Global Mineral Commodity Prices: Perspectives and Trends

17 th Brazilian Mining Congress and EXPOSIBRAM 2017 Global Mineral Commodity Prices: Perspectives and Trends When Will the Market Hit Deficit: Risks, Opportunities, China s Changing Consumption Pattern, and Price Forecasts September 19, 2017 John Mothersole Director, IHS Markit Pricing and Purchasing Service +1 202 481 9227 John.mothersole@ihsmarkit.com

2 Agenda Base metal markets > Top line global GDP growth and metal demand > A look a production growth > Price forecasts Headwinds to a sustained price recovery > Tightening financial markets > The changing character of Chinese growth Data Supplement > Forecasts of industrial production and fixed investment > Snapshots of aluminum, copper, nickel and zinc markets

3 Signs of life in base metals Market has moved into deficit > A synchronized global expansion signals healthy demand growth > Plus years of underinvestment are tightening conditions from the supply-side But we see prices supported rather than a sustained rally Headwinds that will check a strong continuing rally > Slower growth in China > Normalization of financial markets > Don t discount the influence of lower oil prices in 2018 Prices advance modestly over nearterm. Real (inflation adjusted) prices remain fairly flat over the long-term 5,0 4,5 4,0 3,5 3,0 2,5 2,0 1,5 2012 2014 2016 2018 2020 IHS Markit Materials Price Index (all Commodities), 2002w1=1.0, left LME Base Metals Price Index, 2012:1=1.0, right 1,1 1,0 0,9 0,8 0,7 0,6 0,5

4 When will the market hit deficit? It already has Global base metal market balances, thousands of metric tons 4.000 3.000 2.000 1.000 0 (1.000) (2.000) 2001 2005 2009 2013 2017 Sources: WBMS, ICSG, ILZSG LME Six Less Aluminum

5 Metals demand looks good Global new orders diffusion indexes (>50= expanding, 50< contracting) New orders index, steel consuming industries, 3 month moving average 56 New orders index, aluminum and copper consuming industries, 3 month moving average 56 54 54 52 52 50 50 48 48 46 2012 2013 2014 2015 2016 2017 46 2012 2013 2014 2015 2016 2017 Source: IHS Markit 2017 IHS Source: IHS Markit Aluminum Copper 2017 IHS

6 Global growth is healthy and is now synchronized GDP (percent change) 2016 2017 2018 2019 2020 2021-2027 World 2.5 3.1 3.2 3.1 3.1 3.1 Argentina -2.2 2.3 2.9 3.3 3.1 2.6 Brazil -3.6 0.4 2.1 3.2 3.8 3.2 China 6.7 6.8 6.5 6.2 6.0 5.7 Eurozone 1.7 2.1 1.9 1.7 1.6 1.5 India 7.1 7.1 7.5 7.6 7.6 6.6 Japan 1.0 1.4 1.0 0.7 0.2 1.0 Mexico 2.0 2.1 2.2 2.5 2.5 2.8 Russia -0.4 1.6 2.0 2.1 2.1 1.9 United States 1.5 2.1 2.7 2.4 2.1 1.9

7 Years of weak investment have slowed base metals production growth 40 30 20 10 0-10 -20 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 8 6 4 2 0-2 -4 Global Gross Fixed Capital Formation, Metals and Metal Mining, percent change, left Change in Global Base Metal Production, millions of metric tons, right

8 LME Price forecasts (US$ per metric ton) Aluminum Copper Nickel Lead Tin Zinc 2017Q2 1,910 5,663 9,248 2,164 19,967 2,598 2017Q3 2,005 6,385 10,323 2,315 20,412 2,938 2017Q4 2,118 6,459 11,350 2,260 20,523 2,823 2018Q1 2,111 6,337 11,998 2,239 20,721 2,733 2018Q2 2,026 6,151 11,841 2,204 20,530 2,622 2018Q3 2,047 6,078 12,156 2,177 20,699 2,555 2018Q4 2,108 6,130 12,677 2,184 20,750 2,566

9 Financial markets are normalizing in the developed economies Policy interest rates, percent, end of quarter 6 5 4 3 2 1 0-1 2007 2009 2011 2013 2015 2017 2019 United States Eurozone Japan United Kingdom Source: IHS Markit 2017 IHS Markit 9

10 The financialization of base metals: has it peaked? If so, is the change cyclical or structural? LME, SHFE, CME Metals Trading Volume/Physical Consumption 60 50 SHFE introduces Cu contract in 1997, Al contract in Dec 03 40 30 20? 10 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

