Commodities Comment. China copper survey: demand remains robust GLOBAL. Feature article. Latest news

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1 GLOBAL LME cash price % change US$/tonne day on day Aluminium 1, Copper 4, Lead 2, Nickel 1, Tin 2, Zinc 2, Cobalt 28,648.5 Molybdenum 14,828. Other prices % change day on day Gold (US$/oz) 1,269.3 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 2,159,95-22,325 LME copper 338,8-1,15 Comex copper 66,53 66 Lead 188,625-3 Nickel 362, Tin 2, Zinc 452,975-1,125 Source: LME, Comex, Nymex, SHFE, Metal Bulletin, Reuters, LBMA, Macquarie Research, October October 216 China copper survey: demand remains robust Feature article Chinese industry players showed a generally positive attitude toward the outlook for the copper market over the next three months in our latest survey results, which showed some mild positivity. End-user demand for copper improved for the second month, although copper fabricators capacity utilisation rates have not yet shown much of a pick-up. Both fabricators and traders expressed intentions to build refined copper inventory over the next month, and smelters are set to see lower output next month after lifting it this month. Copper smelters seem to be restocking raw materials, which should be positive for the concentrate market. Our proprietary copper survey, first published in July 212, incorporates interviews with smelters, traders and fabricators who are active in the Chinese market. Respondents cover a range of volumes and industry applications to give a representative view of the entire copper value chain. Latest news Metal prices made further broad-based gains spurred by Chinese buying on Tuesday, with gains of more than 2% DoD for zinc, aluminium, copper and palladium. For most base metals these were the highest prices since mid- or early-october, and in the case of tin a 1.7% gain saw it close at its highest price since December 214. Also outperforming was iron ore (62%Fe), rising 4.9% to $61.6/t CFR China, its highest since mid-august 216. Anglo American reported its 4Q production results on Tuesday, with a strong recovery at the Sishen mine leading to iron ore output 9% above our estimate and +33% QoQ for Kumba operations. Platinum output also came in ahead of expectations (although 4Q is expected to be weak with the furnace rebuild at Waterval); however, met coal missed following geological issues at Grasstree. As a result, FY16 met coal guidance has been reduced by ~2%. Meanwhile, Anglo s copper output disappointed, with Los Bronces seeing lower output due to strike activity and the after effects of the severe weather seen in 2Q, but guidance was retained at 57 6kt for 216. In addition, Freeport s 3Q released on Tuesday revealed another tough quarter for the Grasberg copper mine, which saw guidance slide again by ~45kt to 544kt (FCX share) on labour action, lower mining rates and lower grades being processed than planned. This follows Escondida s striking 3Q miss reported last week (14kt Cu-in-conc vs our ~21kt) and lower figures for Bingham Canyon and others, to mean that annualised mine disruption has picked up to 4.1% now running ahead of our deployed rate of 4.% for the first time YTD. Latest data has confirmed the divergent trends in steel production in the two largest economies. Crude steel output at China Iron & Steel Association member mills (representing the vast majority of China s steel output) rose 1.3% sequentially over the first ten days of October. At 636mtpa, output was up 4% over the equivalent period in 215. In contrast, US crude steel output last week was just 75.3mtpa, according to latest AISI data, down 4% over the equivalent week last year. US capacity utilisation has now been below 7% for seven consecutive weeks, the longest period since early-21. Please refer to page 7 for important disclosures and analyst certification, or on our website

