hsbc metals quartely q3 2011

abc Global Research

Metals unmoved by macro clouds Macroeconomic concerns, driven by sovereign debt risk, have grown in the past quarter but, as far as the fundamentals of the physical markets and spot prices are concerned, metals remain relatively immune.

Exchange inventories have not begun to accelerate upwards and bulk commodity markets remain tight even as production has begun to recover from weather-related disruptions earlier in the year. We have edged up

many of our near-term price forecasts, although some of this is currency related, and producers will surrender some of the benefit to costs.

Among metals, aluminium remains our preferred play, with Chinese

domestic inflation only adding to pressure from higher energy prices at the top end of the cost curve. In copper, we find ourselves in the unusual position of increasing (albeit slightly) our deficit estimate for 2011 from

78kt to 143kt, and still think the market is much closer to balance this year than consensus believes. We see zinc struggling against a current market surplus and nickel threatened by one that looks likely in 2012. We

are below consensus in copper (-15%), zinc (-7%) and nickel (-4%), but marginally above consensus for aluminium (+2%) in 2012.

In bulks, we raise our 2012 iron ore fines price from USD110/t (FOB,

Australian fines) to USD140/t and believe marginal supply will be delayed by capital cost inflation and funding concerns in the West, while declining grades will keep Chinese production at high cost. We continue

to like the fundamentals of both coking and thermal coal.

HSBC commodity price revisions

Commodity Unit Spot* 2011e Forecast change

2012e Forecast change

Long term

Forecast change

Aluminium USD/lb 1.12 1.15 1% 1.18 0% 1.00 0%Copper USD/lb 4.39 4.22 4% 3.86 13% 2.30 0%Nickel USD/lb 10.78 11.11 -4% 9.98 0% 7.00 0%Zinc USD/lb 1.09 1.02 3% 1.03 -2% 0.79 0%Ferrochrome USD/lb 1.15 1.30 -3% 1.40 -4% 0.90 0%Iron ore fines (FOB) USD/t 175** 160 8% 140 27% 75 0%Coking coal*** USD/t 306 284 3% 250 0% 120 0%Thermal coal*** USD/t 120 128 -2% 125 0% 82 0%

Source: HSBC estimates Notes: * Spot prices as at close, 18 July 2011; ** Adjusted to FOB; *** JPY fiscal year averages

Natural Resources & Energy Global Metals & Mining

Metals Quarterly Q3 2011

Metals prices are, as yet, unmoved by macroeconomic concerns

We raise our 2012 copper price estimate by 13%, but see the market less tight than consensus expects

We raise our 2012 iron ore price estimateby 27% as we expect further delays and cost issues for marginal supply

21 July 2011

Issuer of report: The Hongkong and Shanghai Banking Corporation Limited

Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

Andrew Keen* Analyst HSBC Bank plc +44 20 7991 6764 [email protected]

Thorsten Zimmermann*, CFA Analyst HSBC Bank plc +44 20 7991 6835 [email protected]

Sarah Mak* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2822 4551 [email protected]

Lourina Pretorius* Analyst HSBC Bank Plc +44 20 7992 3686 [email protected]

Amit Pansari*, CFA Associate, Bangalore

View HSBC Global Research at: http://www.research.hsbc.com

*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations

http://www.research.hsbc.com/

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Natural Resources and Energy Global Metals & Mining 21 July 2011

Metals unmoved by macro clouds 3

Aluminium: Global production at record high 6

Copper: Closer to balance than widely believed 14

Nickel: Plenty of projects 22

Zinc: Ample, but copper price linked 30

Ferrochrome: Temporarily loses its shine 36

Iron ore: Blood from stones 42

Coking coal: Prices to fall, but are still high 48

Thermal coal: Stable at high levels 50

Commodities consumption trends 54

HSBC equity indices performance 56

China demand indicators 57

Disclosure appendix 61

Disclaimer 63

Contents

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As highlighted in our April report, the end of QE2,

easing supply pressures and slowing global macro

data dented the metals rally in the middle of Q2.

Some lost ground has recently been regained,

although exchange metals prices remain, for now,

at the mercy of short-term movements in the wider

market’s appetitive for risk.

HSBC base metals price index*

6,800

7,0007,2007,4007,6007,8008,0008,200

Jan-

11

Feb-

11

Mar

-11

Apr-

11

May

-11

Jun-

11

Jul-1

1

Source: *HSBC base metals index is a USD-denominated weighted index of the six LME traded base metals

Aluminium: Global production at record high

Global aluminium output has been steadily rising

since the start of the year, clocking a record high

run rate of c43.6Mt/y in May 2011 supported

mainly by Chinese growth, which remains robust,

and we do not see any sign of a hard landing.

Strong global cost inflation, driven by higher

energy tariffs, higher bauxite/alumina prices,

appreciating mining currencies and increasing

consumables costs, provides strong support. We

maintain our price forecasts at USD2,546 for

2011e and USD2,601/t in 2012e.

Copper: Closer to balance than widely believed

We see a copper deficit of 143kt in 2011, up from

70kt in our last review, but still lower than

consensus (500kt). Fundamentals will not provide

a clear indication for another 12 months, leaving

prices at the mercy of risk sentiment. On our

revised estimates, 2012 is showing a small surplus

(300kt, down from 480kt in our last review),

arguably small enough to be dismissed by the

market – as such, 2012 looks increasingly like

2011, and we raise our price forecasts from

USD7,500/t to USD8,500/t to reflect this.

Nickel: Plenty of projects

There remains a risk of oversupply in the nickel

industry owing to a number of new projects (mainly

low-risk FeNi) coming into the commissioning

phase of their development. Demand would need to

grow 8-9% per year to hold the market in deficit in

2012/13 if the planned projects ramp up as expected.

At some point in 2012-13, we believe it is likely that

marginal cost will be breached, which will see nickel

prices average below USD20,000/t (we forecast

USD18,500 in 2013).

Zinc: Ample, but copper price linked

Exchange inventory marked a new all-time high

and the market remains in substantial surplus.

Although we continue to see risks for the zinc

price, it appears to be better protected on the

Metals unmoved by macro clouds

Significant project pipelines to keep the market well supplied

No sign yet of a hard landing in China; robust EM growth will continue to offset slow DM growth

We raise our copper and iron ore price forecasts

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4


downside supported by higher marginal costs and

copper price linkage. We therefore raise our

average 2011e forecast to USD2,241/t, up from

USD2,179/t. Given the current surplus, we keep

our price forecast roughly flat in 2012e, at 2,276/t

(down from USD2,312/t before). Given the strong

production incentive, we now move 2013 to a

balanced market, from a deficit before.

Ferrochrome: Temporarily loses its shine

Despite short-term weakness, we remain positive

on ferrochrome prices and believe stainless steel

production and supply-side risks will provide

support in the medium term. We expect a gradual

decline in prices as incremental capacity and new

projects come on-stream in Kazakhstan, Russia,

Finland, China and India, but only from 2014

onwards. Owing to our revised market forecasts,

reflecting Q3 weakness, coupled with our

(unchanged) views on cost pressures in the

industry and project delays, we revise down our

2011 and 2012 ferrochrome price forecasts to

USD1.30/lb and USD1.40/lb, respectively.

Iron ore: Blood from stones

Iron ore producers continue to achieve strong prices

from a struggling steel industry. Supply growth is

proving far more challenging than many have

expected. On our estimates, China will supply 41%

of production growth in 2011, with supply from the

Major 4 (BHP, RIO, VALE and AAL) actually

stagnating in 2011. Spot prices have not fallen as we

had forecasted, as the restart in Indian exports has

been delayed. We raise our 2012-13 price forecasts

and now believe prices are likely to find a floor

around USD140/t FOB (~USD155/t CIF), up from

USD110/t FOB in our last review.

Coking coal: Prices to fall, still high

China has cut prime-grade coking coal imports from

Australia, replacing them with imports from

Mongolia and the US. Australian exports have

recovered somewhat; April exports were 23% higher

from February but still 27% lower than last year.

The Q3 contract price fell 5% to USD315/t from a

record high (USD330/t in Q2), and we expect Q4 to

fall further, to USD250/t, as supply tightness eases.

Thermal coal: Stable at high levels

Australia’s thermal coal supply increased as mine

production recovered from the worst flooding in

Queensland in 50 years. Australian thermal coal

exports were back to 12Mt in April, from 9.3Mt in

February. China’s imports fell 18% in Jan-May,

as Chinese domestic prices were at a discount to

imported price. We believe Chinese buyers are

price sensitive and will cut high-grade imports if

regional coal prices are higher than domestic

supply. With an increase in domestic and import

supply, we expect Chinese coal prices to remain

stable in summer consumption season, but fall

slightly in end-Aug/Sep and then pick up again in

the winter. As the spread narrows, regional coal

prices will follow Chinese price movements,

affected by lower demand from China when

summer consumption ends.

HSBC versus consensus estimates

Unit 2011e 2012e

Aluminium HSBC USD/lb 1.15 1.18Consensus USD/lb 1.15 1.16Spot* USD/lb 1.12 1.12HSBC vs. Consensus % 0% 2%HSBC vs. Spot % 3% 5%Copper HSBC USD/lb 4.22 3.86Consensus USD/lb 4.35 4.54Spot* USD/lb 4.39 4.39HSBC vs. Consensus % -3% -15%HSBC vs. Spot % -4% -12%Nickel HSBC USD/lb 11.11 9.98Consensus USD/lb 11.40 10.43Spot* USD/lb 10.78 10.78HSBC vs. Consensus % -3% -4%HSBC vs. Spot % 3% -7%Zinc HSBC USD/lb 1.02 1.03Consensus USD/lb 1.07 1.11Spot* USD/lb 1.09 1.09HSBC vs. Consensus % -5% -7%HSBC vs. Spot % -7% -5%Thermal Coal** HSBC USD/t 128 125Consensus USD/t 125 128Spot* USD/t 120 120HSBC vs. Consensus % 2% -2%HSBC vs. Spot % 6% 4%Coking Coal** HSBC USD/t 284 250Spot* USD/t 306 306HSBC vs. Spot % -7% -18%Iron Ore Fines HSBC USD/t 160 140Spot*** USD/t 175 175HSBC vs. Spot % -8% -20%

Source: Bloomberg, HSBC estimates. * Spot prices as at close, 18 July 2011; ** JPY fiscal year averages; *** Adjusted to FOB.

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Commodity price forecast changes

Commodity Unit __________2011e ___________ __________ 2012e ___________ __________ 2013e___________ __________ 2014e ___________ ______ Long term (real) ______ Old New Chg Old New Chg Old New Chg Old New Chg Old New Chg

Aluminium USD/lb 1.15 1.15 1% 1.18 1.18 0% 1.20 1.20 0% 1.18 1.18 0% 1.00 1.00 0%Copper USD/lb 4.04 4.22 4% 3.40 3.86 13% 3.26 3.63 11% 2.81 2.95 5% 2.30 2.30 0%Zinc USD/lb 0.99 1.02 3% 1.05 1.03 -2% 1.25 1.21 -4% 1.57 1.57 0% 0.79 0.79 0%Nickel USD/lb 11.54 11.11 -4% 10.00 9.98 0% 8.00 8.39 5% 8.00 9.07 13% 7.00 7.00 0%Iron ore fines (AUS) USD/t 148.50 160.00 8% 110.00 140.00 27% 110.00 140.00 27% 90.00 110.00 22% 75.00 75.00 0%Coking coal* USD/t 275.00 283.75 3% 250.00 250.00 0% 225.00 225.00 0% 200.00 200.00 0% 120.00 120.00 0%Thermal coal* USD/t 130.00 128.00 -2% 125.00 125.00 0% 110.00 110.00 0% 100.00 100.00 0% 82.00 82.00 0%Ferrochrome USD/lb 1.34 1.30 -3% 1.45 1.40 -4% 1.40 1.42 1% 1.28 1.35 6% 0.90 0.90 0%

*Japanese fiscal year averages. Source: HSBC estimates

HSBC commodity prices

Unit 2009 y-o-y 2010 y-o-y 2011e y-o-y 2012e y-o-y 2013e y-o-y 2014e y-o-y Real (LT) mid-cycle

Base metals Aluminium USD/lb 0.76 -35% 0.99 30% 1.15 17% 1.18 2% 1.20 2% 1.18 -2% 1.00 USD/t 1,670 2,175 2,546 2,601 2,646 2,601 2,205Copper USD/lb 2.34 -26% 3.42 47% 4.22 23% 3.86 -9% 3.63 -6% 2.95 -19% 2.30 USD/t 5,152 7,551 9,300 8,500 8,000 6,500 5,071Zinc USD/lb 0.75 -11% 0.98 30% 1.02 4% 1.03 2% 1.21 17% 1.57 30% 0.79 USD/t 1,658 2,163 2,241 2,276 2,664 3,463 1,742Nickel USD/lb 6.67 -30% 9.91 48% 11.11 12% 9.98 -10% 8.39 -16% 9.07 8% 7.00 USD/t 14,707 21,838 24,500 22,000 18,500 20,000Precious Metals Gold USD/oz 973 12% 1,225 26% 1,525 25% 1,500 -2% 1,450 -3% 1,250 -14% 1,250Silver USD/oz 15 -2% 20 38% 34 69% 29 -15% 24 -17% 20 -17% 20Platinum USD/oz 1,203 -24% 1,610 34% 1,850 15% 1,750 -5% 1,650 -6% 1,776 8% 1,625Palladium USD/oz 263 -25% 527 100% 825 56% 750 -9% 725 -3% 765 6% 700Bulks & Energy Alumina USD/t 225 -35% 326 45% 382 17% 390 2% 397 2% 390 -2% 298Iron Ore-Fines (Australia) USD/t 62 -33% 112 81% 160 43% 140 -13% 140 0% 110 -21% 75Ferrochrome USD/lb 0.85 -52% 1.24 46% 1.30 4% 1.40 8% 1.42 1% 1.35 -5% 0.90Coking Coal* USD/t 129 -57% 215 66% 284 32% 250 -12% 225 -10% 200 -11% 120Thermal coal (Newcastle)* USD/t 70 -44% 98 40% 128 31% 125 -2% 110 -12% 100 -9% 82Oil (WTI) USD/bbl 63 -35% 80 27% 100 25% 85 -15% 90 6% 91 1% 80

*Japanese fiscal year averages Source: Thomson Reuters Datastream, McCloskey Coal Report, Metal Bulletin, HSBC estimates

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Supply Demand Market Balance/Pricing Global production at record high supported by China (Mt/y) China aluminium consumption by end use (2010) High energy prices driving cost inflation to support prices

20

25

30

35

40

45

May

-01

May

-03

May

-05

May

-07

May

-09

May

-11

mtp

a

10%

20%

30%

40%

50%

World annualized production (LHS)China share of w orld output (R HS)

Appliances15%

Packaging4%

Other4%

Machinery6%Constructi

on38%

Transport18%

Electrical15%

0

30

60

90

120

150

Jul-0

0Ju

l-01

Jul-0

2Ju

l-03

Jul-0

4Ju

l-05

Jul-0

6Ju

l-07

Jul-0

8Ju

l-09

Jul-1

0Ju

l-11

Oil(

USD

/bbl

)

1,000

1,500

2,000

2,500

3,000

3,500

Ali (U

SD/t)

Oil Ali

Source: HSBC, IAI Source: HSBC, Brook Hunt Source: Thomson Financial Datastream, HSBC

Aluminium: Global production at record high Global aluminium production running at record high rates supported by robust Chinese output growth

China demand remains robust – strong construction and appliances demand to offset weak auto outlook

Maintain bullish outlook – strong cost support, rising utilisation rates and falling stock weeks to drive prices higher

Global aluminium output has been steadily rising since the start of the year, clocking a record high run rate of c43.6Mt/y in May 2011 supported mainly by Chinese growth. Production in gulf region remained strong in Jan-May period (+36% y-o-y) as new capacity is ramped up. We expect global aluminium production to increase by 5.6% y-o-y in 2011e to c42.7Mt. We note that c90% of producers are cash positive at current aluminium prices.

Chinese May output was running at c18.1Mt/y. Power-induced production cuts that market was looking for have not materialised and National Bureau of Statistics June production data confirm this view. We expect Chinese production to increase by c10.3% in 2011e to 17.8Mt accounting for c42% of global output. We do not see much impact on production from the MIIT order to shut down c619kt/y of aluminium capacity in 2011. Despite its efforts to rein in excess capacity, Beijing has not been able to make much progress, and we expect domestic capacity to increase to c30Mt/y by 2015.

We expect global demand growth to moderate to more sustainable levels of c7% in 2011-14e after the post-recession surge of 11.2% in 2010. This will again be driven by China, where we forecast annual growth of 10%. While the market has been focused on a hard landing in China, recent data point to a comfortable soft landing. China's Q2 GDP and June IP both came in above market expectations. We expect strong demand from construction, home appliances and power sectors to offset slowing automotive demand.

We estimate ex-China demand to slow to 4.3% in 2011e after growing by 12.4% in 2010. We expect autos and consumer electronics demand growth slightly to offset weak construction demand.

We expect that increasing use of aluminium in consumer electronics and passenger vehicles (for fuel efficiency) along with recovery in construction market in the Western world will continue to support medium-term demand for aluminium.

We expect global market to remain tightly balanced for the next two years, at which point rising prices will trigger marginal output leading to market surplus. We forecast global stock steadily to decline to 7.4 weeks of consumption by 2013 after peaking in 2009 at 9.3 weeks. LME inventories have declined by 6.7% or c300kt after reaching a record high of 4.72Mt in mid May.

We expect aluminium prices to remain supported by strong global cost inflation driven by higher energy tariffs, higher bauxite/alumina prices, appreciating mining currencies and increasing consumables costs. Most recently, the world's largest aluminium producer, UC RUSAL, reported a 19% y-o-y increase in its cash cost of aluminium production in Q1-11.

We maintain our LME price forecasts at USD1.15/lb for 2011e rising to USD1.18/lb in 2012e and USD1.20/lb in 2013e. We anticipate that a significant portion of aluminium inventories currently tied up in financing deals (over 50% of all inventories) to remain so as the cost of financing in USD is likely to remain low on the back of ongoing QE in the US.

