.7% 1.1% 1.3% 1.4% 1.8% 2.1% 2.5% 4.2% 5.9%
7.50% 7.2% -2.0% -0.3% 0.1% 0.4% 0.8% 1.1% 1.4% 1.8% 2.0% 2.1% 2.5% 2.8% 3.2% 4.9% 6.6%
8.00% 8.9% -1.3% 0.4% 0.8% 1.1% 1.5% 1.8% 2.1% 2.5% 2.7% 2.8% 3.2% 3.5% 3.9% 5.6% 7.3%
8.10% 9.3% -1.2% 0.6% 0.9% 1.3% 1.6% 1.9% 2.3% 2.6% 2.8% 3.0% 3.3% 3.7% 4.0% 5.7% 7.4%
8.20% 9.6% -1.0% 0.7% 1.1% 1.4% 1.7% 2.1% 2.4% 2.8% 2.9% 3.1% 3.5% 3.8% 4.1% 5.9% 7.6%
8.30% 10.0% -0.9% 0.8% 1.2% 1.5% 1.9% 2.2% 2.6% 2.9% 3.1% 3.3% 3.6% 3.9% 4.3% 6.0% 7.7%
8.40% 10.3% -0.7% 1.0% 1.3% 1.7% 2.0% 2.4% 2.7% 3.1% 3.2% 3.4% 3.7% 4.1% 4.4% 6.1% 7.9%
8.50% 10.7% -0.6% 1.1% 1.5% 1.8% 2.2% 2.5% 2.8% 3.2% 3.4% 3.5% 3.9% 4.2% 4.6% 6.3% 8.0%
8.60% 11.0% -0.4% 1.3% 1.6% 2.0% 2.3% 2.6% 3.0% 3.3% 3.5% 3.7% 4.0% 4.4% 4.7% 6.4% 8.1%
8.80% 11.7% -0.2% 1.6% 1.9% 2.2% 2.6% 2.9% 3.3% 3.6% 3.8% 4.0% 4.3% 4.6% 5.0% 6.7% 8.4%
8.90% 12.1% 0.0% 1.7% 2.0% 2.4% 2.7% 3.1% 3.4% 3.8% 3.9% 4.1% 4.4% 4.8% 5.1% 6.8% 8.6%
9.00% 12.4% 0.1% 1.8% 2.2% 2.5% 2.9% 3.2% 3.6% 3.9% 4.1% 4.2% 4.6% 4.9% 5.3% 7.0% 8.7%
10.00% 16.0% 1.5% 3.2% 3.6% 3.9% 4.3% 4.6% 5.0% 5.3% 5.5% 5.6% 6.0% 6.3% 6.7% 8.4% 10.1%
11.00% 19.5% 2.9% 4.7% 5.0% 5.3% 5.7% 6.0% 6.4% 6.7% 6.9% 7.1% 7.4% 7.7% 8.1% 9.8% 11.5%
G D P g r o w t h
M e t a l D e m a n d
C H
I N A
World Excluding China
Source GGDC, Brook Hunt, MG and HSBC calculations
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Spot commodity prices vs. HSBC estimatesChart 19: Copper Chart 22: Iron Ore
6,000
7,000
8,000
9,000
10,000
11,000
D e c - 0 9
J u n - 1 0
D e c - 1 0
J u n - 1 1
D e c - 1 1
J u n - 1 2
D e c - 1 2
U S D / t
Spot prices Av erage spotEstimated av erage
120
140
160
180
200
D e c - 0 9
J u n - 1 0
D e c - 1 0
J u n - 1 1
D e c - 1 1
J u n - 1 2
D e c - 1 2
U S D / t
Spot prices Av erage spotEstimated av erage
Source: LME and HSBC estimates Source: Bloomberg and HSBC estimates
Chart 20: Aluminium Chart 23: Thermal Coal
1,800
2,100
2,400
2,700
3,000
D e c - 0 9
J u n - 1 0
D e c - 1 0
J u n - 1 1
D e c - 1 1
J u n - 1 2
D e c - 1 2
U S D / t
Spot prices Av erage spotEstimated average
65
75
8595
105
115
125
135
D e c - 0 9
J u n - 1 0
D e c - 1 0
J u n - 1 1
D e c - 1 1
J u n - 1 2
D e c - 1 2
U S D / t
Spot prices Av erage spotEstimated av erage
Source: LME and HSBC estimates Source: CRU and HSBC estimates
Chart 21: Nickel Chart 24: Coking Coal
16,000
18,000
20,000
22,000
24,000
26,000
28,000
30,000
D e c - 0 9
J u n - 1 0
D e c - 1 0
J u n - 1 1
D e c - 1 1
J u n - 1 2
D e c - 1 2
U S D / t
Spot prices Av erage spot
Estimated av erage
230
250
270
290
310
D e c - 0 9
J u n - 1 0
D e c - 1 0
J u n - 1 1
D e c - 1 1
J u n - 1 2
D e c - 1 2
U S D / t
Spot prices Av erage spot
Estimated av erage
Source: LME and HSBC estimates Source: CRU and HSBC estimates
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Appendix I:Demand grid methodology
