NPI Production from Laterite Nickel Ore in China Jiang Xinfang– Shanghai Tsingshan Mineral Co., Ltd

Stainless Steel Production & Nickel Consumption in China 2

Stainless Steel Production In China In 2007, the total stainless steel production reached over 7,494,000 ton, which was over 10 times the production of 2000. In 2008, due to stainless steel market stays weak, the production cut continued from Q2 to Q4, the actual production in Q4 is operating at around 30% only, the final production was around 7,100,000 ton, decreased around 5%. 3

Stainless Steel Stock Level Stainless Steel Stock Level in China Following the production cut from Q2, stock level in two major Chinese stainless steel markets, Fushan and Wuxi, continued to decrease till end of 2008. With the expectation of demand recovery in 2009, major producers raised production from Jan. 2009, which give rise to the stock increase again. Without solid and timely demand recovery, production might be cut in April. In that case, nickel demand in Q2 might remain in weak level.

Stainless Steel Product Structure Percentage of 300 and 200 & 400 series stainless steel production in China, Data resource: CSSC From 2000 to 2008, 300 series continuously decreased from 72% to 50%, due to substitution of 200 & 400 in applications as automobile, household appliance, and architectures, etc. In 2007 and 2008, 300 series declined by 6% and 8% respectively; 200 series increased dramatically by 6% in 2008 mainly because wide hot rolled coils production increase. In 2009, some major stainless steel producers may also start the production of 200 series, besides private 200 series producers.

Market Price of 304 Scrap in China 304 Scrap Price Market Price of 304 Scrap in China Due to cost disadvantages comparing with NPI, stainless steel scrap in China maintained in surplus in 2008, and market price keep decreasing by 56%; In the same time, scrap ratio was estimated down to 30% - 35% in 2008. Starting from Q4 2008, with scrap price hitting bottom, scrap gained cost advantages compared with NPI, and scrap demand increased and scrap ratio increased to around 40%.

China Nickel Consumption China Nickel Consumption, Data source: Antaike Figures proved that continuously growth of stainless steel production in China creating a increasing consumption of Nickel; but the increase rate is mild in 2007, due to stainless steel production growth rate slow down and 400 & 200 percentage increase. In 2008, nickel consumption growth was reversed due to greatly production cut from Q2 till end of 2008.

2. Laterite Nickel Ore Importation in China

China Nickel Ore Import Laterite Nickel Ore Monthly Import Quantity & LME Nickel Nickel ore importation is mainly influenced by LME Nickel price. Stimulated by high nickel price and NPI production boom, nickel ore import dramatically increased in 2007 and reached historical peak in July over 2.2M ton/m, and then dropped until end of 2007. In 2007, total annual importation around 15,610,000ton; Slight recovery of nickel price in Q1 2008 created high expectation and excessive importation appeared again in Q2 2008, then importation declined to around 500,000 ton per month; the total importation in 2008 reached 12,190,000 ton. Importation in Q1 2009 are mainly low grade (Ni < 1.0%, Fe > 45%). 9

Nickel Ore Stock in China Nickel Ore Monthly Stock in China Main Ports Data source: Umetal Stock at main ports kept increasing from Q4 2007 and maintained over 7.5 Mton till now, indicating that nickel ore demand continuously weaken. Currently, the stock are mainly “dead stock” with Ni < 1.7, Fe < 20%, which are not economical as raw material for both blast and electric furnaces to produce NPI, and have no value if nickel price maintain in current level.

Nickel Ore FOB Price & LME FOB price of Nickel ore: Ni = 1.6%, Fe < 15%, moisture = 30% FOB price is normally defined through formula based on LME nickel price, nickel content, moisture and price discount ratio; FOB price of nickel ore ( Ni = 1.6%, Fe < 15%, Moisture < 30%) reached peak at 94 usd/wt in June 2007, and drop down to around 20 usd/ton in Q3 2008. Currently this kind of ore have no value since the production cost of such kind of grade will be much more than market price of NPI.

Sea Freight Sea Freight: vessel 50,000 ton, Indonesia to China Main Ports Besides FOB price, sea freight was another major factor influencing nickel ore market price. Sea freight of vessels with capacity over 50,000 ton from Indonesia to China main ports reached 50 usd/ton in Oct. 2007, down to 32 usd/ton in Jan. 2008, recovered to 42 usd/ton in May 2008, and plunge to 7usd/ton from Dec. 2008 till now. Due to weak shipment demand expected from nickel ore, coal, grain etc., sea freight in 2009 will be kept in low level. 12

Market Prices of Different Grades Market Price of Nickel Ore with Different Ni Content Generally, the market prices of various grades have been decreasing from the beginning of 2008 up to now, due to high stock level, decreasing FOB price, sea freight and weak demand, For low grade (Ni < 1.0%, Fe > 45%) market price increased to 200 to 260 Rmb/ton around end of 2008, when most of producers shifted form medium grade NPI ( Ni 5%-7%) to low grade NPI ( Ni < 2).

Importation Cost & Market Price Import Cost & Market Price of Nickel Ore: Ni = 1.6%, moisture = 30% When nickel price skyrocketed in May 2007, spot market price of nickel ore reached historically zenith and unit margin around 500 RMB/Ton; Starting from August until end of 2007, market price stayed lower than importation cost; Slightly increase of nickel price in Q1 2008 encouraged the production of NPI and stimulated the demand of nickel ore, which warm the nickel ore market and end the loss of nickel ore trader; Following nickel price drop from Q2 2008 bellow break-even point of NPI, NPI producers mostly stopped production, nickel ore demand shrink, and market price significantly dropped to level lower than importation cost again.

