China Steel sector. End September steel output edges higher

China Steel sector End September steel output edges higher China s steel output in late September edged higher to 785Mtpa (from 782Mtpa in mid September), driven by higher output from large mills while small mills remained flat. With total inventories indicating a balanced market, 4Q seasonal demand and likely measures to address industry overcapacity, we believe the steel sector remains well placed into the year-end. In our view, the recent steel sector weakness, in line with steel price falls, offers a good buying opportunity Angang remains our preferred sector exposure. China steel output up 0.4% to 785Mtpa. According to China Iron & Steel Association (CISA), Chinese crude steel output for the last days of September averaged 2.15Mtpd or an annualized 785Mt, (+0.4% vs 782Mt in mid Sep). The growth was led by higher output from large and mid sized mills (CISA members), which climbed to a record 1.79Mtpd (or 653Mtpa), which we believe may have been driven by improved industry profits in July-August. In contrast, output from small mills (<3Mtpa capacity) was unchanged from mid Sept at 0.36Mtpd (or 133Mtpa) and well below May's peak of 160Mtpa. For 9M13, annualized steel output (c782mt) is ahead of our FY13 forecast of 775mt (CISA 770Mt, MIIT 790Mt). Steel and iron ore inventories steady. Steel inventories with traders were steady at 14.8Mt in late Sep (14.7Mt in Aug 14.7Mt), while producer stocks eased to 12.6Mt in late Sep (vs 13.2mt in mid Sep). We estimate CISA mills and traders now hold 14.3 days (0.7 days lower than mid Sep), against historical levels of 14.2 days and March's peak of c19 days. On the raw materials side, iron ore inventories at Chinese mills stood at 26.0 days (26.1 days in late Sep), still below trend levels of 28.5 days. Iron ore stocks at Chinese ports rebounded slightly to 70.6Mt (from 69.8Mt in late Sep), supporting c21 days of steel output (historical average of 28 days). Industry sentiment less negative, cash spreads rise post Golden week. Sentiment amongst steel mills and traders turned less negative post Golden week with rebar prices pushing higher while HRC prices remained stable. Spot HRC cash spreads recovered slightly to Rmb1,395/t (vs Rmb1,391/t in late Sep) and rebar cash spreads rebounded to Rmb1,347/t (vs Rmb1,318/t in late Sep). We remain positive on the steel sector given balanced market stockpiles, 4Q demand strength and likely government measures to address industry overcapcaity in the upcoming November Plenary session. Asia Metals and Mining Daniel Kang AC Bloomberg JPMA KANG <GO> Waiyin Karen Li, CFA (852) 2800-8561 waiyin.karen.li@jpmorgan.com J.P. Morgan Securities (Asia Pacific) Limited Figure 1: China steel output edged higher (Mt) 800 750 700 650 600 550 Sep-11 Note: Figures in Million tonnes on an annualized basis Source: Mysteel, CISA, J.P. Morgan Figure 2: HRC/Rebar prices firming post golden week (Rmb/t) 50 4600 40 3600 30 Oct- Oct-11 Rebar HRC Source: Bloomberg, J.P. Morgan Company Ticker Rating Price Perf. P/E (x) P/BV (x) EV/EBITDA (x) ROE (%) Div Yield (%) (LC) YTD (%) 13E 14E 13E 14E 13E 14E 13E 14E 13E 14E Angang Steel H 347 HK OW 4.72-17% 19.5 17.3 0.5 0.5 6.6 6.4 2.9 3.2 2.8 2.8 Angang Steel A 000898 CH OW 3.05-21% 15.8 14.1 0.4 0.4 6.6 6.4 2.9 3.2 3.6 3.5 Baosteel 600019 CH OW 4.22-14% 11.0 7.2 0.6 0.6 6.2 4.7 5.8 8.4 4.2 6.2 Maanshan H 323 HK N 1.97-16% -54.6 23.3 0.5 0.5 8.0 6.6-1.0 2.2 0.0 0.8 Maanshan A 600808 CH N 1.80-13% -62.7 26.9 0.6 0.6 8.0 6.6-1.0 2.2 0.0 1.1 China average -15% 3.0 11.2 0.6 0.6 6.5 5.3 4.3 6.5 3.5 5.0 Source: Bloomberg, J.P. Morgan estimates. Note: Share prices and valuations are as of See page 7 for analyst certification and important disclosures, including non-us analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.jpmorganmarkets.com

