The nickel market outlook – all about Indonesia

September 2013
Jim Lennon
Consultant to:
Macquarie Capital Securities (Europe) Ltd
+44 203 037 4271
jim.lennon@macquarie.com

In preparing this research, we did not take into account the investment objectives, financial situation and particular needs of the reader. Before making an investment decision on the basis of this research, the
reader needs to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of their particular investment needs, objectives and financial circumstances. Please see disclaimer.
Nickel: too much supply from China via Indonesia
 Huge requirements for new capacity driven by explosion in Chinese demand since 2000.
 Nickel shortage up to 2006/07 but then:
1. Growth in 200-series stainless steel (1-2% Ni) as a substitute for 300-series (8-9% Ni)
2. Processing of low-grade laterite nickel ores into nickel pig iron in China
3. $40bn+ spent by the nickel industry to expand production
 Nickel market has moved into large structural over-supply.
 Soaring capex and major technical challenges have made non-Chinese investments
economically unviable in the eyes of the industry.
 Chinese NPI (nickel pig iron) is a low-capex/high opex solution to meeting demand
growth; however, China has limited mine reserves of nickel so it is highly reliant on raw
material imports, especially from Indonesia.
 Indonesia wants to ban exports of unprocessed mineral products by 2014 – what will
happen?

Page 2
Large surplus emerges since 2008
2008-12
'000 tonnes Ni 2008 2009 2010 2011 2012 Change

 Combined surplus of 310kt from 2008 to World consumption

% change YoY
1283
-6.9%
1272 1488 1597
-0.9% 16.9% 7.4%
1667
4.4%
384

2012, equal to 21% of 2012 world use. of which: China

of which: Ex-China
355
928
474
798
587
901
685
912
753
914
398
-14
28% 37% 39% 43% 45%
 Large surpluses continue in 2013 (LME World production 1403 1361 1452 1630 1770 367

stocks rise by >70kt YTD and further large

% change YoY 5.0% -3.0% 6.7% 12.3% 8.6%
of which: China 218 280 343 445 530 312
surpluses predicted for 2014. of which: Ex-China 1185 1082 1109 1185 1240 55

Global balance 120 89 -35 33 103 310

 Large surpluses due to massive growth in
Chinese nickel pig iron production – major
Reported stocks 327.1 486.7 415.6 409.8 483.6 250

delays in Greenfield capacity additions 220000 35000

outside China have reduced potential 200000 32500

30000
180000

over-supply!
27500
160000 25000

LME stocks: tonnes

140000 22500

Price: $/tonne
120000 20000

 China accounts for all of the demand 100000

17500
15000

growth and 85% of supply growth since

80000
12500
60000 10000

2008. 40000 7500

Jan-09
Apr-09

Apr-11

Jan-12

Apr-13
Jan-08
Apr-08
Jul-08
Oct-08

Jul-09
Oct-09
Jan-10
Apr-10
Jul-10

Jan-11

Jul-11
Oct-11

Apr-12
Jul-12
Oct-12
Jan-13

Jul-13
Oct-10
LME stocks LME price

Source: INGS, Macquarie Research, Sept 2013

Page 3
 Nickel: one of worst performing base metals
Index of base metal prices  Lead, copper and tin outperform nickel,
aluminium and zinc
900

800
 All metals except aluminium rose strongly
700 in the boom period for Chinese demand
600
growth and supply shortages up to mid-
2008
Jan 2000 = 100

500
 Supply-side performance made the big
400
difference in the recovery after 2008
300 financial crisis.
200  Chinese over-supply in zinc, nickel and
aluminium combined with weak non-
Chinese demand led to weakness.
100

0
20 00 20 01 2 00 2 20 03 20 04 2 00 5 20 06 20 07 2 00 8 20 09 20 10 2 01 1 201 2 20 13  All prices off 2011 peaks
Pb Cu Sn Ni Al Zn

Source: LME, Macquarie Research, Sept 2013

Page 4
Base metal relative price performance in line with
surplus/deficits recorded
Accum ulated market b alan ce as a percent of g lob al consum ption

