29/04/2015 Nickel Market Outlook Mike Baril
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Agenda 1 The situation in 2015 2 Potential future nickel supply 2 Nickel Market Outlook 29/04/2015
Today, nickel prices are at an almost 40% discount to long-term expectations % 150 140 130 Metal price as % of long-term analyst consensus forecast** Nickel Aluminum* Copper Zinc Gold Platinum 120 110 100 90 80 70 60 2012 2013 2014 2015 Source: World Bank, Bank reports, Vale analysis *Aluminum includes Rotterdam premium ** Analyst consensus forecast in the given month. Consensus forecast includes as many as 20 banks 3 Nickel Market Outlook 29/04/2015
Current nickel industry margins are at historic lows reflecting the Chinese credit situation and global macro economic concerns LME Stocks Weeks of Consumption 12 Median producer margins and LME stocks Median Producer Gross Margin (%) 90 11 10 9 8 7 6 5 4 Supply from ex. USSR and early 90s recession 08 financial crisis Oversupply of ore from Indonesia 80 70 60 50 40 30 Historical average 3 2 1 Asian financial crisis 20 10 Margin as of April 0 1991 1994 Source: LME, Wood Mackenzie 1997 2001 2004 2007 2010 2013 0 4 Nickel Market Outlook 29/04/2015
From what was an underlying deficit, Chinese de-stocking of both ore and refined nickel shifted the world into surplus 2014 market balance kt Ni 180 250 World (ex. China) demand of 0.9M tonnes implies a 27% surplus of which 150kt went on the LME 70 140 40-110 Balance (excl. Indonesian ore) Arrival of Indonesian ores in Jan/Feb Estimated de-stocking of high grade ores Refined world nickel balance Chinese de-stocking of refined nickel Refined surplus (ex. China) Source: Vale analysis, Wood Mackenzie, CRU, GTIS, Macquarie
De-stocking is well advanced which is anticipated to lead to lower NPI production and higher imports of refined nickel into China China In-Country Ore Inventory Million, wmt 37 31 Dec 41 36 Jan 2014 37 33 Feb Source: Neiba 33 29 Mar 29 26 Apr 27 23 21 19 18 May 26 Jun 25 Jul 25 Aug 25 23 21 19 16 17 15 14 12 10 Sep Oct Nov Low Grade High-Medium Grade Dec Jan 2015 14 9 Feb 12 7 Mar High- and medium-grade ore inventories have fallen below 10M tonnes, less available ore is expected to lead to lower NPI production in 2015 The Qingdao scandal in 2014 along with tight Chinese credit triggered the de-stocking of historical surpluses Decrease in NPI inventories over the past 12 months Drawdown in refined nickel inventories with 103kt of exports in 2014 As de-stocking ends, imports into China are anticipated to increase
The situation for Chinese stainless has been challenging, production expected to improve as the year progresses USD/t 1,300 1,200 1,100 1,000 900 800 700 600 Implied stainless steel margin* (3 month trailing average) Chinese stainless under pressure: Stainless mill profitability under pressure Tight credit, increasing environmental regulations, and European antidumping duties add to challenges Macro-economic concerns kt 4.5 4.0 Mar- 11 Jul- 11 Jan- 12 Jul- 12 Jan- 13 Jul- 13 Jan- 14 Chinese austentic stainless production Jul- 14 Jan- 15 As stainless de-stocking comes to an end, stainless production anticipated to improve as year progresses: March 2015 production improved from February lows 3.5 3.0 Actions being taken to stabilize and stimulate economic growth 2.5 2.0 2011 2012 2013 2014 2015 * Stainless price minus contained nickel and chrome value (assumes the cheaper of LME or NPI) Source: CRU, Vale analysis
At current prices, Chinese stainless mills are shifting their demand to imported nickel in coming months USD/t Ni 5,000 RKEF NPI margin* (based on 10-15% NPI sell price) USD/ mt 1,000 SHFE vs. LME price 4,000 500 3,000 2,000 0 1,000 0 At LME price -500 Anticipated to lead to increasing imports in coming months -1,000-1,000-2,000 2011 2012 2013 At 12,500/t LME 2014 2015-1,500 May 2014 Jul Sep Nov Jan 2015 Mar * Assumes efficient operation
With marginal consumption growth and declining NPI, a significant pickup in Chinese net imports of nickel is anticipated for 2015 kt 1,200 Estimated Chinese Nickel Consumption kt 500 Chinese net nickel imports (imports exports) 1,000 Assumed 3-5% consumption growth From nickel stocks and/or net imports Chinese Production (excl. NPI) Chinese NPI production 400 Net imports Assumes no destocking or restocking for the year +298% 800 300 600 200 400 200 100 0 0 Share of world consumption 2015f 2014 2013 2012 2011 2010 2009 2008 2007 2006 19% 52% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015YTD 2015F
2015 market update Nickel margins are at historical lows. A key influence has been Chinese de-stocking of refined nickel and ore Adjusting for Indonesian ore, the nickel market was actually in a structural deficit in 2014 With falling NPI production, the nickel market is anticipated to shift into a small deficit for 2015 Nickel imports into China are picking-up and at current estimates are expected to show a sizeable year-overyear increase in 2015 10 Nickel Market Outlook 29/04/2015
Potential future nickel supply
With 80% of global undeveloped resources, laterites will play a significant role in future supply World nickel production and undeveloped resource 10% 16% 20% 41% 64% 1.71% 1.77% 1.31% 29% Global nickel mine production 17% 4% Undeveloped Resources* (outside existing mining camps) Source: Vale analysis * Excludes projects under development 12 Nickel Market Outlook 29/04/2015 Low Grade Sulphide Limonite Saprolite High Grade Sulphides
The Philippines will struggle to offset Indonesia as a source of nickel ore exports Nickel contained in Indonesian and Filipino laterite resource 13 Source: Vale analysis Nickel Market Outlook 29/04/2015
Unlikely that future supply will reverse the trend of declining grades % Ni 2.6 2.4 2.2 Saprolite Ore Grades (direct shipping) New Caledonia (exports to Japan) CAGR (%) 2.0 1.8 1.6 Philippines (exports to Japan*) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014-2.3% ( 04-14) -4.1% ( 09-13) % Ni 1.6 1.4 Average annual sulphide head grade Sulphide Head Grade Forecast 1.2 1.0 0.8 14 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Source: DIMENC, Nickel Asia Corp, Wood Mackenzie, Vale analysis * Represents Nickel Asia exports Nickel Market Outlook 29/04/2015-1.8% ( 93-14)
Sulphide discoveries have tended to be lower grade and/or much smaller in recent years Discovery of Key Sulphide Deposits Source: Vale analysis 15 Nickel Market Outlook 29/04/2015
While the market remains pessimistic, there are areas of optimism for potential future demand Still room for increased nickel consumption in end use as wealth in China grows while there are segments that will see weakness, there are other areas of potential nickel growth Actual end use intensity* 2013 World Nickel End Use kg Ni/person 1.4 1.3 1.2 1.1 China EU/US/Japan Automotive Aerospace Other Transport Appliances Electronics Energy 7% 4% 5% 6% 6% 6% 1.0 Chemical, Petrochemical 8% 0.9 0.8 Other Engineering 14% 0.7 0.6 Building & Construction 11% 0.5 Cutlery/Kitchen 11% 0.4 0.3 0.2 2005 2006 2007 2008 2009 2010 2011 2012 2013 Intermediate Products Others 18% 4% Source: Pariser, Vale analysis * Total nickel consumption (primary + scrap) adjusted for net trade in intermediates and final products Source: Pariser, Vale analysis