Philip Newman CEO

CRU Strategies

CRU STRATEGIES a division of CRU International Limited

What’s driving commodity prices now?

Mines and Money London 2012

Phil Newman CRU Strategies London December 4th 2012

31 Mount Pleasant, London WC1X 0AD UK Tel: +44 20 7903 2000 Fax: +44 20 7278 0003

517, Tower 2, Bright China Chang An Building, 7 Jianguomennei Avenue, Beijing 100005, China Tel: +86 10 6510 2206 Fax: +86 10 6510 2207

Augusto Leguía Norte Nº 100 of.506, Las Condes, Santiago, Chile Tel: +56 2 231 3900 Fax: +56 2 231 4314

PO Box 1269, Langley, WA 98260 USA Tel: +1 360 321 4707 Fax: +1 360 321 4709

2911 West 54th Street, Minneapolis, MN 55410, USA Tel: +1 612 922 9092 Fax: +1 612 920 3225

Level 2, Kalpataru Synergy, Opp. Grand Hyatt Santa Cruz (East), Mumbai 400055, India Tel: +91 22 3953 7395 Fax: +91 22 3953 7200

CRU STRATEGIES

1. Demand trends...

2. Looking across the markets – is there a direction to the market?

3. Assessing investment opportunities – back to basics

Commodity demand is determined by economic growth & industrialisation trends

CRU STRATEGIES

80

84

88

92

96

100

104

-6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54

months after cyclical peak

Early 2000s

OECD IP fell off a cliff and copper prices reacted slowly and then simply ignored it...

Index of OECD IP

GFC Mid-1970s

Early 1980s

Early 1990s

It will take over 6 years for full OECD recovery => mid-2014 Jan 2008

0

20

40

60

80

100

120

140

160Copper price (indexed to Jan 2008)

…“because of China, stupid!”

CRU

CRU STRATEGIES

Eurozone: we have two scenarios, bad and terrible

USA: 107% of GDP debt (Eurozone is 91%) can’t be ignored but the fiscal cliff will be avoided (for now)...

China: they’re doing OK, they will do what’s right for China...

Policymakers hold the key, now more than before The markets don’t ignore them so neither should we...

CRU STRATEGIES

China (…still) – Urbanisation continues

– Subtle changes in metal needs

India ? – Steady growth but: from a low base and they won’t “do a China”

Investors ?

Recovery in OECD – Is the US the place to build stuff?

Besides policymakers, what drives demand today?

CRU STRATEGIES

China is the dominant commodity consumption region Chinese consumption as % of global consumption

CRU

0%

10%

20%

30%

40%

50%

60%

2000 2005 2010 2015

CopperAluminiumIron OrePotash

CRU STRATEGIES

Don’t get confused by lower growth rates from China as % Index of Chinese consumption, 2007=100 and 2012 = 100

50

60

70

80

90

100

110

120

130

140

150

160

170

180

2007 2008 2009 2010 2011 2012

CopperAluminiumIron OrePotash

50

60

70

80

90

100

110

120

130

140

150

160

170

180

2012 2013 2014 2015 2016 2017

CopperAluminiumIron OrePotash

Note: Shapes in gold 2007-2012 equivalent index

CRU

CRU STRATEGIES

-4,000

-2,000

0

2,000

4,000

6,000

8,000

10,000

12,000

Aluminim Copper Potash

2007-12 2012-17

...as the picture in absolute tonnage still looks good Growth in China’s annual consumption over 5-year period

CRU

0

50

100

150

200

250

300

350

Iron Ore

Thou

sand

s of

tonn

es (k

t)

Mill

ions

of t

onne

s (m

t)

CRU STRATEGIES

India needs reform if it is going to make a difference in our world (metals)

0

200

400

600

800

1,000

1,200

1,400

2010 2011 2012 2013 2014 2015 2016 2017

Ref

ined

Cop

per C

onsu

mpt

ion

‘000

t

India India x 2

CRU STRATEGIES

India needs reform if it is going to make a difference in our world (metals)

0

2,000

4,000

6,000

8,000

10,000

12,000

2010 2011 2012 2013 2014 2015 2016 2017

Ref

ined

Cop

per C

onsu

mpt

ion

‘000

t

India India x 2 China

Adding China puts that optimistic forecast into perspective!!

CRU STRATEGIES

0%

10%

20%

30%

40%

50%

60%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,00019

8019

8219

8419

8619

8819

9019

9219

9419

9619

9820

0020

0220

0420

0620

0820

1020

1220

1420

1620

1820

2020

2220

2420

2620

2820

3020

3220

34

IP s

hare

of G

DP

(%)

IP (2

005

USD

Bill

ion)

China IP India IP China IP share India IP share

Smaller % of a large number still delivers (much) more metals consumption in China than India

CRU, Oxford Economics

forecast China IP 2013-35: Ave 5.3% Adding $5.1Trillion India IP 2013-35: Ave 8.0% Adding $1.3 Trillion

Industrial production is a higher proportion of GDP in China

CRU STRATEGIES

Fore

cast

US

$/M

T

Investment Factors $4,305 Copper Fundamentals $5,325

CRU Copper Price Perspective, March 2011.

Supply Demand Inventory

Short term Hedge Funds

Index Funds

Total Price

Market Shortage

China Balance

Energy Currency

MARCH 2011 COPPER

EXAMPLE

It wasn’t that long ago when investors had a large influence on the copper price....