11 China s debt level does not resemble other middle income countries and has grown alarmingly Total credit to non-financial sector, % of GDP 325 Total credit to non-financial sector, % of GDP 325 250 250 175 2005 2010 175 2005 2010 2016 2016 100 100 25 U.S. Eurozone China 25 Argentina Brazil Mexico Source: Bank of International Settlements Source: Bank of International Settlements

12 Credit expansion in China is unsustainable and is a yellow flag even for near-term growth Credit to GDP gaps, percent 40 30 20 10 0-10 -20-40 -35-30 -25-20 -15-10 -5 0 5 10 15 20 25 30 35 40 Quarters before and after gap peak 120 90 60 30 0-30 -60 Source: Bank of International Settlements Argentina 94Q4-12Q2 Greece 98Q3-16Q4 China 05Q1-16Q4 Ireland 00Q1-16Q4, right

13 The intriguing correlation between Chinese money supply growth and base metal prices Year over year change 40 100 80 30 60 40 20 20 0 10-20 -40 0 2008 2010 2012 2014 2016 2018 2020 Money Supply (M1), China, left LME Price Index, right -60 Source: IHS Markit

14 Imbalances in the Chinese economy also suggest that base metal consumption growth has hit an inflection point Per capita consumption of base metals, in pounds 120 100 80 60 40 20 0 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018 2022 Sources: WBMS, ICSG, ILZSG, IHS Markit China Japan

15 Which has implications for global long-term base metal demand growth 10 8 6 4 Increases in consumption will peak early next decade and are not likely not match growth seen over the last 16 years 2 0-2 -4 2000 2004 2008 2012 2016 2020 2024 Change in Chinese consumption, millions of metric tons Change in global consumption, millions of metric tons

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17 Supplemental Data and Forecasts Forecasts of global industrial production and fixed investment Snapshot views of individual metals Policy environment -- Fraser Institute data

18 Industrial production Industrial Production (percent change) 2016 2017 2018 2019 2020 2021-2027 World 1.3 2.9 3.1 3.1 2.7 2.7 Argentina -4.5 2.8 2.0 1.8 2.0 2.0 Brazil -6.8 1.4 1.9 2.5 2.9 2.9 China 6.1 6.4 5.7 5.5 5.4 5.3 Eurozone 1.5 2.3 2.3 1.8 1.6 1.4 India 5.8 2.3 5.8 6.8 7.1 7.3 Japan -0.2 4.2 2.0 2.2-1.0 0.9 Mexico -0.1 0.8 1.9 1.9 2.0 2.1 Russia 1.3 2.9 2.2 2.3 2.2 2.0 United States -1.2 1.8 2.8 2.8 1.9 1.5

19 Real fixed investment Real Fixed Investment (percent change) 2016 2017 2018 2019 2020 2021-2027 World 1.7 3.2 3.8 4.2 3.7 3.3 Argentina -5.0 10.7 3.6 4.8 3.3 3.4 Brazil -10.3-3.3 3.6 4.6 4.6 3.4 China 3.6 4.8 5.3 5.7 5.0 4.3 Eurozone 4.1 2.2 2.5 2.3 2.2 1.9 India 2.4 1.0 7.6 9.8 10.2 7.3 Japan 1.0 2.9 1.6 3.0 0.0 0.5 Mexico 0.1-0.9 1.6 3.6 2.7 3.0 Russia -2.5 1.2 2.9 3.9 3.4 2.6 United States 0.6 3.3 3.5 3.3 2.6 2.1

20 Aluminum: How disciplined are Chinese producers? 2017Q4 PRICES Higher Flat SUPPLY DEMAND Tighter on production cuts Slightly stronger LME Aluminum, $/metric ton 2.200 2.000 2018Q4 Tighter Stronger Demand > Global primary consumption will growth by more than 3.0% in 2017 and by 2.5% in 2018. Assuming discipline among producers, this growth should be enough to tighten the market over the next four quarters. Supply > Capacity is ample with inventory still high. Chinese production (the root cause of the industry s problems) is being cut. How much illegal capacity comes off-line which isn t offset by new starts, will determine how high prices move. Prices above $2,100/metric do incentivize production. 1.800 1.600 1.400 2015 2016 2017 2018 2019 Source: IHS Markit 2017 IHS Prices > LME prices have pushed above $2,000/metric ton on news that Chinese production is being cut. Prices will remain near or above $2,100 per metric depending on how much Chinese production remains off-line and how much non-chinese capacity comes back into production.

