Aluminum Market Analysis and Investment Insights Q2 2018

Investment Consultation Qualification: CSRC 2012 No. 669 Supply-side Reform & Sino-US Trade Conflict and Chinese Aluminum Market Xu Yongqi Nonferrous Metal Team of Research Department May 2018 Qualification No.: F3028549 Investment Consultation No.: Z0012503

Aluminum: Oversupply softened; Aluminum prices to trend upward in Q2; Focus on captive power plants reform and trade war between the US and China Main point: Consumption improved during the busy season and primary aluminum capacities were launched slowly, softening aggravated supply shortage on the overseas market. Thus aluminum prices are expected to move up. Highlights for Q2 oversupply. Russia sanctions Our views Russia sanctions would result in supply shortage of alumina and primary aluminum on the overseas market Evolvement of Russia sanctions Prices hold above RMB15,000/t (USD2,374/t) for long would stimulate more primary aluminum capacities to be launched Launch of Chinese primary aluminum capacity Inventory decrease The rectification tends to be stricter Captive power plants rectification

Main points Overseas alumina supply is tight while Chinese alumina supply mainly depends on profit. The favorable economic data in Q1 offered FED the chance to raise interest for the first time in 2018 on the meeting in March, after that, prices for precious metal rose again. Before the interest negotiation meeting in May, there would be no interest hike; but the market might keep the strong movement. The meeting in May and speech of FED officers afterwards may impose certain pressure on precious metals prices. If the FED raises interest again in June, the pressure would be heavier, and the prices would have a great potential to retreat. Then the uncertainness of interest hike in September might bring about another round of discussion. In Q2, prices for precious metals would fluctuate in a wide range with those for gold and silver hovering at USD1,250-1,450/oz and USD16.00-17.50/oz respectively.

I. Raw Materials 1.1 Overseas alumina prices surge and Chinese alumina prices rise Surging overseas alumina prices pulled up Chinese alumina prices. According to data from SMM, by late 13 April, the FOB price for Australia imported alumina has been up to USD550/t, up by 54.1% during the past one and a half months. Chinese alumina prices became stable and trend upward; the future prices are noteworthy. Guiyang Shandong Henan Guangxi 4000 Shanxi 3800 3600 3400 3200 3000 2800 2600 2400 2200 2000 2017/11/14 2017/07/14 2017/08/14 2017/09/14 2017/10/14 2017/12/14 2018/01/14 2018/02/14 2018/03/14 2018/04/14 2 Data source: Wind CITIC Futures Research Dept.

I. Raw Materials 1.2 Norsk Hydro's production cut may result in supply shortage of overseas alumina Norsk Hydro's alumina refinery Alunorte, with outputs of 5.8 million tons, was ordered to cut production by 50 percent in February. Alongside with Russia sanctions, alumina on the overseas market might be in short supply. The outputs for overseas alumina increased by 1.44% to 51.56 million tons in 2017 attributable to the production resumption of Alpart alumina plant in Jamaica. New overseas alumina capacities in 2018 are not too much; moreover, the 2 million tons from Emirates Aluminum and 1.5 million tons from Indian Anrak Aluminum would come on stream till late this year. The output increase in 2018 would be less than that in 2017. China's imports of alumina decreased sharply YOY. 600000 400000 200000 0 2015/07 2015/01 2015/04 2015/10 2016/01 2016/04 2016/07 2016/10 2017/01 2017/04 2017/07 2017/10 2018/01 2 Data source: Wind CITIC Futures Research Dept.

I. Raw Materials 1.3 Chinese alumina capacity abundant Chinese alumina capacity is abundant; the supply increase would be determined based on industrial profit and policy. In winter, 4.46 million tons of alumina capacity was restricted; while the new alumina capacity in 2018 is about 4.9 million tons. New alumina capacity prediction in 2018 (10kt) Company Capacity Q1 Q2 Q3 Q4 Progress Xinfa Chemical 100 100 Possible in Q2 Guizhou GAluminum Huaqing Aluminum Fusheng Aluminum Jinzhong Chemical Little possibility for capital and policy issues 60 60 40 40 Launched in Q1, saw products in March 90 90 Under preliminary design 100 100 Capacity enhancement for support SPIC Zuiyi 100 100 Planned in Oct, for further evaluation Total 490 40 100 100 250 2 Data source: Wind CITIC Futures Research Dept.

