Where now for the nickel market?

China Nickel Conference

May 2016

Presented by:

Nikhil Shah Principal Consultant

Nickel, Stainless Steel & Special Alloys

2 2

Disclaimer

This presentation is supplied on a private and confidential basis to the customer. It must not be disclosed in whole or in part, directly or indirectly or in any other format to any other company, organisation or individual without the prior written permission of CRU International Limited.

Permission is given for the disclosure of this report to a company’s majority owned subsidiaries and its parent organisation. However, where the report is supplied to a client in his capacity as a manager of a joint venture or partnership, it may not be disclosed to the other participants without further permission.

CRU International Limited’s responsibility is solely to its direct client. Its liability is limited to the amount of the fees actually paid for the professional services involved in preparing this presentation. We accept no liability to third parties, howsoever arising.

Although reasonable care and diligence has been used in the preparation of this presentation, we do not guarantee the accuracy of any data, assumptions, forecasts or other forward-looking statements.

Source: CRU www.crugroup.com

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Recent developments

Outlook for Stainless Steel Production

Nickel costs

Prospects for Nickel Supply

Summary

Presentation structure

5

Prices at multi-year lows Open interest And LME 3-month nickel price

Source: LME, CRU

140000

160000

180000

200000

220000

240000

260000

280000

300000

7000

9000

11000

13000

15000

17000

19000

21000

23000Ja

n-1

4

Fe

b-1

4

Ma

r-1

4

Ap

r-1

4

Ma

y-1

4

Ju

n-1

4

Ju

l-1

4

Au

g-1

4

Se

p-1

4

Oct-

14

No

v-1

4

De

c-1

4

Ja

n-1

5

Fe

b-1

5

Ma

r-1

5

Ap

r-1

5

Ma

y-1

5

Ju

n-1

5

Ju

l-1

5

Au

g-1

5

Se

p-1

5

Oct-

15

No

v-1

5

De

c-1

5

Ja

n-1

6

Fe

b-1

6

LME 3 month Open interest

Data: LME

LME 3-month $/t Open interest lots

6 6

Market is shifting into deficit…

Source: CRU, LME

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

-60

-40

-20

0

20

40

60

80

100

Balance LME 3-month

'000 tonnes LME 3 month $/t

7

LME and SHFE stocks,000 tonnes Chinese trade in refined nickel, 000 tonnes

Source: LME, GTIS

…but industry stocks are high

0

100

200

300

400

500

600

Ja

n-1

4F

eb

-14

Ma

r-1

4M

ay-1

4Ju

n-1

4A

ug

-14

Se

p-1

4O

ct-

14

De

c-1

4Ja

n-1

5M

ar-

15

Ap

r-1

5Ju

n-1

5Ju

l-1

5S

ep

-15

Oct-

15

No

v-1

5Ja

n-1

6F

eb

-16

Ap

r-1

6

SHFE USA Asia Europe

-60

-40

-20

0

20

40

60

80

100

120

1Q

2013

3Q

2013

1Q

2014

3Q

2014

1Q

2015

3Q

2015

1Q

2016

Imports

Exports

Net imports

Data: CRU, GTIS.

8 8

Global stainless production growth has slowed since mid-

2014 Quarterly change in China and World ex-China stainless production y/y

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

1Q

20

13

2Q

20

13

3Q

20

13

4Q

20

13

1Q

20

14

2Q

20

14

3Q

20

14

4Q

20

14

1Q

20

15

2Q

20

15

3Q

20

15

4Q

20

15

1Q

20

16

China World ex-China Global

% change y/y

9

Decline in manufacturing, infrastructure relatively

severe from 2014…

Percentage change in China’s Manufacturing and Infrastructure fixed asset investment

0

5

10

15

20

25

30

Jan-1

3

Mar-

13

May-1

3

Jul-13

Sep-1

3

Nov-1

3

Jan-1

4

Mar-

14

May-1

4

Jul-14

Sep-1

4

Nov-1

4

Jan-1

5

Mar-

15

May-1

5

Jul-15

Sep-1

5

Nov-1

5

Jan-1

6

Mar-

16

Y/Y Change (%)

Manufacturing FAI Infrastructure FAI Poly. (Manufacturing FAI) Poly. (Infrastructure FAI)

-10%

0%

10%

20%

30%

40%

50%

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

China IP

GDP (Nominal)

Apparent Stainless Steel Consumption

10

…but government ramped up policy support

• Interest rates:

6 cuts since October 2014 – scope for another

1 or 2

• Special Construction Fund:

RMB800bn in 2015 - further RMB1trn for

2016H1

• Local government debt swap:

cut interest and capital payments by ≈ 0.5% of

GDP in 2015 – expanding in 2016

• Mortgages:

down payment requirements lowered

• Fiscal deficit:

expanded by 1.7% of GDP in 2015 - further

increase of around 1% this year

• Reforms:

Deregulation

Migrants and urbanisation

11

12

13

14

15

16

17

18

Jan

-14

Ap

r-14

Jul-

14

Oct-

14

Jan

-15

Ap

r-15

Jul-

15

Oct-

15

Jan

-16

TSF + local govt bondsTSF

Credit growth has rebounded since mid-2015

% y/y

Note: Credit defined as Total Social Financing plus local government bonds.

Data: CRU

11

…which is starting to lift investment, including in

real estate a key driver of metals demand

-5

0

5

10

15

20

25

30 Infrastructure Real estate

Heavy industry Light industry

Other

Fixed asset investment by sector y/y% 3 month moving average

Note: Infrastructure includes utilities

Data: CEIC, CRU

20

25

30

35

40

45

50

1995 2000 2005 2010 2015 2020

Household consumption

Investment (GFCF)

Rebalancing f rom investment to consumption

% of nominal GDP

Data: CEIC, CRU

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Stainless production million tonnes

Ex-China to make a greater contribution to global

stainless growth over the next five years

-4

-2

0

2

4

6

8

10

12

14

16

18

2006-2010 2011-2015 2016-2020

China

ex-China

Global stainless growth

13 13

Demand growth to recover from poor 2015

Global nickel demand m tonnes Percentage change %

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

0.0

0.5

1.0

1.5

2.0

2.5

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Stainless Non-stainless % Change in global demand

14

Curtailments have trickled in… Curtailments since the start of 2015 excluding NPI

Curtailments have been slow

to come but now total around

157,000 tpy excluding

Chinese NPI.

The impact on nickel supply

may be less as some of the

feed could be processed

elsewhere, for example in the

case of QNI in Australia.

Australia

Brazil

China

Canada

Japan

Kosovo

Macedonia

Spain

Venezuela

15

…and will lead to a fall in nickel supply in 2016

Percentage change in nickel supply

-20

-15

-10

-5

0

5

10

Rest of world

China

Global

16

Risk of further cuts with around 56% of capacity under

water at $9,000/t Business cost curve for 2016 $/t

0

5,000

10,000

15,000

20,000

25,000

0 200 400 600 800 1000 1200 1400 1600 1800

$9,000/t

17

•We forecast global nickel demand to rise by 2.3% this year.

•Curtailments will see global supply fall by 4.3% this year.

This will shift the market into deficit in 2016.

•The deficits are expected to persist over the next few years

assuming there is not a hard landing in China.

• However, the market has built up a large overhang of

stocks following 5 years of surpluses and this will take time

to work off.

Summary

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Nikhil Shah

Principal Consultant

CRU

+44 20 7903 2212

Nikhil.Shah@crugroup.com

Thank you for your attention