3. NPI Production in China

NPI Market Price in China Market Prices of NPI Data source: CBI NPI Market Price in China Generally, NPI market price fluctuated with LME nickel price. For NPI with Ni content over 10%, the market price was slightly increased by 9% in March 2008, then dramatically dropped down to price level lower than production cost in March 2009. For NPI with Ni content 4-6%, the market price was also increased by 14% in March 2008, then dropped continuously till end of 2008. 16

NPI Market Price in China Market Prices of NPI NPI Market Price in China For low grade NPI with Ni content less than 2%, it was mainly used as major resource of Iron for stainless steel, instead of nickel. The market price was mainly influenced by iron price and actual demand of stainless steel production. Due to surging iron price, low grade NPI market price also increased by 18% in August 2008, and some blast furnace turned to produce low grade NPI for better margin. But in Sept. when iron price start to drop, low grade NPI price also started to decrease again. In this moment, with iron price down again and surplus from production excess, low grade NPI price was decreased again.

Comparison of Primary and Secondary Nickel Price Nickel cost comparison The curves explained nickel cost difference from various resources as nickel imported, Fe-Ni imported, local NPI, and SS scrap; Deduct the cost of iron and chrome from Fe-Ni, NPI and SS scrap, NPI was shown a big cost advantage comparing with other nickel resources in 2007, and first half of 2008; With nickel price further down in Q3 and increasing production cost of NPI, market price of NPI has no room to decrease further, and gradually lost cost advantages comparing with local scrap and Fe-Ni import.

Comparison of Primary and Secondary Nickel Price Nickel cost comparison on March, 2009 The curves explained nickel cost difference from various resources as imported nickel, local nickel, imported Fe-Ni, local NPI, and local SS scrap based on data on one day in Mar, 2009. As a resource of nickel, NPI (Ni=5% and 10%) lost cost advantage comparing with Fe-Ni imported, and slightly cheaper than nickel. Mainly as a resource of iron, low grade NPI have unmatchable cost advantage.

NPI Cost Structure- Blast Furnace Preconditions 2: Ni % in ore = 0.8 %, Fe = 47%; Ni % in NPI = 1.7%; Ni ore market price = 200 RMB/WT, Coke market price = 1700 RMB/KWH Preconditions 1: Ni % in ore = 1.8 %; Ni % in NPI = 5.5%; Ni ore market price = 250 RMB/WT, Coke market price = 1700 RMB/KWH Currently, cokes was the most important factor influencing the production cost of NPI, accounting for around 42% total cost of NPI. Medium grade NPI production were almost fully stopped, due to no actual demand and no margin. Even with cost advantages as cheap resource of iron, the market price of low grade NPI was reduced down to production cost again due to oversupply.

Market Price of Coke in Shandong Province: Ash < 12.5%, S <0.8% When coke price reached 3000 Rmb/ton in August 2008, most of the furnaces were shut down from Q4. The few remaining furnaces in production were shifted to the production of low grade NPI (Ni<2%) for very poor margin to survive. Following carbon steel production cut in Q4 2008, coke demand shrink rapidly, and cokes price plunged, some NPI producers started again. With gloomy market of carbon steel foreseen in 2009, and coke exportation greatly declined in Q1 2009 and coming quarters, coke demand and market price may not reach high price level as in 2008.

NPI Cost Structure – Electric Furnace Preconditions: Ni % in ore = 1.8%; moisture = 30%, Ni % in NPI = 10%; Nickel ore price ( Ni % = 1.8%) = 250 RMB/WT; Inland transportation cost = 250 RMB/WT Electricity price = 0.35 RMB/KWH Compared with major electric furnaces for Fe-Ni production in the world, the existing electric furnaces in China are in small capacity and have no rotary kiln - higher electricity consumption; mostly designed for other Ferro-alloy – lower production, lower nickel recovery; short life time of refractory lining – higher maintenance cost, lower production time; high inland transportation cost due to its location at west China The production cost of high grade NPI ( Ni>10%) was higher than market price now and several furnaces which are on production might be all shut down in the current market situation.

NPI Production and Consumption 2008 Nickel produced from Laterite ore was calculated as 86,179 ton in 2008. Considering stock level increased at NPI producers, the actual consumption of nickel from NPI was estimated as over 70,000ton. NPI application were threatened by low nickel price. Medium and high grade NPI production were almost completely stopped, and only low grade is still surviving in 2009. Therefore, nickel production from NPI in 2009 might be much lower than in 2008.

Major NPI Projects in China

Outlook in 2009 Over supply of nickel ore: High stock level will be maintained in main Chinese ports, “dead stock” with low Ni & low Fe will only be utilized when nickel price increase above break-even point; Most of nickel mines in Indonesia and Philippine will be kept stopped since limited production in China; Fierce competitions from various nickel ore miners will result in FOB close to mining cost; Restrained Demand of nickel ore: stainless steel production cut expected from Q2 and low nickel price will limit demand of NPI; medium and high grade NPI will have no cost advantages and will be produced in very limited percentage; low grade NPI will be the only cost competitive NPI produced in 2009; coke price will be in reasonable level, considering depressing market in 2009 and decline of exportation; production cost of low grade NPI will be kept in low level, if nickel ore and coke price maintained in low level as expected; most of electric furnaces will stop production of NPI and might turned to the production of other Ferro-alloys; In conclusion, NPI production and consumption will be limited and nickel produced from NPI will be much lower than in 2008.

Thanks for your attention ! Jiang Xinfang Shanghai Tsingshan Mineral Co., Ltd. Tel：+86 21 58776416; Fax：+86 21 58776411 Mobile：+86 13501743519; Email: jxf@tshint.com Address: Room 1401, China Insurance Building, 166 East Lu Jia Zui Road, Shanghai, China   200121