2 Jan-14 May-14 Jul-14 Nov-14 Jan-15 May-15 Jul-15 Nov-15 Jan-16 May-16 Jul-16 Aug-12 Oct-12 Feb-13 Apr-13 Aug-13 Oct-13 Feb-14 Apr-14 Aug-14 Oct-14 Feb-15 Apr-15 Aug-15 Oct-15 Feb-16 Apr-16 Aug-16 Oct-16 China copper survey: demand remains robust Sentiment generally positive for the copper market: Chinese industry players showed a generally positive attitude toward the outlook for the copper market over the next three months in our latest survey results, which showed some mild positivity. End-user demand for copper improved for the second month, although the capacity utilisation rate for copper fabricators has not yet shown much of a pick-up. Both fabricators and traders expressed intentions to build refined copper inventory over the next month, and smelters are set to see lower output next month after lifting it this month. Copper smelters seem to be restocking raw materials, which should be positive for the concentrate market. Fig 1 Sentiment toward copper has improved from the previous month Are you positive or negative on the market over the next three months? Increasing number of respondents positive Copper Smelters Copper Traders Copper Fabricators Increasing number of respondents negative Source: Macquarie Research, October 216 Fabricators sales improved thanks to white goods-led end-user demand growth: Sales from copper fabricators increased for the second consecutive month, led by a pick-up in orders from the white goods and machinery sectors, which is in line with the strong growth in YoY air-conditioner output in August and September (Fig 4), following on from the surge in new housing sales since the start of the year. Orders from the transportation sector also showed steady growth, thanks to robust auto sales, but we noticed that orders from the power sector dropped slightly MoM for the first time this year, suggesting a pause in power grid spending momentum. Fig 2 Copper fabricators sales continued to see improvement in orders over the past month Fig 3 Orders from white goods, machinery and transportation sectors all climbed MoM Have sales increased or decreased over the last month? Increasing no. of fabricators seeing sales rise Increasing no. of fabricators seeing sales fall Net change in orders at copper fabricators - end use sectors Power White goods Construction Transportation Machinery Others Source: Macquarie Research, October 216 Source: Macquarie Research, October October 216 2

3 Fabricators maintained a stable capacity utilisation rate: Despite the rise in sales, fabricators reported a stable capacity utilisation rate in October compared with September, and the utilisation rate is almost flat YoY. This transferred to no increase in copper smelters domestic sales for the past month (Fig 6). Looking forward, however, fabricators still have intentions to raise production after two months of order improvement, based on our survey, and we believe that should help to drive up sales for copper smelters. Fig 4 The sectoral difference in end-user copper demand is in line with official statistics Fig 5 However, fabricators capacity utilisation rate is flat MoM and YoY 6% 4% China grid investment, consumer product output & construction starts YoY % MAs Grid investment, 3mma YoY Refrigerator output, 3mma YoY AC generator output, 3mma YoY AC output, 3mma YoY Construction completions, 5mma YoY 94% 92% 9% 88% Copper fabricators capacity utilisationr rate 2% 86% % 84% 82% -2% 8% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec -4% Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul Source: CEIC, NBS, Macquarie Research, October 216 Source: Macquarie Research, October 216 Fig 6 Smelters reported no increase in their domestic orders over the past month Have domestic orders increased or decreased? Fig 7 but the expectation that smelters production may rise should help to drive up smelters orders Do you expect production to increase or decrease? Increasing no. of smelters seeing orders increase Increasing no. of smelters seeing orders decrease Increasing no. of fabricators expecting output to rise Increasing no. of fabricators expecting output to fall Source: Macquarie Research, October 216 Source: Macquarie Research, October 216 Both fabricators and traders showed restocking interest for refined copper: Apart from possible higher production from copper fabricators, another demand increment for refined copper could come from restocking demand from both fabricators and traders. Current domestic warehouse copper inventory is still near its yearly low after some inventory building during the week-long October holiday (Fig 1), and in addition the domestic physical copper premium has risen from Rmb1 15/t at end-september to Rmb23 28/t this week, which is the highest this year (Fig11), suggesting restocking activities may be underway. 25 October 216 3

4 Jan-15 Feb-15 Apr-15 May-15 Jul-15 Aug-15 Oct-15 Nov-15 Jan-16 Feb-16 Apr-16 May-16 Jul-16 Aug-16 Oct-16 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Fig 8 Copper fabricators showed interest in restocking refined copper Fig 9 Traders also plan to raise copper inventory over the next month Do you plan to increase or decrease refined copper inventory? Increase inventory fabricators Decrease inventory Do you plan to increase or decrease inventory next month? Increasing no. of traders planning to build inventory Increasi Source: Macquarie Research, October 216 Source: Macquarie Research, October 216 Fig 1 China SHFE and bonded warehouse copper inventory at lowest levels since the new year Fig 11 On-shore physical premium jumped in October after a stable September kt SHFE non-bonded warehouse copper inventory 1 China bonded warehouse copper inventory Rmb/t China domestic copper premium Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Macquarie Research, October 216 Source: SMM, Macquarie Research, October 216 For copper, the major concern remains on the supply side: Although demand looks healthy, the major concern for the copper market remains on the supply side. Smelters in our survey reported a higher capacity utilisation rate in October compared with September, despite flat orders over the same period. The capacity utilisation rate is much higher than the same month last year, and this is in line with monthly China refined copper production data that shows good increases YoY this year. The positive feedback is that smelters in our survey expect production to be lower over the next month, although they should remain profitable under the current TCRC. 25 October 216 4

