BMI China Metals Report Q2 2014

Q2 2014
www.businessmonitor.com
CHINA
METALS REPORT
INCLUDES 5-YEAR FORECASTS TO 2018
ISSN 2040-6762
Published by:Business Monitor International
China Metals Report Q2 2014
INCLUDES 5-YEAR FORECASTS TO 2018
Part of BMIs Industry Report & Forecasts Series
Published by: Business Monitor International
Copy deadline: February 2014
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CONTENTS
BMI Industry View ............................................................................................................... 7
SWOT .................................................................................................................................. 10
Metals SWOT .......................................................................................................................................... 10
Industry Forecast .............................................................................................................. 12
Aluminium: Expanding & Shifting West ....................................................................................................... 12
Table: China - Aluminium Production, Consumption & Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Copper: Slowdown In Place ...................................................................................................................... 19
Economic Slowdown To Hit Consumption Growth ........................................................................................ 20
Falling Margins To Curb Output Growth .................................................................................................... 21
Table: China - Refined Copper Production, Consumption & Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Lead: Autos Sector To Lend Support ........................................................................................................... 23
Table: China - Refined Lead Production, Consumption & Balance (kt, unless stated otherwise) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Nickel: Growth To Slow As Economy Rebalances .......................................................................................... 26
Table: China - Refined Nickel Production, Consumption & Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Steel: Bloated Sector Running Out Of Luck ................................................................................................... 29
Demand: Weakness Ahead, Longs To Underperform ..................................................................................... 30
Production: Boom Years Are Over ............................................................................................................ 33
No Sustainable Lifeline From Exports ........................................................................................................ 34
Limited Support From Stimulus Measures ................................................................................................... 35
Large Players To Dominate ..................................................................................................................... 36
Production To Shift Westwards ................................................................................................................. 37
Table: China - Steel Production & Consumption Forecasts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Table: China's Steel Industry, 2005-2012 (kt) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Tin: Demand Growth To Prove More Resilient .............................................................................................. 38
Table: China - Refined Tin Production, Consumption & Balance (kt, Unless Stated Otherwise) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Zinc: Hit By Faltering Steel Sector .............................................................................................................. 43
Table: China - Refined Zinc Production, Consumption & Balance (kt, Unless Stated Otherwise) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Regulatory Development .................................................................................................. 48
Table: Political Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Commodities Forecast ..................................................................................................... 52
Commodity Strategy ................................................................................................................................. 52
Aluminium: Continued Short-Term Weakness .............................................................................................. 55
Copper: Recent Strength Doesn't Change Our View ...................................................................................... 55
Nickel: Recent Strength To Subside ........................................................................................................... 57
Zinc: Price Momentum To Continue .......................................................................................................... 59
Table: Select Commodities - Performance & BMI Forecasts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Commodities Forecast .............................................................................................................................. 61
Table: BMI Steel Forecast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Business Monitor International Page 4
Short-Term Outlook ................................................................................................................................ 62
Core View ............................................................................................................................................. 62
Global Steel Glut To Persist ..................................................................................................................... 62
Production: Rationalisation In The Long Term ............................................................................................ 63
Consumption: Growth Decelerating ........................................................................................................... 65
Excessive Chinese Exports ....................................................................................................................... 66
Growing Arbitrage Between East & West ................................................................................................... 67
Risks To Price Outlook ............................................................................................................................ 67
Table: Steel Data & Forecasts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Table: Global Steel Prices By Region & Product, US$/tonne (ave) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Competitive Landscape .................................................................................................... 70
Table: China - Largest Listed Metal Producers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Company Profile ................................................................................................................ 74
Aluminum Corporation of China (Chalco) .................................................................................................... 74
Company Overview ................................................................................................................................ 75
Latest Financial Results .......................................................................................................................... 75
Table: Chalco - Key Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Baoshan Iron & Steel ............................................................................................................................... 78
Table: Baoshan Iron & Steel - Key Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Angang Steel .......................................................................................................................................... 82
Table: Angang Steel - Key Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Methodology ...................................................................................................................... 86
Cross Checks ........................................................................................................................................ 86
BMI Industry View
BMI View: China's metals industry is set to face a protracted period of slowing growth as the country's
rebalancing process begins in earnest. Companies operating in sectors that are tied heavily to the
construction industry will take the brunt of weakness from the sharp slowdown in fixed asset investment.
With the Chinese economy on course for a continued slowdown over the coming years, we expect China's
metals industry to come under greater pressure. The rebalancing of the Chinese economy away from fixed-
asset investment and towards private consumption will significantly dampen appetite for construction-
related materials. In particular, metals such as steel and refined nickel will be adversely affected due to their
heavy usage in the construction sector.
Slowdown Underway
China - Real GDP (% chg y-o-y)
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
f
2
0
1
4
f
2
0
1
5
f
2
0
1
6
f
2
0
1
7
f
0
2
4
6
8
10
12
14
16
f = BMI forecast. Source: BMI, National Bureau of Statistics
We forecast China's real GDP growth to average 6.1% between 2013 and 2023, compared with an
impressive average growth rate of 10.3% per annum over the past decade. In our view, attempts by the
Chinese government to arrest the structural slowdown in the country's economy will only cushion the
impact of an economic slowdown, rather than revive a growth upturn. That said, we note that China will
retain a structural deficit for key metals such as iron ore, copper and nickel despite slowing consumption
growth.
Demand Slowing...
China - Consumption Of Select Commodities (% of Global Total)
f = BMI forecast. Source: BMI, WBMS, EIA
Government plans to significantly consolidate the metals and mining industry will continue to gain traction
in the coming months, particularly with growing environmental concerns and increasing scrutiny on local
government debt. Consolidation of the metals' industry will be driven by slumping profit margins, falling
prices and the reorientation of China's economy away from fixed asset investment and towards private
consumption. Indeed, state-owned companies, which already enjoyed a dominant role in the mining and
metals industry, will emerge to be even more prominent after the consolidation.
...But Still Retaining Appetite For Some
China - % Of Global Production & Consumption (2012)
Source: BMI, WBMS
However, we are aware that efforts aimed at consolidating the Chinese steel industry are susceptible to
several roadblocks. First, anecdotal evidence suggests that local governments, reliant on steel revenues,
often idle furnaces only for a period of time long enough to escape the central government's attention.
Second, some of the furnaces that were torn down in Hebei had in fact been sitting idle for some time.
Third, it is estimated that the potential job losses stemming from all state-required capacity cuts could reach
as high as 200,000, a figure that could trigger widespread social unrest amidst the slowdown of the Chinese
economy.
While injunctions from the new leaders to rationalise and consolidate the bloated steel industry have been
forthcoming in recent months, we continue to harbour doubts over the effectiveness of the policies initiated.
For instance, China's edict to more than 1,900 companies to shut excess production capacity across many
different sectors in 2013 is unlikely to have much impact on the metals industry. According to the China
Steel Association, the edict will result in just 7mn tonnes (mnt) of steel output being idled in a sector that
has more than 300mnt of surplus capacity. Similarly, China has ordered about 286 thousand tonnes (kt) of
excess aluminium output to be shut when smelting capacity is 30mnt and demand is about 23mnt.
SWOT
Metals SWOT
SWOT Analysis

Strengths

Resilient growth in the automobile sector will provide a silver lining for lead, and to a
lesser extent, aluminium producers.
Weaknesses

Metals consumption growth will experience a marked slowdown over the coming
years as China's rebalancing process begins in earnest. Steel will be the hardest hit
due to its heavy usage in the construction sector.
Remains heavily dependent on higher-grade iron ore (62% content) from Australia
and Brazil.
Stimulus measures will provide only limited respite to the metals industry. Indeed,
China's economy appears to be finally buckling under the weight of its credit binge
and we believe that a recession is at hand.
Opportunities

Continual restructuring of China's metal and mining industry, as part of the 12th Five-
Year Plan (2011-2015), creates opportunities for larger players to gain market share.
Closure of smaller, less efficient mines will give way to further productivity gains down
the road.
SWOT Analysis - Continued
Threats

Imports of raw materials such as bauxite and nickel ore are threatened by resource
nationalism and debilitating regulations in countries such as Indonesia.
Profit margins for the Chinese steel sector are as low as 0.4%, as of December
2013.
Recent clampdown in bank lending to the steel sector will see more producers going
out of business.
Efforts to curb environmental pollution could lead to tighter regulations on the metals
industry over the coming quarters.
Industry Forecast
Aluminium: Expanding & Shifting West
BMI View: The entrenched problem of overcapacity in the aluminium industry is unlikely to fade away
anytime soon. China will continue to drive the supply glut in the global market with the migration of its
smelter capacity west, where rich deposits of thermal coal that will help to substantially lower the costs of
production are located. Indeed, private consumption of durable goods and continued growth in the autos
sector will fail to absorb excess supply in the Chinese market, and this could translate into greater volumes
of cheap aluminium shipments from China over the coming quarters.
We expect China to remain the key growth driver in global aluminium production over the coming years, a
consistent trend over the past decades. According to the London Metal Exchange, China accounted for 119
of the 133 aluminium smelters built globally between 1985 and 2005. Admittedly, the Chinese
government's gradual embrace of free market economics should put an end to the years of artificial support
enjoyed by many domestic producers. However, we believe the global aluminium market will remain
suppressed by the weight of supply pressure from China over the coming years.
China In Driving Seat
Global Aluminium Production (As % Share of Total Output)
e/f = BMI estimate/forecast. Source: WBMS, BMI
Despite production cutbacks by international producers in recent quarters, the entrenched problem of
overcapacity in the aluminium sector is unlikely to fade away anytime soon. Major producers such as Alcoa
and Rusal will continue to suffer the pain of supply glut emanating from China in the medium term, while
the looming LME warehouse reforms could unleash a flood of metal onto the market (see 'LME Changes To
Be Felt In Aluminium Market', November 11, 2013).
Persistent Overcapacity
Aluminium - Global Production Balance (LHS) & Stocks-To-Use Ratio (RHS)
We forecast Chinese aluminium output to increase at an average clip of 5.1% between 2014 and 2017, with
the country's share of global output rising from 46.8% to 49.1% over the same period. In a bid to improve
its sitting on the global cost curve, China has been pushing its aluminium industry to 'go west' since 2012.
According to market estimates, production capacity at the far north-western province of Xinjiang will
increase from 1.5mn tonnes per annum (mntpa) in 2012 to 8-12mntpa in 2015, 15-20mntpa by 2020, and
eventually, up to 30mntpa.
Going West...
China - Aluminium Production - By Province (mnt, 2013) & As % Share of Total (LHS)
Source: Antaike Information Development, BMI
Crucially, Chinese aluminium producers are leveraging on the rich deposits of thermal coal in Xinjiang to
lower their costs of production. With around 1.1tn tonnes of thermal coal on offer, the costs of mining coal
in the province range between US$9/tonne for open-cut mines to US$23/tonne for underground operations.
As a result, power costs in Xinjiang are as low as one-sixth of those in eastern China. Given that the price of
energy accounts for as much as 40% of aluminium production costs, the availability of cheap electricity in
Xinjiang should insulate smelting operations from weakness in aluminium prices to a certain extent. To be
sure, total production costs in Xinjiang are estimated to be US$450-700/tonne lower than the country's
existing capacity, despite incurring higher freight, labour and capital costs.
...For Power Savings
Aluminium Production Cost By Category (As % Share of Total Cost)
Source: AME, CBA, BMI. Note: Data last dated 2011.
Additionally, we note that advances in smelter potline technology have substantially improved power
efficiency in China's aluminium sector over the years. At present, power consumption for every unit of
aluminium output in China is approximately 13.4kwh/kg, compared with the global average of 14.0kwh/kg.
While the mineral export ban in Indonesia will stem bauxite supply to the seaborne market (see 'Mineral
Export Ban Watered Down On Cue', January 15, 2014), this is unlikely to have a significant impact on
Chinese aluminium production in the coming years. First, we continue to believe that Indonesia's export
ban on unprocessed ores will eventually be moderated over the coming quarters. Second, Chinese alumina
refiners have accumulated substantial stockpiles of bauxite, estimated at 18 months of import cover, ahead
of the ban. Third, the Chinese government has been pressing for lower dependency on imports by
encouraging the development of domestic supplies. China's Ministry of Industry and Information
Technology has mandated that all new alumina projects in the country must be vertically integrated with
nearby bauxite mines and equipped with an output capacity of at least 800 thousand tonnes per annum
(ktpa). Lastly, supply from other major bauxite producers such as Australia and Brazil should buffer the
impact of a supply halt in Indonesia.
Seeking Supply Security
China - Bauxite Production
Bauxite Production, mnt (LHS)
% chg y-o-y (RHS)
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
e
2
0
1
4
f
2
0
1
5
f
2
0
1
6
f
2
0
1
7
f
0
10
20
30
40
50
60
70
80
0
10
20
30
40
e/f = BMI estimate/forecast. Source: USGS, BMI
In our view, the migration of Chinese smelter capacity towards the west will cause a major downside risk to
aluminium prices over the medium term. The push to lower cash costs by capturing better power economics
in Xinjiang could exacerbate the oversupply problem in the aluminium industry more than we currently
anticipate. A swelling domestic surplus could result in greater volumes of cheap Chinese aluminium seeping
into the global market. We forecast aluminium prices to remain subdued over the coming years, increasing
from an average of US$1,887/tonne in 2013 to US$2,050/tonne in 2017 (see 'Aluminium Prices To Average
US$1,850/tonne In 2014', January 16, 2014).
Struggling To Head Higher
Three-Month LME Aluminium (US$/tonne)
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
f
2
0
1
5
f
2
0
1
6
f
2
0
1
7
f
0
500
1,000
1,500
2,000
2,500
3,000
f = BMI forecast. Source: Bloomberg, BMI
We expect China to post a growing surplus of aluminium production in the coming years. While private
consumption of durable goods and continued growth in the autos sector will bolster demand growth for the
metal, this will fail to absorb excess supply in the domestic market. The structural shift of the Chinese
aluminium industry to the west will force the exit of marginal producers in the eastern and central provinces
(particularly Henan, Sichuan, Gansu and Yunnan) over the coming quarters. Nonetheless, aluminium
production in China will continue to grow in absolute terms as the industry heads towards a lower-cost
model.
Table: China - Aluminium Production, Consumption & Balance
2009 2010 2011 2012 2013e 2014f 2015f 2016f 2017f
Primary Aluminium
(000 tonnes)

