This presentation is a tale of two metals:China’s copper demand & aluminium supply

Al

• The importance of China as producer of aluminium

• The structure of China’s aluminium industry

• Five year outlook for China’s aluminium productionAl • Five year outlook for China’s aluminium production

Cu

• The importance of China as a consumer of copper

• Structure of China’s copper consumption

• Why most uses of copper are safe from substitutionwith aluminium

Copper and aluminium are two verydifferent base metals

• China the dominant producer andconsumer

• Relatively low barriers to entryAluminium • Relatively low barriers to entry

• Price elastic consumer metal

Aluminium

• China the dominant consumer

• Relatively high barriers to entry

• Price inelastic industrial metalCopper

China’s aluminium production hasgrown by a factor of five over the past decade

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1.2

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duct

ion

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With 40% of global production, China isthe world’s dominant producer of aluminium

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100%

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0%

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60%

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After paying for power, alumina andcarbon nothing left to service the investment

12,000

15,000

18,000

Cash

Cost

(¥pert)

6

0

3,000

6,000

9,000

12,000

Power Alumina Carbon Labour Other Profit SHFE

Cash

Cost

(¥pert)

Average power tariffs have more thandoubled over the past seven years

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600

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600 Pow

erta

riff(¥

perM

Wh)P

ow

erta

riff

(¥perM

Wh)

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0

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0

200

1998 2000 2002 2004 2006 2008 2010 2012(E)

Pow

erta

riff(¥

perM

Wh)P

ow

erta

riff

(¥perM

Wh)

The doubling of power prices hasincreased production costs by ¥4,200 per ton

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600

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erco

st(¥

pert)

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erta

riff

(¥perM

Wh)

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0

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0

200

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Pow

erco

st(¥

pert)

Pow

erta

riff

(¥perM

Wh)

Aluminium sector characterised by lowbarriers to entry and even lower exit barriers

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(¥pert)

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duct

ion

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1More than half the smelters are wholly or partiallyowned by local governments

Technical innovations have partially offset

China’s aluminium sector has growndespite Beijing’s opposition

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2

3

4

Technical innovations have partially offsetescalating power prices

Investment in integrated power stations assurescontinual supply (at a cost)

Chinese engineers can build new capacity at one-third the cost of comparable international projects

This is what China’s aluminiumindustry looks like now

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Because of escalating power prices,aluminium sector is relocating to Xinjiang

Undeveloped remote region, rich in coal and with atroublesome ethnic minority

Develop the West Policy and local ethnic troubles, exemptXinjiang from decrees forbidding aluminium expansion

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Xinjiang from decrees forbidding aluminium expansion

Low power tariffs more than offsetting additional freight andcapital cost. Cash cost of ¥13,000 cf ¥16,000 elsewhere

Integrated power direct to smelter and not via grid

<10 Mtpa of new very productive (500 kA) capacity by 2015,mostly built by experienced producers who will ultimatelyconvert existing sites to industrial parks

Savings of ¥3,400 per tonne in is acompelling argument to relocate to Xinjiang

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15,000

18,000

Cost

(¥perto

nne)

13

0

3,000

6,000

9,000

12,000

EasternChina

Power Alumina Metal Other Saving

Cost

(¥perto

nne)

1China remains the key to future copper demand andoutlook Is still positive

Forecasts of demand destruction have been over

There are still compelling reasonsto be positive on copper

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2

3

4

Forecasts of demand destruction have been overdone. No recognition of new applications

New capacity projects continue to slip as does currentsupply due to water and power shortages, strikes etc.

Labour and equipment shortages affecting newproject costs as well as current operations.

The rest of the copper world stood stillwhile Chinese consumption expanded

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mption

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Consu

mption

(Mt)

ROW China

China now accounts for more thanone-third of global copper consumption

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100%

Share

ofConsu

mption

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0%

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40%

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Share

ofConsu

mption

ROW China

As the world’s largest consumer ofrefined copper, China is a key demand driver

80%

100%

Share

ofglo

baldem

and

17

0%

20%

40%

60%

China Europe USA Japan Korea Other

Share

ofglo

baldem

and

Over 60% of China's copper is used inprice inelastic industrial applications

80%

100%

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0%

20%

40%

60%

Constrn. Infrastruct. Industrial Consumer Transport Other

China's copper demand seemsinsensitive to price (price-inelastic)

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SHFE

(¥pert)

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mption

(kt)

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(¥pert)

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mption

(kt)

Consumption SHFE

As the difference between LME andSHFE prices widens, copper imports increase

-$900

-$600

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$-

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HFE

($pert)N

etim

ports

(kt)