I. Raw Materials 1.4 Aluminum fluoride and prebaked anode supply improves The environmental protection policy in 2017 caused tight supply of aluminum fluoride and prebaked anode, but the situation would improve in 2018. The downstream cost would provide a strong support. 6,000.00 14000 12000 5,000.00 10000 4,000.00 8000 3,000.00 6000 4000 2,000.00 2017/01/04 2017/03/04 2017/05/04 2017/07/04 2017/09/04 2017/11/04 2018/01/04 2018/03/04 2017/07/04 2017/11/04 2018/03/04 2017/01/04 2017/03/04 2017/05/04 2017/09/04 2018/01/04 Data source: Wind CITIC Futures Research Dept.

I. Raw Materials 1.5 Aluminum scrap Aluminum scrap policy is to be reevaluated. China's imports of aluminum scrap account for about 5% of primary aluminum production and those from the US account for 30%. If China forbids importing the material from the US, China would see a decrease of about 400,000t in outputs. The stricter policy on aluminum scrap imports would have a significant impact on supply. 25 10kt Imports US Ratio 20 imports 15 10 5 0 2017/09 2016/01 2016/03 2016/05 2016/07 2016/09 2016/11 2017/01 2017/03 2017/05 2017/07 2017/11 2018/01 2 Data source: Wind CITIC Futures Research Dept.

II. Primary Aluminum 2.1 Overseas primary aluminum supply edges up but Russia sanctions to affect overseas supply Overseas primary aluminum supply edged up. The output of overseas primary aluminum maintained an increasing range of about 1%, which was relatively stable. In 2017, overseas primary aluminum outputs were about 27.5 million tons. In 2018, the new capacities are not much, including about 720,000t from Russia, Vietnam and Alcoa with the actual increasing volume of about 350,000t. Besides, Hindalco would add about 300,000t capacity. However, the Russia sanctions would impact the overseas primary aluminum supply. New and resumed capacity 15 Project Country Date Rusal-BEMO Project II Russia H2 2018 Tran Hong Quan-Stage2 Vietnam 15 2018 Warrick Refinery USA 16 Q2 2018 Aloca Wenatchee aluminum plant USA 16 Late 2017 New Madrid aluminum plant USA 10 Mid-2018 Data source: Wind CITIC Futures Research Dept.

II. Primary Aluminum 2.2 Overseas consumption trends stable but supply tight Overseas consumption increased quickly. The consumption from March to May is expected to be 7.67 million tons, up by 3.03%, higher than 2.92% from January to February. The overseas consumption in 2018 is expected to be 29.88 million tons, up by 2.5% YOY, a little higher than supply. The overseas supply and demand would be balanced with supply being slightly tight. ISM PMI PMI New order for durables: Aluminum and prior nonferrous metal (YOY) 70 16.00% 65 14.00% 12.00% 10.00% 60 8.00% 6.00% 4.00% 55 2.00% 0.00% Jul-17 Jun-17 Apr-17 May-17 Nov-17 Aug-17 Jan-17 Mar-17 Dec-17 Jan-18 Feb-17 Sep-17 Oct-17 50 Jun-17 Nov-17 Dec-17 Jul-17 Oct-17 Feb-17 Apr-17 Sep-17 Feb-18 Mar-17 May-17 Aug-17 Jan-17 Jan-18 Data source: Wind CITIC Futures Research Dept.