25% 21% 22%

21%
% of average consumption

20%
15%
10%
4%
5% 2%
0%
-5% -3% -3%
-5%
-10% -7%
-8%
-11%
-15% -13%
Al Ni Zn Cu Pb Sn

2003-07 2008-2012
Source: Macquarie Research, Sept 2013

Page 5
Take-off of Chinese demand stretched the nickel
supply chain to breaking point in 2006/07
China's nickel demand Index of Chinese consumption
750 1400
700
650 1200
600
550 1000
500
'000t primary Ni

2000=100
450 800
400
350 600
300
250 400
200
150 200
100
50 0
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012

Copper Aluminium Crude Steel Nickel

Zinc Lead Tin Stainless
Stainless steel Non stainless applications

Source: LME, Antaike, Macquarie Research, Sept 2013

Page 6
Nickel demand growth is all about China

Changes in stainless steel output by region, Changes in global nickel use by region,
2000-12 2000-2012

China 11257 China 676

India 1632 India 20

Korea 665 S.America 9

S. America 1 Korea 1

Taiwan -255 N.America -19

N.America -382 Taiwan -42

Europe -530 Japan -50

Japan -681 Europe -65

-5000 0 5000 10000 15000 -200 0 200 400 600 800

'000t SS '000t Ni
Source: INSG, ISSF, Macquarie Research, Sept 2013

Page 7
Chinese found two ways of avoiding an absolute
shortage of nickel after 2007
Globa l ratio of 3 00-s eries s tainles s in total
Nickel "shortage" from 2005 led to Chinese "solutions"
900 900 7 5%
776
800 800 7 3%
2003
686
700 700 7 1%

600 600 6 9%
525
'000t ni

500 500 6 7%

% of total
399 410
400 400 6 5%
345
6 3%
300 300
431 6 1%
200 139 368 393 200
100 274 297 300
68 5 9%
100 100
18 137
0 0 0 68 80 5 7%
0 0 0 0 18 0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 5 5%

19 90

199 3

1 996

19 98

200 0

2 004

20 06

200 8

2 012
1994

2002

2010
Ni use displaced by Chinese 200 SS Chinese nickel pig iron production

Source: ISSF, CSSC, Macquarie Research, Sept 2013

Page 8
Growth by grade-300 share stabilises since 2008-
ferritics fall away (weaker autos?)

World stainless growth (YoY) by main grade group World stainless production share by grade

70% 80%
62%

60% 70%

50%
60%
41%

36%

40%

percent of total
27% 50%
% change YoY

26%
24%

24%

30%
40%
18%

18%

16%
14%

13%

20% 12%
11%
11%

10%
10%

6% 30%
10%
5%
4%

3%

2%

20%
0%
-2%

-2%
-4%
-4%

10%
-6%

-10%
-9%

-9%
-12%

-20% 0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

200 series 300 series 400 series 200 series 300 series 400 series

Source: ISSF, Macquarie Research, Sept 2013

Page 9
World Ex-China has not recovered from 2008 global
financial crisis
World stainless steel output dominated by China

25000

Stainless steel production by region

('000t SS)
20000
2007 2012 % change
China 7108 16000 125%
Asia w/o China 9387 8875 -5%
15000
W.Europe/Africa 8017 7329 -9%
'000t SS

China
Americas 2694 2369 -12%
World Ex-China
10000
Central+Eastern Europe 333 362 9%

World ex-China 20431 18935 -7%

5000
World 27539 34936 27%

0
2013f
2009
2010
2011
2012
2000
2001
2002
2003
2004
2005
2006
2007
2008

Source: ISSF, Macquarie Research, Sept 2013

Page 10
Chinese stainless is grabbing market share from
rest of world – 4.5mtpa swing since 2003!
Chinese net imports of stainless steel
3000 20%

% of non-Chinese demand
2500
15%
2000
'000t SS products

1500 10%
1000 5%
500
0 0%
-500 -5%
-1000
-10%
-1500
-2000 -15%
2000

2001

2004

2005

2008

2009

2012

2013F
2002

2003

2006

2007

2010

2011
Chinese net imports China trade as % of non-Chinese demand

Source: Chinese Customs, Macquarie Research, Sept 2013

Page 11
Signs of recovery in and outside China as
macroeconomic indicators improve
Manufacturing PMIs for G3 China's Manufacturing PMIs
62 55
Increasing rate of expansion (>50) Increasing rate of expansion (>50)

