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Disclaimer

CRISIL Research, a Division of CRISIL Limited has taken due care and caution in preparing this Report. Information has been obtained by CRISIL from sources, which it considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. CRISIL is not liable for investment decisions, which may be based on the views expressed in this Report. CRISIL especially states that it has no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of this Report. CRISIL Research operates independently of, and does not have access to information obtained by CRISILs Ratings Division, which may, in its regular operations, obtain information of a confidential nature, which is not available to CRISIL Research. No part of this Report may be published/reproduced in any form without CRISILs prior written approval.
1.

Commodity Price View

CRISIL Research

September 2011

Table of contents
Price Forecast Summary Methodology: Ferrous Metals Price Forecast Ferrous Metals
HR Steel CR Steel Sponge Iron TMT Steel Pig Iron .11 .17 .19 .21 .22

.06 .09 .10

Methodology: Rubber Price Forecast: Rubber


Natural Rubber SBR & PBR PP ABS

.48 .52
.51 .54 .60 .63

Annexure

.66

Regional commodity consumption pattern Impact of currency on prices Volatility in prices

Non Ferrous Metals


Aluminium Copper Zinc .23 .27 .31

Commodity duty structure

3.

CRISIL Research: Commodity Price Outlook


CRISIL Research has prepared Commodity Price Outlook for select

commodities on a quarterly (2011-2012) and annual (2013 to 2014) basis. This will aid decision-making with respect to purchase of raw materials or in making strategic decisions The commodity price forecasts factor the following:
Global and domestic demand-supply scenario End-user analysis based on key consumption regions

4.

Highlights of CRISILs Commodity Price Outlook


CRISIL Research expects commodity prices to be under pressure in the near term due to the weakening economic situation globally, especially in many advanced economies While demand recovery is expected to be almost non-existent or flat in Europe and US, China too is expected to post lower y-o-y growth Prices are expected to moderate in Q4 2011 through 2012 due to expected slowdown globally, before increasing in 2013 Key monitorables:
Monetary policy by US Federal Reserve Chinas continued tight monetary policy stance to tame inflation Management of debt crisis in developed markets especially Euro member countries Recovery of demand in developed nations US dollar movement vis--vis other currency

5.

Price Forecast Summary - Ferrous Metals


Steel (per tonne)
HR Global ($) HR India (Rs) CR steel (Rs) TMT (Rs)

Quarterly Q311 E
690 - 720 37,500 - 39,500 42,000 - 44,100 39,000 - 41,000

Annual Q212 P
660 - 690 36,800 - 38,700 41,300 - 43,400 41,800 - 43,900

Q411 P
680 - 710 38,000 - 40,000 42,400 - 44,600 40,600 - 42,600

Q112 P
670 - 700 37,400 - 39,300 41,800 - 44,000 40,800 - 42,800

Q312 P
670 - 700 37,300 - 39,200 41,700 - 43,900 40,300 - 42,300

2013 P
670 - 700 37,300 - 39,200 41,800 - 43,900 42,000 - 44,100

2014 P
650 - 680 36,100 - 37,900 40,600 - 42,700 39,100 - 41,100

Steel Intermediates (per tonne)


Pig Iron (Rs) Sponge Iron (Rs)

Quarterly Q311 E Q411 P


27,800 - 29,200 19,500 - 20,500

Annual Q212 P
28,300 - 29,700 21,000 - 22,100

Q112 P
27,400 - 28,800 20,000 - 21,100

Q312 P
28,600 - 30,100 20,000 - 21,000

2013 P
28,800 - 30,300 20,600 - 21,600

2014 P
27,300 - 28,700 19,600 - 20,600

28,300 - 29,800 20,500 - 21,500

E: Estimated, P: Projected US $ 1 = Rs 45 approximately Note: We have assumed a constant currency rate throughout the forecast period HR Global prices refer to fob, CIS Source: CRISIL Research

6.

Price Forecast Summary Non Ferrous Metals & Rubber


Non Ferrous Metals ($ / tonne)
Aluminium Copper Zinc

Quarterly Q311 E
2,350 - 2,450 9,100 - 9,500 2,300 - 2,300

Annual Q212 P
2,430 - 2,520 8,800 - 9,200 2,160 - 2,240

Q411 P
2,350 - 2,450 9,000 - 9,400 2,110 - 2,190

Q112 P
2,400 - 2,500 8,900 - 9,300 2,110 - 2,190

Q312 P
2,450 - 2,550 8,600 - 9,000 2,210 - 2,300

2013 P
2,500 - 2,600 8,300 - 8,700 2,300 - 2,400

2014 P
2,550 - 2,650 7,800 - 8,200 2,550 - 2,650

Rubber ($ / tonne)
SBR PBR NR ABS PP

Quarterly Q311 E
4,400 - 4,600 4,500 - 4,700 4,700 - 4,900 2,500 - 2,600 1,500 - 1,600

Annual Q212 P
3,680 - 3,870 3,810 - 4,010 4,160 - 4,370 2,280 - 2,390 1,470 - 1,550

Q411 P
4,040 - 4,240 4,050 - 4,260 4,100 - 4,310 2,270 - 2,390 1,490 - 1,570

Q112 P
3,880 - 4,070 3,890 - 4,090 4,200 - 4,410 2,250 - 2,370 1,470 - 1,550

Q312 P
3,350 - 3,520 3,470 - 3,650 3,950 - 4,150 2,210 - 2,320 1,440 - 1,520

2013 P
3,450 - 3,630 3,370 - 3,540 3,560 - 3,740 2,190 - 2,310 1,370 - 1,440

2014 P
3,420 - 3,590 3,300 - 3,470 3,740 - 3,930 2,080 - 2,180 1,350 - 1,410

Domestic Price
NR (Rs / Kg) 200 - 210 180 - 190 180 - 190 200 - 210 190 - 200 170 - 180 180 - 190

E: Estimated, P: Projected SBR grade is SBR 1502 US $ 1 = Rs 45 approximately Note: We have assumed a constant currency rate throughout the forecast period Source: CRISIL Research
7.

Price Forecast Methodology - Metals

8.

Methodology: Metals Price Forecast

Commodity Prices

Demand

Supply

Cost Structure

End Use segments of each of the regions such as Construction ,Auto, Consumer Durables, production of machinery have been analysed

Demand as a function of Investment and Investment/GDP have also been analysed for arriving at long term demand forecasts

Raw materials Costs

Processing Costs

Other Costs

Raw material price forecast based on its demand supply scenario

United States of America

Europe

China

India

These regions together account for a significant proportion of the global commodity consumption (Refer Annexure I)
Source: CRISIL Research
9.

Price Forecast for Metals

10.

Steel prices to decline marginally with softening coking coal prices


(per tonne)
HR Global ($)

Q311 E
690 - 720

Q411 P
680 - 710

Q112 P
670 - 700

Q212 P
660 - 690

Q312 P
670 - 700

2013 P
670 - 700

2014 P
650 - 680

Raw material prices forecast (fob, Australia)


($/tonne) 1,200 1,000 800 600 400 200 -

Steel price and key raw material cost

($/tonne)

Iron ore

Coking coal

Forecast
1Q11 P 2Q11 P 2Q12 P 3Q11 P 4Q11 P 1Q12 P 3Q12 P 2013P 4Q10 E 2014P 2Q08 4Q08 2Q09 4Q09 1Q10 2Q10 3Q10 1Q08 3Q08 1Q09 3Q09

Iron & coal Cost

Steel price

3Q11 E 4Q11 P 1Q12 P 2Q12 P 3Q12 P 2013 P 2014 P

150-170 160-180 160-180 160-170 160-170 160-180 160-170

300-330 270-300 260-290 250-280 260-290 250-270 240-270

Source: Metal Bulletin, Industry, CRISIL Research

With coking coal supply estimated to return to normalcy (post Australian floods), we expect coking coal prices to soften from Q4 2011 onwards resulting in lower q-o-q steel prices

Strong bargaining power of iron ore suppliers and tight demand-supply will result in firm iron ore prices through 2014 Going forward, we expect supply of coking coal to improve gradually (from new mine supply), thereby showing a marginal decline in coking coal contract prices in 2013 and 2014

In addition, on the back of rising demand, capacity utilisation in global steel industry is expected to improve from 2010 levels

11.

