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Kathrine FogCapital Markets Day 2016
Market Outlook
Macro and downstream
69
Global macro development improving, uncertainty persistsPrimary demand at or above GDP in key regions
Source: Global Insight, CRU, Hydro analysis
Primary demand annual growth, key regionsReal GDP, annual growth(%)
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
World Industrialized countries Emerging markets
0%
2%
4%
6%
8%
10%
12%
China India North America Western Europe
2015 2016
(%)
Forecast
70
Source: CRU, UN, Hydro analysis
Global aluminium demand prospects remain encouragingBroad-based demand growth across segments, better growth outlook than other base metals
ConstructionTransportElectricalMachinery & equipmentFoil stockPackagingConsumer DurablesOther
Diversified consumption base Continued strong underlying drivers
-
200
400
600
800
1 000
1 200
1 400
USA WesternEurope
SouthKorea
China India
2000 2015 2020
6
7
8
9
10
6 800
7 000
7 200
7 400
7 600
7 800
8 000
8 200
8 400
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
World populationPrimary consumption per capita (kg)
Cars per 1,000 persons of working age World population Consumption per capita (kg)
Global semis demandper segment, 2015
71
Strong substitution trend for aluminium in automotiveHigh demand within body-in-white driving rolled products demand
Source: Ducker Worldwide, CRU, Hydro analysis
0
5
10
15
20
25
30
2014 2015 2016 2017 2018 2019 2020
Castings Extrusions Other Rolled products
7 %
4 %
4 %
Global semis demand for transport sector by product form (Mill t)
CAGR 2015-20
Level ofsubstitution
Chassis
Body
Powertrain
Main module Aluminium potential
Interior
Chassis
Rolled products
Extrusionscastings
Extrusionscastings
Castings
72
51%
16%
14%
8%
5%4% 2%
Packaging
Transport
Construction
Machinery & Equipment
Consumer durables
Electrical
Other
Rolled products demand driven by transport segmentTransport share increasing in total rolled products demand
General rolled products demand, selected regions
• Continued substitution trend in transport segment contributing to overall demand growth
• Packaging segment key growth driver in terms of size
(2015)
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
2013 2014 2015 2016 E 2017 E
North America Europe*
Global segment composition, rolled products
Source: CRU, Hydro Analysis* Total EU27+EFTA
YoY-growth
Expected market development
73
63%14%
12%
4%4% 3%
Construction
Transport
Machinery & equipment
Consumer Durables
Electrical
Other-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
2013 2014 2015 2016 E 2017 E
North America Europe*
Continued growth in extrusion demand Gradual improvement expected in Europe
Extrusion demand, selected regions
• US housing market still sustaining positive momentum• Weakness in US truck and trailer segment• Construction activity in Europe continues to improve
from low levels
(2015)
Global segment composition, extrusion
Expected market development
YoY-growth
Source: CRU, Hydro Analysis* Total EU27+EFTA
74
Extrusion market supported by continued momentum in B&C marketTrend towards Green buildings also shaping up
Source: CRU, Hydro Analysis
Housing market indicatorsIndex, Jan 2006=100
40 % of global energy use related to buildings
0
20
40
60
80
100
120
Jan-
06Ju
n-06
Nov
-06
Apr-0
7S
ep-0
7Fe
b-08
Jul-0
8D
ec-0
8M
ay-0
9O
ct-0
9M
ar-1
0A
ug-1
0Ja
n-11
Jun-
11N
ov-1
1Ap
r-12
Sep
-12
Feb-
13Ju
l-13
Dec
-13
May
-14
Oct
-14
Mar
-15
Aug
-15
Jan-
16Ju
n-16
US Building permits US Housing starts
Wells Fargo construction index EU construction order book
75
China’s consumption pattern changing, with transport emerging as a key engine of growth
35%
16%16%
14%
10%
5% 5%
Construction TransportElectrical PackagingMachinery & equipment OtherConsumer Durables
28%
20%16%
15%
12%
4%5%
49
2025
Construction
2015
Transport
2005
Other
36
9
2015 2025
