“Copper and Nickel Supply Side Economics Make …titanium.scholarlab.com/customer/titanium/resources/ti...“Copper and Nickel Supply Side Economics Make Strong Case for Titanium”

“Copper and Nickel Supply Side Economics Make Strong Case for Titanium” Rob Henson

Manager, Business Development VSMPO Tirus US

Steven Hancock Market Analyst

TiRus International SA

Abstract Increasing population growth and urbanization is driving demand for potable water, electricity, waste water treatment, refrigeration and air conditioning. All of these industrial processes have historically depended on copper and nickel alloys for reliable process equipment, whereas in the case of electrical power generation and distribution there is no alternative to copper. The resulting strong demand projections for copper and nickel come just at a time when mine yields are declining due to depth limitations and processes are becoming more expensive due to increased energy consumption per ton of produced metal. The growing stress on the supply side of these commodity metals is impacting on the economics of material selection and titanium will be shown to be an attractive alternative for many applications within these industrial processes. Our paper will explore the supply side economics of copper and nickel production, including ore reserves, mine development, extraction processes and analyst projections, to show the price impact these developments could have.

Global Population Growth and Urbanisation In 1960, the world’s population consisted of 3 billion people, one billion in the industrialised world and two billion in developing countries. In the subsequent half century industrialised countries have seen modest population growth but the developing world has grown threefold. The rate of growth however, continues to decrease especially in Asia as people become wealthier, more educated and have smaller families. Some projections show the world’s population topping out at around 10 billion by the middle of the century. However, pressure on resources and the environment as a result of population growth, are compounded by an alarming rate of urbanisation: by 2050, 64% of the world’s developing population will live in cities in comparison to just under 50% today and only 18% in 1950. Both phenomena result in higher demand for resources and infrastructure: population growth through sheer numbers and urbanization through higher consumption per capita. As a result, continued economic growth in the developing world will necessitate compound growth in resource extraction and infrastructure construction.

1

Global Economic Growth The industrialisation of the developed world was facilitated by the availability of the raw materials and fossil fuels and simplified by scant regard for environmental impacts. However, real concerns are now emerging over the sustainability of resource extraction at current growth rates. Inevitably, mine yields for many commodities are declining as deposits are being depleted, copper and nickel being the two pertinent examples discussed in the current paper. Also, environmentally unfriendly techniques of extraction and refinement are becoming unacceptable with the deterioration in community health, water and air quality levels.

Since the 2009 recession, global economic growth has stabilised at around 4.5% but includes a wide spread between the growing developing economies lead by China (8.5%) and stagnant developed economies of Europe (2%). However, in the light of both declining yields from resource extraction and environmental impact concerns, the sustainability of continued economic growth at current rates is questionable at least while pressure on supply side economics is undeniable. Medium and long term growth will be largely dependent on emerging technologies for clean, efficient and sustainable processing of resources.

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World Net Electricity Generation The International Energy Agency estimates that 19% of the world's population did not have access to electricity in 2010 and 57% of the African population remains without access to electricity3. In 2010, OECD and non-OECD 1 United Nations, World Population Prospects: The 2012 Revision 2 IMF 5 year forecast: April 2013 (growth at constant prices)

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countries each generated half the net electricity produced globally but by 2050, current non-OECD countries could be generating twice as much as the OECD. To achieve this, developing countries will need to make massive investments in all forms of electricity generation. For example, the World Nuclear Association predicts that China has almost 30 nuclear reactors planned to give more than a three-fold increase in nuclear capacity by 2020 and is aiming for 150 GWe by 2030 and considerably more by 20504. New capacity will also be required in developed countries as under-investment has meant that a large proportion of operating plants are reaching the end of their useful life. So whilst total generation will increase in parallel with demand, growth in the market for new installations and infrastructure may see a step change in the medium term.

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Demand for Desalination Water and energy are inextricably linked with 90% of global generation being water intensive and more that 15% of all water withdrawals going to energy production. Choices made in one domain have direct and indirect consequences on the other and both are essential for human well-being so economic development is not possible without sufficient supplies of both. UNESCO is projecting global water demand in terms of withdrawals to increase by some 55% by 2050. With 20% of the world’s population currently living in areas of high water stress, that number could increase to 40% by 2050.6 China, India and the Middle East will account for around 60% of the increase in demand over the next 20 years and with water scarcity already a major issue, water management will be absolutely critical to enabling continued economic development in these countries. Water and energy infrastructure and technologies with inherent synergies for co-production can minimise trade-offs and will play an essential role. Desalination through combined heat and power plants is one such example of integrated planning and will become far more common, if not essential in the future.

