Commodities Comment. Quick March: manufacturing PMIs power ahead GLOBAL. Feature article. Latest news

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1 GLOBAL LME cash price % change US$/tonne day on day Aluminium 1, Copper 5, Lead 2, Nickel 9, Tin 20, Zinc 2, Cobalt 55,7 2.3 Molybdenum 14, Other prices % change day on day Gold (US$/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 1,877,300-9,100 LME copper 283,900-7,275 Comex copper 130, Lead 184,275-2,900 Nickel 376,476-1,038 Tin 3,0 45 Zinc 370,9-925 Source: LME, Comex, Nymex, SHFE, Metal Bulletin, Reuters, LBMA, Macquarie Research, April April 2017 Quick March: manufacturing PMIs power ahead Feature article March s manufacturing PMIs signal the sector enjoyed a strong end to a strong 1Q, making it the best since early Almost all countries are now reporting an expansion, and in many a fast one. Two potential caveats - alternative measures of the Chinese and US sectors hint that things might be slowing a bit more than our data, and we think the improvement in commodity prices, especially oil, might have biased the survey data upwards compared to real output. But for now, this data remains a clear positive for metals demand and a remarkable turnaround over the past 12 months. Latest news Export recommendations have been issued for PT Aneka Tambang (Antam) to ship nickel ore and bauxite by Indonesia s Mining Ministry to the Trade Ministry. The Trade Ministry is expected to then issue export permits. Indonesia shipped Mt of bauxite in 2013, prior to the ore export ban, and we had assumed Indonesia would be shipping ~5Mt per year since the export ban relaxation in January, which should simply displace Malaysian tonnes so net-net little change to bauxite supply-demand. As for nickel, we assume total exports of around 27kt (nickel contained from Antam) and ~ktpa overall from Indonesia. Stainless steel prices are showing some regional divergence at present. Metal Bulletin has assessed 304 grade cold rolled coil in China down RMB0-600/t ($73-87/t) on the week, after strong production growth continued through Q1. In contrast, base European prices for the same material rose $11/t WoW, while the alloy surcharge in Europe has increased by ~$55/t MoM. This disconnect increases the chances of stronger Chinese exports over Q2. The aftermath of Cyclone Debbie s path through Queensland s coal sector is becoming more apparent, with the extent of rail issues now better understood. Most notably, the ~110mtpa Goonyella rail system connecting the Bowen Basin to Hay Point and DBCT coal terminals looks set to be offline for up to 5 weeks owing to track damage. While there are some buffers in the system in terms of stock at ports, this is still likely to mean a potential met coal impact of >10mtpa over Q2 (last week s preliminary shipping data suggests a ~% WoW drop in exports). This is likely to see some near-term upside in terms of prices, but with the Northern Missing Link to Abbot Point offering a potential export alternative for established producers. This news will offer some support to producers in terms pricing for quarterly met coal contracts in the ongoing discussions. However, those outside of Queensland without volume impacts are best placed to benefit. 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 world-class metals, mining and basic materials companies as well as commodity-related keynote presenters from around the world. Please refer to page 6 for important disclosures and analyst certification, or on our website