Chinese semis demand per key segmentsMill tonnes
Source: CRU, Hydro Analysis
76
Growth in Chinese semis exports largely stable
Source: CRU, Antaike, Hydro Analysis* Est. metal cost China versus EuropeEurope: LME cash + European duty-paid standard ingot premiumChina: SHFE cash + avg. local premium + freight – export rebates (~13 %)
Monthly exportsThousand tonnes
0
50
100
150
200
250
300
350
400
450
500
Jan-
09M
ay-0
9S
ep-0
9Ja
n-10
May
-10
Sep
-10
Jan-
11M
ay-1
1S
ep-1
1Ja
n-12
May
-12
Sep
-12
Jan-
13M
ay-1
3S
ep-1
3Ja
n-14
May
-14
Sep
-14
Jan-
15M
ay-1
5S
ep-1
5Ja
n-16
May
-16
Sep
-16
Net semis exports
Periods of elevated arbitrage in favour of China*
Chinese semis exports
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
0
5000
10000
15000
20000
25000
30000
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
(Est
)
Net semis exports (LHS)Semis demand domestic (LHS)Net exports as share of total semis production (RHS)
Net semis exports as share of total semis productionThousand tonnnes Share of semis
production
Periods of higher arbitrage leading to increased exports
Source: Hydro Analysis, Antaike
Trade regulations and duties impacting trade flows
Chinese semis exports by destination(2015)
AsiaAfricaNorth AmericaEuropeMiddle EastLatin AmericaOceania
US
• 3 – 6 % import duties on semis
Europe• 7.5 % import
duties on semis• Turkey
introducing EU duties
47%
10%
13%
11%
10%
7%3%
Asia
• In general low duties
• India assessing higher duties
78
Primary metal market
79
Recap CMD 2015: Global surplus expected to moderate in 2016Surplus moderating from ~1 million tonnes to 0-1 million tonnes
Source: CRU, Hydro Analysis
30 000
35 000
40 000
45 000
50 000
55 000
60 000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 E 2016E
Supply Demand
Global (’000 mt)
Supply influences 2016Key regions in China
adding capacity
Indian projects
Further curtailments
Demand influences 2016
Chinese construction sector
Continued strong transport segment
Sustained US momentum
Emerging markets weakness
Regional effects from Chinese semis exports
Global growth expectations 2016
Demand: 4-5 %Supply: 2-4 %
80
Market balance progressing better than expectedSurplus moderating from ~1 million tonnes to a small deficit
Source: CRU, Hydro Analysis
30 000
35 000
40 000
45 000
50 000
55 000
60 000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E
Supply Demand
Global (’000 mt)
Supply influences 2016Key regions in China
adding capacity
Indian projects
Further curtailments
Demand influences 2016
Chinese construction sector
Continued strong transport segment
Sustained US momentum
Emerging markets weakness
Regional effects from Chinese semis exports
Global growth 2016Demand: ~5 %Supply: ~3 %
Happened to a limited extent Happened to a large extent
81
Global primary market expected to be largely balanced also in 2017Supply growth in world ex. China driven by India, pace of Chinese restarts uncertain
Source: CRU, Hydro Analysis
30 000
35 000
40 000
45 000
50 000
55 000
60 000
65 000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E
Supply Demand
Global (’000 mt)
Supply influences 2017
Chinese restarts
Chinese curtailments
Key regions in China adding capacity
Indian projects
Demand influences 2017
Momentum in Chinese construction and transport sector
Continued strong transport segment
Steady development US and Eurozone
Global growth expectations 2017
Demand: 3-5 %Supply: 4-6 %
82
Divergence in market balances continuing in 2017Global demand growth largely stable, production increasing in China driven by new projects and restarts
Source: CRU, Hydro analysis
27
28
World ex. China
ProductionDemand
-2000
-1000
0
1000
2000 China
ROW
Global
32
31
China
ProductionDemand
2-3 %
2-4 %
7-9 %
4-6 %
-2000
-1000
0
1000
2000
World ex. China
China
Primary market balances 2016
Primary market balances 2017
(‘000t)
X% Growth from 2016 to 2017
(mill t.)
(mill t.)