Consumption 14,300 15,854 17,629 20,275 21,978 23,186 24,230 25,369 26,434
% Change y-o-y 15.2 10.9 11.2 15.0 8.4 5.5 4.5 4.7 4.2
Production 12,890 16,244 18,062 20,268 22,092 23,417 24,705 25,841 26,953
% Change y-o-y -2.2 26.0 11.2 12.2 9.0 6.0 5.5 4.6 4.3
Balance -1,410 390 433 -7 114 231 475 473 519
Copper: Slowdown In Place
China will retain its dominance in the global copper sector despite our expectation for a continued
slowdown in the country's economy. China is the world's largest producer and consumer of refined copper,
accounting for 28.5% and 43.2% of global total in 2012, respectively. With a persistent shortfall in copper
production, the country has accounted for an increasing proportion of global refined imports over the last
decade to 41.8% in 2012.
Import Growth To Slow
China - Copper Production, Consumption & Balance (kt)
Economic Slowdown To Hit Consumption Growth
We believe growth in refined copper consumption will weaken in the coming quarters on our expectation
that the economic slowdown in China will come back into focus in H114 (see 'Banking Instability To Weigh
On Growth Prospects In 2014', January 20). Weakness in the economy will be centred on the heavy
industry and construction sectors, which have been key drivers of copper demand over recent years.
However, we expect demand for copper to hold up better compared with other industrial metals such as
steel and nickel which are more reliant on fixed capital investment as a source of demand.
Growth To Cool
China - Copper Production & Consumption (% chg y-o-y)
Source: WBMS
We forecast a slowdown in copper consumption growth to 4.7% between 2014 and 2017. This compares
with an average growth rate of 12.8% over the past decade, during which a boom in residential and
infrastructure construction and the development of export-led manufacturing underpinned a surge in copper
usage.
Falling Margins To Curb Output Growth
Chinese refined copper production is relatively consolidated in the hands of a few large players, with
Jiangxi Copper being the largest producer, at around 18% of the country's total output in 2011. Jiangxi
Copper will be a key growth driver in copper output over our forecast period, although production targets
are likely to be scaled back due to falling profitability. We believe profit margins for copper smelters will
remain under pressure over the coming quarters given our expectation for copper prices to remain subdued
against the backdrop of slowing economic growth in China. We forecast Chinese copper production to grow
at an average clip of 7.1% per annum in the coming years.
State-Run Companies To Maintain Dominance
China - Refined Copper Production By Company (2011)
Source: Reuters
Import Growth To Weaken Eventually
China's refined copper imports fell 5.6% year-on-year (y-o-y) to reach 3.2mn tonnes (mnt) in 2013, down
from a record 3.4mnt in 2012. While imports for December expanded by 30.8% y-o-y, we believe the
Chinese government's clampdown on the copper-collateral trade will eventually lay bare a weaker trade
picture. Beijing implemented a set of new rules in May 2013 in order to crack down on trade financing
based on fabricated trades, causing more banks to limit funding for smaller copper importers.
Table: China - Refined Copper Production, Consumption & Balance
2009 2010 2011 2012 2013e 2014f 2015f 2016f 2017f
Refined Copper ('000 tonnes)

Consumption 7,086 7,385 7,915 8,840 9,768 10,393 10,913 11,404 11,746
% Change y-o-y 37.6 4.2 7.2 11.7 10.5 6.4 5.0 4.5 3.0
Production 4,051 4,540 5,197 5,824 6,901 7,522 8,086 8,636 9,068
% Change y-o-y 6.8 12.1 14.5 12.1 18.5 9.0 7.5 6.8 5.0
Balance -3,035 -2,845 -2,718 -3,017 -2,867 -2,871 -2,827 -2,768 -2,679
Lead: Autos Sector To Lend Support
BMI View: We forecast Chinese refined lead production to increase at an average rate of 3.3% between
2014 and 2017. The industry-wide clampdown on small lead plants over the past quarters is unlikely
to reduce output considerably as a large number of firms are choosing to expand capacity by building even
bigger plants. Imports for refined lead should hold up over the long term as lead consumption proves more
resilient than construction-related metals such as steel and nickel, while production for the metal remains
constrained by the country's consolidation plan.
We expect China to remain a dominant player in the global industry for both refined lead production and
consumption, having accounted for just under half of both in 2012. The country is almost self-sufficient in
lead supply and runs a negligible domestic deficit. As a result, China accounted for 1.7% of global refined
lead imports in 2012.
Consumption: Not As Exposed To Construction Slowdown
Despite our downbeat macro view on China, we believe demand for lead will be less affected than other
industrial metals due to its primary usage in the autos sector. Lead-acid battery production is also quite
inelastic given that 60-70% of production is for replacement batteries. We forecast growth in Chinese
refined lead consumption to improve over the coming quarters, following a slowdown in 2013. We expect
consumption growth to average 4.1% per annum between 2014 and 2017.
Locked In Structural Deficit
China - Refined Lead Production, Consumption & Balance (kt)
e/f = BMI estimate forecast. Source: BMI, WBMS
Production: Modest Growth Ahead
We forecast refined lead production in China to average 3.3% between 2014 and 2017, compared with an
annual growth rate of 11.8% over the past decade. With China accounting for 44% of global lead
production, a slowdown in Chinese lead output growth will have a major impact on global lead production
levels. China was the main driver of global growth between 2008 and 2012, with production growing at an
annual average rate of 11.0% compared with the average growth rate of 4.7% globally.
Refined lead production growth over our forecast period will be well-below historical averages given the
Chinese government's plan to curb non-ferrous metal production growth, as part of China's 12th Five-Year
Non-ferrous Industry Plan (2011-2015). The Chinese government plans to consolidate the lead industry by
ensuring that the top 10 smelters in the country will eventually account for 60% of total lead production by
2015. Crucially, lead will be a particular focus of the government given its poisonous properties which have
resulted in a steady flow of lead-poisoning events across the country. China plans to contain output growth
of the top 10 major non-ferrous metals to an average annual rate of 8% between 2011 and 2015 compared
with 13.7% between 2006 and 2010.
Recovery Ahead
China - Refined Lead Production & Consumption (% chg y-o-y)
Source: BMI, WBMS
In 2013, China ordered small lead plants with an annual capacity of 30 thousand tonnes per annum (ktpa) to
either shut down operations by year-end or upgrade their facilities to reach a minimum annual capacity of
50ktpa. However, this is unlikely to adversely affect output growth significantly over our forecast period.
Anecdotal evidence suggests that a large number of firms are choosing to expand their capacity by building
even bigger plants. Indeed, the industry-wide clampdown over the past quarters would not be enough to
offset the entry of a new generation of modern, high-tech facilities that will be entering the supply chain
soon.
Secondary Production To Suffer
We believe secondary production growth will not grow at double-digit rates again in the near term as the
government focuses on closing down secondary production first. Recyclers are more prone to causing
environmental damage due to the production process. Secondary production growth declined sharply to
3.8% in 2012 compared with an average of 16.9% for the previous three years.
China To Remain A Marginal Importer
China will be a net importer of refined lead in the coming years as the domestic market remains locked in
deficit over our forecast period. Although Australia is the world's largest exporter of refined lead, Chinese
imports from the country have dwindled in recent years as shipments from secondary producers have
increased. According to the WBMS, Australia only exported 838 tonnes of refined lead to China in 2012,
compared with 10.3kt in 2010.
Table: China - Refined Lead Production, Consumption & Balance (kt, unless stated otherwise)

2008 2009 2010 2011 2012 2013e 2014f 2015f 2016f 2017f
Refined Lead ('000 tonnes)

