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See Appendix A-1 for Analyst Certification and Important Disclosures EQUITY RESEARCH: SectorM apping GLOBAL A Global View Commodities Alan Heap (612) 8225 4853 Sydney [email protected] Global 31 March, 2005 China - The Engine of a Commodities Super Cycle Commodity Update ! We believe a super cycle is underway, driven by materials intensive economic growth in China. ! A super cycle is a prolonged (decades) trend rise in real commodity prices, driven by the industrialization of a major economy. urbanization and ! There have been two super cycles in the last 150 years: late 1800s-early 1900s, driving economic growth in the USA; 19451975, prompted by post-war reconstruction in Europe and by Japan’s later, massive economic expansion. ! High and rising intensity of metals use is the most useful indicator of a super cycle. In China, intensity of use is now three times that of the USA, with demand driven by urbanization, industrialization and fixed capital formation. Importantly, the domestic market drives China’s metals demand, not exports. ! In past super cycles, supply has increased to meet higher demand growth. ! In the present super cycle, increased supply will come at relatively higher costs. Lead times are also increasing, contributing to extended periods of market tightness. ! Under these circumstances, higher long-term commodity prices should be used. ! Paper presented at the Mineral Economics & Management Society Annual Conference, Washington, April 2005. Smith Barney is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Investment Summary China - The Engine of a Commodities Super Cycle - 31 March, 2005 There have been two super cycles in the past 150 years. We believe a third super cycle is underway, driven by China. Super cycles are… A super cycle is a prolonged (decade or more) trend rise in real commodity prices, driven by urbanization and industrialization of a major economy. There have been two super cycles in the past 150 years: from the late 1800s, driven by the USA; and from 1945 to 1975 as a result of post-war reconstruction in Europe, and subsequently by the Japanese economic renaissance. Super cycles are demand driven Highly materials intensive economic activity is the cause of super cycles – intensity of metals use in the expanding economy is high, and global growth is moving to a higher trend. China – the engine of the present super cycle China accounts for an increasing share of global economic activity (12% of IP, up from 6% in 1995). It accounts for around 20% of demand for copper and other commodities, and a much larger proportion of demand growth. Intensity of use is 3 times greater than that of the USA. The drivers are urbanization, industrialization and fixed capital formation. Greatest metals demand exists in China’s domestic market – not its export market. Supply responses – increased production at higher costs In past super cycles, expansions in commodity production were not sufficient to offset stronger demand growth. In the present super cycle, capital and exploration expenditure are increasing but is not expected to result in oversupply. 2 ! costs are increasing, and ! production lead times are extending. China - The Engine of a Commodities Super Cycle - 31 March, 2005 The higher cost of new supply required to meet demand implies that higher longterm prices are appropriate for project evaluation and discounted cash flow analysis. Figure 1. Appropriate Long-term (Equilibrium) Commodity Prices - 2005$ Commodity Copper Aluminium Nickel Zinc Lead Oil Iron Ore (Lump) Coking coal Thermal coal Unit Value US¢/lb US¢/lb US$/t US¢/lb US¢/lb US$/bbl US¢/Fe unit US$/t US$/t 95 70 3.50 50 27 28 45 62 33 Source: Smith Barney estimates. In this report we draw mainly on the copper market The copper market has a number of attractions for this type of long-run historical analysis. It is a mature market. Consumption is relatively evenly distributed across geographical regions and a diversity of end uses, and it is correlated with general macroeconomic trends. Market data is relatively easy to obtain. Preliminary analysis of other commodities shows similar trends and drivers, although some (such as aluminium and nickel) have shorter market histories. 