Global Commodities Research

25 April 2014

Metals Weekly
We raise our nickel price forecasts
We update our baseline outlook for the global nickel market. While the underlying themes of weak demand and ample inventories remain in place, prospects for forward availability of upstream supply have shifted more than we had expected due to the Indonesian ore export ban. We underestimated its duration and the conviction of the Indonesian government to keep the ban in place for an extended period. Since the beginning of March, LME cash nickel prices have increased by about 26%. Following such a strong surge, we would not be surprised if price momentum slowed or even reversed in the near term. However, if the ban remains in place, forward-looking supply/demand balances suggest higher prices are necessary to cover the costs of additional supply-side investment. We introduce a scenario analysis on possible outcomes for the global nickel market as a result of the Indonesian ore export ban, with corresponding estimates for Indonesian nickel ore exports, nickel pig iron production in China and Indonesia, the global refined balance, and average LME cash prices. Our new baseline expectations lead us to make large changes to our price projections. We increase our LME cash nickel average price forecasts from $15,250/mt to $18,450/mt in 2014 and from $15,750/mt to $24,000/mt in 2015. These represent increases of 22% and 52%, respectively, relative to our prior forecasts.

Global Commodities Research Natasha Kaneva

(1-212) 834-3175 natasha.kaneva@jpmorgan.com JPMorgan Chase Bank NA

James R. Luke
(44-20) 7742-2816 james.r.luke@jpmorgan.com J.P. Morgan Securities plc

Jonah D. Waxman, CFA

(1-212) 834-2203 jonah.d.waxman@jpmorgan.com JPMorgan Chase Bank NA

Gregory C. Shearer
(1-212) 834-2039 gregory.c.shearer@jpmorgan.com JPMorgan Chase Bank NA

Exhibit 1: JPM nickel cash price forecast

US$ per mt

1Q2014 2Q2014 3Q2014 4Q2014 Nickel (US$/mt) New Old Change

14,661 19,000 15,250 25% 18,500 15,100 23% 22,000 16,000 38%

2014
18,540 15,250 22%

2015
24,000 15,750 52%

LT Real
18,000 18,000 0%

Source: J.P. Morgan Commodities Research

See page 6 for analyst certification and important disclosures.

www.jpmorganmarkets.com

Natasha Kaneva (1-212) 834-3175 natasha.kaneva@jpmorgan.com

Global Commodities Research Metals Weekly 25 April 2014

Key nickel market signposts since the Indonesian ore export ban took effect on January 12, 2014:
Chinese nickel ore imports from Indonesia fell by 92% yoy in 1Q2014. While official imports are recorded for the months of February and March, we believe these tonnes were delayed in transit and originally scheduled for January. The Indonesian government rejected a compromise proposed by industry leaderswhere companies building nickel ore processing capacity in Indonesia would be allowed to export ore. We understand the ban is being strictly enforced. At the same time, Chinese nickel ore imports from the Philippines increased by 5% yoy during the same period, on top of an already strong comp a 42% yoy increase during the first three months of 2013. Prices for nickel ore sourced from the Philippines have doubled from $30/mt (wet basis) in January to almost $60/mt today, a faster rate than the LME nickel price appreciation of 30% during the same period. NPI prices have increased much more modestly, falling well behind the appreciation in both ore and refined prices, strengthening our conviction that Chinese merchants are importing ore and stockpiling it, hoping stronger demand relative to supply will bring higher prices later in the year. This working capital adds to the estimated 220 kmt in contained nickel stockpiled in China in 2013, according to our estimates. China imported almost 700 kmt of nickel contained in ore last year, while producing 470 kmt of NPI. This stock resulted in domestic NPI and nickel plate trading at a significant discount to LME prices. The average discount to refined cash LME prices during the March/April window has been about $2,150/mt. Higher nickel ore prices translate into higher NPI production costs, which combined with slower appreciation in Chinese domestic NPI prices, is tightening Chinese producers margins and resulting in production cuts. However, NPI production cuts are not likely affecting the Chinese market yet. We do not see evidence yet of Chinese consumers switching to other forms of nickel. Chinese imports of refined nickel are down 75% yoy in the first three months of the year. Nickel metal inventory is ample with bonded nickel stocks in Shanghai currently estimated at around 60-to-70 kmt, compared to 50 kmt at the end of December.
2

Domestic demand remains weak, with anecdotal evidence suggesting that melting grade nickel is offered at zero premium. Chinese stainless mills are not diversifying toward scrap yet, with domestic stainless scrap prices remaining uncompetitively low. South Korea is winning volumes out of the US. In general, there appears to be good selling interest on higher prices in Asian markets. Outside of China, LME nickel inventories have increased from 271 kmt in the beginning of March, to 278 kmt following warranting of material in Rotterdam and Johor. Melting nickel premia has increased somewhat, while plating premia remains stable. Nickel availability in the US remains good, with large quantities of metal offered at a discount. However, stainless scrap remains tight in North America. Availability of metal in Europe is also good due to lackluster seasonal stainless demand.