Steel prices rose with recovery in demand, higher raw material prices
(Rs/Tonne) 1,400 1,200 1,000 800 600 400 200 0

Steel Prices

Steel demand recovery in 2010 (13 per cent y-o-y growth) was aided by a low base and strong rebound in growth of end-use segments like automobiles,

capital goods etc.


Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11

Recovery in the end-user segments can be attributed to the timely monetary intervention by governments of major

(million tonnes)

Steel: Global Demand Supply

100% 80%

2000 1500 60% 1000 500 0 2005 2006 Demand 2007 2008 2009 2010 Capacity Demand/Capacity 40% 20% 0%

economies. Majority of the recovery in steel demand emanates from emerging markets like China and India. Despite a strong growth in 2010, steel consumption in developed countries has not yet recovered to pre-crisis levels.

Source: Industry, IISI, Metal Bulletin, CRISIL Research

12.

Raw material prices increased with supply constraints and demand recovery
($/tonne) 450 375 300 225 150 75 -

Raw Material Spot Prices

Coking coal prices rose in Q1 2011 mainly due to continued supply constraints in Australia

Coking coal prices have softened from Q1 2011 levels but supply has not yet completely normalised, thereby exerting upward pressure on prices

Q205 Q305 Q405 Q106 Q206 Q306 Q406 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11

Iron ore prices in H1 2011 increased on account of a tight demand-supply situation

Iron Ore

Coking Coal

Steel prices increased in 2010 (~30 per cent yo-y) and H1 2011 (15 per cent y-o-y) due to

Raw material prices (FoB, Australia)


($/tonne) 2005 2006 2007 2008 2009 2010 2011 Q2

Spot Iron ore Contract Spot Coking coal Contract

54 39 82 125

70 47 91 111

122 51 92 92

152 92 269 293

85 61 153 129

153 108 221 191

183 149 340 330

demand recovery and higher raw material prices Going ahead, Iron prices are expected to remain firm on account of tight demand- supply situation and consolidation of suppliers

Source: Industry, CRISIL Research

However, with the coking coal supply situation easing, coking coal prices are expected to soften from Q4 2011 onwards

13.

Demand Outlook: Moderate growth of 5-6 per cent


(million tonnes)

Steel: Global Demand Supply


80% 60% 40%

2500 2000 1500 1000 500 0 2009 2010 Demand 2011E 2012P 2013P 2014P Capacity Demand/Capacity

Steel demand-supply ratio is expected to recover from 72 per cent in 2010 to 79 per cent in 2014

20% 0%

Source: CRISIL Research

Global steel demand is expected to grow at a modest 5-6 per cent during the next 3 years Economic uncertainty remains a specter in the industry particularly in the developed markets. The demand from developed regions is expected to moderate in the long run as the various stimulus packages that fuelled growth in 2010 has paved way for austerity measures

Steel demand from developing regions, especially China and India, is also expected to grow moderately during 2011 to 2014 Chinese steel demand is expected to moderate (6 7 per cent CAGR from 2011-2014) as the Chinese government is currently undertaking measures to manage inflation Indias steel demand is expected to grow by 8-9 per cent, driven by huge investments in infrastructure and expected healthy growth in automobiles, oil and gas sectors

14.

Domestic HR prices to soften with global steel prices


(per tonne)
HR India (Rs)
(Rs/tonne) 65,000 52,000 39,000 26,000 13,000 0

Q311 E
37,500 - 39,500

Q411 P
38,000 - 40,000

Q112 P
37,400 - 39,300

Q212 P
36,800 - 38,700

Q312 P
37,300 - 39,200

2013 P
37,300 - 39,200

2014 P
36,100 - 37,900

HR Steel Prices

($/tonne) 1200 1000 800 600

Domestic steel demand is expected to grow by 8-9 per cent during 2011 - 14 Healthy growth expected in construction (1011 per cent) and automobiles (13-15 per cent) Robust growth expected in oil and gas pipelines (cumulative investments of around Rs 5 trillion over next 5 years)

Forecast
3Q11 E 2013 P 4Q11 P 1Q12 P 3Q12 P 2Q12 P 2014 P 1Q08 3Q08 4Q08 2Q09 4Q09 4Q10 1Q11 2Q11 2Q08 1Q09 3Q09 1Q10 2Q10 3Q10

400 200 0

HR Domestic

HR Steel landed

HR CIS (RHS)

(million tonnes) 140 120 100 80 60 40 20 0 2010-11E

Steel: Domestic Demand-Supply


100% 80% 60% 40%

With

moderate

growth

in

steel

demand,

demand-supply ratio is expected to remain above 80 per cent (lower than pre-crisis levels of ~90 per cent) Domestic steel prices in Q4 2011 are expected to be marginally higher on account of upward

20% 0% 2011-12P 2012-13P 2013-14P 2014-15P

pressure on domestic iron ore prices due to a ban on illegal mining in Karnataka Domestic steel prices are expected to moderate from Q1 2012 onwards due to

Demand

Capacity

Demand/Capacity (RHS)

Source: CRISIL Research

15.

Expected weakness in global prices

Domestic HR prices increased in line with landed cost


(Rs/tonne) 84,000 70,000 56,000 42,000 28,000 14,000 0 600 300 0

Domestic Steel Prices

($/tonne) 1,500 1,200 900

Domestic steel prices have followed landed cost of global steel prices

Domestic steel demand grew by a 13 per cent CAGR during 2005-06 to 2010-11 Demand increase was in driven by continuous and

Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11

infrastructure

construction related investments, strong growth in capital goods and automobile sales

Landed

Domestic

Global (RHS)

(million tonnes) 90 80 70 60 50 40 30 20 10 0 2005-06

Steel: Domestic Demand-Supply


100% 80% 60% 40% 20% 0% 2006-07 2007-08 2008-09 2009-10 2010-11E

Domestic steel prices in 2010-11 have increased by 12-14 per cent supported by an increase in global prices and healthy domestic demand growth Domestic demand in 2010-11 grew by 10 per cent (y-o-y) due to strong growth witnessed in key end-user sectors like infrastructure, pipes & tubes and

Demand

Capacity

Demand/Capacity (RHS)

Source: Metal Bulletin, Industry, JPC, CRISIL Research

automobiles

16.

CR steel prices to decline with HR prices and moderate auto demand


(per tonne)
CR steel (Rs)

Q311 E
42,000 - 44,100

Q411 P
42,400 - 44,600

Q112 P
41,800 - 44,000

Q212 P
41,300 - 43,400

Q312 P
41,700 - 43,900

2013 P
41,800 - 43,900

2014 P
40,600 - 42,700

(Rs/tonne) 50,000 40,000 30,000 20,000 10,000 0

Steel Prices

Automobile industry, a key end-user, to grow moderately by 13-14 per cent over the next 2-3 years

Forecast
1Q12 P 2Q12 P 3Q12 P 4Q11 P 3Q11 E 2013 P 2014 P 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 4Q09 1Q10 4Q10 3Q09 2Q10 3Q10 1Q11 2Q11

In 2010-11, Cars & UVs industry witnessed a strong growth of over 30 per cent. However, going ahead we expect the growth to moderate amid concerns over rising cost of owning a

HR Domestic

CR Domestic

('000 units) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 -

Automobile Production in India

vehicle While, sustained growth in economic activity,


Forecast

rise freight

in

consumption traffic is likely

and to

healthy

continue to drive the demand for commercial vehicles Moderate automobile demand growth

Source: CRISIL Research

and lower HR steel prices will ensure a fall in CR steel prices

17.