2016 levels
2016 levels
83
Market deficits increasing in key consumer regionsRising deficits in North America and Europe amid smelter curtailments and continued demand growth
Source: CRU
Metal deficitMetal surplus
Regional capacity balance
-4000
-3000
-2000
-1000
0
2000 2016 2020
North America
-4000
-3000
-2000
-1000
0
2000 2016 2020
Europe (ex. Russia)
0
1000
2000
3000
4000
2000 2016 2020
Russia
0
1000
2000
3000
4000
2000 2016 2020
Middle East
0
1000
2000
3000
4000
2000 2016 2020
Africa
0
1000
2000
3000
4000
2000 2016 2020
Australasia
0
1000
2000
3000
4000
2000 2016 2020
India
(000t)South-America
largely balanced
Primary metal balances, selected regions outside China
84
Chinese primary stocks largely stable in 2016, while total stocks outside China are decreasingChinese exports not fully filling up deficits outside China
Source: CRU, Hydro analysis
0
20
40
60
80
100
120
140
160
0
2000
4000
6000
8000
10000
12000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E
Reported Unreported Total inventory days
China
0
20
40
60
80
100
120
140
160
0
2000
4000
6000
8000
10000
12000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E
Reported Unreported Total inventory days
World ex. China(‘000t) (‘000t)
85
Energy source for primary production varies between regionsChinese and Indian smelters largely dependent on coal
Coal HydroGas NuclearOther renewables
ChinaNorth America Europe
Middle East
India
Power source used in aluminium smelters in 2016
South America
Source: CRU, Hydro analysis
86
Chinese smelters buying coal from market and on-grid smelters impacted by rising coal prices
30
40
50
60
70
80
90
100
250
300
350
400
450
500
550
600
650
700
Oct
-13
Dec
-13
Feb-
14Ap
r-14
Jun-
14A
ug-1
4O
ct-1
4D
ec-1
4Fe
b-15
Apr-1
5Ju
n-15
Aug
-15
Oct
-15
Dec
-15
Feb-
16Ap
r-16
Jun-
16A
ug-1
6O
ct-1
6
Thermal coal, Qinhuangdao CIF ARA (RHS)
…but with varying impact on smelter costCoal prices rising…
Source: CRU, Thomson Reuters, WoodMackenzie, Hydro analysis
Captive, buys coal from marketCaptive, incl. coal mineOn-grid
30 – 35%
20 – 25%
40 – 50%
Largelyinsulated
Directly impacted, must buy coal from the market
Estimated effect of 1 USD increase in coal price is 5-7 USD/t higher primary production cost
On-grid power rates impacted by higher coal prices with a lag
RMB/t USD/t
87
Global cost curve pressured by higher coal and alumina prices
0
400
800
1 200
1 600
2 000
2 400
0 10 000 20 000 30 000 40 000 50 000 60 000
2014 2016
USD/t
(‘000t)
Cost pressure going into 2017
Higher coal pricesHigher alumina prices
Key development from 2014 to 2016…
Lower energy pricesLower alumina prices
Lower premiumsStronger USD
Source: CRU, Hydro analysis
88
Regional standard ingot premiums falling back to historical levels, all-in price level supported by currency effect
Source: Metal Bulletin, MW/MJP: Platts, Reuters Ecowin, Hydro analysis
0
100
200
300
400
500
600
700
800
900
Jan-11 Nov-11 Sep-12 Jul-13 May-14 Mar-15 Jan-16 Nov-16
Extrusion ingot over standard ingot Standard ingot duty paid Extrusion ingot duty paid
USD/mt
10 000
12 000
14 000
16 000
18 000
1 400
1 800
2 200
2 600
3 000
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
LME cash LME cash + Europe duty paidLME cash + US Midwest LME Cash + Europe dutypaid NOK (RHS)
USD/mt NOK/mt
89
0
20
40
60
80
100
120
140
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
Primary Process scrap Post-consumed scrap
0
5
10
15
20
25
30
35
1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018 2021 2024 2027 2030
Building & Construction Transport PackagingMachinery & Equipment Electrical Consumer DurablesOther
Recycling is becoming more important as the generation of post consumed scrap material gains momentum
Source: GARC, CRU/Hydro analysis
Primary demand versus recycled material, globalMillion tonnes
Estimatede recovery from post-consumed scrap collected
Million tonnes
Forecast Forecast
90
Bauxite and alumina market
91
Chinese primary production dependent on imported resourcesAround 36% based on imported raw material (average 2013-2016)
Source: CRU, China customs, 2016 forecast
0
10
20
30
40
50
60
70
80
90
100
Primary production Alumina Bauxite
100 % 93 %
7 %
64 %
29 %
% of Primary Production
Imported
Imported
Domestic
Domestic
92
Bauxite production in China to level off, triggering more imports
• Depleting resources and deteriorating quality, not sufficient to sustain operations in key provinces, triggering:
- increasing refinery conversion costs- inland refineries could convert to imported
bauxite (additional inland freight of >$20/t)- relocation to southern provinces, Guangxi
and Guizhou - new refinery capacity in coastal areas,
dependent on imported bauxite- development of refinery capacity outside of
China
• Bauxite (equivalent) imports could increase from ~65 Mtpy in 2016 to ~85 Mtpy in 2020
- increasing freight exposure
Chinese bauxite imports influencing price development
Source: CM Group
