Industry Comment

Copper

ICRA Management Consulting Services Limited

IMaCS Research & Analytics

THE INDIAN COPPER INDUSTRYAugust 2010

Industry Comment

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Industry Comment

Copper

Contacts: Vineet Nigam +91 120 4515831

Programme Leader (Research & Analytics)

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Copper

TABLE OF CONTENTSENVIRONMENT ANALYSISPORTERS MODEL ........................................................................4 INDUSTRY STRUCTURE ...........................................................................................................5 OVERVIEW ...................................................................................................................................... 5 MAJOR INDIAN PRODUCERS............................................................................................................... 8 KEY ISSUES........................................................................................................................... 10 CHANGES IN MARKET DEMAND ........................................................................................................ 10 LIMITED DOMESTIC AVAILABILITY OF COPPER ..................................................................................... 12 DEMAND-SUPPLY TRENDS AND PROSPECTS.......................................................................... 16 MINE PRODUCTION ........................................................................................................................ 16 REFINED COPPER PRODUCTION ........................................................................................................ 20 INDIAS REFINED COPPER PRODUCTION ............................................................................................. 24 CONSUMPTION .............................................................................................................................. 26 INDIAS COPPER CONSUMPTION ....................................................................................................... 29 PRICES.......................................................................................................................................... 32 RESERVES ..................................................................................................................................... 38 TRADE ................................................................................................................................. 40 IMPORTS....................................................................................................................................... 40 EXPORTS ....................................................................................................................................... 41 DUTIES AND INCENTIVES.................................................................................................................. 43 FINANCIAL PERFORMANCE ................................................................................................... 45 CONCLUSION ....................................................................................................................... 48

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Copper

ENVIRONMENT ANALYSIS PORTERS MODELThreat of SubstitutesMedium Coppers uses vary over time depending on its price. When copper prices remain high for extended periods, some consumers may switch to other metals instead (e. g., aluminium). Other substitutions arise from performance considerations (aluminium in car radiators to reduce weight), or from technological change (fibre optic cables replacing copper cables for long distance telephone infrastructure).

Bargaining Power of SuppliersHigh High with respect to secondary producers who do not have captive mines. Low with respect to Primary producers who have captive mines.

Inter Firm RivalryLow Market competition limited because of existence of just 3 major primary producers. However, high competition exists in secondary products.

Bargaining Power of BuyersLow There exists a fragmented buyers market, with product prices dependent on primary product prices and underlying demandsupply.

Barriers to EntryHigh High capital cost and ownership of copper mines are key entry barriers.

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Industry Comment

Copper

INDUSTRY STRUCTUREO v e r v ie wCopper (represented as symbol `Cu in the periodic table) is the worlds third most widely used metal (after iron and aluminium). However, copper is a scarce metal. On average, the Earths crust contains only 0.0058% copper, compared with 8% aluminium and 5.8% iron. Most commercial copper ore deposits contain 0.5-0.6% copper. Copper appears in the earths crust mainly as combinations with oxygen, sulphur, carbon, and iron. Copper is a reddish-coloured metal, and gets its characteristic colour because it reflects red and orange light and absorbs other frequencies in the visible spectrum. Although more than 160 types of copper ores have been identified, only about 10-12 are commercially important. These can be divided into three groups: Primary or hypogene ores, which are deposits deep in the earth formed by igneous activity, are represented by compounds such as bornite (Cu5FeS4), chalcopyrite (CuFeS2), enargite (Cu3As5S4) and similar combinations. Oxidised copper ores, commonly formed by the weathering of copper sulphides exposed to erosion, with cuprite (Cu2O), azurite, and chrysocolla the principal representatives of this group. Secondary sulphides, generally formed by copper leached from sulfides exposed near the earths surface; chalcocite (Cu2S) and covellite (CuS) are members of this group. The commercially important ores are chalcocite (with 79.8% of copper) and chalcopyrite (with 34.5% of copper). Presently, the most common source of copper ore is the mineral chalcopyrite, which accounts for about 50% of world copper production. Copper ore may be mined by either open pit or underground (UG) methods, or the mineral values may be leached out of the ore (solution mining). Open-pit mining accounts for 80% of all copper mining operations in the world, with an opening wide enough to allow trucks to enter and go deep enough to reach the ore. UG mining is used when the amount of stripping required (stripping refers to the amount of sterile soil to be removed per tonne or t of ore) is too high or the geology does not permit it. In this method, the ore is reached through a tunnel and brought out either by truck or rail, or is raised by a skip. Once the ore has been mined, the copper is extracted from it either by caching (hydrometallurgical recovery) or through heat (pyrometallurgical methods). In hydrometallurgical processes, water or an acidic chemical solution percolates through the ore and dissolves the minerals. The copper is recovered from the resulting pregnant Ieachate either through iron precipitation or solvent extraction. Pyrometallurgical processes employ high-temperature chemical reactions to extract copper. The ore is first pulverised by tumbling it with steel balls in cylindrical mills. The crushed and ground ore is then beneficiated/concentrated to eliminate much of the valueless material. Copper concentrate can contain 25-35% of copper; similar levels of iron and sulphur; minor percentages of oxides of aluminium, calcium, and silicon; and trace metals that depend on the ore source.

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Depending on the copper minerals and the type of equipment, subsequent pyrometallurgical treatment of the concentrates may take as many as three steps: roasting, smelting, and converting. Roasting dries, heats, and partially removes the sulphur from the concentrate to facilitate smelting. The concentrates are smelted to produce a liquid copper matte (35-75% copper), plus slag (waste), and sulphur dioxide gas. After smelting, the molten matte is converted into blister copper (98.5-99.5% copper), slag, and sulphur dioxide gas. The molten blister is fire refined to further reduce its sulphur and oxygen content and poured into moulds. The cooled copper is called anode copper. In the final stage of purification, these anodes are refined by an electrolytic process to obtain copper cathodes, which have a metal content of 99.99%, and represent the copper metal in its pure form. Cathodes are melted and cast into wirebars or continuous bar stock for wire manufacture, into slabs for mechanical use, or ingots for alloying. Copper Production Flow Chart

Copper is malleable, ductile, and is a good conductor of heat and electricity (second only to silver). It is also highly resistant to corrosion. Because of its properties, copper finds widespread use in a wide range of applications. It is widely used in electrical applications (electrical generators and motors, electrical power and lighting fixtures, electrical wiring, radio and television sets, computers, etc), plumbing (water pipes), heating and cooling (air-conditioning systems, refrigeration units, motor vehicle radiators, home heating systems, steam condensers),

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Copper

roofing (roof coverings), building construction, household goods (kitchenware), ammunition, coins, and pharmaceutical and chemical equipment. Copper is used to form many alloys such as bronze (with tin), brass (with zinc) and Monel metal (with nickel). Copper compounds are also used as inorganic dyes, feed additives, seed disinfectants, foliage sprays, fertilisers, fungicides and algicides, antifouling agents, wood preservatives, and photography. The major consuming industries include telecom, power, construction, transportation, handicrafts, engineering, consumer durables, and defence. Due to its high electrical conductivity, a prime application of copper is wire and cable used to carry power and telecom signals. The high conductivity means good efficiency, and good corrosion resistance means that copper is a very good electrical conductor. High conductivity means a smaller cross-section for wires relative to other metals, which is important for small motors, hand tools, and crowded conduit spaces. However, in long-distance transmission lines, the heavier density of copper relative to conductivity means that aluminium is preferred to copper as the current-carrying metal for such lines. At present, estimated percentages of world copper consumption by end-use markets comprise building and construction (25%), power utilities (11%), telecom (4%), industrial equipment manufacturing (19%), transport equipment (13%), consumer products (8%), and others (20%). Demand growth in recent years has been primarily driven by higher growth in electrical applications, which has offset stagnation in the industrial machinery segment. Over the period 1999 to 2009, world refined copper consumption grew by an estimated compound annual growth rate (CAGR) of 2.9% to 18.65 million tonnes (mt) in 2009. This rate of increase was slightly higher than the growth rate for world industrial production over the same period. Asian copper consumption, led by China, has been particularly strong, increasing by approximately 17% per annum over the period. Asia now represents approximately half of the worlds refined copper consumption, compared with approximately 24% for Western Europe, and approximately 18% for the Americas. Distr ibution of World Copper Consumption2002: 15.05 mtOthers 20% Consumer Products 9%