Consumption 3,456 3,925 4,212 4,662 4,673 4,589 4,754 4,944 5,152 5,389
% Change y-o-y 34.3 13.6 7.3 10.7 0.2 -1.8 3.6 4.0 4.2 4.6
Production 3,452 3,773 4,199 4,648 4,646 4,604 4,696 4,837 5,006 5,231
% Change y-o-y 23.8 9.3 11.3 10.7 0.0 -0.9 2.0 3.0 3.5 4.5
Balance -5 -152 -13 -15 -27 15 -58 -107 -145 -157
e/f = BMI estimate/forecast. Source: BMI, WBMS
Nickel: Growth To Slow As Economy Rebalances
BMI View: A rebalancing of the Chinese economy towards private consumption rather than fixed-asset
investment will impose downward pressure on the refined nickel industry and we forecast significantly
slower production and consumption growth than over the previous decade. We expect refined nickel
production to grow at an annual average rate of 5.0% to reach 576kt by 2017, while consumption will
increase by 6.5% per annum over the same period to reach 1.02mnt.
China is by far the world's largest refined nickel producer and consumer, accounting for 33% and 47% of
global output and consumption in 2012, respectively. The country, however, has been experiencing a
structural deficit in refined nickel production over the past decade and we believe this trend will persist to
reach a deficit of 300 thousand tonnes (kt) by 2017. With imports at around 25% of the global total, China
is also the largest refined nickel importer in the world.
Persisting Reliance On Imports
China - Refined Nickel Production, Consumption & Balance (kt)
We expect Chinese nickel consumption growth to slow over our forecast period as demand from the bloated
steel sector falters (see 'Writing On The Wall For Chinese Steel', July 31, 2013). Indeed, stainless steel
represents the largest industrial use for refined nickel as a common component in the construction,
automotive and engineering sectors.
The key factor underpinning our downbeat view on China's steel industry is our expectation for a continued
slowdown in fixed-asset investment as private consumption becomes an increasingly important driver of
growth in the Chinese economy. As such, we believe construction activity in China will moderate
significantly over the coming quarters and this will have a notable impact on growth in refined nickel
consumption given the steel-intensive nature of the industry. We forecast refined nickel consumption to
grow at an average rate of 6.5% per annum between 2014 and 2017, compared with an average annual
growth rate of 23.5% over the past decade.
Our forecast for refined nickel production growth in China is largely driven by the output expansion of the
country's largest refiner, Jinchuan Non-Ferrous Metals. The company plans to expand production
capacity from 90ktpa to 300ktpa by 2014. Nonetheless, we expect nickel production growth to slow over
our forecast period in line with our downbeat macro view on China. We expect to see China's economic
growth slow from 7.7% in 2013 to 7.1% in 2014 as reform efforts undermine traditional areas of investment
growth.
Indonesia's Pullback No Major Threat
China - Nickel Ore Imports By Country (2012)
Source: BMI, WBMS
With the mineral export ban in Indonesia firmly in place (see 'Mineral Export Ban Watered Down On Cue',
January 15, 2014), we expect the Chinese nickel market to undergo shifting trade dynamics over the
coming quarters. The Indonesian government's decision to press ahead with the export ban on nickel ore
could see China turning to the Philippines to fill the supply gap once its domestic inventories are being
depleted. However, we are aware that low-grade ore from the Philippines may considerably undermine the
economics of Chinese NPI production and prompt China to step up its purchases of refined nickel
altogether. Nevertheless, our core view remains that the export ban on nickel ore will eventually be
moderated and replace with further hike in export tax over the coming quarters.
Table: China - Refined Nickel Production, Consumption & Balance
2009 2010 2011 2012 2013e 2014f 2015f 2016f 2017f
Refined Nickel ('000 tonnes)

Consumption 490 446 610 724 841 894 939 983 1029
% Change y-o-y 53.3 -9.0 36.9 18.7 16.1 6.4 5.0 4.7 4.6
Production 273 318 354 390 461 490 518 547 576
% Change y-o-y 31.3 16.5 11.3 10.2 18.1 6.3 5.8 5.5 5.3
Balance -217 -128 -256 -334 -380 -405 -421 -437 -453
Steel: Bloated Sector Running Out Of Luck
BMI View: China's bloated steel sector is set to come under increasing pressure over the coming quarters
as a result of contracting growth in fixed asset investment. Weak end-user demand and low prices will
maintain pressure on producer margins and we forecast significantly slower production and consumption
growth compared with the previous decade. While rising steel exports from China have been an outlet to
relieve domestic overcapacity, this is unlikely to be a sustainable trend due to the proliferation of anti-
dumping investigations by other countries in recent quarters.
As spotlighted by the demise of Suntech Power Holdings, the world's largest solar manufacturer, in 2013,
we are starting to see signs of a broader realisation on the part of Beijing that the previous government's
state investment-led policies were inherently unsustainable. With a raft of precarious fundamentals
weighing heavily on the Chinese steel industry, we believe the decades of blind expansion and artificial
government-led support are fast catching up with the sector. According to the China Iron and Steel
Association (CISA), the average profit margin for 80 major Chinese steel producers reached 0.13% in
H113, the lowest among all industries in the country.
We forecast Chinese steel production to grow by an annual clip of 4.3% between 2014 and 2017, while
consumption growth will increase by an average of 5.0% per annum over the same period. This will mark a
dramatic slowdown from the previous decade, during which annual production and consumption growth
averaged 13.7% and 11.4%, respectively.
Consolidation A Slow Process
China - Steel Production, Consumption And Balance (mnt)
China is by far the world's largest steel producer and consumer, accounting for 45.3% and 44.5% of global
output and consumption in 2011, respectively. It runs a domestic steel surplus, but is only a modest
exporter.
Demand: Weakness Ahead, Longs To Underperform
The key factor underpinning our downbeat view on China's steel industry is our expectation of a sharp
slowdown in Chinese fixed-asset investment, which will see further softening in demand growth for steel.
We expect construction activity in China to moderate significantly, which will have a notable impact on
demand given the steel-intensive nature of the industry.
Waning Support For Steelmakers
China - Select Indicators (% chg y-o-y)
Fixed Capital Formation
Construction Industry Value Real GDP
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
f
2
0
1
5
f
2
0
1
6
f
2
0
1
7
f
0
4
8
12
16
20
24
f = BMI forecast. Source: National Bureau of Statistics, China Statistical Yearbook, BMI.
We expect growth in Chinese construction activity to moderate significantly, and forecast construction
sector value growth of 5.1% in 2014, compared with 6.4% in 2013. At the heart of this slowdown will be a
rebalancing of the economy away from fixed asset investment. This trend will be exacerbated in the short
term by a sharp contraction in residential construction. Our core view remains that the property tightening
measures enacted in 2013 are unlikely to be rolled back in the face of continued rising prices. As a result,
we forecast growth in apparent steel use to slow to 3.5% in 2014 from an estimated 6.1% in 2013.
Demand Slowing As China Shifts Gear
China's Steel Consumption By Sector (2011)
Source: CISA, Bloomberg Industries
Due to the nature of China's economic slowdown, we expect the flats segment to experience more resilient
demand than the longs segment. The longs segment will be weighed down by an end to the boom years for
construction, while flats will be supported by a more resilient outlook for domestic manufacturing and
consumption.
Creeping Up
China - Total Steel inventories
Source: Shanghai Steelhome Information, BMI
Production: Boom Years Are Over
We believe consolidation of the behemoth Chinese steel sector will be primarily driven by the deterioration
in margins that has made production unprofitable at many smaller, inefficient mills. While abundant finance
has previously allowed such mills to shore up operations in recent years, a clampdown on bank lending to
the steel sector will bring to the fore the cost rationalisation of production.
Production Growth To Slow
China - Crude Steel Production
Source: WSA, BMI
However, we are aware that efforts aimed at consolidating the Chinese steel industry are susceptible to
several roadblocks. Anecdotal evidence suggests that local governments, reliant on steel revenues, often idle
furnaces only for a period of time long enough to escape the central government's attention. Additionally,
some of the furnaces that were torn down in Hebei had in fact been sitting idle for some time. Most
importantly, it is estimated that the potential job losses stemming from all state-required capacity cuts could
reach as high as 200,000, a figure that could trigger widespread social unrest amidst the slowdown of the
Chinese economy.
No Sustainable Lifeline From Exports
As domestic overcapacity continues to bite, we expect greater volumes of steel to be channeled into the
seaborne market. While rising steel exports from China have been an outlet to relieve domestic
overcapacity, we do not see this trend as sustainable. The proliferation of anti-dumping investigations by
countries from the US to Indonesia in recent quarters should stem the recent surge in Chinese steel exports.
Imports could also be discouraged, aided by government policy intended to support embattled domestic
producers. CISA has appealed to central government to alter tax incentives to encourage the purchase of
high-end steel products from domestic producers by plants that usually rely on overseas suppliers.
Exports To Offer Limited Respite
China - Steel Exports
Source: WSA
Limited Support From Stimulus Measures
Incorporated into our forecasts is an expectation that central government economic stimulus measures will
have only a limited impact on turning the ailing steel sector around. First, we do not expect stimulus
measures to compare with 2009-2010 in terms of scale or composition. We expect stimulus measures to be
more weighted towards supporting private consumption than the 2009-2010 stimulus, which was extremely
fixed investment intensive.
Second, Beijing's new leaders are adopting a more cautious stance towards the country's urbanisation drive,
fearing another spending binge could push up local debt levels and inflate a property bubble. Local and
provincial governments are the primary purchasers of domestic steel, and this section of the economy faces
mounting debt levels and central government pressure to curb industrial inefficiency.
Furthermore, as highlighted by the bankruptcy of Jiangxi Pingte Iron & Steel Co Ltd in 2013 (a relatively
small producer with an annual output capacity of 800kt), the Chinese government is adopting an increasing
hardline stance by starting to refrain from further corporate bailouts in the steel sector. This will almost
certainly pave the way for industry consolidation once many of the steel mills currently operating on razor-
thin profit margins are allowed to go bust.
Profit Crunch
Price Ratio: China Steel Rebar/Iron Ore Import Price
Source: Bloomberg
Large Players To Dominate
The dominance of large state-owned steel mills will increase as weak margins at inefficient small mills
force some consolidation. While margins at larger mills will also remain weak, state entities will benefit
from greater government support. According to CISA, China's 10 largest crude steel makers produced 46%
of the country's total crude steel output in 2012. China aims to concentrate 60% of the country's total steel
capacity in the hands of its top 10 firms by the end of 2015, according to its latest five-year plan for the
industry.
Production To Shift Westwards
Over the long term we expect the focus of China's steel sector to move from the east of the country, as the
government announced plans to encourage iron ore mining and steel manufacturing in the west, in
provinces such as Xinjiang and Gansu. Land, labour and electricity tend to be cheaper in the west of the
country, and thus at a time of narrowing margins, companies are looking to lower costs. Approximately
60% of China's steel production is concentrated in six provinces, with Hebei, at 27% of the total output,
accounting for the single largest share of production.
Table: China - Steel Production & Consumption Forecasts

2009 2010 2011 2012 2013e 2014f 2015f 2016f 2017f
Crude Steel
Production ('000t) 577,070 638,743 683,883 705,083 762,195 787,348 805,457 821,566 837,175
% Change y-o-y 12.6 10.7 7.1 3.1 8.1 3.3 2.3 2.0 1.9
Apparent crude steel
use ('000t) 574,420 612,060 649,850 676,494 717,760 742,882 765,911 788,122 809,402
% Change y-o-y 23.4 6.6 6.2 4.1 6.1 3.5 3.1 2.9 2.7
e/f = BMI estimate/forecast. Source: WSA, BMI
Table: China's Steel Industry, 2005-2012 (kt)
2005 2006 2007 2008 2009 2010 2011 2012
Steel

