Outlook for the Zinc Market2008

Nordic Galvanizers Höstmöte

Mikael Lesser

25. oktober 2007

The message from Zn metal market

1. Global Zn market is in balance (+135 Kmt) for 2007 but is expected to move into oversupply (+425 Kmt) in 2008

2. European market needs to import: production – consumption balance Zn metal in 2008: - 280 KMT

3. European 2008 contract premiums under pressure by low spot premiums

1. Global Market situation

Main drivers:A. Concentrates oversupply -> increased metal output

B. Zn metal output is expected to outpace demand

C. However: LME stocks have been decreasing tounder 60 Kmt

D. China imports concentrates, but now metal is inbalance

E. also global freight rates increase again

Business cycle of metalsAvailability of raw materials

Availabilityof metal

-

+

+ -high metal priceslow TC/RC

high metal priceshigh TC/RC

low metal priceshigh TC/RC

low metal priceslow TC/RC

A. World Zn Concentrate Market:The concentrate market has turned from balance in 2007, into an expected oversupply in 2008. High prices have spurred mining activities.

data: CRU Zinc Quarterly, July ´07: comparison of forecasted Zn metal production capacity and available Zn concentrates; orange part of bar indicates the requirements which still can be fullfilled by stock drawdown; green part of bar indicates actual deficit

World Zn Metal Market:Improved availability of raw materials has turned the balance and will create oversupply of zinc metal globally.

World Zinc Metal

(424) (360)

135

425 445310

95

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2005 2006 2007 2008 2009 2010 2011

prod

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(500)

(200)

100

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700

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bala

nce

World Balance in '000 tonsWorld Production in '000 tonsWorld Consumption in '000 tons

data: CRU Zinc Quarterly, July ´07; comparison of forecasted Zn metal consumption versus forecasted Zn metal production, taken the corresponding availability of Zn concentrates into consideration: starting from the availability of concentrates and thesmelter capacities CRU derives the forecasted production

BUT: LME stocks are still decreasing

China: Zinc Market: Record expansion plans for zinc metal production in ’07 and ´08 (in ’08 alone another 680,000 tons of production is expected to come on stream) are currently changing the world scene of the zinc market. The consequence are record imports of zinc concentrates to feed the smelters. Moreover also local production of galvanized sheet has been provided for which led to record exports to Europe, disturbing the production of the European players.

China: Net-Importer of Zn Concentrates Zn Metal is currently in balance

-120,000-110,000-100,000-90,000-80,000-70,000-60,000-50,000-40,000-30,000-20,000-10,000

010,00020,00030,00040,00050,00060,00070,000

Apr´06

May´06

Jun´06

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Oct´06

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tonsConcentratesMetal

Data: CHR Metals: World Zinc/China ZincPositive figures indicate net exports; negative figures indicate net imports Export figures are for all refined zinc, not just >99.995%.

China: Zinc Market:

Within the last couple of years China´s need for zinc metal has multiplied and is expected to continue to do so (from the current 33% share of world demand to 50% in 2020)…

Data: Macquarie Bank Ltd, Jim Lennon, 18.08.07, presentation at the 150th anniversaryof the Zincgruvan mine.

China: Zinc Market: … and also steel. And steel needs to be galvanized.

Data: Macquarie Bank Ltd, Jim Lennon, 18.08.07, presentation at the 150th anniversaryof the Zincgruvan mine.

China: Zinc Market:

Correspondingly China´s per capita zinc metal consumption has increased but is still lagging behind that of developed countries. India has not even started to go down that path – thus: there too is a huge potential.

Data: Macquarie Bank Ltd, Jim Lennon, 18.08.07, presentation at the 150th anniversaryof the Zincgruvan mine.

Freights are increasing..

European zinc deficit is widening in 2008However low spot premiums depress 2008 contract premia

• European zinc deficit increases, forecast:– 2007: 250 Kmt, 08: 286 Kmt (CRU Zinc Quarterly, May 07)

• LME stocks stand at low levels (<12 KMT)• However, unknown level of unwarranted zinc stocks • Zn consumption increase expected for 2008:

– 1.1% increase to 2.3 mln mt (CRU Sept 2007)– New galv. lines 2007/08: Voest Alpine (2x), Corus,

USSteel, Riva, TKS • Current SHG spot slab premium: 230 USD/MT, Ex

works, cash payment (CRU Sept07)• Premiums will increase once stocks are eaten

European premiums under pressure: what happened?

