Aluminium Market Outlook… trade rises to

top of the agenda

Greg Wittbecker
Senior Consultant
CRU Group North America

AEC-San Diego March 16, 2018

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2
 People

CRU people

21 aluminium analysts…

… expanding in the US & Asia

Joined in 2018… Greg Wittbecker,
formerly VP Analysis, Alcoa

3
Agenda
Raw materials and impacts on aluminium smelting industry

Aluminium market outlook

End market drivers; construction, industry and automotive

China macro trends to focus on

Section 232 and impact

LME and premiums forecast

Conclusions

4
Slight surplus alumina outside China in 2019 and 2020

2017 to 2022 growth %, cumulative metallurgical grade World ex. China MGA balance (LHS)
Chinese alumina imports (RHS, ‘000 tonnes)
alumina supply, M tonnes

20 500 4000

18 400
3500
300
16
Middle East 3000
200
14
100 2500
12
0
Other Asia 2000
10 -100
India 1500
8 -200

Central and -300

6 1000
South
America China North -400 China World ex. China
4 America 500
-500 China imports (RHS)
2 Australasia -600 2016 0

2017

2018

2019

2020

2021

2022
Europe
0
0 10 20 30 40 50 60 70 80 90 100 110 120 130 140

Recent production disruptions at Alunorte Brazil likely eliminates 2018 surplus and
creates tightness in the Atlantic Basin.>> USA restarts would pull their alumina from !
5
2016, 2017 and 2018 business cost curves
$/t

3000
2016 2017 2018

2500
2018 LME 3 month price: 2189/t

2017 LME 3 month price: 1980/t

2000

2016 LME 3 month price: 1610/t

1500

1000

500

0
0 10000 20000 30000 40000 50000 60000 70000
Cumulative Production, ‘000 Tonnes

6
Agenda
Raw materials and impacts on aluminium smelting industry

Aluminium market outlook

End market drivers; construction, industry and automotive

China macro trends to focus on

Section 232 and impact

LME and premiums forecast

Conclusions

7
Global aluminium market in modest deficit for 2018
The global aluminium market is now in balance considering the overall size of the market
Global aluminium market balance, million tonnes

4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Data: CRU

8
World excluding China in a large deficit
... but the market is now in a major deficit outside of China and that drives premium volatility
Aluminium market balance, million tonnes

World ex. China China

2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Data: CRU

9
Chinese production growth has continued to climb
China production growth must now slowdown to avoid systemic surpluses
Aluminium production, million tonnes

China World ex. China

45

40

35

30

25

20

15

10

0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Data: CRU

10
China inventory rising- the uncomfortable proof of surplus
2,500
Reported stock above 2.0Mt
['000t]
Jiangsu Shanghai Nanhai Zhejiang Tianjin Henan Chongqing
2,000

1,500

1,000

500

0
Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Feb-18
Data: SHFE,CRU Data: CRU

11
But stocks outside of China are falling rapidly
By the end of 2018, the financial crisis surplus will be gone
World excluding China inventories, million tonnes (LHS) as days of consumption (RHS)

Ex. China reported stocks Ex. China unreported stocks World ex. China stocks as days of consumption

8
160 160
7
140
6
120 120
5
100
4
80
3 68
63 60
2 40
1 20

0 0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Data: CRU, LME, IAI, CME

12
Agenda
Raw materials and impacts on aluminium smelting industry

Aluminium market outlook

End market drivers; construction, industry and automotive

China macro trends to focus on

Section 232 and impact

LME and premiums forecast

Conclusions

13
Broad improvement in global economic growth
World: Leading indicators World IP and leading indicator
Index, normalised to 100 LHS: IP - % y/y 3 month moving average;
RHS: Leading indicator - Index
102 8 102
Developed economies
Emerging economies IP Leading indicator
World 6
101 101

