NCDEX

Base Metals – A Global Perspective

June 08, 2006

 Major Non Ferrous Metals

 Copper
 Aluminum
 Zinc
 Nickel
 Lead
 Tin

2
 Major Exchanges

 LME All
 COMMEX Copper*
 SHFE Copper*
 KTE Tin

LME is synonym for Non Ferrous Metals

More than 90 % of physical trade is based

on LME prices

*Aluminium Contract not liquid

3
 Key Drivers
 Commodity fundamentals
 Demand-Supply (growth) Gap
 Inventory
 China!

 Economic factors
 GDP Growth
 IP Growth
 OECD leading indicators
 Purchasing Manager’s Index

 Others
 Funds
 Currency

4
Base metals supply/demand summary
'000 tonnes % Change Y-o-Y
2003 2004 2005 2006 2007 2008 2003 2004 2005 2006 2007 2008
Copper
Production 15306 15936 16670 18064 18981 19916 -0.4% 4.1% 4.6% 8.4% 5.1% 4.9%
Consumption 15608 17061 16942 17915 18692 19634 3.8% 9.3% -0.7% 5.7% 4.3% 5.0%
Balance -302 -1126 -272 148 289 282

Aluminium
Production 28040 30013 31947 33653 35100 37730 7.8% 7.0% 6.4% 5.3% 4.3% 7.5%
Consumption 27876 30246 31738 33758 35160 37603 9.0% 8.5% 4.9% 6.4% 4.2% 6.9%
Balance 164 -233 209 -105 -60 127

Zinc
Production 9821 10116 10133 10677 11442 12432 1.9% 3.0% 0.2% 5.4% 7.2% 8.7%
Consumption 9668 10334 10420 11095 11575 12369 3.3% 6.9% 0.8% 6.5% 4.3% 6.9%
Balance 153 -217 -287 -418 -133 63

Nickel
Production 1203 1260
Source: Macquarie Research, February 2006
1292 1341 1408 1529 2.6% 4.8% 2.5% 3.8% 5.0% 8.6%
Consumption 1243 1264 1260 1342 1406 1496 6.2% 1.7% -0.4% 6.5% 4.8% 6.4%
Balance -40 -4 32 -1 2 33

Lead
Production 6782 6833 7237 7631 8023 8337 2.0% 0.7% 5.9% 5.4% 5.1% 3.9%
Consumption 6829 7067 7382 7668 7945 8228 2.8% 3.5% 4.5% 3.9% 3.6% 3.6%
Balance -47 -234 -144 -37 78 109

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 How big is this bull market?
IM F M e tal Price Inde x - nominal te rms
IMF Metal Price Index - Nominal Terms
160

140

120

100

80

60

40

20
1960

1975

1980
1950

1955

1965

1970

1985

1990

1995

2000

2005
Source: IMF, Macquarie Research

 This is only the fourth major bull market for the metals in the
past 40 years.
 In terms of scale, it is similar to the late 80s bull market.
 The IMF metal price index: Cu, Al, Zn, Ni, Sn, Pb Fe and
uranium.
6
 Market inventories extremely low
Base metal stocks and prices (nominal)

exchange/producer stocks: weeks of

2800 17

15
2300
LMEX Price Index

13

1800

demand
11

9
1300

7
800
5

300 3
1973
1974
1975

1977

1982
1983
1984
1985
1986

1991
1992
1993
1994
1995

2000

2002
2003
2004
1976

1978
1979
1980
1981

1987
1988
1989
1990

1996
1997
1998
1999

2001

2005
2006
Nominal Prices Exchange/Producer Stocks (Cu/Al/Zn/Pb/Ni) Stocks Trend
Source: Macquarie Research April 2006,

 In the late 1980s, market inventories stayed at critically tight

levels despite slowing economic growth – this is what supported
prices then…and now.
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 Demand growth has accelerated
Copper Demand Growth by Decade Aluminium Demand Growth by Decade
7000 20000
Other E.Bloc 6231
Other E.Bloc
6000 China China 16386
West West
Total 4014 15000 Total
5000

4000

10000
3000 2430 5878
2269
'000t

'000t
1795 1566 5921
2000 5191
5000 3759
1000 2535

0
0

-1000

-2000 -5000
1950- 1960- 1970- 1980- 1990- 2000- 1950- 1960- 1970- 1980- 1990- 2000-
1960 1970 1980 1990 2000 2010 1960 1970 1980 1990 2000 2010

Source: Macquarie Research April 2006,

 Chinese demand growth has caused a massive

acceleration in world metals demand growth.
8
 China eating up huge amounts of
metal

9
 Industrial growth bottomed
out
OECD Leading Indicator and W. World Industrial Production
10% 12%

Leading Indicator (6-Month Rate of

Western World IP (% Change Y-o-Y)

8% 10%

8%
6%
6%
4%
4%

Change)
2% 2%

0% 0%

-2%
-2%
-4%
-4%
-6%
-6% -8%
W. World IP Leading Indicator - Forward 6 Months
-8% -10%
80 82 OECD,
Source: 84 LME, 86
Macquarie88 90
Research, 92 94 96 98 00 02 04 06
Source: Macquarie Research April 2006,