Crude Steel
Production 355,790 421,024 489,712 512,339 577,070 638,743 701,968 716,542
Ingots 9,926 12,346 10,448 9,099 7,735 10,851 10,573 10,800
CCS 345,030 408,048 474,303 483,716 568,532 626,716 690,472 704,742
Liquid for
casting 833 630 854 354 804 1,176 924 1,000
Hot rolled
products 381,510 470,840 566,074 613,795 693,405 802,014 885,195 951,860
Hot rolled
longs 190,916 232,970 271,348 276,115 335,361 368,365 407,522 449,142
Hot rolled flats 172,780 214,761 243,897 275,508 297,167 364,347 447,592 284,639
Other 7,474 19,123 18,179 18,179 18,179 18,179 18,179 37,579
Heavy sections 7,113 9,182 10,354 10,255 9,643 9,771 11,038 11,328
Light sections 19,241 25,623 29,270 29,455 36,965 39,661 45,734 47,020
China's Steel Industry, 2005-2012 (kt) - Continued
2005 2006 2007 2008 2009 2010 2011 2012
Concrete
reinforcing
bars 71,232 86,786 103,909 100,927 130,741 141,378 154,056 175,377
Hot rolled bars
(excluding crb) 29,779 37,392 45,435 48,089 53,101 65,705 69,401 74,102
Wire rod 60,464 70,638 79,210 82,708 98,907 106,206 122,591 136,161
Tube and tube
fittings 28,906 36,614 41,385 50,894 53,214 56,729 66,977 75,951
Exports

Exports 27,414 51,706 66,357 56,304 23,969 41,646 47,899 54,793
Imports

Imports 27,312 19,105 17,185 15,622 22,350 17,181 16,349 14,154
Imports of
scrap 10,136 5,385 3,395 3,590 13,692 5,848 6,767 4,974
Source: WSA
Tin: Demand Growth To Prove More Resilient
BMI View: We expect refined tin production in China to increase at a modest growth clip of 1.0% between
2014 and 2017. Low tin prices by historical standards, the pullback of tin ore supply from Indonesia and
the Chinese government's plans to curb metal output growth will remain major hurdles to production.
Refined tin consumption will also grow at a slower rate than in recent years, although a gradual
reorientation in China's economy towards private consumption will sustain the long-term expansionary
trend.
We believe China will continue to dominate the global refined tin market over the coming years. The
country accounted for 41% and 49% of global production and consumption in 2012, respectively. China has
run an increasingly large domestic deficit in recent years and thus has been forced to ramp up on imports. It
was the second-largest importer of refined tin in 2012, accounting for 11% of global imports.
Domestic Deficit Here To Stay
China - Refined Tin Production, Consumption & Balance (kt)
Production Growth To Slow
Government consolidation plans and disrupted ore supply from Indonesia should constrain refined tin
output growth in China. In a bid to move up the value chain, Indonesia, the world's top exporter of refined
tin, prohibit the exports of tin ingots with purity levels of less than 99.9% from July 1, 2013. This ruling is
bound to take its toll on Chinese refiners who imported around 50% of the metal ore from Indonesia for the
production of high-grade tin in 2012. Although China may shift its attention towards Malaysia for supplies
of low-grade tin, shipments from the latter are unlikely to be forthcoming since Malaysia also relies on
imports from Indonesia.
Additionally, there is a lack of domestic expansion plans from major tin companies including Yunnan Tin,
Yunnan Chengfeng, Guangxi China Tin and Gejiu Zi-Li. Overall, we forecast China's refined tin
production to increase from 172 thousand tonnes (kt) in 2014 to reach 188kt by 2017, marking an average
growth rate of 1.0% per annum.
Taking The Strain
China - Refined Tin Production & Consumption (% chg y-o-y)
Source: BMI, WBMS
With regard to prices, while we forecast global tin prices to outperform the wider base metal complex,
prices will not return to 2011 highs. Tin prices will trend modestly higher over the medium term and we
forecast prices to average US$22,500/tonne in 2014. In 2012, China imposed a mining tax on tin ore which
now stands at CNY12-20/tonne, a sharp increase from the previous range of CNY0.6-1.0/tonne. In a bid to
conserve resources and curb metal production growth, the country has in recent years slowly been
implementing a series of natural resource extraction taxes. Top tin producer Yunnan Tin estimates that the
new law would be likely to increase costs at the company by an additional CNY50mn (US$7.9mn).
Demand To Outpace Supply
We expect refined tin consumption in the country to reach 210kt by 2017, marking an average growth rate
of 5.7% per annum. Despite our downbeat macro view on China, demand for consumer electronics should
continue to improve as private consumption becomes an increasingly important driver of the Chinese
economy.
Yunnan Tin Dominates
China - Refined Tin Output By Company (2011)
Source: BMI, ITRI, WBMS
Persisting Reliance On Imports
We believe China will remain a net importer of tin, but sourcing imports will become increasingly
difficult. This is mainly due to the beneficiation push in Indonesia, as well as the fact that production base in
major tin-producing countries is likely to remain stagnant over the medium term. Indeed, we expect the
global tin market to remain undersupplied in the years ahead. According to the International Tin Research
Institute (ITRI), no new tin mines will enter into production this year, while the bulk of new projects are
still a decade or more from reaching production. Moreover, a limited appetite for mine financing amidst the
current mining downturn could place a greater number of mining projects on the backburner.
Supply Remains Hostage To Indonesia's Policy
Global Refined Tin Exports By Origin (2012)
Source: BMI, WBMS
Table: China - Refined Tin Production, Consumption & Balance (kt, Unless Stated Otherwise)

2009 2010 2011 2012 2013e 2014f 2015f 2016f 2017f
Refined Tin ('000 tonnes)

Consumption 152 168 178 186 190 199 210 221 232
% Change y-o-y 12.6 10.4 6.3 4.3 2.1 4.7 5.3 5.4 5.0
Production 140 150 156 162 169 172 177 183 188
% Change y-o-y 0.0 7.1 4.0 4.0 3.9 2.1 3.1 2.9 3.1
Balance -12.0 -17.8 -22.5 -23.9 -21.5 -26.9 -32.1 -38.3 -43.6
Zinc: Hit By Faltering Steel Sector
BMI View: Waning appetite from China's bloated steel sector will restrict zinc consumption growth and
production will all but stagnate. With the global market significantly oversupplied, and prices set to stay
stubbornly low, we expect output growth to falter as refiners and miners seek to support prices by
maintaining steady capacity rather than investing in new output. A structural deficit means that China will
remain a net importer of refined zinc, but import growth will slow in the coming years.
China dominates the global refined zinc sector, accounting for 38% and 44% of total production and
consumption in 2012, respectively. The country runs a domestic deficit of the metal and as a result was the
world's second-largest importer of refined zinc in 2012, accounting for 13% of total shipments.
Embattled Steel Sector To Drag On Zinc Consumption
Zinc relies on the steel sector for the vast majority of overall demand. The metal is fundamental in the
manufacturing of galvanised steel, an important input for the construction and manufacturing sectors.
Underpinned by our downbeat macro view on China, we believe demand growth for zinc will disappoint
over the medium term as the downshift in the Chinese economy forces a cut in steel production rates. Our
bearish outlook on the Chinese real estate sector will have significant implications for steel and zinc, as
demand for both metals will come in below market expectations.
We expect growth in Chinese construction activity to moderate significantly in the coming quarters, and
forecast construction sector value growth of 5.1% in 2014. This compares with an average growth rate of
12.0% per annum over the past decade. Similar to steel, zinc will be one of the metals most affected by a
slowdown in China. We see no return to the boom years of Chinese galvanised steel production. For overall
crude steel production, we forecast average growth of 4.3% between 2014 and 2017. This is in stark
contrast to the average production growth of 13.7% over the preceding 10-year period.
Persistent Deficit
China - Refined Zinc Production, Consumption & Balance (kt)
f = BMI forecast. Source: BMI, WBMS
Zinc consumption will take a hit from a slowdown in demand from the steel sector and we forecast only
modest expansion in overall usage in the coming years. Due to the nature of the economic slowdown in
China over the coming quarters, demand from the longs segment of the steel sector will be particularly
weak. Indeed, we expect fixed asset investment to be at the heart of the economic slowdown, while private
consumption will remain relatively resilient. As a result zinc demand from the steel flats segment, used
primarily for durable goods such as autos, will be the key source of growth for zinc consumption.
China Dominates
Global - Refined Zinc Production (2012)
Source: BMI, WBMS
We believe economic stimulus measures in 2013 will only stem the trend of slowing demand from the steel
sector, rather than reverse it. We do not expect stimulus from the government to match the 2008-2009
stimulus either in terms of scale or composition. For instance, stimulus measures will be more focused on
cushioning private consumption rather than enacting mass fixed investment programmes.
Production Stagnation
Continued global oversupply of zinc and slackening domestic demand will keep domestic prices subdued
and should give producers less financial incentive to increase output. We forecast prices to average US
$1,950/tonne in 2014, placing us below Bloomberg consensus of US$2,039/tonne. The weakness in zinc
prices will discourage investment into new zinc refining capacity and we therefore forecast declining
production growth out to 2017. Overall, we expect output in China to reach 6.9mn tonnes (mnt) by 2017,
growing at an average rate of 5.0% per annum. In contrast, China's zinc consumption will continue to
outpace production, and we expect consumption to increase at an annual average rate of 4.4% over the same
period, to reach 7.7mnt by 2017.
Losing Strength
China - Refined Zinc Production & Consumption Growth (% chg y-o-y)
Source: BMI, WBMS
The weak outlook for zinc prices will see smelters facing further financial tightness in 2014, amid concerns
of a further credit crunch in China. Because Chinese smelters are relatively inefficient and high-cost
producers, we expect to see further weakness in output as prices decline over the coming quarters. The
country's largest zinc smelter Zhuzhou Smelter Group posted an EBITDA of -28.9% in 2012 due to these
dynamics. We therefore anticipate that few smelters will add to their refining capacity in the coming years,
with output growth reliant on zinc prices and demand.
Imports To Remain Steady
Our expectation for a concurrent contraction in both production and consumption growth will see that
China's dependence on zinc imports will persist over the coming years. Despite being the world's largest
zinc producer, China is unable to meet domestic consumption requirements with domestic supply. Imports
therefore are a key indicator of domestic demand.
Table: China - Refined Zinc Production, Consumption & Balance (kt, Unless Stated Otherwise)
2009 2010 2011 2012 2013e 2014f 2015f 2016f 2017f
Refined Zinc ('000
tonnes)

