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Mining Monitor (October 2016)

Strategic Research Division,

Corporate Research Office

19 October 2016

The Bank of Tokyo-Mitsubishi UFJ, Ltd.

Table of Contents

1. Overview 3

2. Iron Ore 5

3. Coal 9

4. Copper 13

Mining Monitor | 19 October 2016 2

5. Aluminum 17

6. Nickel 21

7. Zinc 25

8. Gold 29

1. Overview

3

Sota Kanda

Strategic Research Division,

Corporate Research Office

THE BANK OF TOKYO-MITSUBISHI UFJ, LTD.

Mining Monitor | 19 October 2016


Mined Commodities Price Forecasts by Strategic Research Division

Ferro-metals prices are recovering moderately. On the other hand, the prices of other mining commodities are likely

to decrease due mainly to weak demand.

1. Overview

Mined Commodity Price Trends

In 3Q’16, the price of iron ore, coking

coal and thermal coal rose mainly

due to temporary factors such as

supply disruption in China.

Since adjustment of supply-demand

balance is expected to take time, the

prices of these mines are forecasted

to decline after the peak in 3Q’ /

4Q’16.

In respect of copper, the price was

roughly flat in 3Q’16. However,

oversupply will remain through 2017

and the price will decline moderately.

On the other hand, the supply deficit

of aluminum, nickel and zinc will

remain in 2016 and 2017. As a result,

the prices of these non-ferro metals

are likely to increase for a forecast

period.

Meanwhile, the price of gold will be

flat supported by strong demand

from safe-haven investment.

Yr Avg 1Q 2Q 3Q 4Q (f) 1H (f) 2H (f)

Iron Ore ($/t) 56 48 56 58 56 54 51

YoY - -24% -5% 5% 19% 0% -4%

QoQ -43% 2% 16% 4% -4% - -

Coking Coal ($/t) 90 79 91 134 188 146 122

YoY - -27% 1% 58% 143% 71% -24%

QoQ -23% 2% 15% 47% 41% - -

Thermal Coal ($/t) 58 51 52 68 75 67 61

YoY - -18% -11% 16% 42% 29% -14%

QoQ -18% -4% 2% 30% 11% - -

Copper ($/t) 5,510 4,676 4,727 4,784 4,675 4,612 4,545

YoY - -19% -22% -9% -4% -2% -4%

QoQ -20% -4% 1% 1% -2% - -

Aluminum ($/t) 1,664 1,516 1,582 1,614 1,554 1,569 1,622

YoY - -16% -11% 0% 3% 1% 2%

QoQ -11% 0% 4% 2% -4% - -

Nickel ($/t) 11,863 8,542 8,863 10,231 10,398 10,625 10,637

YoY - -41% -32% -4% 10% 22% 3%

QoQ -30% -10% 4% 15% 2% - -

Zinc ($/t) 1,932 1,683 1,923 2,248 2,191 2,279 2,335

YoY - -20% -12% 21% 34% 26% 5%

QoQ -11% 3% 14% 17% -3% - -

Gold ($/oz) 1,161 1,185 1,259 1,336 1,334 1,334 1,321

YoY - -3% 6% 19% 21% 9% -1%

QoQ -8% 7% 6% 6% 0% - -Source: Bloomberg, BTMU Strategic Research Division, MUB Strategic Research

2015 2016 2017

Chloe Lim

Strategic Research Division (Singapore)


2. Iron Ore

5 Mining Monitor | 19 October 2016

During 3Q’16, prices traded at

narrower range where they briefly

reached at US$61/t in August before

retreating to US$57/t in September.

Nonetheless, prices averaged at

US$58/t, up 4% from last quarter.

Regional floods and temporary

output restrictions amid

environmental checks in China

spurred expectations of tighter iron

ore supply in the country, causing

prices to edge higher between July

and August. Against these

backdrops, China’s inventories

climbed higher as buyers turned to

imports for supplies.

However, prices tapered off in

September as bearish sentiment

stemming from stricter rules for

property purchases in China

increased worries of falling iron ore

demand in the country.

Meanwhile, China’s inventories have

been reducing in September.

6

Iron Ore Prices and Inventories

Prices traded at narrower range in 3Q’16, turning from bullish to bearish sentiment.

2. Iron Ore

1) Price Trend

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China Iron Ore Inventory (RHS) Iron Ore Fines 62%, CFR China Spot Price (LHS)

($/t) (Mt)

Source: Bloomberg, BTMU Strategic Research Division


In 2016, global supply is estimated to

experience almost flat growth due to

production cuts in China as well as

Australia and Brazil’s slower

combined output growth.

Also, global consumption is

forecasted to be flat on the back of

expectation of tighter steel supply-

demand balance in China.

Consequently, the market is

anticipated to be in surplus, and

average iron ore price is projected to

reach US$54/t in 2016. However,

prices in 4Q’16 are anticipated to

soften from 3Q’16 as China’s

demand moderates.

In 2017, global supply growth is

expected to outpace demand as

more low-cost iron ore supply in

Australia and Brazil (such as Roy Hill

and Vale’s S11D) are forecasted to

come on-stream and offset the falling

production in China.

Thus, moderate price decline is

anticipated with pricing likely to hold

at about US$50/t level.

