Commodities Comment：Aluminium cuts underway, but still more required

Please refer to page 22 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures. GLOBAL LME cash price % change US$/tonne day on day Aluminium 1,557 -0.2 Copper 5,164 -0.3 Lead 1,721 1.5 Nickel 10,758 -0.5 Tin 15,325 -1.3 Zinc 1,852 -0.3 Cobalt 28,722 -5.8 Molybdenum 13,271 0.0 Other prices % change day on day Gold (US$/oz) 1,094 0.3 Silver (US$/oz) 14.75 1.1 Platinum (US$/oz) 963 1.3 Palladium (US$/oz) 603 0.8 Oil WTI 44.26 0.0 USD:EUR exchange rate 1.097 0.4 AUD:USD exchange rate 0.741 0.9 LME/COMEX stocks Tonnes Change Aluminium 3,396,150 -8,325 LME copper 352,325 725 Comex copper 32,708 -502 Lead 210,075 -2,725 Nickel 456,678 -1,812 Tin 6,630 65 Zinc 428,325 -1,325 Source: LME, Comex, Nymex, SHFE, Metal Bulletin, Reuters, LBMA, Macquarie Research, August 2015 Articles of the Week  China thermal coal: supply restraint outshone by demand weakness  LME squeeze rallies: Tin played out, lead and zinc back in the frame?  Just how low were July’s commodity prices?  July PMIs: Manufacturing’s middling, moderate mediocrity Analyst(s) Macquarie Capital (Europe) Limited Colin Hamilton +44 20 3037 4061 colin.hamilton@macquarie.com Jim Lennon Senior Commodities Consultant +44 20 3037 4271 jim.lennon@macquarie.com Matthew Turner +44 20 3037 4340 matt.turner@macquarie.com Stefan Ljubisavljevic +44 20 3037 4247 stefan.lj@macquarie.com Vivienne Lloyd +44 20 3037 4530 vivienne.lloyd@macquarie.com Macquarie Capital Securities Limited Chen Shao +86 21 2412 9041 chen.shao@macquarie.com 10 August 2015 Commodities Comment Aluminium cuts underway, but still more required Feature article  As we recently noted, at current aluminium prices almost half the global cost curve loses money on a cash plus sustaining capital basis. This reflects both the flat nature of the global cost curve plus the fundamental imbalance in the market – demand growth remains healthy compared to peer commodities, however production growth running at 10% YoY is dwarfing this.  In our July 1 aluminium downgrade, we stated that around 1.5mt of global aluminium capacity might need to be shuttered to bring this market back to balance. This process has started, with more capacity cuts in China than we might have expected, plus delayed ramp-ups to new capacity. However, as of yet it is not enough, and we may still have to see even lower prices to get actual closures of ex-China output. Latest news  Underlining these difficulties of oversupply in the aluminium market, Reuters reported on Friday that India’s trade minister has put forward a request to double aluminium import duties to the country’s revenue department for consideration, in a bid to protect domestic producers including Vedanta and Hindalco from growing Chinese and Middle Eastern imports. Metal Bulletin had earlier reported on 22 July that a delegation from the Aluminium Association of India had begun lobbying the government over increasing import duty.  US nonfarm payrolls rose by a seasonally adjusted 215k in July, US Labor Department data showed on Friday, slightly below consensus expectations of 225k. However, combined upward revisions of 14k were made to the May and June data. The unemployment rate remained steady at 5.3%, while average hourly earnings rose 0.2% MoM, both in line with consensus forecasts. Overall the US labour market data is likely to be interpreted by the market as solid if unspectacular, and on its own this release is unlikely to alter consensus expectations of a September Fed rate hike.  It was announced on Friday that the Finnish government has stepped in to acquire troubled Sotkamo nickel mine from Talvivaara, with the intention of resuming mining operations this September. Sotkamo has been closed since last year after struggling with production problems, environmentally damaging leaks and low nickel prices, and had a capacity of around 20ktpa contained nickel. A new company established and wholly owned by the state, Terrafame Mining, will operate the mine.  Our Chinese economist, Dr Larry Hu, is more positive than consensus on the Chinese economy and expects a U-shaped recovery in 2H15. Despite very weak market sentiment, he sees the economy as moving sideways in 3Q15 before recovering in 4Q15, with ‘green shoots’ possibly appearing in September, consisting of higher cement prices and rebounding PMIs (among other things). He sees growth momentum being driven by a recovery in the property sector and policy easing. In terms of monetary stimulus, we expect one interest rate cut and two RRR cuts in 2H, while we also expect fiscal easing, with a pickup in infrastructure FAI. Macquarie Research Commodities Comment 10 August 2015 2 Aluminium cuts underway, but still more required  As we recently noted, at current aluminium prices almost half the global cost curve loses money on a cash plus sustaining capi