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Aluminium: Supply and demand model (kt)

2005 2006 2007 2008 2009 2010 2011e 2012e 2013e 2014e Change 2010-14e CAGR 2010-14e

World Capacity 36,884 38,575 42,476 45,964 49,572 50,675 53,657 56,263 58,607 61,331 10,656 4.9% YoY change 8.3% 4.6% 10.1% 8.2% 7.8% 2.2% 5.9% 4.9% 4.2% 4.6% Production 31,206 33,164 37,419 38,772 36,360 40,423 42,688 45,589 48,555 51,955 11,532 6.5% YoY change 6.3% 6.3% 12.8% 3.6% -6.2% 11.2% 5.6% 6.8% 6.5% 7.0% Consumption 31,235 33,713 37,480 37,236 35,258 39,565 42,465 45,532 48,329 51,319 11,754 6.7% YoY change 5.4% 7.9% 11.2% -0.7% -5.3% 12.2% 7.3% 7.2% 6.1% 6.2% Capacity utilisation 85% 86% 88% 84% 73% 80% 80% 81% 83% 85% World balance (29) (549) (61) 1,535 1,102 859 223 57 226 636 Reported stocks 2,910 2,666 2,804 4,566 6,325 6,338 6,561 6,618 6,844 7,480 Stock/ consumption (weeks) 4.8 4.1 3.9 6.4 9.3 8.3 8.0 7.6 7.4 7.6 China Capacity 10,800 11,845 15,284 17,704 21,000 21,650 23,800 25,800 27,300 28,800 7,150 7.4% YoY change 21.6% 9.7% 29.0% 15.8% 18.6% 3.1% 9.9% 8.4% 5.8% 5.5% Production 7,743 9,300 12,606 13,130 12,963 16,133 17,800 19,764 21,749 23,892 7,759 10.3% YoY change 14.6% 20.1% 35.5% 4.2% -1.3% 24.5% 10.3% 11.0% 10.0% 9.9% Consumption 7,042 8,779 12,486 13,024 14,323 16,026 17,904 19,879 21,875 24,031 8,005 10.7% YoY change 16.9% 24.7% 42.2% 4.3% 10.0% 11.9% 11.7% 11.0% 10.0% 9.9% Capacity utilisation 72% 79% 82% 74% 62% 75% 75% 77% 80% 83% SHFE stock change -14 -28 71 117 91 144 -43 0 0 0 China exports / (imports) 715 549 49 (11) (1,451) (37) (61) (115) (127) (139) China (% of Global production) 24.8% 28.0% 33.7% 33.9% 35.7% 39.9% 41.7% 43.4% 44.8% 46.0% World ex China Capacity 26,084 26,730 27,192 28,260 28,572 29,025 29,857 30,463 31,307 32,531 3,506 2.9% YoY change 3.6% 2.5% 1.7% 3.9% 1.1% 1.6% 2.9% 2.0% 2.8% 3.9% Production 23,463 23,864 24,814 25,642 23,397 24,290 24,888 25,825 26,806 28,063 3,773 3.7% YoY change 3.9% 1.7% 4.0% 3.3% -8.8% 3.8% 2.5% 3.8% 3.8% 4.7% Consumption 24,193 24,934 24,994 24,212 20,935 23,539 24,561 25,653 26,454 27,288 3,749 3.8% YoY change 2.5% 3.1% 0.2% -3.1% -13.5% 12.4% 4.3% 4.4% 3.1% 3.2% Capacity utilisation 90% 89% 91% 91% 82% 84% 83% 85% 86% 86% World ex China balance (730) (1,070) (180) 1,430 2,462 752 327 172 352 775 Prices LME Aluminium price, USD/ t 1,899 2,563 2,641 2,557 1,668 2,175 2,541 2,601 2,646 2,601 LME Aluminium price, USD/ lb 0.86 1.16 1.20 1.16 0.76 0.99 1.15 1.18 1.20 1.18 YoY 10.7% 35.0% 3.0% -3.2% -34.8% 30.4% 16.8% 2.4% 1.7% -1.7%

Source: HSBC estimates, Brook Hunt, IAI

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Primary aluminium balance World aluminium balance – annual World aluminium balance – quarterly World aluminium balance by region – Q2-11

(1,000)

(500)

0

500

1,000

1,500

2,000

2002

2003

2004

2005

2006

2007

2008

2009

2010

kt

1,300

1,550

1,800

2,050

2,300

2,550

2,800

USD

/t

World balance LME cash (RHS)

-2000

200

400

600

800

10001200

Q1-

09Q

2-09

Q3-

09Q

4-09

Q1-

10Q

2-10

Q3-

10Q

4-10

Q1-

11Q

2-11

kt

1,3001,500

1,700

1,900

2,100

2,300

2,5002,700

USD

/t


-750

-500

-250

0

250

500

750

C&E

Eur

ope

Oce

ania

Afric

a

L Am

eric

a

Chi

na

N A

mer

ica

Oth

er A

sia

W E

urop

e

kt

Source: HSBC, Brook Hunt Source: HSBC, Brook Hunt Source: HSBC, Brook Hunt

World aluminium balance by region (kt)

__________________________________________ Annual ___________________________________________ __________________________________________ Quarterly ___________________________________________ 2004 2005 2006 2007 2008 2009 2010 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 Q4-10 Q1-11 Q2-11

North America -1,901 -1,793 -1,886 -1,055 -370 54 -397 -71 -150 60 -117 -129 -211 -199 -179 Latin America 1,165 1,051 1,130 1,057 982 995 467 234 213 113 78 127 149 46 55 W Europe -2,320 -2,166 -2,623 -2,839 -2,257 -1,831 -2,258 -536 -589 -597 -615 -524 -522 -632 -653 C&E Europe 2,789 2,828 2,706 2,981 3,262 2,762 2,790 645 673 666 700 698 726 699 679 China 803 723 559 288 324 -913 385 -318 556 735 -116 -29 -205 -238 -40 Other Asia -3,703 -3,708 -3,637 -3,482 -3,187 -2,119 -2,405 -575 -710 -611 -711 -576 -507 -497 -474 Oceania 1,810 1,801 1,852 1,872 1,835 1,767 1,809 442 444 438 447 463 461 448 453 Africa 1,308 1,327 1,399 1,323 1,074 1,123 1,004 283 282 234 235 255 280 298 311 World balance (49) 63 (501) 146 1,662 1,839 1,395 104 720 1038 -99 285 171 -75 152

Source: HSBC, Brook Hunt

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Primary aluminium production World aluminium production – annual World aluminium production – quarterly World aluminium production by region – Q2-11

20,000

25,000

30,000

35,000

40,000

45,000

2002

2003

2004

2005

2006

2007

2008

2009

2010

kt

-10%

-5%

0%

5%

10%

15%

World Y-o-y (RHS)

7,500

8,500

9,500

10,500

11,500

Q1-

09

Q2-

09

Q3-

09

Q4-

09

Q1-

10

Q2-

10

Q3-

10

Q4-

10

Q1-

11

Q2-

11

kt

-10%

-5%

0%

5%

10%

World Q-o-q (RHS)

Other Asia

15%N America

11%

C&EEurope

10%

W Europe9%

L America5%Oceania

5%Africa

4%

China41%


World aluminium production by region (kt)

_____________________________________________ Annual____________________________________________________________________________________________Quarterly _____________________________________________ 2004 y-o-y 2005 y-o-y 2006 y-o-y 2007 y-o-y 2008 y-o-y 2009 y-o-y 2010 y-o-y Q4-09 q-o-q Q1-10 q-o-q Q2-10 q-o-q Q3-10 q-o-q Q4-10 q-o-q Q1-11 q-o-q Q2-11 q-o-q

North America 5,110 -7% 5,382 5% 5,333 -1% 5,643 6% 5,781 2% 4,759 -18% 4,684 -2% 1,172 2% 1,164 -1% 1,179 1% 1,160 -2% 1,181 2% 1,187 1% 1,247 5% Latin America 2,356 4% 2,390 1% 2,493 4% 2,559 3% 2,663 4% 2,508 -6% 2,328 -7% 622 -1% 568 -9% 573 1% 583 2% 604 4% 547 -9% 566 3% W Europe 4,294 6% 4,345 1% 4,174 -4% 4,321 4% 4,627 7% 3,728 -19% 3,807 2% 904 -1% 910 1% 941 3% 962 2% 994 3% 978 -2% 1,000 2% C&E Europe 4,534 4% 4,627 2% 4,678 1% 4,899 5% 5,101 4% 4,425 -13% 4,602 4% 1,109 2% 1,101 -1% 1,153 5% 1,169 1% 1,179 1% 1,152 -2% 1,161 1% China 6,689 21% 7,806 17% 9,349 20% 12,588 35% 13,177 5% 12,965 -2% 17,300 33% 4,060 21% 4,303 6% 4,484 4% 4,365 -3% 4,148 -5% 4,241 2% 4,630 9% Other Asia 2,980 11% 3,412 14% 3,741 10% 3,985 7% 4,240 6% 4,731 12% 5,592 18% 1,223 2% 1,294 6% 1,372 6% 1,410 3% 1,516 8% 1,590 5% 1,657 4% Oceania 2,245 2% 2,252 0% 2,274 1% 2,316 2% 2,297 -1% 2,210 -4% 2,277 3% 564 1% 555 -2% 566 2% 578 2% 578 0% 564 -2% 572 1% Africa 1,711 20% 1,753 2% 1,865 6% 1,815 -3% 1,715 -5% 1,681 -2% 1,742 4% 433 1% 425 -2% 430 1% 442 3% 445 1% 436 -2% 452 4% World 29,919 7% 31,968 7% 33,907 6% 38,127 12% 39,602 4% 37,008 -7% 42,332 14% 10,087 8% 10,320 2% 10,698 4% 10,669 0% 10,645 0% 10,695 0% 11,285 6%


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10


Primary aluminium consumption World aluminium consumption – annual World aluminium consumption – quarterly World aluminium consumption by region – Q2-11

20,000

25,000

30,000

35,000

40,000

45,000

2002

2003

2004

2005

2006

2007

2008

2009

2010

kt

-12%

-6%

0%

6%

12%

18%

World Y-o-y (RHS)

5,0006,000

7,000

8,0009,000

10,000

11,00012,000

Q1-

09

Q2-

09

Q3-

09

Q4-

09

Q1-

10

Q2-

10

Q3-

10

Q4-

10

Q1-

11

Q2-

11

kt

-15%-10%

-5%

0%5%

10%

15%20%

World Q-o-q (RHS)

Other Asia19%

W Europe15%

China42%

N America13%

Africa1% C&E

Europe4%

L America5%

Oceania1%


World aluminium consumption by region (kt)

_____________________________________________ Annual ______________________________________________ ____________________________________________ Quarterly ____________________________________________ 2004 y-o-y 2005 y-o-y 2006 y-o-y 2007 y-o-y 2008 y-o-y 2009 y-o-y 2010 y-o-y Q4-09 q-o-q Q1-10 q-o-q Q2-10 q-o-q Q3-10 q-o-q Q4-10 q-o-q Q1-11 q-o-q Q2-11 q-o-q

North America 7,011 7% 7,175 2% 7,219 1% 6,698 -7% 6,152 -8% 4,705 -24% 5,081 8% 1,322 8% 1,104 -16% 1,296 17% 1,289 -1% 1,392 8% 1,386 0% 1,426 3% Latin America 1,191 11% 1,338 12% 1,364 2% 1,502 10% 1,681 12% 1,513 -10% 1,861 23% 409 4% 455 11% 495 9% 456 -8% 455 0% 501 10% 511 2% W Europe 6,614 2% 6,512 -2% 6,797 4% 7,160 5% 6,884 -4% 5,559 -19% 6,065 9% 1,493 3% 1,507 1% 1,556 3% 1,486 -4% 1,516 2% 1,610 6% 1,653 3% C&E Europe 1,744 2% 1,800 3% 1,972 10% 1,918 -3% 1,840 -4% 1,663 -10% 1,812 9% 436 -1% 435 0% 453 4% 471 4% 453 -4% 453 0% 482 6% China 5,886 18% 7,083 20% 8,790 24% 12,300 40% 12,854 4% 13,878 8% 16,915 22% 3,504 -5% 3,568 2% 4,600 29% 4,394 -4% 4,353 -1% 4,479 3% 4,670 4% Other Asia 6,683 7% 7,120 7% 7,378 4% 7,467 1% 7,427 -1% 6,850 -8% 7,997 17% 1,933 9% 1,905 -1% 2,083 9% 1,986 -5% 2,023 2% 2,087 3% 2,131 2% Oceania 435 9% 451 4% 422 -6% 444 5% 462 4% 443 -4% 468 6% 120 4% 117 -2% 119 2% 115 -3% 117 2% 116 -1% 119 3% Africa 403 13% 426 6% 466 9% 492 6% 641 30% 558 -13% 738 32% 151 4% 191 27% 195 2% 187 -4% 165 -12% 138 -16% 141 2% World 29,968 8% 31,905 6% 34,408 8% 37,981 10% 37,940 0% 35,169 -7% 40,937 16% 9,367 2% 9,282 -1% 10,797 16% 10,384 -4% 10,474 1% 10,770 3% 11,133 3%


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11


Aluminium stocks, prices, costs and premiums World aluminium stock LME stock change LME forward spread (15-month less 3-month prices)

1,5002,5003,5004,5005,5006,5007,500

Jun-

00Ju

n-01

Jun-

02Ju

n-03

Jun-

04Ju

n-05

Jun-

06Ju

n-07

Jun-

08Ju

n-09

Jun-

10Ju

n-11

kt

13233343536373

Days

World StocksConsumption ratio (RHS)Av erage day s

-150

0

150

300

450

600

Jun-

00Ju

n-01

Jun-

02Ju

n-03

Jun-

04Ju

n-05

Jun-

06Ju

n-07

Jun-

08Ju

n-09

Jun-

10Ju

n-11

kt

1,000

1,500

2,000

2,500

3,000

3,500

USD

/t

LME stock change LME cash (RHS)

-300

-200

-100

0

100

200

Jun-

00

Jun-

01

Jun-

02

Jun-

03Ju

n-04

Jun-

05Ju

n-06

Jun-

07Ju

n-08

Jun-

09

Jun-

10

Jun-

11

USD

/t

LME 15mth less LME 3mth

Source: Thomson Reuters Datastream, IAI, LME, SHFE, HSBC Source: Thomson Reuters Datastream, HSBC Source: Thomson Reuters Datastream, HSBC

Global aluminium cost curve (2011) (USD/t) Aluminium monthly ingot premium (USD/t) Smelting capacity utilisation

C

halc

o

Alc

oa

Rus

al

R

IO

0

500

1,000

1,500

2,000

2,500

3,000

0 5 10 15 20 25 30 35 40 45 50

Cum ulative p roduction (mt)

C1 c

ash

co

st (U

SD/t

)

Nor

sk

0

50

100

150

200

250

Jun-

00

Jun-

01

Jun-

02

Jun-

03

Jun-

04

Jun-

05

Jun-

06

Jun-

07

Jun-

08

Jun-

09

Jun-

10

Jun-

11

W. Europe CIS US Japan spot

50%

60%

70%

80%

90%

Q1-

08

Q2-

08

Q3-

08

Q4-

08

Q1-

09

Q2-

09

Q3-

09

Q4-

09

Q1-

10

Q2-

10

Q3-

10

Q4-

10

Q1-

11

World China

Source: HSBC, Brook Hunt Source: Thomson Reuters Datastream, HSBC, Brook Hunt Source: HSBC, Brook Hunt

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12


China summary

Primary aluminium production (kt) Aluminium production and consumption growth Aluminium imports, exports and net trade (kt)

0200400600800

1,0001,2001,4001,600

Feb-

07M

ay-0

7Au

g-07

Nov

-07

Feb-

08M

ay-0

8Au

g-08

Nov

-08

Feb-

09M

ay-0

9Au

g-09

Nov

-09

Feb-

10M

ay-1

0Au

g-10

Nov

-10

Feb-

11M

ay-1

1-20%-10%0%10%20%30%40%50%60%

Primary Aluminum Production (LHS)YoY% (RHS)

-40%

-20%

0%

20%

40%

60%

80%

Feb-

07M

ay-0

7Au

g-07

Nov

-07

Feb-

08M

ay-0

8Au

g-08

Nov

-08

Feb-

09M

ay-0

9Au

g-09

Nov

-09

Feb-

10M

ay-1

0Au

g-10

Nov

-10

Feb-

11M

ay-1

1

Production Grow th Consumption Grow th

-100

0

100

200

300

400

Feb-

07M

ay-0

7Au

g-07

Nov

-07

Feb-

08M

ay-0

8Au

g-08

Nov

-08

Feb-

09M

ay-0

9Au

g-09

Nov

-09

Feb-

10M

ay-1

0Au

g-10

Nov

-10

Feb-

11M

ay-1

1

Imports Ex ports Net Imports (Ex ports)

Source: HSBC, CEIC Source: HSBC, CEIC Source: HSBC, CEIC

Aluminium semis production (kt) Aluminium semis import, export and net trade (kt) Aluminium scrap imports (kt)

200

600

1,000

1,400

1,800

2,200

Feb-

07M

ay-0

7Au

g-07

Nov

-07

Feb-

08M

ay-0

8Au

g-08

Nov

-08

Feb-

09M

ay-0

9Au

g-09

Nov

-09

Feb-

10M

ay-1

0Au

g-10

Nov

-10

Feb-

11M

ay-1

1

-15%

0%

15%

30%

45%

60%

Aluminum Semis Production (LHS)YoY% (RHS)

-400

-300

-200

-100

0

100

Feb-

07M

ay-0

7Au

g-07

Nov

-07

Feb-

08M

ay-0

8Au

g-08

Nov

-08

Feb-

09M

ay-0

9Au

g-09

Nov

-09

Feb-

10M

ay-1

0Au

g-10

Nov

-10

Feb-

11M

ay-1

1


50

100

150

200

250

300

350

Feb-

07M

ay-0

7Au

g-07

Nov

-07

Feb-

08M

ay-0

8Au

g-08

Nov

-08

Feb-

09M

ay-0

9Au

g-09

Nov

-09

Feb-

10M

ay-1

0Au

g-10

Nov

-10

Feb-

11M

ay-1

1

-120%

-60%

0%

60%

120%

180%

240%

Imports (LHS) YoY% (RHS)


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13


Aluminium consumption by first and end use Japan + N America + W Europe aluminium consumption by first use Western world aluminium consumption by end use

Castings

12%

Wire and cable

4%FRP

44%

Die - Castings

17%

Ex trusions

23%

Transport

22%

Appliances

13%

Machinery

7%

Other

8%

Construction

21%

Packaging

17%

Electrical

12%

Source: HSBC, Brook Hunt Source: HSBC, Brook Hunt

N America aluminium consumption by end use China aluminium consumption by end use

Transport

36%

Electrical

8%Appliances

7%

Other

4%

Construction

12%

Machinery

7%

Packaging

26%

Appliances

15%

Packaging

4%

Other

4%

Machinery

6%Construction

38%

Transport

18%

Electrical

15%


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14


Demand Supply Market Balance/Pricing Demand growth should be a “normal” 4% from 2011 Expecting stronger supply in 2012 Prices remain high on the anticipation of good fundamentals

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

10%

2000

2002

2004

2006

2008

2010

2012

eGlo

bal C

oppe

r de

man

d g

row

th

Annual Dem and 4 y ear C AGR

-100

100

300

500

700

900

1,100

1,300

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Refi

ned

Cu

Gro

wth

Kt

Increm ental refined metal

0

2

4

6

8

10

12

0 300 600 900 1,200 1,500Total Ex change Stocks (million tonnes)

LME

Pric

es ('

000

$/t)

Recent Price v s. Inv entory

Source: Brook Hunt, HSBC estimates Source: Brook Hunt and HSBC estimates Source: LME, SFE and HSBC

Consensus sees a potential squeeze in copper in the coming months owing to the depletion of off-warrant stocks in China. While a surge in imports is possible, this is not the key point. We continue to argue that the presence of this off-warrant material proves, that historical levels of underlying demand have been systemically overestimated and this explains why 2011 is not as tight as widely expected at the start of the year.

We still believe high prices continue to shave 1-2 percentage points off global demand growth, with thrifting and substitution limiting growth.

The extreme of the demand cycle is now behind us – we see a trend rate of 4.0-4.5% as a reasonable assumption in a benign macro environment (this may prove optimistic if price-related substitution is continuing).

Physical market indicators are mixed. The Japanese tsunami has driven up premia (normally a bullish sign, but signs that Japanese producers were covering themselves) and driven up TCRCs (normally a bearish sign of excess mine supply, but probably a sign of repositioning of concentrates). We do not think it is yet likely, but it is not out of the question that the industry will face another smelting bottleneck in the next few years.

2012 will be a year of Brownfield growth, followed by a shift towards new projects. AAL’s Los Bronces expansion should add 250kt/y of Cu in con, with additional production from recovery at Escondida (150kt now BHP has committed to move in-pit crushing), plus the ramp-up at Esperanza (180kt/y) and the commissioning of Konkola Deeps (100kt/y). 2013 Greenfield projects include Oyu Tolgoi and Antapaccay, and our variable disruption allowance (up to 8% in 2013) reflects this mix.

Fundamentals still matter in metals markets, but they have to be heard above the noise of broader sentiment in all financial markets. Copper’s exchange inventories have actually tracked sideways right through the recent rally – destroying the historical price/inventory relationship.

Consensus is now very uniformly bullish, so the fundamental market will need to be demonstrably good or blatantly poor to shift copper away from being a general risk indicator correlated with the equity market.