7

Outlook for Iron Ore Prices

Modest market surplus is anticipated in 2016 and 2017, causing prices to see moderate decline.

2. Iron Ore

2) Outlook

($/t)

Yr Avg 1Q 2Q 3Q 4Q (f) 1H (f) 2H (f)

Price 56 48 56 58 56 54 51

YoY -43% -24% -5% 5% 19% 0% -4%

QoQ - 2% 16% 4% -4% - -

Source: Bloomberg, BTM U Strategic Research Division

2015 2016 2017

Influence Factors on Price Trends


2016 2017

Price Trend

Flat Growth Increase

・Government-led production

cutbacks in China

・Firm supply by low-cost

players in Australia and Brazil

・Higher supply by low-cost

players in Australia and Brazil

Flat Growth Increase

・Stagnant steel demand in

China

・Steel demand growth in

developing countries except

China

Source: BTMU Strategic Research Division, MUB Strategic Research

Moderate decrease will continue after 3Q'16

Demand

Supply


2. Iron Ore

3) News Flows

Source: Various sources, BTMU Strategic Research Division

Roy Hill to reach full production capacity in 2017 instead and has sealed deals for majority of its output - 29 September, 2016

The production target of 55 million ton/year is now expected to reach in early-2017 instead of end-2016 due to issues at its ports and processing plants.

In the meantime, it is expected to see iron ore shipments of 14 million tons in the first nine months of 2016.

Nevertheless, Roy Hill has secured contracts for over 90% of its expected annual production. About 50% of the contracted volume is sold to Chinese

mills while the remaining will be shipped to customers in Japan, South Korea and Taiwan.

Vale’s S11D project to ramp-up to 83% of production capacity by 2020 instead of full capacity by 2018 - 23 September, 2016

Vale's S11D iron ore project is expected to be fully operational by 2020, with first shipment expected to be in January 2017, Vale's Executive Manager

for Shipping and Iron Ore Marketing Luiz Meriz said at a major iron ore conference in Dalian on Thursday.

However, due to the company’s strategy to emphasize “value over volume” and its needs to preserve cash and limit transport disruptions, S11D mine

output will be limited to 83% of production capacity or an equivalent of 75 million ton/year by 2020. It was previously expected to reach full production

capacity of 90 million ton/year by 2018.

China’s crude steel output remained firm in the first eight months of 2016 - 14 September, 2016

The latest numbers released by China’s National Bureau of Statistics showed that crude steel production rose by 3% YoY in August to 69 million tons.

In the first eight months of 2016, the country’s crude steel output reached a total of 536 million tons, largely the same as the same period a year ago.

In 2015, China’s crude steel production fell -2% YoY to 804 million tons. Earlier this year, the China Iron & Steel Association forecasted a further

contraction of -2% to 788 million tons this year. While performing below market expectations, the association remains cautious of the country’s

production.

China’s iron ore imports increased in August and first eight months of 2016 - 8 September, 2016

China’s iron ore imports continued to grow in August, surging 18% YoY, the third highest level recorded in a month. The world’s biggest buyer of the

steelmaking raw material took in 88 million tons in August, compared to 74 million tons a year earlier, according to preliminary Chinese customs data

published.

China imported 670 million tons of iron ore in the first eight months of 2016, up 9% from 613 million tons in the same period last year.

William Cheung

Strategic Research Division (Hong Kong)

THE BANK OF TOKYO-MITSUBISHI UFJ, LTD

3. Coal


Global coking coal price continued to

surge in 3Q’16. The average price

for this quarter was $134/ton, up

47.0% from the previous quarter.

The price increase was driven by the

Chinese authorities to cut the

number of working days at coal

mines to reduce coal production and

improve profitability. Besides, the

supply disruption in China caused by

heavy rain and operational issues at

mines in Australia and Mozambique

have contributed to the bullish price

in 3Q’16.

Global thermal coal price went up in

3Q’16, and the average price for this

quarter was $68/ton. The price

increase was supported by

production disruptions in Inner

Mongolia caused by heavy rain.

Inventory restocking by power plants

because of seasonal electricity

demand in summer helped pushing

the price to a lesser extent.

10

Coal Prices

Coking coal price continued to surge supported by tight supply globally, while thermal coal price went up on the

back of production disruption.

3. Coal

1) Price Trends

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Spot Price (Coking Coal) Spot Price (Thermal Coal)($/t)



The global coal market is likely to

move from production surplus to

slight production shortage in 2016

and 2017, against a backdrop of

stagnation of production activities

while demand will remain weak.

The impacts of coking supply

disruption will gradually relieve in

4Q’16. But coking price is expected

to stay high level at an average of

$188/ton in 4Q’16.

The price will decrease to around

$120/ton by the end of 2017 after the

supply disruption and operational

issues have settled.

Meanwhile, the thermal coal price is

likely to fall moderately from the

current price above $81/ton to

$75/ton in 4Q’16 amid the temporary

rise in thermal coal output in China.

In 2017, the price is likely to continue

its downward momentum.

11

Outlook for Coal Prices

Global coal market could turn into production shortage in 2016 and 2017. Coal prices are likely to decrease in 2017.

