Expect Growing Tightness€¦ · in the IH 2011. The launch of two physical backed Aluminum ETF´s...

Executive summary: In spite slower manufacturingactivity in the world, global apparent primary aluminumdemand grew in June to a fresh record high given lowerprices, re-stocking needs, and scrap scarcity. Althoughdemand will grow at a lower rate ahead, we expectdouble digit rates of growth in demand in practically allregions of the world in the next two years (we havedowngraded North America and China). Long term, wesee global aluminum demand growing at an underlyingrate above 7.5%. Aluminum output also increased in Juneto a new record high, but the outlook is facing risks givenreluctance/inability by most Western World producers torestart idled capacity and China's government intentionsto stop net capacity expansions in the next three years.Assuming all committed projects in China, Middle East,India and Russia do take place; we expect output to stillfall short of demand in the next two years. Meanwhile, theglobal primary aluminum market is getting tighter underdifferent industry metrics. We expect market deficits inthe next two years and thus further reductions ininventories in terms of weeks of consumption. Marketparticipants seem to acknowledge the prospects of atighter market as reflected in LME option positions, inwhich they see twice the price risk to the upside than tothe downside. We at HARBOR expect prices to tradefrom stable to slightly down in the IIH August-IHSeptember period and then to bounce and reach $2,400per mton (110 cent/lb) before the end of the year, andclimb as high as $2,700 per mton (125 cent/lb) sometimein the IH 2011. The launch of two physical backedAluminum ETF´s will probably provide additional priceimpetus to the upside. We see higher regional premiumsafter a small pause in the short term.

I. ASSESMENT OF GLOBAL DEMAND1 The major global industry sectors that demandaluminum continued to consume more metal than ayear ago, but lost some dynamism in the May-Julperiod. The global automotive sector, which has leadedthe recovery, is now increasing its demand at lower rates,while global construction activity is still only modestlycollaborating to the equation. Can sheet demand levels inthe Developed World remain stalled, but growthcontinues in the Emerging World. Regional detailsshowed that manufacturing activity in China, the US,Japan and EU continued to grow in July but at a slowerpace (the bright spot was India where activity grew at ahigher rate).

All rights reserved. HARBOR Intelligence. 2010. No part of this publication (text, figures, or graphics) may be reproduced, stored, or transmitted whatsoever (electronically, mechanically, recorded, or otherwise) without priorconsent in writing from HARBOR Intelligence. For further subscription information please contact Alejandra Dibildox at +1 (210) 5687705. Brief extracts of this publication may be used for the purpose of commentary oranalysis, provided that the information source is also quoted. HARBOR intelligence: 8409 Crown Wood Dr, Laredo, Texas, USA.

2 With respect to aluminum mill product shipments,all regions (with the exception of North America)experienced a pause/slowdown in April-June period thatwas in synch with lower rates of growth in globalmanufacturing activity.

3 Nevertheless, the story is different with respect toprimary aluminum demand. The May-Jul slowdown inglobal manufacturing activity and mill aluminum productswas not reflected in global apparent primary aluminumdemand in June given what was perceived as “lowaluminum prices” and re-stocking needs. In fact, globaldemand for primary aluminum reached in June a recordhigh of 46.04 million annualized tons. We estimate thatadjusted by seasonal factors, demand rose 12.6% in amonth over month basis. In annual terms, global dailyapparent demand grew 27%.

4 It is important to note that primary aluminumdemand continued to receive a boost fromextraordinary low scrap recovery, which fell to thelowest level in more than 20 years in the US. Fromthese low recovery levels, only 18% stayed home, thelowest rate in at least 50 years. A record 82% of thescrap recovered went to the outside world to mainlysatisfy the growing needs of the booming globaltransportation industry. The most powerful evidence isthe fact that the Aluminum Alloy cash price in the LME istrading above Hi Grade Aluminum cash prices for the firsttime since February 2003 and for the second time sinceMarch 1994.

5 The spike in global demand for primary aluminumgiven low prices, re-stocking needs, and scrapscarcity came mainly from outside China. In June, weestimate that China demand contributed with only 17% ofmonthly global increase, while the Rest of the World(RoW) accounted for 83%. China has been losingleadership in terms of aluminum demand growth in termsof tons since April as the Central Government hasengineered a slowdown in the economy to moresustainable levels.

6 Looking forward to the next 18 months, leadingeconomic indicators suggest that global aluminumdemand should continue to grow ahead at rates abovehistorical averages but below the rates we saw in the pastSept-March period. Regional leading indicators point outthat the ROW should continue to over perform China inthe next quarter.

Expect Growing Tightness

JulyAugust, 2010

SAMPLE

SAMPLE

7 Taking all of the above into account, our modelsare prompting us to slightly upgrade our globalprimary aluminum demand growth forecasts for2010 from 18% to 18.3%, and to downgrade 2011from 18.4% to 15%. We are expecting aluminumdemand to grow at double digit rates practically in allregions during this year and 2011. We downgradedNorth America and China, but upgraded Europe, LatinAmerica and Asia. For 2012 and beyond, we seedemand growing at an underlying rate above 7.5% givenstrong demand growth from emerging markets(especially BRIC countries), the final effects of pent-updemand in the Developed World, aluminum gainingmarket share vs substitute materials, and where westand within the expansionary phase of economic cycle.

II. ASSESMENT OF GLOBAL PRODUCTION8 In June, global primary aluminum production grew1.7% mom to an all time high of 41.6 annualizedmillion tons. China accounted for 89% of the monthlyincrease or the equivalent to 630,000 annualized tons.Nevertheless, preliminary figures for July showedaluminum output in China fell back 8% mom (or theequivalent to 1.4 million tons). This is a reflection ofpreviously announced output cuts in the country (includethe government’s plan to shut obsolete inefficientcapacity, cuts in Henan province that agreed that startedon June 28 and cuts in Guizhou, Yunnan, Hubei andShanxi provinces).

9 In the rest of the world, output remained below2008 highs and is growing only slowly in spiteexpansions in the Middle East and India, given outputdisruptions and reluctance/inability of Western Worldproducers to restart idled capacity. Output in the MiddleEast grew in June the equivalent to 161,000 annualizedtons as Qatalum & Emal smelters continued to ramp up.Production fell in North America (could fall further amidoutput disruptions in Rio Tinto Alcan´s Laterriere smelterin Quebec--half of the 235,000 tpy capacity will beaffected for at least six months) and West Europe (asAlcoa´s Avilés smelter in Spain suffered disruptions-willrestart production by IVQ of this year).

10 In fact, poor aluminum output growth in theAmericas and Europe remains as the most likelyscenario for the future supply landscape. Practicallyall the aluminum output capacity increase expected for2010-2014 should come from China (11.2 million tons),Middle East (4.2 million tons), India (2.9 million tons)and Russia (1 million ton) amid either its own domesticdemand story (China, India), proximity to growingmarkets and/or cost advantage (Middle East andRussia). The high-cost output of North America andWestern Europe will hardly return on stream.

11 Additionally, recent government measures inChina (initially expected to be the main contributorof new capacity in the next four years) arejeopardizing future aluminum output capacityexpansions in that country. In the very short term,Chinese government is ordering energy-intensivecompanies to shut inefficient capacity to save energy. Atotal of 17 aluminum companies will have to shut371,000 tpy of capacity by the end of next month, withChalco (the biggest Chinese aluminum producer)ordered to close 120,000 tpy of capacity or 3% of its2009 total capacity. Companies that fail to meet thisruling will loss financial support (access to loans,approval of new investments and land access) and facesuspension of electricity supply.

12 Moreover, these measures seem to have astructural background. The Central government isanalyzing a proposal to limit China’s aluminum capacityto 20 million tpy by 2015, which implies in theory theywill not allow any net new expansions as China hasalready a little more than 20 million tpy of capacity and isproducing at an annual run rate above 17 million tpy. Ifindeed they try to limit output expansions just partially,our Chinese output forecasts for the next 5 years willresult to be too high. This implies that China will havelarge structural deficits of primary aluminum and that itwill have to soak up most of the new capacity comingfrom Middle East (assuming India will move into balanceand less than announced capacity growth in Russia)causing additional significant tightness in the rest of theworld. We should closely watch compliance of alreadyannounced cuts in China and future developments onstructural measures.

13 The output side of the equation is highly fragiletoday, either by insufficient energy, non-economiccapacity, unexpected failures or official measures.The situation in China adds to the context of frequentoutput disruptions in the rest of the world. As we alreadystated, only in the last two months, disruptions havetaken place in Canada, Spain, Venezuela and India.Additionally, Qatalum (one of the two main sources offresh production outside China so far this year) has justannounced that a power failure disrupted output at thesmelter. Our best estimate is that at least in the shortterm, this represents a loss of 210,000 tpy of capacityand the company itself has said that “the ramp-up of theQatalum aluminum plant, which was scheduled to becompleted in the fourth quarter this year, will be delayedas a result of the incident”. All of the above shows howfragile the output side of the equation is today, againeither by insufficient energy, non economic capacity,unexpected failures or official measures.

JulyAugust, 2010

SAMPLE

14 Reality is that incentives for producing primaryaluminum are low at this time. Cash profit margins areway below historical average of 20%, while cash costshave an underlying upward trend. In July, aluminumprices in the LME continued to trade at the same levelas the average global full cost of producing aluminum($2,000 per mton), which implies that half of theindustry is losing money. Historically speaking this isunsustainable.

15 In China (the most important aluminum producerin the world), key aluminum raw materials remainconsiderably above last year levels, but in monthlyterms have fallen slightly since June reflecting net outputdeclines. The benchmark for thermal coal in China, theQuinhuandgao 600 kc spot price, is trading at $110.7per mton, 23% above year ago levels, but 6% belowMay of this year. Anode prices are 30% up from a yearago, but down 7% since May. Imported alumina pricesare 10% above Aug ‘09, but down 10% from this year’speak. Beyond the very short term, the fact is that Chinais structurally bull for raw materials, implying anunderlying upward trend in the cost of producingaluminum.

16 Our models are prompting us to slightlydowngrade our global aluminum output growthforecast for 2010 from 13.3% to 13.2% and for 2011from 15% to 13.1%. For 2012-2015 we are expectingan average annual increase of 6.1% (assuming allalready committed projects actually take place, whichunder current circumstances seems an optimisticscenario), which is below the underlying rate of annualgrowth of global aluminum demand of at least 7.5%.

III. ASSESMENT ON MARKET BALANCE17 Global aluminum market is getting tighter. In June(latest official data), global daily apparent aluminumdemand surpassed global daily aluminum output by 4.4annualized million tons. In the first half of this year, anaverage annualized apparent deficit of 0.26 million tonswas generated vs a surplus of 2.97 million tons in thesame period of ’09. Growing tightness is being evident inglobal visible nominal inventory levels, which althoughremain near record highs, have already peaked. Visibleinventories fell in June to 6.6 weeks of apparentaluminum consumption, considerably below the peak ofMay ´09 (9.6 weeks) and below the historical average(7.1 weeks). The fall in inventory levels continued lastmonth mainly as European inventories continued in afree fall and stood below Asian levels .

18 The clearest evidence of metal tightness is thebroad based upward trend in aluminum premiums.Premiums in the US and Japan fell only marginally in thelast month in spite of weak seasonals, and still remainnear multi year highs. US Midwest aluminum premiumsdecreased slightly in late June from 6.75 cts/lb to 6.63cts/lb. In Japan, premiums for the IIIQ ‘10 have beenmostly agreed at $122-124 per mton, slightly down fromall time highs of $130 per mton in the IIQ of the year.Meanwhile, European aluminum premiums (duty paid)increased a bit in the last week of June to fresh multi-year highs of $175 per mton.

