Commodities Comment. The March benchmark bonanza GLOBAL. Feature article. Latest news

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1 GLOBAL LME cash price % change US$/tonne day on day Aluminium 1, Copper 5,843.8 Lead 2, Nickel 1, Tin 19, Zinc 2, Cobalt 53,2.5 Molybdenum 14,898. Other prices % change day on day Gold (US$/oz) 1, Silver (US$/oz) Platinum (US$/oz) Palladium (US$/oz) Oil WTI USD:EUR exchange rate AUD:USD exchange rate LME/COMEX stocks Tonnes Change Aluminium 2,19,325-13,675 LME copper 34,525 8,475 Comex copper 121,96 37 Lead 19,5-4 Nickel 386,4 1,878 Tin 4,53-55 Zinc 379,275-2,375 Source: LME, Comex, Nymex, SHFE, Metal Bulletin, Reuters, LBMA, Macquarie Research, March March 217 The March benchmark bonanza Feature article The last two weeks of March bring a tranche of commodity benchmark discussions, particularly for materials sold into Japan. After the ferrochrome settlement announced today, over this period we would expect agreements for thermal coal, metallurgical coal and the MJP aluminium premium and may also see potash contracts agreed. We review current market dynamics as we enter the final stage of negotiations. We would highlight that the veracity of many headline price levels agreed is perhaps not what it once was, with discounts now frequently offered to high benchmark agreements. However, they do still play an important role in offering a greater degree of certainty to earnings both for producers and consumers. And in all cases, spot prices give a good lead as to where deals may be struck. In thermal coal, a timely Chinese price push will strengthen miners hands, while for met the question is how far the quarterly contract will fall. For the aluminium premium it is the opposite, with producers pushing hard for an aggressive price rise. Latest news Year-on-year growth in global industrial production slowed sharply to 2.4% in January, we calculate from our database of 7 leading producers, from 3.1% in December, after monthly output rose by only a modest.1%, compared with a.8% increase in January 216. However, we think it is too soon to call an end to the global industrial recovery given there were two specific reasons for this that will not last. First, the oil exporting countries made a substantial reduction in their output, which we count as their industrial production. This reduced the global total by.3% points YoY. February data suggests production stabilised. Second, January 216 presented a high base for global IP, with a surge in European and Japanese industrial output that was partially reversed the following month. Thus February will have a lower base, and as such we see the YoY rate rebounding strongly. The three-month moving average of global IP excluding the oil exporters, a better guide to the underlying trend, rose to 2.9% YoY, its strongest performance in more than two years. Having fallen more than $2/t since the end of February, Chinese domestic alumina prices have now dropped below $4/t (including VAT) for the first time since mid-november last year. This highlights that alumina production recovery has kept pace with the recent surge in aluminium capacity, and while expectations of government-led supply curtailments persist, these will not kick in until 4Q. With international market prices remaining relatively resilient, this means the alumina import arbitrage into China is closed by ~$2/t at present, suggesting some downside risk to international spot prices, which are trading at highly profitable levels for all producers at the present time. US crude steel output continues to climb, with last week s data from the American Iron and Steel Institute showing an estimated output level of 84.5mtpa, the highest since January 215. With prices elevated by protectionism and expectations of reasonable demand growth, sentiment remains strong, and our US steel analyst, Aldo Mazzaferro, has recently upgraded ratings on three US service centres to reflect this. Please refer to page 7 for important disclosures and analyst certification, or on our website