CR steel prices traced HR steel price movement


(Rs/Tonne) 60,000 50,000 40,000 30,000 20,000 10,000 0 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11

Domestic Prices

CR prices largely follow the price trend of HR steel, which is a key cost component The automobile industry, which accounts for around 60 per cent of CR consumption in the country, has grown at a CAGR of 15-16 per cent during 2005-06 to 2010-11 thereby supporting prices of CR steel in India

HR

CR

('000 units) 5,000 4,000 3,000 2,000 1,000 2005-06

Automobile Production in India

2006-07

2007-08

2008-09

2009-10

2010-11

Comm Vehicles

Car & UV

Tractor

Source: Industry, CRISIL Research

18.

Sponge iron prices to remain firm at current levels


(per tonne)
Sponge Iron (Rs)
(Rs/tonne) 20000 300 15000 10000 5000 0 200

Q311 E
20,500 - 21,500

Q411 P
19,500 - 20,500

Q112 P
20,000 - 21,100

Q212 P
21,000 - 22,100

Q312 P
20,000 - 21,000

2013 P
20,600 - 21,600

2014 P
19,600 - 20,600

Sponge iron prices

(index)
400

Forecast
2013 P 4Q11 P 2Q12 P 3Q12 P 1Q12 P 3Q11 E 2014 P 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 2Q10 1Q11 1Q08 1Q10 3Q10 4Q10 2Q11

100 0

Sponge iron

Iron ore prices (RHS)

Source: Industry, CRISIL Research

CRISIL Research expects sponge iron prices to remain firm over the next 2-3 years as Sponge iron demand will grow at a slower pace than growth in long steel industry as large integrated players are increasing production of long products through blast furnace route Upward pressure on domestic iron ore prices on account of measures taken to curb illegal mining of iron ore in near term However, increased supply of scrap to limit the rise in sponge iron prices Increased ferrous scrap supply in the global market is expected to exert downward
19.

pressure on scrap prices in the medium term

Sponge iron prices followed landed cost of scrap


(Rs/tonne) 40,000 32,000 24,000 16,000 8,000 0

Sponge iron prices in India

Jan-01 Jul-01

Jan-02 Jul-02 Jan-03

Jul-03 Jan-04 Jul-04

Jan-05 Jul-05 Jan-06

Jul-06 Jan-07

Jul-07 Jan-08 Jul-08

Jan-09 Jul-09 Jan-10

Sponge iron prices

Landed cost of scrap

Source: Industry, CRISIL Research

Ferrous scrap is a substitute for sponge iron and hence, the landed cost of scrap acts as a ceiling for domestic sponge iron prices Domestically, sponge iron prices have moved in line with iron ore and scrap prices As a raw material, scrap is preferred to sponge iron as the Fe content in scrap is higher Due to constraints in availability of domestic scrap, secondary steel manufacturers import scrap. In 2010-11, scrap imports have been around 3.5 million tonnes

20.

Jul-10 Jan-11 Jul-11

Construction demand to drive TMT prices


(per tonne)
TMT (Rs)

Q311 E
39,000 - 41,000

Q411 P
40,600 - 42,600

Q112 P
40,800 - 42,800

Q212 P
41,800 - 43,900

Q312 P
40,300 - 42,300

2013 P
42,000 - 44,100

2014 P
39,100 - 41,100

(Rs/Tonne) 50,000 40,000 30,000 20,000 10,000 -

Sponge Iron and TMT Prices in India

Demand from construction sector, a key end-user and sponge iron prices, a key raw material, drive TMT prices

Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11

CRISIL Research expects TMT prices to remain firm at current levels due to healthy construction demand Total construction and investments to

Sponge

TMT

(Rs/tonne) 50000 40000 30000 20000 10000 0

Sponge Iron and TMT prices

(industrial

infrastructure)

increase from Rs 10,172 billion during 2006-07 to 2010-11 to Rs 18,209 billion during 2011-12 to
Forecast
4Q11 P 1Q12 P 2Q12 P 3Q12 P 2013 P 3Q11 E 2014 P 1Q08 4Q08 2Q09 3Q09 4Q09 1Q10 3Q10 4Q10 1Q11 2Q08 3Q08 1Q09 2Q10 2Q11

2015-16 Seasonality of construction demand and its impact on TMT prices have been factored forecast in to our quarterly price

Sponge iron

TMT Domestic

Source: Industry, CRISIL Research

21.

Pig iron prices to fall with decreasing input costs in the near term
(per tonne)
Pig Iron (Rs)
(Rs/tonne)

Q311 E
28,300 - 29,800

Q411 P
27,800 - 29,200

Q112 P
27,400 - 28,800

Q212 P
28,300 - 29,700

Q312 P
28,600 - 30,100

2013 P
28,800 - 30,300

2014 P
27,300 - 28,700

Pig iron prices in India

Pig iron prices have moved in line with domestic iron ore and coke prices

35,000 28,000 21,000 14,000 7,000 0


Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11

Of the total demand for pig iron, the castings segment accounts for around 70 per cent and the balance is contributed segment Automobile and construction by the steel making

(Rs/tonne) 33,000 26,000 19,000 12,000 5,000

Pig iron prices

($/tonne) 800 700 600 500 400 300

industries, the key end-users of castings, are estimated to show healthy growth over the next 2-3 years Coke prices are estimated to decline in near term, however healthy demand growth and upward pressure on

Forecast
3Q11 E 2013 P 4Q11 P 1Q12 P 2Q12 P 3Q12 P 2014 P 4Q10 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 1Q11 2Q11

200 100

Pig iron prices

Iron & coal cost (RHS)

Source: Industry, CRISIL Research

domestic iron ore prices will lead to firm pig iron prices in the long term

22.

Price Forecast for Aluminum

23.

Aluminium prices to rise modestly with moderate demand growth


($ / tonne)
Aluminium

Q311 E
2,350 - 2,450

Q411 P
2,350 - 2,450

Q112 P
2,400 - 2,500

Q212 P
2,430 - 2,520

Q312 P
2,450 - 2,550

2013 P
2,500 - 2,600

2014 P
2,550 - 2,650

($/tonne) 3500 2800 2100 1400 700 0

Aluminium prices

(million tonnes) 70 60 50

Global demand supply of aluminium


120% 100% 80% 60% 40% 20% 0%

Forecast

40 30 20 10

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 E 4Q11 P 1Q12 P 2Q12 P 3Q12 P 2013 P 2014 P

0 2009 2010 2011 P 2012 P 2013 P 2014 P

Global demand

Global capacity

Demand/capacity (RHS)

Source: Metal Bulletin, Industry, IAI, CRISIL Research

Chinese demand for aluminium is likely to grow by 8-9 per cent between 2011-2014; growth will be slower than the previous 2 years as demand from key end-user sectors is expected to slow down, due to tightening monetary policies China, one of the high cost producers of aluminium at $2,150-2,200 per tonne, contributes nearly 40 per cent of the global production and consequently sets a floor for aluminium prices Additionally, rising raw material (alumina) prices will support higher aluminium prices during the next few years
24.