60 54
HSBC NBS
USA
58 Eurozone 53
Japan
56 G3 average 52

54 51
Indices

Indices
52 50

50 49

48 48

46 47

44 46
Increasing rate of contraction (<50) Increasing rate of contraction (<50)

42 45
Apr-11
Jun-11
Jul-11
Aug-11

Oct-11
Nov-11

Apr-12
Jun-12
Jul-12
Aug-12

Oct-12
Nov-12

Apr-13
Jun-13
Jul-13
Aug-13
Jan-11
Feb-11
Mar-11
May-11

Sep-11

Jan-12
Feb-12
Mar-12
May-12

Sep-12

Jan-13
Feb-13
Mar-13
May-13

Apr-11
Jun-11
Jul-11
Aug-11
Oct-11
Nov-11

Apr-12
Jun-12
Jul-12
Aug-12
Oct-12
Nov-12

Apr-13
Jun-13
Jul-13
Aug-13
Dec-11

Dec-12

Jan-11
Feb-11
Mar-11
May-11

Sep-11

Dec-11
Jan-12
Feb-12
Mar-12
May-12

Sep-12

Dec-12
Jan-13
Feb-13
Mar-13
May-13
Source: ISM, Markit, Reuters, NBS, HSBC, Macquarie Research, Sept 2013

Page 12
Reasonable correlation between non-Chinese
stainless steel demand and PMI: looking up!
G3 PMI and Ex-Chinese stainless steel demand
59 16%
14%
57
12%

Demand % chge YoY (3MMA)

55 10%

8%
PMI index

53 6%

4%
51
2%
49 0%
-2%
47
-4%

45 -6%
Apr-11

Aug-11

Apr-12

Aug-12

Apr-13

Aug-13
Jan-11
Feb-11
Mar-11

May-11
Jun-11
Jul-11

Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12

May-12
Jun-12
Jul-12

Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13

May-13
Jun-13
Jul-13

Sep-13
Oct-13
Nov-13
Dec-13
G3 PMI (forward 3m) % change YoY SS demand

Source: ISM, Markit, ISSf, Macquarie Research, Sept 2013

Page 13
Need for new nickel capacity – subdued in 2000-10 mainly by use of
200 series stainless, but lots of supply growth now needed
• Major surge in nickel use
Nickel consumption growth from 2000-2010 driven
90 0

80 0
125 mainly by china
70 0

60 0
• Shortage of nickel
50 0
370 prompted switch to 200-
'000t

40 0 775 series stainless in China

30 0

20 0
•Collapse in global demand
361
10 0
270 238 215 in 2009, combined with
120 93
0 substitution led to major
1950-60 1960-70 1970-80 1980-90 1990-00 2000-10 2010-20F
deceleration in demand
Primary use Demand "lost" by substitution
growth

Source: INSG, CSSC, Macquarie Research, Sept 2013

•Past three years has seen
surging demand (and
supply) once again
Page 14
Primary nickel supply has also been all about China
since 2008 – surge in supply too much for market
Supply growth by year FInished nickel supply growth: 2000-2013F
190
170
150 YoY growth in 76
130 nickel production
110 55 Ex-China 157
90
70 27
103 102
'000t ni

50
68 49 85 87
30 50 62 64
20 1 25
10 18 12 13 18 6
7 -1 3 7 8
-10 -30
-37
-30
-50 China 560
-103
-70
-90
-110
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013F

0 100 200 300 400 500 600

'000t Ni
China Rest of world Total

Source: INSG, Macquarie Research, Sept 2013

Page 15
Supply is still coming from new projects ex-
China…and from nickel pig iron

