Morgan Stanley: Copper - Anatomy of a Bull Market

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M O R G A N S T A N L E Y R E S E A R C H

Copper – Anatomy of a Bull Market

Global Metals and MiningCopper – Anatomy of a Bull Market

M O R G A N S T A N L E Y R E S E A R C HGlobal Metals and Mining Team

Morgan Stanley Australia Limited+

Peter G RichardsonChief Metals [email protected]+61 3 9256 8943

Joel B CraneCommodities [email protected]+61 3 9256 8961

October 14, 2011

PRODUCT NAME [ e.g., OVERVIEW, PRIMER, DATA ]

Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.+= Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

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Cash copper prices vs mine production cash costs, 1981-2011

Source: Brook Hunt, Morgan Stanley Research

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

Jan-81 Jan-85 Jan-89 Jan-93 Jan-97 Jan-01 Jan-05 Jan-09

USD/t

50th Percent ile 60th Percentile70th Percent ile 80th Percentile90th Percent ile LME Cash Copper Price

• Over the past decade, the copper market has undergone a remarkable transformation • Industry operating margins for mine production have expanded persistently since 2004-05, with the notable exception of the global recession of 2008-09.• As this chart shows, since 2003 refined copper prices have traded materially above marginal cost for more than 80% of that time. • When seen in a historical context, this is a highly unusual development and indicative of structural changes in the copper market, which are both deep rooted and long lasting.

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Long-run real and nominal copper prices, 1949-2011

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

1949 1959 1969 1979 1989 1999 2009

Real

Nominal

US$/lb

Source: Reuters, Morgan Stanley Research

0

2,000

4,000

6,000

8,000

10,000

12,000

Jan-90 Jan-94 Jan-98 Jan-02 Jan-06 Jan-10

Real

Nominal

US$/t

1990 – 20111949 – 2011

• Another indicator of longer run structural and cyclical change can be seen in the analysis of real prices which since 2002 have broken out of a long-run declining trend for the first time since the period of post WW2 reconstruction between 1949 and 1970.• In our view, these important indicators of structural changes reflect irreversible changes to consumption and all levels of the supply chain that have swept away the old structures of OECD driven demand, western world supply and east-west trade.• In its wake, a truly global market has emerged but one characterized by structural issues that are preventing the establishment of a new equilibrium between demand and supply and the establishment of a new price range much closer to current marginal costs.• As a result, copper prices are expected to remain elevated and well above marginal cost until such time as the global inventory pipeline is replenished and a more reliable supply environment ensues. • This is not expected before 2014-15 at the earliest for reasons that are discussed in this presentation.

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China industrial production growth vs refined copper price, 1999-2011


0.00

1.00

2.00

3.00

4.00

5.00

1999 2001 2003 2005 2007 20090.0

5.0

10.0

15.0

20.0

25.0

LME Copper Price (LHS) China IP growth (RHS)

US$/lb IP growth (YoY%)

• The demand side of this story is widely known. • In effect, the cumulative impact of an extended demand shock over the past 15 years that is directly linked to the industrialization of China, has resulted in an upward shift to the global demand curve.• While cyclicality is still strongly evident both in the refined copper price and the trajectory of Chinese industrial production growth, the cumulative impact of this demand shock is evident from the persistent trend increase in copper prices between 2003 and 2006 and the elevated volatility in these prices thereafter.• The impact of these developments on prices over this time was further intensified by the simultaneous consumption boom in the developed economies of North America and Europe, which both facilitated China’s industrial lift-off through a rapid growth in manufactured imports and an increasingly rapid technology transfer that accompanied or resulted from foreign direct investment.

