Zinc Long Term Report 2010

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2 Zinc Long Term Report 21 Kunal Shah - Research Head kunal.shah@nirmalbang.com Tel: Swati Jain - Research Associate swati.jain@nirmalbang.com Tel: SHORT-TERM OUTLOOK Buy/Sell Range Target Stop loss Zinc(LME) Buy Below 235 Zinc(MCX) Buy Below 15 Respecting this swiftly metamorphosing global business environment, Talks have again shifted to era of Sustainability signifying a radical shift from the period of Recessionary Uncertainty. We are back to an age of High Consumption rate of matter and energy resources. Modern Industrial Houses, or in broader sense, Modern Industrial Nations are portraying unprecedented demand for copper, zinc, aluminum, Materials, Coal, Oil, Natural GAS and there is no end for this list. Metals industry, being an indispensable part of any economy, LONG-TERM OUTLOOK Buy/Sell Target is forming the backbone of this Development. Its contribution is significant for broad gamut of activities ranging from Long Zinc(LME) Sell Zinc(MCX) Sell Term Infrastructure to Health Care, Jewelry and even to daily chores. OVERVIEW OF ZINC The study of Zinc as a Metal constitutes an important ingredient of detailed industry analysis because of its forward and Backward Linkages. Zinc is obligatory for our life style and in terms of quantity of production, secures fourth rank among all available metals in world production - surpassed just by iron, copper and aluminum. With perspective of Non Ferrous Metals, It stands at third place in terms of uses. Zinc's existence can be traced back to the time as early as the time of evolution of earth's Crust. This antique presence makes it very pervasive (Assuming Continental Drift theory to be true!). It is found plentifully on the earth making it 23rd most available element. Its uses are not confined to any particular field and comprise of a broad spectrum of activities as diverse as purifying fats for soaps to a Fungicide and even Sperm Development in Human Beings. Around three quarters of its total production are consumed in metal form and Industries like Agriculture and Painting consume the rest of it. USAGE AND APPLICATION Considering Fundamental characteristics of Zinc like its relative non-reactivity in air or water and it being most electropositive of the common metals, Zinc can be put to several applications. These applications can be understood in terms of Primary Applications where it is being used directly for Galvanization, making Alloys, Brass and Secondary Applications where it indirectly serves Industries like Construction, Transportation, and Machinery etc. 1

3 Zinc Long Term Report 21 7% 4% Zinc Primary Usage PRIMARY USES: Galvanized steel industry accounts for more than 45% for consuming zinc. Rest 55% zinc is being used in making 16% 7% 47% Zinc Usage Galvanizing Brass Zinc base alloy Semi manufacturing Compounds Others Brass, zinc base alloy, semi manufactures, chemicals etc. Zinc is the fourth most metal used after aluminum, iron and copper. Being non active in air and water, it is very significant as a protection against galvanic corrosion in steam boilers, and on the hulls of steel ships. These Features also facilitate the conservation of Copper, Brass and Bronze. 19% Source : ILZSG Report Consumer durables 9% Zinc Secondary Usage Infrastructure 9% Consump on 1% SECONDARY USES: Apart from the primary use zinc is used in many sectors indirectly through galvanized steel. Galvanized steel is used in construction accounting 48% of the total world zinc consumption. Rest other metals is used in transportation, machinery, consumer durables and infrastructure. It is also used automobile industries for die casting and in car bodies, pipes, sheet roofing & household appliance in infrastructure, white pigment in paints, containers of batteries and machinery. Source : ILZSG Report Machinery 1% Transport 23% Construc on 48% Around a quarter of total consumption is facilitated in the form of zinc compounds mainly by the rubber, chemical, paint and agricultural industries. Zinc is not only confined to all these industries only but is also a essential element for proper growth and development in humans, animals and plants. It is the second most common trace metal after iron, naturally found in the human body. Dye castings are precision castings that can be mass produced. Rolled zinc is used for architectural and building applications and for dry cell batteries. Zinc oxide is mainly used in tyre and rubber products. Many other zinc chemicals are used in a wide range of applications. 2