3. Coal

2) Outlook


($/t)

Yr Avg 1Q 2Q 3Q 4Q (f) 1H (f) 2H (f)

Coking Coal 90 79 91 134 188 146 122

YoY -23% -27% 1% 58% 143% 71% -24%

QoQ - 2% 15% 47% 41% - -

Thermal Coal 58 51 52 68 75 67 61

YoY -18% -18% -11% 16% 42% 29% -14%

QoQ - -4% 2% 30% 11% - -Source: Bloomberg, Thomson, BTMU Strategic Research Division

2016 20172015


2016 2017

Price Trend

Decrease Flat Growth

・Government-led production cutbacks

in China

・Supply disruption against a

backdrop of heavy rain in China

・Operational issues in Australia

and Mozanbique

・Recovery from supply

disruption and operational issues

・Progress of cutbacks in China

Decrease Flat Growth

・Switching to low carbon fuels for

electricity generation in China

・Stagnant steel demand in China

・Growth of steel demand in

developing countries except China

・Increase of energy demand in

developing countries


Decrease after 3Q'16

Supply

Demand

Thermal coal price rally may fizzle out amid rising Chinese output – 26 September, 2016

The recent price rally in seaborne thermal coal price may come to an end in the near term, as Chinese thermal coal production is likely to increase

attributable to a possible easing of policy. The price increase in recent weeks was boosted by Chinese supply cuts (i.e. reduction in annual working days

at coal mines from 330 to 276) that have led to severe supply tightness in China and international seaborne coal markets. However, the production

curtailment in China will start to relax in the near term as major coal miners are allowed to increase their thermal coal output because of the short-term

policy loosening (For details, please refer to 2nd News). As such, seaborne thermal coal price is likely to fall to $60/ton by end of 2016.

China allows thermal coal miners to adjust output in 4Q’16 – 9 September, 2016

The NDRC (National Development and Reform Commission) has implemented a short-term policy tool to stabilize the rising thermal coal price in the

next four months. Each of the major thermal coal miners in China is allowed to increase daily output by 500,000 tons if the thermal coal price hits

RMB500/ton ($74.9/ton) for two consecutive weeks. But if the price falls below RMB480/ton ($71.9/ton) for two consecutive weeks, the adjustment for

output increase will be cancelled. This fine-tuning policy gave the flexibility to Chinese thermal coal miners to increase their output from September to

December, but they have to reduce their output in some other months. Hence, the overall output of each thermal coal miner will be no higher than their

mining capacity on 276-workday basis. As of 5 September 2016, the thermal coal price of 5,500 kcal/kg at China’s Qinhuangdao Port was RMB503/ton

($75.4/ton).

China hits 60 percentage of coal capacity cut target for 2016 – 9 September, 2016

China has reduced its annual coal production capacity by 150 million tons in the first eight months of 2016, accounting for 60.0% of its coal capacity cut

target of 250 million tons this year. This ratio was much higher than that of 38.0% in the first seven months of 2016. The NDRC explained that it has

revoked 28 coal mining licenses and stopped 286 coal mining production in August following the safety inspection at 4,624 China’s coal mines. China

was slightly behind its coal capacity cut target in August; however, the NDRC has confident to accomplish the target by the end of November 2016.

Coking coal price are exploding higher – 7 September, 2016

Coking coal price has increased more than double since February 2016 and rose more than 60% alone from the start of August this year. In addition to

cutting working days for coal miners in China, the sharp jump in price was a reflection of supply disruptions caused by weather-related closure of major

coal producing regions and key coal transport routes in China. Also, seaborne export markets have also been constrained with operational issues in

Australia and Mozambique. Looking ahead, the coking coal price movement will depend on the supply disruption ease in the near term.


3. Coal

3) News Flows


Katia Tavarez

Strategic Research (NY)

MUFG UNION BANK, N.A.

4. Copper


Copper prices broadly settled into a

$4,600/t to $5,000/t range. The metal

declined through most of July and

August due mostly to a sharp uptick

in LME stocks, which rose by 53%

over this period, as well as the loss

of momentum in Chinese copper

imports and the strengthening of the

US dollar.

More recently, however, prices have

started to climb, pushing above the

$4,700/t level in mid-September,

where copper was trading prior to the

recent surge in LME inventories. This

turnaround in prices coincided with

the end to inventory build in LME

warehouses, outflows of the material

from SHFE warehouses, and

stronger Chinese macro data.

Ultimately, prices closed the month

of September with a 4.6% m-o-m

gain, but for the quarter, prices were

unchanged.

14

Copper Prices and Inventories

Copper prices recoup early quarter losses in September as LME stock levels stabilize.

4. Copper

1) Price Trends

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LME Inventory (RHS) LME Spot Price (LHS) SHFE Inventory (RHS)

($/t) (Kt)

Source: Bloomberg, MUB Strategic Research


Production cutbacks peaked in

September 2015 in response to lower

prices and have dwindled since due

mostly to industry cost deflation and a

generally bullish outlook on long-term

copper prices among industry players.

In 2016, copper output continues to

grow strongly, with mine supply

surprisingly strong this year due in part

to very low disruption rates.

On the demand side, there was some

improvement since July 2016, owing

mostly to stronger Chinese housing and

auto markets and an uptick in the

country’s air conditioner production.

Despite the recent uptick in Chinese

demand, we expect the market to

remain in a state of surplus due to

strong supply.