Consum
ption 5,054 5,595 5,670 5,982 6,568 6,864 7,159 7,417 7,676
%
Change
y-o-y 18.6 10.7 1.3 5.5 9.8 4.5 4.3 3.6 3.5
Product
ion 4,280 5,160 5,220 5,486 5,964 6,214 6,456 6,669 6,883
%
Change
y-o-y 7.0 20.6 1.2 5.1 8.7 4.2 3.9 3.3 3.2
Balance -774 -435 -450 -496 -605 -650 -703 -747 -793
Regulatory Development
BMI View: China's metals industry is set to grapple with a string of tighter environmental regulations over
the coming quarters. A series of new regulations aimed at slimming down the bloated industry will continue
to gather momentum as domestic companies are forced to shut excess production capacity.
We expect China's metals sector to face tighter environmental regulations over the coming quarters. As
evidenced by the recent wave of 'greener initiatives' being introduced in the metals industry, there is a
growing emphasis on the negative environmental impact of industrial production in China. Indeed, China's
rapid economic growth has come at the cost of environmental degradation. In 2005, Chinese officials
acknowledged that more than 70% of the country's rivers and lakes were polluted. In July 2010, the
Ministry of Environmental Protection stated that 24% of China's surface water was unfit for any purpose,
including industrial use.
Recent Developments
The provincial government of Hebei has orchestrated a string of furnace shutdowns in recent months due
to heavy pollution in the region.
Tighter environmental regulations will be imposed on the metals industry in a bid to address
environmental pollution.
More than 1,900 companies across the heavy industries are forced to slash excess production capacity in
2013.
Companies Held To Higher Environmental Standards
Chinese steelmakers will be forced to increasingly rationalise production over the coming quarters as the
Chinese government steps up its fight against air pollution. The provincial government of Hebei has
orchestrated a string of furnace shutdowns in recent months due to heavy pollution in the region. Hebei has
been ordered to retire 60mn tonnes (mnt) of capacity, or a quarter of the province's steel capacity and 75%
of the nationwide target, over the next five years. According to the Ministry of Environmental Protection,
seven of China's 10 most polluted cities are located in Hebei, where visibility levels in the southern areas
are the worst nationwide.
In 2012, China announced a series of new regulations to fine-tune its iron and steel industry in an effort to
spur energy efficiency and make it more environmentally friendly. According to the Ministry of Industry
and Information Technology, iron and steel companies are prohibited to produce a list of obsolete products
including hot rolled silicon steel and twisted steel of primary level. Furthermore, powder dust emissions,
sulphur dioxide emissions and water consumption for producing each ton of steel should not exceed 1.19kg,
1.63kg and 4.1m
3
, respectively. For equipment capacity requirements, shaft furnaces should be more than
400m
3
, converter or electric furnaces should be above 30 tonnes, while high-alloy steel furnaces should be
over 10 tonnes.
Efforts To Slim Bloated Industries Continue
Apart from tighter regulations aimed at curbing environmental pollution, Beijing's new leaders have also
announced a string of measures aimed at slimming down the bloated industries across many sectors. In
2013, the Chinese government ordered more than 1,900 companies operating in sectors such as steel,
aluminium and cement, to shut excess production capacity. Chinese Premier Li Keqiang has pledged to
tackle the persisting problem of overcapacity as China rebalances its growth model away from fixed-asset
investment and towards private consumption. Under the edict, more than seven million tonnes (mnt) of
excess steel output and 260 thousand tonnes (kt) of excess aluminium output will be slashed.
Amongst other initiatives, the aluminium sector will be slapped with a set of revised regulations. These
include a ban on the construction of new smelting plants in environmentally sensitive zones and the
introduction of stricter limits on power consumption and emissions. New and upgraded aluminium smelting
capacity will be required to have electricity consumption of 12,750-13,200 kwh per tonne, compared with
the current capacity of 13,350-13,800 kwh per tonne.
Tax Regime
China is pushing ahead with reform, with the emphasis on reducing taxes and unifying income tax rates for
domestic and foreign companies.
Corporate Tax: The standard rate is 33%, comprising a 30% national tax and a 3% local tax. Foreign
investment enterprises (FIEs) generally pay tax at concessional rates depending on the location and type of
business. The state tax rate of 30% may be reduced to 15% or 24% if the FIE is located in one of the
specially designated zones. Qualified FIEs are entitled to a tax exemption or reduction during a tax holiday
period. The local tax of 3% may be waived or reduced by the local government. A unified tax for Chinese
and foreign enterprises, involving the removal of concessional rates and exemptions, is anticipated.
Income Tax: Income tax is levied on Chinese and foreign individuals at progressive rates ranging up to a
45% limit. Non-residents who are resident for less than a year are subject to personal tax only on income
sourced in China.
Indirect Tax: China is obliged by WTO rules to offer identical tax treatment for domestic and imported
products. VAT is levied at two rates: a standard 17% rate and a lower 13% rate. A 6% VAT rate applies to
small enterprises.
Withholding Tax: There is no withholding tax on dividends, but a 10% rate is applied to interest and 10%
on royalties.
Corruption To Remain Key Concern
Corruption is prevalent, and anti-corruption efforts are obstructed by weak or non-existent monitoring
mechanisms. Embezzlement and financial mismanagement have been identified by numerous audit reports.
The use of guanxi is widespread in the upper echelons of business. Many of those who come under
investigation are able to deploy their connections to avoid prosecution.
Red tape is a major issue for investors. Given that many laws are defined in very general terms, it is often
left to the bureaucracy to make decisions. With a lack of accountability, this process provides opportunities
for corruption, while numerous bureaucratic obstacles stymie the easy acquisition of licences. According to
World Bank data, 20 separate procedures are required to enforce a contract, which take an average of 180
days.
Table: Political Overview
System of Government Single-party socialist republic
Head of State President Xi Jinping (serving first of a maximum two five-year terms)
Head of Government Prime Minister Li Keqiang (serving first of a maximum two five-year terms)
Last Election Presidential and parliamentary - March 2013

CPC congress - November 2012
Composition of Current
Government Communist Party of China
Key Figures
The Politburo Standing Committee acts as the de facto highest decision-making body in
China and comprises the top leadership of the ruling party. Its members, in order of protocol,
are: Xi Jinping (concurrently general secretary of the Communist Party), Li Keqiang, Zhang
Dejiang, Yu Zhengsheng, Liu Yunshan, Wang Qishan, Zhang Gaoli.
Other Key Posts
Finance Minister - Lou Jiwei; Foreign Minister - Wang Yi; Defence Minister - Chang
Wanquan; Minister of Public Security - Guo Shengkun; Central Bank Governor - Zhou
Xiaochuan.
Main Political Parties
(number of seats in
parliament)
Communist Party of China (CPC): The founding and ruling political party of the People's
Republic of China, whose paramount position as the supreme political authority is
guaranteed by China's constitution and realised through control of all state apparatus. The
CPC was founded in 1921 and came to rule all of mainland China after defeating its rival, the
Kuomintang (KMT), in the Chinese Civil War.
Political Overview - Continued
System of Government Single-party socialist republic
Next Election Presidential and parliamentary - March 2018

CPC congress - Autumn 2017
Ongoing Disputes
Ongoing dispute over Taiwanese sovereignty and Tibetan autonomy; some minor territory
disputes with Asian neighbours, including with Japan over the Senkaku Islands in the East
China Sea and with Taiwan, Malaysia, the Philippines and Vietnam over the Spratly Islands in
the South China Sea.
Key Relations/ Treaties
Close Link With ASEAN, WTO member, permanent seat on the UN Security Council,
founding member of the Shanghai Cooperation Organisation (SCO).
BMI Short-Term Political
Risk Rating 77.3
BMI Structural Political
Risk Rating 62.9
Source: BMI
Commodities Forecast
Commodity Strategy
The first contractionary Chinese manufacturing PMI since July 2013 (HSBC flash PMI of 49.6 for
January) bolsters our view that metals demand growth in China will cool in 2014. Combined with a
positive supply outlook for many metals, this will cap recent price strength.
Our 2014 price forecasts remain generally below Bloomberg consensus, particularly for copper and iron
ore.
We retain a bearish iron ore view in our strategy table (currently up by 4.16%). Faltering demand growth
from China's steel sector and robust mine supply growth should see iron ore prices significantly
underperform in comparison to other metals in 2014.
Temporary upside risks linger for copper due to the potential for greater Chinese demand for collateral
purposes in the coming months. A break above US$7,400/tonne would be a positive short-term signal for
prices.
Tin, lead and zinc prices will outperform other metals over the coming quarters due to a combination of
supply disruption and resilient demand.
Post-Commodities Boom Era
S&P GSCI Industrial Metals Index (monthly chart)
Source: BMI, Bloomberg
Iron Ore: Further Weakness Ahead
We expect the recent slump in iron ore prices to gain traction over the coming months as the economic
slowdown in China increases. In a sign of the stalling momentum of the country's economy, factory output
growth in China fell to a five-month low of 9.7% year-on-year (y-o-y) in December 2013. The resilience of
China's steel sector over the past year is starting to fade, emphasised by the 10.3% fall in iron ore prices
since December 2013. Chinese crude steel production expanded by 5.9% y-o-y in November 2013,
compared with 10.1% y-o-y from the previous month.
Waning Support From Chinese Steel Sector
China - Iron Ore Import Price (US$/tonne, LHS) & Steel Production and Iron Ore Imports (% chg y-o-
y, RHS)
Note: China iron ore import price, 62% grade (US$/dry metric tonne, CFR). Source: BMI, Bloomberg, China Customs General
Administration
Apart from weakening import growth in China, we believe the ramp up of supply in the seaborne market
will remain a drag on prices over the medium term. Major miners in Australia and Brazil are forging ahead
with a series of output expansion plans in a bid to further lower their costs of production. We forecast iron
ore prices to average US$115/tonne in 2014, compared with an average of US$135/tonne last year. Our
bearish conviction on iron ore is reflected in our Commodities Strategy Table, currently up 4.1% since
initiation (see 'Views Update: Bearish Iron Ore', January 09, 2014).
Steel: Limited Scope For Higher Prices
Despite improving global steel demand and an uptick in the MEPS Carbon Steel Index over H213, we retain
a subdued outlook on steel prices. Over 2013, steel production grew on average 4.2% y-o-y, while steel
prices averaged US$708/tonne, lower than their 2012 average of US$757/tonne. We forecast further
weakness in steel prices for 2014, anticipating prices to average US$695/tonne. This forecast is based on
our expectation of continued overcapacity, particularly in China's bloated steel sector. Despite the removal
of some older steelmaking capacity in 2013, steelmaker margins in many countries will stay wafer-thin as
sales remain pressurised by sluggish demand growth in domestic consumption and cheap Chinese supply in
the seaborne market. While we do expect a slowdown in Chinese steel production growth over 2014 as the
government's efforts to reform the sector take hold and producers respond to weak profit margins, the
restructuring of the Chinese steel industry will be a protracted process.
Price Weakness To Stunt Growth
Global Steel Production % Growth y-o-y & MEPS Carbon Steel Index (US$/tonne)
Aluminium: Continued Short-Term Weakness
We forecast continued weakness in LME aluminium prices as global production overcapacity and
inventories remain at all-time highs. We recently revised our 2014 price forecast downward to US$1,850/
tonne, from US$1,900/tonne previously, to reflect price weakness at the year's outset. LME reforms and a
decline in aluminium financing on the back of interest rate normalisation should free up more metal locked
up in such trades for end users and put downward pressure on prices. High aluminium premiums will
incentivize metal production, adding to global supplies. We also forecast continued market surpluses
through 2017, capping price growth over our forecast period.
Underperformance To Persist
Three-Month LME Aluminium (US$/tonne), Weekly
Copper: Recent Strength Doesn't Change Our View
We forecast copper prices are likely to continue trading within the US$7,200-7,400 range over the coming
weeks, but maintain our forecast that prices will average US$6,800/tonne for the year. Recent strength can
be attributed to copper remaining in backwardation, indicating short-term market tightness on the back of
recent strength in Chinese imports. However, we maintain our view that China's underlying macroeconomic
fundamentals will weaken through the year as the economy becomes less reliant on fixed asset investment,
leading to slowing copper demand across the economy. A wider crackdown on collateral financing, which is
currently pushing up copper demand and which is not tied to specific industrial or commercial use, should
also lead to slowing import growth. Strong mine supply growth in various producing countries should cap
upward price movement as more metal comes onto the market and underlies our forecast for continued
market surpluses through our forecast period.
Falling Back From Resistance
Three-Month LME Copper (US$/tonne), Weekly
Lead: Modest Price Gains Ahead
We expect lead prices to outperform other industrial metals including aluminium, copper and nickel over
coming quarters as lead will be relatively insulated from a fixed asset investment slowdown occurring in
China. Lead's primary usage in batteries for the autos sector will provide upside for prices as we remain
positive on the outlook for global vehicle production over coming years. We forecast lead prices to head
higher from the current price of US$2,194/tonne, to average US$2,250/tonne over 2014.
Solid Autos Growth To Bolster Lead Demand
Select Countries: Vehicle Production Growth (% y-o-y)
United States Germany China
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
f
2
0
1
5
f
2
0
1
6
f
2
0
1
7
f
2
0
1
8
f
-10
0
10
20
f=BMI forecast. Source: OICA, VDA, CAAM, BMI
Our outlook for lead also applies to the supply side. We forecast the global stocks-to-use ratio for refined
lead to decrease from an estimated 6.4% in 2013 to 0.5% in 2017. According to our estimates, the refined
lead market will slip into a deficit of 79.5kt in 2014, largely as a result of a collapse in production growth in
China.
Nickel: Recent Strength To Subside
After persistent declines, we believe nickel prices have bottomed out and should respect 2013 lows over the
coming months, leading us to forecast prices will average US$14,750/tonne through the year. Recently
imposed restrictions by the Indonesian government on nickel ore exports have pushed up LME prices above
long-term resistance, but it remains a core view of BMI that the Indonesian government is likely to
moderate its mining policy in the coming months, with higher export tariffs imposed in place of a complete
ban on nickel ore. This should still provide some nickel price support, but we expect high global inventories
and still subdued global steel capacity utilization below 80% to cap gains. Thus, our forecast for 2014
remains below Bloomberg consensus. Still, our forecast for global surpluses to decline through 2016, and
for a deficit to emerge in 2017, lead us to predict rising LME prices through our forecast period.
Modest Turnaround In Sight
Three-Month LME Nickel (US$/tonne), Weekly
Tin: In A Sweet Spot
In line with our expectation, tin prices are slowly improving after a four-month low of US$21,598/tonne in
January 09, 2014 (see 'Tin To Average US$22,500/tonne In 2014', January 08, 2014). We expect tin to
outperform the industrial metals complex over the coming quarters, and expect the uptrend in the ratio
between tin and the S&P GSCI Industrial Metals Index to stay intact. In contrast to construction-heavy
metals such as steel and nickel, the sharp slowdown in Chinese fixed asset investment growth will deal a
much softer blow to demand growth for refined tin. Moreover, we believe any significant fall in tin prices
would invite price-supportive action from the Indonesian government.
Tin Outperformance To Resume
Three-Month LME Tin (US$/tonne, LHS) & Price Ratio: Tin / S&P GSCI Industrial Metals Index (RHS)
Zinc: Price Momentum To Continue
We expect zinc prices, alongside lead, will continue to outperform the base metals complex and may test
resistance around US$2,200/tonne. Market fundamentals should remain supportive of zinc prices as has
been the case in recent months. Indeed, September through November 2013 saw monthly zinc deficits
emerge, and global LME inventories continue to move downward. With continued inventory draw downs
leaving global stockpiles at their lowest levels since September 2012, we believe consumption demand
remains strong and will continue to outpace production. Still, we maintain our forecast that zinc prices will
average US$1,950/tonne in 2014, due to steady mine supply growth and global steel capacity utilization
remaining below 80%. Given zinc's use in the galvanization of steel, the latter will continue to weigh on
prices. Given our forecast for zinc deficits to emerge in 2015 and persist through 2017, we believe risks lie
to the upside over the medium-term.
Potential Test Of Resistance
Three-Month LME Zinc (US$/tonne), Weekly
Table: Select Commodities - Performance & BMI Forecasts
Commodity Unit Spot Price
YTD
(% Chg)
1 Year
(% Chg) 2013 Avg
YTD
(ave)
2014
(BMI ave)
2015
(BMI ave)
Aluminium US$/tonne 1,773 -1.5 -14.6 1,887 1,784 1,850 1,950
Copper US$/tonne 7,264 -1.3 -10.4 7,349 7,317 6,800 6,750
Gold US$/oz 1,245 3.6 -26.1 1,409 1,239 1,150 1,100
Iron Ore US$/tonne 124 -8.0 -15.4 135 130 115 105
Lead US$/tonne 2,175 -2.0 -8.2 2,155 2,177 2,250 2,300
Nickel US$/tonne 14,670 5.5 -16.4 15,081 14,184 14,750 15,500
Palladium US$/oz 746 3.8 2.7 726 741 650 650
Platinum US$/oz 1,461 6.5 -14.0 1,486 1,429 1,500 1,500
Silver US$/oz 20 3.6 -38.2 23 20 32.00 32.00
Steel US$/tonne 716 -0.7 -0.7 708 716 695 690
Tin US$/tonne 22,150 -0.9 -9.5 22,298 22,058 22,500 23,000
Zinc US$/tonne 2,063 0.4 -1.1 1,939 2,058 1,950 2,050
Commodities Forecast
Table: BMI Steel Forecast

