CRU Mineral Commodity Outlook 2020 Vision

Dr Allan Trench

What is driving commodity prices?

...that depends on which commodity you are looking at
Each has its own dynamics CRU looks at the fundamentals: Supply of raw materials, production capacity, industry demand, stocks & the market balance, costs of production & investment capital and financial market influence, as well as prices Each commodity has a story & individual fundamentals Chinas growth in consumption is common to all and this has been a factor in driving prices higher
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Metal prices have increased dramatically over 10 years

600

Lead, Copper & Tin

Copper Tin

500

400

Lead

Zinc

300

Aluminium

Nickel

200

100

Aluminium & Zinc

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: CRU

Heres on reason why: China has accounted for more than 100% of global metals demand growth this millennium
Chinese metals consumption growth as a proportion of global metals consumption growth 2000-2010
160%
140% 120% 100% 80% 60%

Average growth as proportio of total global growth =118%

40%
20% 0% Copper
Data: CRU Analysis

Nickel

Lead

Zinc

Steel

Aluminium

Chinas share of metal consumption

100%

At the turn of the last millennium China accounted for around10% metal consumption Today Chinas share of world consumption is over 40% The industry size and structure has changed in the last decade; and continues to be shaped by Chinas growth There are industry constraints to be managed...

90%

80%
70% 60% 50% 40% 30% 20%

10%
0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Copper World Ex-China Lead World Ex-China Zinc World Ex-China

Nickel World Ex-China

Lead China Aluminium China

Aluminium World Ex-China

Zinc China

Copper China
Nickel China Source: CRU

Chinas development has compensated for lower metal growth elsewhere

Looking at consumption growth of industrial metals China is driving demand growth The World Ex-China is cyclical but stable
Metal Consumption
Copper
yoy 10/09

Zinc

Lead

Aluminium

Tin

Nickel

8.5%

15.8%

7.9%

19.5% 15.0% 15.9%

yoy 11/10 CAGR 00-10 CAGR 10-15

3.5% 2.1% 4.7%

4.4% 2.9% 5.0%

5.3% 3.6% 4.5%

8.8% 5.1% 7.6% 2.4%

5.8% 2.7% 5.7%

Source: CRU

China is reliant on imports across a range of major commodities

50% 45% 40% 35% 30% 25% 20% 15%

Net imports/Demand

10%
5% 0% Aluminium
Source: CRU

Alumina

Bauxite

Fe Ore

Copper

Nickel
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But importantly China is self-sufficient in Aluminium & Steel

450

400
350 300 250 200 150 100 50 0 1000 900 800

Copper

800 700 600

Lead

400 350 300 250 200 150 100 50 0

Zinc

500
400 300 200 100 0

Nickel

800 700 600 500

Aluminium

900 800 700 600 500 400 300 200 100 0

Steel

700
600 500 400 300 200 100 0

400
300 200 100 0

Indexed Price
Source: CRU

Production

Consumption

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
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Business costs & 2010 average metal price

...at these prices just about every miner is making money
7500 6500 5500 4500 3500 2500 1500 500 -500 0 3000 2500 2000 1500 1500 1000 1000 500 0 0 500 1000 1500 2000 2500 5000 10000 5000 20000 15000 1500 1000 2500 2000 25000 3000

Copper US$/t
10000 15000

Nickel US$/t
0 200 400 600 800 1000 1200

500 0 0 400 350 10000

Aluminium US$/t
20000 30000 40000 50000

2500

2000

300 250 200

150

Lead US$/t

500 0

Zinc US$/t
0 1000 2000 3000 4000 5000 6000

100 50 0

Alumina US$/t
0 20000 40000 60000 80000 100000

10

Business costs $/t 2005 v 2010

Changes in the shape of the cost curve over time reflect changes in industry structure
3000 2500 2000 1500 10000 1000 5000 0 0 7000 6000 5000 4000 3000 2000 1000 0 0 2000 4000 6000 8000 10000 12000 14000 1500 1000 500 0 0 500 1000 1500 2000
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25000

Aluminium US$/t

20000

Nickel US$/t

15000

500
0 10000 20000 30000 40000

0 3000

200

400

600

800

1000

Copper US$/t

2500 2000

Lead US$/t

Costs $/t 2005

Costs $/t 2010

Linear Costs

Supply-side Challenges to buoy Long-Term prices

Influences vary from commodity to commodity
Mining houses cant do everything simultaneously adding to the challenge Room for smaller scale commodity-specific producers to add to contestable supply - Examples
Copper Nickel Iron Ore Coking Coal Zinc
12