4 Zinc Long Term Report 21 Galvanization is a chemical process of coating a zinc layer on metals (Steel and Lead) for corrosion protection and water proofing. The steel gets coated in layers of zinc because rust won't attack this protective metal. For various industrial applications, galvanized steel is an essential fabrication component. When steel is submerged in melted zinc, through chemical reaction it adheres to the steel permanently. Therefore it is not just the coat to steel but it becomes the part of steel after galvanization, where zinc reacts with iron molecules to galvanize the steel. This prepared layer is a mixer of zinc and iron that gives steel the ability to withstand corrosion- inducing circumstances, such as saltwater or moisture. Zinc also protects the steel by acting as a "sacrificial layer." If, for some reason, rust does take hold on the surface of galvanized steel, the zinc will get corroded first. This allows the zinc that is spread over the breach or scratch to prevent rust from reaching the steel. The degree of galvanizing is usually represented as the zinc's weight per surface area rather than the thickness of the zinc, because this gives a better representation of how much metal has been applied. Steel often gets galvanized after individual parts have been formed, such as braces, nails, screws, beams, or studs. However, raw galvanized steel in sheets will withstand some bending and forming without flaking. Galvanized steel is used everywhere in infrastructure, construction, transportation tools. Galvanized steel can be found almost everywhere. You might be living in a steel frame house. You are no doubt surrounded by steel parts in your car that allow it to emerge from rainstorms unscathed. Hence secondary use of zinc can be summarized as under: 1. Zinc is used in making coin, pennies, used for die-casting in automobiles Industry, making battery parts, purifying fats for soaps. 2. Zinc is a non corrosions product which supports for increasing the life of Buildings and mode of transports like rail road car linings. 3. Zinc works as a substitute of tin and lead pipes and used in Heat-exchange equipment in oil refineries, crude petroleum & natural gas extraction and Gold extraction. 4. Zinc is also used as a fungicide for prevention and control of agricultural plants diseases. 5. Zinc is a special element in humans and animals which has a role in normal growth, taste and sperm development. 6. The more important zinc compounds are the oxide (ZnO), used in ceramics, rubber industries and in ink production. Zinc sulfate (ZnSO4) is used in textile industry and the treatment of zinc deficiency in soils. Zinc chloride is used to preserve wood and as deodorant in several fluids. This compound is also used in dry cells and in paint production. GLOBAL DEMAND AND SUPPLY SCENARIO: Supply Dynamics Strong global zinc prices are threaten to increase this market surplus pace intact where producers are finding no reasons for production cut where they see some profit in their balance sheet. Production of zinc is expected to grow by 25, tonnes to 3, tonnes per quarter. Below are some of the more significant recent developments for zinc production in the market in 21. Zinc Market developments: The global zinc market was in surplus by 151, tonnes in the first 7 months of the year the Lisbon based International Lead and Zinc Study Group's latest monthly bulletin showed. Global refined zinc use was million tonnes compared with 6.1 million in January to July 29. World refined zinc output rose to million tonnes from million a year earlier. 3

5 Zinc Long Term Report 21 China produced 3,327, tonnes of refined zinc in the first 8 months of the year up 23.9% from a year earlier. Output of mined zinc rose by 34.6% over the same period to reach 2,44, tonnes. Bulgaria's largest zinc and lead smelter KCM is planing to produce 72, tonnes of zinc, up 5.9% on the year. Zinc output rose by 5,4 tonnes to some 37,1 tonnes in the H1 of 21 on an annual basis. Horsehead Holding Corporation said that its Monaca plant's zinc oxide and metal refinery remained temporarily shut the plant was closed following an incident in late July. The company expected to restart the zinc oxide and refined zinc metal columns in stages beginning in November. Output of zinc oxide and metal was expected to return to pre-incident levels by January 211. In terms of total production capacity, we can see an upward surge in almost every country and resultantly at global scale except few countries like Ireland and Australia. The most positive aspect that can be analyzed is increased capacity utilization which is easily discernable for almost all countries. Even countries like Ireland which are witnessing fall in total production capacity are sustainably increasing their capacity PRODUCTION AT ZINC MINES utilization, but still level of capacity utilization is very low as Country (E) 211(E) Cap Pro Cap, Pro Cap Prod. Cap. Prod. Cap. Prod. China 2,971 2,971 3,348 3,339 3,492 3,492 3,592 3,592 3,692 3,692 Peru Australia 1,718 1,498 1,62 1,426 1,563 1,476 1,689 1,67 1,689 1,67 United States Canada Kazakhstan Mexico India Ireland Total of major countries 8,115 7,798 8,569 8,222 8,776 8,395 8,974 8,585 9,92 8,685 World