000t Ni Year Year Year Year Year

Company Project Process Capacity Start-up 2010 2011 2012 2013F 2014F
Vale VNC (Goro) HPAL 57 1Q 11 0.2 7.7 5.7 19.5 26.0
Vale Onça Puma FeNi 25 1Q 11 0.0 7.0 6.0 2.0 16.0
First Quantum Ravensthorpe HPAL 39 2H 11 0.0 5.7 32.2 34.9 34.0
First Quantum Kevista Conc 10 2Q 12 0.0 0.0 3.9 9.0 10.0
Xstrata Koniambo FeNi 60 1Q 13 0.0 0.0 0.0 6.5 30.0
Talvivarra Talvivarra Bioleach 30 4Q 09 10.4 16.1 12.9 12.0 20.0
Anglo American Barro Alto FeNi 40 1Q 11 0.0 6.3 21.6 23.7 30.0
Sherritt/Kores/Sumitomo Ambatovy HPAL 60 2Q 12 0.0 0.0 5.7 31.0 45.0
Sumitomo Metal Mining Taganito HPAL 30 2H 13 0.0 0.0 0.0 4.0 22.0
MMC/Highland Pacific Ramu HPAL 32 2H 12 0.0 0.0 5.3 11.4 22.0
Taguang Taung Nickel Taguang FeNi 23 1Q 13 0.0 0.0 0.0 3.0 17.0
Total Total 406 10.6 42.7 93.3 157.1 272.0
YoY change 32.1 50.6 63.8 114.9

Source: Company Reports, Macquarie Research, Sept 2013

Page 16
The changing face of nickel – stagnation in sulphide
production as laterites take off – mine production basis
Sulphide ore production stops growing Laterite nickel mine production takes off
900
1500
800 Indonesia
1300
Philippines
700 Norw ay
Turkey
Kazakhstan 1100
600 Ukraine
United States
'000t contained ni

'000t contained ni
Albania
Zam bia 900
500 Papua New Guinea
Zim babw e
Madagascar
400 Botsw ana 700
Venezuela
South Africa
Serbia
300 China, P.R. 500
Dom inican Rep.
Aust Sulph
200 FYROM
Canada 300
Aust Laterite
100 Russian Fed.
Cuba
100
Colom bia
0
Brazil
2007 2008 2009 2010 2011 2012 -1002007 2008 2009 2010 2011 2012
New Cal. (France)

Source: INSG, Macquarie Research, Sept 2013

New Caledonia has not participated in the laterite ore surge

Page 17
The growing role of Indonesia and the Philippines
Indonesia and Philippines share in global mine Nickel ore production in Indonesia and the
30% production 1100 Philippines

900
25%
% of world mine production

'000t contained nickel

700
20%

500

15%
300

10%
100

5% 2007 2008 2009 2010 2011 2012

-100
2007 2008 2009 2010 2011 2012
New Caledonia Indonesia Philippines

Mine production overstates the actual impact due to massive ore stocking in China and
also >50% of ore from Philippines not being used as nickel, but iron ore
Source: Philippines Mines and Geosciences Bureau, INSG, GTIS, Macquarie Research, Sept 2013

Page 18
Lots of new rotary kiln electric furnace (RKEF) capacity
was coming on stream in 2013!
Liande (LISCO)
Chinese nickel pig iron production Chinese RKEF Capacity by month Beihai Chengde

Ningbo Wangxiang
450 450 450000
403 Shangdon g Xinhai
Tenlo ng Hejin
400 400 400000
350 Hongda Nieye

350 350 Changjiang Nieye

307 350000

Capacity: tonnes NI a year

Suq ian Xiangxiang
300 300 Jinguang (SW)
300000
'000t Ni

250 250 Bao gang Desheng

Fufeng Sh iye
200 200 250000 Delong Nieye
148 Shangdon g Jinaihui
150 120 150 200000 Shangdon g Xinhai

100 71 82 100 Yichuan Nieye

150000 Haigan Keji
50 20 50 Tsing shan Siji
1 100000
0 0 Shangai Haihe
Tsing shan Changqin g
2005 2006 2007 2008 2009 2010 2011 2012 2013f 50000 Beihai Chengde

Ningbo Wanxiang
0.5-2% Ni blast furnace 4-8% Ni blast furnace 0 Delong Nieye
Shangdon g Jinaihui
9-15% Ni electric arc furnace 9-15% Ni RKEF 2010 2011 2012 2013
Shangdon g Xinhai