Global aluminium prices increase due to rising demand


($/tonne) 3,500 3,000 2,500 2,000 1,500 1,000 500 0

Aluminium prices

In 2010, global consumption of aluminium was primarily driven by China, where demand is estimated to have grown by 19 per cent y-o-y

Sep-00 Sep-02 Sep-04 Sep-06 Sep-08 May-01 May-03 May-05 May-07 May-09 Sep-10 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 May-11

Robust growth in production of automobiles and consumer durables in the country mainly contributed to China's aluminium demand, while the construction sector also maintained a stable growth

(million tonnes) 50 40 30 20 10 0

Global demand supply of aluminium


100% 80% 60% 40% 20% 0%

Also, steady growth from the other key consuming packages regions aided driven by stimulus trend in

the

upward

aluminium prices Weak movement of US dollar vis-a-vis the currencies of major exporting regions has also contributed significantly to the rise in aluminium prices in H1 2011 (Refer Annexure II)

2005 2006 Global demand

2007 2008 Global production

2009 2010 Operating rates (RHS)

Source: Industry, IAI, CRISIL Research

25.

Domestic aluminium prices to increase with global prices


(Rs/tonne) 175,000 150,000 125,000 100,000 75,000 50,000 25,000 0 3000 2000

Aluminium prices

($/tonne) 4000

Domestic aluminium demand is expected to grow by 8-9 per cent between 2011-12 to 2014-15 Steady growth is expected in power

Forecast
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 E 4Q11 P 1Q12 P 2Q12 P 3Q12 P 4Q12 P 2013 P 2014 P

1000 0

(transmission and distribution) sector and double digit growth in automobile and consumer durable sectors India is amongst the lowest-cost

Landed prices

Domestic prices

LME (RHS)

('000 tonnes) 3,500 3,000 2,500 2,000 1,500 1,000

Domestic demand supply of aluminium


120% 100% 80% 60% 40% 20% 0%

aluminium producers in the world, due to an abundant supply of bauxite, captive power sources and lower labour cost compared to US and Europe Hence to address the significant export opportunity, major domestic aluminium players are setting up huge capacities (~2 million tonnes till 2014-15) Healthy operating rates will be maintained as Indian aluminium producers are

2010-11 E

2011-12 P

2012-13 P

2013-14 P

2014-15 P

Apparent consumption

Average capacity

Demand/Capacity (RHS)

Source: Company Reports, Industry, CRISIL Research

estimated to export the surplus

26.

Price Forecast for Copper

27.

Copper prices to remain under pressure due to demand slowdown


($ / tonne)
Copper
($/tonne)

Q311 E
9,100 - 9,500

Q411 P
9,000 - 9,400

Q112 P
8,900 - 9,300

Q212 P
8,800 - 9,200

Q312 P
8,600 - 9,000

2013 P
8,300 - 8,700

2014 P
7,800 - 8,200

Copper international & landed prices

(Rs/tonne) 600,000 500,000 400,000 300,000

Copper demand to be subdued in near future


Demand growth in China is expected to be moderate over the next year on account of measures initiated by the Central Bank In the light of sovereign debt crisis in Europe and anticipated slowdown in US, consumption demand is expected to be flat

12,000 10,000 8,000 6,000 4,000 2,000 0


1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 E 4Q11 P 1Q12 P 2Q12 P 3Q12 P 2013 P 2014 P

Forecast

200,000 100,000 0

LME Price

Landed Cost (RHS)

(mn tonnes) 30 25 20 15 10 5 0 2010

Global demand supply of Copper


100% 80% 60% 40% 20% 0%
2011 E 2012 P 2013 P 2014 P

Refined copper capacity is expected to increase by 3 per cent CAGR over the next 3 years, as per ICSG
Demand to capacity ratio is expected to remain flat, which will exert a downward pressure on prices in 2012 and 2013

However, declining ore grades in major mines and continuing labour issues

Demand

Capactiy

Demand/capacity (RHS)

plaguing the industry are expected to act as a deterrent to the fall in prices

Source: LME, ICSG, CRISIL Research

28.

Prices touched pre-crisis levels due to consumption growth


($/tonne) 10,000 8,000 6,000 4,000 2,000 0
Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11

Copper Prices

The

key

end-users

of

Copper

include construction (architecture, electrical), industrial machinery,

consumer durables, etc Fiscal stimulus aided consumption pick-up from key end-user regions such as China, Europe and US in

(mn tonnes) 25 23 21 19 17 15 2005

Global demand supply of Copper


100% 80% 60% 40% 20% 0%
2006 2007 2008 2009 2010 E

2010 and Q1 2011


These measures helped copper prices to regain their pre-crisis levels However, recent events in US and Europe have impacted prices

significantly in August 2011

Currency

movements

has

also

Demand

Capactiy

Demand/capacity (RHS)

Source: ICSG, LME, CRISIL Research

contributed to the change in copper prices (Refer Annexure II)

29.

Slowdown in demand from China in H1 2011


(000 tonnes) 700 600 500 400 300 200 100 0

Copper Demand -2011

Chinese copper demand (~ 40 per cent of total copper consumption) has posted a y-o-y decline of 9 per cent in Jan- May 2011 During the same period, Europe and US y-o-y copper demand numbers
China USA EU- 15

have been flat Copper stocks in China which were declining through April June 2011 have shown a partial rebound in July ahead of the seasonal demand in Q4 2011

(000 tonnes) 200 160 120 80 40 0

Copper SHFE Stocks

SHFE stocks

Source: ICSG, CRISIL Research


30.

Price Forecast for Zinc

31.

Zinc prices to remain sluggish in 2012 before firming 2013 onwards


($ / tonne)
Zinc

Q311 E
2,300 - 2,300

Q411 P
2,110 - 2,190

Q112 P
2,110 - 2,190

Q212 P
2,160 - 2,240

Q312 P
2,210 - 2,300

2013 P
2,300 - 2,400

2014 P
2,550 - 2,650

($/tonne) 3000

Zinc Prices

('000 Rs/tonne)

2000

1000

Forecast
0

140 120 100 80 60 40 20 0

Source: LME, Industry, CRISIL Research

Dampening of demand in China and impending slowdown in USA and Europe expected to exert pressure on zinc prices in the near future
Players have advanced capital expenditure plans in mine exploration as mine supply is expected to tighten in the latter half of 2013 and 2014

Zinc concentrate market is expected to remain in surplus in 2011, the 5th straight year of surplus, thereby putting a cap on prices Prices expected to inch upwards only 2013 onwards as demand picks up and stocks continue to fall
32.

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 E 4Q11 P 1Q12 P 2Q12 P 3Q12 P 2013P 2014 P

Price ($/tonne)

Landed Cost (RHS)

Prices flat on account of huge stocks and sluggish demand


($/tonne) 4,500 3,750 3,000 2,250 1,500 750 0
Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11

Zinc Prices

The key end-use sectors of Zinc include construction, transport and industrial machinery

Refined

zinc

metal

surplus

increased in H1 2011 as mine output outpaced demand

(mn tonnes) 14 13 12 11 10 9 8 7 2006 2007 2008 2009 2010 2011 E

Stocks increased by over 250,000 tonnes in the same period

Global demand supply of Zinc


100% 80% 60% 40% 20% 0%
Demand Capactiy Demand/capacity (RHS)

Demand

from

China

increased

marginally by 3.7 per cent y-o-y in H1 2011 while that from US declined by 5.4 per cent Currency movements has also led to the change in zinc prices (Refer Annexure II)

Source: ILZSG, CRISIL Research

33.

Region-wise Demand Forecast for End-use Sectors

34.

