Alan Clark, C&M Group. China s Domestic Alumina Industry and Index Pricing

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1 Alan Clark, C&M Group China s Domestic Alumina Industry and Index Pricing

2 C&M work process and recent projects. C&M Consultancy Privately owned, independent consultancy 20 FTE employees, 15 in China Primary, bottom-up approach to research Mix of single-client and multi-client studies

3 At C&M we get out to find out over 750 targeted field visits through China s aluminium industry

4 Presentation Structure China s domestic bauxite reserves China s current bauxite usage Alumina production and costs Capacity expansions Full cost comparison CMAAX China price index Carbon costs in China s aluminium industry

5 Low A/S ratio ores can be treated with Bayer process Source: C&M, USGS, Company Reports Diaspore with A/S ratio < 5.5 treated using pure Bayer in China Limit of Bayer Process in China Assisted Bayer Technology Sintering Technology South region larger deposits higher grades Can technology unlock lower A/S ratio bauxites? Central region - many deposits declining grades

6 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Imports, Mln tonnes CIF Price, US$/t Bauxite Consump on, Mln tonnes % Bauxite Consump on Domes c Bauxite imports tracking higher, but still only 35% of total usage.. Source: C&M Other Australia India Indonesia Imported Bauxite Domes c Bauxite % Bauxite Consump on Domes c 100% 90% 80% % % % % % % % % Bauxite stock building ahead of new capacity (Shandong) Activity of Chinese traders in Indonesia contributing to higher imports Future of Indonesian bauxite? Future for China s domestic bauxite - quality (A/S ratio) falling?

7 Production, Mln tonnes US$/t RMB/t Q China produced record alumina tonnage Jan-03 Apr-03 Jul-03 Other Jiangsu Hunan Chongqing Guangxi Guizhou Shanxi Henan Shandong Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Alumina production broke 3 million tonnes in May, representing a historic high Triggered by new capacity commissioned across the country, especially in Shandong. Shandong producers remain the marginal Chinese producers due to higher bauxite prices Despite new capacity, Chinese producers unlikely to export large quantities Alumina Price - CMAAX excl. VAT (September 2011) Guangxi Chongqing Guizhou Shanxi Henan 0 0 0% 25% 50% 75% 100% Cumulative Production - % Energy Caus c Shandong Other Bauxite Source: C&M 2,871 2,552 2,233 1,914 1,595 1,

8 Capacity growth 34% y-o-y over five years more to come Source: C&M Key themes of the 12 th 5-year plan are likely to be consolidation, energy saving and emission reduction Accelerated rate of industry consolidation is likely Five or six vertically integrated mega producers likely to emerge. A wave of technology improvements targeting Clean and Green energy are likely to impact the industry

9 Capital Costs in China are low and construction periods are short. Western China Chinese refineries are globally competitive on a full cost basis Source: C&M Capex US$1,800 to US$2,200/t US$500 to US$800/t Const Period ~ 3 Years 1-2 Years Capex outside China generally 2 to 3 times capex in China Chinese have a proven track record to bring on plants quickly Plants typically modular in design with minimal changes replication model Western projects - licenses can take up to 5 years, feasibility studies up to 2 years and construction up to 3 years.

10 CMAAX daily alumina price index gaining traction. Source: CMAAX China slowly recognising the index pricing mechanism Large portion of the Chinese market is 3 rd party traded Allows direct comparison between average China domestic spot prices and imported spot prices New website to go live in two weeks Average daily price chart Export prices Traded daily volumes Number of weekly trades Daily price (US$/tonne) % SHFE 3-day average (RMB/tonne) Previous month avg (RMB/tonne)

11 RMB/t CMAAX pricing reflects the key influences on the Chinese market 2,950 2,850 2,750 2,650 2,550 2,450 2,350 4/01/11 1. Stablising a er December 2010's increase 2. Upward trend towards the Chinese new year when smelters stock up 18/01/11 1/02/11 15/02/11 CMAAX Ex-Works Price Series (17% VAT Included) 1. Demand increase a er spring fes val 2. Smelters restar ng a er power cut 1/03/11 15/03/11 * USD:RMB= 6.50 (average across the data period) 1. Alumina capacity started to roll out 2. Aluminium prices was low 3. Government ghtened loans 29/03/11 12/04/11 26/04/11 1. Cartel mee ng caused price spike 2. Market fundementals reacted to ar ficial price 3.Over supply reaches peak 10/05/11 24/05/11 Days 1. Aluminium produc on picks up 2. New smelters stocking up alumina 3. Higher aluminium price 7/06/11 21/06/11 5/07/11 1. Demand growth for Alumina exceeds produc on increase 2. China Aluminium price rise 3. Traders ac vely purchasing 19/07/11 2/08/11 16/08/11 1. Demand & Supply balances 2. China Aluminium price slumps 3. Tight monetary policy 30/08/11 13/09/11 27/09/ Source: CMAAX Different pricing periods over the past year Stability into the Chinese New Year period Rising demand on the removal of forced electricity cutbacks Period of new capacity coming on-stream Volatility through supply tightness and further capacity commissioning Price rise as new smelters come on-stream and market becomes more balanced Relative price stability as supply / demand balance returns A robust, transparent reference price for Smelter Grade Alumina (SGA) derived from daily market-clearing transactions across China's domestic alumina and primary aluminium industries.

12 Imported prices currently converging with CMAAX index prices... Source: CMAAX

13 Direct (scope 1) carbon price under consideration in China, but RES (scope 2) is currently the only price paid by China s aluminium industry Governmental Funds and Surcharges comprises several items Example: Governmental Funds and Surcharges levied in sales tariff in Ningxia (2010) RMB/kWh Only one item identified is related to environment and energy State has issued specific policies to regulate the collection and use of funds and surcharges Only the Renewable Energy Surcharge is directly used to support clean energy development: Amount of levy has been increased by three times in the past five years Renewable Energy Surcharge* (2006~2010) RMB/kWh (US$/kWh) ( ) ( ) ( ) 2006 Jul 2008 Dec 2009 Note: *For Industry-use sales tariff. Xinjiang s surcharge is RMB/kWh currently. Tibet is exempt from this surcharge. Source: C&M

14 Time for questions