Tsing shan Dingxin

Source: Industry estimates, Macquarie Research, Sept 2013

Page 19
Current main production processes for nickel
OXIDE
SULPHIDE (LATERITE) LIMONITE SAPROLITE
ORE TYPE

PAL CARON
UPGRADING CONC.
PROCESS PROCESS

SMELT

PYRO PYRO
PROCESSING PYRO HYDRO

HYDRO

INTERMEDIATE
MATTE NiS NiCO3 MATTE

PROCESSING HYDRO HYDRO HYDRO

PRODUCT CLASS 1 CLASS 1 Ni-OXIDE CLASS 1/2 CLASS 1 FeNi NPI

Source: INSG, Macquarie Research, Sept 2013

Note: excludes leaching processes for sulphides (Talvivaara bioleach in Finland) and limonites (in
Guangxi and Jiangshi in China)
Page 20
Our estimates and forecasts of nickel production by
process route
Finished nickel production by main process Finished nickel production by ore
2250
75% type - % share of total
2000
70%
1750
65%
1500
60%
1250
'000t Ni

55%

% of total
1000 50%

750 45%

500 40%

35%
250
30%
0
2013F
2014F
2015F
2016F
2017F
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012

25%

2013F
2014F
2015F
2016F
2017F
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Sulphide - conventional Sulphide bioheapleach Laterite - ferronickel
Laterite - PAL Other laterite Laterite - nickel pig iron Sulphide Laterite

Source: Company data, INSG, Macquarie Research, Sept 2013

Page 21
NPI accounted for major share of nickel used in
China in 2012 – replacement for scrap use in ROW

Chinese nickel use by type Nickel use ex-China by type

17%
Ni in scrap
Ni in scrap
38% 42% 40% NPI
NPI
FeNi FeNi
Metal/utility/oxide Metal/utility/oxide

38%
0%
7%
18%

Source: INSG, Macquarie Research, Sept 2013

Page 22
Main recent PAL and FeNi projects – late and
expensive
PAL '000tpa $m Ferronickel '000tpa $m
Start-up Capacity Capex $/t cap Acid plant Refinery Start-up Capacity Capex $/t cap
Murrin Murrin 1999 40 1700 42500 x x Gwangywang 2008 30 720 24000
Coral Bay Stage 1 2005 12 220 18333 Onca Puma 2011 52 3200 61538
Ravensthorpe original 2007 40 3000 75000 x x Barro Alto 2011 40 1900 47500
VNC (Goro) 2010 60 6000 100000 x x Koniambo 2013 60 5500 91667
Ramu 2012 32 1800 56250 x Taguang Taung Nickel 2012 22 850 38636
Ambatovy 2012 60 5500 91667 x x
Taganito 2013 30 1600 53333

Total above 274 19820 72336 Total above 204 12170 59657

Ravensthorpe reopening 2011 40 740 18500

•Projects running many years late, capex mostly rose 2-4 times above
original estimates and commissioning problems have been major
•Too early to be precise on operating costs but we think the PAL
projects will range from $8,000-15,000/t with an average of $12-13,000/t
while the ferronickel projects range from $8,500-13,000/t with an
average of $10,000/t. Opex estimates much higher than in feasibility.
Source: Company data, INSG, Macquarie Research, Sept 2013

Page 23
Nickel pig iron progress by contrast has been
miraculous!
The "economics" of new capacity - based on today's parameters
90000
80000
80000
70000
60000
60000
$/tonne

50000
40000
29000
30000 22000
17000 18000 15000 13500 16500
20000 13000
10000
10000 5000

0
PAL (recent) FeNi (recent) Old NPI New NPI (RKEF)
Capex Opex Incentive price

This is a very rough guide to the economics of new capacity

Source: Company data, Wood Mackenzie, Macquarie Research, Sept 2013

Page 24
Long run prices need to be higher…depending on NPI!
How industry costs and incentive prices have evolved
Excluding NPI
30000 70000