3 Investment Summary Implications for long-term prices China - The Engine of a Commodities Super Cycle - 31 March, 2005 Super Cycles are Extended periods (decades) of trend rise in real prices… For the last 30 years commodity prices have been in trend decline in real terms. But when viewed against a longer time period it is evident that this has not always been the case. In particular, commodity prices rose on a trend basis for two extended periods during the last 150 years: from the late 1800s through to the early 1900s; and from 1945 to 1975. This pattern can be most clearly seen for copper (Figure 2), but most commodities show similar trends (Figure 3). Figure 2. Copper Super Cycles 600 nominal price 2004 real price 500 400 US¢/lb 300 200 100 Source: USGS; Platts; US Department of Labor. 4 2000 1995 1990 1985 1980 1975 1970 1965 1960 1955 1950 1945 1940 1935 1930 1925 1920 1915 1910 1905 1900 1895 1890 0 1885 Super cycles occurred in the late 1800s–early 1900s (driven by urbanization and industrialization in the USA), and in the late 1940s–early 1970s (driven by post war reconstruction in Europe and Japan, and subsequently the Japanese economic renaissance). China - The Engine of a Commodities Super Cycle - 31 March, 2005 Figure 3. Other commodities show similar trends... Aluminium Nickel 20 400 nominal price 2004 real price 350 nominal price 2004 real price 18 16 300 14 Aluminium & nickel are new age metals. 12 US$/lb US¢/lb 250 200 10 8 150 6 100 4 50 2 Zinc nominal price 2004 real price 1995 1985 nominal price 2004 real price 1000 200 800 1995 1985 1975 1965 1955 1945 1935 1925 1915 1995 1985 1975 1965 1955 1945 0 1935 0 1925 200 1915 50 1905 400 1895 100 1905 600 1895 150 1885 US$/t 250 1885 US¢/lb 1975 Steel 1200 300 Zinc & steel show similar trends to copper. 1965 1955 1945 1935 1925 1915 1905 1885 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 1895 0 0 Source: USGS; Platts; US Department of Labor. It should be noted that in a super cycle, prices rise on a trend basis. There are still business cycles within a super cycle. ….driven by materials intensive economic growth as major economies urbanize and industrialize. The key driver of these super cycles is materials intensive economic growth in major economies as they urbanize and industrialize. This is reflected by high and rising intensity of use (IOU - the amount of copper consumed per unit of economic activity). 5 China - The Engine of a Commodities Super Cycle - 31 March, 2005 Figure 4. Copper - intensity of use 2.00 USA 1.75 Germany Japan China 1.50 Intensity of use peaked in the early 1900’s in the USA, in the 1950’s in Europe and in the early 70’s in Japan. Index 1.25 1.00 0.75 0.50 0.25 2000 1995 1990 1985 1980 1975 1970 1965 1960 1955 1950 1945 1940 1935 1930 1925 1920 1915 1910 1905 1900 0.00 Source: USGS; US Dept of Labor; GGDC; Smith Barney estimates. Figure 4 shows intensity of use based on GDP as the economic denominator. In China, IOU is only just beginning to rise strongly. In the USA, intensity rose strongly during the early 1900s, then plateaued and declined from around 1940 as its economy evolved. The highly materials intensive growth phase came to an end, as the economy became increasingly services-based. In Europe, reconstruction post the 1939-45 war boosted intensity of copper use. In Japan, intensity rose during the early years of its economic renaissance, but declined from 1980. Declining intensity & slowing demand bring cycles to an end Declining intensity of use brings super cycles to an end as the driving economy evolves from materials intensive infrastructure and manufacturing towards more service based. We also believe declining demand brings typical business cycles to an end, rather than expanding supply (Figure 5). 6 China - The Engine of a Commodities Super Cycle - 31 March, 2005 Figure 5. Cycles in the Copper Market 10.0% 250 8.0% 200 6.0% 4.0% 150 US¢/lb Cycles are brought to an end by declining demand. In some cycles (e.g. the mid 1990’s) supply continued to increase, contributing to a prolonged downturn. 