19 Our broadest measure of market balance, whichcombines commercial inventory movements, forwardcurve, regional premiums, alumina price trends, SHFE-LME price spread among others, confirms there isgrowing metal tightness in the market since June of lastyear.

20 Taking into account ongoing short andmedium/long term global aluminum demand &output trends, our models suggest we shouldexpect an annual market surplus of no more than200,000 tons in 2010 and a deficit of around 500,000tons in 2011 (we were previously expecting a surplus of394,000 tons for this year and a deficit of 970,000 tonsfor 2011). Both forecasts imply falling inventories interms of weeks of consumption. Beyond 2011, there is ahigh risk for the aluminum market to enter into a periodof deficits as today´s confirmed output capacityexpansion projects won´t be enough to meet the risingaluminum demand in the world, especially if additionaloutput capacity in China is actually curbed and/or limitedby official measures.

IV. ASSESMENT ON FINANCIAL FLOWS21 Market fear (VIX index) returned in July to levelsconsistent with upward trends in metal prices givenexpectations of no further monetary tightening in Chinaand as EU financial fears continued to ease on positivebank stress tests and economic data. So far August,market fear has remained at normal levels. In July, mostcommodity and equity markets rallied (copper and S&Pover performed, while the US dollar index fell 5% andgold prices decreased 7%). In the specific case ofaluminum, our proprietary Aluminum Sentiment Indexreturned to bullish territory in mid July after sixconsecutive weeks inside bearish zone.

JulyAugust, 2010

SAMPLE

22 The decline in fear and a slowdown in USeconomic activity, caused the US dollar to continueto weaken and to enter a bearish mode stance, whichusually attracts long positions in commodities. Thefalling US dollar in a context of normal market fearmotivated funds that had been betting on loweraluminum prices to cover their short positions. Actually,in the beginning of this month some incipientspeculative betting on higher prices has been registered(fresh long positions).

23 According to LME data on aluminum optionpositions, the market expects prices to trade above$1,700 per mton (77 cent/lb) and reach as high as$3,500 per mton (158 cent/lb) in 2011. This year theoption market sees prices peaking at $2,500 per mton(113 cent/lb). In other words, given today´s prices, theoptions market estimates the price risk to the upside tobe more than twice than to the downside.

24 The possible launch of two physically-backedaluminum ETFs (Exchange Traded Funds) by theend of the year implies a new market for funds/retailinvestors. One of the ETF is expected to be supportedby UC Rusal (rumors are that other aluminum producerscould also participate) and three Russian banks. TheETF is expected to be launched in the IVQ of this yearor earlier and would be backed by one million tons ofphysical aluminum. The other ETF in the pipeline isexpected to be launched by Glencore-Credit Suisse alsoin the IVQ and be backed by at least another million tonsof metal. If the two ETFs are actually launched, they willremove metal from consumers equivalent to as much as40-50% of today´s LME inventories or 5% of globalannual output. This theoretically should reduce visibleinventories by at least 2 weeks in terms of consumptionand thus push prices up by another $500 per mton in theshort term and $250 per mton permanently.

V. ASSESMENT OF THE PRICE OUTLOOK25 Aluminum prices in the LME have bounced 23%since hitting bottom early last month to $2,249 (102cent/lb). We estimate half of the aluminum priceincrease came from a weaker US dollar and the otherhalf from physical tightness and short covering.

26 Technical and seasonal indicators suggest thatprices could visit support at $2,120-2,020 per mtonzone (95-90 cent/lb) within the next month as the IIHAugust-IH September period tends to be weak fordemand and prices. Nevertheless, our models suggestprices will then bounce and reach $2,400 per mton (110cent/lb) before the end of the year, and climb as high as$2,700 per mton (125 cent/lb) sometime in the IH 2011.Consensus believes prices will end the year no higherthan $2,200 per mton (100 cent/lb) and that prices willnot move far from that level next year.

27 Industry fundamentals and economic cycleanalysis also support the view of higher pricesahead. Prices remain below consensus long term priceequilibrium forecast and remain near historical lows inreal terms. Our models suggest inventory levels in termsof weeks of consumption should continue to decline andthe cost of producing aluminum should trend up. Undereconomic cycle analysis, the expansionary phase has along way to go. The best long term leading indicator wehave suggests we are in a pause and that prices shouldexperience an underlying upward trend for the following18 months.

28 We see higher regional premiums after a smallpause in the very short term. We anticipate growingpremiums given a combination of growing demand andless aluminum availability, especially in North Americaand Western Europe where output capacity utilizationrates are expected to remain as the lowest betweenmajor producing regions of the world.

JulyAugust, 2010

Please see next slide for key charts >>

SAMPLE

SAMPLE

SAMPLE

27

32

37

42

1300

1700

2100

2500

2900

3300

Jan‐07 Jul‐07 Jan‐08 Jul‐08 Jan‐09 Jul‐09 Jan‐10 Jul‐10

1 Global apparent primary aluminum demand rose in June to a fresh all time high…Global Aluminum Demand vs LME 3M Aluminum Prices(monthly data; annualized million tons vs $/per mton)

3 Primary demand continued to receive a boost from scrap scarcity evident in Alloy prices trading above HG

2 …in spite of slower global manufacturing growth, as low aluminum prices motivated restocking

4 We are expecting aluminum demand to grow at double digit rates in most regions in 20102011

Please see next slide >>

Source: HARBOR intelligence with IAI and LME data

Global Industrial Production* vs Global Aluminum Demand(annual % change; six months moving average)

LME Cash Alloy Aluminum Prices vs High Grade($/ per mton)

Source: HARBOR intelligence with LME data

Global Aluminum Demand Forecasts by Region(annual % change)

Source: HARBOR intelligence

JulyAugust, 2010

GLOBAL ALUMINUM DEMAND (DAILY ANNUALIZED RATE)

LME 3M ALUMINUM PRICES ($/TON LEFT SCALE)

‐20

‐10

0

10

20

30

Jan ´01 Jan‐03 Jan ´05 Jan´07 Jan‐09

GLOBAL ALUMINUM DEMAND

GLOBAL IP

*USA, Europe, Japan and China weighted by % of total aluminum consumptionSource: IAI and HARBOR intelligence research.

1000

1250

1500

1750

2000

2250

2500

2750

3000

3250

Jan‐00 Jan‐02 Jan‐04 Jan‐06 Jan‐08 Jan‐10

HI GRADE

ALLOY

20102009

2011

9

‐20 ‐19

‐26

‐7

19 1922

26

181915

11 9

15

‐30

‐20

‐10

0

10

20

30

China North America West Europe Japan Total World


SAMPLE

SAMPLE

‐4.5

‐1.5

1.5

4.5

7.5

Jan ´09 Apr 09 Jul 09 Oct´09 Jan ´10 Apr 10

6 The market is tightening as global inventories fell below historical averages in terms of demand coverage

8 We expect prices to reach $2,700 sometime in the IH 2011 and to hardly trade below $1,900HARBOR´S Monthly Aluminum Price Forecasts 2010-2011 ($/ per mton)

5 Global aluminum production also grew to a record high, but fell short of demand and faces challenges


Please see next slide >>

7 We expect market deficits in the next two years and further declines in inventories in terms of consumption

Source: HARBOR intelligence with IAI data

Global Aluminum Market Annual Balance(million tons; positive readings imply surplus, negative deficit)

Global Aluminum Average Annualized Apparent Balance(thousand tons)

Global Visible Aluminum Inventory Demand Coverage in (quarterly data until IVQ ´08; monthly data from Jan ´09 on)


JulyAugust, 2010

SURPLUS OF 2.97 MILLION TONS

DEFICIT OF 0.26 MILLION TONS

1000

1500

2000

2500

3000

3500

4000

3

5

7

9

11

13

´80 ´84 ´88 ´92 ´96 ´00 ´04 ´08 Dec ´09

ALUMINUM PRICES ($/ per mton right scale)

WEEKS OF CONSUMPTION (Left scale)

9.6 weeks May ‘09

6.6

HISTORICAL AVERAGE7.1 WEEKS

Source: HARBOR intelligence with IAI, SHFE, NYMEX , LME and Bloomberg data

0.34

1.75 1.79

0.21

‐0.54‐0.84

‐1.5

‐0.5

0.5

1.5

2.5

2007 2008 2009 2010 f 2011 f 2012 f

1,800

2,300

2,800

3,300

Jan `10 Apr Jul Oct Jan `11 Apr Jul Oct

UPSIDE SCENARIO(25% odds)

REALISTIC SCENARIO(50% odds)DOWNSIDE

SCENARIO(25% odds)


SAMPLE

SAMPLE

SAMPLE

SAMPLE

KEY MONTHLY SUPPLY, DEMAND AND BALANCE FIGURES(monthly data)

Source: HARBOR intelligence research with data from IAI, LME, SHFE, MB

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

DEMAND> Global Aluminum Apparent Demand 29.2 30.5 33.2 32.5 29.8 36.2 34.3 34.8 38.7 38.4 39.5 37.3 38.3 41.2 40.4 41.2 38.6 46.0(million daily annualized tons)

monthly % change 2.7 4.2 9 ‐2.1 ‐8.4 21.3 ‐5.1 1.5 10.9 ‐0.5 2.9 ‐5.6 1.1 7.6 ‐1.8 1.8 ‐6.2 19.3

> China 11.1 11.2 12.1 15.3 14.2 15.9 14.2 14.4 16.2 15.1 16.7 15.5 15.9 16.7 16.2 16.4 16.0 17.2

> Rest of the World 18.2 19.3 21.1 17.2 15.6 20.3 20.1 20.3 22.5 23.3 22.9 21.8 22.4 24.5 24.2 24.8 22.6 28.8

> Global Aluminum Apparent Demand 28.9 27.6 30.9 30.0 28.3 32.5 33.1 33.3 35.0 35.8 36.8 36.3 37.8 37.4 37.7 38.2 36.8 41.4(seasonally adjusted million annualized tons)

monthly % change 4.1 ‐4.4 11.8 ‐2.8 ‐5.8 14.7 2.0 0.5 5.3 2.1 2.8 ‐1.3 4.0 ‐1.0 1.0 1.1 ‐3.6 12.6

OUTPUT> Global Aluminum Output 35.2 35.5 34.2 34.1 34.7 35.6 35.7 36.6 37.9 38.4 39.3 39.0 39.3 40.7 40.5 41.1 40.9 41.6(million daily annualized tons)

monthly % change ‐2.9 0.8 ‐3.7 ‐0.1 1.7 2.4 0.5 2.4 3.6 1.2 2.4 ‐0.9 0.6 3.6 ‐0.4 1.4 ‐0.4 1.8

> China 10.5 11.3 10.4 10.9 11.6 12.5 12.8 13.6 14.8 15.2 16.1 15.7 15.9 17.0 16.4 16.9 16.7 17.3

> Rest of the World 24.6 24.1 23.8 23.3 23.1 23.0 22.9 23.0 23.1 23.1 23.2 23.3 23.4 23.7 24.1 24.1 24.2 24.3

> Global Capacity Utilization Rate 75.7 76.3 73.5 73.5 74.7 76.5 76.9 78.8 81.5 82.6 84.7 84.0 84.5 87.5 87.1 88.3 88.1 89.6

BALANCE> Total Visible Aluminum Inventories* 5.1 5.4 5.5 5.7 6.1 6.0 6.1 6.3 6.2 6.2 6.2 6.4 6.5 6.4 6.4 6.4 6.6 6.3*includes IAI, LME, SHFE, NYMEX and Japanese ports(inventories in million tons)