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China and India urbanization trends, 1950-2025E

China and India: Percentage of Population Residing in Urban Areas (%)

1214

16 18 17 1719

23

3136

4347

5155

5962

6568

7173

17 18 18 20 21 2327 28 29 30 32

3437

4043

4751

54

26 2624

19

0

10

20

30

40

50

60

70

80

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

E

2015

E

2020

E

2025

E

2030

E

2035

E

2040

E

2045

E

2050

E

China India

Source: Morgan Stanley Research

• This slide illustrates the impact of China’s industrialization and urbanization more directly. • From the perspective of China and this presentation, the key date appears to be between 1980 and 1995 when the trend of rapidly rising urbanization rates became firmly established. • Consistent with trends in industrial production, this development accelerated over the past decade, helping insulate demand for industrial raw materials from cyclical fluctuations in the global economy.• India has been later and slower in this development, but now appears to be firmly set on the same path, a supportive additional long-term demand driver.

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Sectoral Breakdown of Copper Consumption in China and Global, 2010

Market Sector - Global

Transport13%

Industrial Machinery

13%

Electrical & Electronic products

33%

Construction33%

Consumer Products

8%


Market Sector - China

Power46%

Air-con and fridge15%

Transportation11%

Electronics8%

Construction9%

Others11%

• One consequence of this development has been a notably different sectoral breakdown of copper consumption in China by comparison with the global end use patterns.• China’s sector breakdown of copper consumption reflects the strong impact of fixed asset investment demand for power, telecommunications and transportation infrastructure and a relatively low level of sectoral exposure to the construction sector.• This is in marked contrast to the global pattern of consumption which reflects a much higher proportion of construction and consumer electronics related demand, and a much smaller exposure to power and other infrastructure-related demand. • Over time, as per capita urban incomes increase, we would expect to see this sectoral breakdown in China reflect more broadly its global counterpart, shifting more towards automotive and consumer electronics products.

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Growth in global refined copper consumption, 2000-2016E

Source: ICSG, Brook Hunt, Morgan Stanley Research

2000 Consumption - 15.1 MtChina13%

USA19%

W Europe26%

Japan9%

ROW28%

BRI (Brazil, Russia, India)5%

2010 Consumption - 21.3 Mt

China39%


USA9%

W Europe16%

Japan5%

ROW24%

2016e Consumption - 27.4 Mt

China45%


USA6%

W Europe11%

Japan4%

ROW24%

• This slide shows not only the material increase in copper consumption of the past decade that has resulted from this upward shift in the demand curve, but the anticipated further growth in demand for refined copper out to 2016, the end of our active forecast period.• The continued shift in the regional distribution of consumption within this growing trend is also evident, with China’s share of global consumption rising to 45% at the end of this period.• The ongoing shift to emerging market consumption is also evident in the further increase in market share to 10% for the other three BRICs economies.• Equally important will be the continued decline in both absolute share and growth rates of copper consumption by the major developed economies during this coming decade.

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China’s mineral saturation curves

Source: Rio Tinto company presentation

• Consistent with previous industrialization and urbanization events, China’s rapid increase in demand for copper is expected to continue until per capita income exceeds US$20K.• According to research by Rio Tinto, this is unlikely to be achieved before 2020-2030, even if the rate of annual increase in consumption moderates as the trend reaches maturity.• However, it is possible that the anticipated decline in the importance of FAI growth and the concurrent transition to consumer related demand will have some impact on the timing of this event.

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Copper mine production growth (concentrates) by region, 2000-2016E

Source: ICSG, Wood Mackenzie Brook Hunt, Morgan Stanley Research

2000 Production - 10.9 Mt

Africa5% China

5%

Australia8%

USA13%

Canada6%

Mexico3%

Chile 43%

Peru5%

ROW12%

2010 Production - 13.9 MtAfrica11%

USA9%

Canada4%

Mexico2%

Chile 41%

Peru9%

ROW7%

Australia7%

China 10%

2016e Production - 15.7 Mt

Africa11%

USA10%

Canada3%

Mexico3%

Chile 38%

Peru12%

ROW7%

China 10%

Australia6%

• The impact of this structural shift in the copper demand curve has been intensified, in our view, by the fact that China’s relatively poor natural resource endowment of economic copper minerals has necessitated a structural dependence on imports. • These charts show that despite a rising volume of concentrate production and a near doubling of China’s share of global mine production over the past decade, mine output of contained copper remains well short of the current and anticipated future level of copper consumption. • While this has spawned a significant increase in China’s custom smelting and refining capability, ultimately this downstream production capability remains dependent on imported feedstock for a material proportion of supply.