2.0% 100 0.0% -2.0% 50 -4.0% % chg Supply % chg Consumption 2007e 2006e 2005e 2003 2004e 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 0 1981 -6.0% Price (US¢/lb) Source: Smith Barney estimates. China’s Contribution to Global Growth China’s contribution to global growth depends on how you measure it. China accounts for: ! 4% of global GDP on an exchange rate basis. ! 13% on a purchasing power parity basis, up from 9% in 1995. ! 12% of world industrial production, up from 6% in 1995. Figure 6. Regional Shares of Global Industrial Production 10,000 9,000 China 8,000 7,000 US$bn (1987) Other Asia 6,000 Rest 5,000 4,000 Europe 3,000 2,000 North America 1,000 2004 2000 1996 1992 1988 1984 0 1980 China accounts for 12% of world IP, up from 6% in 1995. Source: World Bank; Smith Barney. 7 China - The Engine of a Commodities Super Cycle - 31 March, 2005 th Interestingly, China accounted for 20-30% of global GDP until the mid 19 century, when it was eclipsed by the USA. Perhaps China is on the way to regaining its past dominance, and perhaps this is the true expression of the super cycle (Figure 7). Figure 7. GDP of Key Nations: 0-2004 A.D. 100% ROW 90% 80% Japan 70% China accounted for 2030% of global GDP until the mid 19th century, when it was eclipsed by the USA. 60% Germany 50% USA 40% 30% India 20% 10% China 2004 1998 1973 1950 1913 1870 1820 1700 1600 1500 1000 0 0% Time scale Source: Maddison (OECD publication); Groningen Growth & Dlpmnt Cent., University of Groningen; Smith Barney estimates. Super Cycles – Impact on Commodities Demand & the Role of China. Figure 4 shows that intensity of use in China has begun to lift sharply. The contention then is that: Further materials intensive economic activity (as measured by rising intensity of use) in China will drive another super cycle. Price super cycles are associated with higher levels of trend demand growth. Supply responses are discussed below. 8 China - The Engine of a Commodities Super Cycle - 31 March, 2005 Figure 8. Global Copper Consumption Trend Growth 15% 5 year moving average 10% Price super cycles are associated with higher levels of trend demand growth. 5% trend 2.5%/yr trend 4.8%/yr 0% -5% 2003 2000 1997 1994 1991 1988 1985 1982 1979 1976 1973 1970 1967 1964 1961 1958 1955 1952 1949 1946 1943 1940 1937 1934 -10% Source: Metallgesellschaft (1929-1980); WBMS (1980-present). While China’s demand for copper (and commodities in general) has been growing for some years, it virtually exploded in 2000. Figure 9. Global Copper Demand 20,000 Rest 18,000 16,000 Korea, Taiwan & Other Asia 14,000 kt 12,000 Europe & Other OECD 10,000 China 8,000 6,000 Japan 4,000 2,000 USA 0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 In 1999 China accounted for 10% of world consumption. In 2004 it reached 20%. Source: WBMS; Smith Barney estimates. 9 China - The Engine of a Commodities Super Cycle - 31 March, 2005 China now accounts for around 20% of global demand for a broad range of commodities, and an even larger proportion of growth in demand. Figure 10. China’s Contribution to Commodities Demand Comm odity China now accounts for around 20% of global demand for a broad range of commodities, and an even larger proportion of growth in demand. China's share of global consumption 2002 2003 Cement Ethylene Alum ina Alum inium Copper Nickel Zinc Iron ore Steel Gold Platinum Pulp Container board Crude oil GDP 34% 6% 16% 16% 18% 8% 19% 26% 23% 6% 23% 18% 11% 7% 4% Population 21% China's contribution to y-o-y consum ption growth 2002 2003 8% 3% 56% 23% 60% 39% 112% 13% 53% 39% 77% 3% 75% 27% 30% 57% 7% 5% 59% 53% 78% 48% 86% 70% 84% -5% -560% 18% 11% 40% -16% 21% 11% 11% 6% 19% 19% 20% 10% 21% 29% 27% 7% 18% Source: Smith Barney estimates. Some of the dynamics can be seen in Figure 11. (In this data industrial production is the denominator of intensity of use, rather than GDP shown earlier). Figure 11. China's Copper Demand 50% 6.0 5.0 30% 4.0 20% 10% 3.0 0% 2.0 -10% IP Consumption -20% 0.0 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 -30% Source: WBMS; Smith Barney estimates. 