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-$1,800

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($pert)N

etim

ports

(kt)

Net imports LME SHFE difference

China’s consumption of copper has astrong correlation to fixed asset investment

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9

Appare

ntCopper

Consu

mption

(Mtp

a)

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0

3

- 5 10 15 20 25 30 35

Appare

ntCopper

Consu

mption

(Mtp

a)

Fixed Asset Investment (¥ billion)

The price inelastic power industryaccounts for half of China’s copper demand

80%

100%

Share

ofdom

est

icdem

and

22

0%

20%

40%

60%

Power Construction Transport Machinery Other

Share

ofdom

est

icdem

and

Copper is the backbone of any modernpower system

Copper is used in generator windings, distribution transformersand reticulation (NOT transmission)

Transformers are a mass of copper and special steel - 60 t of

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copper per 1 GVA

Every 1 GW of generating capacity requires 3 to 5 GVA oftransformer capacity

Generators use around 10 t of copper per 1 GW

Copper is also used in house wiring and reticulation

Planned increased grid expenditureis very good for copper

State Grid Corporation (SGC) is the world’s largest purchaser ofcopper

SGC purchased 1.15 to 1.25 Mt of copper last year. Up slightly

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SGC purchased 1.15 to 1.25 Mt of copper last year. Up slightlyfrom 2010

New FYP provides ¥2.55 trillion grid expenditure by SGC, up68% from preceding plan

FYP is based on programs , not investment so gridinvestments will not be affected by the copper price

Following rapid build in capacity, timefor China to develop copper intensive grid

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alle

dca

paci

ty(G

W)

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alle

dca

paci

ty(G

W)

China has under-invested intransmission and distribution

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erin

frast

ruct

ure

inve

stm

ent

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0%

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USA UK Japan China

Pow

erin

frast

ruct

ure

inve

stm

ent

Generation Transmission Distribution

Aluminium is not a substitute forcopper in electric power systems

Aluminium has 62% of copper’s conductivity so aluminiumwound transformers would be much larger. Prohibitively so?

Aluminium cannot handle fluctuating magnetic forces as well ascopper so high failure rate from broken windings

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copper so high failure rate from broken windings

Copper is very much easier to work than aluminium

Aluminium windings require more specialty steel in thetransformer core

In any case substitution is a long-term problem rather than animmediate concern

Aluminium is even less suitable thancopper for domestic wiring

Many authorities prohibit the use of aluminium wire because itis a safety hazard when over-heated and connections loosen

Difference in the coefficient of thermal expansion causes

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Difference in the coefficient of thermal expansion causesaluminium to expand and contract at a different rate to copperwhich is used in fittings

Aluminium is subject to creep (deform) under sustainedpressure and more so at high temperature

Use of copper avoids galvanic corrosion from use of dissimilarmaterials

No sign of substitution: production ofelectric power cable continues to grow strongly

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Length

(million

km

)

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Length

(million

km

)

Sustained production of power andUHV transformers. Where is the substitution?

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15

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25

100

150

Capacity

(GVA)C

apaci

ty(G

VA)

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0

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Capacity

(GVA)C

apaci

ty(G

VA)

Power transformers (LHS) UHV transformers (RHS)

While monthly generator productionvaries, annual output is steady. Substitution?

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20

Capaci

ty(G

W)

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0

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ty(G

W)

It has been long enough…where is theevidence of substitution? Producer plans?

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ratio

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Cu:A

lra

tio

Domestic appliances, especially airconditioners consume a lot of copper

Appliance Copper intensity(Kg per appliance)

Annual Demand(kt)

Refrigerator 1.13 to 1.3 90.4 to 91

33

Washing machine 0.567 39.7

Air conditioner 7.15 to 8.3 929.5 to 1,079.1

Freezer 1.215 19.4

These Chinese domestic appliancesrequire more than a million tonne of copper

0.8

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Copperdem

and

(Mtp

a)

34

0

0.4

Refrigerator Freezer Air conditioner Washingmachine

Copperdem

and

China continues to produce a lot ofcopper intensive consumer appliances

100

150

Pro

duct

ion

(Mt)

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0

50

1990 1993 1996 1999 2002 2005 2008 2011

Pro

duct

ion

(Mt)

Washing machines Refrigerators Air conditioners

New technology passenger vehicles arefar more copper-intensive

40

60

Co

pp

erco

nte

nt

(kg

per

car)

36

0

20

40

Standard Hybrid

Co

pp

erco

nte

nt

(kg

per

car)

Urandaline Investments

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