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CHINA ALUMINUM INDUSTRY REPORT---APRIL 2008

Primary Aluminum and Aluminum Alloys Current estimates have the losses in output to China’s primary aluminum industry resulting from the snow emergency in early 2008 amounting to 470,000 MT. As of February 2008 China became a net importer of primary aluminum. According to Chinese Customs statistics, in February 2008 Chinese companies exported a total of 2372 MT of primary aluminum, a 90% decrease and imported a total of 12712 MT, an increase of 197%. In late March 2008 the China Electric Power Investment Group Co., the Yellow River, Upper Reaches Hydropower Development LLC, the Qingtongxia Aluminum Industry Joint Stock Company and the Xian Maike Metals International Group Co., Ltd. entered into the {Ningdong (Eastern Ningxia) Coal/Power/Aluminum Project Strategic Cooperation Framework Agreement} and the {Ningdong (Eastern Ningxia) Coal/Power/Aluminum Project Investment Agreement}. The total investment of these projects is 69.5 billion Yuan. A feasibility study for these projects already has been completed and a ceremony marking the start of construction on the Qingtongxia Group/Xian Maike Group’s project is expected soon. A patent for a method of starting and stopping primary aluminum pot-lines without stopping power flows was obtained from the National Bureau of Intellectual Property by the Chief Engineer for the Henan Zongfu Industries Joint Stock Co., Ltd., the chief advisor for Zhengzhou Zhongshi Saier Science and Technology Co., Ltd. and others. On April 7, 2008 the vice-chairman of the China Non-Ferrous Metals Industry Association reported that China’s primary aluminum industry’s energy consumption in 2007 showed a clear decrease. For all of 2007, China’s primary aluminum industry cumulatively reduced energy consumption by 2.3 billion Kwh. On average the Chinese primary aluminum industry reduced its energy consumption per MT of primary aluminum produced by 183 Kwh/MT in 2007. Having already completely decommissioned its Soderberg smelting capacity, the Chinese aluminum smelting industry is now gradually closing a portion of the pre-baked smelting technology where the energy consumption is very high. To date, 160 KA or greater, large-scale pre-baked smelters now account for 86% of all aluminum smelters in China. Many Chinese companies now are directly using liquid casting to produce aluminum alloy billet and aluminum ingot; this technique can save approximately 835 Kwh/MT. Alumina and Bauxite

In late March the National Development and Reform Commission approved Chalco’s 800,000 tpy alumina project which will be built in Lvran city, Xing County, Shanxi Province. Xing County in Shanxi Province has approximately 130 million MT of proven bauxite reserves. In January 2008 China imported a total of 2.10 million MT of bauxite, equivalent to 13% of the world’s total. In February 2008 Chinese companies imported a total of 289,500 MT of alumina, a decline of 43% compared with February 2007. In February 2008, Chinese companies imported a total of 1.9 million MT of bauxite, an 80% increase compared with February 2007. The continuing ‘rationalization’ of the Henan Province mining industry has brought about a concentration in the Henan Province bauxite mining industry. Presently the four largest bauxite mining companies control 90% of bauxite resources in Henan Province. Law and Policies Affecting the Chinese Aluminum Industry On April 5, 2008 the Ministry of Commerce and Chinese Customs jointly issued Order #22 of 2008, which promulgates the latest catalogue of prohibited processing trade. In all, the catalogue includes 1816 Customs classifications of prohibited products for processing trade. Among those are bauxite ore and concentrate (except for non-primary aluminum smelting or alumina refining purposes), alumina (except for use in industries other than the primary aluminum industry) imported for processing trade. China's Aluminum Fabrication Industry On April 1, 2008 the city of Meishan, Sichuan Province entered into an agreement with the Sichuan Qimei Aluminum Industry Co., Ltd. with respect to a 50 million Yuan investment to build a 20,000 tpy aluminum profiles project. The project will be developed in two phases, with construction on the first phase beginning in April 2008 and being completed in July 2008. The project is expected to produce 400 million/year in sales and 15 million in taxable income. Construction is proceeding smoothly on the 3.78 billion Yuan aluminum fabrication “base” project being developed by the Chalco’s Northwest Aluminum Processing Company. The project, which had been in planning since April 2007, officially commenced construction on March 1, 2008. The two phase project will include a 1.5 billion Yuan, 50,000 tpy aluminum foil project, which will go into operation at the end of 2009 and a 200,000 tpy aluminum sheet and strip project, which will go into operation at the end of 2010. When the new project is finished, the capacity of the Northwest Aluminum Processing Company will have grown from 100,000 tpy at present to 300,000 tpy and the value of the company’s fixed assets will have grown from 1.4 billion Yuan to 5 billion Yuan. Chalco is now developing what will be Asia’s largest “Double 0” aluminum foil mill in Chengdu, Sichuan Province. The first phase of the 7.3 billion Yuan project will get under construction by September 2008. The entire project will be completed in three years. “Double 0” foil (0.00xx mm) foil is widely used in packaging, electronics, construction and machinery manufacturing. The city of Xian, Shaanxi Province has discovered and recently publicized a group of substandard aluminum alloy building profiles that were being sold in markets in Xian.