Spot Short-Term 2014 2015 2016 2017
US$/tonne, average 716 720 695 690 685 690
Short-Term Outlook
The uptick in the MEPS Carbon Steel World Price
seen since mid-2013 is likely to endure in the short
term as prices are bolstered by a strengthening of US
and Eurozone steel-intensive manufacturing after a
particularly depressed Q112-Q313 period. We
expect steel prices to average around US$720/tonne
over coming weeks, slightly higher than current spot
at US$716/tonne.
Core View
We retain our bearish outlook toward steel prices
over the medium term, expecting the MEPS Carbon
Steel Index to head south over the course of 2014 to
average US$695/tonne. Despite the uptick in prices
since mid-2013, the global steel market remains
plagued by serious overcapacity and sluggish
demand growth. Failure to consolidate the bloated
steel industry in China will remain the crucial factor weighing on prices over coming quarters. We expect
Chinese steel to continue to seep onto the global market, offering a cheap alternative to domestic production
elsewhere. Rationalisation of the Chinese steel industry combined with an effective crackdown on Chinese
steel exports and strengthening of global steel demand growth would be the tonic needed to improve the
fortunes of the global steel industry. This prospect remains beyond our forecast period to 2017.
Global Steel Glut To Persist
We expect the global steel market to remain mired in significant overcapacity over our forecast period to
2017, despite a production growth slowdown in China. This slowdown will be insufficient to rebalance the
global steel market, which we anticipate to remain in surplus, albeit a diminishing one, over coming
years. We forecast the global steel surplus to slim from 107mnt in 2013 to 71mnt by 2017. By our
estimates, the global stocks-to-use ratio will grow from 32% in 2013 to 47% in 2017 as global steel
consumption growth decelerates.
Not Out Of The Woods Yet
MEPS Carbon Steel Product World Price (US$/
tonne)
Note: Dashed lines represent BMI forecasts for 2014 &
2015. MEPS price updated monthly. Source: BMI,
Bloomberg
Staggering Surplus
Global Crude Steel Production Balance (mnt) & Stocks-To-Use Ratio (%)
Note: Stocks calculated using 2000 as base year. 2013 = estimate, 2014-2017 = forecast. Source: BMI, World Steel Association
(WSA)
Production: Rationalisation In The Long Term
We forecast global steel production growth to average 3.3% y-o-y between 2014 and 2017, slower than an
average of 8.3% y-o-y seen over the period 2010-2013. China currently produces roughly 46% of global
steel. We expect Chinese output to grow on average 4.2% y-o-y between 2014 and 2017, marking a
significant slowdown from the 12.7% average y-o-y growth seen over 2005-2013. Nevertheless, this will be
insufficient to effectively tackle the global glut of steel on the global market.
Despite extensive rhetoric emanating from the Chinese government with regard to the restructuring of its
bloated steel sector, evidence of serious reform has been thin on the ground. We anticipate the
rationalisation of China's steel sector to be a protracted process due to government concerns about
employment. For the foreseeable future government intervention will circumvent the natural process of
consolidation in an oversupplied industry. A key indicator of this trend has been the accelerated growth in
Chinese steel production over the past twelve months, urged on by the mid-2013 enactment of an
infrastructure stimulus. Over 2013, steel production in China surged 9.2 % y-o-y to 782mnt.
China Leading The Pack
Select Countries: Crude Steel Production (% Change y-o-y)
The glut of cheap steel available on the open market combined with country-specific challenges will mean
that production growth ex-China remains modest. For example, although India is on track to become a steel
powerhouse over the long term, steelmakers in the country are struggling with a rising import bill due to a
weak rupee and a shortage of iron ore supply. Indian steel production growth averaged 5.9% y-o-y in 2013,
a slowdown from 6.3% y-o-y growth in 2012.
This trend of slowing production growth or even contraction is common to the majority of the world's
largest steel producing countries. Russian steel production contracted 1.7% y-o-y in 2013 after growth of
2.8% y-o-y in 2012. Steel production in the USA contracted 1.5% y-o-y in 2013, following 2.8% y-o-y
growth in 2012. We forecast 2014 steel production growth of 0.5% in Russia and 1.5% in the USA.
Steel Spillover
China Steel Production (LHS) & Exports (RHS)
Consumption: Growth Decelerating
We forecast global steel consumption to grow on average 4.0% y-o-y from 2014-2017, slower than average
growth of 6.9% y-o-y over the previous four years. Although consumption will continue to recover in
developed states, slower emerging market demand growth, led by China, will offset this rise.
Weak demand growth for steel will be a key contributing factor to the aforementioned increasing stocks-to-
use ratio and ultimately to steel price weakness. This view is predicated on our expectation for a sharp
slowdown in Chinese fixed asset investment, which will directly impact the steel sector as the huge steel
tonnages produced by steel mills will become increasingly difficult to absorb. We expect China's export
outlet to become increasingly tenuous over coming years as countries from the USA to Indonesia threaten
greater protectionism as they challenge China on anti-dumping grounds. Equally importantly, the quality of
Chinese steel has come under intense scrutiny as large projects including a number of bridges in the USA
have had to undergo serious repair work due to the use of low quality imported steel.
Sluggish Consumption Growth Despite Promising PMIs
Select Countries: Crude Steel Consumption (% Change y-o-y), LHC & Manufacturing PMI Readings,
RHC
Note: PMI reading above/below 50 indicates expansion/contraction. e/f= BMI estimate/forecast. Source: BMI, WSA, Bloomberg
Aside from China, other countries in Asia and the EU will also suffer from lacklustre demand growth for
steel products. In Japan, automakers have been shifting their production overseas, while domestic
shipbuilders are reducing capacity in light of shrinking orders and rising competition from Chinese and
Korean shipyards. Similarly, many European markets will see negligible growth in steel demand due to low
GDP growth and declining investment in infrastructure.
We forecast steel consumption growth in Japan to average 2.1% y-o-y over 2014-2017, slower than 5.9% y-
o-y over the previous four years. Similarly in South Korea, steel consumption growth will average 1.9% y-
o-y over 2014-2017, a slowdown from 5.3% average y-o-y over 2010-2013. Consumption growth
deceleration will be equally pronounced in the Eurozone, with growth set to average 1.1% y-o-y over
2014-2017, in contrast to 7.7% y-o-y average growth over 2010-2013.
Excessive Chinese Exports
China's excesses will continue to spill onto the global market despite anti-dumping initiatives embraced by
North American, European and Asian countries. Chinese steel exports have continued in their secular
uptrend since the start of 2011, growing from a total of 45.8mnt in 2011 (6.5% of total output) to 55.8mnt in
2012 (7.8% of total output) to 62.3mnt in 2013 (8.0% of total output). The seepage of cheap Chinese steel
onto the global market will continue to be a major factor weighing on prices over our forecast period to
2017.
Growing Arbitrage Between East & West
Although cheap steel from Asia will keep a lid on global steel prices, we expect growing arbitrage between
the MEPS Carbon Steel North America price (current spot: US$813/tonne) and the MEPS Carbon Steel
Asia price (current spot: US$636/tonne). The North America price could head up towards US$850/tonne on
the back of US economic recovery bolstering steel demand, while the US government cracks down on
Chinese steel imports both to protect domestic producers as well as to ensure high quality steel is utilized in
major infrastructure projects. Conversely, the Asia price could head down towards US$600/tonne as the
fixed asset investment slowdown takes hold in China and the Chinese government fails to tackle
overcapacity in the steel sector.
Arbitrage To Grow
MEPS Carbon Steel Prices (US$/tonne)
Risks To Price Outlook
The risks to our forecast are weighted to the upside. More impressive than anticipated recovery in the US
and Eurozone could lead to greater demand for steel products in the West providing tailwinds for steel
prices. A serious move on the part of the Chinese government to tackle overcapacity in the sector could see
much needed consolidation, resulting in excess production cutbacks. Further significant restructuring in the
rest of the world ex-China could also provide upside to prices as major producers including ArcelorMIttal
and Severstal reduce output and restructure their businesses in an attempt to address the global glut. There
is even the more remote possibility of a shock to the system in the form of another infrastructure stimulus
similar to that enacted by the Chinese government in 2013 in response to flagging economic growth. Such a
development would be contrary to the new leadership's aim of rebalancing the economy away from
infrastructure-led investment, but cannot be ruled out.
Table: Steel Data & Forecasts

