Global Aluminium Market Overview 2016

Terece Muir Senior Consultant, CRU Analysis Editor of CRU Carbon Products Monitor and Market Outlook

Presentation structure

1

Economic overview

2

LME price developments

3

Aluminium supply and demand

4

Premiums and LME price forecasts

5

Summary

2

Dollar and oil price boost, a positive for the LME price US dollar index, Brent crude oil price, fake semis export arbitrage and LME stocks US dollar index

Brent crude oil price ($/t bbl Active Contract BBG)

123 122 121 120 119

50 45 40

Aug-16

Jul-16

Jun-16

Sep-16 Sep-16

Sep-16

Aug-16

Jul-16

Jun-16

May-16

Apr-16

Mar-16

-150

Aug-16

-100

Jul-16

-50

Jun-16

0

Visible Stocks

May-16

LME stocks, Mt

50

3.0 2.9 2.8 2.7 2.6 2.5 2.4 2.3 2.2 2.1 2.0 Apr-16

Arbitrage

May-16

Mar-16

Sep-16

Aug-16

Jul-16

Jun-16

May-16

Apr-16

Mar-16 100

Apr-16

35

118

Fake semis export arbitrage, $/t

Brent crude oil

55

Mar-16

Trade Weighted US Dollar Index: Broad

124

Data: CRU, LME, SHFE, Bloomberg Note: *Arbitrage is calculated on fake semis for re-melt to Asia incorporating VAT

3

LME price movements reflect SHFE price movements LME 3-month aluminium price and SHFE cash aluminium price Rising oil prices 1,800

13,500

12,500

1,600

11,500

1,500

10,500

SHFE cash aluminium price (RMB/t)

1,700

Falling LME stocks, neutral arbitrage

LME 3-month alumininium price, $/t (LHS)

Oct-16

Sep-16

Aug-16

Jul-16

Jun-16

May-16

Apr-16

Mar-16

Feb-16

Jan-16

Dec-15

Dec-15

9,500 Nov-15

1,400 Oct-15

LME 3-month aluminium price, $/t

Strengthening US dollar

SHFE cash aluminium price, RMB/t (RHS) Data: LME, SHFE

4

Risks mount as China’s IP and GDP growth slows

10.0

10.0

8.0

8.0

6.0

6.0

% year-on-year change

% year-on-year change

Chinese and developed economies IP and GDP year-on-year change

4.0

2.0

0.0

4.0

2.0

0.0 2013

2014

2015

2016

-2.0

2017

2013

2014

2015

2016

2017

-2.0 Chinese IP Apr '16

Chinese GDP Apr '16

Chinese IP Jul '16

Chinese GDP Jul '16

Developed economies IP Apr '16

Developed economies GDP Apr '16

Developed economies IP Jul '16

Developed economies GDP Jul '16

5

Transport sector to underpin aluminium demand growth Key aluminium demand countries and regions, ‘000 tonnes

Western Europe

1,850 1,750 1,650 1,550 1,450 Q3 2017

8,000 7,000

1,450

India

6,000

600

630

400

590 Q3 2017

Q1 2017

Q3 2016

550

Q1 2016

450 Q3 2017

670

Q1 2017

500

Q1 2016

Q3 2017

Q1 2017

Q3 2016

Q1 2016

1,150

Q3 2016

Middle East

710

Q1 2016

1,250

Q3 2017

5,000

550

Q1 2017

1,350

Q3 2016

1,550

Q1 2017

USA

Q3 2016

Q1 2016

China

9,000

6

China and India continue to drive global aluminium production growth Index of aluminium production: Q1 2016 = 100%

India: The first 312,500tpy potline at the 1.25Mtpy Jharsuguda 2 brownfield project started up in April

140%

China: Shandong, Inner Mongolia and Xinjiang projects to drive growth

135% 130%

Canada: Kitimat operating at full production capacity and Laterriere expansion at 2017 end