Our demand grid analysis uses an index of metals
demand back to 1960 (HSBC Metals Demand
Index, HMDI). The weighting of this index
represents the value of global production over
time at long-run prices (2010 weights: copper
41%, aluminium 41%, nickel 10% and zinc 9% –
see Chart 25 below for index weighting over
time). Metals generally behave similarly throughthe cycle in terms of demand, so in our view a
weighted average index of demand is a valid
indicator of industry-wide trends.
Chart 25: HSBC Metal Demand Index – weighted by metal
0%
10%
20%
30%
40%
50%
60%
1 9 5 9
1 9 6 7
1 9 7 5
1 9 8 3
1 9 9 1
1 9 9 9
2 0 0 7
I n d
e x W e i g h t
Copper Aluminium Nickel Zinc
Source: Brook Hunt, MG, HSBC calculations
As Chart 26 shows, there is a clear pattern to
metals demand around recessions – usually a large
fall, followed by recovery, then a return to trend.
These falls in the HDMI unsurprisingly coincide
with recessions (mid-1970s, early-1980s, early-
1990s, 2001) and 2009 was no exception, with a
contraction of 6%. Our data indicate that 2010
saw the traditional rebound, with an expansion of
11% – again only surpassed by the mid-1970s
cycle. This exaggerated cycle of demand is due to
working capital movements throughout the
manufacturing chain.
It is important to emphasise that recovery is
usually followed by a return to trend.
Consensus was very bullish about the metals cycle
at the start of this year, yet it was almost certain to
see a moderation in demand growth. We forecast
growth of 7% in 2011 and further moderation
towards 5% in 2012.
Chart 26: HSBC Metal Demand Index – absolute level andannual growth
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
1 9 6 0
1 9 6 5
1 9 7 0
1 9 7 5
1 9 8 0
1 9 8 5
1 9 9 0
1 9 9 5
2 0 0 0
2 0 0 5
2 0 1 0
0
200
400
600
800
1000
Demand Grow th Metal Demand Index
Source: Brook Hunt, MG, HSBC calculations
What are the risks around this view? Supply in
most markets is growing due to surging capital
spending (more on this below) but generally
speaking, only demand growth rates less than 3%
(which is the long-term trend) will be a concern
and a move towards another contraction is a major
negative catalyst for the sector.
To calculate the risk, we have divided demand as
Chinese and non-Chinese (see Chart 27 below).
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Chart 27: Metals Demand Index – China & Non-China
0
5
10
15
20
25
30
35
1985 1989 1993 1997 2001 2005 2009 2013
H D M I
Wor ld ex -China China
Source: Brook Hunt, MG, HSBC calculations
Chart 28 shows it is clear that Chinese demand has
had an increasingly positive effect on average rates
of metals demand growth globally. In part this is
because average rates of demand growth are
higher, but also because the proportion of demand
accounted for by China has risen over time.