Chinese steel output edging higher for four consecutive periods Figure 3: China total annualized crude steel output (Mt) 800 750 700 650 600 550 Sep-11 Nov-11 Jan-12 May-12 Source: CISA, Mysteel, J.P. Morgan. Large mills' output hit new record high Figure 4: China CISA membership mills (Large/Medium) annualized crude steel output (Mt) 660 6 560 5 Sep-11 Nov-11 Jan-12 May-12 Source: CISA, Mysteel, J.P. Morgan. Small mills output was flat Figure 5: China small steel mills annualized crude steel output (Mt) 170 150 130 1 90 70 50 30 Sep-11 Nov-11 Jan-12 May-12 Source: CISA, Mysteel, J.P. Morgan 2

Spot HRC prices stabilizing post Golden week Figure 6: China HRC spot price in Rmb/t 4400 4200 4000 3800 3600 3400 3200 3000 Source: Bloomberg, J.P. Morgan. Spot Rebar prices edging higher post Golden week Figure 7: China Rebar spot price in Rmb/t 4200 4000 3800 3600 3400 3200 3000 Rebar Source: Bloomberg, J.P. Morgan. Iron ore - Seaborne now at a premium to domestic prices Figure 8: Domestic and international iron-ore prices in USD/t 250 225 200 175 150 125 0 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Jun-12 Tangshan (Adj. 62% Fe) USD/t International Fines (62% Fe) Equiv. USD/t Source: Bloomberg, J.P. Morgan 3

Spot HRC cash spreads at year lows Figure 9: China HRC Spot Steel spread (HRC less cost of iron ore and coking coal) 1,900 1,800 1,700 1,600 1,500 1,400 1,300 1,200 Feb-12 May-12 Jun-12 Source: Bloomberg, China Coal Resource, J.P. Morgan. Spot Rebar cash spreads firms post Golden week Figure : China Rebar Spot Steel spread (Rebar less cost of iron ore and coking coal) 1,900 1,800 1,700 1,600 1,500 1,400 1,300 1,200 1,0 Feb-12 May-12 Jun-12 Source: Bloomberg, China Coal Resource, J.P. Morgan. Sentiment turns less negative Figure 11: China steel mills/traders survey 1.0 0.8 0.6 0.4 0.2 0.0-0.2-0.4-0.6-0.8-1.0 Oct-11 Jan-12 Survey Index (LHS) Source: Mysteel, J.P. Morgan estimates Note: 1.0 = all mills /traders expect prices to rise in the following week; -1.0 = All mills / traders expect prices to fall HRC Prices-RMB/t (RHS) 5,000 4,500 4,000 3,500 3,000 4

Steel inventories stable near 3 year lows Figure 12: China steel mill and traders inventories Mt 40 35 30 25 20 15 5 0 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar- Sep- Mar-11 Sep-11 at CISA mills at Traders I/S ratio (days) 21 19 17 15 13 11 9 Days Source: Mysteel, CEIC, J.P. Morgan estimates. Iron ore up to 26 days, still well below average of 29 days Figure 13: Iron ore inventory levels at China steel mills 700 600 500 400 300 200 Dec- Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Jun-12 Chinese steel mill iron ore stocks (kt) Iron ore stock Days 50 45 40 35 30 25 20 15 Note: The iron ore stockpile data is based on 64 small and medium sized steel mills across China. Source: Mysteel, J.P. Morgan estimates. Iron ore port inventories rebounded since early October Figure 14: Iron ore inventories at Chinese ports 0 90 80 70 60 40 35 30 25 20 50 15 Oct- Dec- Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Jun-12 Chinese iron ore port inventories (Mt) Port inventory days Source: Bloomberg, J.P. Morgan estimates. 5