125% 120%

Bahrain: Alba is on schedule to start up its 540,000tpy line 6 expansion in early 2019

115%

Iran: Greenfield 330,000tpy Salco-Asalouyeh and 350,000tpy Kalco projects factored in from 2019

110% 105%

Russia: Boguchansky’s first phase 147,000 tpy hits full production; risk of production cuts in 2017

100%

Western Europe: 75,000tpy Karmoy pilot plant to start in 2017; Spanish and UK smelters at risk

95%

China

India

Middle East

Western Europe

Canada

Australasia

Q4 2017

Q3 2017

Q2 2017

Q1 2017

Q4 2016

Q3 2016

Q2 2016

Q1 2016

90%

Australia: Future of Tiwai Point and Portland smelters to be decided in H2 2016

Russia

Data: CRU

7

Chinese aluminium production growth to outpace demand growth Quarterly aluminium production and demand growth Growth in world excluding China, % y-o-y Production

Growth in China, % y-o-y Production

Consumption

4%

Consumption

16%

14.0%

3.3% 3.2% 3%

3.0%

3.2%

3.0%

3.2%

3.2% 12%

2.9%

2.8%

11.1% 2.6%

2.3% 2.2% 2%

1.9%

8.7% 8%

1.9%

7.7%

7.8% 6.1%

1.5%

1.1%

1%

4.3%

4%

3.8%

4.0%

4.0%

4.0%

3.8%

0.9% Q3 2017

Q2 2017

Q1 2017

Q4 2016

Q3 2016

Q4 2017

0.1%

0.1% Q2 2016

0%

Q1 2016

Q4 2017

Q3 2017

Q2 2017

Q1 2017

Q4 2016

Q3 2016

Q2 2016

Q1 2016

0%

8

Aluminium surplus set to rise in China 2016 and 2017 aluminium market balance and trade, ‘000t 1,200

1,200

2017

2016

800

800

400

400

0

0

-400

-400

-800

-800

-1,200

-1,200 World balance

China balance

Ex. China balance

China net exports

World balance

China balance

Ex. China balance

China net exports

9

US aluminium imports sink US Midwest premium USA primary production and imports; regional ingot premiums Regional ingot premiums

USA primary production and imports, annualised million tonnes US primary net imports US primary production Net imports to balance US market

Rotterdam duty paid US Midwest

$/t

Japan 3-month CIF ¢ /lb

300

5.0

250

4.0

Latest regional premiums: US Midwest 6.1¢/lb Rotterdam DUP $63/t, DP $115/t Japan spot CIF $75/t

12

10

200 3.0 7.0

150

6.3

2.0

115

6.1 113

7.4

6.5 118

123

132

7.5 140

100 1.0

92

100 80

85

110

90

2

4Q 2017

3Q 2017

2Q 2017

1Q 2017

4Q 2016

3Q 2016

2Q 2016

1Q 2016

0 4Q 2015

Sep-16

May-16

Jan-16

Sep-15

May-15

0 Jan-15

6

4

50

0.0

8

Note: US Net imports of 4.1Mt will balance the market, based on a 0.5Mt decline in inventories: -0.3Mt decline in reported stocks (producer -0.1Mt, LME -0.2Mt), unreported -0.2Mt

10

LME 7 Signals: Some reprieve possible before sell-off

Bull/Bear 1 month Next 6 CRU's Seven Price Signals (current direction) /Neutral ahead months Short Term View US Dollar: Rising Brent crude oil: Rising

Chinese macroeconomic data: Weaker

Chinese Export Arbitrage: Close to zero

Investors: Largest net long since 2014

Visible stocks: Rising

Aluminium Market: Oversupply

Bearish

While the dollar may continue to drift lower in the next month we see greater upside risk to the dollar than the risk of further weakening. The tone of comments from the Jackson Hole symposium will move the dollar and as the market is only pricing a 21% chance of a September rate hike an increase would wrong foot investors and boost the dollar.