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Beijing is now considering whether to reduce VAT rebates on aluminum tube, aluminum sheet and aluminum strip from 11-13% to 5% as of June 2008. There are also indications that the VAT rebate on aluminum foil will decrease to 8-11% from 13% and that VAT rebates on semi-finished goods are likely to be completely eliminated by December 2008. According to the manager of an aluminum processing company, if VAT rebates are reduced, exports of fabricated aluminum products are likely to decline 20-30%. The Chinese all aluminum can industry is expanding. The Taipingyang (Pacific) Can Manufacturing Company, since acquiring the Zhangzhou International Aluminum Container Co., Ltd., will be increasing its manufacturing capacity to 500 million cans/annum and decreasing the thickness of the cans that it manufactures from 0.3mm to 0.28mm. In addition the Beijing Taipingyang (Pacific) Can Manufacturing Company is now building a new 500 million can/year production line. The Jianlibao Group is now building a can line (100ml to 250ml), having 300 million cans/year in capacity. And the Baoweng Can Manufacturing Company, which is part of Bao Steel, is now building a 500 million can/year steel pop-top can manufacturing facility in Zunhua city. In early April China’s only sanitary aluminum bottle cap manufacturing facility, which is dedicated to alcohol packaging, was completed in Shangdong Province at the Lipeng Packaging Company. The 2008 National Aluminum Doors, Windows and Curtain Wall Industry Annual Meeting and Aluminum Doors, Windows and Curtain Wall New Products Exhibition convened in Guangzhou on March 18-20, 2008. One of the central focuses of this year’s annual meeting was discussion about the impending promulgation of the {Building Energy Conservation Regulations}. Energy consumption by buildings in China account for more than 30% of all energy consumption in China and 40% of that energy consumption is related to windows and doors. At the annual meeting, it was clear that the Chinese aluminum extrusion industry is very cognizant of the new demands, which the {Building Energy Conservation Regulations} will place on the industry and the majority of companies already have environmentally friendly, energy conserving brands available. The 2008 Annual Meeting attracted more than 230 companies, a 25% increase over last year’s meeting and exhibition. Xingfa Aluminum, the Guangdong Province extruder which just went public in Hong Kong, now estimates that its new 498,000 square meter facility in Sanshui, Guangdong will be completed before June 2009. With the completion of the new facility in Sanshui, Xingfa Aluminum will have a total of 150,000 tpy of extrusion capability as of 2010. In 2007 the company’s extrusion capacity was 113,000 tpy and it produced a total of 92,000 MT of extrusion products; Xingfa Aluminum’s sales in 2007 totaled 89,000 MT. Xingfa Aluminum is China’s leading company in providing aluminum extrusions for the insulated container and radiator manufacturing industries. International Aluminum Trade and Investment The China Non-Ferrous Metals Industry Association held consultations with their counterparts in Turkey March 9-15, 2008 to address the rapid increase in exports of Chinese aluminum sheet, strip and foil to Turkey. The Turkish Aluminum Industry Association has expressed ‘extreme dissatisfaction’ with the level of imports of Chinese aluminum products and has demanded that there be an immediate limitation of the amount of exports to Turkey. The CNMA has issued a notice to aluminum industry enterprises that the association will temporarily stop issuing certifications with respect to large quantities of exports to Turkey of low value-added aluminum sheet, strip and foil. In 2007 Chinese companies exported a total of 19528 MT of aluminum sheet, strip and foil products to Turkey; this was a