100 100
2

99 0 99
Jan-11 Jan-13 Jan-15 Jan-17 Jan-11 Jan-13 Jan-15 Jan-17
Note: 'World' is OECD plus China, India, Brazil, Note: The leading indicator is for OECD plus China,
Russia, Indonesia & S. Africa. India, Brazil, Russia, Indonesia & S. Africa and is
advanced three months.
Data: OECD, CRU
Data: OECD, CPB, CRU
• The leading indicators for global economic activity, and IP data, are positive at the start
of 2018.
• We forecast global IP growth of 3.5% in 2018 after 3.5% in 2017, emerging market
growth will be stronger - we expect that during next year the faster growing
economies in the developed world will hand-off momentum to the emerging
economies.
• Whilst there is risk around this transition, it is difficult to identify a catalyst for
recession in 2018. The economies of both Germany and the US, along with many
others…seem immune to political turmoil!
14
China economy: Slowing investment and construction
Residential starts and infrastructure &
China industrial, automotive and
utilities investment
construction output forecasts LHS: Infrastructure investment, % y/y
% y/y RHS: Residential starts, % y/y
2016 2017 2018 2019-2022 25 20
16 Investment Residential Starts

14
20
12

10 15
10
8
10
6

4 5

2
0 0
0 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18
IP Automotive Construction
Data: Oxford Economics, CRU Data: CEIC, CRU

• A breakdown of the GDP shows that the growth was driven by stronger net external
trade, whereas fixed asset investment (FAI) slowed toward the end of 2017.
• Despite last year’s robust growth, we expect GDP growth in 2018 to slow to 6.4%
due to several factors which will constrain domestic demand.
• First, we expect investment spending to continue to decelerate throughout 2018,
given the government’s efforts to rein in capacity in heavy industry.
• Second, a gradual slowdown in credit, accompanied by tighter monetary and
financial policies, will continue to dampen activity in real estate sector.
15
US economy: Construction firm, auto production stable
United States manufacturing PMI United States industrial, automotive and
Diffusion index, 50 implies no change construction output forecasts
% y/y
2016 2017 2018 2019-2022
62 4

60 2

58
0
56
-2
54
-4
52

50 -6
Jan - 17 Apr - 17 Jul - 17 Oct - 17 Jan - 18 IP Automotive Construction
Data: Oxford Economics, CRU
Data: ISM, CRU

• There is clear momentum in spending for non-residential equipment as well as

residential outlays. As such, we expect housing starts to rise to 1.3 M units in 2018, up
from a lower-than-expected 1.2 M last year.
• We continue to expect GDP growth of 2.6% this year and maintain our 2019 forecast
for slower growth of 2.0%. The prospect of a corporate tax cut spurred investment
spending but the stimulus will fade after this year.
• IP growth was just 2.0% last year, we forecast IP growth of 2.4% in 2018. Total vehicle
output is expected to be around 11.6 M units, on par with 2017 production levels.
16
Eurozone economy: Confidence still rising
Eurozone business confidence Eurozone industrial, automotive and
SA, Index construction output forecasts
% y/y
Germany Italy Eurozone 2016 2017 2018 2019-2022
16 4

12 3

8 2

4 1

0 0

-4 -1
Jan - 17 Apr - 17 Jul - 17 Oct - 17 Jan - 18 IP Automotive Construction
Data: Oxford Economics, CRU
Data: EC, IFO, ISTAT, CRU

• GDP expanded robustly by 2.7% y/y in Q4 2017, bringing annual growth to 2.5% last
year, the highest rate since 2008.
• Housing demand, and subsequently residential investment, are expected to slow as
the ECB starts to normalize monetary policy, which will push up mortgage rates
• After a steady recovery from a low production level since 2009, as the benefits to
demand of cheaper fuel fade, autos production in 2018 is set to stay flat at 2017’s level
of about 14.3 M units.
• We forecast total IP growth of 2.5% this year, down from 2.9% posted in 2017.
17
Aluminium consumption: transport leads, construction lags
Global aluminium demand Global aluminium demand
growth growth
Regional compound annual growth rate, End-use compound annual growth rate,
2016-2021 2016-2021