2 1 Copper: Feeding frenzy 2017Q4 2018Q4 PRICES Lower Rising slowly SUPPLY Neutral Neutral DEMAND Stronger Slightly stronger LME Copper, $/metric ton 6.600 6.200 5.800 5.400 5.000 4.600 2015 2016 2017 2018 2019 Source: IHS Markit 2017 IHS Demand > Consumption growth is forecast to be near 3% in both 2017 and 2018. We do not see an acceleration in Chinese consumption growth. We do have concerns about 2018 US consumption growth. Investors are clearly adding momentum now as is a softer US$ Supply > Q1 disruptions have been resolved. Concerns over fresh disruptions seem over blown. Mine production growth will slow but not alarmingly. We still see a relatively balanced market in 2018 Prices > Prices have cleared $6,900/mt though the market is looking overbought. Watch inventory and Chinese imports they will tell the tale. We avoid buys at current prices and await a pull back. We see prices closer to $6,200 rather than $7,000/mt in 2018H2

22 Nickel: Prices need to move higher 2017Q4 2018Q4 Demand PRICES Higher Higher SUPPLY Ample Tighter DEMAND LME Nickel, $/metric ton 15.000 14.000 13.000 12.000 11.000 10.000 9.000 8.000 2015 2016 2017 2018 2019 Source: IHS Markit Slightly Stronger Slightly stronger 2017 IHS > Chinese stainless production remains strong and holds the key to the forecast. Is it sustainable or will slowing stainless production growth undercut improving fundamentals that promise to lift prices? Supply > Inventory remains high but mine production growth is (finally) beginning to slow with refined production now falling. The change should eventually work down inventory and support higher prices. Philippine exports are a wild card. Prices > Market s shift into deficit and the threat to Philippine exports has lifted prices above $12,000/mt. On a cost basis we believe prices need to move above $13,000.

23 Zinc: Deficit closing 2017Q4 2018Q4 PRICES Slightly Lower Lower SUPPLY Tight Less Tight DEMAND Neutral Slightly Stronger LME Zinc, $/metric ton 3.100 2.700 2.300 1.900 1.500 2015 2016 2017 2018 2019 Source: IHS Markit 2017 IHS Demand > Decelerating Chinese consumption growth remains a headwind to zinc prices. Chinese growth look weak thus far in 2017 and may remain flat for the year. > Global consumption ex-china grew by 1.4% year on year (y/y) in June and may grow as much as 4.0% in 2017.Global consumption growth looks to remain under 1.0%. > Global consumption growth looks better in 2018 with growth nearer 3.0%. Supply > Zinc concentrate supply remains tight in the immediate months ahead. > In June, global primary mine production was up 2.5% year on year. Mines in Canada, Peru and China are ramping-up. > Growing mine production stabilizes inventory in the next 12-months. Prices > Zinc's deficit shrinks to 160,000 metric tons in 2017 and moves closer to balance in 2018. Prices retreat to $2,600/mt average in 2018.

24 Climate for the mining industry globally has improved since 2007 and suggests a better investment environment in the near future Fraser Institute Global Policy Perception Index (Adjusted) 1,06 1,04 1,02 1,00 0,98 0,96 0,94 Source: Fraser Institute 2001 2003 2005 2007 2009 2011 2013 2015 Policy Perception Index is composed of survey responses to factors that affect investment decisions: administration of [industry] regulations, environmental and labor regulations, regulatory duplication, legal and tax regime, uncertainty concerning protected areas and dispute land claims, infrastructure, security, trade barriers, institutional stability, geological quality, and availability of skilled labor.

25 Fraser Institute Policy Perception Index for key South American countries Brazil 80 90 Argentina 80 80 70 60 50 40 30 80 70 60 70 60 50 40 30 70 60 50 40 20 2001 2003 2005 2007 2009 2011 2013 2015 Source: Fraser Institute 50 20 2001 2003 2005 2007 2009 2011 2013 2015 Source: Fraser Institue 30 Chile 90 94 Peru 80 78 80 70 60 90 86 82 78 70 60 50 40 30 74 70 66 62 58 50 2001 2003 2005 2007 2009 2011 2013 2015 Source: Fraser Institute 74 20 2001 2003 2005 2007 2009 2011 2013 2015 Source: Fraser Institute 54 Index methodology changes in 2015