Is the rapid increase in the LME nickel price sustainable?

The market consensus seems to be that there will be no change to the ore export ban after the parliamentary and presidential elections later this year. There appears to be overwhelming support across the political spectrum in Indonesia that the ban is the right thing to do. While our base case scenario now embeds maintenance of the export ban, the possibility for different developments is the largest risk factor in the global nickel market at this time. A possible catalyst for change occurred just this week, when the Japanese government warned Indonesia that it will file a complaint with the WTO claiming that Indonesia has been unfairly restricting mineral ore exports.

We review three potential scenarios developing around the Indonesian ban (Exhibit 2).
Scenario 1: After the July presidential election, the ore export ban is removed for those companies who have commenced investment. Indonesian nickel ore exports return to 70% of prior levels in 2H2014. Strict enforcement of the ban remains challenging, meaning exports would likely be higher than those officially allowed under any official compromise or quota agreement. Realization that the government stance toward the ban is weakening precipitates change toward weaker expected fundamentals. Weak demand and elevated

Natasha Kaneva (1-212) 834-3175 natasha.kaneva@jpmorgan.com

Global Commodities Research Metals Weekly 25 April 2014

inventories mean 2014 and 2015 are likely surplus markets. LME nickel forward curve moves toward full contango. In this scenario, we estimate average LME cash prices for 2014 are $14,000/mt and the average for 2015 is $15,000/mt. Scenario 2: Partial relaxation of the ban in early 2015 to fund investment in onshore nickel ore processing capacity. A complete reversal of the ban in 2015 appears unlikely for three reasons: (1) Jokowi, the leading presidential candidate, is in favor of keeping the ban in place, (2) the Indonesian economy is stable and the ban is designed to boost domestic resources, and (3) the ore ban has been effective in accelerating investment plans for downstream capacity. However, turning plans into plants in Indonesia may prove challenging and might trigger a reversal next year. Investors are reporting financing restraints on investment, hampered in part by the lack of cash from ore exports. A compromise is possible, where companies building processing capacity would be permitted to obtain export licenses for ore to fund capex. The Indonesian government allows those who have completed 50% of construction, or who have already invested a certain amount of capital, to export ore. Ore exports would be based on planned annual contained nickel capacity being constructed. Ore exports return to 400 kmt contained nickel in 2015. Under this scenario, prices reach $20,000/mt at the end of the year. However, a compromise leads to higher export volumes and lower nickel cash prices. We estimate average LME nickel cash price for 2014 at $17,000/mt and $16,000/mt in 2015, in this scenario.

Scenario 3: No compromise on the ore export ban. This is our base case scenario. Under a full and sustained ore export ban, the only flows from Indonesia allowed are the domestically produced NPI. Around 140 kmt/a of capacity is currently reported under construction while other companies are waiting until the elections in July to commit capital. We assume a slow ramp up of onshore Indonesian NPI capacity with 8 kmt this year and 65 kmt next. The risk is that Chinese companies prove to be much faster and adept at setting up blast furnaces in Indonesia. Processing equipment is currently being shipped from China, though the quantity is difficult to estimate. Chinese companies appear to have been successful in building cheaper nickel smelting capacity in Indonesia than we previously estimated. We estimate that last year Indonesia exported almost 460 kmt of contained nickel into China. While there is some additional capacity coming out of the Philippines, New Caledonia and Guatemala, we estimate the maximum collective volumes from those countries at under 100 kmtwell below the needed tonnage to fully replace Indonesia. We remain of the view that Chinese lateritic ore stock accumulation is significant and despite the uneven distribution among producers will be sufficient to last until at least September. Smaller producers are the hardest hit, while the largest producers can continue producing into 2015. By the end of this year we would expect Chinese NPI production cuts to start coming through, with NPI prices moving to a premium over refined nickel and stainless scrap. By 4Q2014, LME and Chinese refined nickel stocks begin to be drawn down. LME nickel cash prices average $18,540/mt this year and $24,000/mt in 2015.

Natasha Kaneva (1-212) 834-3175 natasha.kaneva@jpmorgan.com

Global Commodities Research Metals Weekly 25 April 2014

Exhibit 2: Likely nickel fundamentals and price in three scenarios for Indonesias export ban
Volumes in kmt (contained nickel) Prices in US$/mt Indonesian Ore Export Ban Removed Indonesian Ore Export Ban Compromise
A compromise is struck resulting in a partial relaxation of the ore ban in early 2015. The new government is comfortably in place and investing companies successfully make the case that to fund ongoing construction, cash flow from ore exports is needed. Ore exports are allowed at the same rate as planned annual capacity of projects under construction. In this scenario, there is an elevated risk that these quotas would be hard to enforce and volumes would exceed granted quotas, as occurred in 2012. 740 300 400 0 8 80 472 342 300 157 -7 15 15,034 17,000 16,000

Indonesian Ore Export Ban Remains (JPM View)