2008 18.10 mt

Consumer Products 10% Transport 10%

Construction 40%

Constructio n 25%

Indl. Machinery 15%

Electrical 25%

Transport Equipment Manfg 12%

Industrial Equipment Manfg 19%

Telecom 4%

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Industry Comment

Copper

M a jo r In d ia n P r o d uc e r sThe Indian industry can be classified into two broad categoriesmanufacturers of refined copper (copper cathodes) and manufacturers of copper products. The three manufacturers of refined copper are Hindalco Industries Ltd. (Hindalco), Sterlite Industries (India) Ltd. (SIL), and Hindustan Copper Ltd. (HCL). While HCL is the only primary producer, which mines and refines copper; Hindalco and SIL process primarily imported copper concentrate to produce end products like copper bars, rods and wires. Other players include around 1,000 units in the small-scale sector, which are primarily involved in converting scrap into ingots. The Indian copper industry was opened for private sector investment in 1992. Prior to 1992, the industry was dominated by HCL, a public sector undertaking (PSU) owned by the Government of India (GoI). HCL was incorporated in November 1967 with the objectives, inter alia, to carry out mining operations and produce copper and related products. HCL subsequently took over the copper ore mines from National Mineral Development Corporation Ltd. (NMDC). These mines are located at Khetri and Kolihan in Rajasthan, and Rakha Copper Complex in Jharkhand. In 1972, the GoI nationalised a private sector copper producerIndian Copper Corporation Ltd., Bihar, and merged the same with HCL. In 1975, HCL set up a copper complex in Khetri, Rajasthan with a designed output capacity of 31,000 tonnes per annum (tpa) of copper cathode. In 1982, HCL expanded its operation to Madhya Pradesh (MP) by developing the Malanjkhand copper mine. During 1990, as part of forward integration, HCL commissioned a 60,000 tpa or 60 kilotonnes per annum (ktpa) continuous cast (CC) wire rod plant at Taloja, Maharashtra. HCL is the only vertically integrated copper producer in India engaged in a wide spectrum of activities ranging from mining, beneficiation, smelting, refining and continuous cast rod manufacturing. HCL also produces gold, silver, nickel sulphate, selenium, and telurium as by products. With economic liberalisation since the 1990s, the industry was opened to the private sector. Initially, SIL set up a CC copper cathode plant with an installed capacity of 12 ktpa at Tuticorin, Tamil Nadu in 1991, to manufacture CC copper cathode from copper scrap. Subsequently, SIL commissioned Indias privately developed and licensed copper smelter at Tuticorin in Tamil Nadu (TN) in 1997. At present, its copper business is principally one of custom smelting and includes a smelter, refinery, phosphoric acid plant, sulphuric acid plant and copper rod plant at Tuticorin; and refinery and two copper rod plants at Silvassa (in the Union Territory of Dadra and Nagar Haveli). Pursuant to capacity expansion projects implemented at Tuticorin (120 ktpa completed in April 2005, and 100 ktpa completed in November 2006), SIL presently has copper anode1 capacity of 405 ktpa at Tuticorin (and copper cathode capacity of 205 ktpa at Tuticorin, and 195 ktpa at Silvassa). In May 2008, SIL had also reached an agreement to acquire substantially all of the operating assets of Asarco, US. On completion of this acquisition, Sterlite was to acquire ownership of Asarcos three open-pit copper mines, which have estimated reserves of 5.2 mt of contained copper, associated mills, solvent extraction and electrowinning (SX-EW) plant and a copper smelter in Arizona, US; and a copper refinery, rod plant, cake plant and precious metals plant in Texas, US. Asarco is the third largest copper producer in the US, with a capacity of 5001

Copper anode is an intermediate product produced by copper smelters and is not sold to customers. It is used for the production of copper cathode by copper refineries. Approximately one ton of copper anode is required for the production of one ton of copper cathode.

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ktpa of refined copper, and production of 241 kt of refined copper in 2008. The Asarco acquisition was expected to raise SILs capacity to 900 ktpa, making it the worlds fifth largest producer. However, in March 2010, Asarco filed a complaint in the US Bankruptcy Court for the Southern District of Texas, Corpus Christi Division, against SIL and SILs wholly owned subsidiary, Sterlite (USA), Inc. alleging that SIL and Sterlite USA had breached the previously signed agreement to acquire substantially all the operating assets of Asarco by refusing to pay the US$2.6 billion purchase price as allegedly required by the May 2008 agreement and refusing to assume the liabilities and contractual obligations as allegedly required by the same agreement. Indo Gulf Corporation commissioned its copper smelter in Dahej, Gujarat in the second quarter of 1998. The business was subsequently acquired by Hindalco in 2002-03. Hindalco has two copper smelters (of 180 ktpa and 70 ktpa) at Dahej, Gujarat with a total capacity of 250 ktpa. In July 2005, Hindalco commissioned a third smelter of 250 ktpa at Dahej, thereby increasing its copper cathode capacity to 500 ktpa. As noted above, till 1997, the only producer of primary refined copper was HCL. The installed capacity for refined copper production at its two integrated copper plants was (and is) around 47.5 ktpa, which used to meet approximately 25-30% of India's requirement for refined copper. The balance demand was met through imports. The other two producers of copper in India now are Hindalco and SIL. Their present annual capacities are 500 ktpa and 405 ktpa, respectively. Their plants are based on imported copper concentrate. Thus, the total installed capacities for copper in India are presently around 953 ktpa. In addition, SWIL Ltd. is operating a 50 ktpa plant based on secondary route. SIL is the largest producer of copper in India, with an estimated production of 334 kt during FY2010, marginally higher than Hindalcos production of 333 ktpa. As there are only 3 major players in the domestic market, there is limited competition in the domestic market. Trends in Installed Capacity for Copper CathodesThousand tonnes or kt FY Hindalco SIL HCL Total 2004 250.0 165.0 47.5 462.5 2005 250.0 165.0 47.5 462.5 2006 500.0 300.0 47.5 847.5 2007 500.0 405.0 47.5 952.5 2008 500.0 405.0 47.5 952.5 2009 500.0 405.0 47.5 952.5 2010 500.0 405.0 47.5 952.5

Apart from new production, scrap copper supply in India is estimated at around 100-115 ktpa. These include cartridge brass disposed by defence (17%); forgings, fabrication, redrawing and machining (31%); old winding wire scrap (13%); copper cable scrap disposed by users in electricity and telephone (12%); and wire & cable units (9%).

Y

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Copper

ISSUES FACING THE PLAYERSKEY ISSUESC h a n g e s in M a r k e t D e ma n dThe copper industry is highly dependent on the performance of and demand for products like power and telecommunication cables, transformers, generators, radiators and other ancillary components. Hence, its growth is closely linked to the country's economic and industrial growth. Although the industry is capital and power intensive, entry barriers are moderate. These basically relate to economies of scale, access to ore supplies and environmental issues. In India, copper reserves are mainly concentrated in Bihar, Rajasthan and Madhya Pradesh. Indian ore has a copper content of just 1.2-1.3% against the world average of 2-3%. Distr ibution of Copper Usage in IndiaOthers 12% Engineering 9% Consumer Durables 6% Building & Construction 9% Transport 8% Telecom 20%

Electrical 36%

Till the late-1990s, the telecom sector was the major customer segment (accounting for 30-35% of demand) for Indias copper consumption. Because of the rapid expansion of the Indian telecom network during the late-1990s, copper usage in the telecom sector increased from around 20 ktpa in the early-1990s to around 105-110 ktpa in the late-1990s. However, since then demand has declined to around 65 ktpa at present. With the increasing shift from fixed line to wireless mode of communication, there is a threat for demand growth for copper from this segment. Also, in the fixed line communication, optic fibre cables (OFC) offer strong competition to copper. Accordingly, the market for copper usage in telecom sector has declined during the last several years. In both gasoline and diesel automotive vehicles, ferrous metals constitute 65-70% of the total weight, followed by plastics (15-19%), aluminium (6-7%), and glass (3-4%). Metals such as copper (1%) and lead (1%) have only a marginal role on a weight basis. However, copper has a higher share of around 2-2.5% in electric vehicles, and as much as 6-7% in fuel cell vehicles.

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Over the past few decades, aluminium has been the most important substitute for copper, taking over substantial market segments, on account of its conductivity of electricity and heat, its low weight, corrosion characteristics, and lower prices relative to copper. Aluminium weighs about one-third as much as steel or copper. It is malleable, ductile, and easily machined and cast; and has excellent corrosion resistance and durability. However, in some applications, despite being cheaper, aluminium substitution has been restrained. For example, in car radiators, although copper is more expensive, it has superior corrosion and heat conductivity characteristics. Hence, a copper radiator is expected to last longer, and less metal is required for a given cooling performance. Copper is also easy to work with, simplifying and cheapening the manufacturing process, especially where soldering and brazing are involved. Even after 40 years of competition, copper is maintaining a 40% share of the car radiator market. Aluminium has been taking over copper's traditional markets in important electrical applications. One such market is for overhead conductors and underground cables for carrying electricity. Though aluminium is not as good an electrical conductor measured per unit of weight, its lightness and tensile strength makes aluminium cables of a given carrying capacity both lighter and stronger and far cheaper than cables made of copper. For these reasons, aluminium has come to dominate long distance electricity transmission in recent decades. On the other hand, where space, cross section, ease of jointing and ability to stand high temperatures are of concern, e.g. in bus bars, switchgear, transformers and electrical generators, copper has been able to maintain its competitiveness. Thus, substitution is prompted by many characteristics apart from price. Nevertheless, sometimes price overwhelms other considerations, as the usage of silver demonstrates. Silver is superior to copper in terms of malleability, anti-corrosion, and as electric conductor. However, on account of its high price, the ability of silver to penetrate copper's electric markets has been limited to minuscule segments where these characteristics are particularly important. Over the past half century, copper has also faced challenges from plastics and optic fibres in some market segments. Thus plastics have partly replaced copper in piping fresh water into and waste water out of buildings. Plastics have been tailor-made for piping uses, improving such characteristics as durability or ability to withstand chemicals and heat, thereby strengthening their competitive position versus copper. There are even reports about aluminiumplastic composite water piping. Such pipes, made of aluminium tube that is laminated with interior and exterior layers of plastic, are said to be lightweight, flexible, strong and corrosion resistant, and particularly well suited for hot and cold water distribution indoors and outdoors. The replacement of copper by optic fibre for message transmissions in telecommunication has proceeded at fast rates ever since their commercial introduction in such uses by the late 1970s. The substitution process was initiated by telephone companies, later joined by cable television systems and local area networks. So far, it has mainly involved long distance trunk lines, while the ultimate local connection has till recently, remained the preserve of copper. Substitution was prompted by the much higher productivity and substantially lower overall cost of optic fibre. Copper's losses in these market segments are deemed to be definitive and irreversible. Like in the www.imacs.in 11

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case of plastics, the fast product development of optic fibre is likely to strengthen its competitive strength and result in further incursions into copper's markets in the telecoms sector. Copper has been in human use since the dawn of history, and is constantly under threat by materials of more recent origin, sometimes specifically created to satisfy a particular human need. All else alike, this characteristic of the substitutes, along with their relative recency can be expected to facilitate and speed up product development and innovation to a pace that the old copper industry may find hard to match. High prices stimulate substitution, and market segments, once lost, may be hard to regain. The historically very high prices during 2003-08 have clearly constituted a threat of demand shrinkage.