Neutral

Producer countries have flashed the 'output freeze' card to great effect in August, with Brent up over 20% also in part boosted by the weaker dollar. This comes despite less disruptions to crude supply.

Bearish

July FAI appears to have been shockingly weak. Private sector investment (two thirds of the total) shrank by 1.2% y/y after 0% growth in June, state investment growth dropped to 14.4% (June 24.0%). Weaker state investment caused infrastructure investment to slow sharply, but we do not see a fundamental reason for this drop and expect it to quickly reverse. More worrying is the contraction in private sector investment, which will be difficult to turn around quickly. Manufacturing and real estate account for around two thirds of private sector investment and investment in these industries will be weighed down by excess capacity and inventories, respectively.

Neutral

Unwrought and product exports are down 8% y-t-d to July. Most of the fake semis exports in 2016 have been in the form of extrusions and are stockpiled in Vietnam and Malaysia. The recent shift of stocks from Mexico is a signal that these stockpiles are iliquid and will be slow to work down, limiting their impact on physical aluminium markets.

Bearish

Shorts have covered and bullish bets increased in August. At some point investors will get spooked by the waning impact of Chinese stimulus and higher Chinese aluminium production, at which point this streched investor position will reverse.

Bearish

Low ingot premiums, narrow LME forward spreads and high unreported stocks in Korea (~600,000-650,000t) has prompted inflows to LME warehouses. A reminder to the market of the persistent unreported stock overhang. In China, reported ingot stocks are rising in August for the first time since February, the first signal that the Chinese market is starting to deteriorate.

Bearish

The global auminium market was balanced in August but the market will not shift to a surplus until Q4. The LME price may move in anticipation of this weakening and fall before Chinese stocks start to rise in earnest from October.

11

Base case price forecast below $1,500/t in Q1 2017 High case, base case and low case LME 3-month price forecasts, $/t High Case

Low Case

Base case

1800

$1,735 $1,680

$1,685

1700

$1,640 $1,645

1600

$1,550

$1,516

$1,610

$1,500

$1,480

1500 1400

$1,440 $1,380

$1,395

Q1 2017

Q2 2017

1300 1200 Q4 2015

Q1 2016

Q1 2015

Q2 2015

Q2 2016

Q3 2015

Q4 2015

Q3 2016

Q1 2016

Q4 2016

Q2 2016

Low Case Base case High Case

$1,815

$1,790

$1,621

$1,511

$1,516

$1,580

Q3 2016

Q4 2016

Q1 2017

Q2 2017

$1,610

$1,440

$1,380

$1,395

$1,645

$1,550

$1,480

$1,500

$1,685

$1,735

$1,680

$1,640

CRU forecasts the LME 3-month price is expected to average $1,645/t in Q3. By December 2016, we forecast the price will fall towards $1,500/t to average $1,550/t in Q4.

12

Downward pressure is expected to weigh down aluminium prices in 2017 2016 Business cost curve, $/t 2,500

2,500

World ex. China

China

2,300

2,300

2,100

2,100

1,900

1,900 2016 SHFE cash aluminium price = $1,775/t

1,700

1,700

2017 SHFE cash aluminium price = $1,638/t

2017 SHFE cash aluminium price = $1,565/t

1,500

1,500

2016 SHFE cash aluminium price = $1,544/t

1,300

1,300

1,100

1,100

900

900

700

700 0

5

10

15

20

Cumulative production (M tpy)

25

30

0

5

10

15

20

25

30

35

Cumulative production (M tpy)

13

Summary

1

Developed economies to remain relatively stable in 2017

2

India, Middle East and Russia to see aluminium production growth

3

The Chinese economy is slowing

4

Chinese aluminium restarts and projects to ramp up significantly in H2 2016

5

Chinese aluminium production growth to rise as consumption growth slows

6

Downward pressure is expected to weigh down aluminium prices in 2017

14

Thank you for listening! Terece Muir Senior Consultant, CRU Analysis +44 (0) 207 903 2201 [email protected]