On our revised estimates, 2012 is showing a small surplus (300kt, down from 480kt in our last review), arguably small enough to be dismissed by the market – as such, 2012 looks increasingly like 2011, and we raise our price forecasts from USD7,500/t to USD8,500 to reflect this.

Copper: Closer to balance than widely believed We see a copper deficit of 143kt in 2011, up from 70kt in our last review but still lower than consensus (500kt)

We believe the market will be tighter in H2 than in H1, and is tightening now

Fundamentals will not provide a clear indication for another 12 months, leaving prices at the mercy of risk sentiment

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15


Copper: HSBC supply and demand model (000t)


Raw Materials Supply Committed Concentrate 12,278 12,385 12,600 12,688 12,716 12,846 13,276 14,591 15,354 15,891 3,045 5.5% Committed SXEW 2,644 2,754 2,988 3,070 3,288 3,303 3,524 3,997 4,166 4,067 Total Committed 14,922 15,139 15,588 15,758 16,004 16,150 16,800 18,588 19,521 19,958 New Conc. Projects & Restarts 65 337 1,129 Disruption allowance percentage -2% -6% -8% -8% Disruption allowance -266 -879 -1,255 -1,362 Cu in concentrate Supply 12,278 12,385 12,600 12,688 12,716 12,846 13,011 13,776 14,436 15,658 2,812 5.1% New SXEW Projects & restarts 14 46 152 Disruption allowance -20 -100 -120 -250 SXEW Supply 2,644 2,754 2,988 3,070 3,288 3,303 3,504 3,911 4,092 3,968 665 4.7% Total Mined Copper 14,922 15,139 15,588 15,758 16,004 16,150 16,515 17,687 18,528 19,627 3,477 5.0% Refined Copper Supply Smelting Balances Potential Smelter production 13,177 13,567 14,047 14,196 14,081 14,450 14,880 15,800 16,628 16,299 Market Adjustments -150 -250 -350 1,500 Smelter Production Forecast 13,177 13,567 14,047 14,196 14,081 14,450 14,730 15,550 16,278 17,799 3,349 5.3% Refining Losses -198 -244 -253 -256 -253 -260 -268 -284 -299 -212 Scrap to Refining 1,102 1,343 1,447 1,491 1,331 1,453 1,511 1,575 1,646 1,641 non SXEW Refined Copper Production 14,082 14,666 15,241 15,431 15,158 15,643 15,973 16,841 17,625 19,229 Total Refined Copper Production 16,726 17,421 18,229 18,501 18,447 18,947 19,477 20,751 21,717 23,197 4,250 5.2% Market Balance, Stocks and Prices Refined Consumption Forecast 16,968 17,445 18,150 18,450 17,375 18,875 19,620 20,454 21,374 22,336 3,461 4.3% Growth Rate -0.36% 2.81% 4.04% 1.65% -5.83% 8.63% 3.95% 4.25% 4.50% 4.50% Refined Metal Balance -242 -25 79 51 1,072 72 -143 298 343 861 Total Exchange Stocks 90 223 237 386 688 568 425 722 1,065 1,926 Non-Exchange Stocks 385 369 321 331 1,101 1,101 1,101 1,101 1,101 1,101 Total Stocks 475 592 558 717 1,789 1,669 1,526 1,823 2,166 3,027 Exchange Stocks (Days of consumption) 2 5 5 8 14 11 8 13 18 31 Total Stocks (Days of consumption) 10 12 11 14 38 32 28 33 37 49 LME Cash Price (USD/t) 3,681 6,586 7,119 6,948 4,938 7,556 9,300 8,500 8,000 6,500 LME Cash Price (US¢/lb) 167 299 323 315 224 343 422 386 363 295

Source: Brook Hunt, HSBC estimates

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16


Copper balance and production World refined copper balance – annual World refined copper balance – quarterly World refined copper balance by region – 2010

-1,500

-1,000

-500

0

500

1,000

1,500

2002

2003

2004

2005

2006

2007

2008

2009

2010

kt

1,000

2,500

4,000

5,500

7,000

8,500

USD

/t

World balance LME cash price (RHS)

-600

-400

-200

0

200

400

600

800

Q1-

09

Q2-

09

Q3-

09Q

4-09

Q1-

10

Q2-

10

Q3-

10

Q4-

10Q

1-11

Q2-

11

kt

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

USD

/t

World balance LME cash price (RHS)

-3,000-2,000-1,000

01,0002,0003,0004,000

Latin

Am

eric

a

Oth

er E

blo

c

Oth

er W

W

Nor

th A

mer

ica

Oth

er A

sia

W E

urop

e

Chi

na

kt


World refined copper production – annual World refined copper production – quarterly World refined copper production by region – 2010

14,000

15,500

17,000

18,500

20,000

2002

2003

2004

2005

2006

2007

2008

2009

2010

kt

-3%

-1%

1%

3%

5%

World refined production Y-o-y (RHS)

3,600

3,850

4,100

4,350

4,600

4,850

5,100

5,350

Q1-

09

Q2-

09

Q3-

09

Q4-

09

Q1-

10

Q2-

10

Q3-

10

Q4-

10

Q1-

11

Q2-

11

kt

-15%

-10%

-5%

0%

5%

10%

15%

20%

World refined production Q-o-q (RHS)

China

24%

N America

7%

W Europe

10%

Other E

bloc

11%

Other Asia

19%

Other WW

7%

L America

22%


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17


Copper consumption

World refined copper consumption – annual World refined copper consumption – quarterly World refined copper consumption by region – Q2-11

14,000

15,500

17,000

18,500

20,000

2002

2003

2004

2005

2006

2007

2008

2009

2010

kt

-5%

0%

5%

10%

15%

World refined consumption Y-o-y (RHS)

3,500

4,000

4,500

5,000

5,500

Q1-

09

Q2-

09

Q3-

09

Q4-

09

Q1-

10

Q2-

10

Q3-

10

Q4-

10

Q1-

11

Q2-

11

kt

-15%

-5%

5%

15%

25%

World refined consumption Q-o-q (RHS)

Other Asia

24%

Other WW

2%

L America

5%

Other E

bloc

6%

China

37%

N America

10%

W Europe

16%


World refined copper consumption by region (kt)

________________________________________ Annual_________________________________________________________________________________________ Quarterly ________________________________________________ 2005 y-o-y 2006 y-o-y 2007 y-o-y 2008 y-o-y 2009 y-o-y 2010 y-o-y Q4-09 q-o-q Q1-10 q-o-q Q2-10 q-o-q Q3-10 q-o-q Q4-10 q-o-q Q1-11 q-o-q Q2-11 q-o-q

North America 2,549 -6% 2,408 -6% 2,395 -1% 2,216 -7% 1,774 -20% 1,891 7% 393 -13% 484 23% 514 6% 468 -9% 425 -9% 507 19% 539 6% Latin America 955 2% 895 -6% 863 -4% 891 3% 777 -13% 842 8% 236 39% 220 -7% 225 2% 185 -18% 212 15% 242 14% 249 3% W Europe 3,565 -6% 3,923 10% 3,661 -7% 3,419 -7% 2,756 -19% 3,085 12% 755 10% 744 -1% 814 9% 752 -8% 775 3% 780 1% 836 7% China 3,815 7% 3,967 4% 4,600 16% 5,100 11% 6,520 28% 7,433 14% 1,964 23% 1,551 -21% 2,055 32% 1,817 -12% 2,010 11% 1,444 -28% 2,004 39% Other Asia 4,580 -1% 4,676 2% 4,746 2% 4,669 -2% 4,265 -9% 4,748 11% 1,098 -3% 1,134 3% 1,242 10% 1,152 -7% 1,220 6% 1,191 -2% 1,251 5% Other E bloc 1,106 6% 1,210 9% 1,251 3% 1,184 -5% 746 -37% 931 25% 180 -6% 232 29% 236 2% 238 1% 225 -5% 308 37% 312 1% Other WW 390 4% 387 -1% 422 9% 475 13% 473 -1% 501 6% 112 -11% 124 11% 126 2% 131 4% 120 -8% 104 -13% 106 2%

World refined consumption

16,959 0% 17,465 3% 17,938 3% 17,955 0% 17,312 -4% 19,431 12% 4,737 9% 4,489 -5% 5,212 16% 4,743 -9% 4,987 5% 4,576 -8% 5,297 16%


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18


Copper stocks, prices, costs and premiums World refined copper stocks LME stock change LME forward spread (15-month less 3-month prices)

0

500

1,000

1,500

2,000

Jun-

01

Jun-

02

Jun-

03

Jun-

04

Jun-

05Ju

n-06

Jun-

07

Jun-

08

Jun-

09

Jun-

10

Jun-

11

kt

0

1

2

3

4

5

6

Weeks

World stock Stock consumption ratio (RHS)

-100

-50

0

50

100

150

Jul-0

1Ju

l-02

Jul-0

3

Jul-0

4Ju

l-05

Jul-0

6Ju

l-07

Jul-0

8Ju

l-09

Jul-1

0Ju

l-11

kt

0

2,000

4,000

6,000

8,000

10,000

USD

/t

LME Stock change LME cash (R.H.S)

-1,200-1,000

-800

-600

-400-200

0

200

Apr-0

1

Apr-0

2

Apr-0

3

Apr-0

4

Apr-0

5

Apr-0

6

Apr-0

7

Apr-0

8

Apr-0

9

Apr-1

0

Apr-1

1

USD

/t

LME 15mth less LME 3mth

Source: Brook Hunt, HSBC Source: Thomson Reuters Datastream, HSBC Source: Thomson Reuters Datastream, HSBC

Global copper mine cost curve (2011) (US¢/lb) Copper LME grade A premiums in China and Europe (USD/t) Contract and spot TC/ RC for standard grade copper (US¢/lb)

BH

P B

illito

n

An

glo

Amer

ican

Xstra

t a

C

odel

co

Fr

eepo

rt

Sout

hern

Cop

per

-50

0

50

100

150

200

250

300

0 5 10 15 20 25 30 35

Cumulative production (bn lbs)

C1 c

ash

cost

(Usc

/lb)

0

25

50

75

100

125

150

Jan-

10

Apr-1

0

Jul-1

0

Oct

-10

Jan-

11

Apr-1

1

Jul-1

1

China Europe

0

5

10

15

20

25

30

Jun-

08

Oct

-08

Feb-

09

Jun-

09

Oct

-09

Feb-

10

Jun-

10

Oct

-10

Feb-

11

Jun-

11

Spot TC/RCs Contract TC/RCs

Source: HSBC, Brook Hunt Source: HSBC, Bloomberg Source: HSBC, Brook Hunt

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19


China summary and speculative positions

Refined copper production (kt) Refined copper production and consumption growth Refined copper imports, exports and net trade (kt)

050

100150200250300350400450

Feb-

07M

ay-0

7Au

g-07

Nov

-07

Feb-

08M

ay-0

8Au

g-08

Nov

-08

Feb-

09M

ay-0

9Au

g-09

Nov

-09

Feb-

10M

ay-1

0Au

g-10

Nov

-10

Feb-

11M

ay-1

1-10%-5%0%5%10%15%20%25%30%35%

Refined Copper Production (LHS)YoY% (RHS)

-30%-20%-10%

0%10%20%30%40%50%60%70%

Feb-

07M

ay-0

7Au

g-07

Nov

-07

Feb-

08M

ay-0

8Au

g-08

Nov

-08

Feb-

09M

ay-0

9Au

g-09

Nov

-09

Feb-

10M

ay-1

0Au

g-10

Nov

-10

Feb-

11M

ay-1

1


-500

50100150200250300350400

Feb-

07M

ay-0

7Au

g-07

Nov

-07

Feb-

08M

ay-0

8Au

g-08

Nov

-08

Feb-

09M

ay-0

9Au

g-09

Nov

-09

Feb-

10M

ay-1

0Au

g-10

Nov

-10

Feb-

11M

ay-1

1



SHFE copper price and inventory (RMB/t, tonnes) Comex net long/(short) speculative position Comex gross long, gross short and net long/(short) speculative positions

010,00020,00030,00040,00050,00060,00070,00080,000

Jul-0

7O

ct-0

7Ja

n-08

Apr-0

8Ju

l-08

Oct

-08

Jan-

09Ap

r-09

Jul-0

9O

ct-0

9Ja

n-10

Apr-1

0Ju

l-10

Oct

-10

Jan-

11Ap

r-11

Jul-1

1

0255075100125150175200

Inv entory - Kt (RHS) Price - Rmb/t (LHS)

-400

-200

0

200

400

600

800

Jul-0

3

Jul-0

4

Jul-0

5

Jul-0

6

Jul-0

7

Jul-0

8

Jul-0

9

Jul-1

0

Jul-1

1

kt

1,500

3,000

4,500

6,000

7,500

9,000

10,500U

SD/t

Net LME cash copper price (RHS)

-600-400-200

0200400600800

1,000

Jul-0

3

Jul-0

4

Jul-0

5

Jul-0

6

Jul-0

7

Jul-0

8

Jul-0

9

Jul-1

0

Jul-1

1

(in 0

00's

)

Long Short Net

Source: HSBC, Bloomberg Source: CFTC Commitment of Traders Report, HSBC Source: CFTC Commitment of Traders Report, HSBC

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20


Copper consumption by first and end use Global copper consumption by first use Global copper consumption by end use

Wire rod

54%

Plate/Sheet/Strip

8%Other

5%

Tube

11% Rods/Bars /Sections

3%

Cu Alloys

19%

Wire rod

54%

Plate/Sheet/Strip

8%Other

5%

Tube

11% Rods/Bars /Sections

3%

Rods/Bars /Sections

3%

Cu Alloys

19%

Construction

33%

Machinery

13%Transport

13%

Appliances

8%

Electrical and

electronic

products

33%


China copper consumption by first use China copper consumption by end use

Wire rod

52% Cu Alloys

23%

Rods /Bars/Sections

4%

Plate/Sheet/Strip

6%

Tube

15%

Wire rod

52% Cu Alloys

23%

Rods /Bars/Sections

4%

Plate/Sheet/Strip

6%

Tube

15%

Appliances

18%

Construction

8%

Transport

10%Others

10%

Electronics

8%

Pow er

46%

Source: HSBC, Brook Hunt Source: HSBC, Antaike

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22


Supply Demand Market Balance/Pricing

Plenty of technical risk, but plenty of projects Robust demand in 2011 has kept inventories falling Ni prices may be anticipating a return to surplus

0

50

100

150

200

250

2010 2011e 2012e 2013e 2014e

Kt

Min

ed N

icke

l

Goro

Onca

Barro Alto

Ambatovy

Koniambo

Bonao

10

15

20

25

30

Jul-0

9

Oct

-09

Jan-

10

Apr

-10

Jul-1

0

Oct

-10

Jan-

11

Apr

-11

Jul-1

1

LME

pri

ce U

SD'0

00/t

60

90

120

150

180

LM

E stock (kt)

LM E s tock (RHS) Prices (USD'000/t)

-100

-50

0

50

100

150

2000

2002

2004

2006

2008

2010

2012

e

2014

e

kt

0

10

20

30

40

USD'000/t

Ni market balance Price RHS

Source: Brook Hunt, HSBC estimates Source: Brook Hunt, HSBC research Source: HSBC research

Nickel: Plenty of projects Nickel’s fundamentals currently look fine, but there are six major mine projects on the horizon

Even allowing for both delays and technical risk, some supply (Ni Pig Iron?) may need to be cut to balance the market

We continue to see a surplus in 2012 and beyond

There remains a risk of oversupply in the nickel industry because a number of new projects are coming into the commissioning phase of their development. Nickel projects always carry relatively high technical risk, although the initial ramp-up is because of relatively low-risk FeNi projects (we have separated our supply analysis between this technology and higher-risk High Pressure Acid Leach (HPAL)).

We have applied a disruption rate of 20% to new HPAL projects and 2% for the balance of world production. Even allowing for these very high disruption rates, we expect nickel production to grow 5-10% in the next three years. We expect Chinese nickel pig iron to grow 9.5% and add 90kt to supply (around one fifth of supply from new projects) – this could be hindered if Indonesia imposes a ban on ore exports, or could, alternatively, promote a local smelting industry.

Nickel demand is having a strong “normal” year following the restocking seen in 2010, and we expect demand to grow 7.6% this year. Q1 was particularly strong, with stainless melt-rates strong and stainless steel producers in Europe and the US able to achieve increases in base prices. There is some risk, given the cooling of the nickel price, buyers will be tempted to destock. Although with LME inventories yet to rise, many may be wary and wait until a surplus is confirmed.

Although Chinese NPI is a supply threat, stainless demand growth is the strongest in China, and we expect stainless to grow at an 11.4% CAGR from 2010 to 2015. Chinese domestic stainless producers have been increasing NPI as a feed source from 30-40% to as high as 50%, helping to lower costs.

Demand would need to grow 8-9% per year to hold the market in deficit in 2012/13 if the planned projects ramp up as expected.

Nickel prices have ignored some bullish supply news (notably delays at Goro and Ambatovy) and exchange inventory falls, and instead traded off with other metals on the expectation that some of the surge in production will actually succeed.

We trim our forecast 2012 surplus from 46kt to 39kt and cut our 2013 surplus from 117kt to 43kt, but now see the risk that these surpluses are exceeded, particularly if demand falters.

As some point in 2012-13, it is likely, in our view, that marginal cost is breached, and this is likely to see the nickel price average below USD20,000/t (we forecast USD18,500 in 2013) – spot prices may fall further to curb some production, although this should be transient. This is not a bad outcome for the industry if it prevents the huge potential surpluses if demand falters and production does not.