The surplus forecasted for the copper

market will depress prices. Thus, prices

are expected to continue to decline at a

moderate pace through 2017.

15

Outlook for Copper Prices

Tighter supply surpluses are now anticipated for the 2016-17 period, pushing up price forecasts though prices are

still expected to remain well-below 2015 levels.

4. Copper

2) Outlook

($/t)

Yr Avg 1Q 2Q 3Q 4Q (f) 1H (f) 2H (f)

Price 5,492 4,676 4,727 4,784 4,674 4,611 4,545

YoY -20% -19% -22% -9% -4% -2% -4%

QoQ - -4% 1% 1% -2% - -

Source: Bloomberg, M UB Strategic Research

2015 2016 2017



2016 2017

Price Trend

Increase Moderately Increase Moderately

・New mine expansions,

especially in Peru

・Firm production in general

based on players' bullish

copper outlook

・Continuous supply increases

by low-cost players

・Postponement to the restart oｆ　Glencore's African operation

Increase Moderately Increase Moderately

・Temporary demand recovery in

China's housing sector and

solid demand from the

country's automotive sector

・No meaningful re-acceleration

factor in consumption,

particularly out of China


Supply

Demand

Moderate decrease will continue after 3Q'16


4. Copper

3) News Flows

Source: Various sources, MUB Strategic Research

BHP sees tough near-term outlook for copper, but the long-term remains positive – 21 September, 2016

According to BHP Billiton, the world’s largest mining company, although the near term outlook for copper remains challenged, the long-term is

encouraging. In its latest annual report, the company noted that new supply will continue to keep ‘steady demand growth well covered’ in the near-term.

For the longer-term, the ‘trend remains positive’, owing to China and the shift in that country to becoming a more consumption-based economy. Demand

will also be supported by ‘continued growth’ in other emerging economies. BHP expects a supply deficit to materialize ‘as grade declines, a rise in costs

and a scarcity of high-quality future development opportunities are likely to constrain the industry’s ability to cheaply meet this demand growth’.

The Chinese air conditioner market improves in August – 20 September, 2016

According to China IOL, Chinese residential air conditioner (AC) production for August volume rose 33% y-o-y to 9mn units, accelerating from +15% y-

o-y in July. Total sales rose 27% y-o-y to 9mn units, driven by a combination of positive domestic sales (71% of total sales) and export sales (29% of

total sales), which rose 23% y-o-y and 39% y-o-y, respectively. China IOL attributes the strength of August numbers to hot weather in Asia and Africa,

and improving macro conditions in Europe. Despite the recent improvement, for the January-August period, AC production is still down by 3.3% y-o-y

while sales are down by 8% y-o-y. For September and October, higher output levels are expected, which may translate to higher demand for copper

tube.

Rio Tinto sees an inflection point in Chinese growth – 19 September, 2016

According to Rio Tinto, the world’s second largest mining company, even though the short-term picture of Chinese demand is blurry, the Chinese long-

term demand outlook is more encouraging. According to CEO Jean-Sebastien Jacques, Rio Tinto sees ‘an inflection point and [they] are going to make

the most of it’, adding that the company believes that, out of all of the commodities it mines, copper would be the first commodity to come out of the

current ‘twilight zone’. Recent data out of China has been stronger-than-expected and is leading many industry analysts to upgrade their copper price

forecasts.

Week-long strike ends at Anglo American’s Los Bronces copper mine – 16 September, 2016

After being hit by a week-long strike at its Los Bronces copper mine in Chile, Anglo American announced that it signed a new collective contract with

striking workers that will be valid until 2020. Operation began to normalize on September 16 after the striking workers finally accepted the same wage

offer that they had rejected previously, with the impact of the strike to be reported in quarterly results. Los Bronces is one of Chile’s largest mines,

producing around 402K tons of fine copper last year. The strike at Los Bronces follows a five-day strike at Codelco’s El Salvador mine and a long 13-

day strike at Anglo American’s El Soldado mine.

Tom Haddon

Strategic Research Division (London)


5. Aluminum


The apparent decrease in Chinese

production through the first seven

months of the year appears to have

installed a floor to pricing around the

$1,600 per tonne mark as prices have

rarely dipped below it since July.

LME stocks have also continued to

decrease through this period, aided by

relatively healthy demand from transport

and consumer markets, helping to

provide further stability to pricing.

However, worries over Japanese

automotive output, closely watched by

traders, is predicted by Platts to be 10%

lower in 4Q’16 than 3Q’16, limiting the

price upside.

The latest AIA data, released in

September also showed Chinese output

up in the month of August at an 11-

month high. This has reignited fears that

capacity restarts in China are

happening, and increasing bearish

sentiment.

18

Aluminum Prices and Inventories

Price recovery has stalled around the $1,600-1,650 per tonne range as worries persist over long term supply outlook.

However prices appear to have stabilized at this level.

5. Aluminum

1) Price Trends

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LME Inventory (RHS) LME Price (LHS)($/t) (Kt)



Despite government-led production

cutbacks in China in early 2016,

world production will increase

modestly due to Chinese smelters’

restarts against a backdrop of

tightening supply.

On the demand side, consumption

maintains steady growth due to

transport and consumer markets

especially in emerging markets.