The long term growth in desalination market is estimated by GWI at 9% CAGR7 with the Middle East continuing to be the main demand region but with China and India become increasingly important in the medium term. For example, it’s likely that China’s South-North water transfer scheme will need to be complimented by seawater desalination to ensure year round supply. Industrial desalination will also become increasingly important as domestic and industrial demand compete for limited resources.

3 International Energy Agency – Global Energy Outlook 2013 4 World Nuclear Association – Country profile: China 5 Energy Information Administration – International Energy Outlook 2013 6 UN World Water Development Report 2014, Volume 1 – World Water Assessment Programme 7 GWI Desaldata.com forecast webinar June 2013 – Christopher Gasson

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Demand for Corrosion Resistant Metals Since the majority of the growth in population is taking place in underdeveloped regions of the world the infrastructure to support this population is not in place. Potable water is scarce, water for irrigation may not be available and the power grid will have to be built from the ground up. Additionally, sanitation systems and water reclamation systems are often non-existent. To provide an acceptable standard of living for these growing populations a tremendous investment in infrastructure will be required.

The impact of population growth on the demand for specialty metals has been well documented and reported by many authors9. Essentially, copper for electrical power generation and distribution, copper and nickel for alloy production will also create demand for titanium products. While the demand for finished goods will be significant the focus of the current paper is the impact this demand will have on the supply side of the copper and nickel industries.

Increasing demand for copper and nickel alloys have driven large investment in mines and processing plants globally. However, the quality of these new mines has been rapidly declining over the last 25 years and production costs have skyrocketed as a result. Understanding the facts behind this increased production cost will allow projections on future comparative prices for copper, nickel and alloys thereof.

The Status Quo The markets for traditional corrosion resistant materials (copper, copper-nickel and stainless steel) are facing some important supply side constraints that could potentially lead to price rises, improving the economics of substitute materials. For example, copper supply is strained as resources become scarce and production cost increases. Nickel market dynamics could be in for some turmoil due to export restrictions imposed by Indonesia on laterite ore. Both copper and nickel mines have shown declining yields and growing energy costs translate into increased cost of production.

While prices have declined recently, most analysts see this this as temporary due mainly to slowing demand from China and the US Federal Reserve’s plan to reduce their program of bond purchases. In all likelihood the above mentioned constraints on supply could begin to take effect as early as next year. This paper will investigate these constraints in more detail and suggest what impact they might have on bolstering the market for alternative materials such as titanium.

8 GWI Desaldata.com - new contracted capacity in year of contract 9 References ???

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Global Copper Reserves The US Geological Survey estimate current mining operations of conventional copper hold reserves of around 690million MT, most of which is held in the Andes Mountains of South America. In total, known resources could amount to 1.8billion MT some of which has already been exploited.

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Global Copper Production Current mining operations extract just over 16million MT of contained copper per year with global copper demand for semi-finished products estimated at around 25million MT. 5million MT of that is recycled as directly melted high grade copper scrap and around 4million MT of low grade scrape passes back into smelting and refining operations. Chile mines around one third of the world’s copper some of which is further refined but China has ramped up smelting and refining over the last 10 years to become the by far the world’s largest copper producer.

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Assuming copper demand grows at least as fast as that of global economy (a conservative estimate), it could double over the next 20 years but whether or not supply can meet this demand at current prices is not as certain. Despite growth in copper production, supply is becoming constrained by a number of difficulties in the production cycle, namely:

• CapEx costs are escalating due to declining ore grades so larger scale operations need to be developed. • Rising energy costs translate directly into higher production costs. • Greater political risks and infrastructure challenges are being faced as a result of more remote locations.

10 US Geological Survey 2014 11 US Geological Survey 2014

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In addition, skills and equipment shortage, smaller areas available for exploration, lengthy and difficult permitting processes, environmental concerns, social unrest and natural disasters have all been contributing factors to escalating production costs13.

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Copper Supply and Demand Although output of refined copper grew in 2013 due to recovery from previous production constraints, the real copper supply deficit, adjusted for Chinese bonded stock changes, grew to 450’000 MT compared to a surplus of 300’000MT in 2012. This amounts to around 2% of demand15. Although there is enough material in stock around the world to cover this deficit, the constraints to new capacity coming online in the future is of greater concern.