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23


Nickel: HSBC supply and demand model (000t)


Supply Key Projects/Swing Factors Tagaung 14 19 20 21 21 Onca Puma 10 20 35 47 47 Barro Alto 12 25 32 38 38 Koniambo 0 0 15 24 24 Total Fe Ni 36 64 102 130 130 Ambatovy 0 12 24 36 36 Goro 0 12 25 34 34 Voisey's Bay 0 0 0 10 10 Total Non Fe Ni 0 24 49 80 80 Key Projects Total 36 88 150 210 210 Chinese Fe/Ni Pig 3 38 74 77 96 162 221 231 245 252 90 11.7% World production, nickel 1,281 1,346 1,441 1,379 1,330 1,449 1,639 1,821 1,935 2,033 584 8.8% Less: Disruption allowance 0 0 0 0 0 0 -15 -28 -41 -54 World production, nickel 1,281 1,346 1,441 1,384 1,330 1,449 1,624 1,793 1,894 1,979 530 8.1% y-o-y change 1.6% 5.1% 7.1% -4.0% -3.9% 9.0% 11.7% 9.9% 6.2% 5.4% Demand Stainless production US 2,238 2,459 2,171 1,925 1,618 2,201 2,386 2,425 2,377 2,463 262 2.9% Europe 8,484 9,599 8,375 8,069 6,159 7,756 8,276 8,600 8,432 8,603 847 2.6% China 3,400 5,300 8,045 7,200 9,158 12,500 14,000 15,400 17,600 19,262 6,762 11.4% Rest of Western world 10,274 10,858 10,474 9,257 8,513 10,085 10,225 11,101 11,561 12,119 2,035 4.7% World stainless production 24,397 28,216 29,065 26,452 25,448 32,541 34,886 37,526 39,969 42,448 9,906 6.9% y-o-y change -0.2% 15.7% 3.0% -9.0% -3.8% 27.9% 7.2% 7.6% 6.5% 6.2% World ex China stainless production 20,997 22,916 21,020 19,252 16,290 20,041 20,886 22,126 22,369 23,185 3,144 3.7% y-o-y change -4.9% 9.1% -8.3% -8.4% -15.4% 23.0% 4.2% 5.9% 1.1% 3.6% Austenitic production 18,377 21,330 20,907 18,738 18,849 23,429 25,322 27,266 29,031 30,804 7,375 7.1% Austenitic ratio 75.3 75.6 71.9 70.8 74.1 72.0 72.6 72.7 72.6 72.6 Nickel content 8.4% 8.1% 7.6% 7.7% 7.4% 7.2% 7.2% 7.2% 7.1% 7.0% Nickel units 1,545 1,734 1,596 1,441 1,387 1,679 1,820 1,951 2,057 2,161 483 6.5% Nickel in stainless, y-o-y -4.1% 12.2% -8.0% -9.7% -3.7% 21.0% 8.4% 7.2% 5.5% 5.1% Primary ratio 52.4% 51.8% 54.0% 53.9% 59.7% 59.6% 60.1% 60.4% 60.7% 60.1% Primary nickel units 809 898 862 777 828 1001 1094 1178 1248 1298 297 6.7% Non stainless demand 454 486 508 512 500 519 540 576 602 633 114 5.1% y-o-y change 11.5% 7.2% 4.5% 0.8% -2.4% 3.8% 4.1% 6.7% 4.5% 5.1% Global consumption, nickel 1,263 1,385 1,370 1,289 1,328 1,520 1,635 1,754 1,850 1,931 411 6.2% y-o-y change -1.6% 9.6% -1.0% -5.9% 3.0% 14.4% 7.6% 7.3% 5.5% 4.4% Surplus/(deficit) 17 -39 71 94 2 -71 -10 39 43 48 Stocks & prices Total stocks 263 236 277 376 405 335 325 363 407 455 Stocks/consumption ratio (weeks) 10.8 8.9 10.5 15.1 15.9 11.5 10.3 10.8 11.4 12.2 Prices USD/t 14,748 24,219 37,230 21,293 14,845 21,848 24,500 22,000 18,500 20,000 Prices USD/lb 6.69 10.99 16.89 9.66 6.73 9.91 11.11 9.98 8.39 9.07

Source: HSBC estimates, CRU, Brook Hunt

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24


Nickel balance and production World nickel balance – annual World nickel balance – quarterly World nickel balance by region – 2010

-100

-60

-20

20

60

100

2002

2003

2004

2005

2006

2007

2008

2009

2010

kt

0

10,000

20,000

30,000

40,000

50,000

USD

/t


-50

-25

0

25

50

75

100

Q1-

09

Q2-

09

Q3-

09

Q4-

09

Q1-

10

Q2-

10

Q3-

10

Q4-

10

Q1-

11

Q2-

11

kt

9,000

12,500

16,000

19,500

23,000

26,500

30,000

USD

/t


-200

-100

0

100

200

300

CIS

Oce

ania

Amer

icas

Afric

a

Euro

pe

Chi

na

Oth

er A

sia

kt


World nickel production – annual World nickel production – quarterly World nickel production by region – 2010

1,000

1,100

1,200

1,300

1,400

1,500

2002

2003

2004

2005

2006

2007

2008

2009

2010

kt

-10%

-6%

-2%

2%

6%

10%

World production Y-o-y (RHS)

200

250

300

350

400

Q1-

09

Q2-

09

Q3-

09

Q4-

09

Q1-

10

Q2-

10

Q3-

10

Q4-

10

Q1-

11

Q2-

11

kt

-10%

-5%

0%

5%

10%

World production Q-o-q (RHS)

Americas

15%

Other Asia

14%

Africa

3%

China

22%

CIS

20%

Europe

15%

Oceania

11%


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25


Nickel consumption

World nickel consumption – annual World nickel consumption – quarterly World nickel consumption by region – Q2-11

1,000

1,100

1,200

1,300

1,400

1,500

1,600

2002

2003

2004

2005

2006

2007

2008

2009

2010

kt

-8%

-4%

0%

4%

8%

12%

16%

World consumption Y-o-y (RHS)

225

275

325

375

425

Q1-

09

Q2-

09

Q3-

09

Q4-

09

Q1-

10

Q2-

10

Q3-

10

Q4-

10

Q1-

11

Q2-

11

kt

-15%

-5%

5%

15%

25%

World consumption Q-o-q (RHS)

Americas

12%

CIS

2%

China

35%

Other Asia

24%

Africa

2%

Europe

25%


World nickel consumption by region (kt contained nickel)

____________________________________ Annual______________________________________ _________________________________________________ Quarterly ___________________________________________________ 2005 y-o-y 2006 y-o-y 2007 y-o-y 2008 y-o-y 2009 y-o-y 2010 y-o-y Q3-09 q-o-q Q4-09 q-o-q Q1-10 q-o-q Q2-10 q-o-q Q3-10 q-o-q Q4-10 q-o-q Q1-11 q-o-q Q2-11 q-o-q

Europe 406 -7% 442 9% 406 -8% 398 -2% 327 -18% 380 16% 83 2% 90 8% 97 8% 103 6% 84 -18% 96 14% 99 3% 102 3% Americas 167 1% 187 12% 185 -1% 181 -2% 163 -10% 185 13% 45 18% 43 -4% 48 12% 47 -2% 43 -9% 47 9% 50 6% 47 -6% CIS 29 6% 32 8% 29 -7% 30 2% 28 -6% 25 -11% 7 0% 8 14% 7 -13% 6 -14% 6 0% 6 0% 7 17% 7 0% China 195 21% 247 27% 309 25% 294 -5% 423 44% 471 11% 111 6% 97 -13% 116 20% 122 5% 114 -7% 119 4% 140 18% 143 2% Other Asia 426 -3% 444 4% 402 -9% 382 -5% 350 -8% 389 11% 102 16% 102 0% 97 -5% 100 3% 94 -6% 98 4% 96 -2% 97 1% Africa 32 -29% 41 27% 38 -9% 29 -22% 30 3% 28 -7% 10 11% 9 -10% 7 -22% 7 0% 6 -14% 8 33% 7 -13% 7 0% Oceania 3 0% 3 4% 3 4% 3 3% 3 -3% 4 33% 1 0% 1 0% 1 0% 1 0% 1 0% 1 0% 1 0% 1 0%

World consumption 1,258 -2% 1,396 11% 1,372 -2% 1,317 -4% 1,324 1% 1,482 12% 359 9% 350 -3% 373 7% 386 3% 348 -10% 375 8% 400 7% 404 1%


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26


Nickel stocks, prices, costs and premiums

World nickel stocks Change in LME stocks LME forward spread (15-month less 3-month prices)

0

50

100

150

200

250

300

350

Jun-

01

Jun-

02

Jun-

03

Jun-

04

Jun-

05

Jun-

06

Jun-

07

Jun-

08

Jun-

09

Jun-

10

Jun-

11

kt

4

8

12

16

20

24

Weeks

World stock Stock consumption ratio (RHS)

-20

-10

0

10

20

Jul-0

1

Jul-0

2

Jul-0

3

Jul-0

4Ju

l-05

Jul-0

6

Jul-0

7

Jul-0

8

Jul-0

9

Jul-1

0Ju

l-11

kt

0

15,000

30,000

45,000

60,000

USD

/t


-10,000

-8,000

-6,000

-4,000

-2,000

0

2,000

Jul-0

1

Jul-0

2

Jul-0

3

Jul-0

4

Jul-0

5

Jul-0

6

Jul-0

7

Jul-0

8

Jul-0

9

Jul-1

0

Jul-1

1

USD

/t

LME 15mth less 3mth

Source: CRU, HSBC Source: Thomson Reuters Datastream, HSBC Source: Thomson Reuters Datastream, HSBC

Global nickel mining cost curve (2011) (USD/lb) Nickel merchant premiums China refined nickel trade (kt)

An

glo

BHP

Billit

o n

Val

e

Xs

trata

Jinc

huan

RAO

Nor

ilsk

-6

-3

0

3

6

9

12

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5


C1 c

ash

cost

(USD

/lb)

0

20

40

60

80

100

120

Jun-

05

Dec

-05

Jun-

06

Dec

-06

Jun-

07

Dec

-07

Jun-

08

Dec

-08

Jun-

09

Dec

-09

Jun-

10

Dec

-10

Jun-

11

USc

/lb

R'dam US Midw est Japan cif

-10

0

10

20

30

40

50

Feb-

07M

ay-0

7Au

g-07

Nov

-07

Feb-

08M

ay-0

8Au

g-08

Nov

-08

Feb-

09M

ay-0

9Au

g-09

Nov

-09

Feb-

10M

ay-1

0Au

g-10

Nov

-10

Feb-

11M

ay-1

1


Source: HSBC, Brook Hunt Source: CRU, HSBC Source: HSBC, CEIC

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27


Nickel consumption by first and end use Global Nickel consumption by first use Global Nickel consumption by end use

Stainless steel

66%

Non-Ferrous

Alloy s

12%

Alloy Steel

5%

Plating

7%

Other

10%

Others

6%

Metal goods

21%

Construction

12%

Engineering

22%

Appliances

14%

Transport

16%

Tubular

9%

Source: HSBC, Brook Hunt Source: HSBC, INSG

China Nickel consumption by first use China Nickel consumption by end use

Stainless steel

76%

Alloy Steel

2%

Plating

10%

Other

7%

Non-Ferrous

Alloy s

5%

Transport

11%

Appliances

14%

Engineering

16%Tubular

6%

Metal goods

32%

Construction

21%

Source: HSBC, Brook Hunt Source: HSBC, INSG

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28


Stainless steel production

World stainless steel production – annual World stainless steel production – quarterly World stainless steel production by region – Q2-11

12,50015,00017,50020,00022,500

25,00027,50030,00032,500

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

kt

-10%-5%0%5%10%

15%20%25%30%

World Y-o-y (RHS)

4,000

5,000

6,000

7,000

8,000

9,000

Q1-

09

Q2-

09

Q3-

09

Q4-

09

Q1-

10

Q2-

10

Q3-

10

Q4-

10

Q1-

11

Q2-

11

kt

-25%

-15%

-5%

5%

15%

25%

World Q-o-q (RHS)

0

1,000

2,000

3,000

4,000

Chi

na

Euro

pe

O A

sia

Japa

n

Amer

icas

Indi

a

RoW

kt

Source: CRU, HSBC Source: CRU, HSBC Source: CRU, HSBC

World stainless steel production by region (kt)

_____________________________________________ Annual ______________________________________________ ____________________________________________ Quarterly ______________________________________________ 2004 y-o-y 2005 y-o-y 2006 y-o-y 2007 y-o-y 2008 y-o-y 2009 y-o-y 2010 y-o-y Q4-09 q-o-q Q1-10 q-o-q Q2-10 q-o-q Q3-10 q-o-q Q4-10 q-o-q Q1-11 q-o-q Q2-11 q-o-q

N America 2,382 2% 2,231 -6% 2,498 12% 2,171 -13% 1925 -11% 1618 -16% 2261 40% 378 -30% 621 64% 566 -9% 524 -7% 550 5% 666 21% 600 -10% Europe 8,795 4% 8,304 -6% 9,328 12% 8,129 -13% 7866 -3% 6155 -22% 7873 28% 1,709 8% 2,033 19% 2,196 8% 1,656 -25% 1,988 20% 2,122 7% 2,220 5% Japan 4,194 2% 3,983 -5% 4,072 2% 3,882 -5% 3566 -8% 2607 -27% 3385 30% 837 3% 825 -1% 891 8% 849 -5% 820 -3% 857 5% 800 -7% China 2,350 32% 3,572 52% 5,300 48% 7,206 36% 6943 -4% 9158 32% 11376 24% 2,298 -10% 2,768 20% 3,038 10% 2,746 -10% 2,824 3% 3,350 19% 3,470 4% India 1,518 21% 1,753 16% 1,993 14% 2,044 3% 1980 -3% 1640 -17% 1760 7% 509 1% 440 -14% 450 2% 420 -7% 450 7% 560 24% 600 7% Other Asia 3,958 13% 3,805 -4% 4,040 6% 3,492 -14% 3040 -13% 3000 -1% 3541 18% 886 -2% 902 2% 899 0% 835 -7% 905 8% 818 -10% 875 7% RoW 1,432 4% 1,212 -15% 1,485 23% 1,351 -9% 1195 -12% 926 -23% 955 3% 278 -20% 256 -8% 242 -5% 210 -13% 247 18% 259 5% 264 2%

World 24,629 8% 24,861 1% 28,717 16% 28,275 -2% 26,515 -6% 25,104 -5% 31,151 24% 6,893 -5% 7,845 14% 8,282 6% 7,240 -13% 7,784 8% 8,632 11% 8,829 2%

Source: CRU, HSBC

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29


Stainless steel prices and demand by segment Stainless steel production versus global industrial production Stainless steel prices (cold-rolled stainless steel sheet grade 304, 2MM)

-40%

-20%

0%

20%

40%

60%

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

-18%

-12%

-6%

0%

6%

12%

Stainless production y -o-y Global IP y -o-y (RHS)

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Jun-

02

Jun-

03

Jun-

04

Jun-

05

Jun-

06

Jun-

07

Jun-

08

Jun-

09

Jun-

10

Jun-

11

USD

/t

Germany US China

Source: Thomson Reuters Datastream, CRU, HSBC Source: CRU, HSBC

Stainless steel alloy surcharge (Germany cold-rolled stainless steel sheet grade 304, 2MM) versus LME nickel price

Global stainless steel demand by segment

500

1,500

2,500

3,500

4,500

5,500

Jun-

06

Dec

-06

Jun-

07

Dec

-07

Jun-

08

Dec

-08

Jun-

09

Dec

-09

Jun-

10

Dec

-10

Jun-

11

USD

/t

5,000

15,000

25,000

35,000

45,000

55,000

USD

/t

Alloy surcharge Nickel price (RHS)

Others

8%

Process industry

26%

Transport

14%Construction

13%

Utensils and

appliances

39%

Source: Thomson Reuters Datastream, CRU, HSBC Source: HSBC, Brook Hunt

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30



Zinc cost curve (USD/t) Global zinc demand versus supply (kt) Copper/Zinc price correlation

-500

0

500

1,000

1,500

2,000

2,500

3,000

0 25 50 75 100

Cumm ulative Prod. by M ine %

$/t

zinc

min

e C1

cos

ts

9,000

10,000

11,000

12,000

13,000

14,000

2005

2006

2007

2008

2009

2010

e

2011

e

2012

e

2013

e

G lobal demand Global supply

R2= 79%

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

2,800

2,000 4,000 6,000 8,000 10,000 12,000Copper price (USD/t)

Zinc

pric

e (U

SD/t) R2= 79%

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

2,800

2,000 4,000 6,000 8,000 10,000 12,000Copper price (USD/t)

Zinc

pric

e (U

SD/t)

Source: Brook Hunt, HSBC estimates & calculations Source: Brook Hunt, LZSG, HSBC estimates Source: Thomson Reuters Datastream

Mine production is running 4-5% ahead of 2010 as high by-product credits keep costs low and the high zinc price allows virtually all mines to operate profitably. The concentrate balance, on the other hand, remains tight and spot TCs remain relatively low, indicating that a substantial smelting overhang continues to exist.

The zinc cost curve shown above misses quite a bit of capacity in China, and we suspect that marginal cash costs there are closer to cUSD2,000/t than the cUSD1,400/t implied above. This should lend additional cost support compared with our previous assumptions. We leave our 2011e mine production unchanged at 12.5Mt and 2012e at 13.1Mt

HSBC economists have again cut global GDP forecasts to 3.0% in 2011e (-200bp) and 3.4% in 2012e (-100bp). Bearing in mind that 56% of zinc is consumed in steel galvanising and steel itself is highly correlated with global GDP, this translates into slightly lower consumption forecasts globally.

We reduce our zinc consumption forecasts for all regions except Europe, where buoyant export-driven automotive and machinery production push zinc consumption upwards. We reduced our 2011e global consumption forecast by 52kt to 12.2Mt and 2012e by 78kt to 12.8Mt.

Global exchange inventory rose by another 165kt during Q2 and a total 252kt since the start of the year. This marked a new all-time high and inventories have now risen by 42% y-o-y.

Despite the skyrocketing global exchange inventory – the most obvious sign of oversupply – the zinc price has held up remarkably well. No decoupling from the much better balanced copper market has occurred, and it appears as if the market is looking through the near-term oversupply and prices are reflecting tightness post 2013e already. Although we continue to see risks for the zinc price, it appears to be better protected on the downside than we assumed so far. We have therefore raised our average 2011e forecast to USD2,241/t, up from USD2,179/t. Given the high oversupply, we keep this roughly flat in 2012e at 2,276/t (down from USD2,312/t before) and given the strong production incentive, we now move 2013 to a balanced market from a deficit before.

Zinc: Ample, but copper price linked Exchange inventory has marked a new all-time high and the market remains in substantial surplus

Higher marginal costs and copper price link might limit downside

We continue to see good medium-term prospects for zinc and expect incentive pricing to return in late 2012

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Zinc: HSBC supply and demand model (000t)


Supply World mine production 9,916 10,306 10,923 11,482 11,244 12,122 12,468 13,057 13,299 13,456 1,334 2.6% y-o-y 3.6% 3.9% 6.0% 5.1% -2.1% 7.8% 2.9% 4.7% 1.9% 1.2% World ex China 7,326 7,373 7,766 8,393 8,068 8,422 8,656 9,129 9,333 9,455 1,033 2.9% y-o-y 1.2% 0.6% 5.3% 8.1% -3.9% 4.4% 2.8% 5.5% 2.2% 1.3% China 2,590 2,933 3,157 3,089 3,176 3,700 3,812 3,929 3,966 4,001 301 2.0% y-o-y 11.3% 13.2% 7.6% -2.2% 2.8% 16.5% 3.0% 3.1% 1.0% 0.9% Smelter capacity 12,265 12,878 13,288 13,796 14,435 15,466 15,466 16,031 16,152 16,267 802 1.3% Utilisation 82.3% 81.3% 84.0% 83.3% 77.5% 79.9% 81.6% 82.4% 83.3% 83.6% Total world smelter production 10,095 10,475 11,162 11,489 11,187 12,358 12,623 13,202 13,459 13,606 1,247 2.4% y-o-y -0.4% 3.8% 6.6% 2.9% -2.6% 10.5% 2.1% 4.6% 1.9% 1.1% of which is from Secondary/other 748 791 868 895 708 792 885 918 944 949 Direct chemical use 4 4 4 4 4 4 4 4 4 4 Processing loss 558 588 618 633 608 723 737 775 790 802 Concentrate balance 15 38 15 259 161 -164 -4 2 -2 1 US stockpile sales 33 25 20 0 0 0 0 0 0 0 Total Supply 10,128 10,500 11,182 11,489 11,187 12,358 12,623 13,202 13,459 13,606 1,247 2.4% y-o-y -0.5% 3.7% 6.5% 2.7% -2.6% 10.5% 2.1% 4.6% 1.9% 1.1% Demand North America 1,365 1,409 1,276 1,131 1,021 1,074 1,103 1,120 1,134 1,147 73 1.7% South & Central America 623 647 674 671 535 614 632 665 694 724 110 4.2% Europe 2,434 2,545 2,568 2,355 1,767 2,100 2,204 2,227 2,255 2,285 185 2.1% CIS 280 295 306 265 189 197 203 207 211 214 17 2.1% Asia ex China 2,610 2,631 2,598 2,515 2,155 2,600 2,686 2,810 2,920 3,034 433 3.9% China 2,853 3,166 3,531 3,795 4,100 4,705 5,009 5,374 5,756 6,155 1,450 6.9% Oceania 262 273 285 284 217 223 231 239 244 249 26 2.8% Africa 185 193 198 180 153 165 164 169 174 179 14 2.1% Total world consumption 10,611 11,159 11,436 11,198 10,138 11,679 12,232 12,812 13,387 13,987 2,308 4.6% y-o-y 3.1% 5.2% 2.5% -2.1% -9.5% 15.2% 4.7% 4.7% 4.5% 4.5% World ex China consumption 7,759 7,993 7,906 7,402 6,038 6,974 7,224 7,438 7,632 7,832 858 2.9% y-o-y -1.4% 3.0% -1.1% -6.4% -18.4% 15.5% 3.6% 3.0% 2.6% 2.6% China consumption 2,853 3,166 3,531 3,795 4,100 4,705 5,009 5,374 5,756 6,155 1,450 6.9% y-o-y 18.0% 11.0% 11.5% 7.5% 8.0% 14.8% 6.5% 7.3% 7.1% 6.9% Total world balance -483 -659 -254 291 1,048 680 391 390 72 -381 Prices Zinc USD/t 1,383 3,275 3,249 1,875 1,659 2,162 2,241 2,276 2,664 3,463 Zinc US¢/lb 63 149 147 85 75 98 102 103 121 157 Zinc price change y-o-y 32% 137% -1% -42% -12% 30% 4% 2% 17% 30% Zinc TC USD/t (realised) 187 390 320 304 255 258 219 244 199 200 Stock Total Refined stock 2,066 1,407 1,152 1,443 2,492 3,171 3,562 3,952 4,024 3,643 Stock/consumption (days) 71 46 37 47 90 99 106 113 110 95

