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1 GLOBAL LME cash price % change US /lb day on day Aluminium Copper Lead Nickel Tin Zinc Cobalt Molybdenum Other prices % change day on day Gold (US$/oz) Silver (US$/oz) Platinum (US$/oz) Palladium (US$/oz) Oil WTI USD : EUR exchange rate AUD : USD exchange rate LME/COMEX stocks Tonnes Change Aluminium 4,893,375-10,650 LME copper 234,200-1,350 Comex copper 45, Lead 314, Nickel 115, Tin 11, Zinc 961,425-3,950 Source: LME, Comex, Nymex, SHFE, Metal Bulletin, Reuters, LBMA, Macquarie Research, August August 2012 Iron ore: deeper destocking Feature article In the on August 15 (when iron ore prices were $113/t) we outlined our view that iron ore appeared oversold and was poised for a rebound. Prices have since fallen a further $20/t and price declines appear to be gathering pace. Here we re-examine the key short-term iron ore indicators and show that while our core thesis is still intact that price weakness is primarily being driven by destocking in China and that this cannot last forever the depth of destocking has been greater than we had initially anticipated with larger mills having a greater impact than expected. This is putting continued downside pressure on iron ore prices. Latest news Base metal prices closed broadly lower on Tuesday with nickel prices the weakest performer, closing down 1.4% on the day. Gold prices were better supported ahead of the Jackson Hole meeting of central bankers next weekend that could outline the likely course of U.S. monetary policy. The commitment of traders report, published Friday evening, showed the largest one week increase in platinum net length over 10 years. The net long position of non-commercial traders increased from under 19k contracts to 26k contracts driven almost equally by short covering and new long positions following supply disruptions at Lonmin's Marikana mine. We would note that the net short position in platinum still sits at elevated levels; as of last Tuesday there were 14k non-commercial short positions compared to a 52-week average of 9k. The rest of the Comex metals also saw net length increase following dovish comments from the US Federal Reserve. Gold noncommercial traders saw 15k contracts of fresh buying, increasing the net position to 140k contracts, while Comex copper net short position decreased by 5k contracts, driven by 3k contracts of short covering. As expected, Chinese steel output is starting to show signs of cutbacks. The latest CISA data shows crude output fell 2% sequentially in the middle 10 days of August to 704mtpa. Meanwhile, the McCloskey China Coal Daily has reported that the 35% drop in domestic coke prices since the start of 2012 means 70% of Shanxi coke production capacity has been idled. In the rare earths sector, Molycorp has started heavy rare earth concentrate operations at its Mountain Pass mine in California. The company, which will be the largest producer of rare earths outside China, reports that it is on course to reach output of ~19,050t REO equivalent by the end of this year and has plans to approximately double output from there over the course of Rusal has said that it will trim a total of ~,000tpa of primary aluminium smelting capacity across a number of its existing plants in Russia by the end of this year and similar reductions will follow over the next three years. However, these changes do not amount to much more than a rounding error in the context of the global market, with significant new capacity under construction in China to add to the global industry's already ample production capabilities, and Rusal itself building out lower cost smelting capacity elsewhere in Russia that will come on stream over the next few years. Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website