Since 1900, copper demand has grown at a compound annual growth rate of 3.4% until today, with the global average per capita use rising from 2kg to 3kg per person over the last 50 years. Since two thirds of all end use applications are for electrical components and construction, economic growth and development translates inevitably into copper demand. For this reason it’s difficult to see a scenario where growth in copper demand doesn’t at least match that of regional economic growth. With China already accounting for 60% of primary copper demand and their long term economic growth expected to remain above 6% for at least the next 20 years, it is highly likely that the business case for substitute materials will improve.

12 Oracle Mining Corp, AQM Copper, Rio Tinto 13 Mining.com - http://www.mining.com/web/global-copper-production-under-stress/ 14 International Copper Study Group – press release March 2014 15 International Copper Study Group – including seasonal and Chinese bonded stock adjustments

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Copper Grades (% Cu)

Industry Head Grade Trends (Weighted Paid Copper) - Oracle Mining Corp / Brook HuntAverage Grades for Copper Industry - AQM Copper

70%72%74%76%78%80%82%84%86%

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Copper Mine and Refinery Capacity Utilisation (%)

Mine Capacity UtilisationRefinery Capacity Utilisation

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Global Nickel Reserves The US Geological Survey estimate current nickel mining operations hold reserves of around 74million MT with Australia and New Caledonia holding the largest share. In total, known resources could amount to 130million MT.

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16 US Geological Survey 17 International Copper Study Group Statistical Yearbook 2013 18 US Geological Survey

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Electrical ProductsConstructionIndustrial MachineryTransportConsumer Products

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Indonesia Export Ban The global nickel market was rocked in January this year when the government of Indonesia made good on the long standing threat to restrict export of unprocessed nickel laterite ore. Chinese producers of stainless steel have come to rely on this ore supply to produce the nickel pig iron as an alternative to refined nickel for stainless steel production.

Nickel pig iron (NPI) is a low grade ferronickel invented in China as a cheaper alternative to pure nickel for the production of stainless steel19. The production process of nickel pig iron utilizes laterite nickel ores instead of pure nickel sold on the world market. The alternative was developed as a response to high price of pure nickel and this cheaper substitute for pure nickel influences the price of nickel on the world market by lowering the demand in certain applications, the most important being the production of stainless steel, representing about two thirds of nickel use.

Nickel pig iron is composed of low-grade nickel ore, coking coal, and a mixture of gravel and sand as an aggregate. This mixture is heated in either a blast furnace or an electric arc furnace depending on the desired grade. Impurities are then removed via smelting and sintering processes and the resulting nickel pig iron contains 4 – 13% pure nickel.

The export ban for unprocessed ore is a game changer for the nickel industry in that stainless steel producers in China which account for 50% of the global production will now be forced to use refined nickel. According to Macquarie Group if the ban remains in place beyond the July 2014 presidential election in Indosesia the nickel market will see massive deficits and a resulting tightness of supply similar to that of 2006 and 200720.

China and Nickel Pig Iron Eramet, a French nickel and manganese producer reported that despite a 5% increase in global stainless steel production, LME nickel prices fell 14% on average 2013 as compared with pricing in 2012. In the second half of 2013 nickel prices fell further as the production of nickel pig iron in China using ore imports from Indonesia and the Philippines has nearly tripled in just three years and now totals almost a quarter of global supply of nickel.

On Feb. 21, Eramet announced that the deteriorating nickel market and short-term outlook for nickel prices means that they are putting off a final investment decision on its flagship Weda Bay nickel project in Indonesia. According to Scotiabank’s Patricia Mohr “The nickel market is different market today than it was five years ago, mainly due to the production of nickel pig iron in China, where technology has been honed to upgrade the ore to make nickel pig iron.” But the commodities specialist believes that the outlook for nickel prices is probably brightening with the implementation of Indonesia’s ban in January. She predicts that by the second half of 2014, “China will have used up its inventories of ore from Indonesia that it can use to operate nickel pig iron plants and nickel prices will start to firm.”

While there is not universal agreement about how quickly Chinese producers will exhaust their supply of stockpiled ore there is a consensus that if the export ban remains in place nickel prices will continue to firm up as China reverts to the import of refined nickel to meet its needs. Whether the stock piles are consumed by mid-year or last until year’s end the demand for those nickel units will have to be met by import of refined nickel as China’s needs exceed the capacity for production of refined nickel in country.