China: Sectoral consumption pattern for commodities


Steel 54 18 2 6 20

Aluminum

29

12

26

26

Copper

20

36

26

12

0%

10%

20% Construction

30%

40%

50%

60%

70% Auto

80% Others

90%

100%

Industrial Machinery

Consumer Durables

Source: CRISIL Research

China is the leading producer and consumer of commodities on account of its growing economy and demand from major end-use industries and exports

The run-up in real estate prices and high inflation in H2 2010 forced the Government of China to take steps to cool the economy

Accordingly, the Chinese central bank has been taking concrete steps by hiking interest rates from Q4 2010 and authorizing banks to go slow on lending to douse high inflation.

35.

China: Measures to cool economy are paying off


The measures adopted by the central bank have started having an impact and many end-use sectors have now started to slow down Growth in automobile production has moderated considerably in H1 2011. Auto sales showed a mere 5 per cent y-o-y growth in H1 2011 vis--vis a robust growth of 45 per cent y-o-y in H1 2010
This was also attributed to a slowdown in major global economies of US and Europe, which are key importers of vehicles from China

Similarly, fixed asset investment in infrastructure showed a significant decline from 26 per cent in H1 2010 to 16 per cent in H1 2011

Industrial machinery too has shown a significant slowdown by clocking a growth of 22 per cent (y-o-y) in H1 2011 vis--vis a robust 45 per cent in H1 2010

36.

China: Construction, machinery and auto to drive demand


(Index) 500 400 300 200 100 0 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Q211 Q311 PQ411 PQ112 PQ212 PQ312 P Auto Construction FMCG Infrastructure Machinery

China - End user segmental growth

Forecast

Source: China NBS, CRISIL Research

CRISIL Research expects the growth momentum of end-use sectors to moderate in line with economic prospects (as indicated by S&P and IMF)

China is expected to concentrate on domestic growth and wean itself away from exports to cushion any negative impact of slowdown in key export markets

Growth in urbanisation, investments in infrastructure, construction to fuel demand The urbanisation rate in China (at 45 per cent in 2010) is expected to increase significantly, thereby attracting huge investment Construction, a key consumer of commodities, is expected to grow albeit at a slower pace (as the Chinese government tries to soft land the economy)

Automobile production is expected to remain strong due to robust domestic demand and moderate export opportunities

37.

China: Performance of end-use sectors


Fixed Asset Investment in Infrastructure
(100 mn yuan) 50,000 39,529 40,000 32,171 30,000 22,294 20,000 10,000 10,000 2006 2007 2008 2009 2010 H1 2011 2006 2007 2008 2009 2010 H1 2011 18,147 14,893 18,375

Fixed Asset Investment in Real Estate


(100 mn yuan)
70,000 60,000 50,000 40,000 30,000 20,000 28,543 21,446 35,215 43,065 31,709 57,557

Automobile production
(10,000 units)
2000 1600 1200
905 1,827 1,380

Consumer durable production


(10,000 units)
30,000 25,000 20,000
972 953

24,408 19,553 17,176 13,872 17,290 16,049

15,000 10,000 5,000 0

800 400 0

728

2006

2007

2008

2009

2010

H1 2011

2006

2007

2008

2009

2010

H1 2011

Source: NBS

38.

China: Healthy demand expected to continue, albeit at a moderate pace


China consumption outlook (per cent) 2009 2010 E
Steel Alum inium Copper GDP grow th 24.8% 15.0% 36.8% 9.2% 5.1% 19.0% 4.3% 10.3%

2011 P
6.5% 6.6% 3.0% 9.6%

2012 P
6.8% 8.8% 4.0% 9.5%

2013 P
6.2% 8.1% 6.0% 9.5%

2014 P
6.3% 8.1% 6.0% 9.5%

Source: CRISIL Research, IMF

With a controlled slowdown induced by the government of China, CRISIL Research expects commodity growth to remain moderate, in the near future, vis--vis the high historical growth rates. This is in line with the expected economic performance of key end-use industries

However, despite tightening of interest rates, China has reported a healthy GDP growth in H1 2011 (9.6 per cent y-o-y) Going ahead, we expect China to move to a more accommodating economic policy, which keeps an eye on growth Consequently, domestic demand from commodities is expected to remain healthy

However, developments in US and Europe can impact Chinese exports and therefore commodity demand from China

39.

Europe: Sectoral consumption pattern


Steel 38 14 16 32

Aluminum

27

14

16

36

Copper

26

10

58

0%

10% Construction

20%

30% Machinery

40%

50%

60% Electricity

70%

80% Auto

90% Others

100%

Packaging

Source: Industry, CRISIL Research

Europe is the second largest consumer of many commodities in the world Auto production in Europe decreased marginally y-o-y during the first half of 2011. However, car registrations posted a decline of 2.1 per cent y-o-y in H1 2011, primarily due to lack of sales in United Kingdom, Italy and Spain

However, construction output, declined by 1 per cent y-o-y in H12011 During H12011, index of capital goods production increased by 11 per cent y-o-y, primarily due to the low base numbers of H12010

40.

Europe: Commodity demand on the path of stable recovery


EU consumption outlook (per cent) 2009
Steel Alum inium Copper GDP grow th -34.9% -20.0% -19.4% -4.13%

2010
21.2% 3.4% 8.2% 1.76%

2011 E
8.1% 6.0% 1.7% 2.0%

2012 P
4.0% 3.5% 2.0% 1.7%

2013 P
2.6% 2.3% 2.5% 2.2%

2014 P
2.3% 2.1% 2.5% 2.2%

Source: CRISIL Research, IMF

In line with the moderate performance of end-use industries and GDP growth as indicated by S&P and IMF, CRISIL Research expects muted commodity growth during 2012-14 However, anticipated slowdown in European heavyweight countries such as Germany and the United Kingdom is a matter of apprehension Continued concerns arising out of sovereign debt crises in some EU countries such as Ireland, Greece etc. and the risk of it spreading to other member countries is a huge overhang Although the impact of the probable debt concerns on global commodity demand may not be significant, it will have a bearing on the currency and overall sentiment thereby affecting commodity prices

41.

Europe: Demand growth to be muted


(Index)
110 100 90 80 70 60

Europe- End user segmental growth


Forecast

Q108

Q208

Q308

Q408

Q109

Q209

Q309

Q409

Q110

Q210

Q310

Q410

Q111

Q211

Q311 P

Q411 P

Q112 P

Q212 P

Construction

Auto

Source: Eurostat, ACEA, CRISIL Research

European region is not only expected to continue to witness a near term slowdown but also there seems to be a global consensus of Europe veering towards a prolonged slowdown

Many countries in the region are undertaking measures to reduce government spending in order to manage budget deficit, thereby impacting commodity demand

As per IMF, a GDP growth of 1.7- 2.2 per cent is expected during 2011-13 Although, key end-use industries in Europe showed moderate growth performance in H1 2011, the current recovery is expected to be short lived

Sustained unemployment and slowdown in manufacturing sectors in the European region is expected to remain a drag on consumption

42.

Q312 P

Europe: Growth in key end-use industries


(Index) 120 100 80 60 40 20 0 2005 2006 2007 2008 2009 2010 6M 2011

Capital Goods

(Index) 120 100 80 60 40 20 0 2005 2006

Construction Output
1.5%

2007

2008

2009

2010

6M 2011

(Index) 120

Manufacturing

(in 000's) 25,000 20,000 15,000 10,000

Auto production

100 80 60 40 20 0 2005 2006 2007 2008 2009 2010 6M 2011

5,000 2005 2006 2007 2008 2009 2010 6M 2011 E

Source: Eurostat, ACEA, CRISIL Research

43.