> Total Visible Aluminum Inventories* 0.5 0.4 0.1 0.1 0.4 ‐0.1 0.1 0.2 ‐0.1 0.0 0.0 0.1 0.1 ‐0.1 0.0 0.0 0.2 ‐0.2(monthly change in million tons)

> Total Visible Inventory* Coverage 8.3 8.6 8.0 8.3 9.8 8.0 8.6 8.7 7.7 7.7 7.5 7.8 7.6 7.4 7.6 7.4 8.2 6.6(inventories in terms of weeks of global apparent demand)

> Global OutputApparent Demand Gap 5.9 5.0 1.0 1.6 4.9 ‐0.6 1.4 1.8 ‐0.8 0.0 ‐0.2 1.8 1.0 ‐0.5 0.1 ‐0.1 2.3 ‐4.4(daily annualized gap in million tons; negative readings indicate deficit, positive indicate surplus)

> HARBOR´S Oversupply Index** Surplus Surplus Surplus Surplus Surplus Surplus Deficit Deficit Deficit Deficit Deficit Deficit Deficit Deficit Deficit Deficit Deficit Deficit(**broader measure of mkt balance which combines commercial inventory movements, forward curve, regional premiums, alumina price trends, SHFELME price spread among others)

PRICES> LME Cash Aluminum Price 1,414 1,329 1,335 1,424 1,458 1,573 1,667 1,931 1,833 1,878 1,949 2,181 2,234 2,048 2,205 2,318 2,047 1,931(monthly average in $/mton)

> SHFE Aluminum Price 1,747 1,757 1,840 1,977 1,884 1,972 2,037 2,201 2,191 2,186 2,212 2,345 2,490 2,387 2,395 2,397 2,223 2,121(monthly average in $/mton)

PREMIUMS> US Midwest Aluminum Premium 4.1 4.1 4.2 4.2 4.2 4.5 5.0 5.1 5.3 5.3 5.3 5.3 5.9 6.1 6.3 6.4 6.7 6.7(prompt; monthly average in cts/lb)

> Dutypaid European Aluminum Premium 17 25 41 45 45 51 63 65 66 76 89 93 102 109 121 140 164 170(prompt; monthly average in $/mton)

> Japanese Premium 61 62 61 57 57 68 77 76 103 120 130 130 130 130 130 130 130 130(CIF; monthly average in $/per mton)

2009 2010

JulyAugust, 2010

GLOBAL VISIBLE ALUMINUM INVENTORIES(monthly data)

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May JunPRODUCER (IAI) INVENTORIES

> Total Producer Inventories 1,690 1,638 1,552 1,413 1,401 1,223 1,176 1,233 1,209 1,207 1,125 1,205 1,265 1,226 1,174 1,210 1,306 1,192(thousand tons)

> North America 325 308 317 285 315 248 263 272 255 249 225 248 259 262 245 248 249 243> Europe 750 701 652 600 542 489 434 472 450 449 430 446 476 467 432 448 457 431

> Asia 272 297 265 242 263 217 213 215 230 226 220 242 242 237 231 252 271 266

> ROW exc China 343 332 318 286 281 269 266 274 274 283 250 269 288 260 266 262 329 252

LME INVENTORIES> Total LME Inventories 2,803 3,208 3,469 3,786 4,233 4,398 4,560 4,614 4,586 4,550 4,599 4628 4,612 4,575 4,600 4,535 4,561 4,428(thousand tons)

> North America 1,182 1,317 1,444 1,625 1,742 1,839 1,913 1,937 1,961 1,979 1,999 2026 2,062 2,087 2,111 2,095 2,160 2,083

> Europe 841 1,008 1,139 1,289 1,481 1,518 1,562 1,589 1,543 1,515 1,537 1508 1,454 1,382 1,351 1,301 1,253 1,189

> Asia 781 884 886 872 1,011 1,041 1,085 1,089 1,083 1,064 1,064 1094 1,097 1,106 1,138 1,140 1,148 1,156> LME Cancelled warrants 20 23 80 47 52 135 162 138 114 123 121 211 246 298 280 263 298 286

NYMEX INVENTORIES> Total NYMEX Inventories 25 24 24 25 24 31 59 43 51 51 51 51 51 51 51 51 51 51(thousand tons)

JAPANESE INVENTORIES> Japanese Port Inventories 363 374 339 295 243 208 174 192 170 171 181 193 199 201 193 190 204 202(thousand tons)

SHFE INVENTORIES> Shanghai Metal Exchange Inventories 179 200 142 140 177 167 180 222 227 261 270 297 333 370 411 434 496 497(thousand tons)

TOTAL WORLD VISIBLE INVENTORIES> IAI+LME+NYMEX+Japanese+SHFE 5,060 5,444 5,526 5,659 6,078 6,028 6,149 6,304 6,243 6,240 6,226 6374 6,460 6,423 6,429 6,420 6,618 6,370(thousand tons)

> Monthly Change in Visible Inventories 505 384 82 133 419 ‐50 121 155 ‐61 ‐3 ‐15 149 86 ‐38 6 ‐9 198 ‐249

TOTAL VISIBLE INVENTORY COVERAGE> Total Visible Inventory* Coverage (WOC) 8.3 8.6 8.0 8.3 9.8 8.0 8.6 8.7 7.7 7.7 7.5 7.8 7.6 7.4 7.6 7.4 8.2 6.6

2009 2010

Source: HARBOR intelligence research with data from IAI, LME, SHFE, MB

JulyAugust, 2010

All rights reserved. HARBOR Intelligence. 2010. No part of this publication (text, figures, or graphics) may be reproduced, stored, or transmitted whatsoever (electronically, mechanically, recorded, or otherwise) without priorconsent in writing from HARBOR Intelligence. For further subscription information please contact Ale Dibildox at +1 (210) 5687705. Brief extracts of this publication may be used for the purpose of commentary oranalysis, provided that the information source is also quoted. HARBOR intelligence: 8409 Crown Wood Dr, Laredo, Texas, USA.

Jul-Aug 2010

12M MAVG (Trend)

12M MAVG (Trend)

> USEuropeJapan can sheet production ispractically stalled in a month over month basis, butis contracting at a faster rate in annual terms. Weestimate that the can sheet sector in the WesternWorld (US, Europe, Japan) rose 0.5% mom in June,after falling 0.5% in the AprMay period. In annualterms, can sheet production contracted in June by5.0%, the sixth consecutive month of yoycontraction and the deepest one since Apr ´09.Nevertheless, can sheet demand continues to growat double digit rates in emerging markets like Braziland Asia.

1

12M MAVG (Trend)

USEUROPEJAPAN ALUMINUM CANS FOR BEVERAGE*(annual % change)

GLOBAL CONSTRUCTION ACTIVITY*(annual % change)

GLOBAL AUTO INDUSTRIAL PRODUCTION*(annual % change)

*USA, Europe, Japan and China weighted by % of total aluminum consumptionSource: HARBOR intelligence research

*USA, Europe, Japan and China weighted by % of total aluminum consumptionSource: HARBOR intelligence research

*USA, Europe and Japan weighted by % of total aluminum consumptionSource: HARBOR intelligence research

> The rate of growth of the global automotive sectorhas eased somewhat from stellar rates registeredearly in the year mainly as production in China haslost dynamism. We estimate that global autoproduction fell 0.9% mom in June (given declines inChina & US output). In annual terms, global autoproduction rose 32% vs 72% last January. Theabove is mostly explained by China´s autoproduction annual growth rate slowing down from140% in Jan ‘10 to 19% in Jun ’10 .

> Global construction activity accelerated slightly itspace of annual growth in the JanMay ‘10 period asactivity in the Western World (US, Europe andJapan) contracted less and as China´s fixedinvestment growth remained roughly unchanged(eased a bit from 27% in Jan to 25.9% in May).Global construction activity rose 8.5% yoy in May,the highest rate of annual growth since Sep ‘08 (inthe case of the US and Japan we have replacedformer housing starts data for US constructionspending and Japan’s construction activity figures inorder to get a broader indicator of globalconstruction). 0

5

10

15

20

Jan‐01 Jan‐04 Jan‐07 Jan‐10

‐40

0

40

80


‐12

‐8

‐4

0

4

8


Aluminum Industry Fundamentals

(index; 50= no growth) ($/ton)

Aluminum LME3M price

JPMorgan PMI (left axis)

Global Aluminum Demand by Major Markets(as % of total global demand)

Source: HARBOR intelligence research.

> The underlying trend in major sectors that consume aluminum continues to be up in annual terms but lost some dynamism in the MayJul period. Automotive is leading and construction is lagging. Can sheet demand in WW is contracting.

12 M MAVG (Trend)

2

Contraction Anemic GrowthGrowing Market

Durable Goods7%Packaging

22%

Electrical7%

Others16%

Construction22%

Transportation26%

Source: JPMorgan and HARBOR intelligence research

JP MORGAN GLOBAL MANUFACTURING PMI vs LME ALUMINUM 3M PRICES(monthly data)

USEUROPEANJAPANESE DURABLE GOODS SECTOR(annual % change; weighted by % of world aluminum demand)

Source: HARBOR intelligence research

> USEuropeJapan durable goods output istrending modestly up mom and growing strongly inannual terms. We estimate (still need official datafor June in Europe and Japan) durable goodsoutput rose 1.3% mom in May and then remainedroughly unchanged in June. In a year on yearbasis, our estimate is that durable goods outputrose 12% in June, the fastest pace of annualgrowth in more than ten years. Output of durablegoods has been rising in annual terms all this year,after being in contraction zone for seventeenmonths in a row.

> In summary, global manufacturing activity asmeasured by the JP Morgan global PMI is stillgrowing but at a slower pace since May.Nevertheless, although output and new ordersgrowth eased, employment accelerated whichstrengthens the idea of sustained growth ahead.

‐25

‐15

‐5

5

15


1100

1800

2500

3200

30

35

40

45

50

55

60

65

Jan‐98 Jan‐00 Jan‐02 Jan‐04 Jan‐06 Jan‐08 Jan‐10

Demand in annual terms is:


3

GLOBAL INDUSTRIAL PRODUCTION* vs LME 3M ALUMINUM PRICES(annual % change)

*USA, Europe, Japan and China weighted by % of total aluminum consumptionSource: Federal Reserve HARBOR intelligence research

GLOBAL MANUFACTURING PMI SURVEYS(50=no growth)

Source: ISM, GS, PBC and HARBOR intelligence research

China

USJapan

Europe

> Regional details showed that China, US,Japan and EU manufacturing activity continuedto grow in July but at a slower pace. China wasthe weakest. Nevertheless, activity in India grewat a higher rate.

> Again, we estimate that global industrialproduction lost some traction in June and Julyamid slower growth in all regions. In annual terms,global industrial production rose 10.8% in June,the slowest rate of yoy growth since Feb ’10. Thebulk of this easing came from China, whereindustrial production rose in June by 13.7% yoy,the lower rate since the typically weak JanFebperiod.

India

‐60

‐18

25

68

‐8

0

8

16


Global IP *

Aluminum prices (right axis)

25

30

35

40

45

50

55

60

65

Jan‐02 Jan‐03 Jan‐04 Jan‐05 Jan‐06 Jan‐07 Jan‐08 Jan‐09 Jan´10

ECONOMIC SURPRISE INDEX(daily data; index)

Source: HARBOR intelligence research with Citigroup data‐125

‐75

‐25

25

75


> Despite the recent slowdown, economicgrowth has resulted to be stronger thanexpected (according to the Citigroup EconomicSurprise Index). Developed World is surprisingthe most lately. EMERGING

MKTS

G10 MKTS

Levels above 0 imply growth has resulted stronger than expected


4

INDEX OF ALUMINUM MILL SHIPMENTS BY REGION(Dec 08=100; seasonally adjusted data )> With the exception of North America (which is

the weakest in terms of growth), underlyingshipments of aluminum mill products in majorregions of the world experienced apause/slowdown in AprilJune period. This is insynch with the lower rates of growth in globalmanufacturing activity.

