This presentation is a tale of two metals: China s copper demand & aluminium supply

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2 This presentation is a tale of two metals: China s copper demand & aluminium supply Al The importance of China as producer of aluminium The structure of China s aluminium industry Five year outlook for China s aluminium production Cu The importance of China as a consumer of copper Structure of China s copper consumption Why most uses of copper are safe from substitution with aluminium

3 Copper and aluminium are two very different base metals Aluminium China the dominant producer and consumer Relatively low barriers to entry Price elastic consumer metal Copper China the dominant consumer Relatively high barriers to entry Price inelastic industrial metal

4 China s aluminium production has grown by a factor of five over the past decade 1.8 Productio on (Mt) Jan-11 Jan-10 Jan-09 Jan-08 Jan-07 Jan-06 Jan-05 Jan-04 Jan-03 Jan-02 Jan-01 Jan-00 Jan-99 4

5 With 40% of global production, China is the world s dominant producer of aluminium 100% 80% 60% 40% 20% 0% Jan-11 Jan-10 Jan-09 Jan-08 Jan-07 Jan-06 Jan-05 Jan-04 Jan-03 Jan-02 Jan-01 Jan-00 Jan-99 5

6 After paying for power, alumina and carbon nothing left to service the investment Cash Cost ( per t) 18,000 15,000 12,000 9,000 6,000 3,000 0 Power Alumina Carbon Labour Other Profit SHFE 6

7 Average power tariffs have more than doubled over the past seven years Power tariff ( per MWh) (E) Power tar riff ( per MWh) 7

8 The doubling of power prices has increased production costs by 4,200 per ton Power tariff ( per MWh) (E) 8,000 6,000 4,000 2,000 0 Power cost ( per t) 8

9 Aluminium sector characterised by low barriers to entry and even lower exit barriers ,000 Productio on (Mt) ,000 15,000 10,000 5,000 SHFE ( per t) Jan-11 Jan-10 Jan-09 Jan-08 Jan-07 Jan-06 Jan-05 Jan-04 Jan-03 Jan-02 Jan-01 Jan-00 Jan-99 9

10 China s aluminium sector has grown despite Beijing s opposition More than half the smelters are wholly or partially owned by local governments Technical innovations have partially offset escalating power prices Investment in integrated power stations assures continual supply (at a cost) Chinese engineers can build new capacity at onethird the cost of comparable international projects 10

11 This is what China s aluminium industry looks like now 11

12 Because of escalating power prices, aluminium sector is relocating to Xinjiang Undeveloped remote region, rich in coal and with a troublesome ethnic minority Develop the West Policy and local ethnic troubles, exempt Xinjiang from decrees forbidding aluminium expansion Low power tariffs more than offsetting additional freight and capital cost. Cash cost of 13,000 cf 16,000 elsewhere Integrated power direct to smelter and not via grid <10 Mtpa of new very productive (500 ka) capacity by 2015, mostly built by experienced producers who will ultimately convert existing sites to industrial parks 12

13 Savings of 3,400 per tonne in is a compelling argument to relocate to Xinjiang Cost ( per tonne) 18,000 15,000 12,000 9,000 6,000 3,000 0 Eastern China Power Alumina Metal Other Saving 13

14 There are still compelling reasons to be positive on copper 1 China remains the key to future copper demand and outlook Is still positive 2 Forecasts of demand destruction have been over done. No recognition of new applications 3 New capacity projects continue to slip as does current supply due to water and power shortages, strikes etc. 4 Labour and equipment shortages affecting new project costs as well as current operations. 14

15 The rest of the copper world stood still while Chinese consumption expanded Consumption (Mt) Jul-11 Jan-10 Jul-08 Jan-07 Jul-05 Jan-04 Jul-02 Jan-01 Jul-99 Jan-98 Jul-96 Jan-95 ROW China 15

16 Share of Consumption China now accounts for more than one-third of global copper consumption 100% 80% 60% 40% 20% 0% Jul-11 Jan-10 Jul-08 Jan-07 Jul-05 Jan-04 Jul-02 Jan-01 Jul-99 Jan-98 Jul-96 Jan-95 ROW China 16

17 As the world s largest consumer of refined copper, China is a key demand driver Share of global demand 100% 80% 60% 40% 20% 0% China Europe USA Japan Korea Other 17

18 Over 60% of China's copper is used in price inelastic industrial applications 100% 80% 60% 40% 20% 0% Constrn. Infrastruct. Industrial Consumer Transport Other 18

