The view downstream: What is the state of the primary aluminium market? Thomas Bradtke, Partner and Managing Director Singapore October 3, 213
The aluminum & gold baby rattle ordered by Napoleon III for son Prince Louis Napoleon in 1856 Alu Downstream-MB_Singapore-3Oct13-2.pptx 1
Aluminum - From luxury good to challenged commodity LME cash price ($/mt annual average at constant 212 prices) 1, 8, 6, 4, 2, 192 1935 195 1965 198 1995 21 1. Prince Louis Napoleon's rattle considered to be one of the first objects made in Aluminum (France 1856), at that time considered an elite material suitable for jewelry Note: 3-month forward LME price used for 29-212 Source: American Bureau of Metal Statistics; American Metal Market; Engineering & Mining Journal; Metals Week; Platt's Metals Week; LME; US Department of Labor Statistics; BCG analysis Alu Downstream-MB_Singapore-3Oct13-2.pptx 2
Continuous margin squeeze and volatility Industry average price and cost of primary aluminum $/mt 3, 2,5 2, LME Price, 3 months contract Avg. global total costs 1,5 1, 2 21 22 23 24 25 26 27 28 29 21 211 Note: Physical premium not included in LME price; partly adds to profits of aluminum producers Source: LME, Harbor intelligence Alu Downstream-MB_Singapore-3Oct13-2.pptx 3
Fighting capex legacies Value chain capital intensity of aluminum, copper, steel (outside of China) Capex from mining to metal production Value Value chain capital intensity Capex(K$/mt) Price (K$/mt) Capex /Value ($/$) 15 14. 8 7.5 6 1 7.9 6 4 4 3.7-5% 5 1.1 2 2.1.7 2 1.9 1.6 Aluminum Copper Steel Aluminum Copper Steel 1 Aluminum Copper Steel 1. Hot Rolled Coil Source: BCG analysis Alu Downstream-MB_Singapore-3Oct13-2.pptx 4
Agenda What caused the industry's challenging situation? Taking action at the industry and company levels Alu Downstream-MB_Singapore-3Oct13-2.pptx 5
2 21 22 23 24 25 26 27 28 29 21 211 212e Copyright 213 by The Boston Consulting Group, Inc. All rights reserved. Demand Strong past aluminum demand Global consumption increase of aluminum, copper, and steel Demand (2 = 1) 6 55 5 45 15.5% p.a. 14.6% p.a. 13.7% p.a. Primary aluminum Finished steel Primary copper 4 35 3 25 2 15 1 1.6% p.a. 1.2% p.a. -1.% p.a. Finished steel Primary aluminum Primary copper RoW Note: 212 values have been annualized based on first 8 months for aluminum and copper and are based on the October 212 WSA short range outlook for steel Source: WBMS, WSA, BCG analysis Alu Downstream-MB_Singapore-3Oct13-2.pptx 6
Demand Chinese downstream exports grew 28% p.a. since 2 Chinese imports/exports of selected semi-fabricated & fabricated aluminum products, 2-211 Chinese imports Chinese exports Mill. mt % Mill. mt % 5 3% 5 3% 4.4 4 4 +28% 3.4 3 2% 3 3. 3.2 2% +2% 2.4 2 1% 2 1.3 1.9 1% 1.5.4.5.5.6.6.6.6.6.6.6.6 1.3.3.4.6.8 2 22 24 26 28 21 % 2 22 24 26 28 21 % Import/export of semi-fabricated and fabricated products 1 % of Chinese Primary Aluminum Demand % of RoW Primary Aluminum Demand 1. Comtrade codes: 763-7616 Note: Some significant finished aluminum product categories are not included in the above analysis (e.g., aluminum wheels) Source: Comtrade, IAI, BCG Analysis Alu Downstream-MB_Singapore-3Oct13-2.pptx 7
Supply Supply-induced crisis Production capacity and consumption of primary aluminum, China and Rest of World China Rest of World Mt 94% 89% 94% Mt 94% 77% 8% 4 4 3 3 26.7 25.2 29. 22.4 3.5 24.5 2 1 11.2 1.5 15. 13.4 17.8 16.7 2 1 27 29 211 27 29 211 Capacity (Q2) Consumption (avg. with previous year) Consumption as % of capacity Source: Harbor Intelligence, WBMS, BCG analysis Alu Downstream-MB_Singapore-3Oct13-2.pptx 8
Supply China increased production to match local demand growth Primary aluminum consumption and production in China China: Primary aluminum production China: Primary aluminum consumption Mt 2 15 +18.% 13. 12.6 12.9 16.2 18.1 19.6 Mt 2 15 19.7 17.6 15.9 +15.5% 14.3 12.3 12.4 1 5 2.7 3.4 4.4 5.5 6.8 7.8 9.3 1 5 3.5 3.5 4.2 5.2 6.1 7.1 8.6 2 22 24 26 28 21 212e 2 22 24 26 28 21 212e Note: 212 values have been annualized based on first 8 months; Ukraine is considered a member of CIS, although it never ratified the charta Source: WBMS, BCG analysis Alu Downstream-MB_Singapore-3Oct13-2.pptx 9