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65.5% increase y-o-y. Of the total sheet, strip and foil exports from China to Turkey in 2007, foil exports accounted for 11,194 MT, an 117.2% increase y-o-y; exports of aluminum foil to Turkey accounted for 3.4% of all exports of Chinese aluminum foil and the volume of foil exports to Turkey was the 10th largest Chinese foil exports worldwide. In 2007, Chinese exports to Turkey of aluminum sheet and strip totaled 8334 MT, a 25.5% increase y-o-y; this level of exports of aluminum sheet and strip accounted for 1.8% of all Chinese exports of aluminum sheet and strip in 2007. Despite having eliminated the 8-11% VAT rebate on nonalloy manufactured aluminum rods in July 2007, manufactured aluminum product exports still increased by 50% to 1.85 million MT in 2007, and in the first two months of 2008 exports of manufactured aluminum products continued to increase by another 22% to 310,000 MT. In addition to Turkey, Chinese foil exports to certain other European countries increased rapidly in 2007. Chinese exports of foil to Germany in 2007 totaled 13,812 MT, a 631.6% increase y-o-y; Chinese foil exports to Holland totaled 11,923 MT, a 146% increase y-o-y and Chinese foil exports to Italy totaled 8557 MT, a 272.9% increase y-o-y. Energy and the Aluminum Industry Forty percent of China’s total aluminum smelting capacity (5.54 million tpy) is concentrated in the following six provinces: Shandong, Inner Mongolia, Shangxi, Gansu, Ningxia and Jiangsu. Though there should be sufficient power in these six provinces, companies in Inner Mongolia, Shanxi and Shandong Provinces will reduce output to improve air quality around Beijing in advance of the Summer Olympics, though the extent of production slowdowns are not now known publicly. Consequently it is not clear what impact these policies will have on output in 2008. Another 40% of China’s total output of primary aluminum (or 5.59 million tpy) is located in the following five provinces and cities: Henan, Qingdao, Guangxi, Hubei and Sichuan. With the exception of Hunan Province, which was affected by the snow emergency, but which is expected to have power output increase steadily in the second quarter of 2008, the power supply in these areas is expected to be sufficient. Because most of the aluminum smelters in Hunan Province have their own captive power supply, it is not expected that output will be lower than last year in this second batch of regions. The effect of the snow emergency was greatest in Guizhou and Yunnan Provinces and as a result power supply in those areas are expected to be tight throughout 2008; the primary aluminum output of these two provinces totals 1.429 million tpy or 10.3% of China’s total primary aluminum output. Guangdong Province accounts for 40% of China’s consumption of aluminum with the large number of aluminum extruders and other fabricators. Manufacturers estimate that large plants have done without power on average one day per week since the snow emergency and small to medium sized aluminum processors have gone without power for even longer periods each week; this will lead to a total reduction in consumption of aluminum in China in 2008, but there are no solid statistics at present to substantiate what effect will these power shortages have on consumption in 2008. Other factors that are affecting power supply and aluminum output in 2008 include the ability of coal to be produced and to reach power plants, due to the snow emergency; this may mean insufficient coal for Shangxi, Hebei, Shandong, Henan, Hubei and Sichuan provinces. In part because of the damage done to the power grid as a result of the snow emergency, in 2008 there will be 300 billion Yuan in funds allocated for improvements to the power grid, a much higher amount than the 55 billion Yuan that was spent on power grid upgrades in 2007; this is a good sign for consumption of aluminum in China as aluminum accounts for 11% of the power industries’ expenditures. The February 22, 2008 Notice from the National Development and Reform Commission concerning the elimination of preferential power rates for primary aluminum smelters (among other industries) details the pace of reduction and eventual elimination of preferential power rates by province and region. Because there is a multiplicity of preferential rates put in place by a multiplicity of regions in China, the undoing of these preferential rates is being accomplished in stages from December 25, 2007 through January 1, 2010. According to the Notice the largest adjustments in power rates are in the