19 Wikipedia 20 Financial Times, 4/10/2014 Nickel Jumps Above $17,000…

http://en.wikipedia.org/wiki/Ferronickel

http://en.wikipedia.org/wiki/Nickel

http://en.wikipedia.org/wiki/Stainless_steel

http://en.wikipedia.org/wiki/Laterite

http://en.wikipedia.org/wiki/Substitute_good

http://en.wikipedia.org/wiki/Coking_coal

http://en.wikipedia.org/wiki/Gravel

http://en.wikipedia.org/wiki/Aggregate_(composite)

http://en.wikipedia.org/wiki/Blast_furnace

http://en.wikipedia.org/wiki/Electric_arc_furnace

Raymond Goldie of Salman Partners estimates that Western inventories of nickel will drop to 100 days’ of consumption some time in 2016. “Once inventories have hit that pinch point,” he adds, “we expect that nickel prices could rise sharply to the double-digit level.” While prices will remain flat until 2016, he expects the spike will likely come in 2017. Andrew Mitchell, principal nickel analyst at Wood Mackenzie in London, expects nickel prices will to continue to climb and expects another 25% increase in price going into 2016. Mitchell points out that last year production of nickel in nickel pig iron totalled 490,000 tonnes, but anticipates that that number will fall to 450,000 tonnes this year and to 250,000 tonnes in 2015.

Mining and Production

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Nickel Supply and Demand

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21 US Geological Survey 22 International Nickel Study Group

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Stainless Steel Production

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China Stainless Steel Production According to Stainless Steel World, SMI GmbH has conducted an in-depth analysis of the Chinese stainless steel industry during the past three months – Chinese producers has melted more than 20 million tonnes (MT) of stainless steel which also catapulted the global melt production to over 40MT. Chinese production has been accounted for 50.5 % of the global output in 2013.

The total stainless crude production climbed to 20.5MT in 2013 (up 17 % from 17.5MT in 2012) and finished product output reached 18MT(up 16 % from 15.5MT in 2012). Production volumes of more than 100 Chinese plants (including around 60 with own melting) were aggregated and all double-counting was eliminated.

The crude output of the major state owned and foreign invested producers (TISCO, Baosteel, LISCO, ZPSS, JISCO, Dongbei) increased by 11 % in 2013. Private producers contributed to most of the growth: their combined crude production rose by 24 % in 2013.

23 International Nickel Study Group 24 International Stainless Steel Forum

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Ore

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The biggest increase came from Tsingshan Group which already is the second largest producer of stainless steel in China behind the state owned giant TISCO. Eight producers were melting more than 1MT in 2013, including newcomer Beihai Chengde which started production in 2012 in southern Guangxi Province.25

The 2013 melt production of 20.5MT was split into the following grades:

• 200 series incl. CrMn steels 31 % • 300 series 50 % • 400 series 19 %

Nickel Consumption

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HPAL versus Heap Leach Project Cost27 Parameter Unit HPAL HL Nickel Production (LOM) tpa 55,700 32,800 Cobalt Production (LOM) tpa 4,100 640 Capital Cost US$m $3,750m $950m Capital Intensity US$/lb Ni $30.5/lb $13.1/lb Cash Cost (exclude by-products) US$/lb Ni $4.59/lb $3.58/lb Cash Cost (include by-products) US$/lb Ni $3.86/lb $3.39/lb NPV (10% real, non geared) US$m ($2,160)m $220m IRR (real, post tax) % 1.60% 17% Capital Payback (from free cash) Years N/A 7 years

25 Stainless Steel World, 10/4/2014 26 International Nickel Study Group – data for 2011 27 Malachite Process Consulting, Wedderburn, 2010

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Other ElectrolyticFerronickelNickel pig ironPellets, Powders, Salts, Ni OxidePremium Electrolytic NIBriquettes

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Declining Ore Grades for Copper and Nickel

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High Pressure Acid Leaching of Ni Laterite The application of pressure acid leach (PAL) and pressure oxidation technology to the treatment of metal ores has more than a 40 year history of successful application. The Moa Bay processing plant built in the late 1950’s utilizes PAL and steam agitation to treat nickel/cobalt laterite ores. This portion of the plant is very similar to processes in use and under construction today. However, metal recovery and refining options do vary considerably from site to site.

Laterite Ni/Co ores are abundant and may contain as much as 70% of the world’s nickel reserves. While run of mine nickel grades vary widely the ores can be upgraded by grinding, washing and sizing. The PAL process and selective precipitation are effective for producing mixed Ni/Co intermediates from these low grade deposits. As known nickel sulphide ore bodies are rapidly being exhausted the industry must rely on laterite deposits for future supply.