Source: Brook Hunt, HSBC estimates & calculations

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32


Zinc production, consumption and balance

World zinc balance – annual World zinc production – annual World zinc consumption – annual

-800

-400

0

400

800

1,200

2003

2004

2005

2006

2007

2008

2009

2010

kt

500

1,100

1,700

2,300

2,900

3,500

USD

/t


8,000

9,000

10,000

11,000

12,000

13,000

2003

2004

2005

2006

2007

2008

2009

2010

kt

-4%

-1%

2%

5%

8%11%

14%17%

World production Y-o-y (RHS)

7,000

8,000

9,000

10,000

11,000

12,000

2003

2004

2005

2006

2007

2008

2009

2010

kt

-10%

-5%

0%

5%

10%

15%

World consumption Y-o-y (RHS)


World zinc balance – quarterly World zinc production – quarterly World zinc consumption – quarterly

0

100

200

300

400

500

Q1-

09

Q2-

09

Q3-

09

Q4-

09Q

1-10

Q2-

10

Q3-

10

Q4-

10

Q1-

11Q

2-11

kt

1,000

1,300

1,600

1,900

2,200

2,500

USD

/t


1,000

1,500

2,000

2,500

3,000

3,500

Q1-

09

Q2-

09

Q3-

09

Q4-

09

Q1-

10

Q2-

10

Q3-

10

Q4-

10

Q1-

11

Q2-

11

kt

-15%

-10%

-5%

0%

5%

10%

World production Q-o-q (RHS)

2,000

2,300

2,600

2,900

3,200

Q1-

09

Q2-

09

Q3-

09

Q4-

09

Q1-

10

Q2-

10

Q3-

10

Q4-

10

Q1-

11

Q2-

11

kt

-20%

-10%

0%

10%

20%

World consumption Q-o-q (RHS)


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33


Zinc stocks, prices, costs and premiums World zinc stocks LME stock change LME forward spread (15-month less 3-month prices)

0

500

1,000

1,500

2,000

Jun-

01

Jun-

02

Jun-

03

Jun-

04

Jun-

05

Jun-

06

Jun-

07

Jun-

08

Jun-

09

Jun-

10

Jun-

11

kt

2

3

4

56

7

8

9

Weeks

World stocks (LHS) Stock w eeks (RHS)

-50

-20

10

40

70

100

Jul-0

1

Jul-0

2

Jul-0

3

Jul-0

4

Jul-0

5

Jul-0

6

Jul-0

7

Jul-0

8

Jul-0

9

Jul-1

0

Jul-1

1

kt

0

1,000

2,000

3,000

4,000

5,000

USD

/t


-800

-600

-400

-200

0

200

Jul-0

2

Jul-0

3

Jul-0

4

Jul-0

5

Jul-0

6

Jul-0

7

Jul-0

8

Jul-0

9

Jul-1

0

Jul-1

1

USD

/t

LME 15mth less 3mth

Source: Thomson Reuters Datastream, Brook Hunt, HSBC Source: Thomson Reuters Datastream, HSBC Source: Thomson Reuters Datastream, HSBC

Global zinc mine cost curve (2011) (USD/lb) Zinc premiums (USD/t) Zinc Concentrate TC 50% CIF China (USD/t)

Min

met

als

X

stra

ta

Veda

nta

G

lenco

re

Teck

Hin

dust

an Z

inc

-20

0

20

40

60

80

100

120

0 5 10 15 20


C1 c

ash

cost

(USc

/lb)

0

100

200

300

400

Jun-

00

Jun-

01

Jun-

02

Jun-

03

Jun-

04

Jun-

05

Jun-

06

Jun-

07

Jun-

08

Jun-

09

Jun-

10

Jun-

11

USD

/t

Europe US Mid-West

50

100

150

200

250

300

350

Jun-

07

Jun-

08

Jun-

09

Jun-

10

Jun-

11

USD

/t

Source: HSBC, Brook Hunt Source: HSBC, Brook Hunt Source: HSBC, Datastream

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34


China summary China mined zinc production (kt) China zinc concentrate imports (kt) China refined zinc production (kt)

100

150

200

250

300

350

400

Feb-

07M

ay-0

7Au

g-07

Nov

-07

Feb-

08M

ay-0

8Au

g-08

Nov

-08

Feb-

09M

ay-0

9Au

g-09

Nov

-09

Feb-

10M

ay-1

0Au

g-10

Nov

-10

Feb-

11M

ay-1

1-40%

-15%

10%

35%

60%

85%

110%

Production (LHS) YoY% (RHS)

0

100

200

300

400

500

May

-08

Aug-

08N

ov-0

8

Feb-

09

May

-09

Aug-

09

Nov

-09

Feb-

10

May

-10

Aug-

10

Nov

-10

Feb-

11

May

-11

-100%

-50%

0%

50%

100%

150%

200%

Imports YoY% (RHS)

100150200250300350400450500

Feb-

07M

ay-0

7Au

g-07

Nov

-07

Feb-

08M

ay-0

8Au

g-08

Nov

-08

Feb-

09M

ay-0

9Au

g-09

Nov

-09

Feb-

10M

ay-1

0Au

g-10

Nov

-10

Feb-

11M

ay-1

1

-20%-10%0%10%20%30%40%50%60%

Production (LHS) YoY% (RHS)


China refined zinc trade (kt) China zinc production and consumption (y-o-y, %) SHFE zinc price and inventory

-90-60-30

0306090

120150

Feb-

07M

ay-0

7Au

g-07

Nov

-07

Feb-

08M

ay-0

8Au

g-08

Nov

-08

Feb-

09M

ay-0

9Au

g-09

Nov

-09

Feb-

10M

ay-1

0Au

g-10

Nov

-10

Feb-

11M

ay-1

1


-20%

0%

20%

40%

60%

Feb-

07M

ay-0

7Au

g-07

Nov

-07

Feb-

08M

ay-0

8Au

g-08

Nov

-08

Feb-

09M

ay-0

9Au

g-09

Nov

-09

Feb-

10M

ay-1

0Au

g-10

Nov

-10

Feb-

11M

ay-1

1


5,000

10,000

15,000

20,000

25,000

30,000

Jul-0

7O

ct-0

7Ja

n-08

Apr-0

8Ju

l-08

Oct

-08

Jan-

09Ap

r-09

Jul-0

9O

ct-0

9Ja

n-10

Apr-1

0Ju

l-10

Oct

-10

Jan-

11Ap

r-11

Jul-1

1

060

120180

240300

360420

Inv entory - Kt (RHS) Price - Rmb/t (LHS)

Source: HSBC, CEIC Source: HSBC, CEIC Source: HSBC, Bloomberg

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35


Zinc consumption by first and end use Global zinc consumption by first use Global zinc consumption by end use

Galv anizing

56%

Ox ides

8%

Others

4%

Brass

11% Rolled &Ex truded

8%

Die-casting

13%

Construction

51%Appliances

6%

Infrastructure

16%

Industrial

Machinery

7%

Transport

20%


China zinc consumption by first use China zinc consumption by end use

Galv anizing

53%

Die-casting

13%

Rolled &Ex truded

11%

Brass

10%

Others

3%

Ox ides

10%

Construction &infra

55%

Appliances

10%

Consumer

products

20%

Transport

10%

Industrial

Machinery

5%


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36



South Africa electricity generation Global stainless steel production by region Ferrochrome market balance, inventory and price

16,000

17,500

19,000

20,500

22,000

23,500

Q1-

01

Q1-

02

Q1-

03

Q1-

04

Q1-

05

Q1-

06

Q1-

07

Q1-

08

Q1-

09

Q1-

10

Q1-

11

Gig

awat

t Hou

rs

0

10

20

30

40

50

08 09 10 11e 12e 13e 14e 15e

-25%

-15%

-5%

5%

15%

25%

USA EuropeChina Rest of WorldProduction Growth

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

08 09 10 11e 12e 13e 14e 15e0.0

0.3

0.6

0.9

1.2

1.5

1.8

2.1

Balance World Stocks Price

Source: Thomson Financial Datastream Source: Brook Hunt, CRU, HSBC estimates and analysis Source: Brook Hunt, CRU, HSBC estimates and analysis

Despite short-term weakness, we remain positive on ferrochrome prices and believe supply-side risks will provide support in the medium term.

South African power constraints will remain a drag on ferrochrome supply growth for at least the next three to five years, in our view, before projects that will increase the country’s total electrical system capacity start to ramp up meaningfully – enabling ferrochrome producers to lift utilisation rates.

In contrast, we expect to see incremental capacity and new projects coming on-stream in Kazakhstan, Russia, Finland, China and India, but only from 2013 onwards.

We forecast a 4.3% increase in 2011 production (revised down from 6.7% previously; but note 2010 has been restated), from a strong 2010 base, which saw output return to above-2007 levels. Over the next five years, we model supply CAGR of 6.1%.

Volume growth from steel mills underpins ferrochrome demand. While stainless steel production had a promising start earlier in the year, it slowed markedly in the second quarter as steelmakers cut production and destocked – with the effects rippling through to ferrochrome demand.

We lower our demand estimates slightly to reflect poorer-than-expected stainless growth in Q2-11 – we now forecast 6.7% ferrochrome demand growth in 2011, versus the 7.3% growth previously forecast.

Overall, however, our demand growth forecasts remain positive across all major producing regions for 2011: +8% US, +7% EU, +12% China.

Beyond 2011, we believe demand will remain strong into 2012 but slow down slightly thereafter. Over the next five years, we model demand CAGR of 6.6%.

Contract prices for Q3-11 settled at USD1.20/lb (US¢15 lower than Q2-11) – significantly below both our and consensus expectations for the quarter. We see four primary reasons for this:

(i) Weakness in the nickel price has led to reduced stainless steel inventories; (ii) Q3 is a seasonally weak quarter, contributing to lower production and inventories; (iii) credit tightening in China has led stainless steel and ferrochrome producers to reduce inventories across the whole product chain; and (iv) uncertainty about the sustainability of the global economic recovery has inhibited buying.

Owing to our revised market forecasts, reflecting current weakness, coupled with our (unchanged) views on cost pressures and project delays, we revise down our 2011 and 2012 ferrochrome price forecasts to USD1.30/lb and USD1.40/lb, respectively.

In the medium term, escalating input costs will provide a price floor, longer term we expect a gradual decline in prices.

Ferrochrome: Temporarily loses its shine Weak stainless production has put downward pressure on prices, despite substantial cutbacks in ferrochrome output

We maintain a bullish outlook in the medium term, but trim our 2011e price to USD1.30/lb to reflect a poor Q3

Rising cost pressures and supply-side constraints will provide a price floor in the medium to longer term

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Ferrochrome: HSBC supply and demand model

000 tonnes 2006 2007 2008 2009 2010 2011e 2012e 2013e 2014e 2015e Change 2010-15e CAGR 2010-15e

Stainless production

USA 2,459 2,171 1,925 1,618 2,201 2,386 2,425 2,377 2,463 2,635 435 3.7% Europe 9,599 8,375 8,069 6,159 7,756 8,276 8,600 8,432 8,603 8,724 968 2.4% China 5,300 8,045 7,200 9,158 12,500 14,000 15,400 17,600 19,262 21,467 8,967 11.4% Rest of World 10,858 10,474 9,257 8,513 10,085 10,225 11,101 11,561 12,119 12,783 2,698 4.9% World stainless production 28,216 29,065 26,452 25,448 32,541 34,886 37,526 39,969 42,448 45,609 13,068 7.0% y-o-y change 15.7% 3.0% -9.0% -3.8% 27.9% 7.2% 7.6% 6.5% 6.2% 7.4% World ex China 22,916 21,020 19,252 16,290 20,041 20,886 22,126 22,369 23,185 24,142 4,101 3.8% y-o-y change 9.1% -8.3% -8.4% -15.4% 23.0% 4.2% 5.9% 1.1% 3.6% 4.1% Austenitic production 21,330 20,907 18,738 18,849 23,429 25,322 27,266 29,031 30,804 32,907 9,478 7.0% Austenitic ratio 76 72 71 74 72 73 73 73 73 72 Ferritic production 6,887 8,158 7,713 6,599 9,112 9,565 10,259 10,938 11,643 12,702 3,590 6.9% Chrome content Primary stainless demand 5,634 6,187 5,633 5,623 7,117 7,592 8,157 8,711 9,189 9,806 2,690 6.6% Ferritic (22% Cr) 2,339 2,818 2,620 2,267 2,951 3,086 3,299 3,504 3,716 4,040 1,089 6.5% Austenitic (17% Cr) 3,295 3,369 3,013 3,356 4,166 4,506 4,858 5,206 5,473 5,767 1,601 6.7% y-o-y change 14.4% 9.8% -9.0% -0.2% 26.6% 6.7% 7.4% 6.8% 5.5% 6.7% Non-stainless demand 1,134 1,411 1,117 1,219 1,281 1,367 1,468 1,568 1,654 1,765 484 6.6% Total demand 6,768 7,598 6,750 6,842 8,398 8,959 9,625 10,278 10,843 11,571 3,174 6.6% y-o-y change 14.9% 12.3% -11.2% 1.4% 22.7% 6.7% 7.4% 6.8% 5.5% 6.7% HC FeCr supply South Africa 2,791 3,488 3,226 2,317 3,596 3,617 3,921 4,038 4,167 4,428 1,202 4.6% Kazakhstan 899 960 921 862 1,019 1,165 1,210 1,266 1,314 1,335 414 5.5% China 995 1,297 1,510 1,476 2,056 2,205 2,396 2,589 2,818 2,953 1,444 10.1% India 651 820 750 771 885 969 1,075 1,115 1,133 1,142 392 6.2% Other 1,061 1,036 1,001 562 934 1,083 1,179 1,328 1,575 1,581 579 6.7% World 6,447 7,674 7,465 6,025 8,575 8,941 9,669 10,212 10,870 11,294 3,828 6.1% y-o-y change 7.6% 19.0% -2.7% -19.3% 42.3% 4.3% 8.1% 5.6% 6.4% 3.9% Surplus/(deficit) -321 76 716 -817 177 -17 44 -66 27 -278 Inventories / prices World stocks 868 944 1,659 841 1,018 1,001 1,045 978 1,006 728 Weeks supply 7 6 13 6 6 6 6 5 5 3 Prices USD/t 1,578 1,984 3,875 1,874 2,739 2,855 3,090 3,137 2,976 2,816 Prices USD/lb 0.72 0.90 1.76 0.85 1.24 1.30 1.40 1.42 1.35 1.28

Source: Brook Hunt, CRU, Merafe, ENRC, HSBC estimates and analysis

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38


Ferrochrome balance, consumption and production World ferrochrome production – quarterly World ferrochrome consumption – quarterly World ferrochrome balance – quarterly

0

500

1,000

1,500

2,000

2,500

Q1-

09Q

2-09

Q3-

09Q

4-09

Q1-

10Q

2-10

Q3-

10Q

4-10

Q1-

11Q

2-11

000

tonn

es

-50%

-25%

0%

25%

50%

75%

QoQ

Cha

nge

Lev el Grow th

0

500

1,000

1,500

2,000

2,500

Q1-

09Q

2-09

Q3-

09Q

4-09

Q1-

10Q

2-10

Q3-

10Q

4-10

Q1-

11Q

2-11

000

tonn

es

-40%

-20%

0%

20%

40%

QoQ

Cha

nge

Lev el Grow th

-500

-400

-300

-200

-100

0

100

200

Q1-

09

Q2-

09

Q3-

09

Q4-

09

Q1-

10

Q2-

10

Q3-

10

Q4-

10

Q1-

11

Q2-

11

000

tonn

es

60

70

80

90

100

110

120

130

US

¢/lb

Balance Europe Price


World ferrochrome production – annual World ferrochrome consumption – annual World ferrochrome balance – annual

0

2,000

4,000

6,000

8,000

10,000

2002

2003

2004

2005

2006

2007

2008

2009

2010

000

tonn

es

-30%

-15%

0%

15%

30%

45%

YoY

Cha

nge

Lev el Grow th

0

2,000

4,000

6,000

8,000

10,000

2002

2003

2004

2005

2006

2007

2008

2009

2010

000

tonn

es

-20%

-10%

0%

10%

20%

30%

YoY

Cha

nge

Lev el Grow th

-1,000

-500

0

500

1,000

2002

2003

2004

2005

2006

2007

2008

2009

2010

000

tonn

es

25

75

125

175

225

US

¢/lb

Balance Europe Price


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Regional production and consumption World ferrochrome production by region

_______________________________________Annual ___________________________________ _________________________________________________ Quarterly _________________________________________________ 000 tonnes 2005 2006 2007 2008 2009 2010 Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 Q4-10 Q1-11 Q2-11

South Africa 2,642 2,791 3,488 3,226 2,317 3,596 173 580 699 865 933 950 746 967 965 940 Kazakhstan 870 899 960 921 862 1,020 154 210 249 249 254 249 257 259 266 272 China 724 995 1,297 1,510 1,476 2,056 244 377 446 411 432 525 539 560 529 615 Rest of World 1,757 1,761 1,929 1,809 1,369 1,904 287 279 352 451 466 480 475 482 502 468 World production 5,993 6,446 7,674 7,465 6,025 8,575 858 1,446 1,746 1,975 2,085 2,204 2,018 2,268 2,263 2,295 YoY/ QoQ 1.1% 7.6% 19.1% -2.7% -19.3% 42.3% -35.8% 68.5% 20.8% 13.2% 5.6% 5.7% -8.5% 12.4% -0.2% 1.4%

Source: CRU, HSBC World ferrochrome consumption by region

_______________________________________Annual ___________________________________ __________________________________________________Quarterly __________________________________________________000 tonnes 2005 2006 2007 2008 2009 2010 Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 Q4-10 Q1-11 Q2-11

US 440 456 440 377 252 385 57 55 93 48 103 102 96 85 118 102 Europe 1,862 1,990 1,900 1,782 1,329 1,629 233 309 383 404 447 449 366 367 429 438 Japan 956 985 984 875 666 900 94 139 221 212 223 236 222 219 230 195 China 909 1,403 2,342 2,052 2,900 3,683 565 766 814 756 905 978 803 998 1,029 1,014 Rest of World 1,722 1,935 1,932 1,665 1,695 1,801 305 437 496 457 471 455 426 448 500 476 World consumption 5,889 6,768 7,598 6,750 6,842 8,398 1,252 1,706 2,007 1,878 2,149 2,220 1,913 2,117 2,305 2,225 YoY/ QoQ -1.5% 14.9% 12.3% -11.2% 1.4% 22.7% -35.3% 36.2% 17.6% -6.4% 14.4% 3.3% -13.8% 10.7% 8.9% -3.5%

Source: CRU, HSBC World ferrochrome balance

_______________________________________Annual ___________________________________ ________________________________________________ Quarterly_________________________________________________ 000 tonnes 2005 2006 2007 2008 2009 2010 Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 Q4-10 Q1-11 Q2-11