2 The March benchmark bonanza The last two weeks of March bring a tranche of commodity benchmark discussions, particularly for materials sold into Japan. After the ferrochrome settlement announced today, over this period we would expect agreements for thermal coal, metallurgical coal and the MJP aluminium premium and may also see potash contracts agreed. We review current market dynamics as we enter the final stage of negotiations. We would highlight that the veracity of many headline price levels agreed is perhaps not what it once was, with discounts now frequently offered to high benchmark agreements. However, they do still play an important role in offering a greater degree of certainty to earnings both for producers and consumers. And in all cases, spot prices give a good lead as to where deals may be struck. In thermal coal, a timely Chinese price push will strengthen miners hands, while for met the question is how far the quarterly contract will fall. For the aluminium premium it is the opposite, with producers pushing hard for an aggressive price rise. Peak season for benchmark discussions Commodity benchmarks are less prevalent than they used to be, after the breakdown of trust between sellers and buyers in 28/9 as spot prices fell well below contracted levels. However, across many commodities, while duration of agreements may have shortened to reflect a more volatile environment, the system itself has prevailed. The emergence of China as the core consumer (displacing Japan and Europe) has also changed and/or diluted benchmark pricing. In simple terms, this has seen an emergence of buyers with whom getting the best price on a given day is viewed as more important than a longer-term bilaterally negotiated agreement. As a result, index-linked agreements have become more common as benchmarks have altered, making use of flexible quotational periods around a central index. We are now seeing the impact of this on the benchmark process, with headline prices often set at a decent premium to prevailing spot but actual selling prices reflecting heavy discount structures. However, one consistent factor in benchmark discussions will always persist. Producers want to charge more, and consumers want to pay less, with market fundamentals dictating who holds the upper hand at any point in time. The ferrochrome (FeCr) market continues to operate a system of quarterly benchmark prices outside China. Once every three months, a leading FeCr producer and consumer in the stainless steel industry will agree on the benchmark price, which then provides the reference on which other businesses will be based. However, as discussed above, this is a case in point where certain discounts will be applied according to volume and product quality (chrome content, chrome-toiron ratio, silica content, product sizing and so on). Aggregate discounts are understood to be in the range of 12 2%. In China, major stainless steel mills typically table their bids for FeCr on a monthly basis, while there is also an active spot market. And ferrochrome has led the way in March settlements this year, with Wednesday bringing confirmation of a $1.54/lb agreement between Merafe and European buyers for 2Q (slightly higher than our estimate of $1./lb). This is down from $1.65/lb for the current quarter agreed at the peak of supply scarcity at end-216. From this point South African chrome ore supply has responded to price, with increased shipments seeing a decent recovery in Chinese port stocks over January February. Lower-grade (though not high-grade) chrome ore prices have dipped, as have imported ferrochrome quotes in both USD and ZAR terms, which are down more than 1% since the start of the year, with latest spot at ~$1.1/lb CIF. The drop in headline price does seem fair, even though 2Q usually sees a seasonal gain in contract price as stainless production ramps up. And $1.54/lb is still a very high price the highest since 28, apart from the current quarter. Producers will be hoping that gains in the Chinese spot price over the past two weeks will see a further upcycle into the next negotiations. 15 March 217 2

3 J 21 M 21 S 21 J 211 M 211 S 211 J 212 M 212 S 212 J 213 M 213 S 213 J 214 M 214 S 214 J 215 M 215 S 215 J 216 M 216 S 216 J 217 3MMA, m tonnes US /lb Cr, ex-vat Fig 1 Chinese chrome ore stocks rose over Jan Feb, though may draw again over the coming months Fig 2 while spot prices have given back some of their 4Q gains but remain elevated China's Cr ore port stocks Chinese FeCr spot prices Imports CIF 58%-6% Cr Imports - ZAR/lb CIF (RHS) Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Source: Mysteel, Macquarie Research, March 217 Source: CRU, Macquarie Research, March 217 Thermal coal is one area for which annual benchmarks have maintained a relatively important position, based on the Japanese fiscal year. However, as with all others, the Chinese spot price is the most important indicator. With the 276-day policy on the back burner at present, it looked as though the Chinese spot price was in a downward trend towards the RMB 57/t range stipulated by the NDRC for this year and pulling FOB Australia spot quotes down below $7/t. However, a combination of decent demand, logistics restrictions and safety inspections has seen a ~RMB/t jump in Chinese prices over the past fortnight. This is very timely for miners, who have seen (or perhaps made sure) the FOB Australia price has followed directionally, even though other market references (Colombian and Russian prices for example) are falling. It is the norm for the thermal coal contract into Japan to be settled at a $5 1/t premium to spot. And the Japanese fiscal year contract is for higher-grade 6,kcal material rather than the 5,kcal Chinese reference. This therefore attracts a premium, which having jumped to ~$25/t at the start of the year has returned to the long-term average of $12/t. Putting all this together, our current forecast is for $87.5/t FOB Australia, a ~$26/t increase over current levels. Producers will be keen to get this settled before Chinese coal demand seasonally weakens in April. Fig 3 The recent jump in Chinese domestic thermal prices will strengthen producers negotiating positions Fig 4 The high-grade coal premium has fallen back to normal levels $/t 11 5kcal thermal coal delivered Guangzhou Shanxi (QHD) 5kc Newc 5kc (Cape freight) $/t 3 25 Newc 6kcal premium over 5kcal Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jan 13Jul 13Jan 14Jul 14Jan 15Jul 15Jan 16Jul 16Jan 17 Source: Sxcoal, IHS, Macquarie Research, March 217 Source: IHS, Macquarie Research, March March 217 3

