Analysis & Outlook of Non-Ferrous Metals Market Trends

May 2014

Mark Keenan

Head of Commodities Research - Asia

Important Notice: The circumstances in which this publication has been produced are such that it is not appropriate to characterise it as independent

investment research as referred to in MiFID and that it should be treated as a marketing communication even if it contains a research recommendation. This

publication is also not subject to any prohibition on dealing ahead of the dissemination of investment research. However, SG is required to have policies to

manage the conflicts which may arise in the production of its research, including preventing dealing ahead of investment research.

2 March 2014

GENERAL COMMODITY MARKET OVERVIEW

We continue to expect that most metals will exhibit moderate volatility during the remainder of this year as the global

economy recovers. The recent volatility spikes for a few metals, provide a reminder that volatility regimes (profiles) can

change abruptly. Sources of general commodity market volatility so far this year have been the weather, geopolitics

(Ukraine) and fears of a sharp slowdown in emerging markets (China in particular).

The biggest source of uncertainty for commodity prices this year coming from emerging markets. This year is

particularly critical for China as the government has allowed the first few corporate defaults to take place in what is likely to

be the first of many. Given the large amount of estimated bad debt, there are fears that this could trigger a vicious cycle of

defaults, resulting in a potential negative risk to the Chinese economy.

The market is starting to get worried about this, which explains the recent sharp drop in the copper price. Copper is

particularly exposed to fears of a sharp slowdown in China

1) the copper price trading some 40% above its marginal cost of production,

2) China accounting for 35-40% of global copper consumption,

3) copper mine supply accelerating which is likely to result in an inventory surplus this year and next

4) The use of copper in collateralised lending.

Our economists expect China’s government to successfully control the pace of defaults to avoid a hard landing. Our

economists see a 20% probability of a hard landing (sub 5% growth).

We expect a strong bounce back in US macro economic data over the rest of the year after weather-driven weakness in

Q1 with 2014 GDP growth of 3.0%. Fed tapering should be completed before year-end with the first rate hike around mid-

2015. The euro area should grow by 1.0% this year while China is expected to slow to 7.1% growth. Global at 3.6%

3 March 2014

5500

6000

6500

7000

7500

8000

8500

9000

Dec-11 Jun-12 Dec-12 Jun-13 Dec-13

Price

2014 $6875

2015 $6500

2016 $6000

2017 $6500

2014 Q3 $6800

2014 Q4 $6500

2015 Q1 $6500

COPPER – RISING SURPLUS AS SUPPLY OUTSTRIPS DEMAND

1) March decline driven by fears of Chinese credit issues -

possibility that copper held as collateral against loans may

be sold.

2) Now - growing understanding that Copper is typically

hedged in these financing deals - falling copper prices

should not trigger their unwinding. Despite this – Good hedge – e.g. Australia Pension funds

3) What we have learnt - the large amounts of

copper channelled into financing deals in China

suggests physical demand less than implied.

(bonded stocks – 800kt)

4) Going forward - we believe that tight credit

conditions, weaker Yuan, and negative arbitrage

will likely discourage further finance linked

copper imports over months ahead.

7) Despite consumption growth – in 2014, we

expect copper to move into a surplus of 0.47mt

as mine supply increases. (Chile, Mongolia, Peru)

8) In 2015 we forecast a surplus of 0.50mt as

mine supply accelerates.

5) In spite of a China slowdown, the

outlook for copper demand is an

improving one , with global GDP growth

set to accelerate in 2014.

6) We forecast consumption growth of 4%

yoy to 21.63Mt in 2014 compared to a 3.0%

yoy gain in 2013 of 20.80Mt.

Things to watch out for this year:

- El Nino

- India

- June / July Copper Spread

9) We believe that over the

longer term and given time

taken to bring a project from

the exploration stage through

into production, a prolonged

period of “underinvestment”

will again lead to a supply lag

by 2016/17 and onwards. 2018 $7000

2019 $7500

4 March 2014

EL NINO – WHAT IS IT & ITS POTENTIAL IMPACT ON COPPER, ZINC AND NICKEL

On 6 March 2014 an “El Niño” watch was declared by scientists at the National Oceanic and Atmospheric

Administration (NOAA). The scientists attributed a 50% chance of El Niño developing during the summer

or fall and even suggest this event might rival the record El Niño event of 1997-1998.

Currently - the International Research Institute for Climate and Society (IRI) at Columbia University now

report a 70% chance of El Niño occurring in August, rising to a 75-80% probability by October.

5 March 2014

INDIA – THE NEW CHINA?

After three long decades of political alliances of every hue and colour; India has given a clear majority to a

single party at the centre of the political spectrum. The BJP, led by Narendra Modi, has won the general

elections by a clear margin, gaining 282 seats out of 543 in the lower house.