World production 5,993 6,446 7,674 7,465 6,025 8,575 858 1,446 1,746 1,975 2,085 2,204 2,018 2,268 2,263 2,295 World consumption 5,889 6,768 7,598 6,750 6,842 8,398 1,252 1,706 2,007 1,878 2,149 2,220 1,913 2,117 2,305 2,225 Change in stocks -80 -89 -72 -8 -20 -18 -1 -7 -8 -4 -14 -4 0 0 0 0 World balance 184 -233 148 723 -798 194 -394 -253 -253 101 -50 -12 105 151 -42 69

Source: CRU, HSBC

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Ferrochrome stocks and prices World ferrochrome stocks World stainless steel production vs high-carbon ferrochrome (HC FeCr) price

0

400

800

1,200

1,600

2,000

Jun-

01

Jun-

03

Jun-

05

Jun-

07

Jun-

09

Jun-

11

Sto

cks

(000

ton

nes)

0

5

10

15

20

25

Con

sum

ptio

n (w

eeks

)

Stock Lev el Consumption Ratio

0

500

1,000

1,500

2,000

2,500

3,000

Jun-

03

Jun-

04

Jun-

05

Jun-

06

Jun-

07

Jun-

08

Jun-

09

Jun-

10

Jun-

11

Pro

duct

ion

(000

ton

nes)

0

50

100

150

200

250

300

Pri

ce (

US

¢/lb

)

Stainless Steel Production HC FeCr Europe Spot

Source: CRU, HSBC Source: CRU, HSBC

High-carbon (HC FeCr) and low-carbon (LC FeCr) ferrochrome prices Chrome ore vs high-carbon ferrochrome (HC FeCr) prices

0

100

200

300

400

500

Jun-

02

Jun-

03

Jun-

04

Jun-

05

Jun-

06

Jun-

07

Jun-

08

Jun-

09

Jun-

10

Jun-

11

US

¢/lb

Europe 6-8%C Spot Europe Contract Europe 0.1%C Spot

100

200

300

400

500

600

700

800

Jun-

08

Oct

-08

Feb-

09

Jun-

09

Oct

-09

Feb-

10

Jun-

10

Oct

-10

Feb-

11

Jun-

11

Chr

ome

(US

D/t

)

100

200

300

400

500

600

700

800

Fer

roch

rom

e (U

S¢/

lb)

Chrome Ore South Africa Spot Chrome Ore Turkey SpotChrome Ore India Spot HC FeCr Europe Spot

Source: CRU, HSBC Source: CRU, HSBC

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42


Supply Demand Market Balance/Pricing We question consensus assumptions on Chinese supply growth Demand increments will fall, but prices held high by costs Expecting a much slower turn in market balance (Mt)

0

400

800

1,200

1,600

2000 2003 2006 2009 2012e 2015e

10%

20%

30%

40%

50%

AM E Es timateHSBC Es tim ateIm plied Dom estic Ore Grade

-50

0

50

100

150

200

250

300

2000

2002

2004

2006

2008

2010

2012

e

2014

e

Dem

and

incr

emen

t (m

t)0

50

100

150

200

Fines FO

B U

SD/t

Demand increm ent Price

-100

-500

50

100150200250

2005

2006

2007

2008

2009

2010

2011

e

2012

e

2013

e

2014

e

2015

e

Mkt

Bal

ance

(mt)

Q1 F'cast Q2 F'cast Q3 F 'cas t

Source: AME, HSBC estimates Source: HSBC world steel model, SBB, HSBC analysis Source: HSBC estimates

Supply growth is proving far more challenging than many have expected. On

our estimates, China will supply 41% of production growth in 2011, with supply from the Major 4 (BHP, RIO, VALE and AAL) actually stagnating in 2011. Although capex is growing, this has yet to boost supply, which instead has been interrupted by poor weather.

We believe that consensus continues to overestimate Chinese domestic production growth. We think growth will be capped at 5% but see consensus expectations often linked to consultancy projections, which we think are much too high. Grade and infrastructure issues are getting more challenging in China.

Recent newsflow on the cancellation of the Oakagee infrastructure project in Western Australia mid-west region highlights that supply growth from juniors will be constrained by rising capital intensity and difficultly in infusing equity and debt funding.

We continue to expect a moderation in demand growth following the significant 2009/10 cycle. In absolute terms, we believe iron ore demand will grow 189Mt in 2011, similar to average levels for 2005-09 of190Mt pa, although this represents 8% globally rather than the double-digit rates of that period.

We continue to project a moderation in demand growth back to 9-7% globally from 2012, partly to reflect lower GDP growth rates in China and partly to reflect a gradual shift away from fixed-asset investment.

Even with this moderation, however, demand will still be relatively strong in historical terms and at a level that supply will struggle to meet. An additional 130Mt of new production on average will be required each year for the next four years.

Spot prices have not fallen as we had forecast, as the restart in Indian exports has been delayed – although the Supreme Court has lifted the ban, the state government has yet to begin issuing export permits. Also, weather interruptions in the Pilbara region held back Australian production in H1.

We raise our 2012-13 price forecasts and now believe prices are likely to find a floor around USD140/t FOB (~USD155/t CIF) up from USD110/t FOB in our last review. It is inconsistent to believe that Chinese production will grow, yet prices fall to below levels at the top end of the Chinese cost curve.

We see a tighter market in 2011-13 than in our previous review, with a surplus now pushed out to 2014.

Iron ore: Blood from stones Iron ore producers continue to achieve strong prices from a struggling steel industry

Supply-side disruptions in Australia and India kept the market fundamentally tight in H1 2011

We now see a tight market in 2012 and raise our 2012e forecast from USD110/t to USD140/t (FOB)

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Iron ore: HSBC supply and demand model (Mt)


Global crude steel production 1,143 1,246 1,344 1,329 1,226 1,411 1,525 1,614 1,683 1,773 361 5.9% Annual change 6.7% 9.0% 7.9% -1.2% -7.7% 15.1% 8.0% 5.8% 4.3% 5.4% Pig iron & DRI World ex China 513 527 536 532 438 542 581 627 667 711 169 7.0% China 353 419 489 500 568 627 690 724 747 786 160 5.8% Total 867 946 1,026 1,033 1,006 1,169 1,271 1,351 1,414 1,497 328 6.4% Annual change 8% 9% 8% 1% -3% 16% 9% 6% 5% 6% Iron ore demand (product tonnes, 62.5% Fe, 4% loss) Europe 201 207 209 199 138 187 198 205 210 215 28 3.6% CIS 144 153 156 145 127 140 146 161 170 174 34 5.5% N America 98 99 98 93 57 88 92 96 99 104 17 4.5% C&S America 83 80 84 81 59 76 88 98 108 118 42 11.6% Africa/Middle East 47 48 48 47 47 53 60 68 73 79 26 10.4% Asia Ex China 286 295 301 326 304 363 387 422 456 499 135 8.2% World Ex China 858 881 897 890 733 907 971 1,049 1,115 1,189 282 7.0% China 698 909 1,062 1,263 1,502 1,598 1,748 1,826 1,892 1,966 368 5.3% World 1,556 1,789 1,959 2,153 2,234 2,505 2,719 2,875 3,007 3,155 650 5.9% Annual change 12% 15% 9% 10% 4% 12% 9% 6% 5% 5% Iron ore supply Europe 34 34 34 34 27 31 35 38 42 45 13 9.2% CIS 180 194 202 190 176 190 198 205 213 222 33 4.0% N America 97 97 95 99 71 81 91 98 101 106 25 7.0% C&S America 329 357 374 384 331 393 426 470 513 547 154 8.6% Africa/Middle East 73 78 83 90 96 109 116 128 142 159 50 9.9% Asia ex China 409 458 514 564 653 686 732 775 840 908 222 7.3% World ex China 1,122 1,218 1,301 1,362 1,354 1,489 1,597 1,713 1,851 1,987 497 7.5% China 426 588 683 824 880 979 1,070 1,120 1,176 1,211 232 5.5% World 1,548 1,806 1,984 2,186 2,234 2,468 2,667 2,833 3,027 3,198 730 6.7% Annual change 14% 17% 10% 10% 2% 10% 8% 6% 7% 6% China Pig iron & DRI production 344 413 477 471 532 584 639 667 684 716 132 5.2% Iron ore imports (WMT) 272 320 380 439 622 619 678 706 716 755 136 5.1% Iron content of imports (est.) 170 200 237 274 388 387 424 441 447 472 85 5.1% Iron content of domestic ore 174 212 240 197 143 197 216 226 237 244 47 5.5% Iron ore production (product tonnes) 426 588 683 824 880 979 1,070 1,120 1,176 1,211 232 5.5% Implied ore grade 43% 38% 37% 25% 17% 21% 21% 21% 21% 21% Growth in production 37% 38% 16% 21% 7% 11% 9% 5% 5% 3% Balance World ex China 263 337 405 472 621 582 626 664 735 798 China -272 -320 -380 -439 -622 -619 -678 -706 -716 -755 World -8 17 25 33 0 -37 -52 -42 20 43 Seaborne trade 620 704 773 832 896 976 980 1,044 1,134 1,208 231 5.5% Prices Price (Aust fines FOB) * 39.50 47.01 51.47 93.00 62.00 112.39 160.00 140.00 140.00 110.00 Percentage change 72% 19% 9% 81% -33% 81% 42% -13% 0% -21%

Source: AME, HSBC estimates * 2005-2010 prices are annual contract prices

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44


Iron Ore: Regional balance (Mt)


China

Pig iron & DRI 344 413 477 471 532 584 639 667 684 716 132 5.2% Iron ore demand (product tonnes) 698 909 1,062 1,263 1,502 1,598 1,748 1,826 1,892 1,966 698 909 Iron ore production (product tonnes) 426 588 683 824 880 979 1,070 1,120 1,176 1,211 426 588 Balance -272 -320 -380 -439 -622 -619 -678 -706 -716 -755 Europe Pig Iron & DRI 120 124 125 119 83 112 119 122 126 129 17 3.6% Iron ore demand 201 207 209 199 138 187 198 205 210 215 28 3.6% Iron ore production 34 34 34 34 27 31 35 38 42 45 13 9.2% Balance -167 -173 -175 -165 -111 -155 -163 -167 -168 -171 CIS Pig Iron & DRI 86 91 93 87 76 84 87 96 102 104 20 5.5% Iron ore demand 144 153 156 145 127 140 146 161 170 174 34 5.5% Iron ore production 180 194 202 190 176 190 198 205 213 222 33 4.0% Balance 36 41 46 46 49 50 52 44 43 49 N America Pig Iron & DRI 58 59 58 56 34 52 55 57 59 62 10 4.5% Iron ore demand 98 99 98 93 57 88 92 96 99 104 17 4.5% Iron ore production 97 97 95 99 71 81 91 98 101 106 25 7.0% Balance 0 -2 -3 6 14 -7 -1 2 2 1 C&S America Pig Iron & DRI 58 59 58 56 34 52 55 57 59 62 10 4.5% Iron ore demand 98 99 98 93 57 88 92 96 99 104 17 4.5%

Vale 0 280 312 312 248 332 323 347 354 364 31 2.3% Iron ore production 329 357 374 384 331 393 426 470 513 547 154 8.6% Balance 246 277 290 303 273 316 338 372 405 429 Africa/Middle East Pig iron & DRI 28 28 29 28 28 32 36 40 44 47 15 10.4% Iron ore demand 47 48 48 47 47 53 60 68 73 79 26 10.4% Iron ore production 73 78 83 90 96 109 116 128 142 159 50 9.9% Balance 26 30 34 43 48 56 56 61 69 80 Australia Pig iron & DRI 9 9 9 8 6 8 9 9 9 9 1 3.7% Iron ore demand 14 15 15 14 10 14 14 15 15 16 2 3.7%

Rio Tinto 141 151 163 175 202 224 228 238 260 286 62 6.3% BHP 105 108 112 127 128 159 154 175 192 210 51 7.2% FMG 0 0 0 15 35 43 51 54 57 59 16 8.5%

Other Australian Juniors 12 10 24 8 16 7 20 20 34 49 42 62.6% Iron ore production 260 271 300 328 383 435 455 490 545 606 171 8.7% Balance 245 256 286 314 373 421 441 475 530 590 India Pig iron & DRI 46 49 53 58 63 67 75 85 94 111 44 13.4% Iron ore demand 77 83 89 97 105 112 125 142 157 185 73 13.4% Iron ore production 143 181 207 223 257 245 270 278 286 293 48 4.6% Balance 66 98 118 126 152 133 145 136 129 108

Source: AME, HSBC estimates

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HSBC world steel model


Crude steel production (mt) Europe 220 234 239 230 168 206 219 226 232 237 31 3.6% CIS 113 119 123 114 98 108 113 124 132 134 26 5.5% N. America 128 132 133 124 83 112 117 122 126 133 21 4.5% C&S America 45 45 48 47 37 44 50 56 62 68 24 11.6% Asia Pacific 604 681 766 779 807 905 985 1039 1082 1146 241 6.1% Middle East/Africa 33 34 35 33 32 36 41 46 50 54 18 10.4% World 1,143 1,246 1,344 1,329 1,226 1,411 1,525 1,614 1,683 1,773 361 5.9% Change y-o-y 6.7% 9.0% 7.9% -1.2% -7.7% 15.1% 8.0% 5.8% 4.3% 5.4% World ex China 790 827 855 828 658 785 835 890 935 987 202 5.9% Change y-o-y 0.2% 4.7% 3.5% -3.1% -20.6% 19.3% 6.3% 6.6% 5.1% 5.5% China 353 419 489 500 568 627 690 724 747 786 160 5.8% Change y-o-y 24.9% 18.7% 16.7% 2.3% 13.5% 10.4% 10.2% 4.9% 3.2% 5.2% Finished steel consumption (mt) Europe 190 217 230 210 143 176 193 200 207 215 39 5.1% CIS 42 49 57 50 36 49 52 57 61 65 17 7.8% N. America 145 160 146 135 85 113 123 131 139 147 34 6.9% C&S America 30 34 39 42 32 42 47 52 57 63 20 10.4% Asia Pacific 587 629 687 700 764 841 894 951 1005 1061 220 6.0% Middle East/Africa 56 58 66 70 69 71 75 79 84 89 18 5.8% World 1,049 1,147 1,226 1,206 1,128 1,292 1,383 1,470 1,554 1,640 348 6.2% Change y-o-y 6.9% 9.4% 6.9% -1.6% -6.5% 14.5% 7.1% 6.3% 5.7% 5.6% World ex China 701 769 803 771 585 716 770 819 866 916 200 6.4% Change y-o-y -0.6% 9.7% 4.5% -4.0% -24.1% 22.3% 7.5% 6.5% 5.7% 5.7% China 347 378 423 435 542 576 614 651 687 724 148 5.9% Change y-o-y 26.0% 8.7% 11.9% 2.9% 24.8% 6.2% 6.6% 6.0% 5.6% 5.3% Capacity (mt) Europe 261 262 267 270 272 273 275 277 279 281 9 0.8% CIS 135 136 141 138 150 151 157 163 167 171 20 3.1% N. America 150 152 153 155 154 155 156 156 156 156 2 0.3% C&S America 55 56 58 60 64 74 79 81 83 85 11 3.4% Asia Pacific 674 761 847 895 1,043 1,088 1,143 1,179 1,215 1,253 165 3.6% Middle East/Africa 45 48 53 56 59 61 66 67 68 69 8 3.1% World 1,319 1,415 1,519 1,574 1,743 1,802 1,875 1,924 1,969 2,016 214 2.8% Change y-o-y 8.2% 7.3% 7.3% 3.6% 10.8% 3.4% 4.1% 2.6% 2.4% 2.4% World ex China 937 949 974 990 1,025 1,052 1,095 1,120 1,142 1,163 111 2.5% Change y-o-y 2.5% 1.2% 2.6% 1.7% 3.5% 2.6% 4.1% 2.3% 1.9% 1.9% China 382 466 545 583 718 750 780 803 828 852 102 3.2% Change y-o-y 25.4% 22.1% 16.8% 7.1% 23.1% 4.5% 4.0% 3.0% 3.0% 3.0% Capacity utilisation 2005 2006 2007 2008 2009 2010 2011e 2012e 2013e 2014e Europe 84% 89% 90% 85% 62% 76% 80% 82% 83% 84% CIS 84% 88% 87% 83% 66% 72% 72% 76% 79% 79% N. America 85% 87% 87% 80% 54% 72% 75% 78% 81% 85% C&S America 83% 80% 84% 79% 58% 59% 64% 69% 74% 80% Asia Pacific 90% 90% 90% 87% 77% 83% 86% 88% 89% 91% Middle East/Africa 73% 71% 67% 60% 55% 59% 62% 69% 73% 78% World 87% 88% 89% 84% 70% 78% 81% 84% 85% 88% World ex China 84% 87% 88% 84% 64% 75% 76% 79% 82% 85% China 93% 90% 90% 86% 79% 84% 89% 90% 90% 92%

Source: HSBC estimates, World Steel Association

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Iron ore trade and prices China monthly iron ore imports and y-o-y change China share of iron ore imports by country (Jan-May 2011) China share of ore imports from Australia, Brazil and India

0

20

40

60

80

Jun-

05

Jun-

06

Jun-

07

Jun-

08

Jun-

09

Jun-

10

Jun-

11

mt

-40%-20%0%20%40%60%80%100%

Imports (LHS) YoY % (RHS)

Australia39%

Iran3%

Russia2%

India15%

SouthAfrica

5%Others

15%

Brazil21%

70%

75%

80%

85%

90%

95%

May

-04

May

-05

May

-06

May

-07

May

-08

May

-09

May

-10

May

-11

Source: Bloomberg, HSBC Source: Reuters, HSBC Source: CRU, HSBC

China iron ore demand met by imports China iron ore port inventory India, Australia and Brazil iron ore prices

30%

40%

50%

60%

70%

80%

90%

Jun-

04

Dec

-04

Jun-

05

Dec

-05

Jun-

06

Dec

-06

Jun-

07

Dec

-07

Jun-

08

Dec

-08

Jun-

09D

ec-0

9

Jun-

10

Dec

-10

Jun-

11

30

40

50

60

70

80

90

100

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

mt

2550

75100125

150175

Jun-

05

Dec

-05

Jun-

06

Dec

-06

Jun-

07D

ec-0

7

Jun-

08

Dec

-08

Jun-

09

Dec

-09

Jun-

10

Dec

-10

Jun-

11

USD

/t

Indian FoB China spot Australia contractBrazil contract

Source: HSBC, Bloomberg Source: CRU, HSBC Source: CRU, HSBC

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Crude steel production World production (Mt) and y-o-y growth World steel production by region (Jan-May 2011) China share of global production

60

80

100

120

140

May

-00

May

-01

May

-02

May

-03

May

-04

May

-05

May

-06

May

-07

May

-08

May

-09

May

-10

May

-11

-30%

-20%

-10%

0%10%

20%

30%

40%

World YoY% (RHS)

Africa1%

C.I.S7%

N America8%

S America3%

China47%

MiddleEast1%

Europe15%

Other Asia18%

10%

20%

30%

40%

50%

May

-00

May

-01

May

-02

May

-03

May

-04

May

-05

May

-06

May

-07

May

-08

May

-09

May

-10

May

-11

China share of global production

Source: WSA, HSBC Source: WSA, HSBC Source: WSA, HSBC

China production (Mt) and y-o-y growth Europe production (Mt) and y-o-y growth North America production (Mt) and y-o-y growth

010

20304050

6070

May

-00

May

-01

May

-02

May

-03

May

-04

May

-05

May

-06

May

-07

May

-08

May

-09

May

-10

May

-11

-20%-10%

0%10%20%30%

40%50%

China YoY% (RHS)

10

12

14

1618

20

22

24

May

-00

May

-01

May

-02

May

-03

May

-04

May

-05

May

-06

May

-07

May

-08

May

-09

May

-10

May

-11

-60%

-40%

-20%

0%20%

40%

60%

80%

Europe YoY% (RHS)

4

6

8

10

12

14

May

-00

May

-01

May

-02

May

-03

May

-04

May

-05

May

-06

May

-07

May

-08

May

-09

May

-10

May

-11

-60%

-40%

-20%

0%20%

40%

60%

80%

North America YoY% (RHS)

Source: WSA, HSBC Source: WSA, HSBC Source: WSA, HSBC

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Chinese domestic coking coal prices were stable in Q2 (RMB/t) China cut its prime-grade coking coal imports from Australia, replacing it with imports from Mongolia and the US (kt)

The Australia spot price fell 6% to USD306/t from March, as supply tightness eased (USD/t)

800

1,000

1,200

1,400

1,600

1,800

Feb-

09Ap

r-09

Jun-

09Au

g-09

Oct

-09

Dec

-09

Feb-

10Ap

r-10

Jun-

10Au

g-10

Oct

-10

Dec

-10

Feb-

11Ap

r-11

Jun-

11

Shanx i Liulin hard coking coalShanx i Liulin semi-hard coking coal

50

100150200250300350400450

Jan-

07Ap

r-07

Jul-0

7O

ct-0

7Ja

n-08

Apr-0

8Ju

l-08

Oct

-08

Jan-

09Ap

r-09

Jul-0

9O

ct-0

9Ja

n-10

Apr-1

0Ju

l-10

Oct

-10

Jan-

11Ap

r-11

Jul-1

1

Shanghai spot (USD/t equiv alent)Australia contractAustralia spot

Source: China Coal Resource, HSBC Source: China Coal Resource, HSBC Source: China Coal Resource, CRU, McCloskey, CMR, HSBC

As supply disruptions from Queensland’s flooding ended, spot coking coal prices fell 6% to USD306/t from March. Australia’s coking coal exports were 10Mt in April, 23% more than 8.12Mt in February, but still 27% lower than April last year.