6 Zinc Long Term Report 21 per aspirations of some major players in the market. China, the biggest mine producer of zinc in the world is estimated to increase its mine production by 1 lack tonnes to 3.59 million tonnes in the year 21 from the production of 3.49 million tonnes in 29. In terms of India, it is fairly constant which shows a negative impact when it is compared to other swiftly growing economies. This production is likely to rise in China, India and Mexico countries. PRODUCTION OF ZINC (REFINED) China is the largest refiner of zinc across the world followed by Canada, India, Japan and South Korea. China has the capacity of Zinc refineries around 4.5 to 4.8 million tonnes annually. With respect to the demand & prices and supporting conditions like availability of resources, refined zinc production is moving up across the world. Total world production is expected to increase with the decreasing rate and in the year 21 the world zinc production is estimated to increase to million tonnes up by 4.61% from previous year mainly from India, Japan, South korea and peru. China's zinc refined production is estimated to decrease to 4.38 million tonnes from 4.41 million tonnes in 29 on account of some production cuts in some major mines like Shenzhen Zhongjin Lingnan, China's third largest zinc producer. This smelter has Country Cap. Prod. Cap. Prod. Cap. Prod. Cap. Prod. Cap. Prod. China 4,475 3,721 4,81 3,89 5,116 4,416 4,914 4,384 4,914 4,834 India , Japan Kazakhstan South Korea Spain Canada United States Brazil Mexico Peru Australia Total of major countries 9,758 8,689 1,442 9,15 1,81 9,55 1,876 9,63 1,851 1,48 World 13,317 11,361 14,36 11,647 14,419 11,695 14,481 12,236 14,496 12,742 5

7 Zinc Long Term Report 21 halted its production for some months to cope with the provincial government's investigation on a toxic discharge of thallium. in tonnes Total Supply of Zinc in China(Quaterly) 3/1/27 6/1/27 9/1/27 12/1/27 3/1/28 6/1/28 9/1/28 12/1/28 3/1/29 6/1/29 9/1/29 12/1/29 3/1/21 6/1/21 9/1/21 Import Output China is coming up with some new projects in infrastructure and construction. China's domestic supply is not sufficient to feed the total consumption as china's refined production is decreasing by.7% to 4.38 million tonnes. China's imports have increased by (65%) in third quarter from second quarter and have increased by 82% in the same quarter from the year ago. China's zinc output may grow 15% to 5 million this year end in response to the rising demand. Nonferrous Metals Industry Association told China's Metals Industry is still undergoing its expansion and new zinc capacity of 1.12 million tonnes is under construction or scheduled to be built. in million tonnes World Refined Zinc Consump on % % % % % F 211F World refined zinc consump on China refined zinc consump on Change % Source : Bloomberg and NB Research China's zinc outputs jumped in September to record highs as smelters returned to full capacity from maintenance shutdowns and to benefit from higher metal prices. According to the National Statistics Bureau daily refined zinc output surged 2.5% m o m to tonnes in September up 24.1% y o y. China produced a total of 55 mt of refined zinc in September with production during the first nine months of the year coming in at 3.83 million mt up 23.8% year on year. ZINC DEMAND World annual consumption of zinc was million tonnes in the year 29, 2.9% less than previous year. China is biggest consumer of all base metals which accounts for the more than 4% of the total world zinc consumption. It consumed around 4.1 million tonnes in 29 out of the total world production of zinc. New projects for property and housing market developments in china in year 21 is increasing the demand for all the base metals including steel which shows the demand for zinc as well. 6