L i m it e d D o me s t ic A v a i la b i l it y o f C o p p erAt present, the demand for copper for primary copper production is met through two sources i.e. copper ore mined from indigenous mines and imported copper concentrates. The indigenous mining activity among the primary copper producers is limited to only HCL. Production of copper metal in concentrate from mines has stagnated at around 30 ktpa over the last five years. Presently, HCL imports around 40% of its copper concentrates requirements to supplement the shortages in indigenous production. Hindalco and SIL also import their requirements in the form of copper concentrates. Copper ore and concentrate is primarily imported from three countries Chile, Australia, and Indonesia. Indias Impor ts of Copper Ore and ConcentratesFY 3,000 2,500 2,000 1,500 1,000 500 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Quantity-thousand tonnes Value-Rs. million 300,000 250,000 200,000 150,000 100,000 50,000 0

SILs consumption of copper concentrates was 1,140 kt in FY2010. In order to obtain a source for some of its copper and copper concentrate requirements, SIL acquired CMT in 2000, which owns the Mt. Lyell copper mine in Australia, and Thalanga Copper Mines Pty Ltd., or TCM in 2000, which owns 70% of the Highway Reward copper mine in Australia. This mine has since closed in July 2005. CMT and TCM had been acquired by Monte Cello BV, or Monte Cello, in 1999, and SIL acquired them through its acquisition of Monte Cello in 2000. Although these mines supplied www.imacs.in 12

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around 10% of SILs copper concentrate requirements in FY2007, the percentage has declined to 8% in FY2008 and FY2009, and is expected to decline as the estimated mine life at Mt. Lyell is approximately four years from April 1, 2009. In FY2009, Mt. Lyell mined and processed 2.4 mt of ore at a grade of 1.3% copper to produce 98.76 kt of copper concentrate, which also contained 15,675 ounces of gold and 135,953 ounces of silver. Although the grade of copper at Mt. Lyell is low, it produces a clean concentrate that is valuable in the smelting process. In 2003, Hindalco also acquired two captive copper mines in Mt. Gordon in Queensland, Australia and Nifty in Western Australia in 2003 through its 51% owned subsidiary Aditya Birla Minerals Limited (ABML). ABML holds the mining and prospecting licence area for these two copper mines in Australia through its wholly owned subsidiaries, Birla Nifty Pty Limited and Birla Mount Gordon Pty Limited. Total copper (cathode and concentrates) production of ABML was 82.4 kt in FY2008, but has declined to 57.1 kt in FY2010. As of March 31, 2008, the two mines had 32.2 mt of reserves at an average copper grade of 2.2% which contained proven reserves of 23.7 mt at an average copper grade of 2.4% and probable reserves of 8.5 mt at an average copper grade of 1.6% in possible reserves. During FY2008, approximately 26% of Hindalcos copper concentrate consumption of 1,150 kt came from these two Australian mines. The balance was through long term suppliers (58%), and spot markets (17%). As Indian smelters rely on overseas markets for almost their entire requirement of copper concentrates, their profitability is strongly dependent on the international variation in Treatment Charges and Refining Charges (or TcRc) which is defined as the difference between the cathode prices and the concentrate prices. The buyers of copper concentrates from mining companies are the smelters and refiners of copper. Most of the smelters treat a typical chalcopyrite concentrate with copper content of 25-28% with a few treating higher grade averaging from 32-34% Cu. These buyers usually buy at market price (London Metal Exchange or LME price) from which they subtract a certain amount in order to reflect the TcRc for processing the metal. Copper concentrate needs to undergo two processes (smelting and refining) in order to become copper cathode and, therefore, since it is sold on a copper cathodes price basis, discounts that reflect the missing processes should be applied. These are TcRc charges. The treatment charge (Tc) reflects the smelting process and is normally expressed in dollars per dry metric tonne of concentrate material. The copper refining charge (Rc) reflects the electrolytic refining process and is normally expressed in US cents per pound of payable copper. In many cases, the charge is established as an individual, combined charge (TcRc), expressed in US cents per pound (lb) of payable copper. The TcRc charges are determined by the oversupply or deficit of concentrates in the market and not by the real cost for carrying out these processes. If there is an oversupply of concentrates as compared with global smelting capacity, smelters will demand higher TcRc charges, and vice versa. In both cases, the real cost of smelting and refining remains unchanged. Thus, TcRc are negotiated between the buyer and the seller according to market conditions. The TcRc for Indian producers are substantially influenced by the benchmark price set by certain large Japanese and Chinese smelters. India accounts for less than 5% of the global capacity for copper, and thus has limited influence on copper prices on the LME. However, prices on the LME do have an effect on domestic prices, since they determine the TcRc charges, and influence the landed price of imported metal.

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The long decline in TcRc charges that began in early 2001 came to an end in the second quarter of 2004 because of an improved concentrate supply situation. Declining copper prices from mid2000 to late 2002 led to mine cutbacks and closures, pushing the supply-demand balance for concentrate into a deficit from 2001 through 2003 in the range of 0.1-0.25 mt of copper in concentrate. As a result, average annual spot TcRc declined from a level of 62.50/6.25 or US$62.5/t and US6.25 cents () per pound (lb) in 2001 to 17.30/1.73 in 2003. In 2004 and 2005, the concentrate market moved to a surplus. As a result, annual TcRc were at 85/8.5 levels in 2004. With firm copper prices and increased concentrate supply, TcRc charges were on upward trend during most of FY2006. The deficit in the concentrates market that developed during 2005 worsened during 2006 and 2007, as lower growth in concentrates production, increasing capacity utilisation at smelters, and fresh capacities coming online constrained the concentrate market. World production of concentrates remained stagnant in 2006, and increased 3.2% in 2007. Despite the high prices of copper, the low rate of growth in production of concentrates indicates the limited capacity of existing mines to meet the rising concentrates demand. Concentrates production growth during 2007 was primarily in the US, China, and Australia. World concentrates production declined 1.4% in 2008 to 12.42 mt primarily because of a contraction in demand. The decline in concentrates production in 2008 was mainly due to losses in America, mainly Chile and Mexico. The concentrates market was in deficit to the extent of around 590 kt during 2006, but in a surplus of 23 kt in 2007. TcRc which had plunged for most of 2006, increased in late-006, but then declined for most of 2007, except for an increase in late-2007. During 2008, the concentrates market was in a nominal deficit of 53 kt. The concentrates situation worsened during 2008 primarily because of higher demand and refinery capacity, and the slower expansion of concentrates production capacity. However, a sharp decline in copper consumption from mid2008 onwards resulted in a substantial easing of the concentrates deficit. As a result, TcRc declined to 45/4.5 in 1H2008 and to 42.5/4.25 in 2H2008. These TcRc followed protracted negotiations in which smelters strongly but unsuccessfully argued for a return to price participation. Spot contract fees in 2008 closely tracked developments in 2007, sliding in 1H2008 until hitting bottom at 8/0.8 in July 2008, subsequently recovering sharply by end-2008. Spot TC/RC charges stood at 80/8 in January 2009 (their highest point since April 2006), before declining to 70/7 in February 2009. This behaviour was based on smelters anticipating a market surplus in 2009 and a slight deficit in 2010. During 2009, concentrates production is estimated to have increased 1.8% to 12.65 mt, and the market was in a nominal surplus of 48 kt. Concentrate availability eased in the first half of 2009 because of lower demand by smelters, offset by delay in the expected new mine capacities due to difficult terrain, associated risk factors and socio-political factors. The long term TcRc contracts for 2009 were significantly higher than in 2008 due to depressed demand for refined copper and temporary surplus in concentrate availability at the time of negotiations. In January 2009, the annual TcRc between the Japanese smelters and BHP Billiton were settled at 75/7.5 for 2009, compared with spot rates of 80/8. Subsequently, Japan's copper smelters reached mid-year agreements with BHP Billiton, resulting in an estimated 35% decline in TcRc than those agreed in the annual 2009 contracts. The main reason for lower TcRc of 48/4.8 for 2H2009 was tight copper concentrate supply due to high levels of imports by China. The spot TcRc declined substantially

