China China - A A Western Western Miners Perspective Perspective - PowerPoint PPT Presentation

China China - A A Western Western Miner’s Perspective Perspective Radosław Załoziński Director of Market and Credit Risk Management, KGHM 0

After weaker than expected 1H 2014, the global economies accelerate. International Monetary Fund (IMF) forecasts higher growth in 2015. Canada Eurozone* GDP y/y 2014F: 2.3% GDP y/y 2014F: 0.8% GDP y/y 2015F: 2.4% GDP y/y 2015F: 1.3% Poland CPI y/y 2014F: 2.0% CPI y/y 2014F: 0.5% GDP y/y 2014F: 3.2% CPI y/y 2015F: 2.0% CPI y/y 2015F: 0.9% GDP y/y 2015F: 3.3% CPI y/y 2014F: 0.1% CPI y/y 2015F: 0.8% World GDP y/y 2014F: 3.3% GDP y/y 2015F: 3.8% USA GDP y/y 2014F: 2.2% GDP y/y 2015F: 3.1% China CPI y/y 2014F: 2.0% GDP y/y 2014F: 7.4% CPI y/y 2015F: 2.1% Chile GDP y/y 2015F: 7.1% CPI y/y 2014F: 2.3% GDP y/y 2014F: 2.0% CPI y/y 2015F: 2.5% GDP y/y 2015F: 3.3% CPI y/y 2014F: 4.4% CPI y/y 2015F: 3.2% Forecasts of GDP and CPI for 2014 and 2015 are based on IMF data, World Economic Outlook (07.10.2014). 1 *Eurozone aggregate excludes Latvia; F – Forecast; y/y – year over year;

Growth still robust … GDP to grow above 7.0% yoy, but nowhere near pre-crisis levels 12 Real GDP growth (% yoy) IMF WEO forecast 11 10 9 8 7 6 5 4 2010 2011 2012 2013 2014 2015 Source: Bloomberg, IMF WEO, KGHM 2

… although unevenly distributed China’s growth slowdown is concentrated in the north Note: Provincial GDP growth in 1H2014. Source: GavekalDragonomics, KGHM 3

The need for reforms becomes increasingly apparent Reforms may hurt in near-term, but bring benefits globally by 2019 The chart shows change of GDP (in %) resulting from 1ppt change in China’s GDP growth . Source: IMF, KGHM 4

Stable inflation environment is beneficial for the economy Inflation is stable, with no visible pressures 10 8 6 4 2 0 -2 -4 Headline CPI (% yoy) -6 Non-food CPI (% yoy) -8 PPI (% yoy) -10 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Bloomberg, KGHM 5

Investments are slowing … Fixed assets investments (FAI) growth is slowing due to lower public contribution Source: BofAML, Bloomberg, KGHM 6

… as well as IP Industrial production momentum declining along GDP 70 20 18 65 16 60 14 55 12 50 10 8 45 6 40 4 PMI Manufacturing (sa) 35 PMI New Orders (sa) 2 Industrial Production (% yoy, rhs) 30 0 2007 2008 2009 2010 2011 2012 2013 2014 Source: Bloomberg, KGHM 7

Real estate market closely watched New houses prices has showed some weakness recently 10,0 2,5 8,0 2,0 6,0 1,5 4,0 1,0 2,0 0,5 0,0 0,0 -2,0 -0,5 New houses price growth (% mom, rhs) -4,0 -1,0 New houses price growth (% yoy) -6,0 -1,5 Mar-2012 Sep-2012 Mar-2013 Sep-2013 Mar-2014 Note: Average prices of new houses in 70 medium-to-large-sized cities. Source: Bloomberg, KGHM 8

China wants to explore Emerging Markets potential Export becomes more dependent on emerging economies China's export by destination (% of total, 12m sums-based) 40 US Emerging Markets EU Japan ASEAN 35 30 25 20 15 10 5 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Bloomberg, KGHM 9

External trade may suffer from currency appreciation Stronger currency hurts price competitiveness 110 2011-12-31=100 105 100 95 90 RMB appreciation vs. USD RMB appreciation vs. basket (NEER-based) 85 2008 2009 2010 2011 2012 2013 2014 Note: NEER = nominal effective exchange rate. Source: Bloomberg, KGHM 10

Economy in shape to create more than 10 million jobs this year Annual target of creating 10 million jobs should be comfortably reached Note: Data in millions. 2014 bar includes data until August. Source: GavekalDragonomics, KGHM 11