8 Zinc Long Term Report 21 ZINC MARKET IN A FLATTENED WORLD - INTERNATIONAL TRADE BALANCES OF ZINC This chart shows a strange trend in world zinc market which had an increasing market till 29 when it was at peak but is expected to slide down starting from current year with respect to the increase in demand. As per the International Lead and Zinc Study Group, the world refined zinc market will likely remain in surplus in 211, as output is expected to continue to grow quickly in China, India and Mexico. ILZSG predicted the zinc market will be in a 233,-metric-ton surplus in 21, and will experience a smaller surplus of 161, tons in 211. The industry group 2.5 Implied World Market Balance Of Zinc 2.33 forecasts refined zinc demand will rise 13% to 12.3 million tons in 21 and 6.3% in 211 to 13.7 million tons. in lack tonnes In 21, demand will likely be 24% higher in Europe and 11% higher in China. China is expected to see the biggest demand growth in 211 at 8.8% followed by a 5.1% increase in Europe and a 4.3% increase in the U.S. ILZSG expects refined zinc F 211F output will increase by 11% this year to million tons and 5.6% next year to million tons. Source : ILZSG Report and NB Research This year's increase is largely due to the opening of Hindustan Zinc's new Rajpura Dariba refinery in India and an expected 14.3% growth in China. ILZSG said zinc mine output will likely be 1.7% higher this year at million tons and 6.6% higher in 211 at million tons. Output will likely soar by 24% in China this year, while in 211, production is expected to increase in China, India and Mexico and mothballed mines will be restarted in Portugal and the U.S. This plummeting marketing is attributed to various factors which are being shown in coming sections of the report. 7

9 Zinc Long Term Report 21 6 China's Imports of Refined Zinc China imports from India, North Korea, South Korea, Kazakhstan, Australia and Namibia. Zinc imports are 5 increasing since last two quarters in the current year in China In tonnes 4 3 with respect to the increase in demand. China has imported less quantity in this quarter compare to the same quarter in 2 previous year due to the sufficient increase in the production. 1 Kazakhstan, six largest producer of zinc, exports the largest amount to china accounting almost 4% of the total exports. 1/1/28 11/1/28 12/1/28 1/1/29 2/1/29 3/1/29 4/1/29 5/1/29 6/1/29 7/1/29 8/1/29 9/1/29 1/1/29 11/1/29 12/1/29 1/1/21 2/1/21 3/1/21 4/1/21 In the year 29, Kazakhstan exported nearly 83k tones where India has exported only 6k tones to the china. Nkorea Skorea Kazakasthan Namibia India in thousand tonnes Steel produc on in China 1/1/28 3/1/28 5/1/28 7/1/28 9/1/28 11/1/28 1/1/29 3/1/29 5/1/29 7/1/29 9/1/29 11/1/29 1/1/21 3/1/21 5/1/21 7/1/21 Produc on of Steel in China % Change Source : Bloomberg 2.% 15.% 1.% 5.%.% -5.% -1.% -15.% Steel counters which accounts for major demand for zinc underperformed the market in recent months, mainly on concerns over rising iron ore and coking coal prices and slowing downstream demand. China's steel production was 51.6 million tonnes in the month of August down by.2% from the previous month but was up by 1.9% from the same month year ago where production of steel products has also increased to 1 million tonnes in the month of September from million tonnes in the previous month. On the other hand, steel demand has been softening due to slowing construction demand which is expected to rise in the coming months as off-seasons in summer have almost been completed. In response to the unfavorable demand and supply dynamics, steel mills started to hold back production which will again come in the picture now. 8