US: Sectoral consumption pattern


Steel 31 6 31 25 7

Aluminum

14

23

37

26

Copper

50

11

31

0%

10%

20% Construction

30% Machinery

40% Packaging

50%

60% Metal Products

70% Auto

80% Others

90%

100%

Source: Industry, CRISIL Research

The key end-use industries in US recovered sharply in 2010 on the back of stimulus packages and the low base of 2009

Despite a healthy growth in key end-users in the first half of 2011, the July numbers show a slowdown reflecting the negative sentiments prevailing in the US economy
In H1 2011, motor vehicles production in North America grew by a meager 7 per cent vis-a-vis above 60 per cent growth in 2010 Total output of construction units in the first half of 2011 showed a degrowth of around 20 per cent (y-o-y) Machinery IIP index grew by around 14 per cent y-o-y during H1 2011

44.

US: Growth in end-user segments to be moderate


(Index) 120 100 80 60 40 20 0 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Q211 Q311 P Q411 P Q112 P Q212 P Q312 P Q412 P

US End user segmental growth

Forecast

Auto

Construction

US Machinery IIP

Source: US Census, IMF, CRISIL Research

With the end of the current stimulus package by the government, growth in key end-users is expected to be restrained In line with the economic outlook (as indicated by S&P and IMF) we expect growth in the US to be moderate

45.

US: Performance of end-use sectors


(in 000's) 2,000 1,600 1,200
819

Construction Units
3.9 %
1,532 1,636 1,655

(in 000's) 14,000

Auto production
11,570 10,900

-26 %
1,219

12,000 10,000 8,000

-8 %
10,530 8,430 5,870 7,690

800
520 496 198

6,000 4,150 4,000 2,000 -

400 2004 2005 2006 2007 2008 2009 2010

H1 2011

2005

2006

2007

2008

2009

2010

H1 2011

(Index)

Machinery 4%
92 96 100 97

-9 %
91 76 81

100 80 60 40 20 0

2005

2006

2007

2008

2009

2010

H1 2011

Source: US Census, CRISIL Research

46.

US: Demand expected to recover


US consumption outlook (per cent) 2009
Steel Alum inium Copper GDP grow th -34.9% -20.0% -18.3% -2.6%

2010
21.2% 3.4% 6.7% 2.8%

2011 E
8.1% 6.0% 2.0% 2.0%

2012 P
4.0% 3.5% 2.0% 2.1%

2013 P
2.6% 2.3% 1.0% 2.7%

2014 P
2.3% 2.1% 1.0% 2.7%

Source: CRISIL Research, IMF

S&P recently lowered its long-term sovereign credit rating on the United States of America to 'AA+' from 'AAA highlighting the need for US to contain its debt Despite visible support from a recovering auto sector and revived strength in consumer spending, deteriorating financial conditions and faltering business confidence have prompted a moderate growth outlook in commodity demand in US Key monitorable Monetary policy adopted by the US Federal Reserve Depreciation of the dollar will exert upward pressure on commodity prices

47.

Price Forecast Methodology - Rubber

48.

Framework of analysis Natural Rubber


Domestic Tyre Demand Production/ Imports of NR

OEM

Exports

Replacement

Stocks

(I/O norm)

NR Demand Demand Supply Scenario

NR Supply

Domestic NR Price

Global NR Demand
49.

Global NR Price

Global NR Supply

Framework of analysis Synthetic Rubber (SBR/PBR)


RM Price SR Capacity NR Demand

Styrene

Butadiene

Impact of Demand Supply & Crude oil prices

Utilisation level

NR SR Ratio

SR Supply

SR Demand

RM Cost

SR Demand & Supply

Global SR Price

Landed SR Price

Domestic SR Price
50.

Price Forecast for Rubber

51.

Rubber: Price Forecasts


Rubber ($ / tonne)
SBR PBR NR ABS PP

Quarterly Q311 E
4,400 - 4,600 4,500 - 4,700 4,700 - 4,900 2,500 - 2,600 1,500 - 1,600

Annual Q212 P
3,680 - 3,870 3,810 - 4,010 4,160 - 4,370 2,280 - 2,390 1,470 - 1,550

Q411 P
4,040 - 4,240 4,050 - 4,260 4,100 - 4,310 2,270 - 2,390 1,490 - 1,570

Q112 P
3,880 - 4,070 3,890 - 4,090 4,200 - 4,410 2,250 - 2,370 1,470 - 1,550

Q312 P
3,350 - 3,520 3,470 - 3,650 3,950 - 4,150 2,210 - 2,320 1,440 - 1,520

2013 P
3,450 - 3,630 3,370 - 3,540 3,560 - 3,740 2,190 - 2,310 1,370 - 1,440

2014 P
3,420 - 3,590 3,300 - 3,470 3,740 - 3,930 2,080 - 2,180 1,350 - 1,410

Domestic Price
NR (Rs / Kg) 200 - 210 180 - 190 180 - 190 200 - 210 190 - 200 170 - 180 180 - 190

P: Projected Source: CRISIL Research

52.

Natural Rubber: Prices to decline due to poor demand


Rubber ($ / tonne)
NR NR (Rs / Kg)

Quarterly Q311 E
4,700 - 4,900 200 - 210

Annual Q212 P
4,160 - 4,370 200 - 210
($/Kg)

Q411 P
4,100 - 4,310 180 - 190

Q112 P
4,200 - 4,410 180 - 190

Q312 P
3,950 - 4,150 190 - 200

2013 P
3,560 - 3,740 170 - 180

2014 P
3,740 - 3,930 180 - 190

(Rs/Kg)

300 250 200 150 100 50

NR Price Forecast

6.0 5.0

Demand slowdown to exert downward pressure on NR prices H2 2011 onwards. Global consumption to increase merely by 1-2 per cent during 2011 due to

Forecast

4.0 3.0 2.0 1.0

anticipated slowdown in demand

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q 11 1Q12 2Q12 3Q12 2012 P 2013 P 2014 P

Global supply expected to ease H2 2011 onwards (We are assuming there is no further major weather disruption in the

Domestic Price

Landed cost - With Duty

International Price (RHS)

Global rubber production growth


(000 tonnes) Production Grow th(Y-o-Y) 2010 10,384 7.2% 2011 E 10,858 4.6% 2012 P 11,401 5.0% 2013 P 12,085 6.0% 2014 P 12,907 6.8%

leading producer countries of Thailand, Indonesia and Malaysia) Supply expected to grow by 4-5 per cent y-o-y

Consum ption Grow th(Y-o-Y)

10,765 15.4%

10,897 1.2%

11,374 4.4%

12,025 5.7%

12,866 7.0%

Consequently prices expected to decline H2 2011 onwards

Source: Rubber Board, CRISIL Research

53.

NR prices declined on account of weak demand scenario


Review of NR prices

In 2010, NR prices increased significantly by around 88 per cent on account of demand supply mismatch

NR prices continued their upward trend in Q1 2011 reaching $5.7 per kg on the back of favourable demand in key markets of US,

(In 000 tonnes) 11,500 11,000 10,500 10,000 9,500 9,000 8,500 8,000 2005 2006

Natural Rubber Global Demand - Supply


120% 100% 80% 60% 40% 20% 0% 2007 Demand 2008 2009 2010 2011 E

Europe and China

However, prices declined in Q2 2011, on account of unfavourable demand situation due to slowdown in economic growth across key markets

Supply
E: Estimated

Demand/Supply (RHS)

Source: CRISIL Research and IRSG

18 54.