China Crude Steel apparent consumption robust at +9% ytd (A) (B) (C) (D) = (A+B) + (C)/0.94 YoY% Crude Steel Crude Steel Finished Steel Crude Steel Equivalent Crude Steel Crude Steel Equivalent Production Net Imports Net Imports / (exports) Apparent demand Output Apparent demand 2000 127.2 0.4 9.9 138.2 3% 2% 2001 148.9 5.6 12.5 167.9 17% 22% 2002 179.1 3.3 19.0 202.7 20% 21% 2003 219.3 4.4 30.3 256.0 22% 26% 2004 269.2-3.7 15.1 281.6 23% % 2005 348.1-5.9 5.4 347.9 29% 24% 2006 421.5-8.6-24.5 386.8 21% 11% 2007 487.6-6.2-45.8 432.7 16% 12% 2008 497.9-1.0-43.8 450.2 2% 4% 2009 566.4 4.5-7.2 563.3 14% 25% 20 626.2 0.4-26.1 598.9 11% 6% 2011 684.3 0.6-33.3 649.4 9% 8% 2012 708.8 0.4-42.2 664.3 4% 2% 63.6 0.0-3.8 59.6 12% 11% 61.8 0.1-3.3 58.3 11% 9% 66.3 0.1-4.1 62.0 8% 8% 65.7 0.0-4.3 61.1 8% 8% 67.0 0.1-4.2 62.7 9% % 64.7 0.1-4.2 60.2 7% 8% 65.5 0.1-4.0 61.3 6% 5% 66.3 0.1-4.9 61.1 13% % E 64.2 0.0-3.7 60.4 11% 12% 2013 YTD 585.1 0.4-36.4 546.8 9% 9% Source: Mysteel, CEIC, J.P. Morgan China Finished Steel - apparent real demand firm at +8% ytd Finished steel equivalent apparent demand CISA Mill inventory Traders inventory Total Inventory Monthly Change Apparent Real demand finished steel 2007 406.7 73.4 75.2 148.6 1.2 405.5 2008 434.7 95.7 89.8 185.5 0.4 434.3 7% 2009 548.1 90.2 130.8 221.1 7.5 540.6 24% 20 576.0 113.1 191.2 304.3 2.8 573.2 6% 2011 624.8 117.1 186.9 304.0 0.3 624.4 9% 2012 639.2 143.7 187.9 331.6-1.5 640.7 3% 56.1 14.2 16.1 30.3 1.1 55.1 0% 53.4 12.5 15.1 27.5-2.8 56.2 5% 51.8.6 13.2 23.8-3.7 55.5 11% 53.0.4 13.1 23.5-0.4 53.4 9% 51.2.4 12.5 22.9-0.5 51.7 9% 51.6 9.5 12.4 21.9-1.1 52.7 9% 57.4.6 14.8 25.4 3.5 53.8 19% 56.1 12.7 20.4 33.0 7.6 48.5-1% 59.7 13.7 21.9 35.6 2.6 57.1 0% 58.8 12.9 20.2 33.1-2.5 61.4 11% 60.3 13.0 18.2 31.2-1.9 62.2 12% 58.0 12.7 16.9 29.6-1.6 59.5 11% 59.0 12.4 15.3 27.6-2.0 61.0 11% 58.9 12.5 14.7 27.2-0.5 59.3 6% E 58.1 12.6 14.8 27.5 0.3 57.8 4% 2013 YTD 526.2 112.9 157.3 270.1 5.6 520.6 8% Source: Mysteel, CEIC, J.P. Morgan yoy 6

Companies Recommended in This Report (all prices in this report as of market close on, unless otherwise indicated) Angang Steel - A (000898.SZ/Rmb3.04/Overweight), Angang Steel - H (0347.HK/HK$4.79[11 October 2013]/Overweight) Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. Important Disclosures Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Angang Steel - A, Angang Steel - H within the past 12 months. Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Angang Steel - A, Angang Steel - H. Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: Angang Steel - A, Angang Steel - H. Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation from investment banking Angang Steel - A, Angang Steel - H. Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from Angang Steel - A, Angang Steel - H. Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan covered companies by visiting https://jpmm.com/research/disclosures, calling 1-800-477-0406, or e-mailing research.disclosure.inquiries@jpmorgan.com with your request. J.P. Morgan s Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-0406 or e-mail research.disclosure.inquiries@jpmorgan.com. Angang Steel - A (000898.SZ, 000898 CH) Price Chart Price(Rmb) 36 27 18 9 0 Aug 08 OW Rmb21 OW Rmb11.5 N Rmb6 N Rmb5.35 OW Rmb5.5 May 09 Feb Nov Aug 11 May 12 OW Rmb4.3 N Rmb12.1 OW Rmb12.8 UW Rmb4.8 N Rmb5.15N Rmb4.7 OW Rmb4.5OW Rmb4 UW Rmb7.2 N Rmb9.75 UW Rmb5 N Rmb5 N Rmb5.05 OW Rmb5N Rmb4 Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Mar 05, 2009. Feb 13 Nov 13 Date Rating Share Price (Rmb) 05-Mar-09 UW 7.95 7.20 09-Jun-09 N 12.04 12. 04-Aug-09 OW 18.50 21.00 -Aug- N 8.54 9.75 12-Oct- OW 8.58 12.80 31-Oct- OW 9.29 11.50 06-Aug-11 UW 5.98 5.00 23-Aug-11 UW 5.52 4.80 30-Oct-11 N 5.38 6.00 28-Nov-11 N 5.00 5.00 20-Jan-12 N 4.76 5.15 31-Jan-12 N 4.79 5.35 17- N 4.38 5.05 08- N 3.74 4.70 30- OW 3.71 5.50 28- OW 3.55 5.00 25- OW 3.32 4.50 31- N 4.04 4.00 01- OW 3.31 4.00 28- OW 3.27 4.30 Price Target (Rmb) 7