85

105

125

145

165

Jan‐09 May‐09 Sep‐09 Jan‐10 May‐10

CHINA

JAPAN

EUROPE

NORTH AMERICA

+56% June ´10

+45% June ´10

+34% June ´10

+17% May ´10

CHANGE SINCE JAN ´09

> Nevertheless, apparent global primary aluminumdemand spiked in June and reached a recordhigh as the entire supply chain took advantage oflower aluminum prices. We estimate that globaldemand rose in June by a seasonally adjustedmonthly rate of 12.6% to a fresh record high. Inannual terms, global daily apparent demand grew27%. Our models are prompting us to slightlyupgrade our global demand growth forecasts for2010 from 18% to 18.3%, and to downgrade 2011from 18.4% to 15%.

GLOBAL ALUMINUM DEMAND(monthly data, million tons vs $/ per mton)

Source: IAI. LME and HARBOR intelligence research

GLOBAL ALUMINUM DEMAND (DAILY ANNUALIZED RATE)

LME 3M ALUMINUM PRICES ($/TON LEFT SCALE)

27

32

37

42

1300

1700

2100

2500

2900

3300

Jan‐07 Jul‐07 Jan‐08 Jul‐08 Jan‐09 Jul‐09 Jan‐10 Jul‐10

‐20

‐10

0

10

20

30

Jan ´01 Jan‐03 Jan ´05 Jan´07 Jan‐09

*USA, Europe, Japan and China weighted by % of total aluminum consumptionSource: IAI and HARBOR intelligence research.

GLOBAL INDUSTRIAL PRODUCTION* vs GLOBAL AL DEMAND(annual % change; six month moving average)> The MayJul slowdown in global manufacturing

activity was not reflected in global apparentprimary aluminum demand as the ongoing globalaluminum demand recovery has a restockingcomponent in it, that was compounded in June bywhat was perceived as “low aluminum prices”.Our intel suggests restocking will continue to bean additional component pushing aluminumdemand up.

GLOBAL ALUMINUM DEMAND

GLOBAL IP

MARKET IS NOW RESTOCKING AS GLOBAL ALUMINUMD EMAND EXPANDS FASTER THAN UNDERLYING DEMAND

Source: Aluminum Association, JAA, EAA, NBSC and HARBOR intelligence research


SAMPLE

SAMPLE

5

US METALLIC RECOVERY(monthly data in million pounds)

Source: IAI, LME, Comex, Shanghai, Japanese ports HARBOR intelligence research

> At the same time, primary aluminum demand isreceiving a boost from extraordinary low scraprecovery. Scrap scarcity pushes up demand forprimary aluminum. The US recovered 445 millionpounds of aluminum scrap in May, the lowestlevel in more than twenty years and down 40%with respect to June 2007 (the previous peak).

> On top of the low quantities of scraprecovered, only an unprecedented low portion isstaying in the Developed World. In NorthAmerica, 18% of the scrap recovered stayedhome, the lowest rate in at least 50 years. Arecord 82% of the scrap recovered went to theoutside world to mainly satisfy the growingneeds of the booming global transportationindustry.

Source: LME, SHFE, NYMEX and HARBOR intelligence research.

US SCRAP EXPORTS AS % OF METALLIC RECOVERY(monthly data in %)

> As a result, cash aluminum alloy prices aretrading above Hi Grade Aluminum. Record lowavailability of scrap, the booming auto sector, andgrowing structural demand from the emergingworld has contributed without doubt to the factthat the Aluminum Alloy price in the LME aretrading above Hi Grade Aluminum prices for thefirst time since February 2003 and for the secondtime since March 1994. This pattern is cyclicaland shows up before strong multiyear upwardmoves in primary aluminum prices.

0

15

30

45

60

75

90


425

510

595

680

765



LME CASH ALUMINUM ALLOY PRICES VS HIGH GRADE($/per mton)

1000

1250

1500

1750

2000

2250

2500

2750

3000

3250

Jan‐00 Jan‐02 Jan‐04 Jan‐06 Jan‐08 Jan‐10

HI GRADE

ALLOY


‐12

‐7

‐2

3

8

13


> Leading economic indicators suggest thatglobal primary aluminum demand should continueto grow ahead above historical averages but atmore sustainable rates vs early this year.Regional leading indicators point out that theROW should continue to over perform (vs China)at the margin.

6

Total OECD Leading

Indicatorexc China

GLOBAL OECD LI TOTAL VS CHINA(annual % change)

Source: OECD and HARBOR intelligence research

> In annual terms, growth in global apparentprimary aluminum demand remains broad based.In June, demand for primary aluminum in Chinaand outside China grew strongly in a monthlybasis.

Contracting MarketAnemic GrowthGrowing Market

China33%

North America18%

Europe24%

Latin America4%

Others2%

Asia ex China20%

GLOBAL ALUMINUM DEMAND BY REGION 2009(as % of global demand)


OECD Leading Indicator for China

> The spike in global demand for primaryaluminum (given low prices, restocking needs,and scrap scarcity) came mainly from outsideChina. In June, we estimate that China demandcontributed with only 17% of the June´s monthlygrowth in global demand, while the Rest of theWorld (RoW) accounted for 83%. China has beenlosing leadership in terms of aluminum demandgrowth in tons terms as the Rest of the World(RoW) has been growing more every month sinceApril.

GLOBAL ACCUMULATIVE ALUMINUM DEMAND GROWTH(monthly, thousand tons data)

CHINAREST OF WORLD

0

1100

2200

3300

4400

5500

6600

Dec‐08 Mar‐09 Jun‐09 Sep‐09 Dec‐09 Mar‐10 Jun‐10

Demand in annual terms is:

Source: HARBOR intelligence research with IAI, LME, SHFE and China Customs data


> Taking all the above into account, we areexpecting aluminum demand to grow at doubledigit rates practically in all regions in 20102011.We downgraded North America and China.

7

GLOBAL ALUMINUM DEMAND FORECASTS BY REGION(annual % change)

Source: HARBOR intelligence Research

> We should also expect sustained globaleconomic growth ahead as Central Banks havejust started to tighten; the expansionary phase ofeconomic cycle (demand & prices) has a long wayto go.

GLOBAL 10Y INTEREST RATES vs LME 3M ALUMINUM PRICES(% vs $/ton; monthly data)

Source: HARBOR intelligence research with Bloomberg data

> In top of the structural demand that is being andwill be generated mainly in China, India and therest of the emerging economies, aluminum shouldcontinue to gain market participation in keydemand sectors. Aluminum remains considerablycheaper vs substitute materials.

ALUMINUM PRICES VS SUBSTITUTE MATERIALS*(monthly, index Jan 2008=100, prices for North America, aluminum and copper cash LME price)

ALUMINUM

40

60

80

100

120

140

160

180

Jan‐08 Jul‐08 Jan‐09 Jul‐09 Jan‐10 Jul‐10

CR STEEL

COPPERMAGNMPET

Source: HARBOR intelligence research with data from Purchasing Magazine and LME

20102009

2011

9

‐20 ‐19

‐26

‐7

19 1922

26

181915

11 9

15

‐30

‐20

‐10

0

10

20

30

China North America West Europe Japan Total World

1200

1700

2200

2700

3200

1

2

3

4

5

Jan‐00 Jan‐01 Jan‐02 Jan‐03 Jan‐04 Jan‐05 Jan‐06 Jan‐07 Jan‐08 Jan‐09 Jan‐10

TIGHTENING CYCLE STARTS


EASINGCYCLE STARTS

GLOBAL RATES (%)

LME PRICE(right scale)


SAMPLE

SAMPLE

SAMPLE

> In June, China accounted for 89% of themonthly increase or the equivalent to 630,000annualized tons. Nevertheless, preliminary figuresfor July showed aluminum output in China fellback 8% mom (or the equivalent to 1.4 milliontons). This is a reflection of previously announcedoutput cuts in the country (include thegovernment’s plan to shut obsolete inefficientcapacity, cuts in Henan province that agreed thatstarted on June 28 and cuts in Guizhou, Yunnan,Hubei and Shanxi provinces).

CHINA PRIMARY ALUMINUM DAILY OUTPUT (monthly data in thousand tons)

> In the rest of the world, output remains below2008 highs and is growing slowly in spiteexpansions in the Middle East and India, givenoutput disruptions and reluctance/inability ofWestern World producers to restart idledcapacity. Output in the Middle East grew in Junethe equivalent to 161,000 annualized tons asQatalum & Emal smelters continued to ramp up.Production fell in North America (could fall furtheramid the temporal closure of the Rio TintoAlcan´s Laterriere smelter in Quebechalf of the235,000 tpy capacity at least six months) andWest Europe (as Alcoa´s Avilés smelter in Spainis temporarily curtailedwill restart production byIVQ of this year).

NONCHINA PRIMARY ALUMINUM DAILY OUTPUT(monthly data in thousand tons)

Source: HARBOR intelligence research with IAI data 8

GLOBAL PRIMARY ALUMINUM DAILY OUTPUT(monthly data in thousand tons )> With respect to output, global primary aluminum

production also grew in June to an all time high.Global daily aluminum production increased 1.7%mom in June (or the equivalent to 702,526annualized tons) to its highest level ever (41.6annualized million tons). Nevertheless, ourmodels are prompting us to slightly downgradeour global aluminum output growth forecast for2010 from 13.3% to 13.2% and for 2011 from15% to 13.1%.

68

80

92

104

116

Jan‐03 Jan ´04 Jan‐05 Jan‐06 Jan‐07 Jan `08Jan ´09Jan ´10

10

20

30

40

50

Jan‐03 Jan ´04 Jan‐05 Jan‐06 Jan‐07 Jan `08 Jan ´09 Jan ´10

55

59

63

67

71

Jan‐03 Jan ´04 Jan‐05 Jan‐06 Jan‐07 Jan `08 Jan ´09 Jan ´10

Source: HARBOR intelligence research with IAI data



SAMPLE

50

60

70

80

90

100

Africa North America

Latin America

Asia West Europe

East Europe

Oceania China Total

40

50

60

70

80

90

100

Jan‐09 May‐09 Sep‐09 Jan‐10 May‐10

9

CURRENT ALUMINUM PRODUCTION CAPACITY UTILIZATION RATE PER REGION(% of capacity utilization)


88

76

9096

8893

97

89

ExclChina

90

ALUMINUM OUTPUT CAPACITY UTILIZATION RATE CHINA VS WESTERN WORLD (capacity utilization rate; monthly data)

> Utilized capacity in the Western World stood in June at 90% , while capacity utilization in China climbed to a recent record high of 89%

REST OF THE WORLD

CHINA

JUN ´1090.1

JUN ´1088.9

China Middle East India Russia

ALUMINUM PRODUCTION CAPACITY GROWTH ´10´14 PARTICIPATION (% of participation)


3529

21

7

> China, the Middle East and India will account for 85% of the new aluminum output capacity coming on stream in the next five years

> In fact, aluminum capacity utilization rates in North America and West Europe remain the lowest between major producing regions

> This context will hardly change in the years ahead. Practically all the aluminum output capacity increase expected for the next four yearswill come from China, Middle East, India and Russia. The reluctance/inability to increase production in NA and WE is structural.



