LME WEEK ECONOMIC

KEYNOTE ADDRESS
October 2023
Something is amiss in commodity markets

Visible stocks – Copper (global)

Stated as KT

$10,700/t

$7,800/t

Source: LME, COMEX, SHFE, Trafigura Research

2
 Copper prices have been a Macro, not a Micro, story

EUR vs. Copper EUR vs. Copper

LME 3M Copper USD/tonne EUR:USD LME Copper vs. EUR
11000 1.2 9500

10500 y = 9616.6x - 1838

1.15 R² = 0.5924
9000
10000

9500

LME 3MO COPPER $/mt

1.1 8500
9000

8500 1.05
8000

8000
1
7500 LME Copper 7500

EUR
7000
0.95
7000
6500

6000 0.9
6500
0.94 0.96 0.98 1 1.02 1.04 1.06 1.08 1.1 1.12 1.14
EUR:USD

Source: Bloomberg, Trafigura Research Source: Bloomberg, Trafigura Research

3
Why does the Dollar matter so much for commodity markets?

Daily Traded Value: Copper vs. Oil

90

80

70

60

50

40

30

20

10

0
Copper Oil

Source: Bloomberg, Trafigura Research

4
…because it is orders of magnitude bigger than commodity markets

Daily Traded Value: Copper vs. Oil vs. FX

7000

6000

5000

4000

3000

2000

1000

0
Copper Oil FX

Source: Bloomberg, Trafigura Research

5
…and so can outweigh even the most compelling fundamentals

US$ vs. Zinc Stocks

Source: Bloomberg, Trafigura Research

6
A year ago, it was a certainty we would be in a recession by now

Likelihood
120 of a Recession in next 12 months (Bloomberg Model)

% Likelihood
100%
100

80

60

40

20

Source: Bloomberg

7
…driving consumer fears…but now:

Searches for “Recession”

Source: Google Search Trends

8
Globally, Manufacturing is in contraction, while Services have held up

JPM GLOBAL PMIs

Index Value; >= 50 expansion

62

60

58 PMI Manufacturing PMI Services PMI Composite

56

54

52

50

48

46

44

Source: JP Morgan, Bloomberg, Trafigura Research

9
European Manufacturing is very weak right now, although some uptick recently

European Manufacturing PMIs

70
Index Value; >50 = expansion
65

60

55

50

45

40
Germany France

35 Italy Spain

UK
30

Source: IHS/S&P, Bloomberg, Trafigura Research

10
 10
12

-2
0
2
4
6
8
Oct-2017
Jan-2018
Apr-2018
% Change YoY

Source: Eurostat, Trafigura Research

Jul-2018
Oct-2018
EU Consumer Price Inflation

Jan-2019
Apr-2019
Jul-2019
Oct-2019
Jan-2020
EU Inflation at least has dropped sharply

Apr-2020
Jul-2020
Oct-2020
Jan-2021
Apr-2021
Jul-2021
Oct-2021
Jan-2022
Apr-2022
Jul-2022
Oct-2022
10.6

Jan-2023
Apr-2023
Jul-2023
4.3

11
Core Inflation (ex-Food & Energy) remains high, but also coming down

EU Core Consumer Price Inflation

% Change YoY
6 5.7

5
4.5
4

Source: Eurostat, Trafigura Research

12
So the market is now pricing no more hikes, and cuts starting mid-next year

13
Slow growth + no yield differential = weaker EUR

14
 10

0
1
2
3
4
5
6
7
8
9

Oct-2017
Jan-2018
% Change YoY

Apr-2018
Jul-2018
US Consumer Price Inflation

Oct-2018
Jan-2019

Source: Bureau of Labor Statistics, Trafigura Research

Apr-2019
Jul-2019
Oct-2019
Jan-2020
Apr-2020
Jul-2020
Oct-2020
Jan-2021
Apr-2021
Jul-2021
Oct-2021
Jan-2022
Apr-2022
Has the Fed “won”? Headline Inflation is down substantially

9.1

Jul-2022
Oct-2022
Jan-2023
Apr-2023
3.0

Jul-2023
3.7

15
…and Core is coming down sustainably

US Core Consumer Price Inflation

% Change YoY
7 6.6

4.3
4

Source: Bureau of Labor Statistics, Trafigura Research

16
…but rising gasoline prices are a risk

US Retail Gasoline Price, Nationwide Average

$/gallon

4.5

3.5

2.5

1.5

Source: AAA, Bloomberg, Trafigura Research

17
…and job growth is too hot

US Nonfarm Payrolls
‘000 Net Change MoM

500

450

400
350
350 336

300

250

200

150

100

50

Source: Bureau of Labor Statistics, Bloomberg, Trafigura Research

18
The Fed has managed to bring inflation down without causing unemployment

US Unemployment Rate
% Unemployed

16

14

12

10

Source: Bureau of Labor Statistics, Bloomberg, Trafigura Research

19
Forget the headlines: the US consumer is still sitting on a lot of cash

Currency held in Checking Accounts, US Households & Nonprofits

Billion US$
5000

4500

4000

3500

3000

2500

2000

1500

1000

500

Source: Federal Reserve, Bloomberg, Trafigura Research

20
 275
325
375
425
475
525
575
625
675
725

Oct-2000
Sep-2001
Billion US$

Aug-2002
US Retail Sales, Monthly

Jul-2003
Jun-2004
May-2005
…and continue to spend heavily

Apr-2006

Source: US Census Bureau, Bloomberg, Trafigura Research

Mar-2007
Feb-2008
Jan-2009
Dec-2009
Nov-2010
Oct-2011
Sep-2012
Aug-2013
Jul-2014
Jun-2015
May-2016
Apr-2017
Mar-2018
Feb-2019
Jan-2020
Dec-2020
Nov-2021
Oct-2022
21
All this means the Fed might still hike 1-2 more times, and not cut until late 2024