Parties that sit on ”expensive” stocks drive the spot premiums down as need to sell. These stocks accumulated because:

1. Conditions that set 2007 premiums changed:– Backwardation vanished, no more waiting time at New Orleans

LME warehouses, LME price dropped 30%• And thus the high premiums attracted a lot of zinc metal to

Europe (1half 2007: 320 Kmt, which is more than 2007 deficit)2. Lower consumption at Continuous Galvanizers:

– Lower sales as high prices attracted imports of galvanized sheetfrom China and India

– Thinner coatings to reduce galvanizing costs 3. Consumers contracted >100% of needs to secure supply

Zn Metal Balance in Europe:Europe remains a net-importer of zinc metal....

Zn Metal Balance in Europe

2

(193)(251) (286) (324) (330) (351)2000

2100

2200

2300

2400

2500

2600

2700

2005 2006 2007 2008 2009 2010 2011

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Balance EuropeProduction Total EuropeConsumption Total Europe

data: CRU Zinc Quarterly, May 2007; comparison of forecasted Zn metal production capacity and Zn metal consumption; Bulgarian and Romanian figures are taken out of the equation as they mainly export to non-EU countries; as soon as the EU stats show that they start to export more to the EU we will include the those countries again in this chart

European premiums have increased

to overcome Barriers for ”Traditional” importsources:

• Widening European supply - demand gap• ”High” freight rates• Import duty (2.5% of zinc price)• Imports will be slabs: Differential Jumbos vs

Slabs have increased

Zn Metal Imports (custom cleared) into the EU15:

320,000 tons of imports into the EU 15 (Jan-Jun ´07)(excl. Norwegian imports) - a 18% (= 57,000) increase since last month

05000

10000150002000025000300003500040000450005000055000600006500070000

KAZA

KHST

AN

CH

INA

IND

IA

NAM

IBIA

MEX

ICO

AUST

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IA

BRAZ

IL

PER

U

ALG

ERIA

UZB

EKIS

TAN

RU

SSIA

IRAN

U.S

.A.

THAI

LAN

D

CAN

ADA

CGG / GOBHGSHG

data: WorldTradeStats (LME warehouses (i.e. New Orleans) supplied various brands)imports mean customs cleared metal, not necessarily physical shipments; the shipments can have taken place much earlier; data includes only sums per country > 1000 t for a given period

Galvanized Sheet in Europe

(2,000)

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28,000

33,000

2000 2001 2002 2003 2004 2005 2006 Jan-June ́ 07

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Production

Consumption

Balance

data: WorldTradeStats, imports mean customs cleared metal, not necessarily physical shipments; the shipments can have taken place much earlier; data includes galvanized sheet with > 600 mm width

The galvanized sheet market: construction2006: The driver for the galvanized sheet market was the construction industry in 2006 whose businessvolume has increased by 7% yoy (Eurostat figures).2007: Business volume in construction stayed on the same high level for the first six months of this yearand is expected to continue to do so for the next 3 months. Was the construction industry able to absorb all the additional output of galvanized sheet or have stocks been built up?

Construction - Index 2000 = 100

60

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140

Q2 2005 Q3 2005 Q4 2005 Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007

EU27 Germany France Italy UK

data: Eurostat

The galvanized sheet market: car industry in W Europe2006: The car industry has failed to inspire the galvanized sheet industry in 2006. Car production was reduced by -0.5% y.o.y. 2007: for 2007 no production figures are available yet but the market seem not to talk about a significant change from last year´s output. Is the car industry relocating its production locations or is it a temporary reduction of capacity utilization? Applying the 4 month moving average a structural trend with regard to thereduced production of cars in Europe seem to emerge.

data: CRU Zinc metal monthly

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5005506006507007508008509009501,000

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of Z

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Vehicle Galvanised Sheet Zinc 4 per. Mov. Avg. (Galvanised Sheet) 4 per. Mov. Avg. (Vehicle )

Premiums:European premiums continue to ease down, reflecting the oversupply and potentially slowing down the imports. The US zinc metal market is dead. Nose-diving premium levels are theconsequence. Only the Far East shows good demand, supporting premium increases.

Zn Metal Premium

406080

100120140160180200220240260280300320340360380400

Aug-

06

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US$/tUS Midw est DeliveredEurope ex-w orksFar East (Western)

data: CRU Monitor Zinc