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from a high of 90/9 in January 2009 to near zero by end-2009 and remained well below the cash costs of most smelters for significant part of 2009. World concentrates supply is expected to remain tight for 2010-11 primarily because of an expected 0.5% decline in concentrates production during 2010 to 12.59 mt. The Tc/Rc for 1H2010 were negotiated at around 46.5/4.65. However, Tc/Rc could decline to around 40-43/4.-4.3 for 2H2010, with expected further declines during 2011. The main reason for lower TcRc from 2H2009 has been tight copper concentrate supply due to high levels of imports by China. During 2009, the market had an estimated concentrates surplus of 48 kt, which could transform into an expected deficit of 90-100 kt for 2010 resulting from increased foundry capacity in Asia, and negligible growth in availability of concentrates. This would be reinforced by the prospects for 2011, where growth of molten copper production in Asia far exceeds the increase in concentrate production capacity globally, causing an increase in the deficit of concentrates to reach around 500 kt during 2011. Concentr ates Production and Surplus/DeficitThousand tonnes CY Africa America Asia Europe Oceania Production Loss Total 2008 816 6,448 2,705 1,447 1,008 12,424 Production 2009 2010E 902 1,063 6,136 6,486 3,169 3,169 1,452 1,529 988 1,026 -687 12,647 12,586 2011E 1,284 6,877 3,077 1,585 1,021 -987 12,857 2008 232 3,266 -3,241 -899 589 -53 Surplus 2009 2010E 283 272 3,029 3,335 -3,010 -3,205 -868 -797 614 621 -316 48 -90 2011E 314 3,552 -3,801 -803 576 -336 -498

Treatment ChargesUS$/lb

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DEMAND-SUPPLY TRENDS AND PROSPECTS

PRODUCTION, CONSUMPTION, PRICE, CAPACITY UTILISATIONM in e P r o d u c t io nDespite a significant increase in global copper demand and prices since 2003, world copper mine production is estimated to have increased at a slower rate over the last few years. Growth in World Copper Mine Pr oduction, Refined Pr oduction, and Refined Consumption10% 8% 6% 4% 2% 0% 1991 -2% -4% 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011F Mine Production Refined Consumption Refined Production

During 2005-09, while refined consumption increased at a 5-year compound average growth rate (CAGR) of 1.9%, mine production increased at a lower rate of 1.5%. However, scrap usage has probably increased because of higher copper prices. However, growth in scrap usage and availability is expected to slow down, with the market expected to become more reliant on mine production growth than in the last five years. Mine production increased 2% in 2009 to 15.84 mt, as compared with a decline of 0.1% in 2008. World copper mine production has grown at a slow rate because of various factors. Despite large additions to capacity, growth in mine production was constrained by significant supply disruptions caused by equipment failure and low ore grades. Falling copper prices also constrained growth with significant cuts to mine production occurring towards the end of 2008. During 2009, the main contributor to growth was Indonesia, where production increased by 49% (recovering from 2008 operational constraints). In the other two major producerswhile Chiles output increased 1.2%, output in the US declined 6%. Capacity utilisation rates increased from the lows of 78% during 1Q2009 and stood at 82% in 4Q2009. However, they are still significantly below an average utilization rate of 87% over the period 2003-08.

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Industry Comment

Copper

Monthly Growth in World Copper Mine Production, Refined Production, and Refined Usageyoy growth 15% 10% 5% 0% Jan-06 Jan-07 Jan-08 Jan-09 Nov-06 Nov-07 Nov-08 May-06 May-07 May-08 May-09 Nov-09 Jan-10 -5% -10% -15% May-10 Mar-06 Jul-06 Mar-07 Jul-07 Mar-08 Jul-08 Mar-09 Jul-09 Mar-10 Sep-06 Sep-07 Sep-08 Sep-09 Refined Use Mine Production Refined Production

Till the dawn of the Industrial Revolution in the mid-18th century, China was the worlds largest copper mine producer accounting for around 70% of world production of 10 kt in 1750. The balance was accounted for by Europe. However, China lost its dominance after 1750, as the country's role in the world economy contracted. Subsequently, the United Kingdom (UK) attained 23% of global copper output in 1850, but its role as producer then declined, both on account of a limited resource endowment, and rising production in other countries, notably the US and Chile. US share of world output increased from negligible by mid-19th century to 56% by 1900, and 60% by the 1920s. This share subsequently declined, but as recently as 1990, the US was on a par with Chile, as one of the world's two leading copper producers, each accounting for 18% of world output. Since then, US share of mine copper production declined to only 8.5% in 2008. Chile became an important copper producer based on domestic and British investments from the 1850s onwards. Easily accessible rich veins were exploited, output peaked in 1869, and then declined by half until 1891, as the veins were depleted. However, in the early 20th century, a new generation of mines, employing mass mining methods were developed with the help of US investments. By 1920, Chile had attained a 10% share of global output, and that share continued to expand until 1945 when it reached 22%. Although total production continued to rise, Chile's share of the global total shrank in the following decades, to reach a trough of 11% in 1970. This was the period of dramatic nationalisation measures which brought the copper industry under complete government control and aroused prolonged conflicts with the former foreign owners. Subsequent policy changes encouraged foreign investment, and the countrys share in world copper mine production has expanded from 18% in 1990 to 35% in 2009.

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Industry Comment Copper Mine Output1991-2000 Chile US Peru Indonesia Australia China Russian Federation Canada Poland Kazakhstan Zambia Mexico Iran Papua New Guinea Argentina India Others Total kt 29,699 17,608 4,451 5,295 5,176 4,359 4,750 6,963 4,179 2,710 3,786 3,339 1,128 1,864 557 441 12,305 108,607 Share 27.3% 16.2% 4.1% 4.9% 4.8% 4.0% 4.4% 6.4% 3.8% 2.5% 3.5% 3.1% 1.0% 1.7% 0.5% 0.4% 11.3% 100% kt 46,592 10,839 9,236 8,346 7,880 6,957 6,598 5,253 4,340 4,010 4,006 3,026 1,768 1,674 1,620 270 10,598 133,012 2001-09 Share 35.0% 8.1% 6.9% 6.3% 5.9% 5.2% 5.0% 3.9% 3.3% 3.0% 3.0% 2.3% 1.3% 1.3% 1.2% 0.2% 8.0% 100%

Copper

At present, Chile is the worlds largest copper producer, accounting for 35% of world mine production (the copper sector accounts for 15% of Chiles gross domestic product or GDP and over 40% of its total exports). Chiles mine production had declined 4.1% in 2008 to 5.33 mt because of mining of ore with lower grades of copper and supply disruptions. Most notable was equipment failure at Escondida. Production at the worlds largest mine, Minera Escondida in Chile owned largely by BHP Billiton and Rio Tinto, declined 15.5% in 2008 to 1.25 mt. In addition, safety concerns about overburden removal at Chuquicamata prompted Codelco to delay resumption of operations in high-grade areas, causing a 12% decline in production to 1.4 mt in 2008. However, mine production increased 1.2% in 2009 to 5.40 mt, as a 12% decline in production at Escondida (due to equipment failure) was more than offset by a 16% growth in production at Codelcos Norte Division. In Indonesia, production declined 17.6% in 2008 because of problems at Grasbergs open-pit mines as mine planning issues forced development of low-grade areas. However, Indonesias copper mine production increased 49% in 2009 to 0.97 mt, making it the worlds fourth largest producer. Mine production increased substantially in 2009 because of higher grade ore at Freeports Grasberg operation and improved metal recovery at Newmonts Batu Haiju mine. The copper projects developed with foreign investments during the 1990s resulted in Indonesias copper production more than trebling from 0.31 mt in 1993 to a peak of 1.16 mt in 2002. Copper mining foreign investments in Indonesia is concentrated mainly in two projects: Grasberg mine of PT Freeport Indonesia belonging to Freeport McMoRan Copper and Gold, Inc. in Irian Jaya, Papua; and Batu Hijau mine of PT Newmont Nusa Tenggara belonging to Newmont in Nusa Tenggara, Sumbawa. The Grasberg mine contains the largest single recoverable copper reserve of any mine in the world. Perus mine production increased 6.5% in 2008 (12.1% in 2007), after commissioning of Freeports Cerro Verde expansion in Peru (an increase of approximately 145 ktpa) in early 2007. However, production increased only 0.5% in 2009. Australian mine production increased by 1.7% www.imacs.in 18

Industry Comment

Copper

in 2008 as higher production at BHP Billitons Olympic Dam offset mine closures late in 2008. Production declined 3% in 2009 as increased production at some operations was offset by a production disruption at BHP Billitons Olympic Dam. World Copper Mine ProductionMine Production (thousand tonnes) 2007 2008 2009 5,557 5,328 5,390 1,168 1,330 1,248 1,190 1,268 1,275 928 931 961 871 886 859 770 785 742 789 650 970 596 607 495 524 568 561 452 429 439 407 420 406 2,287 2,324 2,492 15,539 15,526 15,838 Growth 2010 5,743 1,176 1,215 1,133 872 687 910 493 857 471 2,463 16,020 2009 1.2% -6.1% 0.5% 3.3% -3.0% -5.4% 49.2% -18.5% -1.2% 2.2% -3.3% 7.2% 2.0% 2010 6.6% -5.8% -4.7% 17.8% 1.5% -7.5% -6.2% -0.3% 52.7% -100.0% 16.0% -1.2% 1.1% 2007-09 0.2% 1.4% 6.7% 3.3% -0.6% -1.6% 5.9% -6.4% 2.9% -4.1% -3.1% 4.8% 1.4%

CY Chile US Peru China Australia Russian Federation Indonesia Canada Zambia Poland Kazakhstan Others Total