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Changing distribution of copper mine and refined production, 2001-10

-40%-20%

0%20%40%60%80%

100%120%140%160%

AustraliaBrazil

CanadaChile

ChinaCongo

Indonesia IranMexico

Mongolia Peru

Russian Fed.

United StatesZambia

-60%-40%-20%

0%20%40%60%80%

100%120%140%160%

AustraliaBrazil

CanadaChile

China

GermanyIndia

Japan

Korean Rep.Peru

Poland

Russian Fed.Spain

United StatesZambia

China +202%

Copper mine production (% chg 2001-2010)

Refined copper production (% chg 2001-2010)

Source: ICSG, Morgan Stanley Research

*Brazil +611%, Congo +795%

• This chart shows these same trends in a different way, highlighting the emergence of a sizeable and influential custom smelting and refining capability in China. • This is an increasingly important source of supply of refined copper to meet China’s rising consumption, but it does not mask the continued dependence on imports of copper concentrate and scrap to supply this growing refinery capacity. • Indeed, the continued mismatch between Chinese and other emerging market smelter and refining capacity, and the availability of concentrates has had a sustained impact on treatment and refining terms, to the longer term benefit of miners producing for the custom concentrate market.

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China copper imports, 2006-2011

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100

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600

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800

900

1,000

Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11

Refined Scrap Ores and Cons (Cu content)

Kt


• This chart illustrates the changing market shares of the different forms of imported copper into China over the past five years.• From this it can be seen that besides a continued dependence on imports of refined copper, a larger proportion of imports of refinery and semi-fabricator feed is drawn from the scrap market, than from the concentrate market. • We would expect this reliance on imported scrap feed to continue along with the dependence on concentrate imports, especially during the first phase of China’s industrialization, as old scrap generation remains low and with higher prices forcing buyers to seek cheaper forms of copper. • These import trends are expected to remain broadly consistent over the coming decade, given the upside limits to domestic mine production based on current and future anticipated reserve development.

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Copper prices and the China inventory cycle, 2004-2011

-60%

0%

60%

120%

180%

240%

300%

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-111.00

2.00

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4.00

5.00

LME copper price (RHS) YoY chg in China's copper imports (3mma)

US$/lb

De-stocking


• These trends in consumption growth and import dependence have had another important impact on the copper market.• As China’s consumption of refined copper (whether drawn from imported or domestic concentrate or scrap) has increased, so too has the impact of China’s inventory cycle on shorter term prices and volatility.• Since 2006, there have been three marked cases of de-stocking and two cases of re-stocking which have had pronounced impacts on price.• This is because the changes in the volumes of refined imports acts as a transmission mechanism for changes in short- term demand for refined copper. • We expect these trends to persist, even if the increased importance of non-refined imports of copper lowers the magnitude and duration of these refined inventory cycles.

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Refined copper inventories vs refined market balance, 1998-2011

Source: ICSG, Reuters, Morgan Stanley Research

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500

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2,500

1998

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2007

2008

2009

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2011

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Total exchange stocks Consumers, producers & merchants

Government Refined market balance, surplus/(deficit) - RHS

Kt Kt

• No bull market of the magnitude or duration of copper bull market could have emerged or been sustained by demand factors alone.• In our view, concurrent and reinforcing structural changes in the supply side of the copper market have also played a major role in the sustained expansion of operating margins that has been the happy experience of established producers in this industry.• This slide shows the growth of copper consumption plotted against refined market balances over the past 12 years. The increasing frequency of deficits, and the declining size of surpluses over this time points to structural constraints on supply response, which has become manifest in widening cash and operating margins for copper miner producers over time.• This development has its origins in the deterrent effect of the multi-decades low real copper prices recorded in the late 1990s and early 2000s on exploration spending, commercial discovery and project development. • Always a challenge, the industry became increasingly reliant on its installed mine capacity and large post-recession accumulation of stock to match the demand shock that unfolded from China.

