THE NICKEL MARKET

I. Historical Prices

Source: Kitco Base Metals

Like other commodities, nickel prices are volatile in nature, very much influenced by supply/demand
conditions and, to some degree, speculation. In the 1990s, nickel supply was boosted by the flow of nickel
exports from the former Soviet bloc, as the Soviet Union collapsed. Faced with oversupply or low demand,
nickel producers sought to improve profit margins by increasing productivity through technical innovation,
logistics and work reforms.

However, one important component of nickel production is the cost of energy, which accounts for 20%-25%
of the total cost and is beyond the producers’ control. In the period of low energy prices from the late 1970s to
the early 2000s, producers actively developed nickel laterites, an oxide form rather than a sulphide, which are
naturally abundant and requires more energy to produce. On the demand side, demand for nickel was
negatively impacted by the 1982 economic recession, the 1997 Asian crisis, and the 2001 economic recession.
As a result of the above factors, nickel prices were depressed at or below the US$5/lb level for a long period
prior to 2003.

From 2003 to mid-2007, nickel prices skyrocketed to a record level of almost US25/lb. This phenomenon
reflected the following:

(1) Slow growth of nickel supply, as nickel inventories fell sharply. The London Metal Exchange (LME)
nickel stock fell from 36,000 tonnes at January 2006 to below 10,000 tonnes by August 2006 and
remained at this level until July 2007. The nickel production shortfall in 2005 was approximately 70,000
tonnes and over 40,000 tonnes in 2006 (source: Norilsk Nickel);

(2) Massive growth in Chinese consumption of nickel, as production of stainless steel increased significantly
(stainless steel and alloys accounts for 87% of nickel consumption). In this period, the world’s economy
also witnessed strong demand growth for stainless steel from North America, Europe and Japan; and
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(3) The role of hedge funds and large institutional traders, as these institutions played a significant role in
triggering a short squeeze on the futures markets. According to David Humphries, Chief Economist for
MMC Norilsk Nickel, the spike in nickel prices was also caused by institutional traders who were caught
with open bets on lower prices and then were forced to cover by purchasing the metal.

Starting in mid-2007, nickel prices began a sharp decline from US$25/lb to the US$10/lb level by mid-2008
and, currently, to US$4.35/lb in mid-February 2009. This downward trend reflects rising nickel production,
largely from Canada, Australia, and New Caledonia. Also, as a result of high nickel prices, stainless steel
production fell by 17% in Q3/2007 (Deutsche Bank), which lowered demand for nickel. The nickel stock at
the LME started moving up, reaching 50,000 tonnes by April 2008. Stainless steel producers, including China,
Japan, and South Korea, started making investments in new technologies. Some steel producers used nickel
free stainless steel, known as the 400 series, further driving down demand for nickel.

II. Supply/Demand

Strong world economic growth from 2003 to 2007 increased demand for stainless steel production which, in
turn, encouraged nickel production and capital investment in new nickel production capacity. In 2007, the
world’s primary nickel production was 24% higher than in 2002. Substantial capital expenditures were
committed in Russia, China, Norway, Australia and New Caledonia.

1. Production by Country (Supply)

Mine Nickel Production by Country

(Tonnes) 2002 2003 2004 2005 2006 2007 2007% CAGR
Russia 310,000 330,000 315,000 315,000 320,000 322,000 19% 0.8%
Canada 178,338 180,000 187,000 196,000 233,000 258,000 16% 7.7%
Australia 122,000 120,000 133,000 140,000 185,000 180,000 11% 8.1%
Indonesia 211,000 220,000 178,000 210,000 140,000 145,000 9% -7.2%
New Caledonia 99,650 120,000 118,000 122,000 103,000 119,000 7% 3.6%
Colombia 58,196 65,000 75,000 72,500 94,100 99,500 6% 11.3%
China 54,500 56,000 64,000 71,000 82,100 80,000 5% 8.0%
Brazil 45,029 46,000 45,200 46,000 82,500 75,300 5% 10.8%
Rest of the World 261,287 263,000 284,800 327,500 340,300 381,200 23% 7.8%
1,340,000 1,400,000 1,400,000 1,500,000 1,580,000 1,660,000 100% 4.4%
Source: USGS (US Geological Survey) CAGR = compound annual growth rate

World's Top 5 Producers Location Market Share (%) (estimate)

Norilsk Nickel Russia 18%
Companhia Vale do Rio Does (CVRD) Canada, UK, Japan, Indonesia 17%
BHP Billion Australia, Colombia 11%
Xstrata Canada, Dominican Republic 9%
Jinchuan China 8%
Rest of World 37%
Total 100%
(Source: CRU Group)

Nickel production from Russia remains relatively stable at the low 300,000-tonne level. However, Russia
remains the largest nickel supply country, accounting for 19% of global 2007 production. Production from
Canada increased by 45% to 258,000 tonnes between 2002 and 2007, with a CAGR of 7.7%. This made
Canada the second-largest producing country (fourth-largest in 2002) in the world.