OECD leading indicator points to an acceleration in growth rates in late 2005 and
early 2006.
Although the relationship between the OECD LI and metals prices is not as strong as
previously (due to the influence of China on prices), this is still a positive sign for
10 1H06.
 Economic indicators looking strong!
Purchasing Managers' Indices and OECD Purchasing Managers' Indices and Base Metal
Lead Indicator 60 Prices 60%
60 10%

58 50%
58
8%
56 40%
56
6%
54 30%
54

4% 52 20%
52

50 2% 50 10%

48 48 0%
0%

46 46 -10%
-2%
44 44 -20%

-4%
42 42 -30%

40 -6% 40 -40%
1999

2000

2001

2003

2004

2004

2005

2005

1998

1998

1999

1999

2000

2000

2002

2002

2004

2004

2006
1998

1998

1999

2000

2001

2002

2002

2003

2006

2001

2001

2003

2003

2005

2005
Average EU/US/Japan PMI (lhs) Average EU/US/Japan PMI (lhs)
OECD lead indicaor (rhs) LMEX, % change yoy (rhs)
Source: OECD, Reuters, LME, Macquarie Research,6
Source: Macquarie Research April 2006,

Purchasing managers’ indices and OECD leading indicator telling the same
story – industrial growth in the Western world is accelerating again.
In terms of year on year changes, there is still a relationship between
these indicators and metals prices.

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 Non-fundamental drivers:
Investment fund inflows
Total Commodity Index Funds  Around $80bn
80
estimated to be
70 invested in
commodity index
60
funds at end 2005 up
50 from around $55bn at
end 2004 and less
$USbn

40 than $30bn at end

30
2003.
 Industrial metals 7–
20
20% of the total
10 (depending on the
index).
0
 Prediction of fund
1993

1996
1997

2000

2003
2004
1990
1991
1992

1994
1995

1998
1999

2001
2002

2005

growth to $110–
Source: Industry estimates, February 2006 120bn by end 2006.
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 Commodity index funds weightings in
each commodity
Industrial Metals
Average Commodity Sector
Weightings
Weightings of Index funds
of Index funds
100%
Lead 0.7%
90%
Nickel 1.3%
80%
Agriculture
Zinc 1.4%
Precious
29% metals 70%
5%
Copper 60%
3.7%
Industrial 50%
metals
12% 40%
Energy
54% 30%
Aluminum
20%
4.2%
10%
Source: Macquarie Research, February 2006
0%

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 Impact of index funds – share of
nearby LME open interest
Index funds - share of cash-three month open
interest on LME
40%

35%
2001 2002 2003 2004 2005
30%

25%
% of total

20%

15%

10%

5%

0%
copper Aluminium Zinc Nickel Lead

Source: Macquarie Research estimates, February 2006

 Ignores impact of OTC (over the counter business) which
could be substantial…nevertheless fund influence is obvious.
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 Interest rates…….
What does rising US rates mean for prices?
190 10
Metal Prices $US
9
170
US Fed Funds Rate
8
150
7
Prices: LMEX Level

130 6

Rate: %
110 5

4
90
3
70
2

50 1

30 0
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: Macquarie Research April 2006,

 Measured in constant 2005 dollars, prices are not that high

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 Current Scenario
 We are in the midst of a massive bull market in
base metals (midst or around the peak???)

 The main drivers have been:

 An acceleration in demand growth – largely
due to China

 A delayed supply response

 More recently huge inflow of investment fund

money into base metals.

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 Scenario Change
 What could end the bull market?

 A substantial slowdown/downturn in demand

growth – driven by weaker economic growth

 A strong supply response – looking less likely

and farther

 A slowdown or reversal of fund flows – driven

by a fundamental change?

17
 Commodity Bubble?

18
 Commodity Bubble?

19
 Commodity Bubble?

20
 Commodity Bubble?

21
 Commodity Bubble?

22
 Opportunity NCDEX
 Localized Contract Specification,
 Trading locally in INR prices.
 Small lots
 Reflection of Realistic Domestic Demand
 Arbitrage Opportunities
 Encourage value-chain participants for
hedging

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 Specifications
Aluminum Copper

Basis Ex- Bhiwandi* Ex- Mumbai*

Trading Unit 2000 Kg (2MT) 1000 Kg (1 MT)

Quotation Rs Per Kg Rs Per Kg

Delivery unit 2000 Kg +/- 2% 1000 Kg +/- 2%

Tick size Rs.0. 100/- per KG Rs.0. 100/- per KG

Delivery Center Bhiwandi Bhiwandi

Additional Delhi Delhi
Delivery Center

* Excl of Excise /CVD, Cess & Sales tax)

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 Specifications
Nickel Zinc
Basis Ex- Bhiwandi* Ex- Bhiwandi*
Trading Unit 250 Kg 2000 Kg (2MT)

Quotation Rs Per Kg Rs Per Kg

Delivery unit 250 Kg +/- 2% 2000 Kg +/- 2%

Tick size Rs.0. 100/- per KG Rs.0. 100/- per KG

Delivery Center Bhiwandi Bhiwandi

Additional Delhi Delhi
Delivery Center

* Excl of Excise /CVD, Cess & Sales tax)

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 Thank You

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