Consequently, the market deficit is

forecast to remain in 2016. However,

in 2017, due to increased Russian

output with Rusal’s Boguchansk

smelter coming online and continued

Chinese smelter restarts, the deficit

is forecast to decrease.

In terms of price, as the early smelter

restarts are felt in 4Q’16 and

Chinese output increases, prices are

expected to decrease.

However demand growth in 2017

should instill marginal price growth

with a small single-digit percentage

price increase forecast.

19

Outlook for Aluminum prices

The aluminum market is forecast to be in deficit during 2016, however Chinese smelter restarts will decrease this

deficit in 2017 to leave a balanced market and a stable price.

5. Aluminum

2) Outlook

($/t)

Yr Avg 1Q 2Q 3Q 4Q (f) 1H (f) 2H (f)

Price 1,680 1,516 1,582 1,614 1,554 1,569 1,622

YoY -11% -16% -11% 0% 3% 1% 2%

QoQ - 0% 4% 2% -4% - -


2016 20172015



2016 2017

Price Trend

Increase Increase

・Continuous supply increase by

major smelters

・Some Chinese smelters

restart operation

・New smelters start operation

in Russia

・Further restarts from Chinese

smelters


・Solid demand from transport and consumer market

Decrease in 4Q'16 but it will turn upward

Supply

IncreaseDemand

Rusal sees stable aluminum prices for first time in five years - 16 September, 2016

Russian aluminum giant Rusal expects aluminum prices to stabilize within a $1,600-1,700 per tonne range next year if China does not increase

production, global stocks keep falling and demand grows. Rusal builds this forecast on the assumption a global deficit of 700,000-800,000 tonnes

develops this year. The figure is quite symbolic, taking into account expected consumption of 60 million tonnes. However, tt is important because it

shows the market is pulling out of the situation of excessive production which will support prices.

Short Term: Chinese Aluminum Production Continues to Fall - 7 September, 2016

According to data released by the International Aluminum Institute, China produced ~2.66 million metric tons of aluminum in July—a YoY decline of

2.4%. Now, Chinese aluminum production has fallen on a YoY basis in six out of the last seven months. On a year-to-date basis, Chinese aluminum

production has fallen by ~3.1%—compared to the same period in 2015.

Norway's Hydro raises 2016 aluminum demand growth forecast to 4-5% - 21 July, 2016

Norsk Hydro has raised its annual global aluminum demand growth forecast to 4-5% for 2016, up from the previous forecast of 3-4%, the Norwegian

producer said. The major producer cited higher-than-expected activity in China raising its demand outlook for the country to grow by 5-7% in 2016.

Globally, the company expects a largely balanced aluminium market for the full year.

Long Term: Rio Tinto Predicts Chinese Aluminum Demand Will Fuel Huge Bauxite Boom - 2 July, 2016

Mining major Rio Tinto has projected a bullish scenario on bauxite demand as the aluminum making raw material will be buoyed by high demand from

China. It said China will need tons of bauxite for running its Aluminum smelters and alumina refineries. Rio Tinto has already done the groundwork by

making sizable investments in Bauxite mines of Australia. Its Amrun development on Queensland’s Cape York Peninsula was approved in 2015 and

can produce 23 million metric tons from 2019 and its existing operation will be raising output by 10 million tons a year. China has drastically increased

the volume of Bauxite imports from 2.2 million tons to 50 million tons in the past decade after the quality and volume of domestic sources became

inadequate.


5. Aluminum

3) News Flows


Tom Haddon



6. Nickel


The initial response to the

environmental crackdown on mining,

predominately nickel mining, in the

Philippines in July was rising prices

on fears of a scarcity of supply for

Chinese buyers.

However, Chinese buying patterns

changed quicker than expected, from

Philippine nickel ore to Indonesian

refined nickel, and as such the price

rally stalled in August.

Conversely in September the

Philippines’ Environment Minister

again warned of further action with a

possible 12 further mines likely to be

closed. This worried the market as it

could possibly represent a supply

gap that other international

producers would struggle to fill.

Due to this price increased by 10% in

six days in September to push back

above $10,600 per tonne.

22

Nickel Prices

The strong price recovery from early June to mid-August abated due to Indonesian supply meeting Chinese demand,

however renewed warnings from the Philippine government put prices back above $10,600 in September.

6. Nickel

1) Price Trends

0

100

200

300

400

500

0

10,000

20,000

30,000

40,000

Sep-0

8

De

c-0

8M

ar-

09

Jun-0

9

Sep-0

9

De

c-0

9

Ma

r-1

0

Jun-1

0

Sep-1

0

De

c-1

0

Ma

r-1

1

Jun-1

1

Sep-1

1

De

c-1

1

Ma

r-1

2

Jun-1

2

Sep-1

2

De

c-1

2

Ma

r-1

3

Jun-1

3

Sep-1

3

De

c-1

3

Ma

r-1

4

Jun-1

4

Sep-1

4

De

c-1

4

Ma

r-1

5

Jun-1

5

Sep-1

5

De

c-1

5

Ma

r-1

6

Jun-1

6

Sep-1

6

LME Inventory (RHS) LME Spot Price (LHS)($/t) (Kt)



23

Outlook for Nickel prices

Further shutdowns of Philippine supply will push the market into deficit during 2016 and support prices through

1H’17. A global supply response is forecast to slow the price increase by 2H’17.