2010 2011 2012 2013 2014f 2015f 2016f 2017f
Price, average (US$/tonne) 733 854 757 708 695 690 685 690
Production, thousand tonnes 1,432 1,582 1,612 1,694 1,764 1,825 1,877 1,928
Consumption, thousand tonnes 1,400 1,485 1,512 1,587 1,661 1,726 1,792 1,856
Inventories, thousand tonnes 209.2 306.2 406.0 512.7 615.4 714.5 799.6 871.1
Stocks-to-Use, % 14.9 20.6 26.9 32.3 37.0 41.4 44.6 46.9
Stocks-to-Use, wks 7.8 10.7 14.0 16.8 19.3 21.5 23.2 24.4
f= BMI forecast. Source: BMI, WSA
Table: Global Steel Prices By Region & Product, US$/tonne (ave)
Description 2006 2007 2008 2009 2010 2011 2012 2013
Flat Products

USA Domestic Hot Rolled Coil (FOB Midwest mill) 676 596 958 538 678 822 703 696
China Domestic HR Sheet 494 564 722 546 629 723 634 599
China Import - HR Sheet 3mm (Shanghai) 619 625 893 541 666 773 668 631
China Export - HRC 3mm Shanghai 560 607 899 551 676 766 653 601
Persian Gulf - HRC CFR na na 908 510 630 731 628 589
Europe - HRC Ex-Works 717 944 1,460 728 911 1,050 836 819
Russia HRC FOB 514 603 868 462 610 694 580 558
CIS - HRC Ex-Works (Inc. VAT) na na 857 464 605 715 592 533
Turkey Domestic - HRC (ex-works) na na 1,002 542 663 743 634 598
Turkey - HRC Import CFR na na 966 479 633 710 613 565
Turkey Export - HRC FOB 518 619 847 485 629 733 631 586
Global Steel Prices By Region & Product, US$/tonne (ave) - Continued
Description 2006 2007 2008 2009 2010 2011 2012 2013
Latin America - HRC (dry) FOB 505 545 987 485 588 728 614 582
Long Products

USA - Rebar CFR FO USG 513 626 911 496 613 721 655 603
China Domestic - Rebar 25mm 382 484 686 538 619 733 623 581
China Export - Rebar 25mm (Shanghai) 447 564 890 583 663 756 652 581
EU Import - Rebar CFR 544 665 948 495 605 740 667 631
EU Export - Rebar FOB na na 903 487 592 703 641 605
CIS - Rebar Ex-Works na na 939 452 590 699 649 578
Turkey Domestic - Rebar (ex-works) na na 911 468 580 702 638 602
Turkey Export - Rebar FOB 487 597 901 468 586 694 628 591
Persian Gulf - Rebar CFR na na 921 477 596 694 642 603
Latin America - Rebar Export FOB 441 530 1,140 464 580 686 645 596
na= not available/applicable. Source: Bloomberg, Metal Bulletin, Steel Orbis
Competitive Landscape
BMI View: State-owned companies will gain increasing dominance in China's metals industry over the
coming years. In contrast, a large number of smaller, inefficient and often private players will struggle to
survive with the downshift of the Chinese economy and the government's aggressive push to consolidate the
metals and mining industries.
In our view, state-owned companies are set to become increasingly dominant in China's metals industry
over the coming years. A large number of smaller, inefficient and often private players will come under
duress with the economic slowdown in China. Furthermore, the Chinese government's aggressive push to
consolidate the metals and mining industries should eventually weed out many of the smaller players over
the medium term.
As part of China's 12th Five-Year Non-ferrous Industry plan, the government plans to cut the annual
average growth of metal output to 8% between 2011 and 2015 compared with 13.7% during 2006 to 2010.
To achieve this, the government is pushing for consolidation of ownership and expects the top ten smelters
in the country to account for 90% of copper and aluminium production and 60% of the total lead and zinc
output. State-owned companies will continue to play a dominant role in China's metals industry given these
consolidation plans. Despite comprising only a small proportion of total mining and metal companies, state-
owned outfits play outsized roles in their respective sectors. In China, the top miners are often the country's
top downstream players, as companies in the industry are often vertically-integrated. Shenhua Energy has
both a power business and a coal mining business. Angang Steel has vast assets of iron ore mines. Jiangxi
Copper is a major copper producer and is also a major copper miner. Chinalco has both sizable bauxite
assets and is also the largest aluminium player in the country.
An Outsized Role
Share of State-Owned Enterprises, 2012 (%)
Source: BMI, 2012 China Statistical Yearbook
Differences between private mining companies and state-owned miners are significant. The average coal,
ferrous, and non-ferrous mining company employs around 585, 157 and 227 people, respectively. In
contrast, the average state-owned mining company in the coal, ferrous, and non-ferrous sectors employed
around 4,046, 913 and 675 people, respectively. We expect state-owned mining companies to contribute to
a larger percentage of said metrics as national consolidation initiatives increase compliance costs and reduce
the overall profitability of smaller mines.
Consolidation And Overseas Extraction
China's plans to curb metal production growth are faced with the country's structural deficit for metals such
as copper and iron ore. Although the need for domestic supply will diminish with a slowdown in the
Chinese economy, stable and cheap access to raw material supply remain key concerns for companies.
Indeed, iron ore import demand from China is unlike to collapse in the coming quarters due to the low
grade, and subsequent high cost, of domestic production. To highlight, costs of production in Brazil and
Australia are in the US$30-50/tonne range, significantly more competitive than Chinese costs. Chinese
companies have been aggressively acquiring overseas assets and will continue to do so in a bid to secure
supply.
Profit Crunch
Price Ratio - China Steel Rebar/Iron Ore Import Price
According to the Chinese Iron & Steel Association (CISA), high iron ore prices relative to steel prices have
left the Chinese steel industry as the least profitable of the country's 39 industrial sectors. Unsurprisingly,
the waterfall decline in margins over recent years is forcing a growing number of steelmakers to diversify
their operations into non-steel businesses such as technology, real estate and farming.
Table: China - Largest Listed Metal Producers
Company
Market Cap
(USDmn) Employees
Revenue
(USDmn)
Net Income
(USDmn)
Profit Margin
(%)
Baoshan Iron & Steel Co Ltd 11,020 32,598 30,304 1,646 5.4
Aluminum Corp of China Ltd 7,980 103,493 23,691 -1,305 -5.5
Fosun International Ltd 6,113 37,000 8,204 588 7.2
Inner Mongolian Baotou Steel Union
Co Ltd 5,144 29,512 5,827 41 0.7
China - Largest Listed Metal Producers - Continued
Company
Market Cap
(USDmn) Employees
Revenue
(USDmn)
Net Income
(USDmn)
Profit Margin
(%)
Wuhan Iron & Steel Co Ltd 3,856 41,150 14,469 33 0.2
Angang Steel Co Ltd 3,728 36,172 12,296 -659 -5.4
China Hongqiao Group Ltd 3,719 31,872 3,931 864 2.2
Hebei Iron & Steel Co Ltd 3,308 49,890 17,664 17 0.1
Pangang Group Vanadium Titanium &
Resources Co Ltd 3,225 16,227 2,407 94 3.9
Gansu Jiu Steel Group Hongxing Iron &
Steel Co Ltd 2,773 23,961 10,078 77 0.8
Shanxi Taigang Stainless Steel Co Ltd 2,428 22,227 16,385 175 1.1
Maanshan Iron & Steel 2,147 49,797 11,767 -612 -5.2
Shandong Iron and Steel Co Ltd 1,805 35,980 11,593 -608 -5.2
na = not available. Note: All data refers to latest financial year. Source: BMI, Bloomberg
Company Profile
Aluminum Corporation of China (Chalco)

Strengths

Dominant position both domestically and globally. It is the world's second-largest
alumina producer (and the only producer in China) and third-largest aluminium
producer (and the largest in China).
Expanding its portfolio into the power industry. To benefit from consistent energy
supplies and reduced exposure to a surge in energy prices.
Weaknesses

Closed 380kt of annual aluminium capacity (or 9% of its annual output in 2012) in
2013.
Significant overcapacity and weak margins in the aluminium industry will continue to
weigh on margins.
Opportunities

As part of China's 12
th
Five-Year Plan (2011-2015), the Chinese government is on a
drive to shut excess capacity in the metals industry with the closure of smaller
aluminium smelters. This could benefit Chalco given its dominance in the Chinese
market.
It can leverage its position as the largest shareholder in Rio Tinto and benefit from
Rio's investment in the Oyu Tolgoi project, the world's largest untapped copper and
gold deposit.
Threats

Could be disadvantaged by its relative inexperience in the power sector, especially
against established power suppliers in the domestic market.
Ongoing probe into metals warehousing could unleash a flood of aluminium onto the
market and push down prices over the coming quarters.
Company Overview
Aluminum Corporation of China (Chalco) is a producer of alumina, primary aluminium and aluminium
fabrication. The company is relatively vertically integrated. It has its own captive bauxite mines, engages in
alumina trading and manufacturing, primary aluminium and aluminium fabrication and also trades non-
ferrous metal products sourced from external suppliers. Chalco is an industry leader in processing non-
ferrous minerals and has a number of large copper mines. Chalco and its 34 subsidiaries have operations
across 22 provinces in China and 15 offices in 10 other countries. The company operates in four segments:
alumina, primary aluminium, aluminium fabrication and trading.
Revenue To Fall As China Slows
Chalco - Revenue By Product Segment (2012)
Source: BMI, Company Report. Note: Data for 2013 unavailable.
Latest Financial Results
Chalco returned to profit in 2013 after efforts to slash costs and sold assets to its parent company reached
fruition. The company posted a net income of CNY1.0bn (US$165mn) last year, compared with a record net
loss of CNY8.2bn in 2012. However, the turnaround in Chalco's fortunes was mainly due to the sale of a
65% stake in its subsidiary iron ore company at CNY12.9bn to its parent group. The company has also
restructured its high-cost refineries and alumina assets in southwest Guizhou and gave up nine downstream
plants in 2013.
Company Strategy
In a bid to improve profit margins, Chalco has been undertaking considerable efforts in coal-power-
aluminium integration over the past years. However, this has yet to reap significant cost benefits for the
company as persistent weakness in the aluminium market continues to weigh on profit margins. In our view,
further headwinds are in store for Chalco over the medium term. We expect the aluminium industry to be
plagued by persistent overcapacity in the coming years, and forecast prices to average US$1,900/tonne in
2014, compared with an average of US$1,887/tonne in 2013.Crucially, proposed reforms by the LME could
unleash a flood of aluminium onto the market and pull down prices more than we anticipate in the coming
months.
Little Respite Ahead
Select Equity & Indices, Rebased
Source: BMI, Bloomberg. Note: Jan 2006 = 100.
Company Details
62 North Xizhimen Street
Hai Dian District
Beijing 100082
China
+86 10 82298103
www.chalco.com.cn
Table: Chalco - Key Financial Data