MtpyChinese bauxite production and imports
0
50
100
150
200
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Historical domestic Forecast domestic Imports (incl. alumina as bauxite equivalent)
93
40
45
50
55
60
65
Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16
20
30
40
50
60
70
80
90
Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
Indonesia Australia India Brazil Guinea Malaysia
Chinese bauxite imports – a dynamic landscape Malaysia ban continues, Guinea emerges as major supplier, increased exposure to freight, prices decreasing and converging
Source: China Customs
Indonesia ban
Malaysia entrance
USD/tonneBauxite price CIF China
USD/tonne CIFChina bauxite imports, volume and price by country
Guinea increases
Bubble size represents volume 5 Mt
94
Chinese bauxite imports increasingly exposed to freightFreight represents ~10 to 50% of the CIF price, freight rates at current low levels
Source: China customs, Bloomberg, Hydro analysisNote: 2016 is Jan-Sep annualised
0
1000
2000
3000
Jan-
13
May
-13
Sep
-13
Jan-
14
May
-14
Sep
-14
Jan-
15
May
-15
Sep
-15
Jan-
16
May
-16
Sep
-16
0
20
40
2013 2014 2015 2016
IndonesiaMill. tonnes
0
20
40
2013 2014 2015 2016
MalaysiaMill. tonnes
0
20
40
2013 2014 2015 2016
Altantic Pacific
2013 2016
GuineaMill. tonnes
Chinese bauxite imports origin
Baltic Dry Index
0
20
40
2013 2014 2015 2016
AustraliaMill. tonnes
95
Higher cost Chinese refineries impacted by imported bauxite prices
• Shandong refineries exposed to bauxite import prices− but necessary capacity, as domestic
bauxite is insufficient
• Additional capacity planned during next 3 years in China; − Shandong 3 Mtpy− Hebei 2-4 Mtpy− Guizhou 2 Mtpy− Shanxi 1.8 Mtpy− Yunnan 0.6 Mtpy
20 Mtpy of high cost alumina capacity in Shandong, still growing
Source: CM Group, CRU
Henan
Hebei
ShandongShanxi
Guangxi
Guizhou
10 15 20
350
30 35 40 45 50 55 60
300
25
250
200
150
100
50
050 65
IMShandongChongqingHenanYunnan
GuizhouShanxiGuangxi
BauxiteCaustic
EnergyOther
USD/t
Million tonnes
96
Alumina curtailments reduce oversupply outside ChinaCapacity curtailments in the Atlantic basin, offset by growth in Pacific
Source: China customs, CRU, Hydro analysis* Jan-Sep 2016 annualised
0
20
40
60
2015 2016e
Atlantic Pacific Demand
Curtailment
Addition
Bubble size represents capacity 1 Mt0
2
4
6
2013 2014 2015 2016*
China alumina importsMill. tonnes
Mill. tonnes
World ex-China alumina supply/demand balance
Corpus ChristiPoint Comfort
Kendawangan
Paranam
Ras Al Khair
97
Alumina prices rising amid smelter restarts and cost inflation
Source: Platts, Bloomberg
Market balances• Smelter restarts and new projects ramping up in China• Tight markets ex. China amid curtailments
Cost inflation• Rising coal prices• Higher caustic soda costs• Higher transport costs (road & rail)
Other factors• Transport bottlenecks• Environmental issues
Recent alumina price drivers Platts alumina index (PAX)PercentUSD/t
12%
13%
14%
15%
16%
17%
18%
19%
20%
150
200
250
300
350
400
450
Aug
201
0
Jan
2011
Jun
2011
Nov
201
1
Apr
201
2
Aug
201
2
Jan
2013
June
201
3
Nov
201
3
Apr
201
4
Aug
201
4
Jan
2015
June
201
5
Nov
201
5
Mar
201
6
Aug
201
6
PAX % of LME 3M
98
Long-term outlook and summary
99
Strong demand drivers in key aluminium segments
Strong growth drivers across segments providing solid demand outlookShort-term macroeconomic volatility, long-term fundamentals still in place
Source: CRU, Hydro Analysis
UrbanizationCopper substitution
UrbanizationHousing market recovery in mature regionsEnergy neutral buildings
Improving industrial sentiment in mature regionsManufacturing activity and industrial growth in emerging countries
UrbanizationEnvironmentally-friendly solutions
Transport
Construction
Electrical
Machinery & equipment
Packaging
Growth in automotive vehicle productionAluminium content in cars increasingGrowth in other transport modes, e.g. railway
Global semis demand
3-4 %
4 – 5 %
2 – 3 %
3 – 4 %
3 – 4 %
3 – 4 %
Semis demand CAGR 2016 – 2025
100
Growth in global semis demand creates opportunities for both primary and recycled materialWorld outside China semis demand growth exceeding Chinese growth rates into next decade
Source: CRU, Hydro Analysis* Post-consumed and fabrication scrap
CAGR 2016 – 2025
Semis
3-4 %Primary
2-3 %Recycling
4-5 % 2016-2025
World ex. China China
Estimated semis demand growth, 2025 vs 2016
+ 14-15 millontonnes + 11-12
millontonnes
101
• Macro drivers and substitution effects supporting underlying aluminium demand growth
• Limited primary supply growth outside China and India
• Global primary market largely balanced this year and next
• Cost curve pressured upwards by rising alumina and coal prices, with regional differences
• Recycling growth accelerating with increased generation of post-consumed scrap
• Chinese bauxite import dependency continues to increase
• Solid long-term demand outlook supported bystrong growth drivers across segments
102