SAMPLE

SAMPLE

10

ALUMINUM OUTPUT EXPANSIONS SCHEDULED FOR ´10´14(effective increase in output in the year; ktons)


COUNTRY PLANT, COMPANY 2009 2010 2011 2012 2013 2014Iran Arak aluminum smelter 35 40Iran Dubal and Fata Group, Hormozal expansion of AlMahdi 147Iran Jajaram 36Iran China Aluminium International 69 207

Oman Sohar, Betchel 190Bahrain Alba 50 50Qatar Qatalum (Hydro, Qatar Aluminum) 49 244 293UAE Abu Dhabi, Dubai 300 400 300 300 100India Vedanta , Chhattisgarh (Korba 3 phase) 244 81India Orissa, Jharsuguda Vendata II 100 200 450 450India Orissa (Angul), Nalco 78 32India Orissa, Jharsuguda Vendata 200 100 75India Jharkhand, Hindalco 179 180India Mahan, Hindalco 170 189India Adyita, Hindalco 25 334

Saudi ArabiaNFC, SINOMACH and WWIDC, JEC (Jazan EconomicCity)

700

Saudi Arabia MMC, Binladin and Chalco 360 360Saudi Arabia Ras Az Zhor, Ma'aden Aluminum 370Azerbaijan Det.Al LTD, CNEC 60Kazahistan Pavlodar, NFC and Kazahistan Al 62 62

China Baiyin Ibis 40 40China Gansu 68 20China Baise Youjiang 75 75 100China Guanxi (Pingguo, Chalco and Alcoa) 40 210China Laibin Yinhai 299China Shenhuo 153China Henan Dengfeng Power Group 60China Yugang Longquan 288China Vimetco,Linfeng Aluminum 125 150

0

100

200

300

400

500

600

Jul‐10 Oct‐10 Jan‐11 Apr‐11 Jul‐11 Oct‐11

KNOWN ALUMINUM OUTPUT CAPACITY INCREASES COMING ON STREAM BY MONTH ´10´11(thousand tons per year of capacity entering the market in each specific month)


25

105 105141 147

105 105

384350

25 25 25 25 25 25 25 25

530

CONTINUES IN NEXT PAGE


SAMPLE

SAMPLE

ALUMINUM OUTPUT EXPANSIONS SCHEDULED FOR ´10´14(effective increase in output in the year; ktons)


COUNTRY PLANT, COMPANY 2009 2010 2011 2012 2013 2014China Sanmenxia Tianyuan Aluminum Co. 30 50China Hubei Changjiang Aluminum Co., Ltd 65 70China Hebei Luquan Quzhai 40

Mongolia Inner Mongolia, Chalco 200 225 75China Jialian Aluminum 75China Jiangsu, Datun power and gas (Datun Aluminum) 113China Fushun Aluminum 95China Tianlong Aluminum 60 90China Houmei Hongjun 153China Qingtongxia Aluminium Group 270 250 250 230China Qinghai Jinyuan Aluminum Co., 70China Henan Wanji Aluminum 18 192China Sichuan Aba Aluminum Smelter 120 90China Huaxin 121China Yinchuan 193China Zhoungfu 160China Weiqiao Aluminium 130 130China Huanghe Xinye Al Co 50 200China Zouping Aluminum 59 100 100China Xinjiang Uygur Autonomous Region 80 170 110China Yunnan Aluminum 300China Dongyuan Qujing 16 70 80China Liancheng 30Russia Bratsk Aluminum Smelter, Rusal 61 39Russia Taishet smelter, Irkutsk Siberia , Rusal 125 208 208 208Russia Boguchanskaya , Rusal and UES 100 47

Argentina Puerto Madryn, Aluar 41 53Canada Kitimat, Rio Tinto Alcan 70 55

Indonesia Nalco, East Kalimantan 200 300Malaysia Chalco and GIIG Holding, Sarawak 30 300Iceland Helguvik, Century 90 90 90Nigeria ALCSON Rusal 2 5

TOTAL 2,523 4,000 3,909 2,358 2,491 1,585

ALUMINUM OUTPUT RESTARTS ANNOUNCEMENTS


COMPANY SMELTERS RESTART (ktpy) LATEST UPDATE COMMENTS ON COMPLIANCE

China Various3,480 Nov09 All curtailed production has returned, confirmed by

IAI official data for Sep ´09Rio TintoAlcan Tiwai Point undefined (2540 estimated) Jun09 Gradual restart; but it won't return full capacity

UC RusalSiberian smelters, ALSCON (Nigeria) and KUBAL (Sweden)

118* Apr10

*Company has yet to specify how the 118 ktons willbe distributed. Our estimations suggest around 90%of the increase are due to restarts and the rest willcome from fresh capacity in Irkutsk and Nigeria

Trimet Hamburg and Essen 90 Jul10The company began to ramp up to full capacity inthe beggining of the year and has now restored fullcapacity in its Hamburg and Essen smelters

Venalum Smelter in Venezuela 7 Jun10Initially just 3% of the end of December´s energy cut has been restored to the smelters; full capacity isexpected to return by the end of the year

Alcasa Smelter in Venezuela 3 Jun10Initially just 3% of the end of December´s energy cut has been restored to the smelters; full capacity isexpected to return by the end of the year

KAP Montenegro smelter Apr10 The company did not report the quantity ofincreased production

Talco Tajikistan Aluminum 40 Aug09 Already returned to '08 production levels

Aluminij Mostar in Bosnia 35 Oct09 Full production restored in Oct '09

Noranda New Madrid 196 Jun10 Has already returned to full production

Norsk Hydro Neuss 50* Apr10*Hydro had previously announced it would stopproduction in June, but it is still producing at 10% ofits capacity. Could be fully closed in the short term

Dubal Dubal 159 May09 Full production restored after power outage

TOTAL OUTPUT RESTARTS 4,161 11


SAMPLE

SAMPLE

12

SEMIS OUTPUT EXPANSIONS SCHEDULED FOR ´10´14(ktons)


COMPANY TYPE CAPACITY (ktpy) BEGIN PRODUCTIONRio TintoAlcan Cable (Tianjin, China) Aluminum Alloy cable 33 Early 2009

Rio Tinto Alcan (Issoire, France) AluminumLithium Alloys na na

AlcoaMa'aden (Saudi Arabia) Can Sheet 460 2013

Matalco (Canton, Ohio) Billet casting 35 mid 2010

Novelis (Pindamonhangaba, Brazil) Aluminum Sheet 300 2012

Aleris (Richmond, Virgina) Rolling mill Partial restart Sep10

Norsk Hydro (Karmoy, Norway) Recycling Plant 35 2012

Vimetco Alro plant (Romania) Sheet, Coils and Plates 10 2010

Gujarat Foils (India) Foil Jul11

QIMC (Qatar) Extrusions End of 2010

Japan Kobe Steel (Suzhou, China) Aluminum Forgings Aug 2012

Kaiser Aluminum (Kalamazoo,Mich) Rod, Bar and Tube Early 2010

Metallurgical Group FE Mottram (UK) Aluminum Alloy 300 Jan 2010

Runxing Aluminum (China) Flat rolled products 100 On construction

Garmco (Bahrain) Foil mill 25 2011

Garmco (Oman) Sheet & Foil mill 160 2014

CPC (65%) Herman Gutmann (35%) Extrusions 22 End of 2009

Bonnell Aluminum (Carthage, Tennesse) Profiles 16 Dec 2009

Rusal ARMENAL (Armenia) Foil mill 10 Dec 2009

Abu Dhabi Basic Ind CorpMidal Cables (Taweelah) Rod 150 IQ '10

Abu Dhabi Basic Ind CorpGulf Extrusions (Taweelah) Extrusions 50 IIQ ´11

China Northwest Aluminium Foil 50 IH ´09

Henan Zhongfu Industrial Co (China) Aluminum Alloy 300 Late 2012

Yichuan Power Group Rolling mill 600 Jul05

Qinghai Golden Sunshine Electronic Material Formed Foil Dec ´09

Daiki Aluminum Japan (Guandong, China) Aluminum Alloy 65 Jan 2010

Baise Xinghe Aluminum Co Foil 50 Dec 2009

China Zhongwang Holdings Extrusions 200 End of 2011

Kangzhuang Aluminum Co Strip and Plate 60 Dec 2011

Xiamen Xiashun Foil Company Strip and Plate na IIH ´10

Chinalco Zhengzhou Plant Flat rolled products 60 IIH ´09Baotou Lianqiang SpecialType HighPrecision AluminumSheet Co. Flat rolled products 200 Early 2009

Jiangsu Changhong Aluminum Co Flat rolled products 40 Early 2009

Yunnan Aluminum Co. Sheets and strips 40 IH ´09

Yunnan Aluminum Co. Alloy rods 20 IH ´09

Foshan city, Guangdong province. (Chinalco) Billets 55 IIH ´09

Kunshan Aluminum Co., Ltd Foil 25 2009

Chinalco Southwest Aluminum Group Co. Cold Rolled 125 IH ´09

Ningxia Qingtongxia Aluminum Sheets and strips 30 2009

Ningxia Qingtongxia Aluminum Strips 100 2009

Ningxia Qingtongxia Aluminum Foil 20 2009

Yunnan Aluminum Co., Ltd Aluminum alloy rod 40 Early 2009

Yunnan Aluminum Co., Ltd Sheets and strips 90 Early 2009

Xingfa Aluminum (SWAED Sichuan) Profiles 50 2010

Junma Aluminum Foil IIH ´09

Hongchen Package Aluminum caps 120 Early 2010

Alcoa Bohai Aluminum Industries Sheets 220 Sep ´09

Zhejiang Tonghui Co. Foil 35 2010

Shandong Yanzhou Mining Group Extrusions 133 IIH ´09

Jiangxi Jinpeng Aluminum Co. Ltd Profiles 60 IIH ´09

Shandong Yanzhou Mining Group Round billet 15 IIH ´09

Chalco Nanhai Alloy Corp Aluminum Alloy 110 August 2009


SAMPLE

> In fact, in the first half of this year, an averageannualized apparent deficit of 0.26 million tonswas generated. In the same period of ‘09, thealuminum market had experienced an annualizedaverage surplus of 2.97 million tons

Aluminum Prices

(cent/lb) ($/ton)

* Weighted by regional premiums as % of global aluminum consumption

GLOBAL ALUMINUM PREMIUMS* vs LME 3M ALUMINUM PRICE(daily data)

GLOBAL ALUMINUM OUTPUT AND DEMAND(annualized figures in million tons)> At the end, global primary aluminum output fell

in June considerably short of demand. Globaldaily apparent aluminum demand surpassedglobal daily aluminum output by 4.4 annualizedmillion tons.

> The most clear evidence of metal tightness isthe broad based upward trend in aluminumpremiums in spite of weak seasonals. Premiumsin the US and Japan fell marginally in the lastmonth, but still remain near record highs. USMidwest aluminum premium decreased slightly inlate June from 6.75 cts/lb to 6.63 cts/lb. In Japan,premiums for the IIIQ ‘10 have been mostlyagreed at $122124 per mton, slightly down fromall time highs of $130 per mton in the IIQ of theyear. Meanwhile, European aluminum premiums(duty paid) increased a bit in the last week ofJune to fresh multiyear highs of $175 per mton.

