The Global Aluminium Market Outlook

What is driving aluminium supply and demand?

Will the aluminium market balance?
Where are prices heading?

Anil Patel, CRU Aluminium

Aluminium Valley In Business Trade Show 2017

Québec, May 2017

Structure of Presentation

Demand: What is expected to drive demand?

Supply: Will China implement environmental closures?

Market balance: Can demand catch supply in 2017?

Price forecast: Where are prices heading?

Conclusions

2
Global economy begins 2017 robustly
Global Industrial Production (IP) Index Global GDP
Quarterly global IP, % y-o-y change Quarterly global GDP, % y-o-y change
3,00 3,50
2,90 3,00
2,80
2,70 2,50
2,60 2,00
2,50
2,40 1,50
2,30 1,00
2,20
0,50
2,10
2,00 0,00

2017Q1
2015Q1
2015Q2
2015Q3
2015Q4
2016Q1
2016Q2
2016Q3
2016Q4

2017Q2
2017Q3
2017Q4
2018Q1
2018Q2
2018Q3
2018Q4
2015Q1

2018Q3
2015Q2
2015Q3
2015Q4
2016Q1
2016Q2
2016Q3
2016Q4
2017Q1
2017Q2
2017Q3
2017Q4
2018Q1
2018Q2

2018Q4
Data: OE, CRU Data: OE, CRU

Aluminium Order Book Index Expected Purchasing Index

56 56
55 55
54 54
53 53
52 52
51 51
50 50
49 49
48 48
47 47
sept-15

sept-16
juin-15

juin-16
mars-15

déc-15

mars-16

déc-16

mars-17

sept-15

sept-16
juin-15

juin-16

déc-16
mars-15

déc-15

mars-16

mars-17
US Europe Asia US Europe Asia
Data: CRU, Markit Data: CRU, Markit

3
China : Supporting growth and containing risks are the
goals ahead of this autumn’s Party Congress

Selected government targets for 2017

Monetary policy
2016 2016 2017 • Officially: “Prudent and neutral”
target outturn target • Reality: loose, some tightening now

y/y % unless stated

Fiscal policy
GDP 6.5 - 7.0 6.7 ≈ 6.5* • Officially: “Proactive”
Inflation (CPI) 3.0 2.0 3.0
• Reality: extremely loose

Credit growth (TSF) - 12.8 12.0

Housing policy
Fiscal deficit (% of GDP) 3.0 3.8 3.0
• “Houses for living in, not investment”
• Hot markets - tightening demand
Note: TSF = Total Social Finance. Fiscal deficit is a narrow measure that excludes
restrictions, instructed more land
off-balance sheet items, notably local government financing vehicles; including these supply
raises 2016’s deficit to around 10%, according to IMF estimates. • Over-supplied markets - instructed
Note: * Or higher, if possible
Source: Chinese government, CEIC, CRU less land supply

4
4
 2017 Global primary demand once again spearheaded by China
Share of global primary aluminium consumption and 2017 y-o-y% growth

y-o-y growth%
63Mt
8
India 34Mt
Russia
6
Rest of world
Africa
4 Rest of Asia
Western Europe
2

0
China Central & Sth Middle East USA Japan
America
-2
Total world demand growth in 2017: 5.3% C&S America
-4
0 10 20 30 40 50 60 70 80 90 100
Country/region share of global aluminium consumption, %

Data: CRU Source : CRU Aluminium Market Outlook

5
 Automotive sector to fuel global demand growth
Aluminium semi-finished product consumption by end-use sector 2016-2021, ‘000t
CAGR 2016-2021
100000 2.5% p.a.
90000 4.2% p.a.
80000 3.5% p.a.

70000 4.2% p.a.

2.9% p.a.
60000
3.3% p.a.
50000

40000 2.1% p.a.

30000

20000

10000 4.9% p.a.