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following provinces: Yunnan (12.75%), Shandong (27.75%), Henan (13.33%), Guangxi (20.41%) and Liaoning (24.01%). The companies that will be most affected by rate increases are said to be Yunnan Aluminum and Chalco companies; Chalco’s Shandong Aluminum, Fushun Aluminum and Pingguo Aluminum are expected to experience 20% or greater increases in power rates. And because most of Yunnan Aluminum’s facilities rely on power from the power grid, the elimination of a 0.432 Yuan/Kwh preference will mean a 12.75% increase for Yunnan Aluminum. The companies that will experience the least repercussions from the elimination of preferential power rates are those that have developed captive power plants or otherwise have integrated power generation and aluminum smelting. These companies include Nanshan Aluminum Industry, Zhongfu Aluminum Industry and Guanlv Aluminum Joint Stock Co. Aluminum Consumption In 2005-2006 period Chinese companies added a total of 3.9 million tpy of new alumina refining capacity and 760,000 tpy of new primary aluminum smelting capacity. The capacity increases lead to increases in output of alumina and primary aluminum in 2007; for all of 2007 primary aluminum output increased 33.8% y-o-y to 12.28 million MT. In the first two months of 2008 the rate of growth of primary aluminum output had shrunk to 6.6% from an average of 33% in 2007. In the first several months of 2008 it has become clear that the rate of growth of consumption of aluminum in China is now clearly exceeding the rate of growth of output of primary aluminum; what’s more the rate of growth of consumption of aluminum in China is now much larger than the rate of growth of China’s GDP. Publicly Traded Chinese Aluminum Companies Of the ten Chinese aluminum industry companies whose shares are listed on the “A” share market in China, six already have issued annual reports for 2007. These six companies collectively reported net profits (excluding non-recurring costs) totaling 13.086 billion Yuan, a 3.32% increase y-o-y; the profit rate of these six companies for their core businesses was 29.82%, which was 6.22% less than the profit rate of these six companies in 2006. One of the core reasons for the decline in net profit margins among these six aluminum industry companies is that net profits in Chalco’s alumina business declined substantially (down 45.77%). A second factor is the steady decline in the price of primary aluminum from ~$2800/MT in July 2007 to $2400/MT as of the end of 2007; consequently, in the fourth quarter of 2007 the aluminum industry’s net profits declined by 17.92% compared with the year before; income in the fourth quarter in the aluminum industry’s core businesses totaled 27.8 billion Yuan, 11.23% higher than in the third quarter of 2007, while expenses increased 17.47% compared with the year ago period (totaling 22.5 billion Yuan). Yunnan Aluminum stated in its annual report that profits declined in the fourth quarter of 2007 as prices declined both domestically and in international markets, domestic output of primary aluminum continued to increase and alumina prices rose. Factors that influenced the profitability of the Chinese fabricated aluminum products industry included changes (for the worse) in power prices and tariff rates, though the higher value-added fabricated aluminum companies showed more significant increases in profitability than the Chinese aluminum companies whose primary business was smelting or refining. A decline in exports contributed to overall declines in profitability of the Chinese primary aluminum industry; for example Jiaozuo Wanfang Aluminum reported foreign income within its core businesses totaling 333 million Yuan, a 44.02% decreased compared with export income in 2006. Likewise Yunnan Aluminum’s export income within its core businesses totaled 346 million Yuan in 2007, a 119.94% decline compared with 2006. On the other hand Xinjiang Zhonghe, whose core products included high purity aluminum, electronics aluminum foil and other aluminum foil products, had export income of 229 million Yuan, an increase over 2006 of 204.82%. Net income was the highest for Xinjiang Zhonghe’s electronics aluminum

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foil (42.81%), Nanshan Aluminum Industry’s alumina (40.47%) and Xinjiang Zhonghe’s high purity aluminum (29.11%); this was clearly higher than the 17% average profit margin for the primary aluminum companies whose shares are public traded. In response to these 2007 results the Chinese aluminum companies whose primary business is smelting are planning to adjust the composition of their products with a greater proportion of output coming from higher valued added products. Zhongfu Industries, for example, has stated that it will change the composition of its output; Zhongfu Industries presently is constructing a 300,000 tpy special aluminum alloy aluminum materials project; likewise Yunnan aluminum is constructing an 80,000 tpy high strength wide aluminum alloy sheet and strip mill and a 40,000 tpy aluminum alloy round pole project.

Related Industries and the Chinese Economy According to the China Electric Power Enterprises Joint Committee, the total quantity of electric power that was generated in China in 2007 was 3.2559 trillion Kwh, a 14.4% increase over total output of electric in China in 2006. In 2007 total consumption of electric power was 3.2458 trillion Kwh, a 14.42% increase y-o-y. Because of the snow emergency at the beginning of 2008, which damaged both electric transmission lines and coal supply facilities, there was an estimated 39,000 MW of power generating capacity in China that closed and 1.6 million tpy of metals smelting capacity in Guizhou, Hunan, Sichuan and Shanxi provinces also temporarily closed. The China Non-Ferrous Metals Industry Association released output statistics in late March 2008 which indicated that for the first time ever output of the ten non-ferrous metals exceeded 20 million MT in 2007; the 23.6052 million MT of non-ferrous metals which were produced in China in 2007 represented a 23.4% increase over 2006 cumulative output. In 2007 the Chinese non-ferrous metals output was the world’s largest for the sixth consecutive year. Seventy-two percent of the total increase in output of non-ferrous metals was accounted for by the 3.2 million MT increase in primary aluminum output in 2007. In 2007 there were 8 provinces where output of non-ferrous metals exceeded 1 million MT, including Henan Province, with output of 4.28 million MT, accounted for 18% of the total output of all non-ferrous metals in 2007. According to the chairman of the CNMA, while output increased in 2007, efficiency also improved. In 2007, for example, energy consumption per MT of primary aluminum produced declined by 183 Kwh/MT, which cumulatively saved a total of 2.3 billion Kwh of electric. In February 2008 China’s producer price index (PPI) increased 6% and the increase was affected to a large extent by rising energy prices.

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