Mining Monitor (January 2017) · of US and China. For coking coal and thermal coal, prices decreased in December. In 2017, returning supply will lead to lower price of them. Prices

Mining Monitor (January 2017)

Strategic Research Division,

Corporate Research Office

27 January 2017

The Bank of Tokyo-Mitsubishi UFJ, Ltd.

MUFG Union Bank, N.A.

Table of Contents

1. Overview 3

2. Iron Ore 5

3. Coal 9

4. Copper 13

Mining Monitor | 27 January 2017 2

5. Aluminum 17

6. Nickel 21

7. Zinc 25

8. Gold 29

1. Overview


Takuya Eto

Strategic Research Division,

Corporate Research Office

THE BANK OF TOKYO-MITSUBISHI UFJ, LTD.


Mined Commodities Price Forecasts by Strategic Research Division

Although the prices of mined commodities increased by and large in 4Q’16, prices will be under pressure due to

supply recovery. Non-ferrous metals prices remain bullish and are likely to grow or remain the same level.

1. Overview

Mined Commodity Price Trends

In 4Q’16, the prices of mined

commodities except gold increased,

but some of them fell in December.

This price fluctuation was mainly due

to supply trends in China.

With regard to iron ore, price rally

was largely driven by strong demand

of US and China. For coking coal and

thermal coal, prices decreased in

December. In 2017, returning supply

will lead to lower price of them.

Prices of non-ferrous metals were

supported by improvement of Chinese

economy in 4Q’16. Since zinc market

is estimated to be firmly in deficit,

price will continue to perform strongly

during 2017. Copper and aluminum

are also likely to increase slowly due

to ramp-up of new mines. As to nickel,

price will decrease moderately caused

by supply increase in Indonesia while

global demand will grow continuously.

Meanwhile, gold price is expected to

be bottomed out and increase

gradually supported by speculative

demand.

Yr Avg 1Q (f) 2Q (f) 3Q (f) 4Q (f) 1H (f) 2H (f) 1H (f) 2H (f)Iron Ore ($/t) 58 77 72 66 63 60 55 56 52

YoY 5% 60% 29% 12% -11% -20% -14% -6% -5%

QoQ - 9% -6% -9% -4% - - - -

Coking Coal ($/t) 142 179 158 140 128 117 112 107 103

YoY 22% 65% 75% 66% 65% -30% -17% -9% -8%

QoQ - 131% -12% -11% -9% - - - -

Thermal Coal ($/t) 65 81 73 68 66 65 65 64 64

YoY -8% 29% 25% 17% 25% -15% -3% -1% -1%

QoQ - 53% -10% -6% -3% - - - -

Copper ($/t) 4,866 5,119 4,763 4,668 4,617 4,617 4,726 4,904 5,132

YoY -11% 9% 1% -2% -13% -7% 2% 6% 9%

QoQ - -3% -7% -2% -1% - - - -

Aluminum ($/t) 1,605 1,654 1,603 1,584 1,576 1,595 1,644 1,724 1,798

YoY -4% 9% 1% -2% -8% -2% 4% 8% 9%

QoQ -3% -3% -1% -1% - - - -

Nickel ($/t) 9,605 10,103 9,901 9,852 10,050 10,565 11,101 11,637 11,990

YoY -19% 18% 12% -4% -7% 6% 12% 10% 8%

QoQ -6% -2% -1% 2% - - - -

Zinc ($/t) 2,091 2,665 2,718 2,746 2,691 2,651 2,611 2,540 2,465

YoY 8% 59% 41% 22% 7% -2% -4% -4% -6%

QoQ 6% 2% 1% -2% - - - -

Gold ($/oz) 1,250 1,153 1,159 1,168 1,181 1,205 1,223 1,238 1,249

YoY 8% -3% -8% -12% -3% 4% 4% 3% 2%

QoQ - -5% 1% 1% 1% - - - -Source: Bloomberg, BTMU Strategic Research Division, MUB Strategic Research

20192017 20182016

Chloe Lim

Strategic Research Division (Singapore)


2. Iron Ore


Iron ore prices remained buoyant in

4Q’16, rising 50% YoY to average at

US$71/t. This brought full year

average price in 2016 to US$58/t, up

5% YoY.

The price rally in 4Q’16 was mainly

driven by heightened speculations on

strong China and US demand, and

potential weather-led supply constraint

in Australia in early-2017.

Even as Chinese government curbed

speculative trading in late-November

and temporarily closed ports and steel

mills in December to reduce smog,

prices traded within US$78-84/t in

December. This can be attributed to

speculative trade positions taken to

hedge against a weakening Yuan.

Meanwhile, China’s iron ore port

inventories continued to climb and

reached a two-year high by end-2016.

In the near-term, potential weather-led

supply constraint in Australia is

expected to provide some support for

iron ore prices.

6

Iron Ore Prices and Inventories

Higher prices in 2016 were largely driven by speculation despite steady rise in China’s port inventories to a two-year

high.

2. Iron Ore

1) Price Trends

Mining Monitor | 27 January 2017

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

($/t) (Mt)

Source: Bloomberg, BTMU Strategic Research Division

Global iron ore production is

expected to fall modestly in 2016,

mainly due to production cuts in

China and Brazil.