4 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Hard coking coal ($/tonne) $/t, FOB Australia Metallurgical coal settlements for 2Q are also due over the next couple of weeks. Spot prices in this market have been on a rollercoaster over the past six months but have found some degree of stability recently at ~$16/t FOB Australia for premium hard coking coal. This, however, compares with a current contract of $285/t something we highlighted at the time as a smart deal for producers given the spot price has already started to plummet downwards. We know that met coal contract prices will fall, and given the previous record quarterly drop was $55/t, the sequential fall is likely to break this record. However, having just negotiated annual contracts with downstream users based on a high prevailing met coal contract price, Japanese steelmakers may actually be willing to keep the headline level high. At such times, contract premiums in excess of $1/t to the prevailing spot price have been realised in the past. We expect a $175/t FOB Australia headline agreement for hard coking coal, although we expect achieved prices for producers to come in well below this, even after adjusting for quality. One potential factor to watch is the Chinese domestic hard coking coal price, which after a period of stability (when international quotes were falling) is now dropping quickly, with expectations from our China trip last week of a further 1 15% decline over the coming couple of months. Fig 5 Spot prices have fallen rapidly since the last contract settlement in met coal Fig 6 Met coal contracts are often set at a premium to prevailing spot quotes 3 3 Benchmark contract Spot premium HCC 2 Chinese Domestic HCC HCC settlement premium over spot Source: SXCoal, TSI, Macquarie Research, March 217 Source: TEX Report, Macquarie Research, March 217 The discussions over 2Q aluminium premiums into Japan (the MJP contract) have been underway for quite a while. Despite rising global aluminium output, these come amid a strengthening price backdrop. As we discussed in our Thursday last week, offers from the sellers into 2Q are said to have been quite punchy, producer offers actually rising from an initial $125/t to $135/t. Besides the rising US premium as protectionism measures draw closer, sellers are pointing to issues at multiple Australian smelters the two-smelter Boyne facility has cut production due to power issues, and Portland is still dealing with technical problems caused by its power outage in December. Meanwhile Tomago has also seen reduced output over the past month. Spot quotes are currently ~$115/t CIF Japan, while trader stocks have recently risen following the rapid decline seen over 216. We feel a compromise at $125/t for the MJP contract will be reached. This would be up $3/t QoQ and two-thirds higher than the $75/t nadir in 3Q last year. 15 March 217 4

5 Dec-9 May-1 Oct-1 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17 1/215 2/215 3/215 4/215 5/215 6/215 7/215 8/215 9/215 1/215 11/215 12/215 1/216 2/216 3/216 4/216 5/216 6/216 7/216 8/216 9/216 1/216 11/216 12/216 Jan-17 Jan-88 Sep-89 May-91 Jan-93 Sep-94 May-96 Jan-98 Sep-99 May-1 Jan-3 Sep-4 May-6 Jan-8 Sep-9 May-11 Jan-13 Sep-14 May-16 Fig 7 Japanese aluminium port inventories are back to normal levels Fig 8 and with international premiums rising and Australian supply problems, a MJP rise seems certain 7 6 Japanese trader aluminium port inventories - kt MJP aluminium premium contract qtly ($/t) Q1 98Q4 Q3 2Q2 4Q1 5Q4 7Q3 9Q2 11Q1 12Q4 14Q3 16Q2 Source: Reuters, Macquarie Research, March 217 Source: Platts, Macquarie Research, March 217 In base metals, we are also still awaiting formal agreement on contract zinc treatment charges for this year. While these are set to fall, the questions just remain to what extent and what other concessions smelters may need to make given the global shortage of concentrate. For feedback from the recent IZA conference, at which discussions began in earnest, please refer to this. Last and probably least, we may see the first potash contracts for 217 settled in the coming weeks. While last year it took until 2H to get an agreement, we expect it to happen sooner rather than later for two reasons. Firstly, the spot price has been flat as a pancake in recent months, as have customs values into China (which led the contract price lower last year), which shows the market-share battle is now being conducted on volume rather than price. Secondly, with a cut to the Indian potash subsidy this year and new supply ramping up from 2H, producers may be keener to reach a more timely agreement. Thus, while our core view is still that the benchmark system for potash is on its last legs, we do expect it to last for this year at least, with an unexciting contract price rollover at $219/t FOB. Fig 9 Spot potash prices have been doing nothing since the previous contract settlement US$/t Chinese contract vs SE Asian spot price Contract CFR China CFR SE Asia Fig 1 while customs values into China, the best lead for the contract, are also extremely stable Average customs value of China's potash imports Global average Russia Belarus Canada Source: Mysteel, Macquarie Research, March 217 Source: Customs data, Macquarie Research, March March 217 5

