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

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

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

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)

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?

The composition of growth is good news for a cyclical uplift in metals demand Japanese Industrial Production and Copper Demand, 1979 - 2012 US Industrial Production and Copper Demand, 1964 - 2012 A recovery in construction from low levels will provide a welcome lift for metals in the Atlantic Economies Source: AME

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?

Aluminium: The supply and technology war

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

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

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

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…

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

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?

Copper: A different type of squeeze

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

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

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

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

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

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?

Nickel: Market consolidation and a shift to the East

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

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

The Indonesian government has backed away from a complete ban of nickel ore exports China Nickel Ore Imports, 2009 - 2013 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

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?

Zinc: Restrictions or exercising restraint?

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, 2005 - 2013 Source: AME Zinc is becoming a demand story

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

Chinese production cuts have put the lead & zinc markets in a sweet spot, temporarily. Refined Zinc Production (kt), 2003 - 2013 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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