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Sequential refined copper stock-to-consumption ratio, 1995-2011

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500

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Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-110

10

20

30

40

50

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Total commercial stocks (LHS) Stock to consumption ratio (RHS) Avg ratio

Kt Days

Source: ICSG, Reuters, Morgan Stanley Research

There have been several long-term consequences of this development:1. The industry became progressively stripped of surplus inventories in exchange warehouses and producers and

consumer storage 2. This in turn has progressively lowered the sequential level of inventory in days of current consumption, increasing the

industry’s vulnerability to negative supply and positive demand shocks. 3. Since 2005, the copper market has had to adapt to an inventory environment in which the level of reported or

transparent inventory has been at or below the long-term clearing level for the market, yet another tailwind for copper prices.

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Trends in global copper refinery feed, 2001-2010

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Primary (concentrate) Electrowon Secondary (scrap)


• Another important consequence of this development has been the marked increase in the importance of scrap in refinery feed.• While this development also reflects the increased emphasis on recycling and the improved efficiency of copper recyclers and changing sources of old scrap feed (i.e. information technology hardware), it also reflects the notable inability of the mining industry to materially increase mine production despite widening margins and rising incentives to lift production.• This is a complex issue which reflects a combination of project delays as a result of extended approval and construction timelines in many jurisdictions accompanied by slower than forecast ramp –up to full capacity in some cases. • It also reflects the impact of disruptions to current output as result of industrial action, power and water constraints and weather or natural disasters.

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Mine production has fallen short of potential output

Source: Wood Mackenzie Brook Hunt, Xstrata Copper estimates, Morgan Stanley Research

Supply has fallen short of plans

-952-917

-987 -966

-800

-700

-850

-1000

-800

-600

-400

-200

02005 2006 2007 2008 2009 2010 2011e

Act

ual v

s pl

an (K

t)

Average primary copper head grades (%)

• Furthermore, this trend also reflects the impact of a sustained decline in head grades at existing operations as a result of the aging of the major mines that comprise the core of current output. • The impact of lower grades and higher impurities has resulted in lower recoveries and recurrent technical difficulties as existing mine and processing infrastructure has been pushed to the limits of sustainable capacity utilization.• The result is that mine and refined supply from primary production has persistently fallen short of company and market forecasts the past seven years.• Xstrata recently estimated that a combined total of 6.2Mt of potential contained copper in concentrate has been lost or foregone over this time as a result of the combined effects of these structural headwinds to supply growth.

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Copper treatment and refining charges vs price, 2002- 2011


0.0

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Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-110.00

1.00

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3.00

4.00

5.00

Combined TC/RC, USc/lb Month-end cash price, US$/lb (RHS)

• The shortage of mine production as smelter and refinery capacity has continued to grow, has had a significant long-term effect on the balance of power between miners and custom smelters and refiners.• Not only have treatment and refining charges fallen on a trend basis, price participation has all but disappeared from many custom concentrate contracts, materially increasing net smelter returns to the miners and aggressively squeezing smelter and refinery margins.• While there have been recent signs of some relief for custom smelters and refiners as a consequence of the reduction in capacity in Japan following the earthquake and tsunami in March 2011, the announcement this week that the Onahama refinery was returning to full production suggests that spot treatment and refining charges will start falling once again.

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Emerging supply response - highly probable new copper mine projects…

0

200

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1,000

1,200

1,400

2013 2014 2015 2016 2017 2018

Mill - Greenfield Mill - Brownfield SxEw - Brownfield SxEw - Greenfield

Kt of Cu


• Notwithstanding these persistent structural constraints on supply, the market is becoming increasingly nervous that we are close to the end game of this component of the copper bull market.• This is the result of the increasingly large pipeline of major and smaller sized new projects that have been announced or are at an advanced stage of development, from 2013 onwards.• We anticipate that new mine capacity growth in 2012/13 will be 8.9% YoY, the largest annual increase since 2004.• Furthermore, this chart suggests that the rate of increase in new capacity will accelerate over the subsequent five year period, reaching a peak in 2018, by which time the copper market is expected to have finally found an existing and installed production base that will allow prices to trade once again close to their marginal cost.

