Deutsche Bank Markets Research Global Metals & Mining Industry Aluminium Market Update Date 4 March 2015 Market Update A more balanced outlook Trimming price forecasts ________________________________________________________________________________________________________________ Deutsche Bank AG/London Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 148/04/2014. Grant Sporre Research Analyst (+44) 20 754-58170 grant.sporre@db.com Key Changes Company Target Price Rating 0486.HK 6.51 to 5.73(HKD) - Source: Deutsche Bank Top picks Alcoa (AA.N),USD14.95 Buy Alumina (AWC.AX),AUD1.83 Buy Norsk Hydro (NHY.OL),NOK43.97 Buy Hindalco (HALC.BO),INR157.50 Buy Rio Tinto (RIO.L),GBP3,154.00 Buy Source: Deutsche Bank Companies Featured BHP Billiton Plc (BLT.L),GBP1,595.50 Buy Alcoa (AA.N),USD14.95 Buy Alumina (AWC.AX),AUD1.83 Buy Century Aluminum (CENX.OQ),USD20.08 Buy Norsk Hydro (NHY.OL),NOK43.97 Buy Hindalco (HALC.BO),INR157.50 Buy Chalco (2600.HK),HKD3.70 Sell United Company RUSAL (0486.HK),HKD5.45 Hold Rio Tinto (RIO.L),GBP3,154.00 Buy Source: Deutsche Bank We remain positive on the outlook for the aluminium market with producer discipline over the past two years resulting in a slight deficit market in 2014. However, the demand outlook especially in China has deteriorated and project momentum in China has also been stronger than anticipated. The outlook for the next two years is therefore more balanced than our previous assessment and we have downgraded our forecasts by an average of 8% over the next few years. When factoring in falling premiums, we expect the annual all-in price appreciation to be low single digits. Given the general deflationary environment in the industry, this should still result in improving margins for the producers. Weak China macro, semi’s export and improving profitability Weak underlying industrial output data (electricity output, rail traffic and cement production) and some downside risk in the improvement trajectory of the Chinese property market has led to a downgrade in our aluminium demand growth forecasts. The over-supplied Chinese market and the favourable arbitrage in exporting semi fabricated products have led to a sharp increase in exports in December and January. Favourable currency tailwinds and cost cutting measures have led to the sector beating earnings expectations by a wide margin in the recent financial results. In our view, this would make further curtailments unlikely and may prompt some reactivations. The favourable currency effect for many producers will have a feedback into the price of the metal, in our view. Modestly increasing LME prices, but falling premiums Although the Chinese aluminium market is clearly in a surplus given the weaker demand environment, flagging domestic price and the sharp increase in exports, we continue to forecast the overall global market to be in balance or at worst modestly over-supplied with a sustained deficit in the world ex-China. The tight market should support a gradual appreciation of LME prices. However, the increased flow of metal from China, the tighter time spreads and the change in warehouse rules should mean that the physical availability of metal will improve, leading to lower premiums. The net effect is a modestly increasing all-in price of 1 – 3% over the next few years. Given the considerable effort in cost cutting, and the deflationary cost environment, we continue to forecast producer margins improvements outstripping the underlying price increase. We forecast the average EBITDA/ton of the main companies under our coverage to increase by USD180/t in 2015E. Earnings downgrades, but valuations remain attractive Our global metal and mining team has downgraded earnings by an average of 9% in 2015E and 15% in 2016E for some of the miners that have a strong contribution from aluminum over the next few years. Valuations have been downgraded by an average of 7% but continue to remain attractive. Our preferred global picks with aluminium exposure are Alcoa, Alumina, Norsk Hydro, Hindalco and Rio Tinto. Price targets are set using ~1.0x NPV, based on a DCF methodology, with the exception of Hindalco which is based on a sum-of-the-parts. The key downside risk is aluminium premiums falling faster than our forecasts, without an increase