Domestic prices have increased in line with landed cost


(Rs/tonne) 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0
Jul-08 Jul-09 Jul-10 Nov-08 Nov-09 Mar-08 Mar-09 Mar-10 Nov-10 Sep-08 Sep-09 Sep-10 May-08 May-09 May-10 Mar-11 Jan-08 Jan-09 Jan-10 Jan-11 May-11 Jul-11

NR - Domestiv V/s Landed Cost

(tonnes) 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0

Import

Domestic Price

Landed Cost

Landed Cost - Duty Free

Source: Rubber Board, CRISIL Research

Historically, India imports a very small proportion of its natural rubber requirements due to high import duty (at 20 per cent or Rs 20 which ever is lower) Most of the imports are made by players who get import duty rebate against export of finished product

Landed cost of global NR prices act as a ceiling for domestic prices Domestic prices, which have been increasing since July 2009 due to a strong auto demand, declined in September 2010 owing to oversupply in the market

55.

Global SR prices to fall in line with crude prices and lower demand
($ / tonne)
SBR PBR
($/tonne) 5,250 4,500 3,750 3,000 2,250 1,500 750 0
4Q11 P 1Q12 P 2Q12 P 3Q12 P 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 2012 P 2013 P 3Q11 E 2014 P

Q311 E
4,400 - 4,600 4,400 - 4,700

Q411 P
4,040 - 4,240 4,030 - 4,280

Q112 P
3,880 - 4,070 3,870 - 4,110

Q212 P
3,680 - 3,870 3,790 - 4,030

Q312 P
3,350 - 3,520 3,450 - 3,660

2013 P
3,450 - 3,630 3,350 - 3,560

2014 P
3,420 - 3,590 3,280 - 3,490

SBR & PBR prices

Review

SBR/PBR prices increased by ~ 80 per cent in


H1 2011 (y-o-y) Forecast Increase in upstream butadiene and styrene prices due to a surge in crude oil prices since Sept Oct 10 Increase constraints in NR prices due to supply

PBR

SBR grade 1502

NR-SBR Price Ratio


2.00 1.60 1.20 0.80 0.40 -

Outlook

Constrained supply of butadiene, on account of


lower yield, is expected to keep its price firm in the short-to-medium term, leading to relatively firm Synthetic Rubber (SR) prices

However, expected fall in crude oil prices from


Nov-02 Nov-04 Nov-06 Nov-08 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Nov-10 Jul-01 Jul-03 Jul-05 Jul-07 Jul-09 Jul-11

H2 2011 onwards to put a cap on SR prices

Additionally, declining NR prices to also exert


downward pressure on SR prices

56.

Source: CRISIL Research

Global SBR and PBR prices increased with demand


($/tonne) 4,500 3,750 3,000 2,250 1,500 750 0 0.0 120.0 80.0 1,500 40.0 750 0

SBR & PBR prices v/s butadiene price

($/bbl) 160.0

Butadiene Vs Crude Oil prices

($/tonne) 3,750 3,000 2,250

1Q07

3Q07

4Q07

1Q08

2Q08

4Q08

2Q09

4Q09

1Q10

2Q07

3Q08

1Q09

3Q09

2Q10

3Q10

Butadiene

PBR

SBR grade 1502

Crude oil prices

Butadiene prices (RHS)

Source: Industry, CRISIL Research

SBR and PBR are manufactured from the same feedstock, Styrene and Butadiene, which are in turn derived from crude oil
Hence their cost is always linked to the international prices of crude oil

Generally, domestic prices of SBR and PBR follow global prices of these commodity chemicals, barring monthly aberrations

57.

Supply constraint for Butadiene The main feedstock for SR


Yield for producing Butadiene from various sources

Global manufacturing unit for ethylene is rapidly shifting to natural gas based crackers This shift led to a lower yield of

Note: Others include Benzene, Toluene, MXC 4, Py Gas, Fuel Gas, and SC Light Fuel Oil

butadiene (refer table) This, coupled with plants shut down in March and April 2011

Source: Industry, CRISIL Research

Ethylene Capacity (KT)

created a shortage in the supply


2010
30% 22% 10% 29% 9% 100% 32,706 26,087 25,290 47,630 11,890 143,603 23% 18% 18% 33% 8% 100%

2005
USA EU Middle East Asia Others World 34,842 25,313 11,803 33,504 10,412 115,874

diff
-7% -4% 7% 4% -1%

of butadiene As a result, prices surged and are expected to remain firm till Q3 2011. However going on

forward,

easing

supply

Note: With the capacity that has become operational in the Middle East, the feedstock mix for cracker has also changed in favour of gas.

account of plant coming into operation will exert downward pressure on prices

Source: RIL India, CRISIL Research

58.

Price Forecast for PP and ABS

59.

Framework of analysis Polypropylene (PP)

* Other Polymers like Poly Styrene (PS), Poly Carbonate (PC), ABS etc

60.

PP: Prices to remain under pressure due to low demand


($ / tonne)
PP

Q311 E
1,500 - 1,600

Q411 P
1,490 - 1,570

Q112 P
1,470 - 1,550

Q212 P
1,470 - 1,550

Q312 P
1,440 - 1,520

2013 P
1,370 - 1,440

2014 P
1,350 - 1,410

($/tonne) 1,900 1,600 1,300 1,000 700 400 100

Propylene & Naptha prices v/s PP price

In 2011, PP prices are expected to increase by 22 per cent y-o-y owing to expected increase in upstream propylene prices

Forecast
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 E 4Q11 P 1Q12 P 2Q12 P 3Q12 P 2012 P 2013 P 2014 P

The expected increase in propylene prices is due to high crude prices and tight supply situation of propylene

PP

Propylene

Naptha

(per cent) 100.0 90.0 80.0 70.0 60.0 50.0

However, 2012 onwards, PP prices are expected to fall on account of

PP: Global capacity-demand and operating rates


70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2005 2006 2007 Capacity 2008 2009 Demand 2010E 2011P

Fall in its major feedstock propylene prices Also higher capacity than demand will lead to lower operating rates and thus exert pressure on PP prices

Global demand for PP is likely to grow at a CAGR of 4-5 per cent over 2010 to

2012P

2014.

Capacity

expansion

is

also

Operating rates

estimated to grow at a similar pace

Source: CRISIL Research


61.

PP prices declined on account of weak demand scenario


(Rs/tonne) 120,000 110,000 100,000 90,000 80,000 70,000 60,000 50,000 40,000 2,000 1,800 1,600 1,400 1,200 1,000 800 600

Polypropylene Prices

$/tonne

PP, the lightest thermoplastic is used mainly in consumer goods, packaging, home products, automotive parts, industrial products, textile yarns, fibres and fabrics

In 2010, domestic demand for polypropylene (PP) is estimated to have grown by 17-18 per cent y-o-y to ~2.6 million tonnes

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jul-04

Jul-05

Jul-06

Jul-07

Jul-08

Jul-09

Jul-10

Domestic Price

Landed Cost

C&F Far East Asia (Injection Moulding)

Jul-11

World consumption of Polypropylene: 2010


Others 29% China 27%

This was on account of healthy demand from raffia, injection moulding, BOPP (biaxially oriented polypropylene) etc.

In 2010, global prices for PP increased by 23 per cent y-o-y to average $1,300 per tonne from

India 5% Japan 6% Middle East 6%


62.