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… but headwinds to rapid growth in new mine production are likely to persist

Source: Global Insight, Wood Mackenzie Brook Hunt, Rio Tinto, Morgan Stanley Research

Location of copper supply

6254

44

3641

47

5 9

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2010 2020

Lower risk Medium risk Higher risk

Indicative depth of discoveries

1980s 1990s 2000s

Completely exposed Covered Blind

C1 Composite cash costs by mining method (2008, c/lb)

95

133

Open pit Underground

• While we broadly subscribe to this medium term view, the headwinds to rapid growth in new mine capacity remain formidable.• Apart from the issue of grade decline and persistent constraint on current output, it is important to emphasize that new supply is becoming increasingly dependent on greenfield rather than incremental expansions.• New projects are naturally higher cost, a feature that is being reinforced by the need for higher returns to offset rising political risk, the greater exploration outlays that have to be recouped to exploit the growing number of blind deposits, and the increased proportion of large scale underground mines.

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Sequential monthly supply/demand balance for copper, 2007-2011


-400

-300

-200

-100

0

100

200

300

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

2011 2010 2009 2008 2007

Kt

• This final slide is designed to provide a quick snapshot of how these structural changes to both demand and supply have played out in recent years. • The sequential development of refined market deficits is clearly evident from this data, apart from a very limited period during the worst days of the 2008-09 global financial crisis.• Even this year, when developed market growth has slowed markedly and China has been in the throes of an intense period of de-stocking, market deficits have been evident. • Whether this trend can be sustained in the wake of slowing OECD growth and with the rising threat of new mine production, is the key question now confronting financial markets.• Our conclusion is that history shows that structurally constrained markets are very resilient, even in the face of cyclical changes to the demand outlook. As a result, we still expect to see at least two to three more years of above average operating margins for miners, and strong above average returns for investors. • However, in this late phase of the bull market, volatility is likely to become more pronounced.

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e = Morgan Stanley Research estimates Source: ISCG, Wood Mackenzie Brook Hunt, Morgan Stanley Research

Copper global refined supply / demand balanceUnit 2003 2004 2005 2006 2007 2008 2009 2010e 2011e 2012e 2013e 2014e 2015e 2016e

