Commodities Research 18 January 2017 Metals Magnifier Trumped up trickle down • The fundamental outlook for metals has improved, although not without risks. The net effect of potentially lower US taxes, increased infrastructure investment, and more protectionism boosts the outlook for copper, steel, and iron ore consumption. • We estimate that an additional $100bn of construction spending in the US yields a rise in consumption of 73kt of refined copper, 4.7mnt of steel, and 7.5mnt of iron ore. A brightening outlook in the US, coupled with strong metals demand in China, also leads us to raise our 2017 price forecasts for copper to $5,458/t (248 c/lb) and for iron ore to $62.5/t. • However, we think that hopes for a large infrastructure boost are premature, and the risks from potentially increased US protectionism are a significant headwind to higher global consumption. The potential for a large rise in commodity demand is certainly there, but we think that the market is “trumping up” the likely effects of Trump’s policies, as additional infrastructure spending requires rapid execution to yield the full metals’ demand boost. FIGURE 1 Our estimates for increased steel and copper demand per additional construction spend show declining, but still positive, returns Source: Bloomberg, Barclays Research 0.000.200.400.600.801.001.201.401.601.802.000.000.010.020.030.040.050.060.070.080.09199719992001200320052007200920112013Cu kt/$1bn (RHS)Steel mnt/$1bn {LHS) Dane Davis +1 212 526 6721 dane.a.davis@barclays.com BCI, US www.barclays.com PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 30 Barclays | Metals Magnifier CONTENTS Focus: Trump & Metals - Trading on rhetoric, not reality ............ 3 Copper ..................................................................................................... 14 Iron Ore ................................................................................................... 19 Copper Data ........................................................................................... 23 Iron Ore Data ......................................................................................... 25 Metal Spot Price Forecasts ................................................................. 29 18 January 2017 2 Barclays | Metals Magnifier FOCUS: TRUMP & METALS Trading on rhetoric, not reality “We will build the next generation of roads, bridges, railways, tunnels, sea ports and airports that our country deserves. American cars will travel the roads, American planes will connect our cities, and American ships will patrol the seas. American steel will send new skyscrapers soaring. We will put new American metal into the spine of this nation. It will be American hands that rebuild this country, and it will be American energy – mined from American sources – that powers this country.” Donald Trump, speech to Detroit Economic Club, 8 August 2016. With the US election now over and the inauguration of President-elect Trump only a few days away, soon is the moment when the rhetoric of the campaign trail meets reality. We think expectations for a revival of the sector are not entirely unfounded, as pro-growth policies in the US have raised our outlook for copper, steel, and iron ore consumption, driven by the upgrade to our GDP growth forecasts. However, we find that hopes for a large infrastructure boost look premature, and the risks from increased US protectionism are a significant headwind to higher global consumption levels. With perfect implementation, we think an additional $100bn of construction spending in the US would yield a rise in consumption of 73kt of refined copper, 4.7mnt of steel, and 7.5mnt of iron ore. We find that steel production could rise by 7-12mnt from tariffs, with copper consumption unaffected. Trump’s election leaves a lot to unwrap... Untangling the effect of Trump’s proposed policies on metals consumption is a difficult, but not impossible, task. Unlike more traditional candidates, Trump’s election was in many ways a revolt against the economic status quo, and his promises of a reduction in US tax rates, higher levels of infrastructure spending, and increased protectionism for US industries offer the potential for a paradigm shift in metals markets. Moreover, the direction in which the set of proposed policies could affect metals demand, and thus prices, is not uniform. Stronger US growth is likely to lift US demand for steel (and thus iron ore) and copper, but a potential trade war from increased US protectionism could cause a contraction in global demand for iron ore and copper. Which effect wins out is not immediately clear, and