Commodities Comment. Xiongan A new city with new metals demand GLOBAL. Feature article. Latest news

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1 GLOBAL LME cash price % change US$/tonne day on day Aluminium 1, Copper 5, Lead 2, Nickel 10, Tin 20, Zinc 2, Cobalt 55, Molybdenum 14, Other prices % change day on day Gold (US$/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 1,837,050-13,375 LME copper 270,550-3,200 Comex copper 131, Lead 175,800-2,900 Nickel 376, Tin 3,475 0 Zinc 368,450-1,075 Source: LME, Comex, Nymex, SHFE, Metal Bulletin, Reuters, LBMA, Macquarie Research, April April 2017 Xiongan A new city with new metals demand Feature article China s central government announced last weekend that it would establish a new region called Xiongan New Area in Hebei province, as part of measures to advance the coordinated development of the Beijing-Tianjin-Hebei region. This move is said to help phase out Beijing s non-capital function so that it can relieve the big population, logistics and environmental pressure that Beijing city is currently facing. Such a major development obviously involves significant potential metals demand, particularly when coupled with a similar (but smaller) development in Tongzhou announced in Our analysis suggests 50mt of new steel demand from the development of Xiongan New Region in the next 10 years, plus almost 30mt from Tongzhou. History shows that the most intensive construction normally starts from the third year after the development plan is announced, which for Xiongan means Of course, this doesn t necessarily mean every tonne for the new city projects is an incremental net addition. It should be considered in a wider China context where total FAI in still closely controlled by the central government. However, this clearly gives a focus for demand and allays fears around a potential rapid decline in China s steel demand over the coming years. Apart from demand growth, we would expect capacity closures over these two regions to be speeded up, particularly for steel. According to Mysteel, there are 4 steel mills located near this area with a total capacity of 11.5mt, which may be forced to close or relocate once the development of new city starts. Latest news South32 has reduced 2017 guidance at its Cannington mine to 135kt of lead (from 163kt), 70kt of zinc (from 80kt), and to 16.5 million ounces of silver (from 19.1Moz) due to an underground fire that caused damage to some haulage equipment. Cannington is generally considered the world s largest silver mine. Following on from yesterday s zinc smelter cuts note, on Thursday there was an announcement of a big maintenance downtime in copper: PPC of Japan sees its April-September copper output falling 20% YoY to 235kt due to a planned day maintenance outage at its Saganoseki smelter. The downtime is planned to begin in September. The company also noted that local demand for copper is likely to remain flat in the six-month period. Macquarie invites you to register for two forthcoming conferences. Our annual Global Metals, Mining and Materials Conference is being held on June 27-28, 2017, at the Macquarie office in New York. This will be Macquarie s 12th year hosting this event, which will feature senior management from up to 40 worldclass metals, mining and basic materials companies as well as commodityrelated keynote presenters from around the world. Meanwhile, we will be hosting our third-annual Global Gemstones Conference in our London office on April 27. This will include participation of senior executives from all segments of the diamond industry and will provide key insights for this year and beyond. Please refer to page 5 for important disclosures and analyst certification, or on our website

2 Xiongan A new city with new metals demand China s central government announced last weekend that it would establish a new region called Xiongan New Area in Hebei province, as part of measures to advance the coordinated development of the Beijing-Tianjin-Hebei region. This New Area includes three counties that are located at the center of this triangle (Fig.1), which will cover 100 square km initially and be expanded to 200 square km in the medium term and 2000 square km in the long term. This move is said to help phase out Beijing s non-capital function so that it can relieve the big population, logistics and environmental pressure that Beijing city is currently facing. The central government views this new region as the one with national significance, similar to what they took for Shenzhen Special Economic Zone and Shanghai Pudong New District, and call it as the sub-capital center. This is not the first time that China has tried to reduce the burden on Beijing city. In late 2015 they announced plans to develop the Tongzhou region as the sub center of Beijing city. However, compared with Tongzhou that has a total area of 907 square km, the long-term plan for the new Xiongan region is more ambitious and more importantly it will be built from scratch, as these three counties are much less developed. This means the government will basically build a new city near Beijing, which should lead to extra demand for commodities, particularly building materials. However, as this plan was just announced and lacks a concentrate plan like how much money the central government will invest, how much infrastructure and properties they will build, etc, it is difficult to estimate what is going to happen for this new region. We have to go to history and other examples to look for the answer. There are three regions that we think could give us some reference; they are Shenzhen (located in Guangdong), Pudong (Located in Shanghai), and Binhai New District (Located in Tianjin). Fig 1 Three counties in the center of Beijing-Tianjin- Hebei to form the new Xiongan region Fig 2 All newly developed regions showed aggressive increases in their FAI New Region Start-up year 5-years FAI GAGR after the start-up (province) 5-years FAI GAGR before the start-up (province) Shenzhen % 15.7% Pudong % 13.9% Binhai % 19.6% Source: Macquarie Research, April 2017 Source: NBS, Macquarie Research, April 2017 Fig.2 shows that all three newly developed regions had a big rise in their FAI growth rate five years after the start-up year. Currently these three counties that are to form the new Xiongan area (Xiongxian, Rongcheng and Anxin) have an annual FAI of Rmb7~9Bn with a growth rate of 10%~15% YoY, which can easily go to over 30% YoY based on history. To make it more accurate, we also consider the area of each new region and compare their FAI intensity per square km to give us a guide to where total investment in this new Xiongan region can go. 6 April