10 Zinc Long Term Report 21 FACTORS AFFECTING PRICE OF ZINC in tonnes LME Zinc Ware House- 3 month price comparision /22/28 8/22/29 8/22/21 LME stocks(lhs) Zinc Price US$/tonne 1. LME Official Warehouse Inventory Data: Prices are hugely impacted by quantum of Increase and decrease in LME stocks data. Generally fall in prices in caused by Piling up of inventory and opposite is the case in situation of fair flow of inventory (assuming other factors to remain constant). Though since last few years, this trend is not being followed very strictly, it is still the most important factor affecting pricing of zinc. For example Zinc prices corrected by almost 36% in 2 quarters of the 21 where continuously building LME Ware House stocks also pushed the prices to go down. 2. The USD exchange rate and Zinc US$/tonne US Dollar and Zinc prices 1/2/28 2/2/28 3/2/28 4/2/28 5/2/28 6/2/28 7/2/28 8/2/28 9/2/28 1/2/28 11/2/28 12/2/28 1/2/29 2/2/29 3/2/29 4/2/29 5/2/29 6/2/29 7/2/29 8/2/29 9/2/29 1/2/29 11/2/29 12/2/29 1/2/21 2/2/21 3/2/21 4/2/21 5/2/21 6/2/21 7/2/21 8/2/21 9/2/21 1/2/21 Zinc prices on LME US Dollar(RHS) Inverse relationship between US$ and Zinc prices is clearly visible form the following chart representing comparison between the two variables. US Dollar Index represents US currency against basket of other major currencies shows the demand for the currency. This chart indicating whenever there is demand for US currency there is less demand for other riskier assets. Current scenario indicating the continuous weakness in the Dollar index due the some rumors in the market like US Government is planning for monetary easing dubbed as QE2. 3. Macroeconomic factors: ISM Manufacturing PMI /1/26 6/1/26 9/1/26 12/1/26 3/1/27 6/1/27 9/1/27 12/1/27 3/1/28 6/1/28 9/1/28 12/1/28 3/1/29 6/1/29 9/1/29 12/1/29 3/1/21 6/1/21 9/1/21 US EUROPE CHINA(RHS) a. ISM manufacturing PMI The Institute of Supply Management (ISM) Manufacturing Purchasing Managers' Index (PMI) number is compiled from a survey of purchasing managers which shows the demand for raw materials in the market. This index plays a significant role in analyzing the performance of the any economy. When the ISM Manufacturing PMI number is above 5, it indicates the manufacturing sector is expanding, which means the economy is growing and vice-versa. 9

11 Zinc Long Term Report 21 Economic activity in US in the manufacturing sector expanded in September for the 14th consecutive month, and the overall economy grew for the 17th consecutive month. ISM manufacturing PMI is also moving up in China and Europe, showing healthy performance of the companies in manufacturing sector in the economy. b. US housing data US Exis ng home sales (Quarterly) 3/1/26 11/1/26 7/1/27 3/1/28 11/1/28 7/1/29 3/1/21 in % New home sales data (Quarterly) /1/26 11/1/26 7/1/27 3/1/28 11/1/28 7/1/29 3/1/21 in % Pending home sales data (Quarterly) /1/26 1/1/26 5/1/27 12/1/27 7/1/28 2/1/29 9/1/29 4/1/21 in % /1/26 Housing starts (Quarterly) 9/1/26 3/1/27 9/1/27 3/1/28 9/1/28 3/1/29 9/1/29 3/1/21 9/1/21 Demand for zinc has a direct correlation with housing demand, future aspirations and housing prices in US. Impact of Sub Prime Crisis is easily perceptible from US housing sales data which had a % growth since 26 which came to very negative levels in 29. With the help of stimulation plans and other measures by the Obama Govt., Recovery is taking place and so as the housing sale which is a positive symbol for future zinc prices. A very positive trend can be observed from new home sales and pending home sales data. c. Total vehicle sales /1/21 1/1/21 5/1/22 12/1/22 7/1/23 2/1/24 9/1/24 4/1/25 11/1/25 6/1/26 1/1/27 8/1/27 3/1/28 1/1/28 5/1/29 12/1/29 7/1/21 in million US Total vehicle sales The world market for Auto sales has been very volatile in recent past. This volatility can be attributed to swift adjustment plans of automakers as per macro Economic Situations. Vehicle demand has a very positive correlation with zinc prices because of its use in steel in galvanization in the production. 1