The export ore ban remains in place. It appears to be working; investments are accelerated, the Indonesian economy is stable, and domestic support of the policy is widespread. Around 140 kmt/a of nickel smelting capacity is under construction while other companies are waiting until the July presidential elections to commit capital. Capacity additions are progressing at a slow pace as associated infrastructure also has to be built. Ore stocks are drawn down in China and NPI production falls heavily, LME stocks start to draw materially by early 2015. 740 130 0 0 8 65 472 342 197 157 -14 -103 15,034 18,540 24,000

Scenarios

Resolve to keep the ore export ban in place falters. After the July presidential elections, the export ban is removed for those who have commenced investment. Strict enforcement of the ban remains challenging and ore exports rise rapidly. Onshore NPI capacity builds, with Indo Ferro and Tsingshan plants coming onstream as planned. Ore prices move lower and Chinese NPI production increases, though not likely to reach 2013 levels.

Indonesian Ore Exports - 2013* Indonesian Ore Exports - 2014 Indonesian Ore Exports - 2015 Indonesian NPI Production - 2013 Indonesian NPI Production - 2014 Indonesian NPI Production - 2015 Chinese NPI production - 2013 Chinese NPI production - 2014 Chinese NPI production - 2015 2013 global balance 2014 global balance 2015 global balance 2013 average price 2014 average price 2015 average price

740 518 650 0 6 45 472 400 430 157 49 110 15,034 14,000 15,000

*Estimates a 1.8% nickel content, 30% moisture content, and 90% recovery rate. Chinese imports of recoverable nickel in Indonesian ore are estimated at 470 kmt in 2013. Total Indonesian exports of nickel ore are 740 kmt in 2013, utilizing the same assumptions of 1.8% nickel content, 30% moisture, and 90% recovery.
Source: China Customs, J.P. Morgan Commodities Research

Natasha Kaneva (1-212) 834-3175 natasha.kaneva@jpmorgan.com

Global Commodities Research Metals Weekly 25 April 2014

Exhibit 3: Global nickel balance (thousand metric tonnes)

Primary Production Asia China North America Central & South America Europe Eurasia Middle East Africa Oceania Primary Production Primary Use Asia China North America Central & South America Europe Eurasia Middle East Africa Oceania Primary Use Global Balance Primary Production Primary Use Balance Balance as percentage of use Estimated global inventories Stocks to use (weeks) Price and volatility forecasts LME average cash price ($/mt) Realized cash price volatility (%-ann) 2005 335 104 136 170 191 281 0 53 120 1,286 2005 644 202 138 27 405 30 0 32 5 1,281 2005 1,286 1,281 5 0.4% 326 13.3 2005 $14,766 41.3 2006 381 151 153 171 196 293 0 54 117 1,366 2006 713 246 149 28 441 31 0 41 5 1,409 2006 1,366 1,409 -43 -3.1% 283 10.5 2006 $24,155 36.6 2007 437 197 153 165 212 287 0 49 114 1,417 2007 757 336 140 26 411 30 0 38 6 1,406 2007 1,417 1,406 11 0.8% 294 10.9 2007 $37,089 47.2 2008 432 204 164 136 221 277 0 38 109 1,377 2008 668 292 132 24 392 30 0 29 6 1,282 2008 1,377 1,282 95 7.4% 389 15.8 2008 $21,058 46.3 2009 479 250 117 122 173 269 0 39 129 1,329 2009 797 431 109 22 332 29 0 30 6 1,326 2009 1,329 1,326 4 0.3% 393 15.5 2009 $14,712 62.7 2010 594 335 107 123 209 281 0 39 102 1,455 2010 937 525 131 26 376 35 0 25 6 1,535 2010 1,455 1,535 -80 -5.2% 313 10.6 2010 $21,811 41.9 2011 705 454 148 142 231 279 0 40 110 1,653 2011 1,057 657 135 26 380 36 0 22 6 1,661 2011 1,653 1,661 -8 -0.5% 305 9.6 2011 $22,866 35.4 2012 795 524 147 166 224 276 0 40 125 1,774 2012 1,151 725 144 24 377 36 0 22 6 1,760 2012 1,774 1,760 14 0.8% 319 9.4 2012 $17,524 37.0 2013 1,022 739 150 144 222 263 0 60 132 1,993 2013 1,233 842 151 25 355 40 0 25 6 1,835 2013 1,993 1,835 157 8.6% 476 13.5 2013 $15,034 25.0 2014F 959 610 149 126 213 256 0 81 127 1,911 2014F 1,297 883 159 27 366 41 0 28 7 1,925 2014F 1,911 1,925 -14 -0.8% 462 12.5 2014F $18,540 30.0 2015F 901 454 153 144 219 261 0 88 128 1,893 2015F 1,350 918 173 27 370 41 0 29 7 1,997 2015F 1,893 1,997 -103 -5.2% 358 9.4 2015F $24,000 35.0

Source: Company reports, ISSF, Wood Mackenzie, LME, J.P. Morgan Commodities Research

Natasha Kaneva (1-212) 834-3175 natasha.kaneva@jpmorgan.com

Global Commodities Research Metals Weekly 25 April 2014

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