2006 5,361 1,197 1,048 873 875 779 817 603 516 497 446 2,168 15,180

During 5M2010 (January-May 2010), while world mine production increased 0.3% (yoy) to 6.39 mt, capacity utilisation declined from 80% in 5M2009 to 78% in 5M2010. Furthermore, when compared with production in 5M2008 (before temporary closures/production cuts occurred), world mine production declined by 2.4%. Production in Chile increased 1.8% (yoy) and was impacted by labour shortages caused by the early 2010 earthquakes. Cumulative output from Peru, the US, Australia and Indonesia, which combined accounted for about 27% of 2009 global production, declined 7.5% (yoy). In Indonesia and the US, lower copper grades are expected to result in declining production through 2010. For example, production is expected to decline at Freeports Grasberg mine in Indonesia and at Rio Tintos Kennecott Utah mine in the US. Australian mine production has declined as the failure of the main haulage shaft at BHP Billitons Olympic Dam in October 2009 resulted in production declining to 2.2 kt in 1Q2010 compared with 45.4 kt in 1Q2009. World copper mine production is expected to increase 1.1% in 2010 to 16.02 mt, and 5% in 2011. This estimate is based on start up of several major projects, and ramp up of production at existing operations around the world. Production growth during 2010 is expected to be driven by higher output in Chile (+350 kt), and Zambia (+300 kt). However, US production is expected to decline by 6% or 72 kt. In Africa, strong production growth is expected to be driven by a ramp-up of operations which started in 2009, including Equinox Minerals Lumwana in Zambia (169 kt) and Freeports Tenke Fungurume in the Democratic Republic of Congo (114 kt) and the start-up of Vedantas Konkola in Zambia (228 kt). Chiles copper production is expected to increase by around 7% as Codelcos Codelco Norte and Andina operations are expanded and Escondida returns to full production following equipment maintenance. In Indonesia and the US, lower copper grades are expected to result in declining production in 2010. Australian mine production is estimated to decline because of the failure of the main haulage shaft at BHP Billitons Olympic

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Industry Comment

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Dam in October 2009. Key risks that could affect production continue to include labour disputes, problems in the mining variables, restrictions in supply of key inputs (electrical energy, water, sulphuric acid), demand conditions, and delays in the delivery of equipment and spare parts. Mining companies investment in copper projects in Chile are expected to result in Chiles mine copper production increasing from 5.6 mt in 2007 to around 5.9 mt in 2011. The largest projects include Codelcos Gaby and Andina projects in Chile (capacity of 150 ktpa and 120 ktpa, respectively). Data on copper mine capacity on a mine-by-mine basis are collected by the International Wrought Copper Council (IWCC) and the International Copper Study Group (ICSG). The figure below shows changes in global mine capacity over the period 19952009. Global capacity rose from about 11.26 mt in 1995 to 18.8 mt in 2008. Mine utilisation rates peaked at 94% in the early-2000s and have since then subsequently declined, even as copper demand increased at a high rate from the early-2000s. Some of the mines that close down may re-open when market conditions improve, but the longer that prices remain weak relative to costs the lower the likelihood. Copper Mine Capacity and Capacity UtilisationCY, kt 22,000 Capacity-LS 20,000 18,000 16,000 14,000 12,000 10,000 8,000 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Utilisation-RS 95% 90% 85% 80% 75% 70% 65% 60% 100%

R e f in e d C o p p e r P r o d u c t io nFrom 1999 through 2009, world refined copper production has grown at an average annual rate of 2.5% to around 19.3 mt in 2009. Production growth was influenced by a number of factors. First, limited investment in new mine production in the latter half of the 1980s coupled with growing demand for copper during that period resulted in market deficits and declining copper inventories that in turn encouraged new investment. Second, an improved investment climate in Latin America, particularly Chile, encouraged investment in that region. In 2000, Latin America (especially Chile) represented 47% of world mine production, a significant increase from 25% in 1990. Third, solvent-extraction electrowinning (SX-EW) technology made some previously uneconomic resources viable investments.

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Industry Comment

Copper

After four years of high growth, world refined copper production growth slowed down to 2.5% in 2008, and 0.6% in 2009; primarily because of a decline in production from 4Q2008 through 3Q2009. Refined production increased 4% (yoy) in 3Q2008, but declined 0.4% in 4Q2008, 1.9% in 1Q2009, 2.5% in 2Q2009, and 1.2% in 3Q2009. Subsequently, although production increased 3.6% in 4Q2009 and 5% in 1Q2010, the increase is primarily because of the base effect. Over the last five years, Chinas rened copper production has increased by an average of 13.3% to 4.11 mt in 2009, and China accounting for around 72% of the total growth in global rened production during 2001-09. The balance was primarily accounted for by Chile (16%), Zambia (13%), and India (12%). By comparison, production in the US and Canada declined 0.6 mt and 0.5 mt, respectively during 2001-09. Excluding China, refined production increased at a 5-year CAGR of 1.2%. Over the last 5 years, significant increase in production has occurred in India, Zambia, and Chile. By comparison, production has declined in North America and former Soviet Union (FSU). World Refined Copper ProductionProduction (thousand tonnes) 2006 2007 2008 3,003 3,499 3,779 2,811 2,937 3,058 1,532 1,577 1,540 1,250 1,326 1,280 959 923 913 662 666 690 627 719 669 497 522 612 575 583 536 557 533 527 429 442 503 508 414 464 500 453 442 428 406 398 379 394 396 2,623 2,636 2,673 17,341 18,029 18,479 Growth 2009 4,110 3,272 1,440 1,187 926 673 721 698 535 503 446 423 336 368 367 2,592 18,596 2008 8.0% 4.1% -2.3% -3.5% -1.1% 3.6% -6.9% 17.2% -8.0% -1.2% 13.8% 12.1% -2.5% -1.9% 0.5% 1.4% 2.5% 2009 8.7% 7.0% -6.5% -7.3% 1.5% -2.4% 7.8% 14.0% -0.2% -4.6% -11.3% -8.7% -24.0% -7.6% -7.4% -3.0% 0.6% 2005-09 13.3% 2.9% 0.9% -2.0% 0.4% 0.6% 11.5% 11.2% 1.5% -1.8% -1.9% -3.5% -8.6% -3.8% -0.9% 2.1% 3.2%

CY China Chile Japan US Russian Federation Germany India Zambia Korea Poland Australia Peru Canada Kazakhstan Belgium Others Total

2005 2,600 2,824 1,395 1,260 968 638 518 446 527 560 471 510 515 419 383 2,576 16,610

While primary refined production has increased at a 5-year CAGR of 2.2% to 15.5 mt in 2009, secondary production (from scrap) increased 7.1% to 2.9 mt, mainly because of continuing high copper prices, which encouraged scrap recycling. Secondary production is highly sensitive to copper prices, with production declining till 2003 because of low copper prices. However, the sharp increase in copper prices has resulted in a significant increase in scrap secondary production during 2003-09. Lower TcRc has also resulted in copper scrap being increasingly used by smelters (especially in China) instead of concentrates.

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Industry Comment World Secondar y Refined Production and Copper Prices3,400 3,000 2,600 2,200 1,800 1,400 1,000 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Secondary Refined Production (thousand tonnes) LME Copper Price (US$/t)

Copper

8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0

Traditional copper processing is termed pyrometallurgy as it involves high temperature smelting. In contrast, SX-EW is a hydrometallurgical process involving the dissolution and reprecipitation of copper from solution. There are three fundamental steps to SX-EWore leaching, solvent extraction (SX), and electrowinning (EW). The first step consists of leaching the copper ore (which may be as prepared ore piles; pre-existing low grade, waste, or oxide dumps; or even in-situ material) with a weak acidic solution, which typically is sulphuric acid. The solution is recovered and in the next stage (or the SX stage), mixed with an organic solvent which selectively removes copper from the original acidic solution. The organic solvent is then separated and the copper stripped from it with a fresh acidic solution to produce a highly concentrated, relatively pure copper liquor suitable for the final step, electrowinning (EW). EW is a variation of electrolytic refining of copper used in refineries. In EW, the copper-rich solution is filtered to remove entrained organics, heated, and then passed through a series of electrolytic cells, where the copper precipitates on copper or stainless steel starter sheets to form high quality cathodes, which are the deliverable product. The SX-EW technology was developed and first used by smaller copper mining companies in the US. Later, SX-EW was adapted by foreign producers and major US copper companies. US SX-EW production peaked by the early-2000s but has since then declined primarily because of ramp-up in production of cheaper Chilean SX-EW copper production as well as a downturn in global demand during 2001-02. At present, Chile is the largest producer of refined copper through SXEW accounting for 69% of world SX-EW output of 3.06 mt in 2009; followed by US, Peru, and Mexico. Initially, SX-EW was used on ores which were uneconomic to mill. However, since the mid-1980s, many mines have integrated SX-EW into their overall operation. They have optimised their milling/flotation and leaching operations by raising the mill cut-off grade (and where favourable mineralogy permits) directing intermediate grade ores to the leach dump. The same cut-off (defined as the economic return per ton of ore) is then calculated from both the flotation and leaching plant, which is a very different calculation than if just the flotation plant was considered alone and waste or low grade placed in the leach cycle. This has had the effect of

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Industry Comment

Copper

significantly increasing the tonnage and grade of material sent to the leach piles and thereby significantly increasing the amount of SX-EW copper produced. World SX-EW production increased at a very high rate during 1990s followed by lower growth rates and even declines in recent years. This has been driven by closures, decline in US production of SX-EW copper, and constraints in the available supply of sulphuric acid and/or significant price increases in this component. World SX-EW Copper ProductionProduction (thousand tonnes) 2006 2007 2008 1,692 530 174 73 61 60 53 51 20 15 2,728 1,832 504 172 81 63 60 42 25 15 15 2,810 1,971 508 160 82 64 60 53 41 7 14 2,960 Growth 2009 2,113 480 162 82 68 60 23 47 9 13 3,056 2008 7.2% -5.5% 1.1% 0.0% 5.4% 0.0% -56.5% 15.4% 32.5% -10.2% 3.2% 2005-09 5.2% -3.9% -0.6% 2.7% 0.0% -17.4% 2.6% -21.8% -4.4% 2.8% 19942003 26.4% 2.2% 28.4% 11.9% 0.5% 5.6% 13.3% 23.9% 13.7%