10 1.0 IOU IOU Intensity in China has increased sharply since 1999… Consumption & IP (% ch yoy) 40% China - The Engine of a Commodities Super Cycle - 31 March, 2005 And can be compared with the USA in Figure 12. Figure 12. USA's Copper Demand 30% 1.8 1.6 1.4 10% 1.2 1.0 0% 0.8 -10% 0.6 IP -20% IOU …and it is now 3 times that of the USA, where intensity is declining. Consumption & IP (% ch yoy) 20% Consumption 0.4 IOU 0.2 0.0 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 -30% Source: WBMS; Smith Barney estimates. Drivers of demand –fixed capital formation Fixed capital formation is an important driver of metals demand in China. Fixed capital formation has increased to around 40% of GDP. Although there is concern that this may prove unsustainable, we expect fixed capital formation to stabilize at around 50% of GDP, but for the growth rate to slow more rapidly than the broader economy. Figure 13. China - Changing Share of Gross Capital Formation in GDP, 1952-2003 (%) 50 % 45 40 35 30 25 20 15 2004 2000 1996 1992 1988 1984 1980 1976 1972 1968 1964 1960 1956 10 1952 Fixed capital formation is increasing as a percentage of GDP. It is expected to stabilize at around 50% Source: National Statistics Bureau of China; CEIC Data Company; Smith Barney estimates. 11 China - The Engine of a Commodities Super Cycle - 31 March, 2005 Figure 14. China's GDP & Gross Capital Formation, 1991-2006 30 GDP by Industry % Fixed capital formation has been growing at around 20%/yr, but is expected to slow more rapidly than the broader economy. 25 Gross Capital Formation % % 20 15 10 5 2006e 2005e 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 0 Source: National Statistics Bureau of China; CEIC Data Company; Smith Barney estimates. Drivers of demand – urbanization Urban migration is an important driver of fixed capital formation and super cycles. In China, 10 million people per year are moving from the countryside to the cities, according to World Bank estimates, and this may increase four fold as restrictions on the movement of labour are relaxed as required by the WTO. Urban migration was also a driver of past super cycles, but fixed capital formation probably did not reach the proportion of GDP seen in China. Drivers of demand-domestic consumption At least 50%, and perhaps 75%, of China’s copper demand is for domestic consumption. Figure 15. China's Copper Consumption, by use OEM & General 48% Infrastructure 24% At least half of China’s copper demand is for domestic consumption. Construction 28% Source: Bloomsbury Mineral Economics. 12 China - The Engine of a Commodities Super Cycle - 31 March, 2005 Therefore, China’s copper demand is not export driven, nor is a result of a relocation of manufacturing capacity from other countries. This is also an important characteristic of past super cycles. For example, the super cycle of the 1960s and early 70s faded as Japanese internal development matured, even though exports continued to grow. It is also notable that the boom of the Asian tigers in the early 1990s, which was an essentially export driven phenomenon, did not translate into a super cycle. Supply Responses in Super Cycles Copper mine supply from 1900 is shown in Figure 16. Figure 16. Copper mine production since 1900 14,000 Supply increases in super cycles. Australasia 12,000 Latin America 10,000 N.America 6,000 Asia kt 8,000 4,000 Africa 2,000 Europe 1990 1995 2000 1985 1975 1980 1970 1955 1960 1965 1945 1950 1940 1930 1935 1920 1925 1910 1915 1900 1905 0 Source: Metallstatistik; WBMS; Smith Barney estimates. This is combined with demand to show supply-demand balances in Figure 17. Figure 17. Copper Supply-Demand Balance & Price 1200 400 1000 350 800 Super cycles are not associated with persisting supply deficits. 600 300 US¢/lb 200 0 200 -200 150 Surplus/Defict (kt) 400 250 -400 -600 100 -800 50 -1000 Surplus/Deficit 2003 2000 1997 1994 1991 1988 1985 1982 1979 1976 1973 1970 1967 1964 1961 1958 1955 1952 1949 1946 1943 1940 1937 1934 1931 -1200 1928 0 Price Source: Metallstatistik; WBMS; Smith Barney estimates. 