6. Nickel

2) Outlook

($/t)

Yr Avg 1Q 2Q 3Q 4Q (f) 1H (f) 2H (f)

Price 11,858 8,542 8,863 10,231 10,398 10,625 10,637

YoY -30% -41% -32% -4% 10% 22% 3%

QoQ - -10% 4% 15% 2% - -


2016 20172015

Global nickel supply will reduce as a

backdrop of a government led

crackdown on mining in the

Philippines.

On the other hand, global

consumption continues to grow,

mainly due to Chinese stainless steel

output increasing.

Consequently, the market is forecast

to be in deficit through 2016.

However, in response to rising prices

due to cuts to supply foreign supply,

Chinese capacity is forecast to return

to the market in 2017. Allied to this,

increased ferro-nickel output will

reduce the deficit in 2017.

Prices are forecast to continue to

increase through 4Q’16 and through

2017 as the effects of a tighten

supply situation continue to be felt.

However due to a global supply

response, it is forecast to be modest

growth.



2016 2017

Price Trend

Decrease Increase

・Government-led mining

crackdown in the Philippines

・Capacity cutbacks in China

・Chinese capacity return to the

market due to higher price

・Increase of ferro-nickel output

in Brazil

Increase Decrease Moderately

・Increase of stainless steel

production in China

・Curming stainless steel

production decreases

moderately


Increase but its pitch will slowdown

Supply

Demand

Philippine mine closures bolster nickel price – 27 September, 2016

The Philippines’ decision to suspend half of its mining operations for failing to meet environmental standards boosted nickel prices, signalling a further

recovery in its fortunes after it hit a 13-year low earlier this year. Results of an audit found only 11 mining operations out of 41 complied with the

country’s environmental and mining laws. Ten mines (8 of which are nickel) have already been ordered to stop production in the country. The mines that

failed the audit, including those previously ordered shut, accounted for half of the Philippines’ nickel production last year, officials said. Analysts at

Goldman Sachs said the total production lost is 223,000 tonnes, or 11 per cent of global supply.

Glencore Sees Nickel Price Rising on Global Supply Shortage – 21 September, 2016

Glencore, the commodities trader and miner, expects nickel prices to climb through 2018 as demand outstrips supply, assuming Indonesia continues its

policy of curbing ore exports and encouraging local processing. The Philippines, the world’s largest shipper of mined nickel used in stainless steel, is

carrying out an environmental audit and closing mines that don’t meet international standards, curbing supply. Output of stainless steel in China, the

world’s biggest producer, has also been increasing this year as new capacity fires up. The global deficit will probably be about 100,000 metric tons in

2016 in terms of nickel metal, and shortages will continue going forward, said Glencore.

Russia's Nornickel sees nickel price stabilizing at $10,000 per tonne – 15 September, 2016

The stainless steel ingredient has been a top performer on the London Metal Exchange this year, with prices up about 30 percent since February lows

to $9,730 a tonne. Its climb has mainly been driven by concern over supplies after mine closures in the Philippines and Indonesia's 2014 ban on nickel

ore exports. Nornickel expects Philippines and Indonesia to be busy building new infrastructure and modern production for some time as it takes 4 to 6

years to build up new facilities. Nornickel admits its expectation is on the conservative side as a Reuters poll shows a consensus of almost $11,000 per

tonne in 2017.


6. Nickel

3) News Flows


7. Zinc

25

Tom Haddon




Zinc prices have gained almost

constantly since July 2016 with only

a small price contraction occurring in

late September due to lower

seasonal galvanized steel production

in China.

Zinc production has fallen and

inventories remain well below 2013

highs, indicating a tight market.

Demand remains resilient, supported

by ongoing global infrastructure

spending.

Therefore prices have received

upwards support on the expectation

that the market will remain in deficit

through 2016 and 2017.

26

Zinc Prices and Inventories

A consistent trend of tightening supply though 3Q’16 has led to a strong price response.

7. Zinc

1) Price Trends

0

500

1,000

1,500

2,000

0

1,000

2,000

3,000

4,000

Sep-0

8

De

c-0

8

Ma

r-0

9

Jun-0

9

Sep-0

9

De

c-0

9M

ar-

10

Jun-1

0

Sep-1

0

De

c-1

0M

ar-

11

Jun-1

1

Sep-1

1

De

c-1

1

Ma

r-1

2

Jun-1

2

Sep-1

2

De

c-1

2M

ar-

13

Jun-1

3

Sep-1

3

De

c-1

3

Ma

r-1

4

Jun-1

4

Sep-1

4

De

c-1

4

Ma

r-1

5

Jun-1

5

Sep-1

5

De

c-1

5

Ma

r-1

6

Jun-1

6

Sep-1

6

LME Inventory (RHS) LME Spot Price (LHS)($/t) (Kt)



Production of nickel is decreased

due to mine closures, strictly

regulation in Chinese market, and

mothballing of Glencore’s mines.

On the demand side, Chinese

consumption will grow due to

government’s stimulus measures

while consumption in the US will

decline. Overall, global consumption

is forecast to increase slightly.

As a result, the market is forecast to

be supply deficit through 2016 and

2017.

Although seasonal factors will cool

prices in 4Q’16, a tight market

continues to support prices.