World IP growth (Adjusted PPP Weights) % 4.57 5.71 5.26 5.80 5.54 2.20 -2.61 7.31 5.37 4.77 4.76 4.81 4.44 4.31World Mine ProductionConcentrates Mt 11.03 11.89 12.23 12.17 12.48 12.45 12.66 12.79 12.68 13.57 14.53 15.25 15.63 15.13SX/EW Mt 2.72 2.71 2.69 2.83 2.99 3.09 3.25 3.32 3.43 3.89 4.04 3.95 3.84 3.71Total Mine Production Mt 13.76 14.60 14.93 15.00 15.48 15.55 15.92 16.13 16.12 17.48 18.57 19.22 19.48 18.85World Smelter ProductionPrimary Mt 11.15 11.26 11.78 11.97 12.14 12.35 12.44 12.89 12.82 13.63 14.58 15.31 15.69 15.18Secondary Mt 1.36 1.61 1.71 1.98 2.12 2.26 2.09 2.30 2.89 3.07 3.13 3.16 3.18 3.20Total Smelter Production Mt 12.50 12.87 13.49 13.95 14.26 14.61 14.53 15.19 15.71 16.69 17.71 18.47 18.86 18.38Capacity Mt 13.43 13.77 14.64 15.22 16.03 16.69 17.34 17.72 18.39 19.50 19.92 20.09 20.22 20.33Smelter Capacity Utilisation Rate % 93.1 93.5 92.2 91.7 89.0 87.5 83.8 85.7 85.9 85.9 85.9 85.9 85.9 85.9Primary/Secondary Ratio % 12.2 14.3 14.5 16.5 17.5 18.3 16.8 17.9 18.3 18.3 18.3 18.3 18.3 18.3Imputed concentrate balance Kt -112.7 631.6 446.5 194.9 343.0 93.3 212.5 -97.6 -141.0 -54.9 -56.7 -58.9 -60.0 -51.5World Refinery ProductionElectrowon Mt 2.72 2.71 2.69 2.83 2.99 3.09 3.25 3.32 3.43 3.89 4.04 3.95 3.84 3.71Primary Mt 10.76 11.14 11.72 11.85 12.20 12.29 12.23 12.40 13.38 13.89 14.54 15.28 15.82 16.05Secondary Mt 1.79 2.07 2.16 2.61 2.74 2.82 2.79 3.36 3.32 3.54 3.67 3.88 3.80 3.85Total Refinery Production Mt 15.27 15.92 16.57 17.29 17.93 18.20 18.28 19.08 20.12 21.32 22.25 23.12 23.47 23.61Capacity Mt 18.54 18.92 19.90 20.65 21.82 22.70 23.62 24.12 25.38 26.72 27.62 27.68 27.67 27.62Refinery Capacity Utilisation Rate % 82.4 84.1 83.3 83.7 82.2 80.2 77.4 79.1 71.8 72.0 73.0 77.0 79.0 80.0World Copper Usage Mt 15.72 16.84 16.67 17.03 18.20 18.04 18.10 19.33 20.32 21.27 22.20 22.94 23.36 23.44World usage growth % 3.2 7.1 -1.0 2.2 6.9 -0.9 0.3 6.8 5.2 4.7 4.3 3.3 1.8 0.3China usagegrowth % 24.5 11.9 8.0 -1.3 37.5 4.9 38.3 5.0 5.2 8.0 7.3 6.4 4.5 2.9Non-China usagegrowth % -0.9 6.0 -3.2 3.1 -1.4 -3.1 -15.0 7.9 5.2 2.5 2.4 1.2 -0.1 -1.7Regional Usage BreakdownChina Mt 3.02 3.38 3.65 3.60 4.96 5.20 7.19 7.55 7.94 8.58 9.20 9.79 10.22 10.52BRI (Brazil, Russia, India) Mt 1.04 1.27 1.38 1.47 1.48 1.54 1.20 1.45 1.77 1.89 2.07 2.24 2.38 2.48USA Mt 2.24 2.41 2.27 2.13 2.14 2.02 1.63 1.63 1.66 1.65 1.60 1.56 1.50 1.40W Europe Mt 3.72 3.81 3.47 3.84 3.62 3.43 2.75 2.93 3.00 2.98 2.91 2.82 2.71 2.55Japan Mt 1.20 1.28 1.22 1.28 1.25 1.18 0.88 1.00 1.02 1.03 1.04 0.96 0.85 0.78ROW Mt 4.49 4.69 4.67 4.71 4.75 4.66 4.46 4.76 4.93 5.15 5.37 5.57 5.69 5.70Refined Market Balance Mt -0.44 -0.92 -0.10 0.26 -0.27 0.16 0.17 -0.25 -0.20 0.04 0.05 0.18 0.11 0.17Refined Stocks End of Period Kt 1,780 923 867 1,131 1,051 1,342 1,415 1,266 1,064 1,107 1,158 1,337 1,447 1,619Refined Stock Change Kt -268 -857 -56 264 -80 291 73 -148 -203 43 51 179 110 172Apparent change in off-warrant stocks Kt -176 -64 -46 -8 -163 31 102 -98 0 0 0 0 0 0Stock to Usage Rate Weeks 5.91 2.86 2.71 3.46 3.01 3.88 4.08 3.42 2.73 2.71 2.72 3.04 3.23 3.60TC (US$/t conc.) US$ 58.0 43.0 85.5 95.0 60.0 45.0 75.0 46.5 75.0 70.0 68.0 68.0 68.0 68.0RC (USc/lb Cu) US$ 5.8 4.3 8.5 9.5 6.0 4.5 7.5 4.7 7.5 7.0 6.8 6.8 6.8 6.8LME Copper Price US$/t 1,780 2,863 3,684 6,727 7,126 6,952 5,076 7,536 9,245 8,378 9,149 8,267 7,055 6,173LME Copper Price US$/lb 0.81 1.30 1.67 3.05 3.23 3.15 2.30 3.42 4.19 3.80 4.15 3.75 3.20 2.80

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Disclosures Section

Morgan Stanley ModelWare is a proprietary analytic framework that helps clients uncover value, adjusting for distortions and ambiguities created by local accounting regulations. For example, ModelWare EPS adjusts for one-time events, capitalizes operating leases (where their use is significant), and converts inventory from LIFO costing to a FIFO basis. ModelWare also emphasizes the separation of operating performance of a company from its financing for a more complete view of how a company generates earnings.