3 Fig 3 FAI forecast for Xiongan and Tongzhou Area (square km) FAI in 2016 (Bn Rmb) FAI intensity (Mn Rmb/square km) FAI per year to reach the intensity of Binhai, Pudong and Shenzhen (Bn Rmb) Implied GAGR in 10 years (4 years for Tongzhou) Tongzhou % Xiongxian % Rongcheng % Anxin % Binhai Pudong Shenzhen Source: Local government report, NBS, Macquarie Research, April 2017 Based on the above assumptions we calculate that total FAI investment from the new Xiongan new region could reach over Rmb1.1Tn in the next 10 years, plus Tongzhou in the next 3~5 years with a total investment possibly over Rmb750Bn. To estimate potential commodity demand from the development of this new region, we then refer to historical commodity intensity per FAI in China to look for the guide. Here we look at the fastest developing period of China (2000~2010) as the reference period for metal consumption, as building a new city is similar to this fast growing phase. Fig.4 shows that the last peak intensity year was in early 2000s, which we could use to calculate what could be the potential metal demand from this new sub-capital. Fig 4 Metal intensity per FAI started to decline since middle 2000s t/mn RMB Steel intensity per FAI-LHS Aluminium intensity per FAI-RHS Copper intensity per FAI-RHS Fig 5 We see 80mt of extra steel demand from the development of Xiongan and Tongzhou Estimated total FAI (Bn Rmb) Steel intensity per FAI Xiongan (10 years) Tongzhou (4 years) Aluminium intensity per FAI Copper intensity per FAI Estimated total steel consumption (Mt) Estimated total aluminium consumption (kt) Estimated total copper consumption (kt) Source: NBS, Macquarie Research, April 2017 Source: NBS, Macquarie Research, April We estimate over 50mt of new steel demand from the development of the new Xiongan region in the next 10 years, and nearly 30mt of demand from Tongzhou city. History shows that the most intensive construction normally starts from the third year after the development plan is announced, and for Xiongan city this means 2019 and for Tongzhou it is 2017/2018. Given we forecast in total 6.8Bn tonnes of steel to be consumed in China for the next 10 years, the 80mt extra steel demand from these two sub-centers is 1.2% of the national total. For aluminium and copper the share of extra demand from Xiongan and Tongzhou in the national total are also at a similar level of around 1%. Of course, this doesn t necessarily mean every tonne for the new city projects is an incremental net addition. It should be considered in a wider China context where total FAI in still closely controlled by the central government. However, this clearly gives a focus for demand and allays fears around a potential rapid decline in China s steel demand over the coming years. Apart from demand growth, we would expect capacity closures over these two regions to be speeded up, particularly for steel. According to Mysteel, there are 4 steel mills located near this area with a total capacity of 11.5mt, which may be forced to close or relocate once the development of the new city starts. Thus there may be a double-whammy in terms of boosting China-wide utilisation rates at steel mills from incremental demand and removal of supply. 6 April

4 Thursday 06 April 2017 Prices Closing price * Closing price * 06-Apr Apr Apr Apr-17 % ch. day 2017 YTD Ave 2016 US$/tonne US /lb US$/tonne US /lb on day US$/tonne US$/tonne LME Cash Aluminium 1, , ,857 1,605 Aluminium Alloy 1, , ,643 1,555 NAASAC 1, , ,845 1,704 Copper 5, , ,830 4,863 Lead 2, , ,280 1,872 Nickel 10, , ,260 9,609 Tin 20, , ,038 18,006 Zinc 2, , ,778 2,095 Cobalt 55,750 2,529 56,250 2, ,728 25,655 Molybdenum 14, , ,245 14,453 LME 3 Month Aluminium 1, , ,862 1,610 Aluminium Alloy 1, , ,655 1,577 NAASAC 1, , ,866 1,725 Copper 5, , ,848 4,867 Lead 2, , ,284 1,878 Nickel 10, , ,315 9,657 Tin 20, , ,017 17,912 Zinc 2, , ,790 2,102 Cobalt 55,750 2,529 56,250 2, ,745 25,758 Molybdenum 15, , ,246 14,472 * LME 2nd ring price 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 1,253 1, ,221 1, Exchange Stocks Change since last report Cancelled End-16 Ch. since (tonnes) 06-Apr Apr-17 Volume Percent warrants stocks end-16 LME Aluminium 1,837,050 1,850,425-13, % 848,950 2,202, ,125 Shanghai Aluminium 332, , % 0 100, ,604 Total Aluminium 2,169,376 2,182,751-13, % 848,950 2,302, ,521 LME Copper 270, ,750-3, % 105, ,825-41,275 Comex Copper 131, , % - 80,112 51,302 Shanghai Copper 307, , % - 146, ,778 Total Copper 709, ,456-3, % 105, , ,805 LME Zinc 368, ,525-1, % 184, ,850-59,400 Shanghai Zinc 183, , % - 152,824 30,262 Total Zinc 551, ,611-1, % 184, ,674-29,138 LME Lead 175, ,700-2, % 98, ,900-19,100 Shanghai Lead 72,218 72, % - 28,726 43,492 Total Lead 248, ,918-2, % 98, ,626 24,392 Aluminium Alloy 14,080 14, % ,980 1,100 NASAAC 129, , % ,380 31,940 Nickel 376, , % 100, ,066 4,500 Tin 3,475 3, % 625 3, Source: CME, LBMA, LME, Reuters, SHFE, Macquarie Research 6 April

5 This publication was disseminated on 06 April 2017 at 16:59 UTC. 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