Mongolian coking coal exports to China rose 48% y-o-y to 6.19Mt in Jan-May 2011. With some exporters expanding their coking coal production in 2011, we expect Mongolia’s coking coal exports to rise from 4Mt in 2009 to 15Mt 2010 and further, to 22Mt, in 2011.

McCloskey reported Erdenes MGL is dividing Tavan Tologoi concessions in Mongolia into an eastern block of 1.1Bt and a western block of 1.2Bt. The western block has 68% coking coal and is still under tender with Peabody Energy, a Shenhua-led group and a Russian-Mongolian venture selected as strategic investors.

Global steel mills’ production continued to rise in 2011. Global ex-China crude steel production rose 6% y-o-y to 319Mt in Jan-May 2011. China’s crude steel production rose 9% y-o-y to 268Mt in Jan-May 2011, accounting for 46% of global output.

China cut its coking coal imports from Australia (-57% to 3.8Mt) by increasing imports from Mongolia (+48% to 6.19Mt) and the US (+74% to 2.17Mt) in Jan-May 2011. We believe China will continue to cut its prime-grade coking coal imports until international prices fall in H2-11. Imports from Mongolia will continue to rise on its price advantage to domestic coking coal.

Japan’s coking coal imports fell to 4.06Mt in May, from 4.76Mt in March. We expect reconstruction demand from the earthquake earlier in the year to increase imports from 53Mt in 2011 to 59Mt in 2012.

Q3-11 contract prices settled at USD315/t (-5% QOQ) as supply tightness eased.

The Shanxi hard coking coal price was RMB1,650/t, an increase of 11% from 2010. Including VAT, Australian Q3-11 prices could be RMB2,421/t, or 47% above the Shanxi spot price. We expect the Shanxi spot price to increase 21%, to RMB1,800/t, in 2011.

We believe supply tightness from Queensland will ease further in Q3 and contract prices will lower to USD250/t in Q4-11. China’s coking coal imports from Australia will continue to be low until the spread narrows.

Coking coal: Prices to fall, but are still high China has cut prime-grade coking coal imports from Australia, replacing them with imports from Mongolia and the US

Australian spot prices fell slightly from March; April exports were 23% higher than in February, but 27% below last year

The Q3 contract price fell 5% from a record high; we expect Q4 to fall further to USD250/t as supply tightness eases

0

1,000

2,000

3,000

4,000

5,000

6,000

Jan-

09M

ar-0

9

May

-09

Jul-0

9Se

p-09

Nov

-09

Jan-

10M

ar-1

0M

ay-1

0

Jul-1

0Se

p-10

Nov

-10

Jan-

11

Mar

-11

May

-11

Australia Mongolia Russia US Canada Others

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Coking coal: HSBC supply and demand model

Million tonnes 2004 2005 2006 2007 2008 2009 2010 2011e 2012e 2013e 2014e Change 2010-14e CAGR 2010-14e

Coking coal imports Japan 86 63 73 54 57 46 53 53 59 61 62 9 4.0% South Korea 21 21 20 23 24 15 19 26 27 28 29 10 11.9% India 16 20 19 23 29 23 25 29 33 36 41 16 13.2% China 7 7 9 6 7 34 47 40 48 53 54 7 3.4% Europe 59 57 65 55 56 41 46 48 50 51 52 6 3.1% Brazil 15 13 10 11 9 11 13 14 16 17 6 11.5% Other 25 44 23 56 53 43 72 66 71 80 88 16 5.1% Total coking coal imports 214 227 222 227 237 211 273 275 302 325 343 70 5.9% Coking coal exports Australia 117 125 124 138 135 135 159 150 166 179 194 35 5.1% USA 24 26 25 29 39 34 51 52 52 52 52 1 0.5% Canada 24 27 25 27 27 22 27 27 29 32 33 6 5.1% Russia 13 11 10 15 16 13 17 20 21 23 24 7 9.0% Mongolia 2 3 4 4 4 15 22 30 35 36 21 24.4% Other 36 36 35 15 16 4 4 4 4 4 4 0 0.0% Total coking coal exports 214 227 222 227 237 211 273 275 302 325 343 70 5.9% Coking coal imports, y-o-y % change Japan 8% -27% 16% -26% 6% -19% 15% 0% 11% 3% 2% South Korea 22% 0% -5% 15% 4% -35% 20% 40% 4% 4% 4% India 0% 24% -5% 21% 26% -21% 9% 16% 14% 9% 14% China 160% 4% 29% -33% 17% 386% 39% -15% 20% 10% 2% Europe 21% -4% 14% -15% 2% -27% 12% 4% 4% 2% 2% Brazil -13% -23% 10% -18% 22% 18% 8% 14% 6% Other -40% 77% -48% 143% -5% -19% 67% -9% 8% 13% 10% Total coking coal imports 4% 6% -2% 2% 4% -11% 29% 1% 10% 8% 6% Coking coal exports, y-o-y % change Australia 5% 7% 0% 11% -2% 0% 18% -6% 11% 8% 8% USA 22% 7% -4% 17% 33% -13% 50% 2% 0% 0% 0% Canada 1% 11% -8% 8% 1% -19% 23% 0% 7% 10% 3% Russia 28% -13% -8% 45% 7% -19% 31% 18% 5% 10% 4% Mongolia 31% 29% 10% 0% 278% 46% 36% 17% 3% Other -11% 0% -3% -58% 10% -78% 0% 0% 0% 0% 0% Total coking coal exports 4% 6% -2% 2% 4% -11% 29% 1% 10% 8% 6%

Source: WCI, ABARE, IMF, HSBC estimates

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Supply Demand Market Balance/Pricing China vs Australia price spread narrowed (RMB/t equivalent including 17% VAT)

Chinese thermal coal imports fell as Chinese domestic prices were at a discount to imported price (kt)

Newcastle spot prices remained stable as Chinese import demand slows (USD/t)

400

600

800

1,000

1,200

1,400

1,600

Jan-

07Ap

r-07

Jul-0

7O

ct-0

7Ja

n-08

Apr-0

8Ju

l-08

Oct

-08

Jan-

09Ap

r-09

Jul-0

9O

ct-0

9Ja

n-10

Apr-1

0Ju

l-10

Oct

-10

Jan-

11Ap

r-11

Jul-1

1

0

3

6

9

12

15

18

China thermal coal imports (RHS)Australian (RMB/t equivalent w 17% VAT)Qinhuangdao Port domestic 6000kc

0

10,000

20,000

30,000

40,000

50,000

60,000

Indo

nesi

a

Aust

ralia

Viet

nam

Mon

golia

Rus

sia

Oth

ers

2008 2009 2010 Jan-Apr 2011

406080

100120140160180200

Jan-

07Ap

r-07

Jul-0

7O

ct-0

7Ja

n-08

Apr-0

8Ju

l-08

Oct

-08

Jan-

09Ap

r-09

Jul-0

9O

ct-0

9Ja

n-10

Apr-1

0Ju

l-10

Oct

-10

Jan-

11Ap

r-11

Jul-1

1

Newcastle Richards BayAus-JPY contract

Source: China Coal Resource, McCloskey, HSBC Source: China Coal Resource, HSBC Source: McCloskey, HSBC

Australia’s thermal coal supply has increased as mine production recovers from the worst flooding in Queensland in 50 years. Its thermal coal exports were back to 12Mt in April from 9.3Mt in February. We forecast its thermal coal exports to fall 3% to 137Mt in 2011 before rising 18% to 162Mt in 2012.

China’s thermal coal imports fell 18% y-o-y to 41Mt in Jan-May 2011, as Chinese coal prices were at a discount to imported coal price. The spread has narrowed to 5% in May from 15% in March (Qinhuangdao 5800kcal), which led to a pick-up in imports to 11.4Mt in May from 6.1Mt in March.

We believe Chinese buyers are price sensitive and will cut high-grade imports if regional coal prices are higher than domestic supply. In response, Chinese coal producers can raise their domestic production to offset lower imports. We expect China to remain a large importer but its thermal coal imports to fall 12% to 105Mt in 2011.

Coal demand in China was solid in Jan-May 2011, with demand increasing 11% from last year. In particular, coal demand from power has been strong in 2011, with an increase of 19% y-o-y to 153Mt in June, and an increase of 13% to 903Mt in H1-11.

India to be the fastest growing importer, driven by an increase in coal-fired power plants. We expect its thermal coal imports to increase 28% to 77Mt in 2011 and 20% to 92Mt in 2012.

Japan’s thermal coal imports fell to 9Mt in May from 11.2Mt in March. Because the March 2011 earthquake led to the damage of coal-fired power plants and related infrastructure, we expect demand from Japan to fall 3% to 122Mt in 2011 but to increase to 131Mt in 2012 as demand recovers for reconstruction.

Newcastle coal spot prices remained strong around USD120/t in Q2, but were 6% lower than Q1 as supply increased from weather disruptions and Chinese were at a discount to imported price.

Strong international prices, together with the drought in some regions, have driven Chinese domestic prices to increase even in the slow season. Qinhuangdao coal prices increased 5% q-o-q to RMB818/t in Q2 and are now at RMB845/t in the summer season.

With an increase in domestic and import supply, we expect Chinese coal prices to remain stable in the summer consumption season, but to fall slightly in end-Aug/Sep and then pick up again in winter. As the spread narrows, we expect regional coal prices to follow the Chinese price movement affected by lower demand from China when summer consumption ends.

Thermal coal: Stable at high levels China’s imports fell 18% in Jan-May 2011, as Chinese domestic prices were at a discount to imported prices

The spread has narrowed recently, with China’s imports back to 11.4Mt in May, from 6.1Mt in March

We expect Chinese prices to remain stable, but fall slightly when summer ends, and think regional prices will follow

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Thermal coal: HSBC supply and demand model

Million Tonnes 2004 2005 2006 2007 2008 2009 2010 2011e 2012e 2013e 2014e Change 2010-14e CAGR 2010-14e

Thermal coal imports Japan 115 117 115 128 128 113 126 122 131 131 131 5 1.0% South Korea 61 61 64 66 76 82 94 99 100 101 104 9 2.4% Taiwan 52 53 55 61 60 59 62 65 65 68 70 8 2.9% China 12 19 28 41 35 92 119 105 107 109 112 -7 -1.5% India 16 23 28 31 34 49 60 77 92 104 112 52 16.9% Hong Kong 11 11 11 12 11 12 12 12 12 13 13 1 1.9% Other Asia 43 46 48 38 42 37 37 40 43 46 49 12 7.2% Total Asia 308 329 350 378 388 444 511 520 555 578 603 92 4.2% Europe 192 192 203 231 223 207 187 194 199 206 214 27 3.4% Other 50 57 59 88 94 74 72 69 69 79 81 9 3.0% Total thermal coal imports 550 579 612 697 704 724 770 783 823 863 898 128 3.9% Thermal coal exports Australia 108 109 110 112 126 139 141 137 162 189 215 74 11.1% Indonesia 105 126 167 191 193 233 270 280 294 307 315 45 3.9% Russia 61 61 69 85 86 84 87 90 92 94 95 8 2.1% Colombia 49 51 53 67 74 63 69 72 77 82 86 17 5.7% South Africa 64 69 74 66 61 67 70 73 74 76 79 9 3.1% China 81 66 55 51 43 22 18 18 17 17 16 -2 -2.9% United States 19 19 18 25 35 20 22 26 23 21 20 -2 -2.4% Canada 2 1 3 4 6 6 6 5 5 5 5 -1 -3.9% Other 62 76 63 96 80 91 87 81 79 72 67 -20 -6.2% Total thermal coal exports 550 579 612 697 704 724 770 783 823 863 898 128 3.9% Imports (y-o-y % change) Japan 12% 2% -2% 12% 0% -12% 12% -3% 7% 0% 0% South Korea 11% 0% 5% 3% 15% 9% 14% 5% 1% 1% 3% Taiwan 13% 1% 5% 11% -2% -1% 4% 5% 1% 3% 3% China 44% 60% 48% 48% -14% 160% 29% -12% 2% 2% 3% India 82% 50% 21% 8% 11% 43% 23% 28% 19% 13% 8% Hong Kong 0% 2% 6% 8% -7% 6% 0% 2% 2% 2% 2% Other Asia -9% 6% 6% -21% 10% -12% 1% 7% 7% 7% 7% Total Asia 11% 7% 6% 8% 3% 14% 15% 2% 7% 4% 4% Total Europe 3% 0% 6% 14% -3% -7% -9% 4% 3% 3% 4% Other -3% 14% 3% 48% 6% -21% -2% -4% 0% 14% 3% Total 7% 5% 6% 14% 1% 3% 6% 2% 5% 5% 4% Exports (y-o-y % change) Australia 4% 1% 1% 2% 13% 10% 2% -3% 18% 17% 14% Indonesia 19% 20% 33% 14% 1% 21% 16% 4% 5% 4% 3% Russia 30% 0% 14% 23% 1% -3% 5% 3% 2% 2% 1% Columbia 11% 4% 4% 26% 10% -14% 9% 4% 7% 6% 5% South Africa -5% 9% 6% -11% -7% 9% 5% 4% 1% 3% 4% China 1% -18% -17% -8% -16% -50% -16% 0% -6% 0% -6% United States 0% 0% -5% 37% 43% -44% 12% 18% -12% -9% -5% Canada 50% -28% 113% 39% 42% 1% -4% -4% -4% -4% -4% Other -5% 23% -17% 53% -16% 14% -5% -7% -2% -9% -7% Total 7% 5% 6% 14% 1% 3% 6% 2% 5% 5% 4%

Source: WCI, ABARE, IMF, HSBC estimates

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China coal trade and global coal prices China net imports/(exports) of thermal coal (tonnes in thousands) China net imports/(exports) of metallurgical coal (tonnes in thousands)

-8,000-6,000-4,000-2,000

02,0004,0006,0008,000

10,00012,00014,000

Jan-

06Ap

r-06

Jul-0

6O

ct-0

6

Jan-

07Ap

r-07

Jul-0

7O

ct-0

7

Jan-

08Ap

r-08

Jul-0

8O

ct-0

8

Jan-

09Ap

r-09

Jul-0

9O

ct-0

9

Jan-

10Ap

r-10

Jul-1

0

Oct

-10

Jan-

11

Apr-1

1


-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

Jan-

06Ap

r-06

Jul-0

6

Oct

-06

Jan-

07

Apr-0

7Ju

l-07

Oct

-07

Jan-

08Ap

r-08

Jul-0

8O

ct-0

8

Jan-

09Ap

r-09

Jul-0

9

Oct

-09

Jan-

10

Apr-1

0Ju

l-10

Oct

-10

Jan-

11Ap

r-11


Source: China Coal Resource, HSBC Source: China Coal Research, HSBC

Thermal coal spot versus contract prices (FOB) Coking coal prices – Shanghai spot vs Australia (USD per tonne)

40

60

80

100

120

140

160

180

200

Jan-

07

Apr-0

7

Jul-0

7

Oct

-07

Jan-

08

Apr-0

8

Jul-0

8

Oct

-08

Jan-

09

Apr-0

9

Jul-0

9

Oct

-09

Jan-

10

Apr-1

0

Jul-1

0

Oct

-10

Jan-

11

Apr-1

1

Jul-1

1

New castle Richards Bay Aus-JPY contract

60100

140180

220260300340

380420

Jan-

07M

ar-0

7M

ay-0

7Ju

l-07

Sep-

07N

ov-0

7Ja

n-08

Mar

-08

May

-08

Jul-0

8Se

p-08

Nov

-08

Jan-

09M

ar-0

9M

ay-0

9Ju

l-09

Sep-

09N

ov-0

9Ja

n-10

Mar

-10

May

-10

Jul-1

0Se

p-10

Nov

-10

Jan-

11M

ar-1

1M

ay-1

1Ju

l-11

Shanghai spot (USD/t eq.) Australia contract Australia spot

Source: McCloskey, HSBC Source: China Coal Resource, McCloskey, CRU, HSBC

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1950-1981

____________________________________________ Western World ____________________________________________ ________________________________________ China_______________________________________ Aluminium Copper Nickel Zinc OECD IP Aluminium Copper Nickel Zinc Aluminium Copper Nickel Zinc Aluminium Copper Nickel Zinc 000t 000t 000t 000t Change YoY % % % % 000t 000t 000t 000t % % % %