2 Sep-10 Nov-10 Sep-10 Nov-10 Iron ore inventory at 50 smaller mills- days of use Spot iron ore prices - 62% Fe, CFR China, $/t Imported iron ore purchasing, mtpa, 6wk ma Iron ore spot price, $/t, CFR China Macquarie Private Wealth Destocking at larger Chinese mills putting real pressure on iron ore In the on August 15 (when iron ore prices were $113/t) we outlined our view that iron ore appeared oversold and was poised for a rebound. Prices have since fallen a further $20/t and price declines appear to be gathering pace. Here we re-examine the key shortterm iron ore indicators and show that while our core thesis is still intact that price weakness is primarily being driven by destocking and that this cannot last forever the depth of destocking has been greater than we had initially anticipated with larger mills having a greater impact than expected. This is putting continued downside pressure on iron ore prices. One of the best indicators of near-term iron ore price movements has been the level of iron ore inventory held by 50 smaller steel mills (the mills produce less than 5mtpa of steel and account for ~30% of Chinese production). Data is collected by a local consultancy and mills report inventory levels for domestic and imported iron ore on a days-of-use basis and also in volume terms. As was the case in the September/October 2011 price decline, inventory at the smaller mills has fallen sharply in volume terms and on a days-of-use basis as iron ore prices have fallen over the last few weeks see Fig 1 below. While on the surface the dynamics of this current round of destocking look very similar to last year, there are some important differences. As the smaller mills in the inventory survey report stocks on both a days-of-use basis and a volume basis, we can back calculate their consumption of iron ore. What s more, if we add the change in inventory volumes to the rate of consumption we can estimate what the rate of iron ore purchasing activity has been at these smaller mills. The chart in Fig 2 below shows the estimated level of purchasing activity specifically of imported iron ore against the spot price for imported ore. In the 2011 downturn, the rapid fall in iron ore prices coincided with a 30% MoM decrease in the level of purchasing activity a true buyers strike driven by the smaller mills. This time, purchasing activity from the smaller mills has fallen just 7% but still prices are falling sharply. Fig 1 Iron ore inventory at smaller mills has fallen sharply with the iron ore price now below the 2011 trough Fig 2 Iron ore purchasing activity at the smaller mills has not slowed much in recent months but still the iron ore price is falling Iron ore inventory (days of use) and spot prices Implied iron ore purchasing (consumption net of stock changes), 6 wk ma vs spot price Imported iron ore purchasing Spot iron ore price Iron ore inventory - days of use Spot iron ore prices Source: Mysteel, TSI, Macquarie Research, August 2012 Source: Mysteel, TSI, Macquarie Research, August 2012 The charts above show that over September-October 2011, the smaller mills reduced inventory by simply buying less iron ore. This year, purchasing activity has hardly been reduced and inventory volumes have been run down instead by increasing the rate of consumption of iron ore by keeping pig iron and crude steel production volumes at a high level. This goes someway to explaining why the reported crude steel production numbers remain persistently high, although it is important to note that finished steel production was cut back quite significantly in July despite crude only falling 1% MoM. 29 August

3 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Apr-11 Oct-11 Apr-12 Days of sales Rebar price, RMB/t Rebar inventory, million tonnes Sep-10 Nov-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 kt/d Macquarie Private Wealth Fig 3 Smaller mills have reduced iron ore inventory by pushing up consumption of ore Fig 4 Production of finished steel has been cut ahead of crude Daily consumption of iron ore - average of 50 smaller mills (not grade adjusted) 15% 10% MoM change in output Crude Hot rolled longs Hot rolled flats % % % % Source: Mysteel, TSI, Macquarie Research, August 2012 Source: Mysteel, TSI, Macquarie Research, August 2012 The fact that smaller mills are yet to show signs of making significant upstream production cuts presents more downside risk for iron ore once mills do start to cut production, iron ore inventory can go lower still meaning the current destock and the associated price decline can continue. In our view production cuts are inevitable as mills inventory of steel has continued to rise and steel traders are not looking to take on extra volumes yet. In fact, steel traders are in a particularly bearish