Argentum Metal Management Ltd HOLGER ELLMANN PARTNER

Argentum Metal Management Ltd HOLGER ELLMANN PARTNER

The macro-economic outlook Year to date YOY Aluminium demand January to September 2015 Global demand rose by 5.6 % to 43.4 Mio tonnes European demand rose by 2.1 % Turkish demand rose by 5.9% Increase in developing SE Asian countries of 3.1% (includes a reduction in Japanese demand of 5.6 %) India grew by 3.4 % with strong further growth expected in the cable and conductor business North American car production increased by 3.2 % EU automotive market increased by 9.8 % Automotive production in Japan was down 7.6 % in the period

The macro-economic outlook Current situation For 2015 it is anticipated that there will be a primary Aluminium surplus of about 500,000 mt. The growth forecast for 2016 has been revised down to 5.6% (from 6%), which again will result in a nominal surplus of around 375,000 mt assuming current levels of expansion plans, deferrals on projects and curtailments on production It is estimated that on current price levels about 50 % of all global production is loss making Furthermore it is estimated that about 50 % of Chinese production is loss making as well - some15.5 m tonnes

The macro-economic outlook Shiny future? The global Aluminium price In spite of stable global economic growth and the US and European aluminium automotive sector and other applications showing further growth, upside potential is limited due to overall negative expectations on commodity prices: Historical aluminium surplus situation and significant inventory levels globally of both primary metal and semi-finished products, will mean that rallies of the aluminium price will be limited and short-lived With Aluminium supply/demand balance continuing to be in a surplus for 2016, any sustainable price recovery will be dependent on further significant production cuts in the western world and/or China New capacities over compensate for cut backs or closure of high cost smelters.

Chinese impact Average total production cost of Auminium is 12,000 Yuan / mt SHFE Aluminium price fell below 10,000 Yuan repeatedly last week Physical inventory levels at historical high 2.5 m mt of capacity have been cut ytd, 3 m mt have been commissioned and 600,000 mt of idled capacity restarted Production has been shifted from the traditional industrial locations to the energy-rich western province of Xinjiang Since 2011 China s monthly aluminium output has increased by more than 110% contributing to the decline in prices from over USD 2600 to around USD 1500 currently Since 2009 the EU has imposed anti-dumping duties on some Chinese Aluminium products, followed by the US in 2011 Chinese net exports of semi-fabricated products rose by 29.5% in the period January September 2015 Semi fabricated products are subsidised by being exempt from export tariffs and from China s 17% VAT Chinese Government reluctant to opt for cut back decisions with expected year end state reserve stockpiling and offer of continued subsidised energy Severe restrictions on domestic stock financing since Qingdao scandal

Inventory levels 5000000 4000000 3000000 2000000 1000000 0 LME Aluminium HG - Official LME warehouse stocks 14-11-14 to 12-11-15 Aluminium Inventories are meanwhile at a 6 - year low equating to 62 days of consumption The equivalent of 40 days of which are held by financiers and consequently unavailable to the market. (Average stock-to-consumption ratio pre 2008 = 30 days) Cancelled warrants stand at 45% of total stocks This reflects opportunistic activities related to new LME warehouse regulations

Premium and price expectations LME prices will remain under downside pressure due to high global inventories 600 Global MB Pr imar y Aluminium Pr emium Compar is on Nov 2014 - Nov 2015 Unlikelihood of short term LME price recovery More pressure on high cost smelters further cutbacks expected across Europe and US 500 400 300 Premiums will remain highly volatile with risk of ongoing spread squeezes but opportunity of new financing deals due to lower premium entrance hurdle 200 100 0 MB Euro Duty unpaid increased by 60% since beginning of October based on strong demand and finance deal opportunities following end of backwardation (Oct-Nov) Aluminium P1020A, in-warehouse Rotterdam duty-unpaid, spot weighted average, $/tonne Aluminium P1020A, cif main Japanese ports, spot weighted average, $/tonne Anticipated increase in deliveries into Europe Aluminium P1020A, delivered US midwest, spot, $/tonne Regional arbitrage of premiums likely

Volatility in nearby spreads 50 40 30 20 LME Aluminium HG C-3m Spread 2-12-14 to 12-11-15 High volatility and tightness in the nearby spreads is largely caused by substantial short positions held by CTAs. Many of these positions have been rolled into Q1 10 0-10 -20-30

Impact of a flat forward curve 1540.00 1520.00 1500.00 1480.00 1460.00 1440.00 LME 3m Aluminium HG Forward Curve Basis Unofficial Close - 13th Sept 2015 The Aluminium curve is relatively flat, making it difficult to profit from finance deals over the long term Current forward curve will limit structured producer forward hedging Under current market situation, finance opportunities will rather result from opportunities within the nearby spreads

Additional factors impacting price and flows USD/RUB The freight factor Much reduced energy prices will keep freight rates under pressure, encouraging extended global metal flows and competition Devaluation of local currencies will impact the competition between regional producers Strong US dollar will put further pressure on $-based producers Devaluation of other currencies eg RMB, Ruble will improve overall competitiveness of the largest primary producing areas

Regional factors Currency moves and their impact on the commodities markets Will enhance the risk of major changes in international material flows (devaluation of currencies) Impact on competiveness of production costs What variations in cast and wrought product demand are emerging across the regions? With physical alloy price above LME HG there will be even more competition for higher grade scrap between wrought product producers with integrated recycling cast houses and spec alloy producers Since the pricing methodology is different (LME related vs fixed price) can increase volatility even more

Scrap supply With P1020 and the like at attractive price levels, how is this affecting scrap availability? lower Primary ingot premiums might lead to pressure price/ premium pressure on high quality grades but high Primary premium volatility and imbalance between Ingot premiums and semi-fabricated premiums (billets, sheet ingots, foundry alloys)could make utilisation of scrap even more attractive Which scrap grades are abundant and which remain in tighter supply? With low underlying base price levels the availability of lower end type of scrap (collection scrap, contaminated scrap) could be reduced

In summary Major restructuring phase Many years of over production has resulted in worldwide oversupply 50% of producers globally not able to produce below market price levels Financing and warehousing deals have led to record high global premiums resulting in an extended lifeline to higher cost producers Fundamentals for Aluminium outshine those for many other base metals, but will result in major overhaul in the industry How we respond to the globalisation of our market is key for survival

Thank You ANY QUESTIONS? Argentum is a privately held global trading company, specialising in Consultancy, Metal management, Trading, Supply chain, Procurement, Risk management Across the Primary and recycled aluminium sectors www.argentum.uk.com