12 Zinc Long Term Report 21 As visible from chart shown above, US vehicle demand registered a huge slump in recessionary period eventually resulting in decreased demand for zinc by automakers. But the recent trend has shown upward tendency in near past and this drift is expected to be continued at least for short to medium term future. Automakers in China supplied 1.2 million passenger cars to dealers in September, up 19.3 percent from a year earlier which marks a further improvement compared with August when wholesale car sales in the country began to regenerate sales, rising 18.7 percent to 1 million units. Break-neck expansion in the world's biggest auto market has been tapering off since the second quarter as the government aims to keep the economy from overheating. As per industry observers, the upturn in demand since August could extend into October, the peak auto sales season. Sales might remain solid in the winter months if automakers continue to slash prices to drive sales. Fears that Beijing may scale back or even scrap its policy incentives in 211 will also help drive buyers to the showroom in the fourth quarter. Global demand for hot-dipped galvanized sheet, the major consumer of the zinc metal, will grow 15 percent a year in coming years, mainly from the auto sector. Hence contribution of Auto sector in pricing of zinc is going to be very crucial. d. GDP growth rate(quarterly) US GDP China GDP /1/24 9/1/24 3/1/25 9/1/25 3/1/26 9/1/26 3/1/27 9/1/27 3/1/28 9/1/28 3/1/29 9/1/29 3/1/21 3/1/24 9/1/24 3/1/25 9/1/25 3/1/26 9/1/26 3/1/27 9/1/27 3/1/28 9/1/28 3/1/29 9/1/29 3/1/21 9/1/21 11

13 Zinc Long Term Report India GDP 3/1/24 11/1/24 7/1/25 3/1/26 11/1/26 7/1/27 3/1/28 11/1/28 7/1/29 3/1/ Europe GDP 3/1/24 1/1/24 5/1/25 12/1/25 7/1/26 2/1/27 9/1/27 4/1/28 11/1/28 6/1/29 1/1/21 Like every other commodity or metal, demand and supply dynamics of zinc are also expected to be hugely impacted by GDP growth globally specifically in US, China, Europe and India. Higher the GDP, higher the demand and supply forces and vice versa. For all these countries, trend has almost been the same. Highly consistent and higher rate of growth up to late 27 and sudden downfall after 28 for all the countries thanks to subprime crisis. In year 21, except Euro zone all the major economies have witnessed a slow growth. e. Industrial production Industrial production index for any country shows the state of industry development for country and demand for all Industrial raw materials. Again portraying recessionary scenario, it is showing a slump in 28 and a recovering trend recently. It is expected to rise further with greater growth in near future and eventually the demand for the commodity. 12

14 Zinc Long Term Report 21 % change US Industrial Produc on % change China Industrial Produc on Europe Industrila Produc on /1/21 9/1/21 3/1/22 9/1/22 3/1/23 9/1/23 3/1/24 9/1/24 3/1/25 9/1/25 3/1/26 9/1/26 3/1/27 9/1/27 3/1/28 9/1/28 3/1/29 9/1/29 3/1/21 9/1/21 3/1/21 11/1/21 7/1/22 3/1/23 11/1/23 7/1/24 3/1/25 11/1/25 7/1/26 3/1/27 11/1/27 7/1/28 3/1/29 11/1/29 7/1/21 3/1/21 6/1/22 9/1/23 1/2/25 4/2/26 7/2/27 1/2/28 1/2/21 % change 13

15 Zinc Long Term Report 21 f. Supply And Demand Scenario: Global refined zinc use in 29 fell down 1.8 million tonnes from million tonnes a year earlier. World refined output was million tonnes in the year 29 compared with million in 28. Zinc prices are highly impacted by economic situation and stability in china as it facilitates huge demand for construction and various other purposes. We can observe a huge price slide as demand has come down from China especially from Chinese State Reserve Bureau and some provinces from the country. g. Energy prices: The hindrance to expanding supply of various metals is that it frequently ends up lagging in demand and supply rises just as demand vanishes. Apart from the cyclical supply and demand dynamics of the metals industry, profit margins can take a hit from high energy prices. One of the key costs of producing metals is fuel and energy. For mining, refining, smelting and transporting metals, high energy costs can adversely affect the bottom line. The rise in cost of diesel fuel, natural gas and coal, have been the most critical aspects for metals and mining industries. Other Factors Except the above mentioned factors, there are numerous other factors which can impact prices of zinc in short run and the long run. Few of them can be Production Cuts Any disruption in the Zinc production Mines Disruptions Strikes Changes in the prices of other substitute metals Economic growth of major countries like US, China, Europe, Japan and India Key interest rates of US, China, India, Japan New capacities added/ production cuts 14