The following list outlines some recent project and associated problems:

• Bulong was never large enough to generate positive cash flow and a heavy debt burden doomed the project early on. The plant has not operated since 2002 and is currently owned by Norilsk as a result of the LionOre acquisition in 2007.

• Cawse Nickel like Bulong was too small to stand on its own and failed to generate cash for expansion. A large portion of capital was invested in the SX/EW plant that never did produce high quality nickel, a plan to utilize the refinery for EMD has never gotten off the ground.

• Murrin Murrin was largely designed for success and has weathered the storm. A design choice by the original EPC contractor on the flash vessels proved disastrous and the project was significantly delayed while replacements were built. Moreover, the replacement flash vessel design was constrained by existing equipment and a full 20% reduction in autoclave throughput was unavoidable.

• Goro Project in New Caledonia suffered badly due to cost overruns and major revisions to the process flow sheet during construction. The plant is now operating but continues to suffer from compromises made in an effort to reduce capital costs.

• Ravensthorpe Nickel was constructed by BHP Billiton (BHPB) beginning in 2004 with an initial capital estimate of $1.2B, construction took 4 years and the plant was commissioned in 2008. Final capital costs were reported to be $2.4B and still the plant produced only 35% of design volume. BHPB shuttered the plant in 2009, took a write down of $3.6B and sold the facility to First Quantum Minerals for a price

28 Macquire Resarch / Brook Hunt

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Average grade of nickel saprolite ore mined in New Caledonia -Macquarie Research / Brook Hunt

reported to be less than 10% of the total investment. First Quantum has made modifications to the process plant and is operating today at an annual nickel production rate of 39,000 MT/yr.

• Coral Bay was built with a simplified flow sheet which produces a Ni/Co sulphide product which is further processed at a smelter in Japan. The absence of an acid plant and metal refinery at the mine site greatly reduces capital cost and allowed production ramp up to reach name plate capacity in only 14 months. Final capital cost for the project came in within 10% of budget.

• Ambatovy required five years and $4.5B to construct a plant for the production of 60,000 MT/yr refined nickel. The plant delivered the first nickel in late 2012 and continues to push toward design capacity.

High Pressure Acid Leach (HPAL) Processing - HPAL Project Costs vs Heap Leach29 Parameter Unit HPAL HL Nickel Production (LOM) tpa 55,700 32,800 Cobalt Production (LOM) tpa 4,100 640 Capital Cost US$m $3,750m $950m Capital Intensity US$/lb Ni $30.5/lb $13.1/lb Cash Cost (exclude by-products) US$/lb Ni $4.59/lb $3.58/lb Cash Cost (include by-products) US$/lb Ni $3.86/lb $3.39/lb NPV (10% real, non geared) US$m ($2,160)m $220m IRR (real, post tax) % 1.60% 17% Capital Payback (from free cash) Years N/A 7 years Commodity Prices Commodity markets and especially major base metals have been affected by two main factors recently:

• Slowing industrial growth in China: this has translated into weaker demand for metals and reduced prices. • The US Federal Reserve’s winding down of stimulus measures (quantitative easing / government bond

purchases): commodity markets are widely thought to have benefitted from liquidity generated by these measures.

Both of these factors have put downward pressure on previously inflated prices but at the same time have masked the supply constraints that exist for some commodities, notably copper and nickel. It’s likely that prices will begin to reflect the supply / demand imbalance more closely in the near term.

30

29 Malachite Process Consulting, Wedderburn, 2010

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Cu-Ni Tube Trade According to trade data, China exports about half of all copper-nickel tubes and pipes traded around the world. Quantity and unit values have increased from insignificance in the early 2000’s to current levels with a peak in mid-2011. Since then unit values have moderated slightly to their current level of between $11-$12/kg.

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Comparative Prices for Condenser Tubes Since Titanium is usually an alternative to Copper in desal, the price differential is a driver in the material choice. The drop in price differential during 2010-11 resulted in the titanium becoming significantly more attractive. Were the prices of both materials to rise, other technologies such as RO are favoured. Typically, Ti tubes make up 10% of the tube bundle and are used where corrosion risk is high. Since the density of Ti is half that of brass, if the price of Ti tubes is less than double that of copper tubes, Ti will be cheaper per meter irrespective of the value associated with its corrosion resistance.