13 China - The Engine of a Commodities Super Cycle - 31 March, 2005 From an analysis of this data, we conclude that super cycles are not associated with persisting supply shortfalls. Supply typically expands in response to growing demand, but production costs also increase. This supports our view that super cycles are demand driven. We believe this is the outlook for the present super cycle, as discussed below. Changes in the sources of copper supply since 1900 is illustrated in Figure 18. Figure 18. Copper mine production - regional contributions 100% Australasia 80% The geographical centre of production shifts over time as the resources of each province are depleted. Latin America 60% N.America Asia 40% Africa 20% Europe 2000 1995 1990 1985 1980 1975 1970 1965 1960 1955 1950 1945 1940 1935 1930 1925 1920 1915 1910 1905 1900 0% Source: Metallstatistik; WBMS; Smith Barney estimates. The chart highlights how the geographical centre of copper production shifts over time as the economically accessible resources of major mining provinces are depleted. North American production dominated global supply in the first half of th the 20 century, eventually giving way to Africa – a major producer in the 1950s and 60s. Latin American has been the pre-eminent copper-producing region since the early 1990s There is no known mineral province comparable to that of Latin America that can be developed over the next 5-10 years to deliver new supply at relatively low cost. Influence of Technology The rapid advancement of technology is sometimes cited as a dampening influence on an emerging super cycle. However, on-going technical innovations have been a long-standing feature of the global mining industry – they are not a recent phenomenon. 14 China - The Engine of a Commodities Super Cycle - 31 March, 2005 Figure 19. Copper industry developments - a history Technical advances have been a longstanding feature of the global mining industry. 1862 1898 1906 1930 1963 1968 1972 1974 1984 1990 1990 1995 1997 1998 Bingham Canyon discovered Bulk mining introduced at Kennecott using steam-powered shovels Bingham Canyon start-up Introduction of open pit mining Bougainville discovery SxEw introduced in USA Ertsberg start-up Bougainville start-up Ok Tedi start-up Escondida; Olympic Dam start-ups Chilean production expands substantially La Candelaria start-up El Abra start-up Collahuasi start-up Source: Smith Barney. While it is difficult to identify new technologies under development, they are likely to have the same impact on the copper market (increasing supply, lowering costs) as did solvent extraction and electro-winning in the 1990s. The Capital Cycle Capital spending typically lags the commodity price cycle (Figure 20). Figure 20. Metals & Mining Capex 50 250 40 200 Capex (US$bn) 35 30 150 25 20 100 15 10 50 Metals & Mining Capex (Real 2004) 5 Base Metals Real Price Index 45 The capital cycle lags the commodity price cycle. Base Metals Real Price Index (2004=100) 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 0 1978 0 Source: Smith Barney estimates. The base load of stay-in-business capital spending is around US$15bn per year, although there are indications that this is increasing. Peaks above this base represent spending on new projects. The excess capital expenditure of the late 1990s, combined with a slowdown in demand following the Asian crisis, contributed to the subsequent prolonged recession in commodity markets that extended from the mid 1990s until 2004. This pattern reflects that illustrated in Figure 5. A capital cycle is underway at present. But, increasing production costs mean that higher capital expenditure is likely to translate into a relatively small expansion in production. Furthermore, increasing lead times due to environmental permitting 15 China - The Engine of a Commodities Super Cycle - 31 March, 2005 and more stringent capital budgeting will delay the expansion of current operations. Exploration expenditure is also increasing. Again though, long lead times threaten to delay the conversion of these projects into new supply sources (Figure 21). At this stage, we see no sign of oversupply emerging. Figure 21. Worldwide Non-ferrous Exploration Budgets 6 5 US$bn 4 3 2 1 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 0 Source: Metals Economics Group. Production costs and margins Data on production costs and margins in past super cycles has proved elusive. However, we surmise that cost increased as production rose to meet demand. Over the last 25 years or so, production costs have been declining on a trend basis, as have prices (Figure 22). Figure 22. Copper Costs, Prices & Margins 240 220 Real cash cost (2004 US¢/lb) Cost & Price (US¢/lb) 200 Real LME Cu price (2004 US¢/lb) 180 160 140 120 100 80 equilibrium price 60 40 equilibrium cost 20 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 0 Long-term Source: Brook Hunt; CRU; Smith Barney estimates. 