As for global demand, a slight

decline is expected in 2016 against a

backdrop of China's weak

consumption growth and Brazil’s

demand contraction. As a result,

global market is estimated to be in

deficit in 2016.

For 2017, while China’s output is

projected to continue falling, higher

supply from Australia and Brazil

coupled with concerns of China’s

subdued consumption may cause

global market to return to a slight

surplus. Thus, progressive price

softening is expected during the year.

Looking further, given more low-cost

production from Australia and Brazil

and lacklustre growth in China’s

import demand in the next two years,

rising market surplus is expected. As

such, prices are likely to continue

falling from 2017.

7

Outlook for Iron Ore Prices

Influence Factors on Iron Ore

Despite progressive price softening in 2017, prices may see some support from China’s demand for seaborne supply

to offset its falling output. Further price decline is projected in 2018 and 2019 in view of growing low-cost supply.

2. Iron Ore

2) Outlook

Mining Monitor | 27 January 2017

($/t)

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

Price 58 77 72 66 63 60 55 56 52

YoY 5% 60% 29% 12% -11% -20% -14% -6% -5%

QoQ - 9% -6% -9% -4% - - - -


2017 20192016 2018

2017 2018 2019

Price Trend Progressive price softening

Increase

・Low-cost supply is expected to

increase in Australia and Brazil,

underpinned by ramp-up of Roy

Hill operation and commissioning

of S11D project

Increase Moderately

・Steel demand growth in

developing countries (excluding

China) from infrastructure-

related investments

・Lacklustre growth in China's

import demand

Source: BTMU Strategic Research Division, MUB Strategic Research

Decrease

・Steel demand growth in developing countries (excluding China)

from infrastructure-related investments

・China's imports are expected to rise to offset on-going decline in

domestic production to meet demand

・Higher low-cost supply, led by Australia and Brazil

Supply

Demand

Increase

Increase


2. Iron Ore

3) News Flow

Source: Various sources, BTMU Strategic Research Division

Anglo American set to start its last phase production at Minas-Rio Complex in 2019 – 03 January, 2017

Anglo American aims to have the operating license for final phase of its Minas-Rio mine in Brazil by end-2018. This is expected to help the mine to reach

its full capacity of 27 million tons by 2019. In addition, it is expected to add at least another 10 years to this mine’s production life. According to Anglo

Brazil’s CEO Ruben Fernandes, the final development of Minas-Rio mine will need an investment of about US$308 million.

Back in October 2016, the company was given the operating license for phase 2, which increased production capacity to 17 million tons at the Minas-

Rio complex.

Spot iron ore prices to average higher in 2017 than 2016: Metallurgical Mines Association of China (“MMAC”) – 19 December, 2016

MMAC believes average seaborne iron ore prices in 2017 will rise moderately from 2016, to over $60/t CFR China. Vice chairman of MMAC, Lei Pingxi,

said at a meeting with the association members that while China’s iron ore production in 2017 is expected to drop, its demand is likely to remain steady

or improve slightly and thus strengthening average prices. This is despite Chinese government’s continued pollution control efforts, reigning in of

overcapacity and consolidation within the steel industry, which is likely to cap steel output.

According to National Bureau of Statistics, China's domestic run-of-mine iron ore production fell -3.6% YoY to 1.2 billion tons in January-October’16.

China's domestic iron ore miners, which were forced to halt or cut production since 2H’14 due to mounting losses, are unlikely to resume operations

soon unless there is sustainable uptrend in prices.

Vale inaugurates Carajás S11D project in Brazil and starts first shipment in January 2017 – 18 December, 2016

Vale officially commissioned its S11D mine in Brazil’s Carajás region, Pará state. The US$14.3 billion project – which includes a mine, plant, railroad

and port logistics – will enable the company to consolidate its position as the miner with the lowest production costs in the industry.

First production is expected in late-December’16 and its first shipment in January’17. With an annual production rate of 90 million ton, this project will

have a four-year ramp-up phase instead of the original two-year as Vale focused on “margins over volume”. The C1 cost of S11D’s iron ore delivered at

the Ponta da Madeira maritime terminal in São Luís, Maranhão state is estimated to be $7.70/t, 41% lower than Vale’s current average C1 cost.

Iron ore exports from Australia and Brazil rose in latest year-to-date trade data – 15 December, 2016

Australia exported 664 million tons of iron ore in 10M’16, up 5% YoY, according to Australian Bureau of Statistics data.

Similarly, Brazil’s trade data posted 4% YoY increase in the country’s iron ore exports to 338 million tons in 11M’16. Its iron ore exports to China grew

strongly with shipments increasing 18% YoY to 193 million tons in the same period. So far, China accounts for about 61% of Brazil’s export share.

William Cheung

Strategic Research Division (Hong Kong)

THE BANK OF TOKYO-MITSUBISHI UFJ, H.K.

3. Coal


The global coking coal price rose by

99.5% in 4Q’16 from the last quarter.

But price started to fall in December.

The recent price decrease was

because China has temporarily

eased restrictions on coal production

amid rapid price increase in previous

months. The increase coal supply to

the market has led to a price fall in

December.

The global thermal price remained

high at $92/ton in 4Q’16, but it began

to go down in December.

The price fall was due to supply

increase as a result of relaxed coal

mining restrictions. Also, mild

temperature in December has hit the

heating demand in North Asia, which

put downward pressure to the price

to a lesser extent.