Chart 28: Metals Demand Index Growth – China & Non-China
-20%
-10%
0%
10%
20%
30%
40%
1
9 8 6
1
9 9 1
1
9 9 6
2
0 0 1
2
0 0 6
2 0
1 1 E
M e t a l D e m a n d G r o w t h
Global China World ex China
-20%
-10%
0%
10%
20%
30%
40%
1
9 8 6
1
9 9 1
1
9 9 6
2
0 0 1
2
0 0 6
2 0
1 1 E
M e t a l D e m a n d G r o w t h
Global China World ex China
Source: Brook Hunt, MG, HSBC calculations
We have correlated these separate indices for
China and non-China against GDP growth in each
region. For the “World ex China”, this analysis
yields a reasonably well-known relationship:
economic growth is positively and reliably
correlated with metal usage with an intercept
around 2% (ie developed economies generally
need to grow by 2% to prevent metal demand
from shrinking).
Chart 29: Global metals demand accounted for by China1970-2011
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
1 9 7 0
1 9 7 4
1 9 7 8
1 9 8 2
1 9 8 6
1 9 9 0
1 9 9 4
1 9 9 8
2 0 0 2
2 0 0 6
2 0 1 0
C h i n e s e s h a r e w o r l d d e m a n d %
Copper Aluminium ZincSteel Nickel
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
1 9 7 0
1 9 7 4
1 9 7 8
1 9 8 2
1 9 8 6
1 9 9 0
1 9 9 4
1 9 9 8
2 0 0 2
2 0 0 6
2 0 1 0
C h i n e s e s h a r e w o r l d d e m a n d %
Copper Aluminium ZincSteel Nickel
Source: Brook Hunt, MG, HSBC calculations
Chart 30: GDP & metals demand – World ex China
y = 2.8264x - 0.0524
R2 = 0.7243
-20%
-15%
-10%
-5%
0%
5%
10%
-4% -2% 0% 2% 4% 6%
World ex China GDP Growth
W o r l d E x C h i n a D e m a n d
Source: GGDC, Brook Hunt, MG, HSBC calculations
For China, the relationship is less reliable, but still
workable – Chart 31 below shows the correlationof the Chinese portion of the HMDI post 1994 with
GDP (as the charts on this page show, Chinese
metal demand growth was very volatile up to the
mid-1990s, but it was also relatively immature).
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Chart 31: GDP & metals demand – China
y = 3.5207x - 0.1924
R2 = 0.4396
0%
10%
20%
30%
40%
4% 6% 8% 10% 12% 14%
Chinese GDP Growth
C h i n e s e D e m a n d
Source: GGDC, Brook Hunt, MG, H SBC calculations
This relationship shows that metal demand in
China is geared more to the rate of economic
growth than in the West – the gradient of the
relationship is higher, and the intercept is at 5.5%
(ie GDP growth in China needs to be 5.5%
according to this relationship to prevent metal
demand from contracting). In reality, the threat of
China growing at this slower rate is probably lessthan this historical relationship implies, as it is
likely that the demand relationship for metal will
slowly shift to that of a more developed nation
(more steady consumer-driven demand for metal in
white goods, packaging and consumer goods rather
than stimulus/infrastructure driven spurts of
demand). In the short run, however, the
downside of such elastic metal demand growth
cannot be denied.
It is possible to combine these two relationships to
provide a grid of global demand outcomes for
different combinations of economic growth(shown in Chart 32). At 2011 GDP growth of 9%
for China and 2% for the rest of the world, these
relationships indicate global metals demand
growth rates of 5.3%, below the 7% average
growth over 2002-07 (the up-cycle following the
last recession), but in line with the 10-year
average to 2011. Also, our bottom-up demand
analysis by metal is for average growth of 7% –
slightly higher due to specific reasons in each
industry (notably tightness in some scrap marketsboosting demand for primary metal).