This is the first time since 1984 a single party majority has ruled India and represents a significant shift.

The last three decades were marked by the politics of coalition and alliances where consensus building

was crucial for government, both to push forward any agenda and to remain in power, thereby significantly

slowing growth and developed on many fronts

10.10%

9.36%

8.63%8.16%

7.83% 7.71%7.23% 7.02%

6.48%6.03%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

GJ DL MH TN AP IND BH KA WB UP

Average Real Growth Rate of States (GSDP %) at Constant Prices (Period 2002 - 2012)

6 March 2014

INDIA – COPPER THE MOST SENSITIVE?

0%

1%

2%

3%

4%

5%

0%

2%

4%

6%

8%

10%

12%

1995 1998 2001 2004 2007 2010

China India

0%

2%

4%

6%

8%

10%

0%

10%

20%

30%

40%

50%

60%

1995 1998 2001 2004 2007 2010

China India

0%

1%

1%

2%

2%

3%

3%

4%

0%

10%

20%

30%

40%

50%

1995 1998 2001 2004 2007 2010 2013

China India

0

100

200

300

400

500

600

700

800

1995 1998 2001 2004 2007 2010

Copper

Aluminium

Zinc

Nickel

Lead

Steel

0

500

1000

1500

2000

2500

3000

1995 1998 2001 2004 2007 2010 2013

Copper

Aluminium

Zinc

Nickel

Lead

Steel

Crude Oil consumption (China

LHS, India RHS) - linear trend for

both countries

Coal consumption (China LHS,

India RHS) - linear trend for both

countries.

Copper consumption (China

LHS, India RHS) - linear trend for

both countries until 2009

Industrials metal and steel consumption in India –

rebased to 100 in 1995. (Steel 1998-2012) Industrial metals and steel consumption in China –

rebased to 100 in 1995. (Steel 1998-2012)

7 March 2014

JUNE COPPER SQUEEZE?

The Jun-Jul copper spread could move into a much steeper backwardation as outstanding shorts from the

March sell-off are likely to struggle to buy back positions or deliver against them given low LME stocks.

Severe tightening looks inevitable given the presence of large shorts/trade hedge shorts and the absence

of lenders.

Looking at the latest LME data there appears considerable short interest outstanding on the June prompt

date which will have to be covered. LME data shows one entity alone holds a short position equal to 30-

40% of market open interest.

The Jun-Jul spread backwardation is currently trading at $27.50-30/t from flat in March, while the cash-3’s

backwardation has widened to $93/t from $10/t.

What about the possibility of a surge in copper exports from China to relieve the situation?

The LME nearby backwardation is not yet sustained or extreme enough to trigger a surge in Chinese

exports. The SHFE-LME arbitrage has widened slightly, but is still much narrower than it was earlier in Q1.

In addition, bonded premia are high to probably attract deliveries from Chinese smelters rather than for

metal to be exported.

The cash-3’s backwardation will need to approach $150/t or thereabouts before we are likely to see exports

of copper from China.

8 March 2014

1600

1700

1800

1900

2000

2100

2200

2300

2400

Dec-11 Jun-12 Dec-12 Jun-13 Dec-13

Price

2014 $1765

2015 $1900

2016 $2000

2017 $2100

2014 Q3 $1775

2014 Q4 $1825

2015 Q1 $1850

ALUMINIUM – MODERATELY HIGHER PRICES LOOK LIKELY

1) Overall, Aluminium remains under pressure from weak

fundamentals, namely high inventories and a global

market in surplus.

2) Speculative sellers have dominated market activity,

but some have covered their shorts in recent weeks in

response to the rising political tensions between Russia

and Ukraine.

5) Production growth should outstrip

consumption in 2014, leaving the aluminium

market in surplus to the tune of 0.55Mt, the

eighth successive year of surplus.

6) With the rate of growth of aluminium

consumption one of the fastest among the base

metals, moderately higher prices look likely,

although the huge inventory overhang, strong

production growth will cap the upside.

3) Physical premiums recently spiked and continue to remain

elevated. It remains to be seen what the impact will be surrounding

the LME warehouse issue.

4) Overall, and separately from the LME issue, we believe that

stronger physical demand, production cuts and scrap shortages will

support physical premiums.

Things to watch out for this year:

- Indonesian ore export ban.

Despite huge Chinese bauxite

imports last year & 10m tonnes of

aluminum stocks, the cost of landing

bauxite in China has increased form

$40/t last year to $60/t due to cost of

bringing form further away. (Australia

& India)

9 March 2014

1600

1700

1800

1900

2000

2100

2200

2300

2400

2500

2600

Dec-11 Jun-12 Dec-12 Jun-13 Dec-13

Price

2014 $2075

2015 $2200

2016 $2400

2017 $2500

2014 Q3 $2050

2014 Q4 $2125

2015 Q1 $2150

ZINC - BULLISH - SMALLER DEFICITS AS CONSUMPTION RISES

1) Underlying zinc consumption in 2014 is forecast

to increase in all of the major economies.