25000 60000
$/lb prices and costs

$/lb capital intensity

50000
20000
40000
15000
30000
10000
20000
5000 10000

0 0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Average cash costs Incentive price (with 20% capital charge)
90th percentile cash costs Capital intensity new projects ($/lb capacity) RHS

Source: Wood Mackenzie, Macquarie Research, Sept 2012

Page 25
Nickel pig iron – still the big unknown
 Estimates for 2012 output (still!) vary from 310kt to 370kt – very little reporting, lots of
guessing. 2013 forecasts from 380-500kt.
 Cash costs range from $12-20,000/tonne ($5.45-9/lb) depending on process and
location. Costs vary widely.
 Costs do vary with nickel price so there is no single price below which supply shuts –
indeed costs have fallen sharply (15-20%) since March 2012 (lower carbon and ore prices
and new power rebates in Inner Mongolia).
 Capacity potential is massive – OVER 400,000 tpa NEW capacity due, mostly Greenfield
rotary kiln/electric arc furnace and integrated with stainless mills. Costs will rise as energy
prices rise and RMB appreciates but new plants have 30-50% less energy consumption
and stainless mills get significant energy and iron credit benefits.
 Ore supplies from Philippines and Indonesia are critical in determining the future output
limits. Many Chinese producers trying to backwardly integrate into ore.
 If new supply outside China comes on successfully, capping prices, NPI production will
be limited – if new supply fails, there will be more NPI.

Page 26
NPI production appears to be falling in some
categories
Chinese nickel pig iron production
 Apparent production has fallen from annualised by month

annualised rate of 465ktpa in March to 475

450
375ktpa in July, a 90ktpa cut 425
400
375
 However, Year-to-date total production is 350
325

'000t Ni annualised
300
still running 25% higher YoY 275
250
225
 Price discounts for NPI over LME have 200
175
disappeared, a sure sign of a tightening 150
125
100
supply/demand for this product. 75
50
25
0

Mar-12

Nov-12

Feb-13

Jun-13
Jan-12
Feb-12

May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12

Dec-12
Jan-13

Mar-13
Apr-13
May-13

Jul-13
Apr-12
8-12% EAF 1.5-2% BF 4-6% BF

Source: SMM, Macquarie Research, Sept 2012

Page 27
Drivers of LME price not always same as for NPI
and stainless steel scrap. NPI rallies!
LME nickel price and Chinese NPI prices Price premiums and discounts in China
31000
29000 14000
Price: $US/tonne Ni ex-VAT

Price: $US/tonne Ni ex-VAT

27000 12000
25000
10000
23000
8000
21000
6000
19000
17000 4000

15000 2000
13000 0
11000 -2000
9000 -4000
Jan-12

Apr-12
May-12
Feb-12
Mar-12

Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13

Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Feb-13

-6000

Jan-13
Jan-12

Mar-12
Apr-12
May-12

Aug-12
Sep-12
Oct-12
Nov-12

Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Feb-12

Jun-12
Jul-12

Dec-12
1.5-2% NI blast furnace NPI LME cash price

8-13% Ni electric furnace NPI i in SS scrap (EU/US) 8-13% Ni - LME price

1.5-2% Ni minus LME price
Ni in SS Scrap minus LME

Source: SMM, Macquarie Research, Sept 2012

Page 28
Ore, carbon and electricity main cost drivers for NPI
– 2012 averages

Cost breakdown for 4-6% Ni blast furnace NPI Cost breakdown for 10% Ni electric arc furnace NPI
8%
15%

3%

5%
47%
31%
50%

30%

6%
5%
Ore Coke Coal Electricty Other Ore Coke Coal Electricty Other

Source: Industry estimates, Macquarie Research, Sept 2013

Page 29
NPI costs for electric furnace producers – big differences in costs
according to location and furnace types – costs fall as raw material
and power costs fall
24000 24000

