1. Great expectations: The upcoming rationalisation of metals supply Shaun Browne, Chairman, AME group

2. Great Expectations: Metals Supply and Political Economics Shaun Browne
AME Group
October 2013
London, New York, Hong Kong, Beijing, Sydney

3. Engineering Economics – AME Group
Relationship
Support
Research
Engineering
London 
New York
Hong Kong
Beijing
Sydney

4. AME Group Supply & Value Chain
Advanced Exploration
Geological Modelling to Prefeasibility
Project Development
Feasibility Studies to Commissioning
Production
Completion test, Debottlenecking, Expansions
Infrastructure & Transport Logistics
Ports, rail, barges, shipping & trucking
Beneficiation
Smelters, Refineries, Steel Mills, Hydrometallurgical/Pyrometallurgical.
General Commercial Marketing
Trading, Sales, Contracts
Manufacturing
Company Demand, Specifications
End User Analysis
Consumer real demand (not apparent demand)

5. Agenda – Is this political economics?
Taking stock: The supply perspective
Aluminium: The new supply and technology war
Copper: A different type of squeeze
Nickel: Market consolidation and a shift to the East
Zinc: Restrictions or exercising restraint?

6. The composition of growth is good news for a cyclical uplift in metals demand
Japanese Industrial Production and Copper Demand,
US Industrial Production and Copper Demand,
A recovery in construction from low levels will provide a welcome lift for metals in the Atlantic Economies
Source: AME

7. Agenda – Is this political economics?
Taking stock: The supply perspective
Aluminium: The new supply and technology war
Copper: A different type of squeeze
Nickel: Market consolidation and a shift to the East
Zinc: Restrictions or exercising restraint?

8. Aluminium:
The supply and technology war

9. New supply holding prices under $1,800/t in the third quarter of 2013
Aluminium Projects scheduled to be commissioned in 2013
Source: AME
Oversupply means not all projects will commission as scheduled

10. Chinese committed supply next year is breathtaking – more production cuts coming
Aluminium Projects expected to be commissioned in 2014
New Aluminium centre of the world – Xinjiang Uygur Autonomous Region
Source: AME
More project commissioning deferrals will be announced

11. Estimated Chinese Aluminium Smelting Capacity 2000 – 2015
Proposed smelting capacity in China would eclipse current global capacity by 2017
Estimated Chinese Aluminium Smelting Capacity 2000 – 2015
Source: AME
We do not expect any new capacity to be commissioned in the West which is not already under construction

12. Aluminium production of the future will be a technology war
Soderberg vs Pre-bake technology
Typical size vs power for reduction pots
Source: AME
Chinese producers are winning the war…for now…

13. Soderberg capacity will experience faster obsolescence than previously expected
Soderberg vs Pre-bake Smelter Technology for Key Aluminium Producers
(Includes affiliated smelters)
Source: AME
The question is now when the next step change in technology will be

14. Agenda – Is this political economics?
Taking stock: The supply perspective
Aluminium: The new supply and technology war
Copper: A different type of squeeze
Nickel: Market consolidation and a shift to the East
Zinc: Restrictions or exercising restraint?

15. Copper:
A different type of squeeze

16. Smelter technology costs and energy consumption rates
Copper smelting cost and energy consumption for different smelting technologies
Smelter technology costs and energy consumption rates
Reverberatory and Noranda furnaces are high energy consumers resulting in high cost of production
Older technology progressively being replaced with Bath and Mitsubishi smelters
Cheaper cost of production
Better emission capture
Flash capex high
No reverberatory technology built since the fall of the iron curtain
A shift to cleaner, lower cost technologies will increase capex requirements for the base metals smelting industry

17. Sulphur dioxide and acid plants will be a medium term defining feature for smelters

18. The changing environmental landscape changing competitive landscape for base metals smelter
Average SO2 Daily Emission Limits (μg/m3) 2013
Source: AME
Tighter emission standards will generally cause refits, not closures

19. Despite better TCs, supply chain margins will sit with concentrate producers
Copper Smelter Cash Costs
Source: AME
Operating and upgrade costs will determine smelter viability

20. Supply from new copper mine projects – 2012 vs. 2013
Further concentrate delays mean TCs may disappoint, adding additional pressure
Supply from new copper mine projects – 2012 vs. 2013
Source: AME
AME’s base case supply forecast for 2015 has been reduced by 2Mt on project delays and cancellations

21. Agenda – Is this political economics?
Taking stock: The supply perspective
Aluminium: The new supply and technology war
Copper: A different type of squeeze
Nickel: Market consolidation and a shift to the East
Zinc: Restrictions or exercising restraint?

22. Nickel:
Market consolidation and a shift to the East

23. The medium term demand outlook for nickel remains favourable
Nickel to Steel Consumption Ratio, 2013
Source: AME
Lower nickel prices will encourage a shift back to 300 series stainless steel

24. AME forecasts Chinese Nickel Pig Iron (NPI) production of 430kt in 2013
Estimated NPI operating costs, 2013
Blast Furnace NPI production is the most expensive but offset by iron credits
Electric Arc Furnace (EAF) and Rotary Kiln (RKEF) technology has been built to replace energy intensive Blast Furnace production
However EAF and RKEF plants require a higher grade of laterite ore feed than BF (>1.5% Ni) - predominantly sourced from Indonesia
Source: AME
Iron Credits make Chinese ferronickel cash costs opaque

25. The Indonesian government has backed away from a complete ban of nickel ore exports
China Nickel Ore Imports,
Proposed Ferronickel smelters in Indonesia
This adds to the 500+kt of capacity added in China over the last 6 years
More Indonesian project announcements are expected
Not enough ore and demand to go around in the rest of Asia
Suphides will continue to shrink as a share
The weight of production firmly now in Asia
Source: China Customs, AME

26. Agenda – Is this political economics?
Taking stock: The supply perspective
Aluminium: The new supply and technology war
Copper: A different type of squeeze
Nickel: Market consolidation and a shift to the East
Zinc: Restrictions or exercising restraint?

27. Zinc:
Restrictions or exercising restraint?

28. After two disappointing years, rising incomes gives zinc demand leverage to steel production
Zinc consumption (kg) per tonne of steel production, 2013
Global zinc consumption % ch. p.a,
Source: AME
Zinc is becoming a demand story

29. Zinc still has the long term demand narrative despite expected demand slowdown
Zinc Intensity of GDP – The Japanese and US experience
Zinc in particular has leverage to growing wealth in the East
Source: AME

30. Chinese production cuts have put the lead & zinc markets in a sweet spot, temporarily.
Refined Zinc Production (kt),
Zinc prices and stocks, 2003 – 2013
Source: AME, Bloomberg
AME expects a 100kt zinc deficit and 200kt lead deficit in 2013

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