This presentation is a tale of two metals:China’s copper demand & aluminium supply
Al
• The importance of China as producer of aluminium
• The structure of China’s aluminium industry
• Five year outlook for China’s aluminium productionAl • Five year outlook for China’s aluminium production
Cu
• The importance of China as a consumer of copper
• Structure of China’s copper consumption
• Why most uses of copper are safe from substitutionwith aluminium
Copper and aluminium are two verydifferent base metals
• China the dominant producer andconsumer
• Relatively low barriers to entryAluminium • Relatively low barriers to entry
• Price elastic consumer metal
Aluminium
• China the dominant consumer
• Relatively high barriers to entry
• Price inelastic industrial metalCopper
China’s aluminium production hasgrown by a factor of five over the past decade
0.9
1.2
1.5
1.8
Pro
duct
ion
(Mt)
4
0.0
0.3
0.6
0.9
Jan-9
9
Jan-0
0
Jan-0
1
Jan-0
2
Jan-0
3
Jan-0
4
Jan-0
5
Jan-0
6
Jan-0
7
Jan-0
8
Jan-0
9
Jan-10
Jan-11
Pro
duct
ion
(Mt)
With 40% of global production, China isthe world’s dominant producer of aluminium
60%
80%
100%
5
0%
20%
40%
60%
Jan-9
9
Jan-0
0
Jan-0
1
Jan-0
2
Jan-0
3
Jan-0
4
Jan-0
5
Jan-0
6
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Jan-0
9
Jan-10
Jan-11
After paying for power, alumina andcarbon nothing left to service the investment
12,000
15,000
18,000
Cash
Cost
(¥pert)
6
0
3,000
6,000
9,000
12,000
Power Alumina Carbon Labour Other Profit SHFE
Cash
Cost
(¥pert)
Average power tariffs have more thandoubled over the past seven years
400
600
400
600 Pow
erta
riff(¥
perM
Wh)P
ow
erta
riff
(¥perM
Wh)
7
0
200
0
200
1998 2000 2002 2004 2006 2008 2010 2012(E)
Pow
erta
riff(¥
perM
Wh)P
ow
erta
riff
(¥perM
Wh)
The doubling of power prices hasincreased production costs by ¥4,200 per ton
6,000
8,000
400
600
Pow
erco
st(¥
pert)
Pow
erta
riff
(¥perM
Wh)
8
0
2,000
4,000
0
200
1998 2000 2002 2004 2006 2008 2010 2012(E)
Pow
erco
st(¥
pert)
Pow
erta
riff
(¥perM
Wh)
Aluminium sector characterised by lowbarriers to entry and even lower exit barriers
15,000
20,000
25,000
0.9
1.2
1.5
1.8
SHFE
(¥pert)
Pro
duct
ion
(Mt)
9
0
5,000
10,000
15,000
0.0
0.3
0.6
0.9
Jan-9
9
Jan-0
0
Jan-0
1
Jan-0
2
Jan-0
3
Jan-0
4
Jan-0
5
Jan-0
6
Jan-0
7
Jan-0
8
Jan-0
9
Jan-10
Jan-11
SHFE
(¥pert)
Pro
duct
ion
(Mt)
1More than half the smelters are wholly or partiallyowned by local governments
Technical innovations have partially offset
China’s aluminium sector has growndespite Beijing’s opposition
10
2
3
4
Technical innovations have partially offsetescalating power prices
Investment in integrated power stations assurescontinual supply (at a cost)
Chinese engineers can build new capacity at one-third the cost of comparable international projects
This is what China’s aluminiumindustry looks like now
11
Because of escalating power prices,aluminium sector is relocating to Xinjiang
Undeveloped remote region, rich in coal and with atroublesome ethnic minority
Develop the West Policy and local ethnic troubles, exemptXinjiang from decrees forbidding aluminium expansion
12
Xinjiang from decrees forbidding aluminium expansion
Low power tariffs more than offsetting additional freight andcapital cost. Cash cost of ¥13,000 cf ¥16,000 elsewhere
Integrated power direct to smelter and not via grid
<10 Mtpa of new very productive (500 kA) capacity by 2015,mostly built by experienced producers who will ultimatelyconvert existing sites to industrial parks
Savings of ¥3,400 per tonne in is acompelling argument to relocate to Xinjiang
12,000
15,000
18,000
Cost
(¥perto
nne)
13
0
3,000
6,000
9,000
12,000
EasternChina
Power Alumina Metal Other Saving
Cost
(¥perto
nne)
1China remains the key to future copper demand andoutlook Is still positive
Forecasts of demand destruction have been over
There are still compelling reasonsto be positive on copper
14
2
3
4
Forecasts of demand destruction have been overdone. No recognition of new applications
New capacity projects continue to slip as does currentsupply due to water and power shortages, strikes etc.