Chart 32: Economic growth and metal demand growth in China and the World ex-China
GDP growth -1.00% 0.00% 0.20% 0.40% 0.60% 0.80% 1.00% 1.20% 1.30% 1.40% 1.60% 1.80% 2.00% 3.00% 4.00%
Metal demand -8.1% -5.2% -4.7% -4.1% -3.5% -3.0% -2.4% -1.8% -1.5% -1.2% -0.7% -0.1% 0.5% 3.3% 6.2%
5.00% -1.6% -5.5% -3.8% -3.5% -3.1% -2.8% -2.4% -2.1% -1.7% -1.6% -1.4% -1.1% -0.7% -0.4% 1.4% 3.1%
6.00% 1.9% -4.1% -2.4% -2.0% -1.7% -1.4% -1.0% -0.7% -0.3% -0.2% 0.0% 0.4% 0.7% 1.0% 2.8% 4.5%
7.00% 5.4% -2.7% -1.0% -0.6% -0.3% 0.0% 0.4% 0.7% 1.1% 1.3% 1.4% 1.8% 2.1% 2.5% 4.2% 5.9%
7.50% 7.2% -2.0% -0.3% 0.1% 0.4% 0.8% 1.1% 1.4% 1.8% 2.0% 2.1% 2.5% 2.8% 3.2% 4.9% 6.6%
8.00% 8.9% -1.3% 0.4% 0.8% 1.1% 1.5% 1.8% 2.1% 2.5% 2.7% 2.8% 3.2% 3.5% 3.9% 5.6% 7.3%
8.10% 9.3% -1.2% 0.6% 0.9% 1.3% 1.6% 1.9% 2.3% 2.6% 2.8% 3.0% 3.3% 3.7% 4.0% 5.7% 7.4%
8.20% 9.6% -1.0% 0.7% 1.1% 1.4% 1.7% 2.1% 2.4% 2.8% 2.9% 3.1% 3.5% 3.8% 4.1% 5.9% 7.6%
8.30% 10.0% -0.9% 0.8% 1.2% 1.5% 1.9% 2.2% 2.6% 2.9% 3.1% 3.3% 3.6% 3.9% 4.3% 6.0% 7.7%
8.40% 10.3% -0.7% 1.0% 1.3% 1.7% 2.0% 2.4% 2.7% 3.1% 3.2% 3.4% 3.7% 4.1% 4.4% 6.1% 7.9%
8.50% 10.7% -0.6% 1.1% 1.5% 1.8% 2.2% 2.5% 2.8% 3.2% 3.4% 3.5% 3.9% 4.2% 4.6% 6.3% 8.0%
8.60% 11.0% -0.4% 1.3% 1.6% 2.0% 2.3% 2.6% 3.0% 3.3% 3.5% 3.7% 4.0% 4.4% 4.7% 6.4% 8.1%
8.80% 11.7% -0.2% 1.6% 1.9% 2.2% 2.6% 2.9% 3.3% 3.6% 3.8% 4.0% 4.3% 4.6% 5.0% 6.7% 8.4%
8.90% 12.1% 0.0% 1.7% 2.0% 2.4% 2.7% 3.1% 3.4% 3.8% 3.9% 4.1% 4.4% 4.8% 5.1% 6.8% 8.6%
9.00% 12.4% 0.1% 1.8% 2.2% 2.5% 2.9% 3.2% 3.6% 3.9% 4.1% 4.2% 4.6% 4.9% 5.3% 7.0% 8.7%
10.00% 16.0% 1.5% 3.2% 3.6% 3.9% 4.3% 4.6% 5.0% 5.3% 5.5% 5.6% 6.0% 6.3% 6.7% 8.4% 10.1%
11.00% 19.5% 2.9% 4.7% 5.0% 5.3% 5.7% 6.0% 6.4% 6.7% 6.9% 7.1% 7.4% 7.7% 8.1% 9.8% 11.5%
G D P g r o w t h
M e t a l D e m a n d
C H I N A
World Excluding China
Source GGDC, Brook Hunt, MG and HSBC calculations
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Appendix II:Detailed usage curves
Chart 33: Common commodity intensity curves
Steel intensity - USA from 1900, EU15 from 1950 China f rom 1974
0
100
200
300
400
500
600
700
0 5000 10000 15000 20000 25000 30000 35000
real GPD/capita
S t e e l c o n s u m p
t i o n k g / c a p i t a
China EU15 U SA
early
70s
mid 50s
Steel intensity - USA from 1900, all others from 1974
0
200
400
600
800
1,000
1,200
1,400
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000
real GPD/capita
S t e e l c o n s u m p t i o n k g / c a p i t a
US from 1900 China Korea Japan India Taiw an
Source: USGS, GGDC, National Bureau of Statistics Ch ina and HSBC analysis
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Notes
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Notes
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Notes
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