However capacity, such as

Glencore’s mines with up to 500kt

per annum capacity, are forecast to

return to production. Although not

expected to achieve full output next

year, it is likely some production will

return and slow price gains in 2H’17.

27

Outlook for Zinc prices

A sustained supply deficit will drive prices higher in 2017, although capacity is assumed to return to the market (e.g.

Glencore’s mothballed assets) limiting 2H’17 price growth.

7. Zinc

2) Outlook

($/t)

Yr Avg 1Q 2Q 3Q 4Q (f) 1H (f) 2H (f)

Price 1,939 1,683 1,923 2,248 2,191 2,279 2,335

YoY -11% -20% -12% 21% 34% 26% 5%

QoQ - 3% 14% 17% -3% - -


2016 20172015



2016 2017

Price Trend

Decrease Increase

・Mine closures in Australia,

India, Ireland & Peru

・Glencore's mines remain

mothballed

・Restart of Glencore's

operations though it will take

time to reach full capacity

Increase Slightly Increase Slightly

・Chinese consumption

increase offsetting a decrease

in the US

・European demand moderate

increase

・Robust demand growth in

　China due to solid

　inflastructure investment


Decrease in 4Q'16 but it will turn upward

Demand

Supply

Five years of deficits will keep zinc price on the boil – 20 September, 2016

Zinc's prospects brightened considerably after the shutdown of two major mines last year – Australia's Century and the Lisheen mine in Ireland. The two

mines had a combined output of more than 630,000. The shuttering of top zinc producer Glencore’s depleted Brunswick and Perseverance mines in

Canada in 2012 brings total tonnes going offline since 2013 to more than one million tonnes. Shortage is most acute at mine level with ore and

concentrate production forecast to drop by 6.8% year on year in 2016. Total global refined output will shrink by just under 1% this year and return to

tepid growth of less than 2% through 2020, outpaced by demand growth.

Zinc demand set to outpace production – 119 October, 2016

Global zinc demand growth is set to marginally outpace production growth between now and 2020, averaging 1.7% and 1.3%, respectively, advisory

firm BMI Research (a division of Fitch) said. Refined zinc production is slowing as weak prices and an ore shortage force major producers to curb

output. This includes China’s refined zinc output falling by 2% to 6.1-million tons as the Chinese government continues to consolidate the sector and

refiners start to feel the supply constraints. Zinc prices on the London Metal Exchange are expected to average $2 000/t for the next three months,

implying prices will finish the year at around $2 130/t, the advisory firm said.

Lundin CEO sees right conditions for Portuguese zinc mine expansion – 19 October, 2016

Lundin Mining could double zinc production at its Neves-Corvo mine in Portugal as a big rally in prices and looming deficit of the metal used to rust-

proof steel have created the right conditions for an expansion, its chief executive said. The expansion would increase annual zinc in concentrate

production to 150,000-160,000 tonnes from 80,000 tonnes at the mine, which also produces copper. The project will take about two years, once

approved, and cost an estimated 250 million euros ($280.53 million). Major new sources of production are unlikely in the near-term, he said, with just a

handful of new mines planned and a paucity of exploration in the last decade.


7. Zinc

3) News Flows


Katia Tavarez

Strategic Research (NY)

MUFG UNION BANK, N.A.

8. Gold


30

Gold Prices, ETF Holdings, and 10Yr US TIPS Yield

Gold prices remain range-bound, rising slightly September on USD sell-off and Fed’s rate decision and guidance.

8. Gold

1) Price Trends

After recording a moderate loss in

August, gold prices turned slightly

higher in September (+2.1% m-o-m);

still, the metal remained bound to the

$1,309/oz to $1,366/oz range of the

past quarter.

In September, prices were buoyed by

the sell-off in the US dollar early in

the month after disappointing US

economic data from the US Institute

for Supply Management (ISM), as

well as the Federal Reserve's

September FOMC meeting where

the central bank left rates unchanged

and cut the number of rate hikes it

expects in 2017 and 2018.

Gold positioning continues to look

bullish, with net long contracts at the

COMEX remaining near all-time

highs in September though those

positions were roughly unchanged

on a monthly basis. Gold ETF

holdings were also unchanged in

September, but remain at multi-year

highs.

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

10Yr US TIPS Yield (%)

600

900

1,200

1,500

1,800

2,100

2,400

2,700

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Sep-0

8D

ec-0

8M

ar-

09

Jun-0

9

Sep-0

9D

ec-0

9M

ar-

10

Jun-1

0

Sep-1

0D

ec-1

0M

ar-

11

Jun-1

1

Sep-1

1D

ec-1

1M

ar-

12

Jun-1

2

Sep-1

2D

ec-1

2M

ar-

13

Jun-1

3

Sep-1

3D

ec-1

3M

ar-

14

Jun-1

4

Sep-1

4D

ec-1

4M

ar-

15

Jun-1

5

Sep-1

5D

ec-1

5M

ar-

16

Jun-1

6

Sep-1

6

(t) ETF Holdings (RHS) Gold Price (LHS)($/oz)

Source: World Gold Council, GFMS, Bloomberg, MUB Strategic Research


31

Outlook for Gold Prices

Resilient investment demand to continue to offset lackluster physical demand for gold, with relatively stable prices

anticipated through end 2017.