1950 1,339 2,595 128 1,828 - - - - - 1951 1,553 2,650 121 1,783 9.4% 16.0% 2.1% (5.5%) (2.5%) - - - - - - - - 1952 1,684 2,736 137 1,646 1.4% 8.4% 3.2% 13.2% (7.7%) - - - - - - - - 1953 2,060 2,636 141 1,837 8.5% 22.3% (3.7%) 2.9% 11.6% - - - - - - - - 1954 2,099 2,870 138 1,977 (1.2%) 1.9% 8.9% (2.1%) 7.6% - - - - - - - - 1955 2,602 3,268 162 2,281 11.3% 24.0% 13.9% 17.4% 15.4% - - - - - - - - 1956 2,700 3,360 182 2,164 4.9% 3.8% 2.8% 12.3% (5.1%) - - - - - - - - 1957 2,372 3,336 184 2,167 3.6% (12.1%) (0.7%) 1.1% 0.1% - - - - - - - - Recession 1958 2,479 3,369 140 2,164 (2.1%) 4.5% 1.0% (23.9%) (0.1%) - - - - - - - - 1959 3,207 3,552 190 2,328 8.1% 29.4% 5.4% 35.7% 7.6% - - - - - - - - 1960 3,237 3,829 219 2,498 7.8% 0.9% 7.8% 15.3% 7.3% 90 90 - 80 - - - 1961 3,458 4,009 226 2,624 (3.9%) 6.8% 4.7% 3.2% 5.0% 80 120 - 100 (11.1%) 33.3% - 25.0% 1962 3,893 4,122 213 2,757 7.2% 12.6% 2.8% (5.8%) 5.1% 85 120 - 100 6.3% 0.0% - 0.0% 1963 4,322 4,398 235 2,952 6.2% 11.0% 6.7% 10.3% 7.1% 85 120 - 100 0.0% 0.0% - 0.0% 1964 4,809 4,928 290 3,254 7.7% 11.3% 12.1% 23.4% 10.2% 85 120 - 100 0.0% 0.0% - 0.0% 1965 5,232 5,052 317 3,348 6.7% 8.8% 2.5% 9.3% 2.9% 95 120 - 100 11.8% 0.0% - 0.0% 1966 6,045 5,243 349 2,923 7.0% 15.5% 3.8% 10.1% (12.7%) 95 130 - 100 0.0% 8.3% - 0.0% 1967 6,088 4,918 358 3,439 3.8% 0.7% (6.2%) 2.6% 17.7% 130 140 - 100 36.8% 7.7% - 0.0% 1968 7,035 5,168 370 3,781 6.7% 15.6% 5.1% 3.4% 9.9% 160 150 - 100 23.1% 7.1% - 0.0% 1969 7,732 5,750 383 4,104 8.1% 9.9% 11.3% 3.5% 8.5% 200 180 - 110 25.0% 20.0% - 10.0% 1970 7,935 5,920 451 3,950 3.0% 2.6% 3.0% 17.8% (3.8%) 225 200 - 115 12.5% 11.1% - 4.5% 1971 8,469 5,813 396 4,027 2.0% 6.7% (1.8%) (12.2%) 1.9% 245 210 - 115 8.9% 5.0% - 0.0% 1972 9,449 6,360 435 4,490 7.0% 11.6% 9.4% 9.8% 11.5% 295 240 - 120 20.4% 14.3% - 4.3% 1973 11,187 6,982 514 4,994 9.3% 18.4% 9.8% 18.2% 11.2% 370 270 - 125 25.4% 12.5% - 4.2% Recession 1974 11,246 6,609 556 4,613 (0.3%) 0.5% (5.3%) 8.2% (7.6%) 400 280 - 140 8.1% 3.7% - 12.0% Recession 1975 8,627 5,620 415 3,595 (8.1%) (23.3%) (15.0%) (25.4%) (22.1%) 440 300 - 180 10.0% 7.1% - 28.6% 1976 11,073 6,605 499 4,254 8.2% 28.4% 17.5% 20.2% 18.3% 470 320 - 180 6.8% 6.7% - 0.0% 1977 11,358 6,958 473 4,331 4.3% 2.6% 5.3% (5.2%) 1.8% 510 330 - 185 8.5% 3.1% - 2.8% 1978 12,027 7,351 533 4,724 3.9% 5.9% 5.6% 12.7% 9.1% 560 340 - 185 9.8% 3.0% - 0.0% 1979 12,607 7,553 599 4,829 4.6% 4.8% 2.7% 12.4% 2.2% 580 340 - 190 3.6% 0.0% - 2.7% Recession 1980 11,969 7,415 546 4,557 0.0% (5.1%) (1.8%) (8.8%) (5.6%) 550 330 - 259 (5.2%) (2.9%) - 36.3% Recession 1981 11,198 7,437 486 4,496 0.1% (6.4%) 0.3% (11.0%) (1.3%) 560 370 - 278 1.8% 12.1% - 7.3%

Source: WBMS, CRU, HSBC, Brook Hunt

Commodities consumption trends

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1982-2010

____________________________________________ Western World ___________________________________________ ________________________________________ China ________________________________________ Aluminium Copper Nickel Zinc OECD IP Aluminium Copper Nickel Zinc Aluminium Copper Nickel Zinc Aluminium Copper Nickel Zinc 000t 000t 000t 000t Change YoY % % % % 000t 000t 000t 000t % % % %

Recession 1982 10,911 6,689 456 4,267 (2.4%) (2.6%) (6.0%) (6.2%) (4.2%) 550 405 - 304 (1.8%) 2.7% - 9.4% 1983 11,942 6,775 501 4,589 1.5% 9.4% 1.6% 9.9% 7.4% 600 440 - 322 9.1% 0.0% - 5.9% 1984 12,510 7,294 584 4,746 6.1% 4.8% 8.3% 16.6% 3.2% 630 500 - 337 5.0% 2.6% - 4.7% 1985 12,720 7,210 563 4,786 3.0% 0.4% (2.3%) (3.6%) 0.6% 550 693 - 349 14.3% 7.7% - 3.6% 1986 13,119 7,508 582 4,938 0.7% 2.2% 3.7% 3.4% 3.0% 650 618 - 382 16.1% 7.1% - 9.5% 1987 13,959 8,067 644 5,100 3.3% 5.7% 5.4% 10.7% 3.4% 805 586 - 409 (13.0%) 4.4% - 7.1% 1988 14,604 8,242 674 5,324 5.7% 6.0% 1.8% 4.7% 4.3% 672 561 - 385 (9.5%) (1.1%) - 6.4% 1989 14,813 8,658 673 5,247 3.4% 2.0% 4.5% (0.1%) (1.7%) 973 620 - 391 39.8% 13.5% - 11.5% 1990 15,156 8,833 686 5,363 2.3% 2.5% 0.4% 1.9% 0.2% 976 660 - 500 (6.4%) 18.4% - 13.4% Recession 1991 15,279 8,946 663 5,525 (0.5%) 0.0% 1.8% (3.4%) 2.2% 1,058 676 - 530 8.9% 20.0% - 8.2% Recession 1992 15,655 9,106 630 5,501 (0.5%) 3.1% 1.4% (5.0%) 1.1% 1,328 870 38 600 33.7% 17.3% - 10.6% Recession 1993 15,673 9,428 674 5,635 (0.5%) 2.5% 3.4% 7.0% 2.3% 1,356 971 39 620 5.1% 12.6% 3.5% 9.4% 1994 17,344 10,359 776 5,967 4.4% 12.2% 7.1% 15.1% 5.3% 1,537 1,015 41 755 12.6% 5.4% 5.1% 8.3% 1995 17,653 10,399 898 6,377 3.9% (1.0%) 1.7% 16.0% 7.1% 1,942 1,172 37 918 26.3% 12.4% 1.0% 12.2% 1996 17,622 10,925 863 6,319 2.5% 1.3% 5.0% (2.5%) 0.2% 2,135 1,260 42 990 15.1% 7.2% 5.3% 12.0% 1997 18,611 11,356 940 6,531 5.3% 5.6% 4.9% 7.5% 3.7% 2,260 1,270 42 901 (6.7%) 3.9% 3.0% 4.1% Asia crisis 1998 18,391 11,513 935 6,607 2.2% (0.5%) 1.8% (0.3%) 1.2% 2,425 1,397 43 1,127 25.1% 7.1% (2.2%) 6.4% 1999 19,433 12,152 997 6,813 3.1% 4.4% 4.7% 6.1% 3.4% 2,926 1,500 43 1,218 13.0% 9.8% 10.3% 10.6% 2000 20,374 12,701 1,027 7,243 4.8% 4.3% 6.7% 2.6% 4.8% 3,375 1,850 65 1,351 13.8% 23.4% 31.4% 12.5% Recession 2001 19,095 11,852 1,002 7,017 (2.7%) (7.5%) (10.7%) (3.8%) (2.3%) 3,640 2,230 87 1,530 9.3% 18.7% 37.6% 13.0% 2002 19,744 11,669 1,036 7,166 (0.2%) 4.5% 1.5% 4.5% 1.4% 4,150 2,425 104 1,705 22.0% 13.4% 12.5% 14.8% 2003 21,117 11,673 1,062 7,172 1.1% 5.3% (0.7%) 3.7% 0.1% 4,994 3,020 136 1,982 19.3% 18.1% 32.8% 18.6% 2004 22,369 12,409 1,089 7,413 2.8% 7.1% 6.5% (0.2%) 3.1% 5,886 3,565 161 2,417 17.7% 14.4% 19.4% 22.9% 2005 22,986 12,000 1,033 7,320 1.9% 2.9% (2.9%) (4.7%) (2.3%) 7,083 3,815 195 2,853 18.1% 10.2% 18.9% 16.7% 2006 23,622 12,258 1,103 7,521 3.1% 3.5% 2.4% 7.9% 1.2% 8,790 3,967 243 3,166 22.2% 3.9% 39.2% 10.9% 2007 23,720 12,037 1,012 7,420 2.7% (0.0%) 0.5% (12.0%) (1.2%) 12,347 4,670 321 3,531 37.7% 19.3% 32.0% 8.3% Recession 2008 23,184 11,707 952 6,974 (2.5%) (2.3%) (2.7%) (5.9%) (6.0%) 12,560 5,100 296 3,795 1.7% 9.2% (7.7%) 7.5% Recession 2009 20,037 10,166 865 5,746 (11.9%) (13.6%) (13.2%) (9.2%) (17.6%) 13,879 6,520 423 4,100 10.5% 27.8% 42.7% 8.0% 2010 22,235 11,005 971 6,537 6.9% 11.0% 8.3% 12.3% 13.8% 16,515 7,368 472 4,705 19.0% 13.0% 11.6% 14.8%

Source: WBMS, CRU, HSBC, Brook Hunt Growth rates, 1950-2010

______________________________Western World _____________________________ __________________________________ China____________________________________ Period Aluminium Copper Nickel Zinc Aluminium Copper Nickel Zinc 000t 000t 000t 000t 000t 000t 000t 000t

CAGR 1950-2010 4.8% 2.4% 3.4% 2.1% - - - - CAGR 1950-1970 9.3% 4.2% 6.5% 3.9% - - - - CAGR 1970-1990 3.3% 2.0% 2.1% 1.5% 7.6% 6.2% - 7.6% CAGR 1990-2000 3.0% 3.7% 4.1% 3.1% 13.2% 10.9% - 10.5% CAGR 2000-2010 0.9% -1.4% -0.6% -1.0% 17.2% 14.8% 22.0% 13.3%

Source: WBMS, CRU, HSBC, Brook Hunt

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HSBC Global Mining 100 Index HSBC Global Base Metals Index HSBC Global Aluminium Index

0

100

200

300

400

500

600

700

Jul-0

1

Jul-0

2

Jul-0

3

Jul-0

4

Jul-0

5

Jul-0

6

Jul-0

7

Jul-0

8

Jul-0

9

Jul-1

0

Jul-1

1

Reb

ased

Jan

uary

200

0 =

100

0

100

200

300

400

500

Jul-0

1

Jul-0

2

Jul-0

3

Jul-0

4

Jul-0

5

Jul-0

6

Jul-0

7

Jul-0

8

Jul-0

9

Jul-1

0

Jul-1

1

Reb

ased

Jan

uary

200

0 =

100

0255075

100125150175200

Jul-0

1

Jul-0

2

Jul-0

3

Jul-0

4

Jul-0

5

Jul-0

6

Jul-0

7

Jul-0

8

Jul-0

9

Jul-1

0

Jul-1

1Reb

ased

Jan

uary

200

0 =

100

HSBC Global Aluminium LME Aluminium

Source: Thomson Reuters Datastream, HSBC Source: Thomson Reuters Datastream, HSBC Source: Thomson Reuters Datastream, HSBC

HSBC Global Copper Index HSBC Global Nickel Index HSBC Global Zinc/Lead Index

0

200

400

600

800

1,000

Jul-0

1

Jul-0

2

Jul-0

3

Jul-0

4

Jul-0

5

Jul-0

6

Jul-0

7

Jul-0

8

Jul-0

9

Jul-1

0

Jul-1

1Reb

ased

Jan

uary

200

0 =

100

HSBC Global Copper LME Copper

0

200

400

600

800

1,000Ju

l-01

Jul-0

2

Jul-0

3

Jul-0

4

Jul-0

5

Jul-0

6

Jul-0

7

Jul-0

8

Jul-0

9

Jul-1

0

Jul-1

1

Reb

ased

Jan

uary

200

0 =

100

HSBC Global Nickel LME Nickel

0

500

1,000

1,500

2,000

2,500

3,000

Jul-0

1

Jul-0

2

Jul-0

3

Jul-0

4

Jul-0

5

Jul-0

6

Jul-0

7

Jul-0

8

Jul-0

9

Jul-1

0

Jul-1

1

Reb

ased

Jan

uary

200

0 =

100

Source: Thomson Reuters Datastream, HSBC Source: Thomson Reuters Datastream, HSBC Source: Thomson Reuters Datastream, HSBC

HSBC equity indices performance

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Macro indicators Purchasing Managers Index – manufacturing & new orders M1, M2 and loan growth Fixed asset investment

3540

45

50

55

60

65

Jun-

07Se

p-07

Dec

-07

Mar

-08

Jun-

08Se

p-08

Dec

-08

Mar

-09

Jun-

09Se

p-09

Dec

-09

Mar

-10

Jun-

10Se

p-10

Dec

-10

Mar

-11

Jun-

11

HSBC PMI ManufacturingHSBC PMI New Orders

0%

10%

20%

30%

40%

Jun-

07Se

p-07

Dec

-07

Mar

-08

Jun-

08Se

p-08

Dec

-08

Mar

-09

Jun-

09Se

p-09

Dec

-09

Mar

-10

Jun-

10Se

p-10

Dec

-10

Mar

-11

Jun-

11

M1 y oy M2 y oy Loan y oy

20%

25%

30%

35%

40%

Jun-

07Se

p-07

Dec

-07

Mar

-08

Jun-

08Se

p-08

Dec

-08

Mar

-09

Jun-

09Se

p-09

Dec

-09

Mar

-10

Jun-

10Se

p-10

Dec

-10

Mar

-11

Jun-

11

FAI y td y oy %

Source: CEIC, HSBC Source: CEIC, HSBC Source: CEIC, HSBC

Consumer confidence China composite leading indicator Industrial production

98100102104106108110112114

Feb-

07M

ay-0

7Au

g-07

Nov

-07

Feb-

08M

ay-0

8Au

g-08

Nov

-08

Feb-

09M

ay-0

9Au

g-09

Nov

-09

Feb-

10M

ay-1

0Au

g-10

Nov

-10

Feb-

11M

ay-1

1

Consumer Confidence Index

96

98

100

102

104

106

May

-96

May

-97

May

-98

May

-99

May

-00

May

-01

May

-02

May

-03

May

-04

May

-05

May

-06

May

-07

May

-08

May

-09

May

-10

May

-11

China Composite Leading Indicator

0%

5%

10%

15%

20%

25%

Jun-

07Se

p-07

Dec

-07

Mar

-08

Jun-

08Se

p-08

Dec

-08

Mar

-09

Jun-

09Se

p-09

Dec

-09

Mar

-10

Jun-

10Se

p-10

Dec

-10

Mar

-11

Jun-

11

Industrial production y oy %

Source: CEIC, HSBC Source: Thomson Reuters Datastream, HSBC Source: CEIC, HSBC

China demand indicators

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Construction indicators Floor space under construction and completed Floor space under construction by type Floor space started and land area purchased

-20%-10%

0%10%20%30%40%50%60%70%

Jun-

07Se

p-07

Dec

-07

Mar

-08

Jun-

08Se

p-08

Dec

-08

Mar

-09

Jun-

09Se

p-09

Dec

-09

Mar

-10

Jun-

10Se

p-10

Dec

-10

Mar

-11

Jun-

11

Floor space under construction (y oy %)Floor Space completed (y oy %)

-20%

0%

20%

40%

60%

80%

Jun-

07Se

p-07

Dec

-07

Mar

-08

Jun-

08Se

p-08

Dec

-08

Mar

-09

Jun-

09Se

p-09

Dec

-09

Mar

-10

Jun-

10Se

p-10

Dec

-10

Mar

-11

Jun-

11

Floor space under construction residential y oy %Floor space under construction non-residential y oy %

-50%-25%

0%25%50%75%

100%125%150%175%200%

Jun-

07Se

p-07

Dec

-07

Mar

-08

Jun-

08Se

p-08

Dec

-08

Mar

-09

Jun-

09Se

p-09

Dec

-09

Mar

-10

Jun-

10Se

p-10

Dec

-10

Mar

-11

Jun-

11

Floor space started total y oy%Land area purchased for development y oy %


Real estate investment Cement production Fixed asset investment – residential building

-15%5%

25%45%65%85%

105%125%

Jun-

07Se

p-07

Dec

-07

Mar

-08

Jun-

08Se

p-08

Dec

-08

Mar

-09

Jun-

09Se

p-09

Dec

-09

Mar

-10

Jun-

10Se

p-10

Dec

-10

Mar

-11

Jun-

11

Real estate inv estment residential y oy %Real estate inv estment non-residential y oy %

-5%0%5%

10%15%20%25%30%

Jun-

07

Oct

-07

Mar

-08

Jul-0

8

Nov

-08

Apr-0

9

Aug-

09

Dec

-09

May

-10

Sep-

10

Jan-

Feb

11

Jun-

11

Cement production y oy %

0%

10%

20%

30%

40%

May

-07

Aug-

07N

ov-0

7Fe

b-08

May

-08

Aug-

08N

ov-0

8Fe

b-09

May

-09

Aug-

09N

ov-0

9Fe

b-10

May

-10

Aug-

10N

ov-1

0Fe

b-11

May

-11

FAI residential building y oy %


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Manufacturing indicators Auto sales and production Electricity production Power cables production

-30%0%

30%60%90%

120%150%

Jun-

07

Oct

-07

Mar

-08

Jul-0

8

Nov

-08

Apr-0

9

Aug-

09

Dec

-09

May

-10

Sep-

10

Jan-

Feb

11

Jun-

11

Auto production y oy % Auto sales y oy %

-10%

0%

10%

20%

30%

Jun-

07

Oct

-07

Mar

-08

Jul-0

8

Nov

-08

Apr-0

9

Aug-

09

Dec

-09

May

-10

Sep-

10

Jan-

Feb

11

Jun-

11

Electricity prodcution y oy %

-20%0%

20%40%60%80%

100%

May

-07

Sep-

07

Jan-

Feb

08

Jun-

08

Oct

-08

Mar

-09

Jul-0

9

Nov

-09

Apr-1

0

Aug-

10

Dec

-10

May

-11

Pow er Cables y oy %


Home appliances* production Air conditioner production Industrial boilers production

-30%

-10%

10%

30%

50%

70%

May

-07

Sep-

07

Jan-

Feb

08

Jun-

08

Oct

-08

Mar

-09

Jul-0

9

Nov

-09

Apr-1

0

Aug-

10

Dec

-10

May

-11

Home appliances production y oy %

-60%-20%

20%60%

100%

140%180%

May

-07

Sep-

07

Jan-

Feb

08

Jun-

08

Oct

-08

Mar

-09

Jul-0

9

Nov

-09

Apr-1

0

Aug-

10

Dec

-10

May

-11

Air conditioner production y oy %

-20%

0%

20%

40%

60%

80%

May

-07

Sep-

07

Jan-

Feb

08

Jun-

08

Oct

-08

Mar

-09

Jul-0

9

Nov

-09

Apr-1

0

Aug-

10

Dec

-10

May

-11

Industrial Boilers y oy %

Source: HSBC, CEIC * Air conditioners + refrigerators + washing machines Source: CEIC, HSBC Source: CEIC, HSBC

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Notes

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Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Andrew Keen, Thorsten Zimmermann, Sarah Mak and Lourina Pretorius

Important disclosures

Stock ratings and basis for financial analysis HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described below.

This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this website.

HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not be used or relied on in isolation as investment advice.

Rating definitions for long-term investment opportunities

Stock ratings HSBC assigns ratings to its stocks in this sector on the following basis:

For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the implied return must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.

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Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change.

*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However, stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.

Rating distribution for long-term investment opportunities

As of 20 July 2011, the distribution of all ratings published is as follows: Overweight (Buy) 52% (23% of these provided with Investment Banking Services)

Neutral (Hold) 36% (18% of these provided with Investment Banking Services)

Underweight (Sell) 12% (19% of these provided with Investment Banking Services)

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.

* HSBC Legal Entities are listed in the Disclaimer below.

Additional disclosures 1 This report is dated as at 21 July 2011. 2 All market data included in this report are dated as at close 18 July 2011, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are

involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

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Disclaimer * Legal entities as at 04 March 2011 ‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; ‘CA’ HSBC Securities (Canada) Inc, Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; ‘GR’ HSBC Securities SA, Athens; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch

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