Comparison of 19.05mm OD condenser tubes of different materials

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30 Metalsprices.com – March 2014 31 UNComtrade database - HS741122 Pipes & tubes, copper-nickel base alloy or copper-nickel-zinc base alloy 32 VSMPO estimates

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2

Comparative cost per meter Ti Gr2 = 100%

Copper vs Titanium Pricing The price differential between copper and titanium can be a good indicator of the business case for using titanium in industrial heat exchange applications since copper-nickel and titanium tubes are to a certain degree interchangeable. For example, the rising price of copper in 2009/2010 would have helped make the case for titanium for Ras Azzour and Yanbu 3 desalination plants where all condensers were made entirely from titanium - a first for the desalination industry.

33

Titanium Metal Supply Having only entered the titanium sponge production market 10 years ago, China has built up a vast sponge production capability brining global capacity well above demand. Most of the sponge produced in China is destined for commercial and industrial applications rather than aerospace or medical applications so supply of commercial grade titanium is reasonably secure for the foreseeable future. This in addition to the proliferation of titanium tube welding lines around the world is likely to add to the case for titanium tubes as an alternative to incumbent materials such as copper-nickel.

34

Conclusion It is clear that the combined effect of declining head grade at mines and increased energy costs will drive the LME price of nickel and copper higher over time. Substitution of other materials for construction will alleviate the 33 Metalprices.com 34 Regional Titanium Associations & VSMPO Estimates

Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Uni

t Pric

e

Copper versus Titanium Pricing LME Copper Cash OfficialTi Gr.1 Slab FOB Rotterdam

-

50

100

150

200

250

300

350

400

2001 2003 2005 2007 2009 2011 2013

Global Titanium Sponge Capacity (MT)

-

50

100

150

200

250

300

350

400

2001 2003 2005 2007 2009 2011 2013

Global Titanium Melting Capacity (MT)

China

Japan

Russia & CIS

Europe

US

demand shortfall in some instances but many of the applications for these commodity metals do not currently have a substitute such as nickel for jet engine application and copper for electrical power generation. The pressure for additional tonnage will continue on the supply side and this will result in a steepening price curve.

With regards to the titanium industry, there is a well developed mining industry that is currently shipping 95% of its production as a mineral product. The potential increase in value to the titanium miners is very attractive if they ship to a metal production facility, and as only 5% of mined titanium product is reduced to titanium metal in today’s market there is considerable elasticity in the supply side of the business.

In spite of the advances in nickel pig iron production over the last three years copper-nickel alloys are at a price disadvantage to titanium products. Furthermore, with regulatory restrictions on exports of non-processed nickel ore, this advantage for titanium is expected to increase. Increasing production cost for copper and the lack of an alternative metal in electrical power generation is expected to also widen the cost of ownership in favor of titanium.

Rob Henson, Manager, Business Development May 19-21, 2014 • Hilton Sorrento Palace, Sorrento, Italy

Copper and Nickel Supply Side Economics Make Strong Case for Titanium

VSMPO-AVISMA Corporation

Rob Henson, Manager, Business Development Steve Hancock, Market Analyst


Demand for corrosion resistant materials • Population

– Inevitable demand on resources • Economic Growth

– China needs to maintain but moderate growth • Electricity Generation

– Hand-in-hand with population & economic growth • Water – Desalination

– Resources are finite and under pressure globally


Global Population Growth

Source: United Nations, World Population Prospects: The 2012 Revision

• 7.1 billion now ~ 10 billion by 2050

-

2

4

6

8

10

12

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

Wor

ld P

opul

atio

n (B

illio

ns)

More developed regions

Less developed regions


4%

8% 7%

3% 2%

-5%

0%

5%

10%

15%

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

GD

P G

row

th

World

China

India

United States

European Union

Middle East and North Africa

CIS

Global Economic Growth

Source: IMF 5 year forecast: April 2013 (growth at constant prices)

• China & India moderate while West stabilises


0

2

4

6

8

10

12

2005 2010 2015 2020 2025 2030 2035 2040

Trill

ion

kWh

OECD Americas

OECD Europe

OECD Asia

Europe and Euraisa

Middle East & Africa

India & Other Asia

China

Central and South America

World Net Electricity Generation

Source: Energy Information Administration – International Energy Outlook 2013

• China and India leading capacity expansion Forecast CAGR

3.2%

Forecast CAGR

1.3%

Forecast CAGR

3.5%


Demand for Desalination

Source: Desaldata Forecast, June 2013

-

1

2

3

4

5

6

7

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Capa

city

(m3 /

day)