Coal Prices

Both coking coal and thermal prices remained high in 4Q’16. But prices began to fall in December as result of policy

easing on coal production in China.

3. Coal

1) Price Trends

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


In 2016, the global coal supply fell

moderately against a backdrop of

operation restrictions in China, while

global demand remained weak. As a

result, the global coal market is

estimated to have moved into deficit.

However, it will return to production

surplus from 2017 to 2019, mainly due

to policy relaxation on coal production

in China and re-opening up idle mines

in Canada, Australia and US.

The global coking price is expected to

fall, as a result of recovery from supply

disruption last year, policy-driven

supply increase in China and idle

mines re-opening. Then, price will

decrease modestly till 2019 as policy

impact from China gradually diminishes

and re-startup of idle mines slows

down.

Meanwhile, the global thermal coal

price could decrease due to production

ramp up. Price will then fall slightly till

2019 amid gradual switching to low

carbon fuels globally.


Outlook for Coal Prices

Influence Factors on Coal

Global coal market will return to production surplus from 2017 to 2019. Coal prices are likely to decrease in the

forecast period.

3. Coal

2) Outlook

2017 2018 2019

Price Trend Decrease after 4Q'16

Increase moderately Increase slightly Increase slightly

・Recovery from supply disruption

and operational issues last year

・Flexibility in coal capacity cut

execution in China

・Production ramp up in Canada,

Australia and US

・Flexibility in coal policy capacity

cut execution in China

・Production ramp up in Canada,

Australia and US

・Flexibility in coal policy capacity

cut execution in China

Increase slightly Increase slightly Increase slightly

・Growth of steel demand in

developing countries except

China

・Increase of energy demand in

developing countries



China



・Switching to low carbon fuels in

developed countries.



China



・Switching to low carbon fuels in

developed countries.


Supply

Demand

($/t)

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

Coking Coal 142 179 158 140 128 117 112 107 103

YoY 22% 65% 75% 66% 65% -30% -17% -9% -8%

QoQ - 131% -12% -11% -9% - - - -

Thermal Coal 65 81 73 68 66 65 65 64 64

YoY -8% 29% 25% 17% 25% -15% -3% -1% -1%

QoQ - 53% -10% -6% -3% - - - -

2017 2018 20192016

Source: Bloomberg, Thomson, BTMU Strategic Research Division

China continues overcapacity fight in coal sector in 2017 – 29 December, 2016

After accomplishment of 250 million tons of capacity cut target in 2016, China will aim to raise its target for capacity cut in coal sector by more than 10%

in 2017, according to the National Energy Administration in China. This is because the capacity removal in 2016 has not fundamentally improved the

supply-demand balance in coal sector, and more capacity should be reduced in the next three to five years. Besides, stricter rules for controlling coal

capacity and elimination illegal production capacity will be another focus in 2017, according to NDRC (National Development and Reform Commission).

Coking coal prices plunge as Chinese output rises – 28 December, 2016

The global coking coal prices have decreased sharply after China lifted the restrictions on production of coking coal. Chinese coking coal production is

recovering, as the Chinese government temporarily relaxed the limits on the number of days that coal mines can operate. Also, some coal mines in

overseas (i.e. US) which was suspended operation are planning to re-open soon. As such, the global coking coal supply is likely to increase in the near

term. According to the market consensus, the global coking coal prices are likely to decrease from above $300/ton in late 2016 to an average of

$200/ton in 2017, which suggests that a sharp turnaround is coming.

China’s steps to fight demand rampant pollution hits Asian coal demand – 21 December, 2016

Asian thermal coal prices are set to come under pressure as China takes measures to fight against rampant smog. The Chinese government has

temporarily shut the coal-fired power stations and stopped handling coal cargos at some major Chinese ports (i.e. Tianjin Port) to reduce thermal coal

consumption. Besides, the mild temperature in the Northern Hemisphere is likely to restrain heating demand. Based on the weather forecast by

Thomson Reuters Eikon, the temperature could be warm in most of Asia’s Northern Hemisphere, which will not see a jump in North Asian coal demand.

As of 20 December, the thermal coal prices were around $88/ton, down from $100/ton in early November after the China’s mining restrictions were

loosened and early winter cold snap eased.

Global coal demand to slow over next five years: IEA – 12 December, 2016

According to the latest forecast announced by the IEA (International Energy Agency), the global coal demand is expected to slow down over the next

five years. The average annual growth in global coal demand could fall to 0.6% from 2015 to 2021, compared with average yearly growth of 2.5% over

the past decade. The slowdown could be due to the Chinese government’s measures to limit coal consumption, as well as increasing use of renewable

energy in developed countries like US.


3. Coal

3) News Flow

Source: Various sources, BTMU Strategic Research Division

Satoshi Kondo

Strategic Research (NY)

MUFG UNION BANK, N.A

4. Copper


After being mostly dormant this

year, copper prices picked up

steam in November and climbed to

18-month highs at almost $6,000/t,

benefitted mainly from expectations

of an infrastructure rebuild program

of president-elect Donald Trump

and sharp drop in inventories at the

LME.