mood it is unusual for them to liquidate inventory in a falling market as they are, at the moment, the only recent precedent being end 2008 and early Fig 5 Mills inventory of steel continues to push up production cuts required Fig 6 Rebar inventory is falling with prices similar to 2008/9 liquidation What level of steel inventory are you currently holding? - Macq steel sector survey Rebar inventory and prices Rebar Price Rebar Inventory Total Large Mills (>10mtpa) M edium M ills (5-10mtpa) Small Mills (<5mtpa) Source: Mysteel, TSI, Macquarie Research, August 2012 Source: Mysteel, TSI, Macquarie Research, August 2012 The question remains as to why iron ore prices have performed so badly if the smaller mills have maintained purchasing activity. The answer lies in the behaviour of the larger and mid-sized steel mills. Larger mills usually keep relatively stable levels of iron ore inventory but, driven by a collapse in profitability, they are currently cutting steel production and inventory levels. This has led to a fall in purchasing activity of iron ore of 10-15% MoM, thus freeing up volumes for the smaller mills to take. 29 August

4 Macquarie Private Wealth The table in Fig 7 below shows the massive impact on top down iron ore demand that results from this destocking. The table is in four parts the top section shows data for total China iron ore demand. This data is the sum of the three sections below, where we have estimated iron ore demand and stock changes across large mills, mid-sized mills and smaller mills. The table shows that for August, although the smaller mills have only reduced apparent demand (purchasing) of iron ore by 7%, the fact that the larger mills have cut back more means that on aggregate, Chinese demand for iron ore could fall 11% MoM or by over mtpa. To further emphasise the importance of destocking and its impact on the market we outline three potential s for September. The first has mills continuing to reduce steel production (quite aggressively) but has them holding iron ore inventory on a days-of-use basis at the same level as August. The result is a 12% or 90mtpa increase in the volume of iron ore purchasing MoM. The second is more bearish steel production is cut by the same degree and inventory days continue to fall. The result is a 2% or 20mtpa decline in iron ore purchasing MoM. The final shows one way that iron ore could rebound back to $130/t production holds at 700mtpa but mills restock iron ore back up to July levels. For a one month view, this now feels difficult and we would attribute a higher probability to the two less positive s. Fig 7 The impact of steel industry-wide iron ore stock changes far outweighs changes in real demand Source: CISA, Mysteel, Macquarie Research, August 2012 stabilisation continued destocking $130/t Total China Units Aug 12 E Current steel production run rate mtpa MoM % change -1% -2% -4% -4% -1% Pig iron production mtpa Implied iron ore demand (62% equiv) mtpa Inventory days days Inventory volumes mt Stock change mtpa Apparent demand for iron ore mtpa MoM % change -11% 12% -2% 38% Larger mills (>10mtpa) Jul Aug E Sep E Sep E Sep E Current steel production run rate mtpa MoM % change -2% -5% -4% -4% -1% Pig iron production mtpa implied iron ore demand (62% equiv) mtpa Inventory days days Inventory volumes mt Stock change mtpa Apparent demand for iron ore mtpa MoM % change -13% 11% -1% 33% Mid sized mills (5-10 mtpa) Jul Aug E Sep E Sep E Sep E Current steel production run rate mtpa MoM % change 2% -4% -4% -4% -2% Pig iron production mtpa implied iron ore demand (62% equiv) mtpa Inventory days days Inventory volumes mt Stock change mtpa Apparent demand for iron ore mtpa MoM % change -13% 7% -4% 26% Smaller mills (<5 mtpa) Jul Aug E Sep E Sep E Sep E Current steel production run rate mtpa MoM % change -1% 3% -4% -4% -1% Pig iron production mtpa implied iron ore demand (62% equiv) mtpa Inventory days days Inventory volumes mt Stock change mtpa Apparent demand for iron ore mtpa MoM % change -7% 16% -3% 52% 29 August