II. Primary Aluminum 2.3 Overseas shadow inventory made explicit The supply and demand on the overseas market is well, maintaining the performance of 2017 with stocks at the low level. The stage risk is about the shadow inventory is made explicit. NA LME : : : EU AS LME 1000000 2500000 900000 800000 2000000 700000 600000 1500000 500000 1000000 400000 300000 500000 200000 100000 0 0 Jun-17 Nov-17 Dec-17 Oct-17 Jul-17 Feb-17 Apr-17 Sep-17 Feb-18 Aug-17 Mar-17 May-17 Mar-18 Jan-17 Jan-18 Jun-17 Nov-17 Dec-17 Jul-17 Oct-17 Feb-17 Apr-17 Sep-17 Feb-18 Mar-17 May-17 Aug-17 Mar-18 Jan-17 Jan-18 LME (0-3) 60 40 20 0 Nov-15 Nov-16 Nov-17 Jul-15 Jul-16 Jul-17 Sep-15 Sep-16 Sep-17 May-15 May-16 May-17 Jan-15 Mar-15 Jan-16 Mar-16 Jan-17 Mar-17 Jan-18 Mar-18 -20 -40 -60 Data source: Wind CITIC Futures Research Dept.

II. Primary Aluminum 2.4 Primary aluminum capacity increases Based on data from SMM, China produced 5.74 million tons of primary aluminum in January and February 2018, down by 2.37% YOY. In March, the primary aluminum output in China was 3.112 million tons, up by 23.0% YOY. The total output of the material in Q1 this year was 8.988 million tons, up by 22.1% YOY. New capacity and resumed capacity were released together late last year, so supply of aluminum ingot increased noticeably. By 6 April, Chinese running annual capacity of primary aluminum has exceeded 37 million tons. It is reported by SMM that Chinese primary aluminum capacity was stable in April and the total output is likely to reach 3.041 million tons, up by 21.9% YOY. Running capacity 146 8.4 35 Reduced capacity 12 3.6 18 Total capacity 158 12 53 Company Production resumption condition Shandong Xinfa Yongdeng Aluminum Wanji Aluminum Undetermined Resumed, to finish in one month Resumed, to finish by late Jun Not resume for bad weather, hope to start with good sales Not resumed Zhongfu Industrial 32 14.1 46.1 Yugang Longquan Linfeng Aluminum & Electricity Jiaozuo Wanfang Shanxi Zhaofeng Aluminum 42 18 60 17 8 25 Planned in late March but postponed 30 11.5 42 Resumed in mid-Mar, to finish in Apr Not resumed; waiting for better market 15.6 6.9 22.5 Data source: Wind CITIC Futures Research Dept.

II. Primary Aluminum 2.5 New primary aluminum capacities launched slowly According to plans announced by companies, 2.08 million tons of capacities would be put into production from March to May; but 530,000t of them might be put off. Designed annual capacity Planned new capacity Running capacity Launching date Region Company Quota Note Laibin Yinhai Aluminum 50 33 17 Q2 Early March With quota With quota Guangxi Xinfa Aluminum 32 22 10 Finished in late April Acquired by Baise Mining; to be launched late May Launched 100,000t in late March Suyuan Aluminum 20 8 12 Late May Guangxi Guangxi Baise Mining Aluminum With quota 134 30 50 Late March Waiting for the last power generation unit to operate normally With quota Hualei New Material 40 25 15 March With quota Poor condition, may be postponed Huayun New Material 83 65 18 March Looking for quota With quota 400,000t Inner Mongoli a Mengtai Coal Power 50 0 50 TBD Commissio ning Q2-Q3 Chuangyuan Metal 80 10 30 To be launched in June East Hope Guyang 50 0 40

II. Primary Aluminum 2.5 New primary aluminum capacities launched slowly Designed annual capacity Planned new capacity Running capacity Launching date Region Company Quota Note Capacity replacem ent With quota Yuping Guangmao Aluminum 10 0 10 2018 Xingren Denggao Aluminum 50 0 30 March Unclear Guizhou Xingren Denggao New Material Looking for quotaMay not be launched 50 0 50 TBD With quota With quota Huaren New Material 50 45 5 March Launched in March Yunnan Aluminum ZhaotongPlant Yunnan 70 0 35 April May be postponed TBD for environmental protection With quota Liaoning Liaoning Zhongwang 90 43 46 TBD Zhongrui Aluminum phase I Zhongrui Aluminum phase II With quota 10 0 10 April Launched in April Gansu 50 0 30 November 400,000t Without quota With quota With quota With quota Shanxi Zhongrun Project 50 0 50 TBD SPIC Ningxia Energy Aluminum Ningxia 99 93 6 2018 East Hope 160 80 3 2018 Xinjiang Qiya Aluminum & Electricity 115 90 35 May