In December, the prices dropped

back down to around $5,500/t, the

level seen in the wake of the

November presidential election,

against a sharp increase in

inventories at LME and profit-taking

as anticipation of market rally on

Trump victory cooled down. And

yet, the year-end prices came in

above 17.4% compared to the

year-end 2015.


Copper Prices and Inventories

Copper prices somewhat calmed down after Trump rally, but ended sharply higher than early 2016.

4. Copper

1) Price Trends

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

Source: Bloomberg, MUB Strategic Research

Copper output continues to grow

strongly in 2016. China, although at a

little slower pace compared to 2014

and before, is the main driver.

On the demand side, although there

was some improvement since mid-

2016, it is expected to remain at a low

growth level. As a result, the supply

surplus is estimated to remain in 2016.

In 2017, the supply-demand balance

surplus is expected to continue as the

growth in demand remains weak.

However, the surplus is expected to

improve after reaching a peak in 2017,

turning to a deficit in 2019, as the

demand growth should remain slow

but solid, coupled with limited supply

growth from major production

countries such as Chile.

In respect of copper price, we expect

the decline to continue until 2H’17. As

the supply-demand balance begins to

improve in 2018, the prices are

expected to bottom out, reaching

$5,000/t during 2019.


Influence Factors on Copper

Outlook for Copper Prices

A market surplus is expected to peak in 2017, turning to a deficit by 2019 as growth in supply falls below demand.

Prices are expected to bottom out in 2H’17, subsequently rising gradually.

4. Copper

2) Outlook

($/t)


Price 4,866 5,119 4,763 4,668 4,617 4,617 4,726 4,904 5,132

YoY -11% 9% 1% -2% -13% -7% 2% 6% 9%

QoQ - -3% -7% -2% -1% - - - -

Source: Bloomberg, M UB Strategic Research

2017 20192016 2018

2017 2018 2019

Price Trend

Increase Increase Moderately Flat Growth

・Continuous supply increases by

low-cost players

・Postponement to the restart of

Glencore's African operation

・Lower supply growth from major

production countries such as

Chile and Peru

・Restart of Glencore's African

operation

・Lower supply from major

production countries such as

Chile and Peru


Supply

Demand

Moderate decrease throughout 2017, bottoming out in early 2018

Increase Moderately

・Lower but stable demand growth without any meaningful re-acceleration factor

Copper supply from Indonesia disrupted by export ban – 12 January, 2017

Freeport-McMoran Inc, the owner of the word’s second-largest copper mine Grasberg in Indonesia, halted exports of copper concentrates from

Indonesia as a result of an export ban which took effect on 12 January, 2017. While disruption of supply could provide support to copper prices, any

disruption from the current export ban is not expected to last long enough to have an immediate impact on prices owed to ample inventory ahead of the

Chinese New Year, and as the regulators continue to work on resolution to ease the ban. A spokesman from Freeport commented that the company

was “working cooperatively with government officials to ensure that our operations can continue without interruption.” According to the company, the

target production from the Grasberg mine is 180,000 – 200,000/t of copper ore per day.

Chinese copper imports November reached highest level in five months in November – 22 December, 2016

According to customs data, China’s net refined copper imports rose to the highest level since June to 277kt, up 46% m-o-m, supported by price rallies

and declined output. The domestic copper prices gained on stronger Chinese demand and an inflow of speculative funds. Production fell to the lowest

level in five months, sliding 2.3% m-o-m to 720kt.

Codelco reached wage deal at Chilean mine – 16 December, 2016

Codelco, a state-owned copper mining company, reached a wage deal at its Chuquicamata copper mine in Chile, one of its largest operations. The

wage negotiations at the mine are regarded as a precursor of other Chilean copper mines, such as the Escondida, the world’s largest mine owned by

BHP Billiton. The offer which was accepted by the six unions at the mine provides no salary increase, but allows to retain all the benefits deemed

favorable to the workers negotiated during prior talks. Codelco, which has already been cutting costs to regain its financial health, shared its intention to

maintain its recent policy of zero raises and tighter bonuses.

Codelco plans to invest $3.8 billion in 2017– 4 December, 2016

The CEO of the world’s largest copper producer, Codelco, said that it plans to invest approximately $3.8 billion ($3.143 billion in projects, $651 million in

mine development) in 2017, up from $3 billion in 2016, and cut more costs. The priority will be to expand the Chuquicamata mine, while expansions at

Andina and Rodamiro Tomic mines would be delayed, as the company prioritizes more profitable projects. The company hopes to reach savings of

$200 million in 2017 ($400 million in 2016, $500-600 million in 2015) from cost cuts, and to achieve a structural savings goal of $2 billion by 2020. The

company had recently cut its five-year investment plan from $25 billion to $18 billion as falling copper prices eroded company earnings.


4. Copper

3) News Flow

Source: Various sources, MUB Strategic Research

Tom Haddon

Strategic Research Division (London)


5. Aluminum


The 2016 closing price was nearly

13% higher than 2015’s close.

However on average across the year,

prices were 4% lower, reflecting the

weak prices at the beginning of the

year.

Despite some intra-month fluctuation

during December, Aluminum prices

finished the month just 1% down

compared to the end of November at

$1,704 per tonne.

Spot price was under downward

pressure by futures spreads pushing

further into backwardation (futures

prices lower than spot prices) which

attracted more inventory into the LME

warehouses to sell on the spot market.