CY Chile US Peru Mexico Laos Zambia Australia Congo Myanmar Others Total

2005 1,585 555 166 78 30 60 51 50 34 14 2,623

During 5M2010, world refined copper production increased 5.7% (yoy) to 7.83 mt. While primary production increased 2.2% (yoy) to 6.48 mt, secondary production increased 26.6% (yoy) to 1.35 mt, because of substantially higher copper prices and consequently higher availability of scrap. The large increase in secondary refined copper production also reflects in part the lower copper prices and consequent tight scrap market that existed in early 2009. On a 2-year basis, world refined copper production increased 1.9%, with primary and secondary production increasing 0.5% and 9.3%, respectively. Primary refined production declined in each quarter of 2009, before registering a modest increase of 1.3% (yoy) in 1Q2010. World refined production growth during 5M2010 has been mainly driven by China (15.5%), Japan (13%) and the EU (8.8%) that combined represent almost one half of world refined copper production. Production in two other major world producers, Chile and the US, declined by a combined 2.5%. World refined production is expected to decline 0.3% in 2010 to around 18.5 mt. This decline is expected to be because of a slight fall in the contribution of new production from primary sources, accompanied by a surge in secondary copper production. Weak demand and low profit margins in the EU are expected to continue to constrain refined primary production. However, this is expected to be offset by a significant increase in refined primary production in Africa with the ramp-up of SX-EW operations in the Democratic Republic of Congo and Zambia. During 2009 the primary copper smelters have managed to recover the production decline from the previous year, growing by 1% compared to 2008. For 2010, primary refined production is expected to increase by 350 kt in Asia and Africa, which is not expected to offset by declines in US and EU. Increased SX-EW production is forecast to come from the restarting of small SX-EW operations,

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Industry Comment

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closed as a result of low prices, and increased secondary refined production as higher prices lead to an increased availability of copper scrap. World refined production is expected to increase at a high rate of 4% in 2011 to 19.3 mt, representing an increase of around 700-750 kt. This increase would be led by SX-EW copper production, but also reflect the sustained recovery in secondary production in the period. An expected increase in the availability of scrap in 2011 as the copper price increases is also expected to increase production of secondary refined copper. The control of the world's primary copper output has been dominated by a group of large miners. For 2007, Freeport in the US and state-owned Codelco of Chile dominate among the copper mining giants, each with an annual output of close to 1.7 mt. The worlds eight largest miners controlled 53% of output in 2007, compared with 54% in 1974, and 70% in 1956, suggesting a decline of concentration over time. Corporate concentration has not been exceptional compared with other metal industries in recent decades.

I n d ia s R e f in e d C o pp e r P r o d u c t io nTill the mid-1990s, Indias refined copper production had increased only marginally from 47 kt in 1991 to 70 kt in 1997. However, the commissioning of private sector smelters during 1996-98, and increased domestic consumption resulted in a sharp increase in production to around 627 kt in 2006. Following a 6.9% decline in 2008, Indias refined copper production increased 7.8% in 2009 to 721 kt. Production increased at a 5-year CAGR of 11.5%. Indias Refined Copper Production and GrowthCY, Thousand tonnes

800 700 600 500 400 300 208 200 100 0 49 40 39 70 134

Production 5-year CAGR

Growth 719 669 627 518 374 391 419

721

100% 80% 60% 40% 20% 0% -20% -40%

325 259

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Indias refined copper production growth decelerated in the second half of FY2009 because of lower conversion margins, higher copper prices, slowdown in demand, and declining customs duty differential (caused by duty protection from imports). However, after four successive quarters of decline, Indias copper production increased at double digit rates from Q1FY2010 to Q3FY2010 initially because of inventory build-up but subsequently also because of demand recovery. However, refined production declined in Q4FY2010 and Q1FY2011. During Q1FY2011,

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Industry Comment

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Indias refined copper production declined 3.9% (yoy) to 156 kt, with declines during April-May 2010 not fully offset by a 3.7% (yoy) increase in June 2010. Hindalcos output declined 4.4% (yoy) to 76 kt in Q1FY2011. Hindalcos production during Q1FY2009 was lower due to the planned shutdown of Smelter-1. Production during Q1FY2011 was affected by a planned shutdown of a smelter for 24 days in April 2010. SILs total cathode production declined 1.3% (yoy) primarily on account of a planned maintenance shutdown. Hindustan Copper Limited (HCLs) copper output declined 45.4% (yoy) to 2.2 kt. Indias Copper Productionthousand tonnes 70,000 65,000 60,000 55,000 50,000 45,000 40,000 35,000 30,000 25,000 20,000 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 -40% -60% 0% -20% 40% 20% Production-LS Growth (yoy)-RS 80% 60%

During FY2010, while Hindalco and SIL reported an increase in production, HCL reported a decline (which followed a decline in FY2009). Hindalcos production of copper cathodes increased 11.9% in FY2010 to 333 kt, compared with a decline of 9.1% in FY2009. Hindalco had reported higher production from FY2007 because of satisfactory performance of Hindalcos third smelter at Dahej, which operated at rated capacity after November 2006. However, operations at Smelter-2 were temporarily suspended from end-October 2006, keeping the overall economics in view of unremunerative price of copper concentrate in international markets. SILs production increased 6.8% in FY2010 to 334 kt, compared with a 7.8% decline in FY2009, and increases in FY2006-08. Production increased at a high rate in FY2007 because of a capacity expansion at its Tuticorin facility which increased the anode and cathode capacities to 405 ktpa in November 2006. Production had increased at a very high rate in FY2006 because of an earlier capacity expansion at its Tuticorin facility which increased the smelters copper anode capacity from 180 ktpa to 300 ktpa and the addition of a refinery at the Tuticorin facility with a capacity of 120 ktpa. Apart from a demand-driven production decline, SILs Tuticorin copper refining and smelting facility had an unscheduled 34-day interruption in production between November and December 2008 due to damage in a cooling tower as a result of the collapse of its foundation.

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Industry Comment Company- wise Refined Copper ProductionRefined Production (thousand tonnes) 2007 2008 293.5 327.7 312.7 339.3 39.8 44.7 646.0 711.7 Growth 2009 297.8 312.8 30.0 640.7 2010 333.4 334.2 15.9 683.4 2009 -9.1% -7.8% -32.9% -10.0% 2010 11.9% 6.8% -47.1% 6.7%

Copper

FY Hindalco SIL HCL Total

2005 217.2 172.0 24.2 413.4

2006 212.7 273.0 36.1 521.8

2006-10 8.9% 14.2% -8.1% 10.6%

C o n s u mp t io nSince 1990, world refined copper consumption grew at an estimated CAGR of 2.8% to 18.4 mt in 2009. This rate of increase was slightly higher than the growth rate for world industrial production over the same period. Asian copper consumption, led by China, has been particularly strong, increasing by approximately 6% from 1990. Asia now represents approximately half of the worlds refined copper consumption, compared with approximately 24% for Western Europe and approximately 18% for the Americas. During 2003-07, world copper consumption increased at an annual rate of 3.8%, followed by stagnation in 2008, and an increase of 1.4% in 2009. Over the period from 2003-09, while consumption in China increased at an annual average of 14.7%, Indias consumption also increased at a high rate of 9.7%. Excluding China, world consumption declined at an annual rate of 1.3%, with significant declines in US, Japan, and EU. High industrial growth in China has also contributed to copper consumption growth in neighbouring countries, most notably Taiwan, South Korea, and Japan, as these countries use copper to produce machinery and equipment for export to China. The strong demand for copper in Asia has been driven by the increasing standard of living in this region as well as production of value-added products for export to the developed world. World refined copper consumption remained stagnant in 2008, compared with an increase of 6.7% in 2007. Copper consumption had previously declined 0.2% in 2005, as a substantial increase in copper consumption in China (growth of 8.7%) was offset by decline in US, Japan, Korea, and EU. In these countries, consumers delayed purchases because of higher copper prices and instead drew down existing stocks of copper. During 2006, consumption growth of 2% was primarily driven by high consumption growth in Germany, India, and Italy; which offset declines in China and US. During 2006, consumption was affected by high copper prices and de-stocking in China. Chinas consumption declined 1.2% in 2006. However, as this does not include extensive draw-down in inventories by Chinas State Reserve Bureau, thus actual consumption was much higher. US consumption declined 7.1% in 2006 because of worsening of demand from residential construction. During 2007, consumption growth of 6.7% was driven by a 35% increase in China, accompanied by higher growth in India, and recovery in demand in key developed markets such as US and Korea. The power industry accounts for around half of Chinas copper consumption. According to the National Development and Reform Commission, an additional 95 Gigawatts (GW) of capacity was connected to the electricity grid in 2007. During 2008, world refined copper use remained depressed in two of the main usage regions, the EU and the US. Chinas apparent usage increased by 5.6% (+270 kt), which represented a sharp