M

illio

ns

Online Year

Middle East and Africa

Asia South Pacific

Americas

Europe

Other


The status quo under threat Primary materials in corrosive environments • Copper Nickel & Stainless

– Copper supply is strained as resources become scarce and production cost increases

– Nickel market dynamics could be in for some turmoil due to export restrictions

– Chinese stainless production is directly linked with Indonesian laterite ore exports


Global Copper Reserves & Trade

Source: US Geological Survey

• Remaining global copper reserves – 280 Million MT

US, Canada &

Mexico 87mil MT

Chile & Peru

266mil MT

Poland 26mil MT

Congo & Zambia 40mil MT

Russia & Kazakh 27mil MT

China & Indonesia

58mil MT

Australia 86mil MT

Arrows showing trade are indicative only


Global Copper Production

Source: International Copper Study Group

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

1960 1970 1980 1990 2000 2010 2020 2030

Prod

uctio

n or

Use

(mill

ion

MT)

Mine ProductionRefined ProductionRefined UsageDemand assuming 3% CAGR


Copper Demand & End-use

Source: Anglo-American, International Copper Study Group, 2012

• China dominates demand

33%

32%

13%

13% 9%

Sector

Electrical ProductsConstructionIndustrial MachineryTransportConsumer Products

72%

16%

12%

Product

Wire RodCake / SlabBillet

60% 20%

14% 6%

Region

AsiaEuropeAmericasOther


Copper Supply & Demand

Source: (1) Mining.com

• CapEx costs are escalating because: – Declining ore grades mean larger scale operations for the

same yield – Newer projects are more often in remote areas with little or

no infrastructure • Capital intensity for Teck’s Quebrada Blanca’s reported to be

$28,000 USD/MT • Other factors putting pressure on supply:

– Skills shortage – lengthy and difficult permitting processes – environmental concerns


Copper Supply & Demand

Source: (1) Mining.com

• Difficult road ahead for mining companies: – Peru

• > 15 projects have been delayed due to social unrest – Chile

• Power and water shortages • Environmental groups opposed to new capacity • Codelco sites lower copper grades and higher energy

prices as reason for increasing production cost


Global Nickel Reserves & Trade

Source: US Geological Survey

• Remaining global nickel reserves – 75 Million MT (estimated 70% are laterite ores)

Canada 3.3mil MT

Brazil & Columbia

8.6mil MT

South Africa, Madagascar &

Botswana 5.8mil MT

Russia 6.1mil MT China,

Indonesia & Philippines

8.3mil MT

Australia 20mil MT

Arrows showing trade are indicative only

New Caledonia

12mil MT


The effect of Indonesia’s export ban

Ref: Materials World Feb, 2014

• 78% of Indonesia’s mined nickel products are exported unprocessed – 90% of that goes to China for conversion to NPI – China has been stockpiling in anticipation of the ban

• Indonesia’s electricity supply could be a challenge for the economic viability of developing domestic processing.

• The Philippines will be watching the Indonesian experiment carefully


China, Nickel Pig Iron & Stainless

Source: The Northern Miner

• Chinese stainless steel makers have increasingly used NPI as a cheaper alternative to pure Ni

• China’s production of NPI using ore form Philippines and Indonesia has nearly tripled in three years and is now ¼ of global supply

• China has been stockpiling laterite ore in anticipation of the Indonesian ban on exports but this will be used up by the end of 2014

• The question now is whether or not China will carry out planned invest in plants in Indonesia

• Nickel price is expected to rise which will bring additional capacity to market


Nickel Supply & Demand

Source: International Nickel Study Group

Africa America

Asia

Europe

Oceania

0200400600800

10001200140016001800

2007

2008

2009

2010

2011

2012

‘000

MT

Primary Ni Production

Africa America

Asia

Europe

0200400600800

10001200140016001800

2007

2008

2009

2010

2011

2012

‘000

MT

Ni Consumption


Distribution of Raw Materials • Indonesian export ban: 72% of exports go to China

- 50,000

100,000 150,000 200,000 250,000 300,000 350,000

Ore

Laterite ore

Concentrate

Ores and concentrates

Other


Nickel Consumption

Source: International Ni Study Group, 2011

28.3%

18.6% 16.2%

15.6%

10.9%

10.4%

Ni Source Product

Other ElectrolyticFerronickelNickel pig ironPellets, Powders, Salts, Ni OxidePremium Electrolytic NIBriquettes

65.1% 9.9%

9.8%

6.8% 4.5%

3.9% Ni End-use Product

Stainless Steel Electroplating

Nickel Alloy Other

Other Steel Foundry


Impending Nickel Shortage?