On the other hand, higher alumina

prices (which is around 60% higher

y-o-y) and higher electricity costs, due

to increased coal prices, helped

sustain pricing.

Therefore aluminium prices stayed

range bound during December

between $1,690 and $1,750.


Aluminum Prices and Inventories

December prices stayed range bound as bullish and bearish signals stayed in near equilibrium. Prices finished the

year 13% higher than 2015’s closing price.

5. Aluminum

1) Price Trends

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


Global aluminum supply is estimated to

increase slightly in 2016 due to return

of Chinese smelters in late Q4.

On the demand side, the growth was

restrained by sluggish economic growth

in Europe. As a result, the market will

move to supply surplus in 2016.

In 2017, the market will remain to be in

supply surplus as the return of Chinese

smelters.

However with higher input costs

expected in 2017, including electricity

costs and alumina prices, in an

oversupplied environment the market

will be heavily competitive. This is

expected to force those smelters at the

high cost out of the market, gradually

bringing the market to balance by 2019.

Also due to returning Chinese supply,

prices are forecast to be under

pressure through 2017. By 2018, due

to high cost smelters gradually being

forced out the market, it is forecast that

supply will have become tight enough

to produce gradual prices increases.


Influence Factors on Aluminum

Outlook for Aluminum prices

The tighter market has tempted mothballed Chinese smelters back to the market with record production in November

2016 and this is forecast to return the market to surplus in 2017.

5. Aluminum

2) Outlook

($/t)

2016


Price 1,605 1,654 1,603 1,584 1,576 1,595 1,644 1,724 1,798

YoY -4% 9% 1% -2% -8% -2% 4% 8% 9%

QoQ -3% -3% -1% -1% - - - -

Source: Bloomberg, BTM U Strategic Research Division

2017 2018 2019

2017 2018 2019

Price Trend Decrease Moderate Increase Increase

Increase Increase Increase moderately

・Returning mothballed Chinese

smelters remain in the market,

following record production in

Nov'16

・Higher cost Chinese smelters

are forced out of the market

due to oversupply and low prices

・High cost smelters remain

uneconomical, limiting supply

growth


Supply

Demand ・Solid demand from transport and consumer market

Increase

U.S. launches WTO complaint over Chinese aluminum subsidies - 13 January, 2017

A new complaint against Chinese aluminum subsidies has been submitted by the US government to the World Trade Organization, accusing Beijing of

artificially expanding its global market share with cheap state-directed loans and subsidized energy. The complaint argues that "artificially cheap" state-

directed loans and coal, electricity and alumina for the Chinese aluminum sector causes such prejudice by undercutting global prices and artificially

expanding China's market share. If the complaint is upheld, the WTO has a range of options, one of which could be increased tariffs placed on Chinese

exports.

India not to impose penal import duties on aluminum – 27 December, 2016

India has terminated its investigation on imposition of safeguard or penal duties on imports of aluminium products. The decision is significant as the

Directorate General of Safeguards had initially proposed a five per cent provisional safeguard duty on unwrought aluminium products for 200 days in

April this year after investigating complaints from domestic producers such as Vedanta Ltd, Hindalco, and Balco, which demanded additional protection

against imports. The duty was, however, not imposed at that point of time following protests from exporting countries, and DG Safeguards continued

with its final investigations.

Alcoa says Australia aluminum smelter running at 30% capacity - 21 December, 2016

Australia's 300,000-tonnes-per-year Portland aluminum smelter is operating at below a third of its capacity after power to the plant was temporarily

knocked out three weeks ago, operator Alcoa Corp said. The smelter was hit when a power interconnector between the states of Victoria and South

Australia went down, cutting power to both of the plant's potlines, which allowed molten aluminum to solidify and raised questions about its long-term

future. If 300kt per annum is removed from global supply, it would represent approx 30% of the forecast supply surplus in 2017.


5. Aluminum

3) News Flows

Source: BTMU Strategic Research Division

Tom Haddon



6. Nickel


The 2016 closing price was nearly

15% higher than 2015’s close.

However on average across the

year, prices were 19% lower,

reflecting the stark depths the price

had fallen to during H1’16.

In December, prices were under

almost constant downward pressure,

falling below $10,000 per tonne from

a high of $11,500 at the beginning of

the month, an 11% fall.

The main driver of this December

trend was rising inventories which

remain a critical worry for the market

as they stay resolutely near record

highs.

Rising inventory was driven by off

market stocks returning to LME

warehouses. For off market stocks,

suspicions are that the total is

roughly equal to LME inventory,

meaning that any rise in LME

inventory causes strong corrections

in price.


Nickel Prices and Inventories

December prices suffered under the weight of rising LME inventories and worries that off market stocks will prevent

true rebalancing of the market for some time.

6. Nickel

1) Price Trends

0

100

200

300

400

500

0

10,000

20,000

30,000

40,000

De

c-0

8M

ar-

09

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

3M

ar-

14

Jun-1

4

Sep-1

4

De

c-1

4M

ar-

15

Jun-1

5

Sep-1

5

De

c-1

5

Ma

r-1

6

Jun-1

6

Sep-1

6

De

c-1

6



2016 production is forecast to have

decreased as an environmental

crackdown on mining in the Philippines

took hold.