GLOBAL ALUMINUM AVERAGE ANNUALIZED APPARENT BALANCE (million tons)

Source: IAI and HARBOR intelligence research

13

OUTPUT

DEMAND

27

32

37

42

47

Jun‐08 Oct‐08 Feb‐09 Jun‐09 Oct‐09 Feb‐10 Jun‐10

1,200

1,650

2,100

2,550

3,000

3,450

1

3

5

7

9

11

4‐Jan‐09 23‐Jun‐03 04‐Dic‐06 17‐May‐10

‐4.5

‐1.5

1.5

4.5

7.5

Jan ´09 Apr 09 Jul 09 Oct´09 Jan ´10 Apr 10

Global Premiums(left scale)

Source: Bloomberg, MB and HARBOR intelligence research



400

1200

2000

2800

3600

4400

5200

02‐Jan‐06 11‐Jun‐07 17‐Nov‐08 27‐Apr‐10

1000

1500

2000

2500

3000

3500

4000

3

5

7

9

11

13

´80 ´84 ´88 ´92 ´96 ´00 ´04 ´08 Dec ´09

14

GLOBAL PRIMARY ALUMINUM STOCKS(thousands of mtons)

Source: IAI, LME, Comex, Shanghai, Japanese ports HARBOR intelligence research

> The gradual tightening of the market is nowbeing evident in visible nominal inventory trends,which, although remain near record highs, theyhave peaked (fell in June to their lowest levelsince Nov ´09).

> In terms of demand coverage, inventories tella more intense story of falling availability, asglobal visible aluminum inventories covered inJune 6.6 weeks of apparent aluminum demand,below the peak of May ‘09 (9.6 weeks) andbelow the historical average (7.1 weeks).

Source: LME, SHFE, NYMEX and HARBOR intelligence research.

GLOBAL COMMERCIAL ALUMINUM STOCKS (mtons)

ShanghaiCOMEXNYMEXLME

GLOBAL ALUMINUM STOCKS/ DEMAND RATIO vs LME 3M PRICES(quarterly data until IVQ ´08; monthly data from Jan ´09 on)

> Indeed, the fall in nominal inventory levelscontinued in July. Global visible aluminumcommercial inventories fell by 47,310 tons in Julymainly amid a withdrawal of 42,775 tons in LMEaluminum inventories. We still need July’s officialfigures for producer inventories (IAI) in order tohave the monthly change in total global visiblealuminum inventories.

Source: IAI, LME, Comex, Shanghai, Japanese ports and HARBOR intelligence research

Al Prices (right axis)

Global Stocks/ Consumption Ratio (woc left scale)

2,200

2,950

3,700

4,450

5,200

5,950

6,700

May‐03 Jan‐05 Sep‐06 May‐08 Jan‐10

9.6 weeks May ‘09

6.6HISTORICAL AVERAGE

7.1 WEEKS


15

LME CANCELED WARRANTS vs LME 3M PRICES(daily data; $ per mton vs mtons)


> More inventory withdrawals should beexpected ahead as the current level of canceledwarrants is still considerably high (despite somedecrease in the last month and a half) andsuggesting a continuation of the downwardtrend in LME inventories.

ALUMINUM CASH PRICES VS HARBOR’S ALUMINUM WELL SUPPLIED INDICATOR LEVEL*(weekly indicator; $/ton)

> The bottom line is that the global aluminum market has been tightening since June of last year and we estimate that itwill probably register annual deficits in the next two years. Our broadest measure of market balance, which combinescommercial inventory movements, forward curve, regional premiums, alumina price trends, SHFELME price spreadamong others, confirms there is growing metal tightness in the market. Our proprietary measure timely showed thealuminum market began to gradually get tighter a year ago.

*formula that includes commercial inventory movements, forward curve, regional premiums, alumina price trends, SHFELME price spread among others

CANCELED WARRANTS (RIGHT SCALE)

LME 3M ALUMINUM PRICES


0

60,000

120,000

180,000

240,000

300,000

360,000

1,000

1,500

2,000

2,500

3,000

3,500

01/10/1997 29/11/2001 29/01/2006 29/03/2010

LME CASHPRICES

(right axis)

WELL SUPPLIEDINDICATOR

MARKET IS IN MONTHLY DEFICIT


MARKET BALANCE 591 22 510 341 1,755 1,798 216 544 847 16

GLOBAL ALUMINUM SUPPLY, DEMAND, AND BALANCE BY REGION (thousand of mtons)

> Our models suggest we should expect an annual market surplus of no more than 200,000 tons in 2010 and a deficit of around 500,000tons in 2011 (we were previously expecting a surplus of 394,000 tons for this year and a deficit of 970,000 tons for 2011). Both forecastsimply falling inventory coverage in terms of weeks of consumption.

2004 2005 2006 2007 2008 2009 2010f 2011f 2012fChina 5,945 7,081 8,744 12,304 13,116 14,327 17,050 20,300 23,400

y/y 19.1% 23.5% 40.7% 6.6% 9.2% 19.0% 19.1% 15.3%

North America 7,193 7,221 7,263 6,458 5,775 4,600 5,480 6,300 6,700y/y 0.4% 1.4% 11.1% 10.6% 20.3% 19.1% 15.0% 6.3%

West Europe 6,716 6,752 6,992 7,295 6,900 5,619 6,850 7,600 8,000y/y 0.5% 4.4% 4.3% 5.4% 18.6% 21.9% 10.9% 5.3%

East Europe 1,670 1,730 1,811 1,919 1,900 1,728 2,050 2,350 2,500y/y 3.6% 4.7% 6.0% 1.0% 9.1% 18.6% 14.6% 6.4%

Japan 2,377 2,286 2,429 2,450 2,400 1,780 2,250 2,450 2,600y/y 3.8% 6.3% 0.9% 2.0% 25.8% 26.4% 8.9% 6.1%

Other Asia 4,591 4,931 5,106 5,175 5,395 5,175 5,743 6,400 6,850y/y 7.4% 3.6% 1.4% 4.3% 4.1% 11.0% 11.4% 7.0%

Latin America 1,171 1,196 1,245 1,330 1,380 1,245 1,470 1,675 1,775y/y 2.1% 5.1% 6.8% 3.8% 9.8% 18.1% 13.9% 6.0%

Africa 413 410 472 517 517 490 515 574 610y/y 0.7% 15.1% 9.5% 0.0% 5.2% 5.1% 11.5% 6.3%

Oceania 403 361 354 370 370 350 375 410 420y/y 10.4% 1.1% 4.5% 0.0% 5.4% 7.1% 9.3% 2.4%

Total World Consumption 30,479 31,967 34,416 37,818 37,753 35,314 41,783 48,059 52,855% 10.1 4.9 7.7 9.9 0.2 6.5 18.3 15.0 10.0

CONSUMPTION BY REGION

2004 2005 2006 2007 2008 2009 2010f 2011f 2012fChina 6,589 7,743 9,317 12,607 13,105 12,964 16,600 20,300 22,600

y/y 18.8% 17.5% 20.3% 35.3% 4.0% 1.1% 28.0% 22.3% 11.3%

North America 5,110 5,379 5,333 5,643 5,783 4,759 4,800 4,927 4,997y/y 7.0% 5.3% 0.9% 5.8% 2.5% 17.7% 0.9% 2.6% 1.4%

West Europe 4,295 4,350 4,175 4,306 4,618 3,722 3,660 3,734 3,824y/y 5.6% 1.3% 4.0% 3.1% 7.2% 19.4% 1.7% 2.0% 2.4%

East Europe 4,140 4,191 4,232 4,460 4,658 4,117 4,195 4,397 4,629y/y 3.6% 1.2% 1.0% 5.4% 4.4% 11.6% 1.9% 4.8% 5.3%

Asia ex. China 2,735 3,139 3,494 3,707 3,923 4,401 5,531 6,902 8,557y/y 10.5% 14.8% 11.3% 6.1% 5.8% 12.2% 25.7% 24.8% 24.0%

Latin America 2,356 2,391 2,493 2,557 2,660 2,508 2,513 2,556 2,556y/y 3.6% 1.5% 4.3% 2.6% 4.0% 5.7% 0.2% 1.7% 0.0%

Africa 1,710 1,748 1,864 1,815 1,715 1,681 1,692 1,692 1,838y/y 19.7% 2.2% 6.6% 2.6% 5.5% 2.0% 0.6% 0.0% 8.6%

Oceania 2,216 2,252 2,274 2,315 2,297 2,211 2,259 2,259 2,259y/y 0.8% 1.6% 1.0% 1.8% 0.8% 3.7% 2.2% 0.0% 0.0%

Nonreported output 707 755 720 749 749 749 749 749 749

Total World Ouput 29,888 31,945 33,906 38,159 39,508 37,112 41,999 47,515 52,008% 6.6 6.9 6.1 12.5 3.5 6.1 13.2 13.1 9.5

PRODUCTION BY REGION


SAMPLE

SAMPLE

> Again, we should expect this market toexperience a maximum nominal surplusof 0.2 million tons in this year, and thenturn into deficit for the next two years.

*Global reported stocks (IAI, LME, Nymex, Shanghai & Japan Main Ports)**Reported stocks in terms of week of consumption

> Consensus and HARBOR expectsthe market to continue to tighten at themargin and see declining inventorycoverage in next two years.

17

GLOBAL ALUMINUM BALANCE FORECASTS BY OTHER ANALYSTS(thousand tons)

ALUMINUM SUPPLY, DEMAND, BALANCE & STOCKS FORECASTS(thousand tons)

Source: WBMS and HARBOR intelligence research

Source: HARBOR intelligence research internal database

Supply Demand Balance Stocks* WOC**´04 29,888 6.6% 30,479 10.1% 591 2,913 5.0´05 31,945 6.9% 31,967 4.9% 22 2,936 4.8´06 33,906 6.1% 34,392 7.6% 486 2,680 4.1´07 38,159 12.5% 37,818 10.0% 341 3,021 4.2´08 39,508 3.5% 37,753 0.2% 1,755 4,776 6.6´09 37,112 6.1% 35,314 6.5% 1,798 6,574 9.7´10f 41,999 13.2% 41,783 18.3% 216 6,790 8.5´11f 47,515 13.1% 48,059 15.0% 544 6,246 6.8´12f 52,008 9.5% 52,855 10.0% 847 5,399 5.3

Analyst 2010 2011 2012HARBOR Intelligence 216 (544) (847)Most Bullish Analyst (JanJul '10) 191 (900) (960)Most Bearish Analyst (JanJul '10) 2970 1370 1079Balance Most Forecasted (JanJul '10) 1126 (25) (243)Best 5 Analyst 1403 565 597CONSENSUS FORECAST 1237 340 246

Inventories in terms of weeks of consumption (WOC)

10.0 9.2 8.3



SAMPLE

SAMPLE

SAMPLE

SAMPLE

11.0

13.5

16.0

18.5

21.0

IQ01 IQ02 IQ03 IQ04 IQ05 IQ06 IQ07 IQ08 IQ09 IQ10

> With respect to key aluminum raw materials, ourbest estimate is that global alumina demand soaredby 5.0% qoq in the IIQ of this year reaching a new alltime quarterly high of 20.3 million tons as a result ofprimary aluminum production also reaching recordhighs (driven mostly by Chinese & Middle Eastoutput). We don’t have official figures for IIQ globalalumina production. Latest official IAI data showedthat global alumina production was 19.5 million tons inthe first quarter of the year. We expect global aluminaconsumption to grow 13.2% this year and 13.4% in2011, while we expect global alumina production toincrease 11% in this year and 12.9% in 2011.

> The alumina market registered in the IQ ‘10 aquarterly surplus of 258,000 tons (taking intoaccount official IAI figures for global aluminaproduction and inferring global aluminaconsumption from the level of primary aluminumproduction), 41% lower than the IVQ ‘09 surplusand the lowest one for a first quarter in threeyears.

18Source: LME, Metal Bulletin and HARBOR intelligence research.