16 China - The Engine of a Commodities Super Cycle - 31 March, 2005 Over the last year, costs have increased sharply – although largely from cyclical factors including fuel prices, consumables and labour. However, we also believe production costs are likely to continue rising on a structural basis. The additional supply required to meet higher trend demand growth will be higher cost. Margins are expected to remain constant, and prices will be driven higher. Implications for long-term prices We believe this environment means that it will be appropriate to adopt higher long-term (equilibrium) prices for project evaluation and discounted cash flow valuations. Higher trend demand growth will be met by higher cost production. Industry average margins will remain constant. As a consequence, prices will trend higher. Our approach to deriving long-term prices differs from traditional mineral economics dogma. Dogma dictates that the equilibrium price is the capital cost of new production, plus a return on the investment. The flaws we see with this are that 1) it ignores the influence of existing production capacity, in which costs are largely depreciated and 2) mining operations rarely return their cost of capital. Our approach to determining long-term prices is shown schematically in Figure 23. Figure 23. Cash Costs vs. Prices – a shift in the curves Cost & Price 1.2 Long term price will rise with increasing costs. 1 0.8 New forecast LT price 0.6 New forecast cost curve Previously forecast LT price 0.4 Previously forecast cost 0.2 0 0 0.2 0.4 0.6 0.8 1 Cumulative Production 1.2 Source: Smith Barney. Given higher demand growth, the long-term price is a function of costs and margins. If the average cost increases, and margins remain constant, the long-term price will increase. 17 China - The Engine of a Commodities Super Cycle - 31 March, 2005 Implications for trough prices A further consequence of the super cycle is that as the current business cycle slows, prices will likely decline to a relative trough level set higher than those reported for recent industry downturns (1993, 2001). Figure 24. Cash Costs vs. Prices - parameters Real cash costs Real prices Trend real price Cost & Price In the next downturn, trough prices will be higher than those of previous cycles. Trough margin 10% Average margin 39% Prev. equil price 05 US¢85 New equil price 05 US¢95 Prev. trough price 05 US¢65 New trough price 05 US¢72 Years Source: Smith Barney estimates. Iron ore – a different market 65 60 55 50 45 40 35 30 25 20 15 10 5 0 70% equilibrium margin 60% 50% equilibrium price 40% 30% equilibrium cost 20% 10% Cash cost (2004 US¢/Fe Unit) Price (2004 US¢/Fe Unit) 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 0% 1994 Cost & Price (US¢/Fe unit) Figure 25. Iron ore Costs, Prices & Margins Long-term Margin % Source: Brook Hunt; CRU; Smith Barney estimates. The history of iron ore costs and margins is starkly different from that of copper. Its industry has seen sustained margin expansion. Persisting tight markets mean that margins will probably be sustained. 18 China - The Engine of a Commodities Super Cycle - 31 March, 2005 Figure 26. Appropriate Long-term (Equilibrium) Commodity Prices - 2005$ Commodity Copper Aluminium Nickel Zinc Lead Oil Iron Ore (Lump) Coking coal Thermal coal Unit Value US¢/lb US¢/lb US$/t US¢/lb US¢/lb US$/bbl US¢/Fe unit US$/t US$/t 95 70 3.50 50 27 28 45 62 33 Source: Smith Barney estimates. 