Labour and equipment shortages affecting newproject costs as well as current operations.
The rest of the copper world stood stillwhile Chinese consumption expanded
0.9
1.2
1.5
1.8
Consu
mption
(Mt)
15
0.0
0.3
0.6
0.9
Jan-9
5
Jul-9
6
Jan-9
8
Jul-9
9
Jan-0
1
Jul-0
2
Jan-0
4
Jul-0
5
Jan-0
7
Jul-0
8
Jan-10
Jul-11
Consu
mption
(Mt)
ROW China
China now accounts for more thanone-third of global copper consumption
60%
80%
100%
Share
ofConsu
mption
16
0%
20%
40%
Jan-9
5
Jul-9
6
Jan-9
8
Jul-9
9
Jan-0
1
Jul-0
2
Jan-0
4
Jul-0
5
Jan-0
7
Jul-0
8
Jan-10
Jul-11
Share
ofConsu
mption
ROW China
As the world’s largest consumer ofrefined copper, China is a key demand driver
80%
100%
Share
ofglo
baldem
and
17
0%
20%
40%
60%
China Europe USA Japan Korea Other
Share
ofglo
baldem
and
Over 60% of China's copper is used inprice inelastic industrial applications
80%
100%
18
0%
20%
40%
60%
Constrn. Infrastruct. Industrial Consumer Transport Other
China's copper demand seemsinsensitive to price (price-inelastic)
40,000
60,000
80,000
400
600
800
SHFE
(¥pert)
Consu
mption
(kt)
19
0
20,000
40,000
0
200
400
Jan-0
8
Jul-0
8
Jan-0
9
Jul-0
9
Jan-10
Jul-10
Jan-11
Jul-11
SHFE
(¥pert)
Consu
mption
(kt)
Consumption SHFE
As the difference between LME andSHFE prices widens, copper imports increase
-$900
-$600
-$300
$-
200
300
400 LME-S
HFE
($pert)N
etim
ports
(kt)
20
-$1,800
-$1,500
-$1,200
-$900
-
100
200
Jan-9
8
Jan-9
9
Jan-0
0
Jan-0
1
Jan-0
2
Jan-0
3
Jan-0
4
Jan-0
5
Jan-0
6
Jan-0
7
Jan-0
8
Jan-0
9
Jan-1
0
Jan-1
1
SHFE
($pert)N
etim
ports
(kt)
Net imports LME SHFE difference
China’s consumption of copper has astrong correlation to fixed asset investment
6
9
Appare
ntCopper
Consu
mption
(Mtp
a)
21
0
3
- 5 10 15 20 25 30 35
Appare
ntCopper
Consu
mption
(Mtp
a)
Fixed Asset Investment (¥ billion)
The price inelastic power industryaccounts for half of China’s copper demand
80%
100%
Share
ofdom
est
icdem
and
22
0%
20%
40%
60%
Power Construction Transport Machinery Other
Share
ofdom
est
icdem
and
Copper is the backbone of any modernpower system
Copper is used in generator windings, distribution transformersand reticulation (NOT transmission)
Transformers are a mass of copper and special steel - 60 t of
23
copper per 1 GVA
Every 1 GW of generating capacity requires 3 to 5 GVA oftransformer capacity
Generators use around 10 t of copper per 1 GW
Copper is also used in house wiring and reticulation
Planned increased grid expenditureis very good for copper
State Grid Corporation (SGC) is the world’s largest purchaser ofcopper
SGC purchased 1.15 to 1.25 Mt of copper last year. Up slightly
24
SGC purchased 1.15 to 1.25 Mt of copper last year. Up slightlyfrom 2010
New FYP provides ¥2.55 trillion grid expenditure by SGC, up68% from preceding plan
FYP is based on programs , not investment so gridinvestments will not be affected by the copper price
Following rapid build in capacity, timefor China to develop copper intensive grid
800
1,000
1,200
Inst
alle
dca
paci
ty(G
W)
25
0
200
400
600
800
2000 2002 2004 2006 2008 2010 2012
Inst
alle
dca
paci
ty(G
W)
China has under-invested intransmission and distribution
60%
80%
100%
Pow
erin
frast
ruct
ure
inve
stm
ent
26
0%
20%
40%
60%
USA UK Japan China
Pow
erin
frast
ruct
ure
inve
stm
ent
Generation Transmission Distribution
Aluminium is not a substitute forcopper in electric power systems
Aluminium has 62% of copper’s conductivity so aluminiumwound transformers would be much larger. Prohibitively so?
