c) Nickel
We believe that of all the base metals, nickel will be the most favorably impacted by Chinese growth over the
balance of this decade. This view has been underlined by a recent interview we had with Inco.
From 2000-2003, Chinese nickel demand has had annual average growth of 33%. The driving force behind this
growth rate has been stainless steel demand, which has seen a growth rate of 30% from 1990 to 2003. Chinese steel
demand now represents almost 20% of global steel demand. Demand for stainless in China is expected to grow by
25% this year (from 4 million tonnes last year to 5 million tonnes) and to average anywhere between 10% and 20%
over the subsequent two years. Per capita consumption of stainless steel is still lower than most developed Asian
economies leaving the Chinese market yet to be fully exploited. China, which currently produces 25% of its
requirements for stainless steel, will need investments in large production facilities to meet this burgeoning demand.
The other 75% of China?s stainless steel requirements is imported from Korea, Taiwan and Japan.
Following several years in the low 40,000 tonnes range, the demand for nickel in China more than doubled during
the last three years to approximately 132,050 tonnes in 2003, a year over year increase of 39%. China?s mine
production was not able to keep up with the increased demand, increasing production by only 15% to about 62,000
tonnes during the same time period. According to Inco, China represented three quarters of the world demand growth
of 7.1% in 2003. 2003 world nickel demand was 1.25 million tonnes of which China and Japan represented 12% and
16%. Inco forecasts that China will surpass Japan as the leading nickel market in the world by the end of 2004.
China?s importance to nickel markets will accelerate through this decade. China is following the same stainless steel
demand timeline pattern as Korea, Taiwan and Japan. Stainless steel demand accelerates when GDP per capita
exceeds US$2,000. 300 million Chinese out of the population of 1.3 billion have now surpassed this point. As the
chart below shows, annual steel demand could reach 13 million tonnes by 2012 at the latest. As a result, we expect
China to consume 260,000 tonnes of nickel by the end of the decade with its domestic mine production failing to
increase materially.
In terms of global supply through 2010, the four largest new potential sources of nickel are Inco?s Voisey?s Bay
(2006 at 50,000 tonnes), Inco?s Goro (end of 2006 at 55,000 tonnes), Falconbridge?s Coniambo (2009? at 50,000
tonnes) and BHP?s Raventhorp (2009?at 50,000 tonnes). If we included every other potential new source of potential
supply (and several of these projects are questionable), we could add another 75,000 tonnes by 2010 to global nickel
supply. Thus, China?s demand alone could take up 260,000 tonnes of this incremental supply of 280,000 tonnes.
Thus, the Chinese market will have an increasing influence on Inco?s operations in Asia. This region, excluding
Japan, is now Inco?s largest market representing 42% of its sales. Including Japan, the region accounts for two thirds
of Inco?s sales. Although the company does not provide a breakdown of sales by countries in this region, we believe
that the Chinese market will become a larger proportion of that geographical segment going forward. Inco has a
presence in China having a sales office in Shanghai in 1994. It also owns a 65% interest in a nickel salts plant near
Shanghai partnering with China?s largest nickel company. As for Falconbridge, it does not disclose its sales to China
or Asia.
In view of the above analysis and the importance of China to world nickel demand, we believe that nickel prices are
at least likely to average between US$6 and $7 per pound for the foreseeable future. This means considerable free
cash flow for both Inco and Falconbridge and argues strongly for overweight long-term positions in both these
stocks.
d) Zinc
In 1996, China consumed 990,000 tonnes and produced 1,121,000 tonnes. At the end of 2002, China was the largest
zinc producer in the world with an output of 1,691,000 tonnes to meet its consumption requirement of 1,610,000
tonnes. For 2003, we estimate that China will have produced 130,000 tonnes less than 2002 due to smelter closures
to meet its consumption of about 1,900,000 tonnes or close to 20% of the world?s consumption. In 1990, China
accounted for only 8% of the world?s consumption.