19 China - The Engine of a Commodities Super Cycle - 31 March, 2005 Appendix 1: References Bloomsbury Mineral Economics (BME), 2005 [Online] Available at: http://www.bloomsburyminerals.com/ CEIC Data Company, 2005 [Online] Available at: http://www.ceicdata.com/ Groningen Growth and Development Centre (GGDC), 2005 [Online] Available at: http://www.ggdc.net/index-dseries.html MADDISON, A. 2001, The World Economy - A Millennial Perspective, OECD Development Centre, Paris Metallstatistik (historical commodity production data, 1900-1990), subscription to combined WBMS & CRU research Metals Economics Group, 2005 [Online] Available at: http://www.metalseconomics.com/meglogin.html National Bureau of Statistics of China, 2005 [Online] Available at: http://www.stats.gov.cn/english/ U.S. Department of Labor, 2005 [Online] Available at: http://www.bls.gov/ U.S. Geological Survey (USGS) 2005 [Online] Metal Prices in the United States through 1998, Available at: http://minerals.usgs.gov/minerals/pubs/metal_prices/ World Bank, 2005 [Online] Available at: http://www.worldbank.org/data/ World Bureau of Metal Statistics (WBMS), (compiled, 1980-present), World Metal Statistics Monthly Reports, WBMS, London 20 China - The Engine of a Commodities Super Cycle - 31 March, 2005 Appendix 2: Historical Price Data Details Copper 1850-96, New York price for Lake copper (99.9%-pure copper), in Loughlin, G.F., Prefatory note on the report on gold, silver, copper, lead, and zinc, Mineral Resources of the United States 1922, Part I, U.S. Geological Survey, 1925, p. 127a. 1897-98, New York price for Lake copper (99.9%-pure copper), in Engineering and Mining Journal. 1899-1908, Electrolytic (99.9%-pure copper) refinery price in New York, in Engineering and Mining Journal. 1909-22, Electrolytic (99.9%-pure copper) domestic f.o.b. refinery, in American Metal Market. 1923-72, Electrolytic (99.9%-pure copper) domestic delivered to Connecticut price, in American Metal Market. 1973-77, U.S. producer electrolytic (99.9%-pure copper) wirebar, in Metals Week. 1978-2004, U.S. producer cathode (99.99%-pure copper), in Metals Week (1978-92) and Platt’s Metals Week (1993-2004). Aluminium 1850-94, in U.S. Geological Survey Minerals Yearbooks and predecessor volumes. 1895-98, 98%-pure aluminum, in American Bureau of Metal Statistics. 1899-1900, 99%-pure aluminum ingot, in American Bureau of Metal Statistics. 1901-04, 99.75%-pure aluminum ingots in 2,000-pound lots, in American Bureau of Metal Statistics. 1905, 99.75%-pure aluminum ingots in 2,000-pound lots, in American Metal Market/Metal Statistics, 1955. 1906-19, 99%-pure No. 1 aluminum ingots, in American Metal Market/Metal Statistics, 1955. 1920-21, 98%- to 99%-pure aluminum, in American Metal Market/Metal Statistics, 1955. 1922-28, 98%-pure aluminum metal, in American Metal Market/Metal Statistics, 1955. 1929-35, 99%-pure aluminum metal, in American Metal Market/Metal Statistics, 1955. 1936-54, 99%-plus pure aluminum virgin ingot, in American Metal Market/ Metal Statistics, 1955. 1955-56, 99%-pure aluminum virgin ingot, in Engineering & Mining Journal. 1957-71, 99.5%-pure unalloyed aluminum ingot, in Engineering & Mining Journal. 1972, 99.5%-pure unalloyed aluminum ingot, in Metals Week. 1973-82, U.S. market spot price, in Metals Week. 1983-92, 99.7%-pure aluminum ingot, U.S. market spot price, in Metals Week. 1993-98, 99.7%-pure aluminum ingot, U.S. market spot price, in Platt’s Metals Week. 1999-2004, LME 1875-1904, New York price for Prime Western zinc (98% pure), in Ingalls, W.R., Lead and Zinc in the United States, McGraw-Hill, NY, 1980, p. 342. 1905-70, St. Louis/East St. Louis producer price for Prime Western zinc, in American Metal Market/Metal Statistics. 1971-79, U.S. Dealers Prime Western delivered price, in Metals Week. 1980-93, U.S. Dealers High Grade zinc (99.9% pure) delivered price, in Metals Week. 1994-2004, U.S. Dealers Special High Grade zinc (99.99% pure) delivered price, in Platt’s Metals Week. Zinc Nickel 1850-1912, Price of refined metal, as supplied by Inco Ltd. 1913-21, Price of refined metal, Historical Statistics of the U.S., Colonial Times to 1970, U.S. Dept of Comm, Census Bureau 1922-45, Price quoted by Inco for electrolytic Ni cathode at NY, in 2-short-ton minimum lots, in US Bureau of Mines Yearbook. 