2) Global consumption in the automotive,

infrastructure, construction and white goods

sectors, is expected to rise by 5.0% in 2014

(13.35mt to 14.02mt). In 2013 it grew 4.0%.

2) European demand will make a more meaningful

contribution and US consumption looks positive.

3) The outlook for global refined production remains

positive with few constraints on mine supply . Higher

treatment charges should also boost smelter output.

4) Global refined output should advance by 6.2% yoy in

2014 (13.00mt to 13.80mt).

5) Adjusting for full year 2013 data,

we have made some minor changes

to our supply and demand balances.

6) We have slightly smaller deficits

forecast for 2014 (-0.22), but a

slightly larger deficit for 2015 (-0.29)

Things to watch out for this year:

- El Nino

10 March 2014

1600

1800

2000

2200

2400

2600

2800

Dec-11 Jun-12 Dec-12 Jun-13 Dec-13

Price

2014 $2225

2015 $2400

2016 $2500

2017 $2600

2014 Q3 $2250

2014 Q4 $2400

2015 Q1 $2400

LEAD - BULLISH - ONGOING SUPPLY CONSTRAINTS, ROBUST CONSUMPTION

1) Lead continues to be characterised

by bullish fundamentals, with ongoing

supply constraints, robust

consumption - which is likely to be

further boosted by restocking.

3) Continuing strong automobile production and sales have boosted

demand in the US and in China while recent data suggests that

conditions in Europe are improving.

4) Lead demand will probably get a further boost over the coming

months as restocking is likely both in the US and parts of Europe

following extremely cold weather.

4) After a balanced market in

2013 we are forecasting a

deficit of 50kt for this year,

and in 2015 of 160kt.

Continued strong

fundamentals should support

price increases going forward

2) LME stocks are at their lowest level in

just over three years and further falls are

likely given the expected restocking by

battery manufacturers.

Things to watch out for this year:

- High scrap availability

11 March 2014

11600

13600

15600

17600

19600

21600

23600

Dec-11 Jun-12 Dec-12 Jun-13 Dec-13

Price

2014 $17000

2015 $21000

2016 $22000

2017 $23000

2014 Q3 $18000

2014 Q4 $19500

2015 Q1 $20000

NICKEL – TURNAROUND IN PRICES

1) Although LME stocks have continued to rise to record

highs, supply-driven fears have been reflected by

elevated cancelled warrant numbers which now stands at

44% of total LME stocks.

2) Indonesia’s ban on ore exports and possible western

sanctions on Russia, potentially restricting nickel

exports, have led to these fears.

3) Aside for supply issues - stronger global

growth outlook is likely to drive higher nickel

usage in stainless and non-stainless sectors.

4) After an increase of 7.3% in 2013 we expect

global nickel consumption growth to accelerate

to 8% yoy in 2014 to reach 1.99Mt.

4) Our supply/demand balances show the global

nickel market essentially in balance this year but

moving into a large deficit in 2015.

3) Indonesia’s ban on nickel ore exports

which we expect to be enforced, is likely to

shift the nickel market from structural

oversupply to a balanced outcome this year.

Things to watch out for this year:

- El Nino

- Russia

- Indonesia

12 March 2014

THE COMMODITY COMPASS

1. SG trade recommendations

2. Commodity market analysis

3. SG Cross Asset Research - Commodity Indices

4. Principal Component Analysis (PCA)

5. Dispersion analysis

6. Significant option trades

7. Brent & gold option open interest (OI) maps

8. Key changes/assessments across the major forward curves

9. Commodity ETP flows

10. Commodity index notional value (CFTC)

11. CFTC Commitment of trader analysis – futures & options positions

12. CFTC Commitment of trader analysis – number of traders

13. Short-term price forecast vs forward prices*

14. Long-term price forecast vs forward prices*

13 March 2014

COMMODITY COMPASS – RESERCH EXAMPLES

THE END

May 2014

Mark Keenan

Head of Commodities Research - Asia

Important Notice: The circumstances in which this publication has been produced are such that it is not appropriate to characterise it as independent

investment research as referred to in MiFID and that it should be treated as a marketing communication even if it contains a research recommendation. This

publication is also not subject to any prohibition on dealing ahead of the dissemination of investment research. However, SG is required to have policies to

manage the conflicts which may arise in the production of its research, including preventing dealing ahead of investment research.

15 March 2014

MACRO FORECASTS

Source: SG Cross Asset Research