Source: Wood Mackenzie

• Long term demand growth 2%pa

0

500

1000

1500

2000

2500

3000

2000 2005 2010 2015 2020 2025 2030

‘000

MT

Highly Probably Projects

Existing Supply

Consumption620kT


Declining Grades

Source: Oracle Mining Corp, AQM Copper

00.20.40.60.8

11.21.41.61.8

1985

1990

1995

2000

2005

2010

2015

2020

2025Co

pper

Gra

de (%

Cu)

Copper

Industry Head Grade Trends (Weighted Paid Copper) -Oracle Mining Corp / Brook HuntAverage Grades for Copper Industry - AQM Copper

2.22.32.42.52.62.72.82.9

3

2000 2005 2010

Nic

kel

Gra

de (%

Ni d

ry 1

2MM

A)

Nickel

Average grade of nickel saprolite ore mined inNew Caledonia - Macquarie Research / BrookHunt


- 5.00

10.00 15.00 20.00 25.00 30.00 35.00

Jan-

90Ja

n-91

Jan-

92Ja

n-93

Jan-

94Ja

n-95

Jan-

96Ja

n-97

Jan-

98Ja

n-99

Jan-

00Ja

n-01

Jan-

02Ja

n-03

Jan-

04Ja

n-05

Jan-

06Ja

n-07

Jan-

08Ja

n-09

Jan-

10Ja

n-11

Jan-

12Ja

n-13

Jan-

14

$/kg

LME Nickel

LME Copper

316 Stainless Flat Coil

Cupro Nickel 90-10

Cupro Nickel Scrap 30-70

Commodity Prices

Source: Metalprices.com

• Nickel & Copper 1990 to present


11.27

-

200

400

600

800

1,000

1,200

1,400

02468

10121416

2000 2005 2010 2011 2012

Trad

e Q

uant

ity (M

T/m

onth

)

Uni

t Pric

e (U

S$/k

g)

Trade Quantity (MT/month)Trade Uniti Price (US$/kg)

Cu-Ni Tube Trade

Source: UNComtrade database - HS741122 Pipes & tubes, copper-nickel base alloy or copper-nickel-zinc base alloy

• Chinese export stats annualized 2010 onward by month


Alloy Comparison for Heat Exchange Tubes

Source: VSMPO estimates

• Comparison for 19.05mm OD Tube

1.2

1.2

0.71

1

1.2

0.5

90-1

0 C

u/N

i

70-3

0 C

u/N

i

Al29

-4Ci

Alum

inum

Bra

ss

Ti G

ade

2

Wall Thickness mm

8.9

6

8.9

5

7.6

7

8.4

7

4.5

1

90-1

0 C

u/N

i

70-3

0 C

u/N

i

Al29

-4Ci

Alum

inum

Bra

ss

Ti G

ade

2

Density g/cm3

280%

340%

200%

150%

100%

0%

100%

200%

300%

400%

90-1

0 C

u/N

i

70-3

0 C

u/N

i

Al29

-4Ci

Alum

inum

Bra

ss

Ti G

ade

2

Comparative cost / meter Ti Gr2 = 100%

60%

75%

85%

35%

100%

90-1

0 C

u/N

i

70-3

0 C

u/N

i

Al29

-4Ci

Alum

inum

Bra

ss

Ti G

ade

2

Comparative alloy cost Ti Gr2 = 100%


Titanium Metal Supply

Source: Regional Titanium Associations, VSMPO

• No shortage in Ti sponge & melting capacity

- 50

100 150 200 250 300 350 400

2001 2003 2005 2007 2009 2011 2013

Prod

uctio

n Ca

paci

ty (M

T)

Sponge

- 50

100 150 200 250 300 350 400

2001 2003 2005 2007 2009 2011 2013M

eltin

g Ca

paci

ty (M

T)

Melting

China

Japan

Russia & CIS

Europe

US


Conclusion • Increasing energy cost and lower mine grades will result in higher

prices for copper and nickel • Titanium currently has a price advantage over this materials and

expanded use of titanium is expected • Additional incentive to specify titanium can be found in:

– Reliability – Environmental compatibility – Longevity – Expanding global production which ensures product availability

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