II. Primary Aluminum 2.6 Inventory to decrease Aluminum are mainly used for the real estate (30%), autos and exports. The end consumption weakened but may rebound from Mar to May. Real estate: With the mortgage rate increasing, sales area of real estates narrowed from Jan to Feb, which would affect demand for aluminum products. Autos: With the preferential tax cancelled, auto sales declined by 2.97% YOY from Jan to Feb, so the increasing range would be lower than 3.8% in 2017. 240 Optimistic From consumption would reach 9.5 million tons and supply would be 9.25 million tons with stocks to decrease by about 250,000t. Inventory would still be large, but much are affected by the capital cost and monthly discrepancy expectation: to May, Mar the 210 180 150 120 90 60 30 0 2017/01/09 2017/03/09 2017/05/09 2017/07/09 2017/09/09 2017/11/09 2018/01/09 2018/03/09 Data source: Wind CITIC Futures Research Dept.

III. Environmental Protection Policies and Trade War 3.1 Policies before 2017 Document Date Main content Construction scale for alumina project must be over 800,000tpy; New and upgraded primary aluminum projects must apply prebaked bathes of more than 400kA while current primary aluminum projects should be equipped with lines of more than 160kA; Construction of carbon cathode and carbon anode for aluminum projects with capacity lower than 150,000tpy and 200,000tpy are forbidden; AC consumption from new and upgraded primary aluminum liquid and ingot projects must be less than 12750kWH/t and 13200kWH/t respectively. Aluminum Industry Regulations Jul 2013 New capacity construction must be forbidden; Illegal capacities should be cleared and rectified while outdated capacity should be eliminated. Before late 2015, bathes lower than 16000kA should be eliminated; For aluminum liquid projects with AC over 13700kwh/t or failed to reach standard in late 2015, the electricity cost should rise by 10%. No preferential electricity prices are allowed in regions; Encourage capacities with no electricity price advantage to quit and transfer capacity to hydropower area. Support primary aluminum companies to sign direct-electricity purchase agreement with power plants. Guidance on Overcapacity from the State Council (SC 2013 No. 41) Oct 2013 Data source: Wind CITIC Futures Research Dept.

III. Environmental Protection Policies and Trade War 3.1 Policies before 2017 Document Date Main content The measures shall apply to industries with extreme overcapacity such as iron & steel, primary aluminum, cement, glass. Projects construction concerning with these industries should set up capacity replacement scheme and take replacement based on equivalent or decrement capacity; New or upgraded projects should replace capacity based on obsolete quota announced by MIIT or the government after 2013. Obsolete capacity which exceeds time limit could not be replaced while unapproved construction projects should replace obsolete capacity announced after 2011. Illegal projects under construction which match relevant guidance and regulation should be filed on basis of capacity replacement; those don't match requirements should be shut down or closed; those without land procedures could not be constructed before completing procedures. Illegal projects constructed which match requirements should be filed, while those don't match requirements should be filed after consumption adjustment. Projects built before 2004 which were not included in the rectifying scope should be filed independently. New (upgraded or expanded) primary aluminum projects with capacity utilization of more than 80% should make replacement plan and be published online; New illegal primary aluminum projects shall be punished severely; Primary aluminum companies with power plants should pay governmental fund and subsidiary as well as system standby fee. Set up local power network in recycle renewable resources area on premise of adding no primary aluminum capacity. Notice on Capacity Replacement for Industries with Overcapacity (MIIT 2015 No. 127) Apr 2015 Notice on Illegal Capacity Elimination among Iron & Steel, Primary Aluminum and Shipping Industries (NDRC 2015 No.1494) Jun 2015 Guidance on Creating Favorable Market Environment to Promote Nonferrous Metal Industrial Restructure (SC 2016 No.42) Jun 2016