Total world Transport

World ex. China Machinery

India Electrical

Middle East Cons. durables

China Packaging

North America Foil stock

Europe Other

Japan Construction

0% 2% 4% 6% 8% 0% 2% 4% 6%

18
 Penetration of NA ABS primarily in closures and body

Roof Body
2016 2025
7% 17% 5% 15%

Trunk
Hoods
11% 46%
41% 95%

Contents of aluminum sheet in automobiles

300 lbs. per vehicle
250 250
200 Door
153 Fender
150
+63%
100
between 7% 38%
40
50 2018-2015 8% 25%
0
2010 2012 2014 2016 2018 2020 2022 2024

Data:
 Further boost in shift to electric vehicles, “mix” changes!
Aluminium content breakdown by Aluminium content breakdown by
product, ICE product, BEV

15%
25%
36%
10%

56%

19% 19%

20%

Rolled Extrusions Rolled Extrusions

Primary castings Secondary castings Primary castings Secondary castings

20
Agenda
Raw materials and impacts on aluminium smelting industry

Aluminium market outlook

End market drivers; construction, industry and automotive

China macro trends to focus on

Section 232 and impact

LME and premiums forecast

Conclusions

21
China supply side reform finally getting serious

• Chalco • US WTO
losses case
● 3 million • US 232
tonnes per SOE
year of Exports
Reform
operational
aluminium
Central
smelting Govt.
capacity to
close
Pollution Financial
o 8% of output market
o Illegal • Northern risk • Hongqiao
o Privately owned Shandong
o Permanent
closure
Data: CRU Aluminium Market
Outlook 22
China production growth will be more deliberate
Chinese smelter expansions to add over
2.8Mt of production in 2019 Major smelter ramp-ups expected in Guangxi and Inner Mongolia
Increase in Chinese production from major greenfield
and brownfield projects, million tonnes Increase in annualised production by province, '000t
3.0

Guangxi Inner Mongolia Guizhou Xinjiang

2.0
1600
1.5Mt

1.0

1200
1.0Mt
0.0
2016 2017 2018 2019 2020 2021 2022
Data: CRU
800 0.6Mt
Special status projects will contribute the
largest share of production growth in China
Growth in Chinese aluminium production from major
0.5Mt
projects, split by approval type, M tpy 400
Purchased replacement capacity
Internal transfer
Special status projects
0
1.7
Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18
Data: CRU
3.0

2.7

Data: CRU

23
Environmental regulation in China IS getting tougher
• The Chinese government cannot ignore the environmental issues anymore. …the
“environmental mortgage has gotten TOO BIG”
• It must continue fixing the problem as it has created expectations amongst its
population of steady improvement
• The central government is doubling down on control
 Ministry of Environmental Protection (MEP) being changed to Ministry of Ecological
Environment
 Assuming wider from over Land, Water and Agriculture Ministries= more central
coordination of efforts
• Winter curtailment is expected to be continued next winter. The Henan provincial
government issued the plan for next winter already
• Aluminium smelters in 2+26 cities have been asked to meet higher emission standards
in March;
• Greenhouse gas trading scheme has been created by the end of 2017, but real
transaction will be seen in 2020;
• Illegal capacity control will remain tight, all of new capacity have to purchase capacity
quota first; * by end of 2018, illegal capacity either has to acquire operating rights
or it can not return to production…time is running out to find willing sellers
24
Chinese aluminium demand growth slowing
Chinese consumption growth is slowing but rising demand growth outside of China
Year on year change in aluminium consumption

China World ex. China

50%

40%

30%

20%

10%

0%

-10%

-20%

-30%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Data: CRU

25
China primary demand consumption is slowing
• CRU forecasts 2018 Chinese primary aluminium
will be 36.5Mt in 2018, up 5.4% y/y. Quarterly
growth y/y has slowed compared to that of 2017,
indicating a softening market. There will be a
seasonal drop in Q1 2018, as small downstream
plants shut down and larger plants curtail operations.

