METALS & MINING//////////////////////////////////////////////

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Q1 2013

Improving economic activity in China and the U.S. may increase demand for base metals, with prices also expected to gain. Little support is expected for steel prices and while demand for iron ore is strong, market factors may limit price momentum. Cost support foundations for met coal are in place, while consensus expectations for thermal coal suggest strong price gains.

BASE METALSExpectations are for a pickup in demand growth. After exhibiting some softness in 2012, improving data in China is expected to help re-ignite consumption while the U.S. is showing signs of life from a healthy auto sector and a recovery in the housing markets.

Prices are also expected to post average year-on-year percentage gains as supply side growth projections are reined in due to project delays. While new production capacity is on the horizon for copper, nickel and zinc, historically delays have muted supply growth expectations. In 2013 the market could again witness the same pattern as optimistic projections by companies fail to come to fruition.

Financing arrangements may continue to push up physical premiums. A contango pricing curve, low interest rates and storage costs are keeping metal remains locked away in storage warehouses and reducing the availability of aluminum, zinc and lead to downstream consumers.

STEEL, IRON ORE & COALThe global finished apparent steel demand growth rate may accelerate to 3.2% in 2013 compared with 2.1% in 2012, according to the World Steel Association’s most recent short-range outlook. Growth is expected to be driven principally by higher demand in Central and South America, the Middle East and China.

With raw material prices for steel expected to be largely flat to down in 2013, steel price support could materialize through more supply rationalization, lower output and an improvement in demand.

Iron ore and coking coal prices may stagnate into 2013. While output cuts and low restocking demand have helped support prices, both materials will be affected by new capacity additions slated to hit the market. Though input price inflation may be kept in check, without sufficient capacity rationalization, steel prices could follow their raw material counterparts.

Chinese steel production may peak in 2013, followed by a decline of several hundred million metric tons in the years ahead, according to Steelhome, a Chinese independent third-party provider. If this is correct, a massive consolidation of the global steel industry would be necessary, possibly along with a price drop, to navigate the painful process of restructuring.

China Dominates Demand and Supply in Many Metals

Base Case Scenario Calls for Higher 2013 Prices

Financial Community Impact on Metals is Building

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METALS & MINING//////////////////////////////////////////////

Q1 2013

China’s role as the supporter of iron ore prices should be watched closely as the nation’s steel demand growth rate stays in the low single digits. The pledge by the country to keep property market curbs in place coupled with a shift to less fixed-asset investment growth could cause reduced steel demand and pressure iron ore prices lower.

Global Steel Demand Growth May Accelerate

Steel Supply-Demand Need to Align

Steel Supply-Demand Need to Align

China imports continue to climb higher

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METALS & MINING//////////////////////////////////////////////

THERMAL COALConsensus expectations are for prices to average a 4% to 9% gain over the year, with a number of positive factors in play. First, lower U.S. thermal coal export growth, via higher natural gas, is pulling tonnages back to domestic markets, with elevated transport costs also making export economics unprofitable. Second, there is lower but still robust growth in China and Indian imports—and even Europe—amid favorable coal-to-gas economics. Third, early 2013 could see cooler northern hemisphere temperatures. Finally, the sector may experience supply rationalization from Columbia, Russia and subdued export growth from Indonesia.

Negative factors include high port and power plant inventories across China, India and the U.S., and new capacity coming on line that makes sense and could add nearly 4% to global supply next year.

CONCLUSION » Base metals may see demand growth driven by recovery

in the U.S. and China, with prices also expected to rise. Financing arrangements may continue to push up physical premiums, while increases in production capacity may lag expectations.

» Steel prices may stagnate on subdued input price pressures.

» Iron ore may battle with steady Chinese demand and

rising capacity.

» Production cuts and minimal capacity additions could shape met coal outlook.

» Thermal coal may be reliant on weather, power choices and supply rationalization.

Thermal Coal Supported by Increased Demand

High Chinese Coal Inventories May Impact Imports