Urban population to reach 1 billion by mid-century Urban population is forecast to grow rapidly as people move to cities 1 600 Total population (millions) Urban population (millions) 1 400 1 200 69% 71% 73% 75% 77% 1 000 65% 61% 56% 800 49% 51% 43% 600 36% 31% 26% 400 23% 12% 14% 16% 18% 17% 17% 19% 200 0 1950 1960 1970 1980 1990 2000 2010 2015 2025 2035 2045 Note: Urban population as percentage of total in brackets. Source: United Nations, KGHM 12

Decrease of stocks in official warehouses, low volatility on the market Copper price and LME stocks tons USD/t 1 000 000 12 000 LME COMEX Shanghai LME copper price 900 000 10 000 800 000 700 000 8 000 600 000 500 000 6 000 400 000 4 000 300 000 200 000 2 000 100 000 0 0 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Source: Bloomberg, KGHM 13

High-cost mines may start losing money Lower price now threatens marginal mines [USD/t] Source: CRU International 14

Pushbacks to the expected start-up date and ramp-up of key mine projects Current expected production estimates vs. January 2014; projects with capacity of 25,000 t/y+ CRU Jan 2014 Current estimates Difference 2014 2015 2016 2017 2014 2015 2016 2017 2014 2015 2016 2017 Toromocho, Peru 143 219 219 229 100 180 258 231 -43 -39 39 2 Caserones (ex Regalito), Chile 127 146 150 140 70 140 150 150 -57 -6 0 10 Nchanga Refractory Ore SxEw, Zambia 83 83 83 76 30 50 50 50 -53 -33 -33 -26 Collahuasi Expn, Chile (SX-EW) 24 29 32 30 20 20 20 20 -4 -9 -12 -10 Sentinel, Zambia 0 190 239 290 0 90 170 225 0 -100 -69 -65 Jabal Sayid, Saudi Arabia 5 47 57 57 0 50 57 53,7 -5 3 0 -3 Constancia, Peru 0 42 97 118 0 50 90 130 0 8 -7 12 Antucoya SxEw, Chile (SX-EW) 0 38 66 80 0 50 82 82 0 12 16 2 Boleo SXEW, Mexico (SX-EW) 3 31 37 37 0 36 54 55 -3 5 17 18 Ok Tedi Open Pit Extension, PNG 0 53 53 53 0 0 75 60 0 -53 22 7 Las Bambas, Peru 0 49 330 400 0 0 45 200 0 -49 -285 -200 Tenke Expansion 2, Congo DR (SX-EW) 40 56 68 68 0 0 0 115 -40 -56 -68 47 Rosemont, USA 0 0 0 31 0 0 0 97,4 0 0 0 66 Aktogay, Kazakhstan 0 2 17 20 0 0 0 50 0 -2 -17 30 Tia Maria SxEw, Peru (SX-EW) 0 0 0 79 0 0 0 45 0 0 0 -34 Tsagaan Suvarga, Mongolia (SX-EW) 0 46 58 71 0 0 0 20 0 -46 -58 -51 Total -259 -338 -479 -143 Source: KGHM Analysis, CRU International April 2014, Macquarie Research 15

Weaker consumption growth this year … Copper consumption, % change in 2014 vs. 2013 Source: CRU International 16

…but should stabilise in the following periods Copper consumption, global (‘000 tonnes), 2014 - 2018 25 000 20 000 15 000 10 000 5 000 - 2014 2015 2016 2017 2018 North America Europe Australasia Asia ex. China China Africa Source: CRU International, KGHM 17

Power sector is the biggest copper consumer in China Chinese copper demand by end user, 2013 Real estate, construction; 7% Others; 9% High-tech; 7% Infrastructure; 6% Power Generation and distribution; 28% Manufacturing; 10% White goods/automobiles/ electronics; 33% Source: CRU International, National Bureau of Statistics, KGHM 18

Copper market balance – oversupply in 2015-2016 2014 2015 2016 2017 Institution 150 597 144 -243 Macquarie 162 553 637 319 Wood Mackenzie 149 556 23 -703 HSBC 331 316 146 129 SML (BME Copper) 385 454 15 -112 Goldman Sachs 103 259 410 138 CRU International Average 213 456 229 -79 Median 156 504 145 9 Source: Market researches, KGHM 19

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