22000 22000
$/lb ex-VAt

20000 20000

$/lb ex-VAT
18000 18000

16000 16000

14000 14000

12000 12000
Mar-10
May-10

Mar-11

Sep-11
Nov-11

May-12

Nov-12
Jan-13
Mar-13

Mar-10
May-10
Jul-10

Nov-10

Mar-11
May-11

Nov-11

Mar-12
May-12

Nov-12
Jan-13
Mar-13
May-13
Jan-10

Jul-10
Sep-10
Nov-10
Jan-11

May-11
Jul-11

Jan-12
Mar-12

Jul-12
Sep-12

May-13
Jul-13

Jan-10

Sep-10

Jan-11

Jul-11
Sep-11

Jan-12

Jul-12
Sep-12

Jul-13
Price: 8-13% NP I Price : 8-13 % NPI
Costs: 10% Ni - Coasta l Costs: 12% Ni - Conventional
Costs: 10% Ni - Inner Mongolia Costs: 12% Ni - RKEF

Source: SMM, Macquarie Research, Sept 2013

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Low Ni NPI blast furnace producers still profitable
22000 32000

30000
20000

28000
18000
$/lb ex-VAT

$/lb ex-VAT
26000

16000
24000

14000
22000

12000 20000
Jan-13

Apr-13

Jul-13

Jan-10

Jul-10

Apr-12

Jul-13
Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Jan-12

Apr-12

Jul-12

Oct-12

Apr-10

Oct-10

Jan-11

Apr-11

Jul-11
Oct-11

Jan-12

Jul-12

Oct-12

Jan-13

Apr-13
Oct-11

P rice: 4-6% NPI Price: 1.5-2 % NPI

Costs: 6% Ni in blast furna ce Costs: 1.7% Ni in blast furnace

Source: SMM, Macquarie Research, Sept 2013

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Key factors in NPI
Indonesian ore ban planned for end-2013. Widely believed this is unlikely to
happen! Quotas and taxes more likely? 20% export tax (adds 35-40c/lb to costs
if passed on…but it was not!) from May 2012…maybe higher?
Longer term cost pressures – breakeven for NPI could rise from $12,000-
17,000/t currently to $19,000-25,000/lb over next 4-5 years as ore costs,
electricity costs rise and RMB appreciates?
Competition for higher-grade ore (1.8%+Ni) will intensify as more RKEF comes
on and high grade reserves deplete – price of these ores could rise sharply.
Still unclear how long the high-grade resources can last at current rates.
We don’t think ore supply from Indonesia to China will stop in 2014 – it will
become (a lot) more expensive and there will probably be some NPI capacity
built in Indonesia from 2015 onwards.

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Nickel supply/demand summary – surplus to 2015?
'000 tonnes Ni 2010 2011 2012 2013F 2014F 2015F 2016F 2017F 2018F
World consumption 1488 1597 1667 1749 1844 1942 2027 2093 2150
% change YoY 16.9% 7.4% 4.4% 4.9% 5.5% 5.3% 4.3% 3.3% 2.7%
of which: China 587 685 753 832 904 976 1034 1077 1115
of which: Ex-China 901 912 914 916 940 967 993 1016 1035
39% 43% 45% 48% 49% 50% 51% 51% 52%
World production 1452 1630 1770 1826 1928 1967 2023 2049 2069
% change YoY 6.7% 12.3% 8.6% 3.2% 5.6% 2.0% 2.9% 1.3% 1.0%
of which: China 343 445 530 617 600 590 570 560 555
of which: Ex-China 1109 1185 1240 1210 1328 1377 1453 1489 1514

Global balance -35 33 103 78 84 25 -3 -44 -81

Reported stocks 415.6 409.8 483.6 561.2 645.4 670.0 666.5 622.6 542.0
Weeks' demand 14.5 13.3 15.1 16.7 18.2 17.9 17.1 15.5 13.1
LME price 21810 22831 17527 15190 15501 19500 23999 27000 28660

Source: INSG, Macquarie Research, Sept 2013

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What can drive prices higher or lower in late
2013/2014?
Higher
 Stainless steel recovery outside China as
economic growth recovers and restocking
takes place (PMIs suggest this is likely)
 Bigger NPI cuts (potentially but muted by new
capacity)
 Scrap “shortage” as stainless production
recovers (possible but unlikely)
 Indonesian ban (unlikely but uncertainty)
 Extensive production cuts – a matter of time?
(more in 2014)
 Short covering by funds on LME as prices
recover feeding upon itself (always possible!)
 LME stocks availability limited (not a major
factor with high off-market stocks)
Lower
 No Indonesian export ban and delayed
production cuts (likely)
 Ramp-up of Chinese RKEF nickel pig iron
and surge in output from new projects
with costs in the $12-13,000/t range
(happening)
 Weaker than expected economic growth
in China and elsewhere (looking unlikely)
 Copper over-supply drags whole LME
price complex lower (potentially)