The information and opinions in Morgan Stanley Research were prepared or are disseminated by Morgan Stanley Asia Limited (which accepts the responsibility for its contents) and/or Morgan Stanley Asia (Singapore) Pte. (Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H), regulated by the Monetary Authority of Singapore (which accepts legal responsibility for its contents and should be contacted with respect to any matters arising from, or in connection with, Morgan Stanley Research), and/or Morgan Stanley Taiwan Limited and/or Morgan Stanley & Co International plc, Seoul Branch, and/or Morgan Stanley Australia Limited (A.B.N. 67 003 734 576, holder of Australian financial services license No. 233742, which accepts responsibility for its contents), and/or Morgan Stanley Smith Barney Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license No. 240813, which accepts responsibility for its contents), and/or Morgan Stanley India Company Private Limited and their affiliates (collectively, "Morgan Stanley").For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY, 10036 USA.Analyst CertificationThe following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Peter Richardson.Unless otherwise stated, the individuals listed on the cover page of this report are research analysts.Global Research Conflict Management PolicyMorgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies.Important US Regulatory Disclosures on Subject CompaniesThe equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity and specialized trading, risk arbitrage and other proprietary trading, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report.Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions.

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Disclosure section (cont.)STOCK RATINGSMorgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations.Global Stock Ratings Distribution(as of September 30, 2011)For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.

Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months.

Analyst Stock RatingsOverweight (O or Over) - The stock's total return is expected to exceed the total return of the relevant country MSCI Index, on a risk-adjusted basis over the next 12-18 months.Equal-weight (E or Equal) - The stock's total return is expected to be in line with the total return of the relevant country MSCI Index, on a risk-adjusted basis over the next 12-18 months.Not-Rated (NR) - Currently the analyst does not have adequate conviction about the stock's total return relative to the relevant country MSCI Index on a risk-adjusted basis, over the next 12-18 months.Underweight (U or Under) - The stock's total return is expected to be below the total return of the relevant country MSCI Index, on a risk-adjusted basis, over the next 12-18 months.Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.

Coverage Universe Investment Banking Clients (IBC)

Stock Rating Category Count % of Total Count% of Total

IBC% of Rating

Category

Overweight/Buy 1130 40% 457 46% 40%Equal-weight/Hold 1168 42% 419 42% 36%Not-Rated/Hold 112 4% 23 2% 21%Underweight/Sell 400 14% 104 10% 26%Total 2,810 1003

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Disclosure section (cont.)Analyst Industry ViewsAttractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below.In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below.Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below.Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index.

Important Disclosures for Morgan Stanley Smith Barney LLC CustomersCiti Investment Research & Analysis (CIRA) research reports may be available about the companies or topics that are the subject of Morgan Stanley Research. Ask your Financial Advisor or use Research Center to view any available CIRA research reports in addition to Morgan Stanley research reports.Important disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan Stanley Smith Barney LLC, Morgan Stanley and Citigroup Global Markets Inc. or any of their affiliates, are available on the Morgan Stanley Smith Barney disclosure website at www.morganstanleysmithbarney.com/researchdisclosures.For Morgan Stanley and Citigroup Global Markets, Inc. specific disclosures, you may refer to www.morganstanley.com/researchdisclosures and https://www.citigroupgeo.com/geopublic/Disclosures/index_a.html.Each Morgan Stanley Equity Research report is reviewed and approved on behalf of Morgan Stanley Smith Barney LLC. This review and approval is conducted by the same person who reviews the Equity Research report on behalf of Morgan Stanley. This could create a conflict of interest.