5 Fig 12 Copper smelters lifted capacity utilisation rate in October Fig 13 But they expect production to be lower in the coming month 95% 9% 85% 8% 75% 7% 65% What is your current level of capacity utilisation? 94% 92% 9% 88% 86% 84% 82% 8% 78% 76% 74% What is your current capacity utilisation rate (one month lag) 9 How do you expect production to change over the next month? Source: Macquarie Research, October 216 Source: NBS, Macquarie Research, October 216 Smelters seem to be restocking concentrate amid stable spot TCRC: On the raw material side, copper smelters concentrate inventory has been increasing, according to our survey. We understand from the market that there has been increased demand from smelters located in north China for winter restocking, and spot TCRCs failed to rise further in 3Q and early-q4 as the market expected, suggesting the concentrate market balance did not soften in 2H this year. Given we are approaching contract negotiations for next year s benchmark, this is less supportive for buyers hoping to gain an increase in TCRCs from the current spot terms. Fig 14 Smelters concentrate inventory seems to be rising Fig 15 and they plan to increase concentrate purchases over the next month Is copper conc inventory rising or falling? Increasing no. of smelters with falling inventory Increasing no. of smelters with rising inventory Do you plan to increase copper conc purchases? Increasing no. of smelters planning to increase purchases Increasing no. of smelters planning to decrease purchases Source: Macquarie Research, October 216 Source: Macquarie Research, October October 216 5

6 Tuesday 25 October 216 Prices Closing price * Closing price * 25-Oct Oct Oct Oct-16 % ch. day 216 YTD Ave 215 US$/tonne US /lb US$/tonne US /lb on day US$/tonne US$/tonne LME Cash Aluminium 1, , ,577 1,661 Aluminium Alloy 1, , ,555 1,724 NAASAC 1, , ,71 1,767 Copper 4, , ,725 5,495 Lead 2, , ,81 1,784 Nickel 1, , ,296 11,87 Tin 2, , ,291 16,7 Zinc 2, , ,983 1,928 Cobalt 28,648 1,299 28,5 1, ,598 28,613 Molybdenum 14, , ,275 14,837 LME 3 Month Aluminium 1, , ,576 1,68 Aluminium Alloy 1, , ,579 1,736 NAASAC 1, , ,723 1,79 Copper 4, , ,73 5,487 Lead 2, , ,796 1,793 Nickel 1, , ,29 11,858 Tin 2, , ,121 16,3 Zinc 2, , ,977 1,939 Cobalt 28,65 1,3 28,5 1, ,718 28,72 Molybdenum 15, 68 15, ,299 14,87 * 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 1,269 1, ,26 1, , Exchange Stocks Change since last report Cancelled End-15 Ch. since (tonnes) 25-Oct Oct-16 Volume Percent warrants stocks end-15 LME Aluminium 2,159,95 2,182,275-22,325-1.% 793, 2,889,55-729,6 Shanghai Aluminium 84,981 84,981.% 297,37-212,56 Aluminium 2,244,931 2,267,256-22,325-1.% 793, 3,186, ,656 LME Copper 338,8 339,95-1,15 -.3% 13, ,225 12,575 Comex Copper 66,53 65, % - 64,184 2,346 Shanghai Copper 117, ,634.% - 177,854-6,22 Copper 522, , % 13, ,263 44,71 LME Zinc 452, ,1-1, % 63, ,4-11,425 Shanghai Zinc 165, ,295.% - 2,428-35,133 Zinc 618,27 619,395-1, % 63, ,828-46,558 LME Lead 188, , % 33,4 191,65-3,25 Shanghai Lead 32,538 32,538.% - 12,74 2,464 Lead 221, , % 33,4 23,724 17,439 Aluminium Alloy 13,68 13,68.% 2 15,14-1,46 NASAAC 77,56 77,48 8.1% 6 47,6 3,5 Nickel 362, , % 124, ,342-78,918 Tin 2,935 2, % 1,85 6,14-3,25 Source: CME, LBMA, LME, Reuters, SHFE, Macquarie Research 25 October 216 6

7 This publication was disseminated on 25 October 216 at 18:4 UTC. 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