Chinese zinc consumption has grown 14.7% per year from 1990 to 1993. This has been the key factor in raising the
annual global zinc consumption growth rates to 3.4% from 1990-2003 since the Rest of the World excluding China
grew at a 2.2% annual rate over the same period. Steadily increasing domestic demand has lead to lower Chinese
zinc exports recently. According to data provided by Teck Cominco at its institutional investor conference a month
ago, exports dropped last year by 22% - from 404,000 tonnes in 2002 to 315,00 tonnes in 2003.
In the same presentation, the Company also noted that Chinese imports of zinc concentrates were actually down
modestly as a result of tight supply worldwide (388,00 tonnes last year vs. 406,00 tonnes the year before). China?s
mine production is falling and it was in 2001 that China became a net importer of zinc concentrates after being a net
exporter since 1990 except for one year. By 2006, China is forecast to be a net importer to meet the conservatively
estimated consumption requirement, according to Falconbridge, of 2,023,000 tonnes. By the end of the decade,
China is projected to continue to need to import zinc in order to meet its estimated consumption requirement,
according to Falconbridge?s conservative estimate of 2,277,000 tonnes.
China?s net trade in zinc has changed dramatically over the last seven years. According to Teck Cominco, China?s
net trade (net concentrates and refined metal) in 1990 represented net exports of 10% of Western World demand
whereas in 2003, China?s net trade represented net imports of only 1% with 2004?s net trade projected to be a net
export of 0.1% of Western World demand.
As Teck Cominco noted in its recent investor conference, the significant growth in China?s steel industry has
resulted in its increased demand for zinc. Zinc is used for galvanizing or rust proofing steel. As steel production
grows, the need for galvanizing, and therefore zinc, increases. China produces more steel than the US and Japan
combined. Traditionally, China uses less galvanizing for its steel products than the Western World, but it has been
moving aggressively to catch up. Currently, there are about 23 galvanizing plants under construction and it is
anticipated that they will be completed by 2005. By next year, China?s capacity of galvanizing sheet steel is expected
to increase to 5.6 million tonnes per year from its current 2.4 million tonnes per year.
e) Lead
From 1996 to 2000, China?s domestic mine production was sufficient to meet its domestic demand for lead. In 1996,
China consumed 470,000 tonnes versus the 581,000 tonnes it produced. However, since 2001 China has been a net
importer of lead. In 2003, we estimate consumption would have been 845,000 tonnes versus the 640,000 tonnes it
was capable of producing.
We expect that China will continue to be a net importer of lead. China is estimated to represent just over 12% of
world lead consumption (compared to its estimated 18% of global zinc consumption). Teck Cominco, in the above
mentioned investor conference, indicated that imports of lead concentrates in 2003 increased by 71.9% - to 435,000
tonnes. Exports of refined metal were estimated to have risen only 13.2% last year ? to 411,000 tonnes. We expect
that by 2010 China?s lead consumption will have increased to better than a million tonnes (but still representing only
12-13% of global consumption, which includes recycled lead) with no meaningful increase in domestic mine
production to meet this higher level of demand. This would mean that China would be importing better than 350,000
tonnes of lead or about 14% of the world?s total lead production. China?s import requirement, therefore, could be a
significant factor in determining the long-term price of lead. We would regard this as an important potential plus for
Teck Cominco, which produced about 3% of the world?s supply in 2003.
Earnings (mm) Leverage for 10% change in base metal prices
Copper Zinc Nickel Aluminim
Alcan NA NA NA $301
Falconbridge $79 $7 $74 NA
Inco $23 NA $143 NA
Noranda $72 $41 $37 $26
Teck Cominco $50 $52 NA NA
Shares
Outstanding
(mm)
Alcan 367.5
Falconbridge 177.1
Inco 183.1
Noranda 286.9
Teck Cominco 185.3
EPS Leverage for 10% change in base metal prices
Copper Zinc Nickel Aluminim
Alcan (Post-Pechiney) NA NA NA $0.82
Falconbridge $0.44 $0.04 $0.42 NA
Inco $0.13 NA $0.78 NA
Noranda $0.25 $0.14 $0.13 $0.09
Teck Cominco $0.27 $0.28 NA NA