2 Index Macquarie Wealth Management March manufacturing PMIs signal even faster growth Industry/manufacturing is a key sector for metals demand, and the PMIs are a timely indicator of its health. They do not always lead official data but they are available much earlier, with March s PMIs all now out, whereas equivalent official data will only be released in one to two months time. March saw further gains. Aggregating the manufacturing PMIs of 15 1 countries plus the 19 country Eurozone (weighted by their share of global manufacturing output), we estimate globally the manufacturing PMI gained 0.1 points MoM to.9, its highest since 1Q 2011 (fig 1). How this will translate into the official output data is not an exact science, but the past relationship, shown in fig 2, suggests output growth YoY (on 3m moving average) could accelerate from its current 3.0% to 4.0% in the next few months. This would be a very strong figure by recent standards. Fig 1 Global manufacturing PMIs (>=expansion) Fig 2 Global manufacturing PMI vs output growth, 3m moving average, YoY Increasing rate of expansion Global weighted average BRIC G4 47 Increasing rate of contraction PMI Manufacturing Industrial Production % 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Source: Markit, NBS, Macquarie Research, April 2017 Source: ISM, Macquarie Research, April 2017 By country, on a MoM (fig 3) basis the biggest gains were seen in Brazil, India, Indonesia and importantly given its heft, the Eurozone. But it was not all good news: the US, Japan and the UK fell back, albeit to a slower expansion not a contraction. On a YoY basis (fig 4) the improvement globally is clear, seeing the US and Eurozone enjoy a sizeable upswing, China positive growth, and even laggards Brazil and Russia improving. Only Mexico has gotten notably worse. Fig 3 Manufacturing PMIs: MoM change v level Fig 4 Manufacturing PMIs: YoY change v level 3.5 Shrinking slower Growing faster Brazil India 1.5 Indonesia 1.0 China Canada Eurozone 0.5 Mexico 0.0 Russia -0.5 Korea USA UK Shrinking faster Japan Growing slower Shrinking slower Growing faster 6 Russia USA 4 Japan Brazil Canada Eurozone 2 China UK 0 India Korea Indonesia -2 Mexico -4 Shrinking faster Growing slower Source: Markit, NBS, Macquarie Research, April 2017 Source: ISM, Macquarie Research, April Except the US, for which we use the ISM PMI, and China, for which we use the NBS PMI, all PMIs discussed in this report come from research group Markit. The aggregations are our own and include Korea, Indonesia, Mexico and Poland as well as the BRICs and G4 (US, Eurozone, Japan, UK). 3 April

3 Macquarie Wealth Management This month we focus on China, the largest manufacturing power, which appropriately but confusingly has two widely followed manufacturing PMIs. Our preferred one, the official NBS PMI, showed an increase to.8, from.6, marking the highest since April But the other Markit/Caixin one fell back to.2, from.7 (fig 5). Which is giving the accurate picture? A common explanation of the differences between the two is that the Caixin puts more weight on smaller companies. This doesn t seem to explain the differences in March that can be seen in fig 6, which shows the sub-indices of the NBS PMI, and the small category rebounding strongly. Fig 5 China manufacturing - better or worse? Fig 6 Not something to do with small v large firms (NBS sub-indices v Caixin/Markit PMI) NBS Caixin-Markit Source: Markit, NBS, Macquarie Research, April 2017 Source: NBS, Macquarie Research, April Large Medium Small NBS Caixin-Markit 44 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Another explanation is offered by our China economist, Larry Hu. He notes that the NBS PMI tends to rise in March, something he attributes to incomplete correction of New Year seasonality. But this year s March increase in the NBS PMI was smaller than average, so he argues that really is a weak reading, much like the Caixin PMI. Certainly if we look at the Caixin/Markit PMI, which is available in both seasonally adjusted (headline) form and non-seasonally adjusted, we see the extent of the adjustment made to data around the New Year period, and that March would have been higher before adjustment. Fig 7 Seasonality always as big thing in Jan-March (Caixin/Markit PMI) Fig 8 But NBS doesn t seem to adjust fully (NBS PMI by month, rebased to Jan = 100) SA NSA 40 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Source: Markit, Caixin, Macquarie Research, April 2017 Source: NBS, Macquarie Research, April 2017 That said, an analysis of the last five years shows while the NBS PMI did strengthen considerably between Feb and March in 2013 and 2016, that was after falling between January and February. This year it rose in those months, suggesting the seasonal dynamics have been rather different. For now we will stick to the NBS reading, though April s releases will be interesting. 3 April

