Platts Aluminum Symposium Citi Investment Research and Analysis. Brian Yu, CFA

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1 Platts Aluminum Symposium Citi Investment Research and Analysis Brian Yu, CFA January 16, 2012

2 Exchange Inventories (000 tonnes) Global metals exchange inventories have climbed significantly in recent years from under 1 million tonne during the last decade to roughly 5 million tonnes. Much of this inventory build occurred during the credit-crisis and exceeds prior cycle highs. 5,500 5,000 4,500 Source: LME, SHFE, Bloomberg and Citi Investment Research and Analysis 2 4,000 3,500 3,000 2,500 2,000 1,500 1, Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Asia (LME + SHFE) USA (LME + COMEX) Europe

3 However relative to the global aluminum market that has grown to 43 million tonnes annually vs. 15 million tonnes in the mid-90s, the real inventory build is less when measured relative to production Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Global Exchange Inventory (Months vs Production) Source: IAI, LME, SHFE, Bloomberg and Citi Investment Research and Analysis 3

4 Merchant Premia - $/lb Despite ample inventories, merchant premia in US, Japan and Europe are sitting near historical highs, typically more characteristic of tight markets. $0.10 $0.09 $0.08 $0.07 $0.06 $0.05 $0.04 $0.03 $0.02 $0.01 $ US Japan Europe Source: Metal Bulletin, Bloomberg and Citi Investment Research and Analysis 4

5 Aluminum futures have traded in contango since the middle of 2007 and this jumped sharply in the middle of 2008, offering an incentive to sell into the future vs. today so there is less spot availability. 15% 10% 5% 0% -5% -10% -15% Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Source: LME and Citi Investment Research and Analysis Annualized 15-Month Contango/(Backwardation) 5

6 The economics of an inventory financing deal.. Source: LME and Citi Investment Research and Analysis 6

7 LME Aluminum Price ($/tonne) Annualized Contango/(Backwardation) Steeper contangos and inventory financing deals are not necessarily a positive. In fact there is a negative correlation between the steepness of the futures curve and spot aluminum prices over the past 20 years. 4,000 15% 3,500 10% 3,000 5% 2,500 0% 2,000-5% 1,500-10% 1,000 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12-15% Source: LME and Citi Investment Research and Analysis Spot Al ($/tonne) Annualized 15-Month Contango/(Backwardation) 7

8 Monthly Production (000 tonnes) We are producing too much aluminum! 2,500 2,000 1,500 Credit Crisis 1, Energy Conservation at the end of the Five-Year Plan China Smelter Production Rest-of-World Smelter Production Source: IAI and Citi Investment Research and Analysis 8

9 2011 Estimated Cash Cost ($/tonne) 66% of global smelting supply is operating below cash costs here. $3,200 $3,000 $2,800 $2,600 $2,400 $2,200 $2,000 $1,800 $1,600 $1,400 $1,200 $1,000 Aluminum closed at $2,163/tonne or $0.98/lb 1 5,001 10,001 15,001 20,001 25,001 30,001 35,001 40,001 45,001 Cumulative Production (000 tonnes) Source: Wood Mackenzie and Citi Investment Research and Analysis 9

10 There s too much aluminum inventory at the moment. This is leading to a steeper contango as spot prices decline, and incentivizes inventory financing arrangements. With inventory locked-up under financing agreements, physical markets become tighter, contributing to historically high merchant premia. However from an end-user perspective, better off paying $0.03-$0.04/lb more on the merchant premia side than $0.15-$0.20/lb more for LME aluminum. Slowing down the pace of new capacity or curtailing existing production will help draw down inventories over time, but this also implies aluminum should sell for $2,600/tonne ($1.18/lb) based on marginal production costs. 10