We need more mines to meet consumption growth... Copper Example

(Mt contained Cu in concentrates and SXEW cathode)

32 28 24 20 16 12
Existing mines Firm projects Incremental Discoveries Prospects Probable projects Possible projects Production needed 2.67% per year (2010 -2035) Extra potential supply requirement = 13.1Mt New technology

8 2000 2003 2006 2009 2012 2015 2018 2021 2024 2027 2030 2033
World copper mine production, 2000-2035
13

Source: CRU

Miners are responding but it takes time

...on average it take 10 years to bring a project on stream
1200

1000

After Escondida, insufficient influx of new supply

Mining start-up gap of approx 10 years

Significant volumes from relatively new locations: Mongolia, Pakistan, Alaska

Production (000 t contained Cu)

800
Escondida Collahuasi
Oyu Tolgoi

600

400

200

Los Pelambres

Toromocho Tenke Fungurume

0 1988

1992

1996

2000

2004

2008

2012

2016

2020

Expected Year of production start-up

14 Source: CRU

Threat of several large-scale nickel projects...

New conventional* nickel operations and their start-up dates, 000 tonnes, 1995-2015
Production (000 t contained Ni)
Two medium sized operations start-up Mainly small-sized sulphide mines starting up over this 10-year period Voiseys Bay OncaPuma Barro Alto Talvivaara Raglan Ravensthorpe Many large-sized projects scheduled to start-up at the same time Ambatovy VNC Koniambo

Murrin Murrin

Expected year of production start-up

Data: CRU Analysis

*Excluding mines in the Philippines and Indonesia that supply the Chinese nickel pig iron sector.

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New mines help balance the market (copper example)

New copper capacity is coming on stream 2012/13

New capacity additions

delays are likely

The market will remain tight before we return back to defect after 2014
2012 2013 2014 2015 2016 2017 2018 2019 2020

Project pipeline delays are likely

16

Source: CRU

Copper development costs have increased substantially...

7,000 6,000
US$/tonne (2011$)

Cu Mining, Refining and Smelting

CRU estimates real development cost inflation of 13% pa over this time period

5,000 4,000 3,000

2,000
1,000 0 2004 2005 2006 2007 2008 2009 2010 2011
17

Source: CRU

Projects compete for capital

18 Source: BHP Billiton Half Year Results Presentation 16th Feb 2011

Iron Ore A great business to be in........

Global business cost curve for iron ore fines, (UScents/dmtu)

cents/ dmtu

...demand firmly at the high end of a steep cost curve providing strong pricing support & strong margins

M tonnes

Data: CRU iron ore cost model

Iron ore Demand: The original China story and still running
Iron ore 2,500 steel construction, transport, infrastructure....

Chinese percentage of global steel production rising

2,000
Million tonnes 1,500 1,000 500 -

Rest of World
Data: CRU Analysis

China

With China tracking towards more than 1 billion tonnes steel demand by 2020
Per capita crude steel equivalent consumption kg/head
Shanghai Tianjin Beijing Jiangsu Zhejiang Guangdong Inner Mongolia Shandong Liaoning Fujian Jilin Heilongjiang Inner Mongolia Hebei Hubei Chongqing Hunan Shaanxi Sichuan Jiangxi Guangxi Anhui Shanxi Hainan Xinjiang Qinghai Ningxia Tibet Yunnan Gansu Guizhou 0 Regional Kg/head 2009

39% POPULATION
610
341 Coastal Central

258

Western

39% POPULATION

National average 2020 = 794kg/head

Regional Kg/head 2020 1000 Coastal Central

700

22% POPULATION
100 200 300 400

National average 2009 = 450kg/head 500 600 700 800 900 1000

600

Western

1100

Source: CRU China

2 1

But is future steel demand-growth simply about Asia?