Angang Steel - H (0347.HK, 347 HK) Price Chart 36 27 Price(HK$) 18 9 0 OW HK$9.4 OW HK$19.1 OW HK$14.5 N HK$5.5N HK$6.2 OW HK$6 W HK$9.5 N HK$13.8 UW HK$12 OW HK$15.95 W HK$16 UW HK$5.2 OW HK$18 N HK$12 OW UW HK$6.5 N HK$4.5 Aug 08 May 09 Feb Nov Aug 11 Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Break in coverage Mar 22, 2011 - Aug 06, 2011. UW HK$5.5N HK$7OW HK$5.5N HK$6 N HK$5.5 OW HK$6 May 12 Feb 13 Nov 13 Date Rating Share Price (HK$) 13-Aug-08 OW.62 16.00 24-Oct-08 OW 3.56 9.50 11-Nov-08 OW 6.30 9.40 05-Mar-09 UW 6.83 5.20 09-Jun-09 N 12.86 13.80 31-Jul-09 OW 16.98 19. 28-Oct-09 OW 15.22 18.00 22-Jan- UW 14.68 12.00 -Aug- N 11.94 12.00 12-Oct- OW 13.32 15.95 31-Oct- OW 12.54 14.50 22-Mar-11 OW.42 -- 06-Aug-11 UW 7.47 6.50 23-Aug-11 UW 6.29 5.50 30-Oct-11 N 4.84 5.50 28-Nov-11 N 4.71 4.50 20-Jan-12 N 6.63 7.00 17- N 5.38 6.20 08- N 4.49 5.50 30- OW 3.65 5.50 21- OW 4.92 6.00 31- N 6.04 6.00 01- OW 4.25 6.00 Price Target (HK$) The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst s (or the analyst s team s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst s (or the analyst s team s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst s (or the analyst s team s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-australia) and U.K. small- and mid-cap equity research, each stock s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst s coverage universe can be found on J.P. Morgan s research website, www.jpmorganmarkets.com. Coverage Universe: Kang, Daniel: Aluminum Corporation of China - A (601600.SS), Aluminum Corporation of China - H (2600.HK), Angang Steel - A (000898.SZ), Angang Steel - H (0347.HK), Baoshan Iron & Steel - A (600019.SS), China Coal Energy - A (601898.SS), China Coal Energy - H (1898.HK), China Hongqiao Group (1378.HK), China Nonferrous Mining Corporation Ltd (1258.HK), China Shenhua Energy - A (6088.SS), China Shenhua Energy - H (88.HK), China Steel Corp (2002.TW), Chinalco Mining Corporation (3668.HK), Jiangxi Copper - A (600362.SS), Jiangxi Copper - H (0358.HK), Maanshan Iron & Steel - A (600808.SS), Maanshan Iron & Steel - H (0323.HK), Mongolian Mining Corporation (0975.HK), SouthGobi Resources Ltd (1878.HK), SouthGobi Resources Ltd. (SGQ CN) (SGQ.TO), Taiwan Cement (11.TW), Yanzhou Coal Mining - A (600188.SS), Yanzhou Coal Mining - H (1171.HK) 8

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