19 800 80, , , ,000 0 SHFE ( per t) Consumption (kt) China's copper demand seems insensitive to price (price-inelastic) 0 Jul-11 Jan-11 Jul-10 Jan-10 Jul-09 Jan-09 Jul-08 Jan-08 Consumption SHFE 19

20 As the difference between LME and SHFE prices widens, copper imports increase $-$ $ $900 -$1, $1,500 Net imports Jan-11 Jan-10 Jan-09 Jan-08 Jan-07 Jan-06 Jan-05 Jan-04 Jan-03 Jan-02 Jan-01 Jan-00 Jan-99 -$1,800 Jan-98 - LME-SHFE SHFE ($ per t) Net imports (kt) 400 LME SHFE difference 20

21 China s consumption of copper has a strong correlation to fixed asset investment Apparent Copper Consumption (Mtpa) Fixed Asset Investment ( billion)

22 Share of domestic demand The price inelastic power industry accounts for half of China s copper demand 100% 80% 60% 40% 20% 0% Power Construction Transport Machinery Other 22

23 Copper is the backbone of any modern power system Copper is used in generator windings, distribution transformers and reticulation (NOT transmission) Transformers are a mass of copper and special steel - 60 t of copper per 1 GVA Every 1 GW of generating capacity requires 3 to 5 GVA of transformer capacity Generators use around 10 t of copper per 1 GW Copper is also used in house wiring and reticulation 23

24 Planned increased grid expenditure is very good for copper State Grid Corporation (SGC) is the world s largest purchaser of copper SGC purchased 1.15 to 1.25 Mt of copper last year. Up slightly from 2010 New FYP provides 2.55 trillion grid expenditure by SGC, up 68% from preceding plan FYP is based on programs, not investment so grid investments will not be affected by the copper price 24

25 Following rapid build in capacity, time for China to develop copper intensive grid Installed capacity (GW) 1,200 1,

26 China has under-invested in transmission and distribution Power infrastructure investment 100% 80% 60% 40% 20% 0% USA Generation UK Transmission Japan China Distribution 26

27 Aluminium is not a substitute for copper in electric power systems Aluminium has 62% of copper s conductivity so aluminium wound transformers would be much larger. Prohibitively so? Aluminium cannot handle fluctuating magnetic forces as well as copper so high failure rate from broken windings Copper is very much easier to work than aluminium Aluminium windings require more specialty steel in the transformer core In any case substitution is a long-term problem rather than an immediate concern 27

28 Aluminium is even less suitable than copper for domestic wiring Many authorities prohibit the use of aluminium wire because it is a safety hazard when over-heated and connections loosen Difference in the coefficient of thermal expansion causes aluminium to expand and contract at a different rate to copper which is used in fittings Aluminium is subject to creep (deform) under sustained pressure and more so at high temperature Use of copper avoids galvanic corrosion from use of dissimilar materials 28

29 No sign of substitution: production of electric power cable continues to grow strongly Length (million km) Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 29

30 Sustained production of power and UHV transformers. Where is the substitution? Capacity (GVA) Capacity (GVA) Jan-12 Sep-11 May-11 Jan-11 Sep-10 May-10 Jan-10 Sep-09 May-09 Jan-09 Sep-08 May-08 Jan-08 Power transformers (LHS) UHV transformers (RHS) 30

31 While monthly generator production varies, annual output is steady. Substitution? Capacity (GW) Jan-12 Sep-11 May-11 Jan-11 Sep-10 May-10 Jan-10 Sep-09 May-09 Jan-09 Sep-08 May-08 Jan-08 31

32 It has been long enough where is the evidence of substitution? Producer plans? Cu:Al ratio Jul-11 Jul-08 Jul-05 Jul-02 Jul-99 Jul-96 Jul-93 Jul-90 Jul-87 Jul-84 Jul-81 32

33 Domestic appliances, especially air conditioners consume a lot of copper Appliance Refrigerator Washing machine Air conditioner Freezer Copper intensity (Kg per appliance) 1.13 to to Annual Demand (kt) 90.4 to to 1,

34 Copper demand (Mtpa) These Chinese domestic appliances require more than a million tonne of copper Refrigerator Freezer Air conditioner Washing machine 34

35 China continues to produce a lot of copper intensive consumer appliances Production (Mt) Washing machines Refrigerators Air conditioners 35

36 New technology passenger vehicles are far more copper-intensive Copper content (kg per car) Standard Hybrid 36

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