• Construction and transport sectors will continue

to drive demand growth. New applications such as
pedestrian bridges, bus stations, aluminium
formwork and aluminium furniture will be an
additional source of growth. More than 60
aluminium made pedestrian bridges have been
installed in China as of December 2017. Also, we
estimate 15% of formwork is now made of
aluminium.

• China remains far behind the ROW in terms of

efficient scrap utilization in its aluminium
downstream operations
 This will change as Beijing places more
emphasis on carbon trading
 Practically speaking, downstream in China can’t
compete making FRP and Extrusions out of
nearly 100% primary metal
26
Transport sector key to offset for slower construction
Construction growth in infrastructure and residential development slowing…even
“hukou reform”…which promises legal rights to 250m disenfranchised migrants in Tier
1 cities may not be enough to sustain residential growth
Aluminium demand rising in 2018 at a slower pace Construction growth to slow down in 2018
[million tonnes]

20.0%
60.0 14.0%
15.0%
50.0 12.0%
10.0%
10.0%
40.0
5.0%
8.0%
30.0
0.0%
6.0%
20.0 -5.0%
4.0%
10.0 2.0% -10.0%

0.0 0.0% -15.0%

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
-20.0%
2013 2014 2015 2016 2017
Construction Transport
Packaging consumption Foil stock
Real estate under construction
Electrical Consumer durables
Machinery & Equipment Other Real estate started this year
Annual demand growth% Real estate completed
Data: CRU Data: NBS. CRU

27
Trade actions are a wakeup call to China’s ability to export
China has operated with a premise that it had unbridled access to ROW demand to
export its surplus capacity….NOW for the first time, that assumption is being challenged

China FRP export up 25% Chinese foil to US down Chinese foil to India up in Q4
['000t] ['000t]
2,000 25 16
1,800 14
1,600 20
12
1,400
1,200 15 10
1,000 8
800 10 6
600 4
400 5
200 2
0 0 0
2016 2017
Data: CRU
Data: IHS
Data: IHS

28
One Belt One Road (OBOR) is China’s next export plan
• $150 billion/year being spend in 68 countries currently part of the scheme
• May total upward of $5 TRILLION dollars over the life the Plan
• Involves countries with 62% of global population and 30% of its GDP
• Multiple motives:
 Investing in foreign infrastructure providing a profitable home for China’s massive
foreign exchange reserves vs investing in US securities
 Providing economic stability in adjacent Central Asia creating insulation against
unrest spreading back into China (example….Tibet and Xinjiang)
 Broadens political influence
 Creates external demand for China’s massive excess capacity in core industries

• Within the aluminum sector we see examples of this increasing:

 Bauxite mine development in Guinea
 Alumina refineries in Indonesia and Vietnam
 Aluminum smelter technology and ventures in India, Iran, and Malaysia
 Attempted acquisitions of rolling capacity in the USA
 Purchases of LME warehousing capacity and LME dealing members
29
Agenda
Raw materials and impacts on aluminium smelting industry

Aluminium market outlook

End market drivers; construction, industry and automotive

China macro trends to focus on

Section 232 and impact

LME and premiums forecast

Conclusions

30
trade wars are good,
and easy to win

31
Why? As US smelters have closed down...
Aluminum capacity, million tonnes per year, and number of operational smelters

US aluminium smelting capacity Operational US smelters

6 35
33
5
27
4 23 23
21
3

2
10
1 6

0 0
1960 1970 1980 1990 2000 2010

32
. ….Chinese exports to the world have surged
Chinese exports up14-fold since 2000 when China emerged as a player
Chinese aluminium exports, million tonnes

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0
2000 2002 2004 2006 2008 2010 2012 2014 2016

33
 The practical effects of Section 232 on US prices
• US remains an net importer of metal units, the imposition of the tariff simply raises the
clearing physical premium for the imported metal required

• Producers exempt from the tariff EARN the incremental clearing premium as revenue

• Domestic restarts should be incentivized by the tariff but the timing may be slower

• Producers NOT exempt from the tariff are revenue neutral as the tariff becomes a cost of
doing business and they are not earning any more or less as a result of this…hence no effect
on their production decisions