4 Macquarie Wealth Management Summing up, March s manufacturing PMIs signal the sector enjoyed a strong end to a strong 1Q, making it the best since early Almost all countries are now reporting an expansion, and in many a fast one. The global industrial recovery seems on solid ground. We must add two caveats. One is that if we use Markit s data for China (and the US) instead of the NBS and ISM data, we get a worse performance. Given the size of these countries manufacturing sectors this makes a difference to our global aggregate and indeed the recent narrative, as shown in fig 9. We still prefer the NBS and ISM data, but this needs paying close attention. We also are uncertain as to the extent PMIs are pointing to a strong manufacturing recovery, which will boost commodity demand and prices, or reflecting higher commodity prices, in particularly the turnaround in oil prices. We ve noted before that the US ISM seems particularly sensitive to changes in the oil sectors fortunes. In time this will become a drag on the PMIs as the YoY oil price gains fade (see fig 10). Fig 9 Not just China but US where using Markit data gives different performance (our global aggregate) Fig 10 Global PMI v lagged oil price YoY change, % Global aggregate PMI Using ISM/NBS Using Markit.0.0 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 2013 Jul 2014 Jul 2015 Jul 2016 Jul 2017 Source: Markit, NBS, Macquarie Research, April 2017 Source: NBS, Macquarie Research, April % 40% 20% 0% -20% -40% -60% These make us think that global industrial production is more likely to accelerate in the next few months than manufacturing, and perhaps fall short of the pace implied by chart 2. Nevertheless these are only caveats. March s PMIs imply continued robust growth in global industrial production and manufacturing, a clear positive for metals demand and a remarkable turnaround over the past 12 months. 3 April

5 Macquarie Wealth Management Monday 03 April 2017 Prices Closing price * Closing price * 03-Apr Apr Mar Mar-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, , ,8 1,605 Aluminium Alloy 1, , ,638 1,555 NAASAC 1, , ,845 1,704 Copper 5, , ,831 4,863 Lead 2, , ,278 1,872 Nickel 9, , ,277 9,609 Tin 20, , ,026 18,006 Zinc 2, , ,780 2,095 Cobalt 55,7 2,9,0 2, ,856 25,655 Molybdenum 14, , ,244 14,4 LME 3 Month Aluminium 1,9 89 1, ,855 1,610 Aluminium Alloy 1, , ,6 1,577 NAASAC 1, , ,866 1,725 Copper 5, , ,8 4,867 Lead 2, , ,281 1,878 Nickel 9, , ,332 9,657 Tin 20, , ,007 17,912 Zinc 2, , ,791 2,102 Cobalt 55,7 2,9,0 2, ,866 25,758 Molybdenum 15, , ,2 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 1,247 1, ,219 1, Exchange Stocks Change since last report Cancelled End-16 Ch. since (tonnes) 03-Apr Mar-17 Volume Percent warrants stocks end-16 LME Aluminium 1,877,300 1,886,400-9, % 873,325 2,202, ,875 Shanghai Aluminium 332, , % 0 100, ,604 Total Aluminium 2,209,626 2,218,726-9, % 873,325 2,302,897-93,271 LME Copper 283, ,175-7, % 118, ,825-27,925 Comex Copper 130, , % - 80,112,956 Shanghai Copper 307, , % - 1, ,778 Total Copper 721, ,9-6, % 118,075 8,5 182,809 LME Zinc 370,9 371, % 184,9 427,8-56,900 Shanghai Zinc 183, , % - 1,824 30,262 Total Zinc 5,036 5, % 184,9 580,674-26,638 LME Lead 184, ,175-2, % 106, ,900-10,625 Shanghai Lead 72,218 72, % - 28,726 43,2 Total Lead 256,3 259,393-2, % 106, ,626 32,867 Aluminium Alloy 14,320 14, % ,980 1,340 NASAAC 129, , % 0 97,380 31,920 Nickel 376, ,4-1, % 98, ,066 4,410 Tin 3,0 3, % 335 3,7-240 Source: CME, LBMA, LME, Reuters, SHFE, Macquarie Research 3 April

6 This publication was disseminated on 03 April 2017 at 17:57 UTC. 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