Consumption is estimated to have been

robust in 2016 as Chinese stainless

steel production (the key end market for

nickel) increased by 11% (Jan-Sep).

As a result, the market is estimated to

have moved into deficit in 2016.

However the scaling back of the ban on

Indonesian nickel ore exports, allowing

around 70% of production to be

exported, is forecast to encourage

increased production in the country and

remove the deficit.

However, the return of Indonesian ore

exports to global markets is forecast to

force some higher cost production from

the market by Q4’17, at which point

prices are forecast to have bottomed

out.

Although, due to large inventories,

prices are not expected to rally higher

than $12,000 per tonne by 2019.


Influence Factors on Nickel

Outlook for Nickel prices

The nickel market is estimated to have entered deficit during 2016. However a partial reversal on an Indonesian

export ban is forecast to return the market to a small surplus in 2017.

6. Nickel

2) Outlook

($/t)

2016


Price 9,605 10,103 9,901 9,852 10,050 10,565 11,101 11,637 11,990

YoY -19% 18% 12% -4% -7% 6% 12% 10% 8%

QoQ -6% -2% -1% 2% - - - -


2017 2018 2019

2017 2018 2019

Price Trend Decrease

Increase

・Partial lifting of Indonesian ban

on nickel ore stimulates

increased production in the

country


Supply

Demand

Increase Moderately

・Some production in Philippines gains environmental approval

after being shuttered in 2016

・Higher cost mines are forced from market as abundant

Indonesian and Chinese production keeps the market

well supplied

Increase

Increase

・Chinese stainless steel output growth remains albeit the rate slows through to 2019 as government

enforced production capacity cuts hamper output

Indonesia eases ban on mineral exports – 12 January, 2017

Indonesia, an important global commodities producer, halted exports of some mineral ores in 2014 as part of a plan to boost economic growth by

promoting the development of a domestic processing industry. However the government announced this week that it would end the prohibition on the

export of nickel ore and bauxite, used to make aluminium, and extend a temporary deal to allow the export of copper concentrate. The new rules allow

exports of low-grade nickel ore, which has added to fears of greater supply. That has hit global prices of nickel, which is used to produce stainless steel.

The price of nickel fell 5 per cent on Thursday to a four-month low on the London Metal Exchange. The removal of the ban could see the country’s state-

owned producer PT Antam ship around 70,000 tonnes per year of nickel ore over the coming years, according to analysts at Macquarie.

Caledonia approves extra nickel ore exports to China – 30 December, 2016

The government of New Caledonia has approved requests from three mining companies to export as much as 2 million tonnes of low-purity nickel ore

annually to China as part of efforts to help the industry to recover from a prolonged slump in prices. The export permits were granted to Eramet's

Societe Le Nickel (SLN), Groupe Ballande's Societe des Mines de Tontouta (SMT) and Societe Mai Kouaoua Mines (MKM), specifically aiming to

compensate for the loss of demand from Australia's Queensland Nickel, which went into administration at the start of this year. SLN will be allowed to

ship 650,000 tonnes of nickel ore a year to China over three years, SMT has permission for 950,000 tonnes over two years and MKM is authorised to

export 350,000 tonnes a year for two years.

Stainless melt shop production up 7% in January-September: ISSF – 20 December, 2016

Stainless steel melt shop production in the first nine months of 2016 rose 7% year on year to 33.585 million mt, figures from the International Stainless

Steel Forum showed Tuesday. Production increased in all regions except Central/Eastern Europe, the ISSF said. Chinese production stood at 18.083

million mt for the January-September period, up 11.4% from the year-earlier period, while output from the rest of Asia was up 4.2% at 7.372 million mt.


6. Nickel

4) News Flows


7. Zinc


Tom Haddon



The 2016 closing price was 58%

higher than 2015’s close. However

on average across the year, prices

were only 8% higher. Although the

average is lower it still reflects the

situation of a supply deficit in the zinc

market during 2016.

Despite some intra-month gains

during December, zinc prices

finished the month almost 5% down

compared to the end of November at

$2,557 per tonne.

The falling price goes against the

fundamental picture where demand

remains bullish and supply remains

tight, shown by LME stocks

decreasing through December and

SHFE stocks being 45% down since

March.

Therefore the headwinds in

December are likely to have been

driven by a strong US dollar and

some profit taking from long

speculative positions into year end.


Zinc Prices and Inventories

The fundamental picture for the zinc market remains bullish with tight supply but prices cooled slightly in December

as a strong US dollar and market speculators provided headwinds to price growth.

7. Zinc

1) Price Trends

0

500

1,000

1,500

2,000

0

1,000

2,000

3,000

4,000

De

c-0

8M

ar-

09

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

3M

ar-

14

Jun-1

4

Sep-1

4

De

c-1

4M

ar-

15

Jun-1

5

Sep-1

5

De

c-1

5

Ma

r-1

6

Jun-1

6

Sep-1

6

De

c-1

6



In 2016, global mined zinc production

decreased driven by mine closures or

capacity reductions in Australia, India,

Ireland and Peru.

On the other hand, demand for zinc is

estimated to increase, mainly due to

China’s consumption growing as

galvanized steel production (the main

end use of zinc) benefited from the

government infrastructure stimulus.

As a result, the market is into a deep

deficit during 2016.