0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Transport Construction Packaging Foil stock
Electrical Consumer durables Machinery & Equipment Other

6
 China: The world’s aluminium semis factory
2016 Semis Net
Exports (‘000t)

>1000

500 – 999
21kt
100 – 499
-972kt 66kt

0 – 99
13kt 2001kt 92kt

-99 – 0
-365kt
-499kt
-499 – -100 -47kt

-200kt
-999 – -500

<-1000
-207kt

Categorised as: North America, Central & South America, Western Europe, Eastern Europe (w/Russia), Africa, Middle East, China, Japan, India, Rest of Asia, Australasia 7
Structure of Presentation

Demand: What impact will greater global tariffs have?

Supply: Will China implement environmental closures?

Market balance: Can demand catch supply in 2017?

Price forecast: Where are prices heading?

Conclusions

8
The old world’s share of aluminium production is dropping
Primary aluminium production split by region

100%

90% Russia, India & Middle East

80%

70%

Rest of world excluding China

60%

50%

40% Rest of China

30% Xinjiang

20%
Shandong
10%
Inner Mongolia
0%
2000 2005 2010 2015 2020

9
 Production Trends: China supply growth in focus
World monthly annualised aluminium production, million tonnes Impact of proposed seasonal cuts on production, million tonnes
36
0,0

34
-0,2
32
-0,4
30
-0,6
28
-0,8
26
-1,0
24 2017 2017 2017 2017 2018 2018 2018 2018
avr-15 oct-15 avr-16 oct-16 avr-17 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
China production CRU annualised Henan Shanxi Shandong Hebei
Ex. China production CRU annualised

• China is set to put in its strongest year for production growth on record. CRU expects China
will increase production by 3.8Mt in 2017, surpassing the last record of 3.3Mt in 2010.
Record output this year is despite the inclusion of 975,000t of unallocated closures in our
base case for 2017. The closures include around 350,000- 500,000t of environmentally led
closures in November and December.

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Chinese projects will add a cumulative 12.2Mt over next 5
years without supply reform
Aluminium production, million tonnes

2017 2018 2019 2020 2021

Yunnan

Xinjiang

Shandong

Shaanxi

Shanxi

Qinghai

Liaoning

I.Mongolia

Guizhou

Guangxi

- 500 1000 1500 2000 2500 3000 3500

Data:CRU

Source: CRU Aluminium Market Outlook

11
Structure of Presentation

Demand: What impact will greater global tariffs have?

Supply: Will China implement environmental closures?

Market balance: Can demand catch supply in 2017?

Price forecast: Where are prices heading?

Conclusions

12
Global market will move into deficit in 2018…only if China
cuts supply Key Assumptions
Production Consumption 925,000t and 4.5Mt of Chinese closures needed in
Balance (right axis) 2017 and 2018
70 2000
Environmental closures should account for 455,000t
1500 and 600,000t of the closures in 2017 and 2018
65
Impact of supply reform policy uncertain at this stage
1000 but could be large
60

480 500 Chinese consumption growth to fall in 2018 to 4.5%

344
55
Chinese net primary exports to rise from 500,000t in
0
2017 to 800,000t in 2018
50
-538 -500 Risks

45 -913 -1000 Supply policy response in China could sway prices

either way
40 -1500
Projects still being added- mainly by SOEs
2015 2016 2017 2018
Costs inflation from alumina, power and carbon

Source: CRU Aluminium Market Outlook

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Stock levels declining rapidly outside China
Mt Ex. China China World days' inventories (right axis) days
14 90

12 84

80
10

74
8 73
70
6 67

4
60

0 50
2015 2016 2017 2018

Source: CRU Aluminium Market Outlook

14
Structure of Presentation

Demand: What impact will greater global tariffs have?

Supply: Will China implement environmental closures?

Market balance: Can demand catch supply in 2017?

Price forecast: Where are prices heading?