8. Gold

2) Outlook

Even though physical demand for

gold has been dismal in 2016,

strength from ETFs continues to

support gold. We expect this trend to

persist in the quarters ahead given

recent downgrades to the Fed’s

2017-18 rate outlook, as well as

expectations of negative interest

rates in major economies like the EU

and Japan. Another supportive factor

is uncertainty surrounding the US

presidential election.

We increase our investment demand

forecasts for 2016 and 2017 to

reflect the current global macro

outlook. At the same time, we

continue to anticipate a decline in

mine supply in 2016 and 2017 as

new projects are unlikely to make up

for falling ore grades.

As for prices, we increase our 2H’17

gold price forecast to $1,321/oz from

$1,220/oz previously, but note some

near-term downside risks stemming

from the potential liquidation of long

positions.

($/oz)

Yr Avg 1Q 2Q 3Q 4Q (f) 1H (f) 2H (f)

Price 1,160 1,185 1,259 1,336 1,334 1,334 1,321

YoY -8% -3% 6% 19% 21% 9% -1%

QoQ - 7% 6% 6% 0% - -

Source: Bloomberg, M UB Strategic Research

2015 2016 2017



2016 2017

Price Trend

Increase Decrease Moderately

・Increase in gold scrap supply

as it responds to higher gold

prices

・Falling ore grades to drag

down mine supply despite

new projects


・Solid demand for ETFs as safe-haven investment

Increase

Supply

Demand

Decrease moderately after 3Q'16


8. Gold

3) News Flows

Gold attracts highest level of exploration spending in 2015 – 22 September, 2016

According to a new report by SNL Metals and Mining, gold was the commodity that attracted the highest level of exploration spending in 2015 with a

US$3.94bn allocation (45% of the global total) even as the global exploration budget fell on an annual basis. A separate SNL report earlier in the month

showed that major gold miners have markedly switched their exploration focus over the past ten years, moving towards mine-site exploration and away

from greenfield projects. Among the Top 20 gold producers, the share of near-mine work rose from 44% to 54% between 2006 and 2015, while the

share of greenfields fell from 40% to 22%.

Lower M&A deals amid high gold prices – 21 September, 2016

According to mining.com and data gathered from Thomson Reuters, gold mining companies have closed 142 deals worth just US$4.6bn so far this year,

down sharply from US$6bn in the same period last year. As Gary Goldberg, CEO of Newmont Mining, suggests, higher gold prices have dampened

M&A hopes for the industry. At the annual gold mining industry conference in Denver, Goldberg noted that ‘if the industry experienced lower gold prices

for longer this year, there would likely have been more mergers and acquisitions’, adding that ‘folks who may have been knocking on our door have

gone the other direction now that prices have come up.’

Barrick’s third largest gold mine is suspended – 15 September, 2016

The cyanide-bearing solution leakage at Veladero, Barrick Gold Corp.’s third largest gold mine, has resulted in an ‘indefinite’ closing of the mine. The

Argentinean Environment Minister has called Provincial officials to start criminal proceedings in reference to the event. This suspension at the

Argentinean operation comes almost one year after Barrick was forced to suspend work at Veladero after a more serious toxic solution spill. Veladero is

expected to produce between 580K and 640K ounces of gold this year. Barrick doesn’t expect ‘any material impact to Veladero’s production for the

year’.

Miners push into the digital era with Cortez mine – 12 September, 2016

Barrick Gold Corp. announced that it would partner with Cisco Systems Inc. to drive the ‘digital reinvention’ of its global mining operations. The company

noted that by harnessing the potential of digital technology, it would be ‘enhancing productivity and efficiency’ at its mines and ‘improving decision-

making and performance across every area of our business’. The first step of the Barrick-Cisco collaboration will be developing a ‘flagship digital

operation’ at Barrick’s Cortez mine in Nevada, whereby digital technology becomes entrenched in every aspect of the mine to deliver ‘better, faster, and

safer mining’. For example, there will be equipment automation to improve productivity while algorithms will improve the accuracy and speed of

maintenance and metallurgy.

Source: Various sources, MUB Strategic Research

Disclaimer


This report is intended only for information purposes and is not intended to constitute an offer or solicitation to buy or sell securities or any

other products. Contents of the report are information as at publish date and are subject to change without notice. This report has not been

prepared to provide legal, taxational, financial, market-judgmental, or any other advises on propriety of any transactions. In taking any

action, each reader is requested to act on the basis of his or her own judgment upon consulting certified lawyers, accountants or other

professionals regarding the accuracy, validity and reliability of information appeared in this report.

Bank of Tokyo-Mitsubishi UFJ is regulated by the Financial Services Authority.

No part of this publication may be reproduced, stored in a retrieval system or transmitted without the prior written permission of The Bank

of Tokyo-Mitsubishi UFJ Limited.

Copyright© 2016 The Bank of Tokyo-Mitsubishi UFJ, Ltd. All rights reserved.

Publisher：The Bank of Tokyo-Mitsubishi UFJ, Strategic Research Division (Corporate Research Office)

2-7-1, Marunouchi, Chiyoda-ku, Tokyo 100-8388, Japan

Contact details for inquiries : Kouichi Akimoto

(TEL：03-3240-5386、e-mail：[email protected])

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