However, the supply response will be

triggered by strong price rally. Glencore

has around 500kt of capacity

mothballed which is assumed to come

online through 2017 and 2018. Other

mine projects in countries such as

Australia, Peru and Russia are also

likely to come online.

Therefore prices will continue to

perform strongly during 2017 as the

market remains in deficit. However the

supply response will bring a cooling of

prices through 2018 and 2019.


Influence Factors on Zinc

Outlook for Zinc prices

A deep supply deficit led to a strong price performance in H2 2016 and this is forecast to continue in 2017. However a

supply response is forecast to halt the rally in 2018.

7. Zinc

2) Outlook

($/t)

2016


Price 2,091 2,665 2,718 2,746 2,691 2,651 2,611 2,540 2,465

YoY 8% 59% 41% 22% 7% -2% -4% -4% -6%

QoQ 6% 2% 1% -2% - - - -


2017 2018 2019

2017 2018 2019

Price Trend Increase

Increase Moderately

・Other mine projects in countries

such as Australia, Peru and

Russia are also likely to come

online.

Increase Moderately


・Glencore currently has around 500kt of capacity mothballed which

is assumed to come online through 2017 and 2018Supply

Demand

Decrease

Increase

・Chinese and US infrastructure stimulus plans provide demand growth for galvanized steel,

offsets sluggish European consumption

Lundin Mining Announces 2016 Production Results– 12 January, 2017

Lundin achieved annual production guidance for copper and nickel. Zinc production was marginally below the most recent guidance. Candelaria's fourth

quarter capped a strong operating year with the highest quarterly copper production of the year. Eagle production met full year guidance on continued

robust performance. Neves-Corvo's zinc plant demonstrated stability with continued zinc recovery improvements, while Zinkgruvan's performance was

impacted by lower than planned zinc head grades in the final quarter.

Zinc smelter mulls output cut – 3 January, 2017

Zhuzhou Smelter Group Company Ltd, the biggest zinc smelter in China by output, is going to cut back production, at a time when the international price

for zinc ore is rising, according to the report by news agency Bloomberg. Bloomberg quoted sources saying Zhuzhou Smelter Group is going to reduce

output by 5,000 metric tons of zinc in January though the company did not give the reason for the cutdown. Throughout 2016 the closure of major mines

－such as Century and Lisheen in 2015 and production cuts from other mines including Glencore and Nyrstar－have allowed zinc concentrate prices to

surge. If further output cuts, either strategic or ‘black swan events’ occur, the price rally will be further entrenched.

Total US steel mill output up in November, galvanized steel output declines, AISI – 3 January, 2017

According to latest statistics released by the American Iron and Steel Institute (AISI), the US steel mill shipments during November last year totaled

6,724,277 net tons, up marginally down by 1.6% when matched with 6,832,801 net tons shipped during October 2016. Year-on-year, the steel

shipments registered increase of 4.1%. However when matched with the prior month, shipments of hot dipped galvanized sheets and strips were down

by 6%.

European galvanized steel production capacity is on the way to replace Chinese imports blocked by EU duties – 22 December, 2016

Traders argue the demand for higher margin auto grades has left a gap in the spot market for importers to plug, primarily with Chinese material. They

say the initiation of an anti-dumping investigation has already closed that option. Lengthy lead-times and the potential for retroactive duties make deals

a gamble while, more fundamentally, Chinese offer prices are not currently attractive. Anti-dumping duties imposed on Chinese and Russian cold-rolled

coil have resulted in y-o-y declines in imports from the two countries of 94.5% and 77.6% respectively, while total non-EU CRC supply fell 21.9% y-o-y

in the January-September period. In response to this, ArcelorMittal plans to restart a 400,000 mt/y galvanizing line in Krakow, Poland having moved the

idled plant from Estonia, while ThyssenKrupp is reopening its 400,000 mt/y line in Sagunto, Spain.


7. Zinc

4) News Flows


Satoshi Kondo

Strategic Research (NY)

MUFG UNION BANK, N.A

8. Gold



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

Gold price continued lower in December followed by the sell-off related to Mr. Trump election in November;

A combination of factors such as USD strength and a rate hike contributed.

8. Gold

1) Price Trends

After the sell-off due to concern of

higher US inflation and stronger

USD, all which related to the

unexpected Mr. Trump election in

November, gold prices continued

in December, down 2.2% in the

month.

The downtrend in the month owed

to a combination of factors,

notably USD strength, solid US

economic data, and a rate hike in

the US.

Money manager net length at the

COMEX dropped sharply again in

December, reaching 10-month

lows. Gold ETF holdings were also

lower, down 9.0% from the recent

peak in October.

-2.0

-1.0

0.0

1.0

2.0

3.0

4.010Yr 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

De

c-0

8M

ar-

09

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

3M

ar-

14

Jun-1

4

Sep-1

4

De

c-1

4M

ar-

15

Jun-1

5

Sep-1

5

De

c-1

5

Ma

r-1

6

Jun-1

6

Sep-1

6

De

c-1

6

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

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


Influence Factors on Gold

Outlook for Gold Prices

Mine supply is expected to decline, but medium- to long-term investment demand is expected to remain elevated.

Prices are expected to bottom out soon, thereafter gradually trending upward.