Other Important DisclosuresMorgan Stanley is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.Morgan Stanley produces an equity research product called a "Tactical Idea." Views contained in a "Tactical Idea" on a particular stock may be contrary to the recommendations or views expressed in research on the same stock. This may be the result of differing time horizons, methodologies, market events, or other factors. For all research available on a particular stock, please contact your sales representative or go to Client Link at www.morganstanley.com.Morgan Stanley Research does not provide individually tailored investment advice. Morgan Stanley Research has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. The securities, instruments, or strategies discussed in Morgan Stanley Research may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them.The fixed income research analysts, strategists or economists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality, accuracy and value of research, firm profitability or revenues (which include fixed income trading and capital markets profitability or revenues), client feedback and competitive factors. Fixed Income Research analysts', strategists' or economists' compensation is not linked to investment banking or capital markets transactions performed by Morgan Stanley or the profitability or revenues of particular trading desks.Morgan Stanley Research is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. The "Important US Regulatory Disclosures on Subject Companies" section in Morgan Stanley Research lists all companies mentioned where Morgan Stanley owns 1% or more of a class of common equity securities of the companies. For all other companies mentioned in Morgan Stanley Research, Morgan Stanley may have an investment of less than 1% in securities/instruments or derivatives of securities/instruments of companies and may trade them in ways different from those discussed in Morgan Stanley Research. Employees of Morgan Stanley not involved in the preparation of Morgan Stanley Research may have investments in securities/instruments or derivatives of securities/instruments of companies mentioned and may trade them in ways different from those discussed in Morgan Stanley Research. Derivatives may be issued by Morgan Stanley or associated persons.

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Disclosure section (cont.)With the exception of information regarding Morgan Stanley, Morgan Stanley Research is based on public information. Morgan Stanley makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in Morgan Stanley Research change apart from when we intend to discontinue equity research coverage of a subject company. Facts and views presented in Morgan Stanley Research have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel.Morgan Stanley Research personnel may participate in company events such as site visits and are generally prohibited from accepting payment by the company of associated expenses unless pre-approved by authorized members of Research management.The value of and income from your investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in securities/instruments transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. If provided, and unless otherwise stated, the closing price on the cover page is that of the primary exchange for the subject company's securities/instruments.Morgan Stanley may make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report.To our readers in Taiwan: Information on securities/instruments that trade in Taiwan is distributed by Morgan Stanley Taiwan Limited ("MSTL"). Such information is for your reference only. Information on any securities/instruments issued by a company owned by the government of or incorporated in the PRC and listed in on the Stock Exchange of Hong Kong ("SEHK"), namely the H-shares, including the component company stocks of the Stock Exchange of Hong Kong ("SEHK")'s Hang Seng China Enterprise Index is distributed only to Taiwan Securities Investment Trust Enterprises ("SITE"). 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The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (QFC Branch), regulated by the Qatar Financial Centre Regulatory Authority (the QFCRA), and is directed at business customers and market counterparties only and is not intended for Retail Customers as defined by the QFCRA.As required by the Capital Markets Board of Turkey, investment information, comments and recommendations stated here, are not within the scope of investment advisory activity. Investment advisory service is provided in accordance with a contract of engagement on investment advisory concluded between brokerage houses, portfolio management companies, non-deposit banks and clients. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely to this information stated here may not bring about outcomes that fit your expectations.The trademarks and service marks contained in Morgan Stanley Research are the property of their respective owners. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Global Industry Classification Standard ("GICS") was developed by and is the exclusive property of MSCI and S&P.Morgan Stanley has based its projections, opinions, forecasts and trading strategies regarding the MSCI Country Index Series solely on publicly available information. MSCI has not reviewed, approved or endorsed the projections, opinions, forecasts and trading strategies contained herein. Morgan Stanley has no influence on or control over MSCI's index compilation decisions.Morgan Stanley Research, or any portion thereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley.Morgan Stanley Research is disseminated and available primarily electronically, and, in some cases, in printed form.Additional information on recommended securities/instruments is available on request. H6899R

Disclosure section (cont.)

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