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Industry Comment

Copper

decline from growth of 34.62% (+1,250 kt) in 2007. World copper consumption increased 0.7% (+31 kt) in 3Q2008, but declined 3.2% (-141 kt) in 4Q2008, and 4.8% (-219 kt) in 1Q2009, primarily because of a severe economic downturn and contraction in demand for metals. Indeed, a comparison of key Chinese copper user sectors in 2008 indicate significant declines, notably in air conditioning (11.5%), generating equipment (9.7%), and computers (7.5%). World copper consumption increased 1.4% in 2009, driven by 39% growth in Chinese consumption. Excluding China, world consumption declined 13.6% in 2009 or by 1.76 mt. A number of factors have contributed to increased consumption in China including the large fiscal stimulus package, stock building by Chinas Strategic Reserve Bureau, producer restocking, reduced availability of copper scrap and a positive price differential between the Shanghai Futures Exchange and the London Metal Exchange in the first half of 2009. Chinas increased demand for refined copper has been a significant factor in the strong rise in copper prices over the course of 2009. Indias copper consumption also increased 9.5% in 2009, compared with a decline of 0.1% in 2008. By comparison, copper consumption declined at double-digit rates in most developed countries, reflecting reduced construction and manufacturing activity. In the US, the worlds second largest copper consumer, copper consumption is estimated to have declined by 16% (- 316 kt). Lower copper consumption was partially attributable to declining construction activity and lower production of consumer durables. World Refined Copper ConsumptionRefined Consumption (thousand tonnes) 2007 2008 2009 4,863 5,134 7,144 2,123 2,021 1,706 1,392 1,398 1,118 1,252 1,184 876 856 815 936 764 635 530 688 717 462 603 582 494 365 379 215 516 515 564 345 318 337 330 382 324 391 365 318 301 242 221 206 256 216 3,115 3,158 2,889 18,109 18,102 18,350 Growth 2010E 6,350 1,700 1,340 976 830 583 412 515 330 663 318 365 360 295 240 3,003 18,280 2009 39.2% -15.6% -20.0% -26.0% 14.8% -16.5% -35.6% -15.2% -43.3% 9.5% 6.0% -15.1% -12.8% -9.0% -15.6% -8.5% 1.4% 2010E -11.1% -0.3% 19.8% 11.4% -11.3% 10.0% -10.8% 4.3% 53.7% 17.5% -5.6% 12.6% 13.1% 33.8% 11.3% 3.9% -0.4% 2005-09 16.3% -6.7% 0.3% -7.3% -0.1% -5.8% -3.4% -6.5% -16.7% 11.0% -3.1% 0.0% 2.5% -4.3% -2.7% -2.2% 1.9%

CY China US Germany Japan Korea Italy Russia Taiwan France India Mexico Brazil Turkey Poland Thailand Others Total

2006 3,614 2,096 1,398 1,282 828 801 693 643 460 407 348 339 302 275 251 3,239 16,974

Overall world refined copper consumption is expected to decline 0.4% in 2010 to 18.3 mt, with most of the decline in the latter half of 2010. The decline is primarily because of the expectation that China's apparent demand will moderate as a result of lower inventory build-up. Excluding China, world copper consumption is expected to increase 6.5% in 2010 to around 12 mt. According to ICSG, world usage increased 8.7% (yoy) during 5M2010 to 8.02 mt mainly owing to the continued recovery from 2009 weak usage levels in US, Japan, and the EU; and a 5% (yoy) www.imacs.in 27

Industry Comment

Copper

increase in Chinese apparent usage. Usage increased by 3.6% in China, 11.5% in the EU, 37% in Japan and 4.5% in the US. In the US, copper consumption is expected to remain flat, compared with a decline of 16% in 2009. US economic conditions have improved, with manufacturing production growing and, in April 2010, housing starts reached the highest level since November 2008. An expected increase in copper-intensive activities is likely to support copper consumption in the US. Copper consumption in the EU is expected to decline in 2010, reflecting the adverse effect of recent instability in regional financial markets. High sovereign debt in many European economies is likely to dampen economic growth in the short term as austerity measures are implemented. Over the long-term, China is expected to remain an important driver of growth in world copper consumption as its rapid urbanisation and industrial transformation continue. Demand for copper in the construction of housing and infrastructure and the expansion of electricity grids is expected to support growth in copper consumption. In the past few years, China has imported large volumes of copper scrap for reprocessing into secondary refined copper for domestic consumption. Growth in World Refined Copper DemandCY 50% 40% 30% 20% 10% 0% 1993 -10% -20% -30% 1995 1997 1999 2001 2003 2005 2007 2009 2011 World China World (excl. China)

World copper demand is facing threat from a number of substitutes. Aluminium substitutes for copper in power cables, electrical equipment, automobile radiators, and cooling/refrigeration tube; titanium and steel are used in heat exchangers; optical fibre substitutes for copper in some telecom applications; plastics substitute for copper in water pipe, drain pipe, and plumbing fixtures; and composite materials substitutes for copper in jet aircrafts. Aluminium, being cheaper and lighter than copper, is also being used in manufacturing absorbers for solar collectors. However, in electric motor drive systems, copper rotor motors and magnetic steel motors are replacing aluminium in the rotor `squirrel cage structure of the motor. The electrical conductivity of these materials is up to 60% higher than aluminium, resulting in a more energy efficient induction motor. www.imacs.in 28

Industry Comment

Copper

Amongst metals, aluminium consumption is beneting from its price competitiveness relative to other metals, especially copper, for which it can be substituted in some uses. In the case of However, since June 2002, aluminium prices have declined relative to copper, and were on average only 32% of copper prices in 2009. World Aluminium and Copper PricesUS$/tonne (t) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010F Aluminium Copper

I n d ia s C o p p e r C o ns u mp t io nAs can be seen from the figure below, Indias copper consumption remained at around 100-150 ktpa during the 1990s. The slow growth in consumption was primarily because of limited domestic capacity and supply, high import duties on both concentrates and finished products, inadequate and low level investments in Indias telecom and power infrastructure, and high prices. However, over the period 2003-09, consumption has increased at an annual rate of 9.7%. Indias copper consumption increased 9.5% in 2009 to an estimated 564 kt in 2009. By comparison, consumption declined 0.1% in 2008. Consumption growth was high till 2007, but slowed down in 2008 and 2009 because of continued high copper prices, and the slowdown in industrial production and construction activity. Indias copper consumption is expected to grow at around 15% to around 650-660 kt by 2010 driven by growth in key end-use segments such as electricity, construction, consumer electronics, and industrial machinery and equipments. Data for Indias apparent copper consumption is somewhat unreliable as data is limited. As a result, apparent consumption, rather than actual consumption, is commonly used as an approximation. Apparent consumption is defined as domestic production plus net imports minus reported stock changes. It therefore represents the volume available for consumption adjusted for reported stock changes. Although apparent consumption is a good approximation of actual

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Industry Comment

Copper

consumption, it is subject to many measurement errors. For example, unreported changes in stocks, either at the retail or wholesale level, can result in large differences between apparent consumption and actual consumption. Indias Copper Consumption and GrowthCY, Thousand tonnes 850 750 650 564 550 450 350 263 250 150 50 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010F2011F 116 140 160 200 -10% -20% 240 293 295 307 335 0% 397 407 516 515 20% 10% Consumption Growth 5-year CAGR (2005-09) 663 40% 720 30%

Worldwide, consumption of base metals such as copper and aluminium is positively related with industrial production and income. The average world elasticity of demand for copper with respect to industrial production is 1.1. However, the estimated elasticity of demand with respect to industrial production is high at 1.6 for emerging markets and developing countries, as compared with 0.7 for developed economies. Per capita consumption of copper also tends to rise with income. According to estimates by the International Monetary Fund (IMF), some countries reach saturation in their per capita consumption at income levels between US$15,00020,000 purchasing-power-parity (PPP) adjusted. However, demand can continue to grow at even higher income levels, if industrial production and construction contribute significantly to growth.

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Industry Comment Indias Index of Industrial Production (IIP) and Copper Consumption1993=100 600 500 400 300 200 100 0 IIP Copper Consumption

Copper

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

As depicted in the figure above, Indias copper consumption has increased with increased levels of industrial production and strong growth in construction activity during FY2003-08. Although copper demand stagnated in the early-2000s because of decline in demand from the telecom sector, demand has increased at a healthy rate since 2003 because of a significant increase in demand from the end-user segments. Further, as depicted above, annual growth in copper consumption is related with annual growth in industrial production. With the stagnation in demand from telecom sector, the electrical sector has been the largest consumer of copper. The recent government initiatives (SEB restructuring, the Electricity Act of 2003, and thrust on Transmission & Distribution) have created an environment for rising investments in the power sector. Power generation capacity additions are expected at around 78,700 MW during the 11th Five Year Plan (FY2008-12). Based on the expected capacity expansions during the 11th Plan and associated investments in transmission and distribution, The Working Group on Power for Eleventh Plan has estimated copper requirement of around 0.8 mt during FY2008-12, and 0.81 mt during FY2013-17. The annual per capita consumption of copper in India is currently at 0.47 kg, which compares poorly with Chinas per capita consumption of 5.4 kg, and world average of 2.7 kg. Even though Indias annual per capita consumption has increased from 0.2 kg in 2000, it is unlikely to increase at the same rate as China. Chinas per capita consumption at a given income level is higher than in the other emerging markets, mainly because it has a higher share of industry in GDP. By comparison, Indias industrial sector has a much lower share in GDP. As such, while copper consumption in India is forecast to grow strongly over the medium term, it is not expected to replicate the very strong growth trend evident in China.