8. Gold

2) Outlook

Gold demand in 2017 is expected

to remain relatively flat y-o-y as

declines in inflows to ETFs could

be offset by jewellery demand.

Demand is expected to remain flat

thereafter, as relatively low prices

support jewellery demand while

investment demand remains

elevated.

Meanwhile, we continue to

anticipate a decline in mine supply

through 2019 as new projects are

unlikely to make up for falling ore

grades.

As for prices, signs that prices

could be bottoming out have been

appearing since the beginning of

2017. Prices are expected to

gradually trend upward against the

backdrop of expectations of

negative interest rates in major

economies like the EU and Japan

and uncertainty surrounding the

US politics.

($/oz)


Price 1,250 1,153 1,159 1,168 1,181 1,205 1,223 1,238 1,249

YoY 8% -3% -8% -12% -3% 4% 4% 3% 2%

QoQ - -5% 1% 1% 1% - - - -

Source: Bloomberg, M UB Strategic Research

2017 20192016 2018

2017 2018 2019

Price Trend

Decrease Slightly

・Continuous supply decreases

but at a slower pace

Decrease Slightly Flat Growth Increase Slightly

・Sharp declines in inflows

to ETFs

・Increase in Jewellery demand

・Moderate decrease in investment

demand

・Lower but positive jewellery

demand growth

・Relatively flat investment

demand

・Stable jewellery demand growth

Supply

Demand

Bottoming out in 2017 and moderate increase in 2018 and 2019

・Falling ore grades to drag down mine supply despite new projects

Decrease Moderately


8. Gold

3) News Flow

Goldcorp announces sale of Mexico’s Los Filos mine to Leagold – 12 January, 2017

Canada’s Goldcorp, the 3rd largest gold miner in the world by market value, announced that it has agreed to sell Mexico’s Los Filos mine to Leogold

Mining, as part of its plan to focus on core mines which are more profitable. The President and CEO of Goldcorp commented that “the divestiture of Los

Filos is consistent with our strategy of focusing on our core camps to drive increasing net asset value per share.” According to the terms of the

agreement, Goldcorp will receive $438 million ($279 million in cash, $71 million in common shares of Leogold, and tax receivables of approximately $88

million). Upon closing the transaction, the company expects to reverse impairment in mining interests at Los Filos posted in 2015 of about $30 to $60

million on a pre-tax basis.

Shanghai Gold Exchange to limit transaction size – 28 December, 2016

Shanghai Gold Exchange, the world’s largest physical bullion exchange, announced that it will cut the amount gold investors can trade per transaction

by half to 500 kg on some spot gold contracts beginning January 1, 2017. According to gold analysts, the move seems to target institutional investors

(i.e., banks and hedge funds), limiting such investors’ influence on prices, and “will prevent a big amount of capital flowing out of the market at one time,

and therefore prevent the gold price going down sharply in a short period of time.” Appetite of Chinese retail investors for gold as a safe-haven

investment has increased, and the trade volume reached 3.4 million kg in November, the highest monthly total YTD in 2016. International prices have

weakened to their lowest for 2016 as institutional investors have sold gold in anticipation of US interest rate hikes in 2017, as higher interest rates

discourage purchase of bullion, which is non-interest-paying and priced in dollars.

Newmont faces over $1 billion impairment charges in 4Q’16 – 13 December, 2016

Newmont Mining Corp, the largest US gold company, said it expects to record a non-cash impairment charge of between $1 billion and $1.2 billion in

4Q’16 due to higher estimated cost of closing its Yanacocha gold mine in Peru. Yanacocha, the largest gold mine in South America, is jointly owned by

Newmont (51.35%), Peruvian miner Minas Buenaventura (43.65%), and International Finance Corporation (5%). After reviewing the mine’s closure

plan, the asset retirement obligation increased between $400 million and $500 million in 4Q’16, due mostly to higher estimated future water treatment,

earthworks and demolition costs, which required the company to reassess the mine’s assets for impairment.

Gold mining companies cut capex while corporate costs increase – 6 December, 2016

Gold mining companies have cut capital expenditures to “historic lows” in 2016, while overall cost has increased as corporate costs jumped by 25% y-o-

y. According to Metals Focus, a specialist consultancy, 3Q’16 cash cost of mining and processing gold decreased 2% y-o-y with average gold prices at

their highest in 3+ years. On the other hand, ‘all in sustaining costs (or AISC)’ including all ‘life cycle’ costs such as exploration, infrastructure and

closure, and corporate costs such as head office and hiring increased for the second consecutive quarter, up 3% from 3Q’15. Metals Focus commented

that considering the huge cost cuts during 2013-2015, the contrast between cash costs and AISC “highlights that mining companies seem to have now

loosened their collective belts in regard to spending on non-mine site items and sustaining capital expenditure.” Moreover, the consultancy’s analysts

indicated that corporate costs seems to have increased 25% y-o-y on average, while “project capital expenditure remains at historic lows” among 12 of

the world’s largest producers. Metals Focus estimates that solid gold prices in 3Q’16 have led the miners to enjoy the strongest net operating cash flow

since at least 2008.

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.

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of Tokyo-Mitsubishi UFJ Limited.

Copyright© 2017 The Bank of Tokyo-Mitsubishi UFJ, Ltd. All rights reserved.

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

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Contact details for inquiries : Kouichi Akimoto

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

Documents

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