Supply Oversupply outside of China likely to worsen Production capacity and consumption of primary aluminum, China and Rest of World China Rest of World Mt 5 94% 89% 94% Mt 9-94% 5 94% 77% 8% 73-75% 4 3 31-32 28-3 4 3 26.7 25.2 Industry expectation is lower capacity due to cancellation of additional projects 29. 22.4 3.5 24.5 36-37 ~27 2 1 11.2 1.5 15. 13.4 17.8 16.7 2 1 27 29 211 217f 27 29 211 217f Capacity (Q2) Consumption (avg. with previous year until 211) Consumption as % of capacity Note: 217 capacity assigns probability between and 8% for "present, upcoming, and potential projects" listed by Harbor Intelligence; also assumes capacity creep of.5% p.a. Source: Harbor Intelligence, WBMS, BCG analysis Alu Downstream-MB_Singapore-3Oct13-2.pptx 1
Supply 7% p.a. demand growth required outside of China to match expected 217 primary aluminum capacity Mt Warehouse overstock available to fulfill further demand Demand CAGR: 7% Capacity 217e 37.1 36.5 3.5 Capacity Q2 211 3.5 3.4 Demand CAGR: 3% 211 212 213 214 215 216 217 218 219 22 Source: BCG Analysis Alu Downstream-MB_Singapore-3Oct13-2.pptx 11
Industry outlook Current momentum case Upstream Outlook Primary Downstream Source: BCG Analysis Alu Downstream-MB_Singapore-3Oct13-2.pptx 12
Agenda What caused the industry's challenging situation? Taking action at the industry and company levels Alu Downstream-MB_Singapore-3Oct13-2.pptx 13
The way forward: Ten Action Items for the Aluminum CEO (I) Aluminum CEO Agenda Industry-level agenda Create viable industry structures outside of China Address supply-side issues in China Capture opportunities in the value chain 1 2 3 4 5 6 7 Create industry leader through M&A Create new company for marginal assets Obtain regulatory support for industry actions Accelerate removal of highest-cost Chinese capacity Systematically internationalize Chinese primary aluminum production...... Enterprise-level agenda 8... Achieve enterprise excellence 9... 1... Source: BCG analysis Alu Downstream-MB_Singapore-3Oct13-2.pptx 14
The way forward: Ten Action Items for the Aluminum CEO (II) Aluminum CEO Agenda Industry-level agenda Enterprise-level agenda Create viable industry structures outside of China Address supply-side issues in China Capture opportunities in the value chain Achieve enterprise excellence 1 2 3 4 5 6 7 8 9 Create industry leader through M&A Create new company for marginal assets Obtain regulatory support for industry actions Accelerate removal of highest-cost Chinese capacity Systematically internationalize Chinese primary aluminum production Explore upstream opportunities in bauxite and alumina Focus on high-value or lowest-cost downstream businesses Raise cost excellence to a fundamentally new level Radically improve management of large-capex projects 1 Achieve commercial excellence Source: BCG analysis Alu Downstream-MB_Singapore-3Oct13-2.pptx 15
Strategic implications for upstream Strong-long term demand growth But: Short-term uncertainties But: Growing role of recycling Good condition for upstream growth Decoupling of alumina price from LME Supply curve based logic But: Willingness of smelters to pay Good move for upstream industry Need to focus on cost/capex competitiveness more than ever before Increasing operational challenges Country conditions/ requirements Rising costs Good for operationally superior players Need to focus on cost/capex and incountry strategies more than ever before Consolidation of buyers downstream Industry M&A / Portfolio cleanup Backward integration Good for operationally superior players Cost excellence Commercial excellence Alu Downstream-MB_Singapore-3Oct13-2.pptx 16
How to move to the Champions League: Next generation mining excellence Maturity level for operational excellence 1 Local League Programs at local plant level 2 National League Standardized production system for all production plants 3 Champions League Enterprise excellence established beyond manufacturing Time Get quick wins with bottom-line impact Ensure sustainability and continuous improvement Get full potential across entire organization Need to look outside industry for best practices! Alu Downstream-MB_Singapore-3Oct13-2.pptx 17