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Industry Comment Per Capita Copper ConsumptionKg per annum 25 2000 2009 20 15.9 15 10.7 10 6.9 5.4 5 1.5 0 China US Germany Japan Korea India Italy Russia Brazil 0.5 0.2 5.5 3.3 1.3 1.9 1.7 13.6 11.8 10.6 8.9 18.3 19.2

Copper

2.7 2.5

World

P r ic e sCopper is an internationally traded commodity, and its prices are effectively determined by the three major metals exchangesNew York Commodities Exchange (COMEX)2, LME and Shanghai Futures Exchange (SHFE). The prices on these exchanges generally reflect the worldwide balance of copper demand and supply, but are also influenced significantly from time to time by speculative actions and by currency exchange rates. Copper demand and price tend to follow economic cycles and, therefore, copper price has historically experienced significant fluctuations. For the period 1990-2009, the LME price of copper averaged US$3,073/t (US$1.39 per pound or lb), and ranged from a high annual average price of US$7,118/t (US$3.23/lb) in 2007 to a low annual average price of US$1,560/t (US$0.71/lb) in 2002. The COMEX price of copper averaged US$1.40/lb from 1990 to 2009, and has ranged from a high annual average price of US$3.22/lb in 2007 to a low annual average price of US$0.72/lb in 2002.

2

COMEX is now a division of the New York Mercantile Exchange (NYMEX), which is the world's largest physical commodity futures exchange, located in New York City.

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Industry Comment Year ly Average of World Copper Prices8,000 7,000 6,000 5,000 LME (US$/t)-LS COMEX (US$/lb)-RS

Copper

3.5 3.0 2.5 2.0

4,000 1.5 3,000 2,000 1,000 0 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 (7M) 1.0 0.5 0.0

Because of a global shortage situation since 2003 caused by slow growth in production and rising demand, prices of copper cathode maintained a rising trend since 2003, though there was a moderation in late-2006. Average LME price per tonne (for grade A cathode, minimum 99.9935% purity, CIF European ports) increased 82.7% in 2006 to US$6,722/t, as compared with an average annual increase of 33% during 2003-05. The average price reached a high of US$8,046/t in May 2006, before declining to US$6,675/t in December 2006. However, copper prices were extremely volatile, with daily volatility almost doubling in comparison to the same period a year ago. This was largely the result of growing concerns about the global macro economic outlook affecting demand in the wake of high crude prices and uncertainties about mine supply. High prices are discouraging consumers, with the resulting price weakness encouraging good buying interest, so supporting prices and increasing volatility. During 2007, prices fell very rapidly in early January 2007, on chart based selling. Several labour contracts were resolved in December 2006 removing a key factor deterring selling. Exchange stocks also continued to edge upward. However, after a decline to US$5,677/t in February 2007, copper prices rebounded to US$8,009/t in October 2007 led by a surge of copper imports into China, in part due to re-stocking. Lower copper prices in the second half of 2006 and early 2007 encouraged the Chinese Government and copper users to rebuild stocks. Chinas copper imports increased 54% in 2007 to 2.8 mt, compared with a decline of 23% in 2006. The resulting tight supply-demand balance resulted in a steady decline in copper stocks on the LME. Prices had also increased during February-October 2007 because on a monthly basis, mine production had been decreasing since May 2007, reflecting production problems in Mexico, Indonesia and Chile. However, in late October 2007, the tight demandsupply balance began to moderate, resulting in a steady increase in stocks and declining copper prices. On an annual basis, copper prices increased only 5.9% in 2007 to US$7,118/t (US$3.23/lb), compared with an annual average of 55.8% during 2004-06. On a quarterly basis, average LME prices declined from US$7,068/t in 4Q2006 to US$5,933/t in 1Q2007, but increased to US$7,641/t in 2Q2007.

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Industry Comment

Copper

During 2008, copper prices increased sharply to average US$8,685/t in April 2008, primarily because of a production deficit, drawdown of stocks, and investment demand. Prices peaked at US$8,985/t on July 3, 2008, subsequently moderating to an average of US$8,414/t in July 2008. Between August-December 2008, prices declined 63% (or by US$5,342/t) to US$3,072/t in December 2008. Prices averaged US$3,905/t in 4Q2008, compared with US$7,680/t in 3Q2008. On an annual basis, prices declined 2.3% in 2008 to average US$6,956/t. Prices declined because of a sudden decline in demand, strengthening US dollar, concerns over the global economy, and rising physical exchange inventories. The current financial crisis raises issues for the future of commodities, including base metals, as an asset class. While the counter-cyclical relationship between commodities and equities/bond markets would suggest that commodities could see a surge in interest from the current turmoil as they can offer investors a safer haven from inflationary pressures, commodities are still categorised as a riskier asset class. During 2009, prices recovered since February 2009 initially due to supply problems rather than any initial demand recovery. Labour disputes significantly curtailed production but there were many issues impinging on supply, notably declining ore grades; lack of equipment and skilled labour; power and water constraints; project delays; accidents; and rising costs. Even with the sharp decline in prices since mid-2008, prices remained well above supply costs compared with other metals, and announced cuts in production were less. Prices also increased because of a recovery in demand primarily from China. Although demand declined since October 2008, it has recovered from April 2009 driven by Chinese demand. During 2009, China remained the primary driver behind the recent increase in prices, and has compensated almost entirely for the contraction in the demand of copper in the developed countries. Refined stocks had increased from 962 kt at end-October 2008 to 1,323 kt in February 2009, but since then declined to 993 kt in July 2009. Copper prices increased from their 2009 lows of US$3,428/t in 1Q2009 to US$6,648/t in 4Q2009. However, annual average price of US$5,150/t in 2009 was still 26% below the average for 2008. During 7M2010, copper prices averaged US$7,074/t, representing an increase of 68% over 7M2009. The trend of upward prices that commenced from January 2009 continued till April 2010 followed by a significant decline during May-June 2010, followed by a 4% increase in July 2010. Higher copper prices till April 2010 were supported by strengthening growth in the world economy and continuing strong demand from China. However, since mid-May 2010, economic uncertainty associated with the European debt crisis have resulted in copper prices weakening on the world market.

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Industry Comment Monthly Trends in International and Domestic Copper PricesAverage per tonne 11,000 Avge LME (US$)-LS Cathode Mumbai (Rs.)-RS 9,000

Copper

450,000 400,000 350,000 300,000

7,000

250,000 200,000 150,000

5,000

3,000

100,000 50,000

1,000 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10

0

Quarter ly Trends in Inter national and Domestic Copper PricesAverage per tonne 9,000 Avge LME (US$)-LS Cathode Mumbai (Rs.)-RS 7,000 450 400 350 300 5,000 200 150 3,000 100 50 1,000 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 0 250

Reflecting the global trend of rising prices, domestic refined cathode prices per kg in Mumbai increased 24.2% in FY2008 to Rs. 372/kg, compared with an increase of 70.8% during FY2007, and 20.9% during FY2006. Prices increased by an annual average of 37% during FY2006-08. During FY2009, domestic prices increased to Rs. 397/kg in July 2008, but subsequently declined 57% to Rs. 172/kg in March 2009. Average prices declined 17% in FY2009 to Rs. 308.5/kg. The decline in domestic prices was less than the decline in world prices primarily because of the sharp rupee depreciation. Indian producers benchmark their prices to landed cost of imports. However, prices have recovered in FY2010-11, with average prices in Q4FY2010 being 87% above their levels of Q4FY2010. On an annual basis, prices declined 13% in FY2010 to average Rs. 268/kg. During

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Industry Comment

Copper

Q1FY2011, although LME prices declined 2.8% (qoq) to average US$7,027/t, domestic copper prices actually increased 11.2% (qoq) and 82% (yoy), primarily because of the rupee depreciation and continued recovery in domestic demand. Quarter ly Trends in Domestic Copper PricesAverage per tonne 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 Q1FY03 Q4FY03 Q3FY04 Q2FY05 Q1FY06 Q4FY06 Q3FY07 Q2FY08 Q1FY09 Q4FY09 Q3FY10 Price-LS Yoy Growth-RS 120% 100% 80% 60% 40% 20% 0% -20% -40% -60% -80%

Historically, copper prices have moved predictably when stock levels fall below a critical level. Over the last few decades, the trend in stocks and prices suggest that the critical level declined from 6 weeks of consumption in the 1980s and early 1990s to the present level of 4-5 weeks. Over the past decade, global refined stocks increased from 943 kt (28 days of usage) at end-1995 to a high of 2,048 kt (49 days of usage) in 2002, but declined thereafter to 999 kt at end-2007 (21 days of usage). The reduction in copper inventories resulted from several factors, including high growth in consumption, slow growth in Chiles copper production, and strong positions taken by investment funds in commodities markets. During 2008, copper inventories increased to 1,164 kt (5 weeks of usage) as demand declined in the latter-half of 2008. However, the inventory situation again declined to less than 20 days of usage by mid-2009 as Chinese buyers took advantage of lower copper prices to increase their strategic reserves. During 2H2009, inventories increased to 27 days of usage by end-2009. During 2010, although copper inventories have remained in a narrow range at 1.5 mt at the end of each month, strong 8.4% (yoy) increase in consumption during 5M2010 resulted in inventories declining to around 25 days of usage at endMay 2010. During 2010, the market seemed to have largely ignored the relation of higher inventories to prices, primarily because of the strong growth in demand and prospects of sustained recovery.

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Industry Comment World Refined Copper StocksAt end1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 Quantity-thousand tonnes Stocks (days of usage)

Copper

50 45 40 35 30 25 20 15 10 5 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E

The sharp rise in copper prices since early-2009 is largely attributable to a significant increase in Chinas demand fo