CRU STRATEGIES

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Investment Factors $2,190/t Copper Fundamentals $5,975/t

CRU Copper Price Perspective, October 2012

Supply Demand Inventory

Short term

Investors Hedge Funds

Index Funds

Total Price

Physical ETFs

China Balance

Energy Currency

..and although still important, less so.

LME Cash Price – October 2012 MTD Average $8,165/t

Fore

cast

US

$/M

T

…last 18 months: price down ~$2k; investors down ~$4k, fundamentals up ~$1k

CRU STRATEGIES

• Cheap gas

• Skilled labour

• Infrastructure

• Rule of law (at least you know what you have to do!)

• Labour flexibility?

USA – a resurgence?

++ ++ ++ ++ ??

CRU STRATEGIES

Different commodities have different drivers Is it as simple as putting commodities into boxes?

Fertilizers+Uranium • Ammonia

• DAP

• Potash

• Sulphur

• Sulphuric acid

• Urea

• Uranium

Steel related • Cobalt

• Coking Coal

• Iron Ore

• Manganese

• Met Coke

• Vanadium

• Zinc

Precious Metals • Gold

• Silver

• Platinum

• Palladium

Industrial metals • Alumina / Aluminium

• Copper

• Lead

• Palladium

• Platinum

• Tin

CRU STRATEGIES

1. Demand trends...

2. Looking across the markets – is there a direction to the market?

3. Assessing investment opportunities – back to basics

Commodity demand is determined by economic growth & industrialisation trends

CRU STRATEGIES

60

80

100

120

140

160

2011 2012 2013 2014 2015 2016 2017

Industrial metals fare well... Indexed to Q3 2012 = 100, nominal

CRU

CRU Index - Steel

CRU Index – Industrial Metals

CRU Index – Fertilizers and Uranium

CRU Index - Precious

Note: all forecasts are weighted to market value

CRU STRATEGIES

Looking across all 23, we have a number looking strong to 2016 – although generally modest growth (+13%) Base metals registers the strongest growth with the exception of copper

Hot > 15%

Warm 5% to 15%

Cold -5% to 15%

Freezing < -15%

Mild 0% to 5%

Cool 0% to -5%

* 2016 annual average price forecast (nominal $ or benchmark) versus 2012 Q3 average actual prices

Palladium, Tin, Zinc, Uranium, Alumina, Nickel, Aluminium, Platinum,

Lead, Vanadium, Coking Coal, Cobalt,

Phosphate DAP,

Iron Ore,

Manganese, Urea, Sulphuric Acid, Gold, Met Coke, Potash,

Copper, Ammonia, Silver, Sulphur

CRU

CRU STRATEGIES

60

80

100

120

140

160

180

200

2011 2012 2013 2014 2015 2016 2017

‘Industrial metals’ do well, even though it is dragged down by worries about copper... Indexed to Q3 2012 = 100, nominal

CRU

Tin

Lead

Palladium

Copper

Alumina Aluminium

Platinum

Palladium and Tin face tightness but both have substitution risks

Copper pessimism driven by supply – will it materialise?

CRU STRATEGIES

60

80

100

120

140

160

180

2011 2012 2013 2014 2015 2016 2017

Fertilizers generally have weaker outlooks (albeit from current highs), Uranium is a supply story Indexed to Q3 2012 = 100, nominal

CRU

Potash Sulphur

Uranium

Ammonia

Phosphate DAP Sulphuric Acid Urea

Uranium has supply concerns although a weak 2012 may alleviate / delay this

Sulphuric acid facing falling demand

Exc. Uranium and ferts are down 15% !

CRU STRATEGIES

80

100

120

140

160

180

200

2011 2012 2013 2014 2015 2016 2017

Steel holds pace with inflation – Zinc looks hot (have heard that before!!) Indexed to Q3 2012 = 100, nominal

CRU

Vanadium Iron Ore

Zinc

Coking Coal

Cobalt

Manganese Met Coke

Steel more or less holds its own, +13% - although this means ~zero% REAL growth

If any graph shouts “COST CONTROL” – it is this one....

CRU STRATEGIES

40

60

80

100

120

140

160

180

200

2011 2012 2013 2014 2015 2016 2017

Precious metals – uncertainty set to ease and price falls for Au and Ag; Pt and Pd have supply issues.. Indexed to Q3 2012 = 100, nominal

CRU

Platinum

Silver

Gold

Palladium Take out PGMs and Au/Ag are down 15% (only hope this means uncertainty does really abate...!)

CRU STRATEGIES

1. Demand trends...

2. Looking across the markets – is there a direction to the market?

3. Assessing investment opportunities – back to basics

Commodity demand is determined by economic growth & industrialisation trends

CRU STRATEGIES

…you just need a few things to fall into place. Finding a good project is easy...

Skilled labour

Growing resources

Good grades

Low political risk

Consistent geology Clear tax rules

CRU STRATEGIES

• Economic uncertainty is not going away immediately, investors have to be truly prized away from their cash!

• China is still supporting our industry, the worlds 2nd largest economy is growing at 7-8% p.a.

• The mining industry has always been risky – isn’t that why we like it?

What next...?

“Of all those expensive and uncertain projects, however, which bring bankruptcy upon the greater

part of the people who engage in them, there is none perhaps more perfectly ruinous than the search after

new mines”. Adam Smith “The Wealth of Nations” p.562

CRU STRATEGIES a division of CRU International Limited

Thank-you Phil Newman CEO CRU Strategies phil.newman@crugroup.com