16 Zinc Long Term Report 21 ANALYZING THE TREND, FUNDAMENTALS AND SPECULATIVE TENDENCIES Strong global zinc prices threaten to keep the market in surplus for longer as producers see no reason to cut output even as stocks rise. There is no incentive for anyone to cut back. The longer the price stays up here the more stocks are mounting. The faster than expected improving production of zinc especially from china is indicating that zinc market will be more surplus in the current year end. But better than expected demand from Europe, and U.S. is expected to suck the surplus from the market. This production is basically increasing in China and India. China's annual production is expected to decrease to.7% to the 4.38 million tonnes from the previous year production 4.41 million tones. On traditional fundamental ground, demand/ supply balance table showing that zinc would be in surplus of around 233,- metric-ton in the year of 21 that is expected to decrease with respect to increase in the demand for major economies like china, US and Europe. Industries like infrastructure, construction are improving every now with the growing economies. Demand is raising with depleting LME warehouse stocks which is the vibrant example of demand for the commodity. Stocks have decreased to tonnes in the month of October from the May where it rose to tonnes. On the demand side, steel demand started slowing as downstream consumption weakened. The Chinese government introduced a series of macro-control policies to curb the property market, decreasing demand for construction steel. As more than 3% of China's steel demand comes from property development, a real estate investment growth would define the demand for the steel and zinc. Moreover, steel demand from auto and machinery manufacturing sector also showed signs of improvement. This also put a support to the recovery in zinc prices. Albeit china has hiked its interest rate for the first since 27 to lid its economy growth, which indicates china might slow the demand for the commodities in near term by sucking some liquidity from the market. That will have impact in shorter period where we can expect CPI for the fourth-quarter may come less than before to 2.7 percent year-on-year and will have negative impact on the commodity prices. Whereas, US is planning to come up with second round of quantitative easing dubbed as QE2 to increase the liquidity in the market. If US Govt. comes with stimulus package according to expectations in the market again then it will increase the liquidity in the market. Thus it may have a positive impact for the risky asset prices and in short term we may see spike in the price of zinc. 15

17 Zinc Long Term Report 21 China's Henan province has reduced power supplies to the Zinc and Lead smelters in October 21. That resulted region to shut or cut output. Henan Yuguang Gold and Lead has also reduced zinc production by 5 percent at its 2, t/yr zinc smelter % China's Top Zinc refineries 7.7% 5.13% 6.16% 5.2% 11.41% China's Zinc refineries Huludao Zinc Shaanxi Baoji Dongling Group Shenzhen Zhongjin Lingnan Nonfemet Co Ltd Yunnan Jinding Zinc Zhuzhou Smelter Group Co Ltd Various China Shenzhen Zhongjin Lingnan Nonfemet Co. accounts for 6% of the total production of zinc in china that have the capacity to produce 2.7 lack tones of zinc annually. It halted its smelting of zinc after local government's discovery of excessive thallium discharges into the local river. That may create some shortage of total zinc supply in the market. That may support the prices of zinc in the short term. On the other hand, Zhongjin Lingnan is aiming to produce 42, mt refined zinc and lead this year which is expected to pump the supply in the market again. This effect will likely to cap the upside for the longer term. But if measures taken by Chinese government to curb the rising property market and increase in lending rates later on this year or next year. It may weaken the demand for zinc, thus pressurizing down zinc prices. And demand supply scenario may also pressurize the prices in long term. Disclaimer: This Document has been prepared by N.B. Commodity Research (A Division of Nirmal Bang Commodities Pvt Ltd). The information, analysis and estimates contained herein are based on N.B. Commodities Research assessment and have been obtained from sources believed to be reliable. This document is meant for the use of the intended recipient only. This document, at best, represents N.B. Commodities Research opinion and is meant for general information only. N.B. Commodities Research, its directors, officers or employees shall not in any way be responsible for the contents stated herein. N.B. Commodities Research expressly disclaims any and all liabilities that may arise from information, errors or omissions in this connection. This document is not to be considered as an offer to sell or a solicitation to buy any securities. N.B. Commodities Research, its affiliates and their employees may from time to time hold positions in securities referred to herein. N.B. Commodities Research or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this document. 16