Russia Forum Buzz: Commodities Markets: the New Reality

April 24, 2013


Has the commodities supercycle come to an end and what is the new paradigm of the commodities market?

Will the individual commodities’ performance diverge and what are the key risks and opportunities for different commodities in the coming years?

Is vertical integration of producers and traders the new cure or will it expose both sides to increased volatility?

What are the implications of the changing market conditions for Russian producers?

What are the main factors limiting interest of global strategic players in Russian assets? What steps need to be undertaken for increase in investment appeal?

Will producers re-evaluate greenfield opportunities or is M&A now the best strategy for growth for Russian and international producers?

Christof Ruehl: US oil imports are likely to halve over the next six to seven years. The US and Canada account for most of the net increase in oil production. The commodities supercycle and maintained demand from the Chinese economy provoked a change in the oil market’s balance. The high prices have spurred production of tight oil and gas in the US. According to BP’s forecasts, the share of tight oil in the global market supply will grow from 2.5% to 9.0% by 2030. This will have an impact on the price. OPEC is willing and able to cut production, but in order to balance the market, the spare capacity would have to increase to 6 mln bpd. Another implication is the geopolitics of energy, which shifts the focus in the Middle East. The US becomes much less dependent on oil imports, while China imports considerable volumes and the EU remains an importer. The markets do not like a vacuum normally. Another implication is a beneficial effect on the global economy. A considerable share of the US’ deficit will disappear. For Russia, if the price cools, the pace of reform will pick up.

Paul Robinson: The supercycle is not over. China’s GDP per capita is 10% of the US’ levels. Underlying consumption growth will come from China. One needs to look at specific commodities, on a case-by-case basis. We need a deeper understanding of Chinese consumption. China gave the market the wrong signal. Everyone was convinced that the country, which consumes about 50% of global raw materials, was a bottomless pit that would continue to absorb everything, but now it is unclear where the growth trajectory of China’s economy will head, and what policies the new government will employ.

Ivan Glasenberg: The development of the Chinese economy was a key factor in the 10y boom on commodity markets. Growth in China will continue; for example, more urbanization is yet to come, which will drive construction. Even with the slowdown of China’s economic growth to 7.5-7.9%, the country will provide for 3.5% growth in the raw materials market. India and Indonesia are also growing. Back in 2003, we did not believe China was coming. Then mining went crazy with expansion and the market was oversupplied when the crisis of 2008 arrived. We did not expect China itself to start investing in mining. In evaluating a commodity, it is very important to understand whether China can produce it itself. For example, China does not mine copper. Iron ore has not been bad (80% of its consumption is imported). China produces nickel. If Indonesia stops exporting nickel ore to China, it could turn the industry overnight. So, one needs to look at it commodity by commodity. There has been a misallocation of capital into greenfield projects. We need to finish with that and cut costs. We must not overfeed the monster; be more cautious, and let commodity prices rise. Mining companies need more discipline and to be smarter. In China, 30% of aluminum costs are represented by power, which is not cheap there. Instead of producing more electricity, the country could import more aluminum and save power. When it comes to Russia, every country has its metals and mining champion, and it will be interesting to see whether such a champion will emerge here as well.

Margarita Louis-Dreyfus: In Russia, 20 people are needed to farm 1,000 ha, versus less than 10 people in other countries. Farming technologies, education and infrastructure development are needed, in other words – investment in agriculture. Important factors for improving the business environment in Russia include stability and predictability, strong and efficient economic structure (rail transportation and port access), a transparent legal framework and reduced bureaucracy.

Maxim Volkov: The problem is that in a global market, information is spreading fast and sometimes that information is misused, creating hysteria. In an attempt to get a better bargaining position, buyers try to exert pressure via information channels and delay fertilizer purchases. However, the natural need for fertilizers is there. There is a tendency for more of a spot market element in the pricing. For phosphate rock, for example, we used to sign 3-5y contracts. Now the terms are FOB Casablanca with quarterly re-pricing. Whether this is good or bad is difficult to judge, but it is not helping to improve stability.

Vladislav Soloviev: The new paradigm is overproduction and oversupply. Until 2008, we had a demand-driven cycle, now it is a supply-driven one. China stands for 50% of consumption. At the same time, it has an 80% utilization rate, and 30% of this capacity is working below the breakeven point (not making money). Instead of that, China could import from other countries. In Russia, the cost of electricity and transportation is rising, and UC RUSAL’s EBIT margin has fallen from 40% to 10%. Electricity costs $0.04/kWh in Siberia, which is higher than in the US. There is a need to finalize energy reform, hopefully this year, and to stop this growth.