5 CIF Cost China ($/t) Macquarie Private Wealth Below we outline what each of the iron ore demand s outlined above mean in terms of cost support. Combining the various China numbers with estimates for demand for iron ore from other importing regions we arrive at a total iron ore demand number that can be read off our iron ore cost curve. In a where destocking continues through September, iron ore could potentially hit the $80/t level on the cost curve though only as a bottoming rather than settling price. If inventory is held but steel production falls, the cost curve will be impacted at ~$/t, while in a restock situation we could see cost support at the higher end of the curve. Fig 8 Seaborne iron ore demand under different China s Seaborne iron ore demand mtpa Aug-12 E stabilisation continued destocking $130/t China Europe Japan Korea Taiwan Total Fig 9 Cost support could be as low as $80/t if destocking continues Supply curve to Chinese market for iron ore fines Vale Rio Tinto BHP Billiton FMG Other Australia Other Brazil India Africa China Other continued destocking stabilisation $130/t+ Volume (mt) Source: Customs data, Macquarie Research, August 2012 Source: Company data, Macquarie Research, August August

6 Macquarie Private Wealth Tuesday 28 August 2012 Commodities Prices Closing price * Closing price * 28-Aug Aug Aug Aug-12 % ch. day 2012 YTD Ave 2011 US$/tonne US /lb US$/tonne US /lb on day US$/tonne US$/tonne LME Cash Aluminium 1, , ,030 2,395 Aluminium Alloy 1, , ,938 2,262 NAASAC 1, , ,034 2,379 Copper 7, , ,970 8,811 Lead 1, , ,999 2,398 Nickel 16, , ,861 22,831 Tin 20, , ,026 26,021 Zinc 1, , ,946 2,191 Cobalt 29,500 1,338 29,500 1, ,728 35,702 Molybdenum 26,000 1,179 26,000 1, ,235 34,381 LME 3 Month Aluminium 1, , ,069 2,420 Aluminium Alloy 1, , ,965 2,259 NAASAC 1, , ,080 2,261 Copper 7, , ,957 8,825 Lead 1, , ,016 2,390 Nickel 16, , ,929 22,857 Tin 20, , ,053 26,036 Zinc 1, , ,955 2,210 Cobalt 29,500 1,338 29,500 1, ,660 35,507 Molybdenum 26,000 1,179 26,000 1, ,235 34,554 * LME closing price hrs London time. Year-to-date averages calculated from official fixes. Gold - London PM Fix (US$/oz) Silver - London AM Fix (US$/oz) Platinum - London PM Fix (US$/oz) Palladium - London PM Fix (US$/oz) Oil WTI - NYMEX latest (US$/bbl) EUR : USD exchange rate - latest AUD : USD exchange rate - latest 1,668 1, ,640 1, ,521 1, ,519 1, Exchange Stocks Change since last report Cancelled End-11 Ch. since (tonnes) 28-Aug Aug-12 Volume Percent warrants stocks end-11 LME Aluminium 4,893,375 4,904,025-10, % 1,722,975 4,970,400-77,025 Shanghai Aluminium 364, , % - 207, ,346 Total Aluminium 5,257,687 5,268,337-10, % - 5,178,366 79,321 LME Copper 234, ,550-1, % 42, , ,700 Comex Copper 45,701 45, % - 79,817-34,116 Shanghai Copper 158, , % - 93,219 65,719 Total Copper 438, ,097-1, % - 543, ,097 LME Zinc 961, ,375-3, % 132, , ,725 Shanghai Zinc 298, , % - 364,186-65,541 Total Zinc 1,260,070 1,264,020-3, % - 1,185,886 74,184 LME Lead 314, , % 76, ,075-38,875 Shanghai Lead 18,282 18, % - 30,586-12,304 Total Lead 332, , % - 383,661-51,179 Aluminium Alloy 88,440 89,540-1, -1.2% 7, 142,880-54,440 NASAAC, , % 9, ,820-6,900 Nickel 115, , % 13,896 90,048 25,188 Tin 11,560 11, % 5,765 12, Source: Comex, LBMA, LME, Nymex, Reuters, SHFE, Macquarie Research 29 August

7 Macquarie Private Wealth Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie First South - South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 60 % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 30 June 2012 AU/NZ Asia RSA USA CA EUR Outperform 55.67% 61.00% 53.43% 42.58% 69.23% 46.60% (for US coverage by MCUSA, 9.05% of stocks followed are investment banking clients) Neutral 30.50% 22.11% 36.99% 52.41% 28.02% 33.69% (for US coverage by MCUSA, 8.14% of stocks followed are investment banking clients) Underperform 13.83% 16.89% 9.59% 5.01% 2.75% 19.71% (for US coverage by MCUSA, 0.45% of stocks covered are investment banking clients) Company Specific Disclosures: Important disclosure information regarding the subject companies covered in this report is available at Analyst Certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN , AFSL No ) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General Disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN , AFSL No ) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN , AFSL No ) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN , AFSL No ) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. 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