22
The move in rates is now going to be painful

US 10 Year Treasury Bill

% Yield
5

4.8

4.6

4.4

4.2

3.8

3.6

3.4

3.2

Source: Bloomberg, Trafigura Research

23
China is facing challenges in executing an economic transition

China Share of GDP

Stated in % Stated in %

Source: CEIC, Trafigura Research

24
Property has been extremely weak this year

25
Unlike before, China’s problem is not supply of credit, but demand for credit

Property Sales & Mortgage Rates

7.5%

7.0%
Rates very unlikely to result
Avg First Home Mortgage Rate, % p.a.
in rising sales

6.5%

6.0%

Rates more likely than not

5.5%
to lead to rising sales

5.0%

4.5%

Rates likely to lead to rising sales

4.0%
-50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60%
Floor Space Sold, YoY%
Source: CEIC, Trafigura Research

26
Despite bearish sentiment on China, record demand across commodities

27
Property may be very weak, but other sectors are clearly offsetting

Commodity Demand Change, 2023 vs. 2021

‘000 tonnes
COPPER ALUMINIUM ZINC STEEL

15080
990
+360 46447 6632
+880
6582
+80

-450 960
14250 +1050 -75 +15
43729
+3900
+320
-580
-2060
+30

2021 Construction Others 2023 2021 Construction Others 2023 2021 Construction Others 2023 2021 Construction Others 2023

Source:Trafigura Research

28
 Solar installations, air conditioner output and EV production running at high levels

Solar Panel Installations Air Conditioner Production Passenger Vehicle Production

Stated in mn units Stated in mn units Stated in mn units EV Production ICE Production
20
20 2500

2000
15

1500
10 10

1000

5
500

0 0 0
2020 2021 2022 2023 2020 2021 2022 2023 2020 2021 2022 2023
Source: NBS, Trafigura Research Source: NBS, Trafigura Research Source: NBS, Trafigura Research

29
China is looking to utilize capacity via increased exports

Top 10 Fastest Growing Exports Passenger Vehicle Exports

Billion US$ YoY Change Number of Vehicles

Source: NBS, Trafigura Research Source: Customs Data, Trafigura Research

30
China has been destocking for an extended period – this is now coming to an end

Industrial Inventory Industrial Product Inventory—Midstream Sectors

Stated in YoY%, Nominal Months of Inventory

3.0
First COVID Lockdown, 1Q2020
2.8

2.6
Excess build in
inventory, 1Q23
2.4
Large scale COVID
Lockdown, 2Q2022
2.2

2.0

1.8
AVERAGE INVENTORY: 1.7 MONTHS
1.6

1.4

1.2

1.0

Mar-18

Mar-19

Mar-20

Mar-21

Mar-22

Mar-23
Jul-18
Sep-18

Jul-19
Sep-19

Jul-20
Sep-20

Jul-21
Sep-21

Jul-22
Sep-22
Nov-18

Nov-19

Nov-20

Nov-21

Nov-22
May-18

May-19

May-20

May-21

May-22

May-23
Jan-18

Jan-19

Jan-20

Jan-21

Jan-22

Jan-23
Source: NBS, CEIC, Trafigura Research Source: NBS, CEIC, Trafigura Research

31
August PMI looks like a restocking PMI; all Aug. data points have beat expectations

PMI Production & Purchases August Data for China (released so far)

Index Score; >50 = expansion Indicator Units Actual Expected Previous MoM Trend

58.0 Expansion PMI - Official Index 49.7 49.2 49.3

Production Raw Material Purchases New Orders
56.0
PMI - Caixin Index 51 49 49.2
54.0
Imports % YoY -7.30% -9% -12.40%
52.0
Exports % YoY -8.80% -9% -14.50%
50.0

48.0 CPI % YoY 0.10% 0.10% -0.30%

46.0
PPI % YoY -3% -2.90% -4.40%
44.0
New Credit RMB bn 3120 2690 528
42.0
Contraction
40.0

Source: NBS, Trafigura Research

Source: CEIC, Trafigura Research

32
KEY MESSAGES

• Macro matters: rates, US$, inflation and growth fears have all been the key drivers of Metals prices

• Fundamentals are better than the headlines

• China property remains a concern but other areas are more than picking up the slack

• US growth is running too strong; either we are headed for a recession, or the Fed needs to keep rates
higher for longer…or both

• Higher rates are also likely to impact investments in future production, further tightening markets

• Spikes not Cycles: more volatility ahead, but long-term trends remain intact

33
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