III. Environmental Protection Policies and Trade War 3.2 Policies after 2017 Document Actions on Air Pollution Treatment in Beijing-Tianjin- Hebei and Surrounding Areas in 2017 (NEPA 2017 No. 29) Date Main content Illegal projects built after May 2013 or failed to implement the document 2015 No. 1494 should be halted of construction or production. Feb 2017 Primary aluminum plants in 2+26 cities should limit production by more than 30% based on electrolytic bathes; alumina plants should limit production by about 30% based on production lines. Carbon plants failed to reach emission standard should shut down; those reached standard should limit production by more than 50% based on production lines. Special Actions on Rectifying Illegal Primary Aluminum Projects (NDRC 2017 No. 656) Apr 2017 During the heat-supply period, primary aluminum plants should limit production by more than 30% based on electrolytic bathes while alumina plants should limit production by about 30% based on production lines. Carbon plants failed to reach emission standard should shut down; those reached standard should limit production by more than 50% based on production lines. Nonferrous recycle industry should cut production by 50% for the casting process. Actions on Air Pollution Comprehensive Treatment in Beijing-Tianjin-Hebei and Surrounding Areas during Autumn and Winter from 2017 to 2018 (NEPA 2017 No. 110) Aug 2017 Data source: Wind CITIC Futures Research Dept.

III. Environmental Protection Policies and Trade War 3.2 Policies after 2017 Document Date Main content Projects for aluminum liquid or ingot production including electrolytic process should obtain capacity replacement quota through merge or internal transfer to finish equivalent or decrement replacement. Quota for replacement must accords to national policies and project approval requirements, and must be listed on the illegal projects rectification report in late Oct 2017. Primary aluminum quota which were closed or published from 2011 to 2017 must be replaced before 31 Dec, 2018. Notice on Capacity Replacement through Merge and Reorganization for Primary Aluminum Industry (MIIT 2018 No. 12) Jan 2018 Special Actions on Standard Construction and Operation of Coal- Consumption Power Plants (NDRC) Control construction and clear illegal plants. Since the issuing date of the Action, new coal-consumption power plants which are unapproved or unlisted shall be blamed, meanwhile all power projects in the region shall be denied. new coal-consumption power plants Late Mar 2018 Data source: Wind CITIC Futures Research Dept.

III. Environmental Protection Policies and Trade War 3.3 Trade war between the US and China No. Date Main content The USITC confirmed the damage for domestic aluminum industry caused by aluminum plate imports from China. 1 12 Jan, 2018 Announced to impose tariff of 25% and 10% on iron & steel and aluminum imported from China . 2 8 Mar, 2018 Based on 301 investigations, announced to impose high tariff against commodities imported from China, restrict Chinese investments in the US and take actions targeting China in WTO. The US would impose tariff on Chinese imports which value about USD60 billion. The US Treasury announced to sanction Russian individuals and entities in order to crack down on Russian Malicious Intent. The list includes Oleg Djeripaska, a Russian tycoon and the shareholder of Rusal. 3 22 Mar, 2018 4 6 Apr, 2018 The US Treasury to impose an anti-subsidy tariff of 113% on aluminum plates imported from China. 5 17 Apr, 2018 Data source: Wind CITIC Futures Research Dept.

IV. Supply-Demand Balance Prediction 4.1 Alumina supply-demand balance Prediction on Annual supply-demand balance for Chinese alumina (Unit: 10kt) 2016 2017(e) 2018(e) Production 6069 7064 7308 Production increase rate 5.18% 16.39% 2.99 Net import 292 288 320 Supply 6361 7352 7595 Demand 6462 7307 7672 Demand increase rate 5.16% 13.08% 5% Supply-demand balance -101 45 -77 Data source: Wind Aladdiny SMM Antaike CITIC Futures Research Dept.

IV. Supply-Demand Balance Prediction 4.2 Primary aluminum supply-demand balance Prediction on Annual supply-demand balance for Chinese primary aluminum(Unit: 10kt) 2016 2017(e) 2018(e) Production 3252 3660 3860 Production increase rate 5.6% 12.50% 5.5% New import 18.2 10 5 Supply 3270 3670 3865 Demand 3254 3550 3799 Demand increase rate 7.8% 9.10% 7% Supply-demand balance 16 120 66 Data source: Wind Aladdiny SMM Antaike CITIC Futures Research Dept.

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