GLOBAL ALUMINA QUARTERLY BALANCE(thousand mtons)


GLOBAL ALUMINA SUPPLY VS DEMAND(million tons; quarterly data)


ALUMINA PRICES(monthly quotes; dlls/ton)

> The surplus could have increased in the IIQ2010, as evident in falling alumina prices. China’salumina prices have continued to fall, whileAustralia export spot alumina prices and Nalcoalumina prices have now joined the downwardtrend. In late June/early July, Chalco alumina spotprices fell from $417 per mton to $390 per mtonand NonChalco alumina spot prices fell from $367per mton at the end of June to $357 per mton atthe end of July. Australia export spot aluminaprices fell in midJuly from $335 per mton (hadremained at those levels since late Mar) to $315,their lowest mark since January. Meanwhile, Nalcotender alumina price fell to its lowest level sinceDecember ’09. The company sold 30,000 tons ofalumina (to be shipped this month) to Glencore for$320.6 per mton FOB. Nalco’s prior tender had analumina price of $378 per mton FOB.

Nalco tenders (fob)

China Chalco Prices

GLOBAL ALUMINA DEMAND

GLOBAL ALUMINA SUPPLY

China non Chalco

150

250

350

450

550

21‐Jul‐08 19‐Jan‐09 20‐Jul‐09 19‐Jan‐10 21‐Jul‐10

Australia export spot prices (fob)

‐800

‐400

0

400

800

1,200

IQ00 IQ01 IQ02 IQ03 IQ04 IQ05 IQ06 IQ07 IQ08 IQ09 IQ10


SAMPLE

2004 2005 2006 2007 2008 2009 2010f 2011f 2012fMARKET BALANCE 315 1,001 2,206 133 1,771 1,660 266 67 567

> Nevertheless, we expect the alumina market will get tighter ahead. We expect a surplus of 0.26 million tons this year down from asurplus of 1.6 million tons in ’09, then roughly balanced in ’11 and a deficit of 0.56 million tons in ‘12 . The market needs a larger scale ofoutput capacity increases to meet the alumina demand that will be generated in the next ten years.

19

GLOBAL ALUMINA SUPPLY, DEMAND AND BALANCE BY REGION(thousand tons)

2004 2005 2006 2007 2008 2009 2010f 2011f 2012fChina 12,914 15,176 18,261 24,710 25,686 25,409 32,370 39,585 44,070

y/y 17.5% 20.3% 35.3% 4.0% 1.1% 27.4% 22.3% 11.3%

North America 10,016 10,543 10,453 11,060 11,335 9,328 9,408 9,657 9,794

y/y 5.3% 0.9% 5.8% 2.5% 17.7% 0.9% 2.6% 1.4%

West Europe 8,418 8,526 8,183 8,440 9,051 7,295 7,174 7,318 7,495

y/y 1.3% 4.0% 3.1% 7.2% 19.4% 1.7% 2.0% 2.4%

East Europe 8,114 8,214 8,295 8,742 9,130 8,069 8,222 8,617 9,072

y/y 1.2% 1.0% 5.4% 4.4% 11.6% 1.9% 4.8% 5.3%

Asia ex. China 5,361 6,152 6,848 7,266 7,689 8,626 10,841 13,528 16,772

y/y 14.8% 11.3% 6.1% 5.8% 12.2% 25.7% 24.8% 24.0%

Latin America 4,618 4,686 4,886 5,012 5,214 4,916 4,926 5,009 5,009

y/y 1.5% 4.3% 2.6% 4.0% 5.7% 0.2% 1.7% 0.0%

Africa 3,352 3,426 3,653 3,557 3,361 3,295 3,316 3,316 3,602

y/y 2.2% 6.6% 2.6% 5.5% 2.0% 0.6% 0.0% 8.6%

Oceania 4,343 4,414 4,457 4,537 4,502 4,334 4,428 4,428 4,428

y/y 1.6% 1.0% 1.8% 0.8% 3.7% 2.2% 0.0% 0.0%

Total Consumption 57,136 61,138 65,037 73,324 75,968 71,271 80,685 91,458 100,241% 10.1 7.0 6.4 12.7 3.6 6.2 13.2 13.4 9.6

CONSUMPTION BY REGION

2004 2005 2006 2007 2008 2009 2010f 2011f 2012fChina 6,994 8,510 13,436 18,552 21,781 22,895 25,921 28,421 30,221

y/y 21.7% 57.9% 38.1% 17.4% 5.1% 13.2% 9.6% 6.3%

North America 5,895 5,945 5,929 5,331 5,277 3,540 3,351 4,018 4,018

y/y 0.8% 0.3% 10.1% 1.0% 32.9% 5.3% 19.9% 0.0%

West Europe 4,982 4,931 4,998 5,224 5,089 3,502 3,110 3,130 3,130

y/y 1.0% 1.4% 4.5% 2.6% 31.2% 11.2% 0.6% 0.0%

East Europe 4,771 4,833 4,853 4,920 4,771 4,189 5,251 5,251 5,251

y/y 1.3% 0.4% 1.4% 3.0% 12.2% 25.4% 0.0% 0.0%

Asia ex. China 4,460 4,533 4,489 4,737 5,221 5,155 5,675 8,295 10,678

y/y 1.6% 1.0% 5.5% 10.2% 1.3% 10.1% 46.2% 28.7%

Latin America 12,824 12,965 14,667 14,913 15,589 13,161 13,242 14,292 15,342

y/y 1.1% 13.1% 1.7% 4.5% 15.6% 0.6% 7.9% 7.3%

Africa 779 736 530 526 595 530 2,102 3,035 4,385

y/y 5.5% 28.0% 0.7% 13.1% 10.9% 296.6% 44.4% 44.5%

Oceania 16,746 17,684 18,341 18,987 19,416 19,959 22,299 24,949 26,649

y/y 5.6% 3.7% 3.5% 2.3% 2.8% 11.7% 11.9% 6.8%

Total Production 57,451 60,137 67,243 73,190 77,739 72,931 80,951 91,391 99,674

% 5.2 4.7 11.8 8.8 6.2 6.2 11.0 12.9 9.1

PRODUCTION BY REGION


SAMPLE

SAMPLE

SAMPLE

1000

1550

2100

2650

3200

Jan‐03 Jan‐04 Jan‐05 Jan‐06 Jan‐07 Jan‐08 Jan‐09 Jan‐10

> Expected alumina production growth will bejust barely enough to satisfy demand in the nexttwo years (especially in ´11). We should starthearing of more capacity expansion and restartplans in order to meet with the growing demandthat is expected to arise in the mid and long term(estimated requirements of new aluminacapacity for the next ten and twenty years are of17 and 58 million tons respectively).

GLOBAL ALUMINA AND ALUMINUM OUTPUT GROWTH(thousand tons)


20

ALUMINUM VS GLOBAL CASH AND TOTAL OUTPUT COSTS(monthly average, $ per mton)


LME 3M PRICES

$2,007 July

CASH COSTS$1,740 July

TOTAL COSTS$2,000 July

> Reality is that incentives for producing primaryaluminum are low at this time. Cash profitmargins are below the historical average, whilecash costs have an underlying upward trend. InJuly, aluminum prices in the LME continued totrade at the same level as the average global fullcost of producing aluminum ($2,000 per mton),which implies that half of the industry was losingmoney. Historically speaking this isunsustainable.

ALUMINUM RAW MATERIAL PRICES IN CHINA(monthly data; Dec ´09=100)

Source: HARBOR intelligence with Bloomberg and AZ China data

THERMAL COAL CHINA

$110.7 per mton Aug ´10

ANODE IN CHINA$545 per mton

Aug ‘10

> In China (by far the most important aluminumtotal and marginal producer), key aluminum rawmaterials remain considerably above last yearlevels, but in monthly terms have fallen slightlysince June. The benchmark for thermal coal inChina, the Quinhuandgao 600 kc spot price, istrading at $110.7 per mton, 23% above year agolevels, but 6% below May of this year. Anodeprices are 30% up from a year ago, but down 7%since May. Imported alumina prices are 10%above Aug ´09, but down 10% from this year’speak. Beyond the very short term, the fact is thatChina is structurally bull for raw materials thusimplying a underlying upward trend in the cost ofproducing aluminum.

5.26.3 6.0

‐4.8

8.0

10.4

8.3

2.84.1

1.3

‐2.4

4.95.5

4.5

‐6

0

6

12

´06 ´07 ´08 ´09 ´10 f ´11 f ´12 f

Alumina Aluminum

IMPORTED ALUMINA CHINA

$382 per mtonAug ´10

50

75

100

125

Jan‐09 Jul‐09 Jan‐10 Jul‐10

CHINA CASH COST$2,219 July


SAMPLESAMPLE

All rights reserved. HARBOR Intelligence. 2010. No part of this publication (text, figures, or graphics) may be reproduced, stored, or transmitted whatsoever (electronically, mechanically, recorded, or otherwise) without priorconsent in writing from HARBOR Intelligence. For further subscription information please contact Veronica Medina at +1 (210) 5687705. Brief extracts of this publication may be used for the purpose of commentary oranalysis, provided that the information source is also quoted. HARBOR intelligence: 8409 Crown Wood Dr, Laredo, Texas, USA.

Jul-Aug 2010

1,200

1,900

2,600

3,300

70

75

80

85

90

Jan‐08 Jul‐08 Jan‐09 Jul‐09 Jan‐10 Jul‐10

> In this context, aluminum prices have ralliedalong with most commodity and equity markets.Copper and US stock markets have overperformed, followed by aluminum and oil.

> In July, market fear (VIX index) returned tolevels consistent with upward trends in metalprices given expectations of no further monetarytightening in China and as EU financial fearscontinued to ease on positive bank stress testsand economic data. So far August, market fearhas remained at normal levels which are usuallyrelated to higher commodity prices.

> The decline in market fear and a slowdown inUS economic activity, caused the US dollar tocontinue to weaken and to enter bearish mode atleast for the short term (bullish for aluminumprices)

COMPARATIVE COMMODITY PERFORMANCE INDEX FOR JULY ’10 (daily data; Jun 30, 2010=100)


21

ALUMINUM LME 3M PRICES VS FEAR INDEX (VIX)(monthly data; $/ton vs index)

Source: HARBOR intelligence with Bloomberg data

ALUMINUM PRICESLeft axis

ALUMINUM LME 3M PRICES VS DOLLAR/EURO(daily data; $/per mton vs index)


US DOLLARLeft axis

90

95

100

105

110

30‐Jun 7‐Jul 14‐Jul 21‐Jul 28‐Jul

Copper 8%

Gold 7%

Aluminum 4%

Oil 2%

S&P 8%

0

10

20

30

40

50

60

701000

1500

2000

2500

3000

3500

Jan‐07 Ago‐07 Mar‐08 Oct‐08 May‐09 Dec‐09 Jul‐10

CONFIDENCE(VIX indexInverted scaleRight axis)

ALUMINUM PRICESRight axis

> In the same line, energy (a powerful leadingindicator) is suggesting higher prices ahead.Energy is the most important direct and indirectraw material to produce aluminum as itrepresents more than 60% of the total cash cost.Oil prices (WTI) have just reached today pricesof $81.4 per bbl, reentering the $8090 per bblzone, which is consistent with aluminum pricesin the range of $2,2002,700 per mton (100125cent/lb).