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According to the CRU (an independent consultant group focused on mining and metals), supply over the next
few years should keep up with demand growth.

Existing nickel projects should provide an increase in production capacity by approximately 370,000 tonnes
per year (tpy) by 2012, net of replacement. This reflects increases in the number of current laterite projects in
primarily Australia, Indonesia and New Caledonia.

2. Consumption (Demand)

(a) Demand by Type

Stainless Steel 65%

Other Alloys 22%
Electroplating 8%
Chemicals 5%
Totals 100%

(b) Demand by Region

(Thousands of Tonnes) 2005 2006 2007 2008 2009 2010 CAGR
China 195 249 311 380 422 486 20.0%
% of global demand 15.4% 19.4% 21.8% 24.2% 25.5% 27.2%
USA 135 142 151 153 154 155 2.8%
% of global demand 10.7% 11.0% 10.6% 9.7% 9.3% 8.7%
European Region 410 349 433 455 472 498 4.0%
% of global demand 32.4% 27.1% 30.3% 29.0% 28.5% 27.9%
Rest of World 524 546 534 583 610 647 4.3%
% of global demand 41.5% 42.5% 37.4% 37.1% 36.8% 36.2%
Total 1,264 1,286 1,429 1,571 1,658 1,786 7.2%
Demand Growth (YOY) 1.74% 11.12% 9.94% 5.54% 7.72%
Source: Deutsche Bank AG/London YOY = year over year

Stainless steel and alloys are the main sources of nickel consumption. The demand for stainless steel has
increased significantly over the past decade, due to rapid industrialization in countries such as China, Russia
and India. China is responsible for the highest increase in nickel consumption, with a CAGR of 50% in the
2002-2006 period. Since 2002, the world’s demand for nickel has grown at the rate of 10% per year (The
Economics of Nickel, 11th Edition 2006, reported by Roskill Information Services).

China is expected to remain a leader in demand growth with an annual growth rate of 20% over the 2005-2010
period: an additional 175,000 tonnes will be required in 2010 over 2007 consumption.

Deutsche Bank forecasts an increase in global nickel demand by an average of 7.7% per annum for the next
three years, with an additional amount of 293,000 tonnes being required in 2010. The CRU forecasts
additional consumption of 355,000 tonnes by 2011.

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III. Outlook
Demand and Supply Outlook
(Thousands of Tonnes)
2005 2006 2007 2008E 2009E 2010E CAGR
World Refined Demand 1264 1286 1429 1571 1658 1786 7.2%
World Refined Supply 1288 1361 1463 1542 1674 1809 7.0%
Supply Overage/(Shortfall) 24 75 34 (29) 16 23
CAGR: Compound Annual Growth Rate; E: Estimate
Source: Deutsche Bank AG/Brook Hunt

Having assessed global nickel supply/demand conditions, and having taken into account existing nickel
projects that are highly likely to be in operation over the next five years, we predict the following trends in the
nickel market:

● China will continue as a major source of consumption; however, countries such as India, Russia and Brazil
should add to demand growth, reflecting increasing demand for stainless steel and alloys in these
countries.

● China and other major industrialized countries will continue to look for alternatives such as non-nickel
stainless steels.

● Nickel production from laterite ores will continue to increase. However, costs will increase should there
be a return to higher energy prices. This would close the gap in production costs between laterite and
sulphide.

● Supply should keep pace with demand growth over the next five years, assuming all major nickel projects
to be completed and brought into preproduction as expected (the Koniambo project in New Caledonia is
expected to be in production in 2010 with total production of 35 thousand tonnes, increasing to 100
thousand tonnes per year in 2011).

● However, any disruption in major nickel producing mines or delays in current nickel projects could create
a short-term situation where demand would outpace supply. Should this happen, we may see the nickel
price rise sharply, as traders and speculators in commodities have become major players in influencing
short-term prices.

● There continues to be price pressure on nickel. It reached a low of US$4.00/lb in December 2008 and
currently is US$4.35/lb. These low prices reflect the deteriorating global economic situation. We expect
these low prices will prevail until global economics stabilize and recovery begins.

● The long-term nickel price should reflect supply/demand conditions, as well as costs of nickel production.
As a result, we believe an average of US$10/lb-US$15/lb is a more likely range over the next five years.

Eric Eng, BA, MBA

February 2009

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