Page 34
In conclusion – on the medium term
The laterite “revolution” has arrived – it is built on the shaky ground of low-cost
Indonesian ore/Chinese NPI and VERY high-cost non-Chinese capacity
Failure of major Greenfield projects outside China and massive rises in costs of
non-Chinese Greenfield projects likely to deter future investment
Next two years will be challenging for the nickel industry – unless the
Indonesians ban ore exports in 2014
Growing deficits by mid-decade will lead to need for new capacity…new
capacity needs prices significantly above $22,000/t ($10/lb)
Huge reliance on Indonesian ore to feed RKEF plants in China – unlikely to stay
as “cheap” as it is today?

Page 35
Important disclosures:
Recommendation definitions
Macquarie - Australia/New Zealand
Outperform – return > 3% in excess of benchmark return
Neutral – return within 3% of benchmark return
Underperform – return > 3% below benchmark return
Benchmark return is determined by long term nominal GDP growth plus 12
month forward market dividend yield
Macquarie – Asia/Europe
Outperform – expected return >+10%
Neutral – expected return from -10% to +10%
Underperform – expected <-10%
Macquarie First South - South Africa
Outperform – return > 10% in excess of benchmark return
Neutral – return within 10% of benchmark return
Underperform – return > 10% below benchmark return
Macquarie - Canada
Outperform – return > 5% in excess of benchmark return
Neutral – return within 5% of benchmark return
Underperform – return > 5% below benchmark return
Macquarie - USA
Outperform – return > 5% in excess of benchmark return
Neutral – return within 5% of benchmark return
Underperform – return > 5% below benchmark return
Volatility index definition*
This is calculated from the volatility of historic price
movements.
Very high–highest risk – Stock should be expected to
move up or down 60-100% in a year – investors should
be aware this stock is highly speculative.
High – stock should be expected to move up or down at
least 40-60% in a year – investors should be aware this
stock could be speculative.
Medium – stock should be expected to move up or
down at least 30-40% in a year.
Low–medium – stock should be expected to move up or
down at least 25-30% in a year.
Low – stock should be expected to move up or down at
least 15-25% in a year.
* Applicable to Australian/NZ stocks only
Recommendation – 12 months
Note: Quant recommendations may differ from
Fundamental Analyst recommendations
Financial definitions
All "Adjusted" data items have had the following adjustments
made:
Added back: goodwill amortisation, provision for catastrophe
reserves, IFRS derivatives & hedging, IFRS impairments & IFRS
interest expense
Excluded: non recurring items, asset revals, property revals,
appraisal value uplift, preference dividends & minority interests
EPS = adjusted net profit /efpowa*
ROA = adjusted ebit / average total assets
ROA Banks/Insurance = adjusted net profit /average total
assets
ROE = adjusted net profit / average shareholders funds
Gross cashflow = adjusted net profit + depreciation
*equivalent fully paid ordinary weighted average number of
shares
All Reported numbers for Australian/NZ listed stocks are
modelled under IFRS (International Financial Reporting
Standards).

Recommendation proportions – For quarter ending 31 March 2013

AU/NZ Asia RSA USA CA EUR
Outperform 45.12% 53.24% 50.00% 40.70% 62.98% 43.30% (for US coverage by MCUSA, 10.55% of stocks covered are investment banking clients)
Neutral 41.52% 28.01% 41.43% 55.01% 32.60% 34.10% (for US coverage by MCUSA, 9.05% of stocks covered are investment banking clients)
Underperform 13.36% 18.74% 8.57% 4.29% 4.42% 22.60% (for US coverage by MCUSA, 0.00% of stocks covered are investment banking clients)

Page 36
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