Key success factors for next generation mining excellence Change in behaviors and mindsets is key Alignment of senior and mid-level management around continuous improvement targets Targets based on crystal clear view of bottlenecks and key value drivers Broadly shared accountability for improvement (both project and line management) Key elements of continuous improvement infrastructure embedded in workshops Critical mass of managers committed to improvement and fluent in analytical and Lean tools KPIs and motivation system for managers and employees aligned with continuous improvement targets Disciplined monitoring and reporting of progress Employees to the shop floor engaged via two-way communications program Alu Downstream-MB_Singapore-3Oct13-2.pptx 18
Next generation mining excellence can generate massive economic improvements Benefits Benefits potential Observed example benefits 1 Throughput improvement Cost reduction Safety improvement Up to 2% throughput improvement through better coordination, reduced variability, increased asset uptime ~15-2% reduction in operating cost base through removal of staff from site, increased automation and remote ops, lower maintenance costs No fatalities or severe injuries through removal of people from operating environment and minimal variability 3% rail capacity improvement without additional track through integrated operations (rail) 3% staff reduction in operating division due to automation 1-15% reduction in labour costs From 5 to critical incidents per year 2/3 reduction in safety incidents 1. Site visits and BCG project experience Source: BCG Alu Downstream-MB_Singapore-3Oct13-2.pptx 19
Strategic implications for upstream Strong-long term demand growth But: Short-term uncertainties But: Growing role of recycling Good condition for upstream growth Decoupling of alumina price from LME Supply curve based logic But: Willingness of smelters to pay Good move for upstream industry Need to focus on cost/capex competitiveness more than ever before Increasing operational challenges Country conditions/ requirements Rising costs Good for operationally superior players Need to focus on cost/capex and incountry strategies more than ever before Consolidation of buyers downstream Industry M&A / Portfolio cleanup Backward integration Good for operationally superior players Cost excellence Commercial excellence Increasing role of China Great opportunity High degree of uncertainty Need clear China strategy Sales strategy Partnering strategy Alu Downstream-MB_Singapore-3Oct13-2.pptx 2
China securing positions abroad: How to capture the opportunities? Country Australia Foreign investments in bauxite or alumina Shandong Nanshan Aluminum Co. acquired a 2% stake in Gulf Alumina Yankuang Group joint venture with Bauxite Resources Chalco revived bid for rich bauxite deposits on Cape York Peninsula Citic Group bought a 13% stake in Australia s Alumina for 468 M USD Canada Chinalco substantial shareholder of Rio Tinto Limited, as well as of Rio Tinto plc. Fiji Shandong Chiping Xinfa started receiving supply from bauxite mine it has constructed Ghana Bosai acquired 8% of shares in the Ghana Bauxite Company Guinea China Power Investment with planned investment in Guinea bauxite and alumina plant Guyana Bosai Minerals Group Co., Ltd has purchased 7% of Omai Bauxite Minerals Indonesia Chalco, Bosai, and Shandong Weiqiao plans to invest at least 1 B USD in bauxite mines and refineries Laos Yunnan Aluminum Company Limited purchased a majority stake in Sino Lao Aluminum Company Limited to explore bauxite resources Chalco with plan to develop bauxite mine in Laos through joint venture China Nonferrous Metal Industry joint venture to develop Balaven plateau bauxite mine Vietnam Chalco is looking into developing Vietnam's Dak Nong bauxite project Source: Annual reports; Press search; BCG analysis Alu Downstream-MB_Singapore-3Oct13-2.pptx 21
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Alu Downstream-MB_Singapore-3Oct13-2.pptx 24 Copyright 213 by The Boston Consulting Group, Inc. All rights reserved.