% of global growth in crude steel production 2007-2021

100%

80%

YES! >95%

60%

40%

20%
0% Western Europe Other Europe North America South America & CIS Africa Asia Oceania

-20%

Data: CRU Analysis

Longer term, continued and rapid industrialisation expected in China, India and other developing nations
X-axis: 2010 GDP/capita, US$000(1), Y-axis: 2010 Apparent finished steel consumption/capita, kg Bubble area proportional to 2010 apparent finished steel consumption
1,200 1,000 800 600 400 200 0 0 India 5
China Taiwan
Russia

South Korea

Saudi Arabia Turkey Russia Brazil

Italy Spain

Japan

Germany

Canada USA

UK

France

10

15

20

25

30

35

40

45

50
23

Data: International Monetary Fund, CRU Analysis Note: (1) current prices

Continued recovery in developed markets and further growth in emerging economies will see steel demand rise steadily
LHS: Industrial production by country, year-on-year change, % RHS: Global finished steel consumption, m tonnes
20% 15% 10% 5% 0% -5% -10% 2004 2005 2006 2007 2008 2009 2010 2011f 2012f 2013f 2014f 2015f Consumption India Global USA China Germany 2000 1800 1600 1400 1200 1000 800 600 400 200 0

Data: CRU Analysis, OE

Note: f forecast

Coking Coal - Chinese import potential is great, though Mongolia will

help fill the gap
Net imports/exports of metallurgical coal, China, 2003-2015
Imports from Mongolia Seaborne Imports Exports Net exports

20 10 0 -10 -20 -30 -40 -50 -60 -70 2003 2004 2010 2011 2012 2013 2014 2015
25

m tonnes

2005

2006

2007

2008

Data: CRU Analysis, GTIS

2009

Steel mills have been aggressive in acquiring captive coal supply, and this should continue
Recent upstream integration movements from steel mills
USA Essar JSW Steel Metinvest Mechel Severstal Trinity Coal WV ops United Coal Bluestone Coal PBS Coals 2010 2010 2009 2009 2008 2008 ArcelorMittal? POSCO? MMK ArcelorMittal Russia Belon 2009 Kuzbass mines 2008 Mongolia Tavan Tolgoi ? Australia Foxleigh Sutton Forest Maryborough Rockalds Richfield jv

ArcelorMittal Mid-Vol Coal

Nippon POSCO Xinyang Jindal Mozambique

2010 2010 2010 2010 2009 2009 2008 2008 2007

Nippon POSCO WISCO

Revuboe Revuboe Zambeze

2010 2010 2010

Baosteel Aquila JFE Steel Byerwen ArcelorMitta Macarthur l POSCO Bhushan Steel Cockatoo, Macarthur Bowen Energy

CSN
Tata Steel

Benga, etc.
Benga

2009
2007
26

ArcelorMittal CoAL (S Afr.) 2008

Data: CRU Analysis, TEX Report

But there are no perfect solutions for coking coal supply, and the market will be dependent on higher-risk areas
Russia (Kuzbass)
Quality questionable. Will continue to struggle with transport limitations, and focus on domestic market Western Canada High cost to develop, run coal operations Poland, E. Europe Deep reserves, poor geology, increased local demand.

Siberia (Elga deposit) Infrastructure lacking, transport costly, and export capacity uncertain

Western Ukraine
Size and quality of deposits largely unknown

Mongolia

Appalachia

Dwindling base of quality reserves, high operating costs, decreasing yields, increased regulation

Political risks, no infrastructure, and limited seaborne export options Indonesia Limited current production. Development of hard coal deposits has proven difficult logistically

Mozambique Primary seaborne supply sources Other important suppliers Prospective major projects Good reserves and mining conditions, but limited infrastructure, and high ash

Central Queensland Costs rising, fewer development opportunities though substantial reserve base remains

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Commodity Price Climate Change: Zinc to lead Global Warming in Prices Even cooling commodities will be highly profitable
CRU Commodity Price Climatic Zones Whats hot to 2015?

Torrid

Zinc (2015, not before)

Warm Temperate

Uranium, Tin, Nickel, Molybdenum, Alumina, Lead, Copper, Aluminium, Manganese, Cobalt, Vanadium

Cool Temperate

Platinum, Iron Ore, Palladium, Gold

Frigid

Phosphate Rock, Coking Coal, Met Coke, Ammonia, Urea, Silver, Sulphur, Sulphuric Acid

* Relative forecast average 2015 prices versus June 1st 2011 e as a base level

Thank you
Dr Allan Trench Associate Consultant, CRU Strategies

Allan.Trench@crugroup.com
Philip Sewell Business Development Manager, Australasia Philip.Sewell@crugroup.com

With Thanks to Peter Ghilchik

CRU International Ltd 31 Mount Pleasant, London WC1X 0AD Phone: +44 20 7903 2208

Peter.Ghilchik@crugroup.com

http://www.crugroup.com
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