2006 2007 2008 2009 2010 2011 2012
Revenue (US$mn) 8,132 11,204 11,044 10,286 17,879 22,518 23,691
% chg y-o-y na 37.8 -1.4 -6.9 73.8 25.9 5.2
EBITDA (US$mn) 2,660 2,735 1,095 443 1,433 1,406 273
% chg y-o-y na 2.8 -60.0 -59.6 224.0 -1.8 -80.6
Net Income (US$mn) 1,485 1,414 3 -680 115 37 -1,305
% chg y-o-y na -5 -100 -24,331 -117 -68 -3,644
Profit Margin (%) 18.3 12.6 0.0 -6.6 0.6 0.2 -5.5
Debt to EBITDA 1.0 1.4 7.7 21.6 7.4 8.2 62.0
P/E Ratio 7 18 2,567 na 100 137 na
na = not available. Source: BMI, Company Report. Note: Data for 2013 unavailable.
Baoshan Iron & Steel
SWOT Analysis

Strengths

Bulk of its 26.5mnt production capacity is located at its district headquarters in
Shanghai. This provides direct access to ports for iron ore imports and also brings
Baoshan closer to its key customer base of automobile and home appliance
manufacturers.
Major revenue drivers are in the high-end high-margin products of automobile steel
sheets and silicon sheets. Hence, it is able to charge a premium for its products and
has better margins than its competitors.
Weaknesses

Highly exposed to fluctuations in input prices due to a lack of upstream investment
into iron ore.
Our below consensus view on the Chinese economy, particularly the real estate
sector, will significantly weaken domestic demand for steel products and force
steelmakers to adopt further price cuts.
Opportunities

As a state-owned company, Baoshan is well-placed to benefit in the long-term
urbanisation process of China, albeit at a slower pace than during the previous
decade.
Asset injection by its parent company, Baosteel Group, could substantially boost
Baoshan's value.
As one of the top five steel producers in the country, Baoshan is set to benefit from
any future M&A activity due to consolidation efforts by the Chinese government.
Threats

Exposed to collapsing profit margins resulting from lower steel prices.
Growing backlash against Chinese steel products on anti-dumping investigations.
Growing number of debt-laden steel traders in China defaulting on loans and leading
to further swelling of inventories at Chinese steel mills.
Company Overview
Baoshan Iron & Steel Co. is the biggest-listed steel producer in China and is among the
largest in the world. Its parent company, Baosteel Group, owns a 74% stake. Baoshan
has a high-end, high-margin product mix focused on flat products with a dominant
market share in the domestic automobiles and home appliance markets. The company
also holds sizable market positions in the markets for transmission of oil and natural
gas, engineering machinery, bridges, buildings, ships, containers and rail track
transportation, among others.
China Slowdown To Weigh On Growth
Baoshan Iron & Steel - Revenue By Geography (2012)
Source: BMI, Company Report
Strategy
Baoshan recorded a net profit of US$947mn and operating revenue of US$31.2bn in
2013, down 44% year-on-year (y-o-y) and 0.6% y-o-y, respectively.
Baoshan holds a dominant position in the high-margin automotives and home
appliances steel markets. We believe this should offer some cushion to the downside
for the company over the coming quarters as China's rebalancing process begins in
earnest. Unlike most of the industry where steel companies are either being merged or
closed down, Baoshan continues to invest heavily in organic capacity expansion and is
seeking to increase its production capacity to 33mnt by 2015. However, the lack of
upstream investment makes the company vulnerable to spikes in raw material prices.
We believe China's bloated steel sector is set to come under increasing pressure over
the coming quarters. The steel sector is plagued by significant overcapacity, depressed
margins, weak demand and persistent losses due to decades of blind expansion and
artificial government-led support. Apart from the downshift in China's economy, the
increasingly hardline stance of Beijing's new leaders should usher in more consolidation
activity for the steel industry over the medium term.
Underperforming
Company Details

Baoshan Iron & Steel
South Block
Baoshan Hotel 1813
Mudanjiang Road
Baoshan District
Shanghai
China
+86 21/2664 7000
www.baosteel.com
Table: Baoshan Iron & Steel - Key Financial Data

2006 2007 2008 2009 2010 2011 2012
Revenue (US$mn) 20,252 25,026 28,705 21,657 29,832 34,418 30,304
% chg y-o-y na 23.6 14.7 -24.6 37.7 15.4 -12.0
EBITDA (US$mn) 3,983 4,151 3,510 3,130 4,415 3,318 2,676
% chg y-o-y na 4.2 -15.4 -10.8 41.1 -24.8 -19.4
Net Income (US$mn) 1,640 1,672 930 851 1,902 1,139 1,646
% chg y-o-y na 2.0 -44.4 -8.4 123 -40.1 44.5
Profit Margin (%) 8.1 6.7 3.2 3.9 6.4 3.3 5.4
Debt to EBITDA 1.0 1.9 2.6 2.9 2.2 3.9 3.4
P/E Ratio 11.5 23.9 12.5 29.3 8.8 11.5 8.2
na = not available. Source: BMI, Bloomberg
Angang Steel
SWOT Analysis

Strengths

Largest-listed steel company in Hong Kong in terms of market capitalisation.
Flexibility and relative depth of its Hong Kong shares can mitigate the costs of equity
capital.
Enjoys significant economies of scale compared with industry peers.
Able to source as much as half of its iron ore needs from its parent company, limiting
exposure to input price fluctuation.
Operations are heavily focused on flat steel products. Flats demand will prove more
resilient than longs demand as China re-orientates its growth model away from fixed-
asset investment and towards private consumption.
Weaknesses

Market share in the high-margin flat steel segment has slowly eroded in recent years
while its competitor, Baosteel, has gained.
Net losses widened in 2012, to reach US$689mn.
Tighter credit curbs and environmental regulations in the Chinese steel sector to
weigh on operations.
Opportunities

Future asset injections from its unlisted parent company provide an opportunity for
further growth.
Ongoing industry consolidation as part of China's Five-Year Plan (2011-2015) could

enhance Angang's productivity and efficiency over the long term.
Threats

Our downbeat view on the real estate sector will significantly crimp demand for steel
products amidst the downshift in the Chinese economy.
Given the high-margin nature of the flats segment, the industry might face increasing
competitive pressure in the coming quarters as existing steel players move into the
segment.
Company Overview
Angang Steel is principally engaged in the production and distribution of steel products.
Approximately 90% of the company's production goes into flat steel products and it is
thus a major supplier to the domestic shipbuilding, automobile and home appliance
industries. In 2012, the company produced around 20.3mn tonnes (mnt) of iron,
19.6mnt of steel and 19.0mnt of steel products, representing a year-on-year (y-o-y)
decrease of 0.8%, 0.8% and 0.4%, respectively. Angang distributes most of its
products within China but also has a sizable export segment.
Diversification Across Steel Products
Angang Steel - Revenue By Product Type (2012)
Source: BMI, Company Report
Strategy
Angang Steel is relatively more integrated on the upstream compared with its peers in
the industry. The company can source as much as half of its iron ore needs internally. In
2013, Angang announced that it will be focusing on the development of its mining
subsidiary in a bid to increase its advantage in the raw materials segment. While this
could reduce the company's exposure to input price fluctuations, we believe the
downshift of the Chinese economy will nonetheless, be a significant drag to Angang's
operations over the coming years.
A bright spot, however, is its recent joint venture with Kobe Steel. Kobe Steel signed a
joint-venture agreement with Angang on October 2013 for the establishment of
Kobelco Angang Auto Steel Co. Ltd. The new company aims to tap into China's fast-
expanding automotive industry with the sale of advanced cold-rolled high strength steel
sheet.
Struggles To Continue
Company Details

Angang Steel
Angang industrial Zone

Tiexi District
Anshan
Liaoning
China
+86 412/84172713
www.ansteel.com.cn
Table: Angang Steel - Key Financial Data

2006 2007 2008 2009 2010 2011 2012
Revenue (US$mn) 6,769 8,486 11,324 10,228 13,583 13,933 12,296
- % chg y-o-y na 25.4 33.4 -9.7 32.8 2.6 -11.8
EBITDA (US$mn) 1,796 2,289 1,360 1,176 1,539 750 248
- % chg y-o-y na 27.4 -40.6 -13.5 30.8 -51.3 -67.0
Net Income (US$mn) 878 991 429 109 304 -335 -659
- % chg y-o-y na 12.8 -56.7 -74.5 177.2 -210.3 96.8
Profit Margin (%) 13.0 11.7 3.8 1.1 2.2 -2.4 -5.4
Debt to EBITDA 1.4 1.3 3.3 4.5 3.5 8.2 21.9
P/E Ratio 10.3 17.8 18.5 146.4 35.5 na na
na = not available. Source: BMI, Bloomberg
Methodology
BMI's industry forecasts are generated using the best-practice techniques of multiple regression analysis,
using a combination of industry indicators, as well as country-specific, regional and global macroeconomic
variables that have statistically significant explanatory power in explaining past movements in industry-
specific indicators. The indicators used vary from industry to industry, and from country to country within
each industry, depending on the structure of supply and demand
When forecasting for some of our industry sub-component variables, however, using a variable's own
history is often the most desirable method of analysis. Such single-variable analysis is called univariate
modelling. We use the most common and versatile form of univariate models: the autoregressive moving
average model (ARMA).
In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality
is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a basis for
analysis and forecasting.
Human intervention plays a necessary and desirable part of all our industry forecasting techniques. Intimate
knowledge of the data and industry ensures we spot structural breaks, anomalous data, turning points and
seasonal features where a purely mechanical forecasting process would not.
Cross Checks
Whenever possible, we compare government and/or third-party agency projections with the reported
spending and capacity expansion plans of the companies operating in each individual country. Where there
are discrepancies, we use company-specific data, as physical spending patterns ultimately determine
capacity and supply capability. Similarly, we compare capacity expansion plans and demand projections to
check the chemicals balance of each country. Where the data suggest imports or exports, we check that
necessary capacity exists or that the required investment in infrastructure is taking place.

BMI China Metals Report Q2 2014

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Q2 2014

62 North Xizhimen Street

Hai Dian District

Growing backlash against Chinese steel products on anti-dumping investigations.

+86 21/2664 7000

Enjoys significant economies of scale compared with industry peers.

Net losses widened in 2012, to reach US$689mn.

Ongoing industry consolidation as part of China's Five-Year Plan (2011-2015) could

Angang industrial Zone

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