1946-47, Contract price to US buyers of electrolytic Ni cathode in carlots, fob. Port Colborne, Ont, incl. 2.50¢/lb duty, in US Bureau of Mines Yearbook; 1948-61, Contract price to US buyers of electrolytic nickel cathode in carlots, fob. Port Colborne, Ont, incl. 1.25¢/lb duty, in U.S. Bureau of Mines Yearbook. [duty halved on January 1, 1948] 1962-79, Contract price to U.S. buyers of electrolytic nickel in carlots, f.o.b. Port Colborne, Ontario, in American Metal Market. Weighted average for the year. U.S. import duty of 1.25¢/lb was suspended September 27, 1965. 1980-93, LME cash price for primary Ni (min. 99.80%, cut cathodes, pellets, briquets, 6t lots), Metals Week [through June 14, 1993]. 1993-2004, LME cash price for primary primary Ni (min. 99.80%, cut cathodes, pellets, briquets, 6t lots), Platt’s Metals Week. Steel 1897-February 1987, hot-rolled carbon steel bars merchant, Pittsburgh base, dollars per cwt., in American March 1987-1998, hot-rolled carbon SBQ (special bar quality) 1000 series, in American Metal Market. 1998-2004, Metal Bulletin Source: USGS. 21 China - The Engine of a Commodities Super Cycle - 31 March, 2005 Notes 22 China - The Engine of a Commodities Super Cycle - 31 March, 2005 AZ2991 ANALYST CERTIFICATION Appendix A-1 I, Alan Heap, the author of this report, hereby certify that all of the views expressed in this research report accurately reflect my personal views about any and all of the subject issuer(s) or securities. I also certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. IMPORTANT DISCLOSURES Analysts' compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc. and its affiliates ("the Firm"). Like all Firm employees, analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the Private Client Division, Institutional Equities, and Investment Banking. Smith Barney Equity Research Ratings Distribution Data current as of 31 December 2004 Buy Hold Sell Smith Barney Global Fundamental Equity Research Coverage (2598) 39% 42% 18% % of companies in each rating category that are investment banking clients 56% 55% 44% Guide to Fundamental Research Investment Ratings: Smith Barney's stock recommendations include a risk rating and an investment rating. Risk ratings, which take into account both price volatility and fundamental criteria, are: Low [L], Medium [M], High [H], and Speculative [S]. Investment ratings are a function of Smith Barney's expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating. For securities in developed markets (US, UK, Europe, Japan, and Australia/New Zealand), investment ratings are: Buy [1] (expected total return of 10% or more for Low-Risk stocks, 15% or more for Medium-Risk stocks, 20% or more for High-Risk stocks, and 35% or more for Speculative stocks); Hold [2] (0%-10% for Low-Risk stocks, 0%-15% for Medium-Risk stocks, 0%-20% for High-Risk stocks, and 0%-35% for Speculative stocks); and Sell [3] (negative total return). For securities in emerging markets (Asia Pacific, Emerging Europe/Middle East/Africa, and Latin America), investment ratings are: Buy [1] (expected total return of 15% or more for Low-Risk stocks, 20% or more for Medium-Risk stocks, 30% or more for High-Risk stocks, and 40% or more for Speculative stocks); Hold [2] (5%-15% for Low-Risk stocks, 10%-20% for Medium-Risk stocks, 15%-30% for High-Risk stocks, and 20%-40% for Speculative stocks); and Sell [3] (5% or less for Low-Risk stocks, 10% or less for Medium-Risk stocks, 15% or less for High-Risk stocks, and 20% or less for Speculative stocks). Investment ratings are determined by the ranges described above at the time of initiation of coverage, a change in risk rating, or a change in target price. At other times, the expected total returns may fall outside of these ranges because of price movement and/or volatility. Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management. Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stock's expected performance and risk. OTHER DISCLOSURES For securities recommended in this report in which the Firm is not a market maker, the Firm usually provides bids and offers and may act as principal in connection with such transactions. The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in this report. The Firm regularly trades in, and may, at any time, hold a trading position (long or short) in, the shares of the subject company(ies) discussed in this report. 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