$1,061 per tonne in 2009 on account of increase


Western Europe 15% United States 12%

in upstream propylene prices

Source: CRISIL Research

Framework of analysis Acrylonitrile Butadiene Styrene (ABS)

* Other Polymers ABS competes with specialty and advanced thermoplastics, such as Polyamide (PA), Polybutylene terephthalate (PBT), Polyethylene Terephthalate (PET), and Poly(p-phenylene oxide) (PPO). Substitutes of ABS - Polystyrene (PS), Polypropylene (PP), However, owing to ABS' superior properties for electronics segment, higher volatility in polystyrene prices and the narrowed gap between its 63. prices and that of ABS, ABS is preferred

ABS: Prices to decline in sync with crude oil prices


($ / tonne)
ABS

Q311 E
2,500 - 2,600

Q411 P
2,270 - 2,390

Q112 P
2,250 - 2,370

Q212 P
2,280 - 2,390

Q312 P
2,210 - 2,320

2013 P
2,190 - 2,310

2014 P
2,080 - 2,180

Forecast

Source: CRISIL Research

Outlook

We expect ABS prices to decline Q4 2011 onwards on account of a fall in its chief feedstock acrylonitrile and styrene
with the expected drop in crude oil prices

Going forward margins are also expected to improve in line with the expected fall in upstream feedstock prices, on account of the expected improvement in the demand scenario.

64.

ABS prices increased due to firm raw material prices


(Rs/tonne) 140,000 130,000 120,000 110,000 100,000 90,000 80,000 70,000 60,000 50,000

ABS Prices

($/tonne) 2,500 2,300 2,100 1,900 1,700 1,500 1,300 1,100 900

Jul-04

Jul-05

Jul-06

Jul-07

Jul-08

Jul-09

Jul-10

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Ex-factory (Natural)

Landed Cost

C&F Far East Asia (Inject)

Acrylonitrile Butadiene Styrene (ABS) is used in various home appliances, electronics and automobiles

The largest consumer for ABS is China accounting for nearly 60 per cent of global consumption

In 2010, ABS prices increased significantly by around 42 per cent to $1,980 per tonne.

This is on account of the continuous tight supply situation, coupled with a high increase in upstream styrene, butadiene and ACN prices

However, ABS prices at present are under pressure due to a decline in upstream ACN prices coupled with subdued buying trends

65.

In YTD 2011, high crude prices and continual shortage of key feedstocks like butadiene and acrylonitrile (ACN) has led to an increase in ABS prices

Jan-11

Jul-11

Annexure

66.

Annexure I: Regional commodity consumption pattern


Steel
North America 6%

Aluminium
Europe 11%
RoW 22% North America 13% Europe 18%

RoW 33%

Japan 4%

Japan 5%
Total 1380 million tonnes (2010)

China 45%

Total 39.6 million tonnes (2010)

China 43%

Copper
RoW 20% Japan 5% America 15%
RoW 30%

Zinc

North America 9% Europe 15%

Europe 22%
Japan 5%

Total 19.3 million tonnes (2010)

China 38%

Total 12.5 million tonnes (2010)

China 42%

Source: CRISIL Research


67.

Annexure II: Impact of currency on commodity prices


A Month B C Currency adjusted prices ($/tonne) B1 x A1 / A2 D Actual Price Index = B (base 100) E Currency influence index = C (base 100) Curency Aluminium Index prices ($/tonne)

Jan-09 Feb-09 Mar-09

75 80 79

1413 1330 1336

1413 1319 1336

100 94 95

100 93 95

Sep-10 Oct-10

65 63

2162 2354

1637 1678

153 167

116 119

Source: CRISIL Research

Methodology As indicated above, Jan-2009 is considered as the

(Index) 200

Currency impact on Aluminium prices


178

150

base period.
100

128

Currency index is the weighted average of the key


50

exporting countries of a particular commodity.


0

Jan-09

Nov-09

Jan-10

Nov-10

May-09

Sep-09

May-10

Sep-10

Jan-11

May-11

Mar-09

Jul-09

Mar-10

Jul-10

Mar-11

currency fluctuation (in column C). Both prices (column B&C) are converted on a base of 100 in Jan-2009 (column D & E) and plotted.
68.

Actual price

Currency influence

Jul-11

The actual prices (column B) are discounted for

Impact of currency on commodity prices


($/tonne) 210 190 170 150 130 110 90
Jan-09 May-09 Mar-09 Jul-09

Currency impact on Steel prices


183

($/tonne) 330 290 250 210 108 170 130 90

Currency impact on Copper prices


299

125

Nov-10

May-10

May-11

Sep-09

Nov-09

Jan-10

Sep-10

Jan-11

Mar-10

Mar-11

Jul-10

Jul-11

Jan-09

May-09

Sep-09

Nov-09

Jan-10

May-10

Sep-10

Nov-10

Jan-11

May-11

Mar-09

Jul-09

Mar-10

Jul-10

Mar-11

Actual Price

Currency influence

Currency Influence

Actual Price

($/tonne) 230 210 190 170 150 130 110 90

Currency impact on Zinc prices


201

118

($/kg) 440.0 390.0 340.0 290.0 240.0 190.0 140.0 90.0

Currency impact on NR prices

Jul-11
314 95

Sep-09

Sep-10

Jul-09

Jul-10

Mar-09

Mar-10

May-09

May-10

Mar-11

Jan-09

Nov-09

Jan-10

Nov-10

Jan-11

May-09

May-10

May-11

Mar-09

Mar-10

Mar-11

Actual Price

Currency influence

Actual Price

Currency influence

69.

May-11

Jan-09

Nov-09

Jan-10

Nov-10

Sep-09

Sep-10

Jan-11

Jul-09

Jul-10

Jul-11

Jul-11

Annexure III: Historical volatility in prices


Quarterly Volatility in Aluminium prices
30% 25% 20%
30.0% 50.0% 40.0%

Quarterly Volatility in Copper prices

15% 10% 5% 0% Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 01 01 02 02 03 03 04 04 05 05 06 06 07 07 08 08 09 09 10 10 11
20.0% 10.0% 0.0% Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 01 01 02 02 03 03 04 04 05 05 06 06 07 07 08 08 09 09 10 10 11

Quarterly Volatility in HR prices


45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 01 01 02 02 03 03 04 04 05 05 06 06 07 07 08 08 09 09 10 10 11 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%

Quarterly Volatility in Zinc prices

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 01 01 02 02 03 03 04 04 05 05 06 06 07 07 08 08 09 09 10 10 11

Source: LME,CRISIL Research

70.

Historical volatility in prices


Quarterly Volatility in NR prices
30% 25% 20% 15% 10% 5% 0% Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 04 04 05 05 06 06 07 07 08 08 09 09 10 10 11 40% 35% 30% 25% 20% 15% 10% 5% 0% Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 01 01 02 02 03 03 04 04 05 05 06 06 07 07 08 08 09 09 10 10 11

Quarterly Volatility in PP prices

Quarterly Volatility in ABS prices


30% 25% 20% 15% 10% 5% 0% Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 01 01 02 02 03 03 04 04 05 05 06 06 07 07 08 08 09 09 10 10 11

Source: CRISIL Research

71.

Annexure IV: Commodity Duty Structure


(per cent) Commodity HR Steel CR Steel Sponge iron TMT Steel Pig iron Aluminium Copper Zinc NR * PBR SBR (1502) PP ABS Excise Duty 2010-11 10 10 10 10 10 10 10 10 10 10 10 10 2011-12 10 10 10 10 10 10 10 10 10 10 10 10 Custom Duty 2010-11 5 5 5 5 5 5 5 5 20 10 10 5 5 2011-12 5 5 5 5 5 5 5 5 20 10 10 5 5

Note: Education cess is applicable at 3 percent In case of NR, customs duty applicable is 20 per cent or Rs 20, w hichever is low er During Jan-Mar 2011 customs duty w as reduced to 7.5 per cent

Source: Central Customs Tariff, Central Excise Tariff

72.

CRISIL Limited, a Standard & Poors company

www.crisil.com
73.

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