Conclusions

15
LME 7 Signals: China supply-reform the dominant topic
Key LME drivers – bullish, neutral or bearish
Bull/Bear 1 month Next 6
CRU's Seven Price Signals (forecast) /Neutral ahead months Short Term View
The dollar will strengthen a tad against the Euro. Trump wants a
weaker dollar, but increases in US interest rates in 2017 will send
US Dollar: To remain stable Neutral the currency higher. CRU anticipates a neutral impact on prices
over the next 12 months.

CRU forecasts Brent will average $54/bbl in 2017. The price is

currently trading around $53/bbl. Unless the oil market moves into
Energy prices: Oil prices to remain stable Neutral deficit there is unlikely to be much of a move in oil prices this
year. We have a neutral impact on prices from changes to oil.

Economic activity remains firm in 2017 with GDP and IP to rise

Chinese macroeconomic data: Remaining firm Neutral 6.6% and 6.0% respectively. Chinese IP growth will ease from
6.3% to 5.7% y-o-y.

Fake semis exports in the form of CC coil for remelt are set to rise
in the next quarter due to a widening of the price arbitrage in the
Chinese Export Arbitrage: Exports expected to rise Bearish last months. However, the recent surge in the SHFE price may
reduce export expectations into Q3 2017.

Capital inflows flowed into aluminium in the last two months whilst
other metals saw outflows of money. Expectations of supply
Investors: Looking for more stringent Chinese policy Bullish reform in China keep investors on-board for now. But, if there is
no meaningful reform then expect a quick exit of money.

Chinese reported warehouse stocks rose to 1.2Mt in April.

Further inflows will temper some investor expectation in coming
Visible stocks: China slower increase, LME record low Neutral months. LME stocks fell to a nine-year low providing a positive
boost to prices. Stocks will continue to fall as deficits widen.

China will remain in surplus this year unless there are rapid and
meaningful supply reforms. The deficit outside China will
Aluminium Market: Widened deficit outside China Bearish increase. Disruptions to supply at Alba and Vedanta have widened
the market deficit.

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Aluminium outperforms non-ferrous metals in Q1 2017
Investors remain bullish LME metals Investors starting to favour aluminium
Money manager net long, '000 lots Money manager net long, '000 lots

Lead Nickel Zinc Copper Aluminium Aluminium LME metals excluding Aluminium
450 300
400
250
350

300 200
250
150
200

150 100
100
50
50

0 0
janv-16 mai-16 sept-16 janv-17 janv-16 mai-16 sept-16 janv-17

Source: CRU Aluminium Market Outlook

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LME Price forecast: LME 3-month price upgraded to $1,885/t

LME 3-month price forecast

$/t High Case Forward curve, March 27, 2017 Low Case Base case

2100 High case, base case and low case LME 3- $2,050 $2,050
month price forecasts, $/t $2,010
2000

1900 $1,930 $1,910

1800 $1,850 $1,850
$1,709
1700 $1,632 $1,775
$1,725
$1,582 $1,700
1600

1500 $1,516

1400
Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017
Data: CRU, LME

Source: CRU Aluminium Market Outlook

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Regional ingot premiums hold firm
(LHS) $/t, (RHS) ¢/lb
300
Rotterdam duty paid Japan 3-month CIF US Midwest
12
250
10,5
10,2
10,0 10
9,6
200
8
7,5
156 158
150 145
150
133 128 6
120 125

100 95
4
74

50 2

0 0
Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017

Data: CRU

Source: CRU Aluminium Market Outlook

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Structure of Presentation

Demand: What impact will greater global tariffs have?

Supply: Will China implement environmental closures?

Market balance: Can demand catch supply in 2017?

Price forecast: Where are prices heading?

Conclusions

20
Conclusion

Global demand is expected to be robust in 2017 with a strengthening

global economy supporting increased uptake of aluminium.

Supply in 2017 is expected to be a story about China, even with expected

environmental closures capacity growth will be significant.

The aluminium market will register a small surplus in 2017 with a

large surplus in China and a deficit in the world ex-China.

We expect the LME price to fall back in Q3 and Q4 due to the surplus.

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