> Normal fear levels, a falling dollar and risingenergy prices (usually a bullish scenario foraluminum) prompted funds that were betting onlower aluminum prices to cover their positions.We estimate half of the aluminum priceincrease since bottoming came from a weakerUS dollar and the other half from physicaltightness and speculators withdrawing their betson lower prices (short covering). In fact, latestOI data in the LME suggests there has beensome incipient speculative buying

22

ALUMINUM LME 3M PRICES VS OIL PRICES(daily data;$/ton vs $/bbl)

OIL PRICESLeft axis


ALUMINUM LME 3M PRICES VS OPEN INTEREST(daily data; JanJul ‘10)


1,250

1,850

2,450

3,050

3,650

30

70

110

150

07‐Jan‐04 24‐Aug‐05 11‐Apr‐07 26‐Nov‐08 15‐Jul‐10

ALUMINUM PRICESRight axis

670000

700000

730000

760000

790000

1800

1975

2150

2325

2500

4‐Jan‐10 5‐Mar‐10 4‐May‐10 3‐Jul‐10

ALUMINUM PRICESLeft axis

OPEN INTERESTRight axis

1 PRICES UP AND OI down: Fund short covering (funds buying back sold positions)

> Under economic cycle analysis, data suggestCentral Banks have just started to tighten; theexpansionary phase of economic cycle fordemand and prices has a long way to go.

GLOBAL 10Y INTEREST RATES vs LME 3M ALUMINUM PRICES(% vs $/ton; monthly data)

1200

1700

2200

2700

3200

1

2

3

4

5

Jan‐00 Jan‐01 Jan‐02 Jan‐03 Jan‐04 Jan‐05 Jan‐06 Jan‐07 Jan‐08 Jan‐09 Jan‐10



EASINGCYCLE STARTS

GLOBAL RATES (%)

LME PRICE(right scale)

Source: HARBOR intelligence research with Bloomberg data

SAMPLE

SAMPLE

23

* Each group’s position (netted across all brokers) on all of the three subject prompt dates is measured against the open interest figure for that date. If the group’s net position is big enough as a percentage of the open interest figure for that date, it is reported in the respective band.

>The futures banding report shows thatpositions are evenly dispersed for August andSeptember and slightly short for October.

* Is the number of market participants with concentrations of positions by metals, in five bands. Theaggregate of a participant’s LME warrant holdings and Cash Today (“Tom”) positions as a percentage oftotal stock at close of business as of two days ago. The positions indicated in this table may no longer beheld. The denominator of this ratio – total stocks – is LME Live warrants for the metal. It does not includeholdings of offwarrant stocks or cancelled warrants.

FIGURE ALUMINIUM COPPER LEAD NICKEL TIN ZINC

30 <40% 1 0 1 0 1 0

40 <50% 0 0 0 0 0 0

50 <80% 0 0 0 0 0 0

80 <90% 0 0 0 0 0 0

90% > 0 0 0 0 0 0

ALUMINIUM COPPER LEAD NICKEL TIN ZINC

30 <40%

40 <50%

50 <80% 0

80 <90% 0 0 0

90% > 0 0 0

May June July

LONG/SHORT FIGURE COUNTM1 COUNTM2 COUNTM3

Long 05 <10% 0 4 4Long 10 <20% 0 1 0Long 20 <30% 0 0 0Long 30 <40% 0 0 0 Long 40% > 1 0 0 Short 05 <10% 2 1 2Short 10 <20% 0 1 1Short 20 <30% 1 0 1Short 30 <40% 0 1 0 Short 40% > 0 0 0

August September OctoberLONG/SHORT FIGURE COUNTM1 COUNTM2 COUNTM3

Long 05 <10% Long 10 <20% Long 20 <30% Long 30 <40% 0 0 Long 40% > 0 0 Short 05 <10% Short 10 <20% Short 20 <30% Short 30 <40% Short 40% >


LME FUTURES BANDING REPORT(number of players with open positions as % of total open interest; as of Aug 3)

LME WARRANT CASH BANDING REPORT*(concentration as % of total stocks; as of Aug 3)

Source: LME and HARBOR intelligence research

> According to the most recent LME reports,one dominant player continues to hold 30%40% of the LME aluminum inventories.

LME ALUMINUM OPTIONS OPEN INTEREST (number of contracts per month)


> There is still notably low open interest in theoption market for the next year. This probablymeans (just as it happened so far this year), thereis significant portion of the market that has nothedged its requirements for 2011. If pricesactually continue to trend up (as our modelssuggest) we could see a strong and rapid wave ofpurchases in coming months.

0.2

0.7

1.2

1.7

2.2

2.7

0

30,000

60,000

90,000

120,000

150,000

180,000

210,000

Jan´07 Jan´08 Jan´09 Jan ´10 Jan '11

OPEN INTEREST

Put/Call ratio

SAMPLE SAMPLE

24

LME AL prices

Call strike price with highest OI

Put strike price with highest OI

LME ALUMINUM AVERAGE CASH vs CALLS AND PUTS STRIKE PRICE WITH HIGHEST OPEN INTEREST(monthly data; $/ per mton)

LME ALUMINUM CASH PRICE vs LME ALUMINUM PUT/CALL RATIO(monthly data; ratio vs $/per mton)


> The put/call ratio indicator suggest the LMEoption market expect prices to trade between$1,700 and $3,200 per mton in the next year (awide range given the low open interest that existstoday for 2011).

> According to the calls and puts strike price withthe highest open interest, the option marketexpects the floor of this market to remain nextyear at $1,700 per mton. Meanwhile, it expectsprices could reach levels as high as $3,500 permton in 2011 (this year the option market seesprices peaking at $2,500 per mton). In otherwords, given today´s prices, the option marketestimates twice the potential risk to the upside(from $2,200 to $3,500 per mton) than to thedownside (from $2,200 to $1,700 per mton).


1,200

1,700

2,200

2,700

3,200

0.0

0.5

1.0

1.5

2.0

2.5

Jan´06 Jan´07 Jan´08 Jan´09 Jan ´10 Jan '11

Put/Call ratio

LME AL Cash

1,100

1,700

2,300

2,900

3,500

4,100

Jan´06 Jan´07 Jan´08 Jan´09 Jan´10 Jan´11

LME ALUMINUM AVERAGE CASH vs AVERAGE CALLS AND PUTS STRIKE PRICE WITH HIGHEST OPEN INTEREST(monthly data; $/ per mton)

Source: HARBOR intelligence and LME data

LME Average

Cash

Average CallPut Strike Price

> The average call and put strikes with highestopen interest (has been an accurate predictor offuture prices) suggests prices will tend to trendbetween $1,700 and $2,800 per mton (78113cts/lb) during the next year.

1,200

1,800

2,400

3,000

3,600

Jan´06 Jan´07 Jan´08 Jan´09 Jan ´10 Jan '11

SAMPLE

SAMPLE

SAMPLE SAMPLE

SAMPLE

SAMPLE

25

> Aluminum prices completed a text book bottoming formation called “inverted head and shoulders” implying an initial target of $2,200 (which already reached) a pause toward $2,1202,020 per mton (9095 cent/lb) and then $2,400 (110 cent/lb) before the end of the year.

LME 3M ALUMINUM PRICE TECHNICALS(weekly; $/mton)

SS

H

BULLISH MODEAFTER PIERCING 200 EMA AND NOW OFFICIAL SUPPORT

SHORT TERM TARGET


SAMPLE

SAMPLE

`09 `10 `11 `12 `13

AVERAGE FORECAST (forecast updated since Jan '10) 1,664 2,076 2,238 2,442 2,389

AVERAGE FORECAST (updated during MayJul '10 period) 1,664 2,087 2,220 2,390 2,410

LOWEST FORECASTED PRICE (updated during MayJul '10 period) 1,664 1,764 1,653 1,900 1,764

HIGHEST FORECASTED PRICE (updated during MayJul '10 period) 1,664 2,425 3,086 4,100 3,333

AVERAGE OF THOSE EXPECTING HIGHER PRICES (updated during MayJul '10) 1,664 2,087 2,303 2,565 2,431

AVERAGE OF THOSE EXPECTING LOWER PRICES (updated during MayJul '10) 1,664 NA 1,945 2,039 2,389

BEST 10 ANALYSTS in ´09 1,664 2,182 2,220 2,453 2,782

BEST 5 ANALYSTS in ´01´09 1,664 2,145 2,274 2,383 2,590

HARBOR Upside (25% chance in '10'13) 1,664 2,216 2,887 4,100 3,333

HARBOR Realistic (50% chance in '10'13) 1,664 2,160 2,527 2,700 2,700

HARBOR Downside (25% chance in '10'13) 1,664 2,035 1,888 2,200 2,200

PREDOMINANT FORECAST 1,664 2,118 2,295 2,661 2,575

ALUMINUM LME CASH PRICE FORECASTS($/per mton)

26

> Our models suggest prices should trend up to $2,400 by year end. We have downgraded our average price forecast for 2011 to$2,527 (from $2,700 per mton). Analysts continue to see prices at $2,150 by year end (slightly below today’s levels) and averagebetween $2,000 and $2,200 next year. Looking forward, the HARBOR´s and Consensus (in a more moderate path) long term viewis that we should see prices higher in coming years.

HARBOR`s MONTHLY ALUMINUM PRICE FORECASTS RISK, REALISTIC AND OPTIMISTIC SCENARIOS(usd/ton, monthly average)


UpsideScenario

(25% odds)

Realistic Scenario

(50% odds)

DownsideScenario

(25% odds)

Upside Realistic DownsideScenario Scenario Scenario

Jan `10 2,234 2,234 2,234Feb 2,048 2,048 2,048Mar 2,205 2,205 2,205Apr 2,318 2,318 2,318May 2,047 2,047 2,047Jun 1,930 1,930 1,930Jul 1,988 1,988 1,988Aug 2,270 2,185 2,050Sep 2,250 2,100 1,900Oct 2,370 2,230 1,900Nov 2,430 2,300 1,900Dec 2,500 2,340 1,900Jan `11 2,630 2,450 1,900Feb 2,780 2,520 1,900Mar 2,900 2,450 1,900Apr 2,950 2,530 1,900May 3,000 2,650 1,900Jun 2,880 2,450 1,850Jul 2,850 2,400 1,850Aug 2,850 2,490 1,900Sep 2,800 2,410 1,850Oct 2,900 2,500 1,900Nov 3,000 2,675 1,900Dec 3,100 2,800 1,900

2010 2,216 2,160 2,0352011 2,887 2,527 1,888

1,800

2,300

2,800

3,300

Jan `10 Apr Jul Oct Jan `11 Apr Jul Oct

SAMPLE

SAMPLE

SAMPLE

SAMPLE

SAMPLE

MONTHLY ALUMINUM PRICE FORECAST IN VARIOUS CURRENCIES(EUROS, YENS, POUNDS AND SHFE PRICES IN US DOLLARS)

27

FORECAST IN EUROS € FORECAST IN YENS ¥

FORECAST IN POUNDS £ SHFE FORECASTS IN US DOLLARS



`09 1,188 1,188 1,188`10 1,734 1,627 1,521`11 2,318 1,819 1,319



`09 155,224 155,224 155,224`10 205,370 195,451 180,402`11 283,914 235,779 166,848



`09 1,058 1,058 1,058`10 1,452 1,398 1,299`11 1,850 1,569 1,123

SAMPLE SAMPLE

SAMPLE SAMPLE

28

US, EUROPEAN AND JAPANESE ALUMINUM PREMIUMS DATA & FORECASTS

Source: Historical data HARBOR intelligence with MB and Bloomberg; Forecasts HARBOR intelligence

> We see higher regional premiums after a small pause in the very short term. We anticipate growing premiums given acombination of growing demand and less aluminum availability, especially in North America and Western Europe where outputcapacity utilization rates are expected to remain as the lowest between major producing regions of the world.

SAMPLE

SAMPLE

Expect Growing Tightness€¦ · in the IH 2011. The launch of two physical backed Aluminum ETF´s...

Documents

Transcript of Expect Growing Tightness€¦ · in the IH 2011. The launch of two physical backed Aluminum ETF´s...