6 Wednesday 15 March 217 Prices Closing price * Closing price * 15-Mar Mar Mar Mar-17 % ch. day 217 YTD Ave 216 US$/tonne US /lb US$/tonne US /lb on day US$/tonne US$/tonne LME Cash Aluminium 1, , ,618 1,65 Aluminium Alloy 1, , ,431 1,555 NAASAC 1, , ,616 1,74 Copper 5, , ,144 4,863 Lead 2, , ,2 1,872 Nickel 1, , ,114 9,69 Tin 19, , ,616 18,6 Zinc 2, , ,443 2,95 Cobalt 53,2 2,415 53, 2, ,774 25,655 Molybdenum 14, , ,435 14,453 LME 3 Month Aluminium 1, , ,621 1,61 Aluminium Alloy 1, , ,443 1,577 NAASAC 1, , ,634 1,725 Copper 5, , ,158 4,867 Lead 2, , ,4 1,878 Nickel 1, , ,163 9,657 Tin 19, , ,67 17,912 Zinc 2, , ,451 2,12 Cobalt 53,2 2,415 53, 2, ,785 25,758 Molybdenum 15, 68 15, ,436 14,472 * LME 2nd ring price - 17 hrs London time. Year-to-date averages calculated from official fixes. Gold - LBMA Gold Price (US$/oz) Silver - LBMA Silver Price (US$/oz) Platinum - London 3pm price (US$/oz) Palladium - London 3pm price (US$/oz) Oil WTI - NYMEX latest (US$/bbl) EUR : USD exchange rate - latest AUD : USD exchange rate - latest 1,199 1, ,7 1, Exchange Stocks Change since last report Cancelled End-16 Ch. since (tonnes) 15-Mar Mar-17 Volume Percent warrants stocks end-16 LME Aluminium 2,19,325 2,33, -13, % 726,525 2,22, ,8 Shanghai Aluminium 268, ,824.%, ,12 Total Aluminium 2,288,149 2,31,824-13, % 726,525 2,32,897-14,748 LME Copper 34, , 8, % 16,7 311,825 28,7 Comex Copper 121,96 121, % - 8,112 41,794 Shanghai Copper 326, ,732.% - 146,598 18,134 Total Copper 789,163 78,318 8, % 16,7 538,535 2,628 LME Zinc 379, ,6-2, % 178, 427,8-48,575 Shanghai Zinc 194, ,788.% - 152,824 41,964 Total Zinc 574,63 576,438-2, % 178, 58,674-6,611 LME Lead 19,5 191, % 69, 194,9-4,3 Shanghai Lead 72,159 72,159.% - 28,726 43,433 Total Lead 262,79 263, % 69, 223,626 39,83 Aluminium Alloy 14,7 14,7.% 72 12,98 1,72 NASAAC 123,76 123,76.% 97,38 26,38 Nickel 386,4 384,522 1,878.5% 11, ,66 14,334 Tin 4,53 4, % 1,195 3,7 78 Source: CME, LBMA, LME, Reuters, SHFE, Macquarie Research 15 March 217 6

7 This publication was disseminated on 15 March 217 at 19:17 UTC. 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 >+1% Neutral expected return from -1% to +1% Underperform expected return <-1% Macquarie South Africa Outperform expected return >+1% Neutral expected return from -1% to +1% Underperform expected return <-1% 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 (Buy) return >5% in excess of Russell 3 index return Neutral (Hold) return within 5% of Russell 3 index return Underperform (Sell) return >5% below Russell 3 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 6 % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 4 6% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 3 4% in a year. Low medium stock should be expected to move up or down at least 25 3% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 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 December 216 AU/NZ Asia RSA USA CA EUR Outperform 57.53%.72% 45.57% 42.28% 6.58% 52.79% (for global coverage by Macquarie, 8.71% of stocks followed are investment banking clients) Neutral 33.9% 33.97% 43.4%.11% 37.23% 35.62% (for global coverage by Macquarie, 8.5% of stocks followed are investment banking clients) Underperform 8.56% 15.3% 11.39% 7.61% 2.19% 11.59% (for global coverage by Macquarie, 4.63% of stocks followed are investment banking clients) Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. 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