Aluminium cannot handle fluctuating magnetic forces as well ascopper so high failure rate from broken windings
27
copper so high failure rate from broken windings
Copper is very much easier to work than aluminium
Aluminium windings require more specialty steel in thetransformer core
In any case substitution is a long-term problem rather than animmediate concern
Aluminium is even less suitable thancopper for domestic wiring
Many authorities prohibit the use of aluminium wire because itis a safety hazard when over-heated and connections loosen
Difference in the coefficient of thermal expansion causes
28
Difference in the coefficient of thermal expansion causesaluminium to expand and contract at a different rate to copperwhich is used in fittings
Aluminium is subject to creep (deform) under sustainedpressure and more so at high temperature
Use of copper avoids galvanic corrosion from use of dissimilarmaterials
No sign of substitution: production ofelectric power cable continues to grow strongly
2.0
2.5
3.0
3.5
Length
(million
km
)
29
0.0
0.5
1.0
1.5
2.0
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11
Length
(million
km
)
Sustained production of power andUHV transformers. Where is the substitution?
10
15
20
25
100
150
Capacity
(GVA)C
apaci
ty(G
VA)
30
0
5
10
0
50
Jan-0
8
May-0
8
Sep-0
8
Jan-0
9
May-0
9
Sep-0
9
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
Capacity
(GVA)C
apaci
ty(G
VA)
Power transformers (LHS) UHV transformers (RHS)
While monthly generator productionvaries, annual output is steady. Substitution?
10
20
Capaci
ty(G
W)
31
0
10
Jan-0
8
May-0
8
Sep-0
8
Jan-0
9
May-0
9
Sep-0
9
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
Capaci
ty(G
W)
It has been long enough…where is theevidence of substitution? Producer plans?
3
4
ratio
32
-
1
2
Jul-8
1
Jul-8
4
Jul-8
7
Jul-9
0
Jul-9
3
Jul-9
6
Jul-9
9
Jul-0
2
Jul-0
5
Jul-0
8
Jul-11
Cu:A
lra
tio
Domestic appliances, especially airconditioners consume a lot of copper
Appliance Copper intensity(Kg per appliance)
Annual Demand(kt)
Refrigerator 1.13 to 1.3 90.4 to 91
33
Washing machine 0.567 39.7
Air conditioner 7.15 to 8.3 929.5 to 1,079.1
Freezer 1.215 19.4
These Chinese domestic appliancesrequire more than a million tonne of copper
0.8
1.2
Copperdem
and
(Mtp
a)
34
0
0.4
Refrigerator Freezer Air conditioner Washingmachine
Copperdem
and
China continues to produce a lot ofcopper intensive consumer appliances
100
150
Pro
duct
ion
(Mt)
35
0
50
1990 1993 1996 1999 2002 2005 2008 2011
Pro
duct
ion
(Mt)
Washing machines Refrigerators Air conditioners
New technology passenger vehicles arefar more copper-intensive
40
60
Co
pp
erco
nte
nt
(kg
per
car)
36
0
20
40
Standard Hybrid
Co
pp
erco
nte
nt
(kg
per
car)
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