• Inventory liquidation could delay but not halt premium appreciation

• Scrap substitution through higher imports and domestic recycling could also help but can’t
fully displace the more expensive cost seaborne primary supply

• Billet upcharge indexed to Midwest could see some appreciation as domestic duty paid
capacity may not be adequate to replace seaborne imports subject to duty
34
Delays on power & tariff execution could scupper any restart
935,000 of capacity presently
US smelting capacity and production idle in the USA
2017 annual output and capacity in 000 MT

annual output idle capacity

300 Warrick restarted
161,00tpy in Q1 2018
250 65

200 21
151 122
150
276 269 8
100 184

50

0
New Madrid Warrick Wenatchee Hawesville Mount Holly Ferndale Sebree Massena
West
Data: CRU

35
Bottom up construction of the import clearing premium
USA premium expressed in cents/lb

Duty presents 50% of total

20.75
.25
2.25
.75

10.25

CIF USA 10% Ad Discharge Costs Interior Freight Finance Dlvd. Midwest
Duty Unpaid Valorem Duty 1/ Duty Paid

1/ LME cash $2,112.50+ $154 CIF premium x 10%

36
Agenda
Raw materials and impacts on aluminium smelting industry

Aluminium market outlook

End market drivers; construction, industry and automotive

China macro trends to focus on

Section 232 and impact

LME and premiums forecast

Conclusions

37
Prices to stabilise in 2018

LME 3-month price forecast

$/t
High Case Forward curve, February 21, 2018 Low Case Base case

$2,550
2600 $2,500
$2,450
2500
2400 $2,290
2300 $2,235
$2,175
$2,119 $2,225
2200
2100 $2,028
$2,120
2000 $1,915 $2,105
$1,856
1900
$1,715 $1,950
1800 $1,875
1700 $1,633 $1,900
1600 $1,582
1500
Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018

Data: CRU, LME 38

... But with smelter utilisation rates rising...

Smelter utilisation outside of China to exceed 90% by 2020

Smelter utilisation rates

World China World ex. China

100%
95%
90%
85%
80%
75%
70%
65%
60%
2000 2005 2010 2015 2020 2025 2030 2035 2040
Data: CRU

39
Growing investment need will keep prices higher long term

Additional smelting investments needed before 2020

Primary aluminium investment capacity requirement, million tonnes per year

World China World ex. China

25
20
15
10
5
0
-5
-10
-15
-20
2000 2005 2010 2015 2020 2025 2030 2035 2040
Data: CRU

40
US Midwest premium already pricing in the duty

US Midwest premium ¢/lb

17
16
15
14
13
12
11
10
9
Oct-17 Oct-17 Nov-17 Dec-17 Dec-17 Jan-18 Feb-18 Feb-18

Spot MW premium
CME March18 MW futures
Data: CRU, CME

41
Longer term premiums stay high, duration of duty is key!

US Midwest premium will jump if duties are confirmed

US aluminium premium, ¢/lb

Current CRU US Midwest premium CIF Baltimore

Post 10% duty US Midwest premium
30

25

20

15

10

0
2017 2017 2017 2017 2018 2018 2018 2018 2019 2019 2019 2019 2020 2021 2022
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Data: CRU

42
Agenda
Raw materials and impacts on aluminium smelting industry

Aluminium market outlook

End market drivers; construction, industry and automotive

China macro trends to focus on

Section 232 and impact

LME and premiums forecast

Conclusions

43
Conclusions

Large market deficits outside China

China in surplus but supply reforms are getting serious

Demand ex China is good, but China is slowing

China’s access to ROW markets is being seriously challenged

LME prices and premiums may remain high to encourage more investment and
to price the cost of seaborne imports to the US market
Doug Hilderhoff
Doug.hilderhoff@crugroup.com
724-759-7872

Mike Southwood
Mike.Southwood@crugroup.com
724-759-7868

Greg Wittbecker
Gregory.wittbecker@crugroup.com
865-621-4564

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