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                  October 6, 2010
    Global Metals Playbook, 4Q10




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Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010
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Financial Pacific: Focus on Currencies, China and India (third party), October 12.2010

  1. 1. MORGANSTANLEYRESEARCH October 6, 2010 Global Metals and Mining Team Global Metals Playbook: 4Q10 Our highest-conviction commodity exposures are in base and precious metals in the short Research Global Focus on currencies, China and India term. We expect bulk commodities to trade in narrow ranges close to current prices over the coming quarter.  Accelerating weakness in the US currency, driven by fears of Preferred commodity exposures by sector: renewed quantitative easing (QE) to confront sluggish US growth, • Base metals – copper, nickel and tin is proving to be a boon to commodity markets, especially as • Precious metals – gold, silver and palladium growth risks from fiscal policy normalisation, the European • Bulks – iron ore and thermal coal sovereign debt crisis, policy tightening in China and high unemployment in the USA and Europe persist. Highest-conviction Overweight equities: • Kobe Steel  Cyclical growth is going through a soft patch after moderating • US Steel from unsustainably high levels in 1H 2010. However, net positive • Fortescue Metals • Implats Limited growth, especially as China achieves a soft landing, is still • Tata Steel supportive of raw material demand. • Xstrata • POSCO  Base metals outlook: After a significant correction in 3Q 2010, • Kazakhmys we expect resilient growth in emerging markets to deliver renewed • Mechel relative and absolute outperformance in 4Q2010 and 2011 in this sector, especially in our favoured metals – copper, nickel and tin. Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As  Precious metals outlook: Currency concerns relating to the a result, investors should be aware that the firm may have a conflict of interest that could affect the possibility of renewed QE and a prolonged period of negative real objectivity of Morgan Stanley Research. Investors interest rates in the US are likely to drive strong investment should consider Morgan Stanley Research as only a single factor in making their investment decision. demand for gold and silver. Auto demand recovery remains a For analyst certification and other important positive for the platinum group metals (PGM). disclosures, refer to the Disclosure Section, located at the end of this report.  Bulk commodity outlook: Emerging market industrialisation += Analysts employed by non-U.S. affiliates are not remains a key long-term driver of demand for steel-making raw registered with FINRA, may not be associated persons of the member and may not be subject to materials and thermal coal, but current prices are challenging for NASD/NYSE restrictions on communications with a steel makers and thermal power generators. subject company, public appearances and trading securities held by a research analyst account
  2. 2. MORGANSTANLEYRESEARCH October 6, 2010 Global Metals Playbook, 4Q10 Table of contents Executive Summary 4 Top Picks 6 Key Changes 7 Economic and Commodities Outlook 10 Base Metals Precious Metals Top Equity Ideas Aluminium & Alumina 21 Gold 38 Kobe Steel 69 Harunobu Goroh Copper 25 Silver 41 US Steel 70 Nickel 28 Palladium 44 Mark Liinamaa Fortescue Metals 71 Lead 31 Platinum 46 Craig Campbell Zinc 34 Rhodium 48 Implats Limited 72 Simon Kendall Steel & Bulk Commodities Tata Steel 73 Steel 52 Vipul Prasad Xstrata 74 Met Coal 55 Ephrem Ravi Iron Ore 58 POSCO 75 Charles Spencer Mined Energy Kazakhmys 76 Thermal Coal 63 Ephrem Ravi Mechel 77 Uranium 65 Dmitriy Kolomystyn 2
  3. 3. MORGANSTANLEYRESEARCH October 6, 2010 Global Metals Playbook, 4Q10 Global Commodities Team Global Metals & Mining (Australia) Latin America Steel, Metals & Mining, Pulp & Paper (New York/São Paulo/Mexico) Peter Richardson 6+ 61 3 9256 8943 Carlos de Alba 1 1 212 761 4927 Joel Crane 6+ 61 3 9256 8961 Bruno Montanari 2+ 55 11 3048 6225 EMEA Metals & Mining, Steel (London) Non-Japan Asia Metals & Mining (Singapore/Seoul/Hong Kong) Ephrem Ravi 3+ 44 (0)20 7425 2127 Charles Spencer (team leader) 5+ 65 6834 6825 Carsten Riek 3+ 44 (0)20 7425 3075 Hyunjae Lee (Seoul coverage) 3+ 82 2 399 4850 Markus Almerud 3+ 44 (0)20 7425 9870 Sandy Niu (China coverage) 5+ 852 2239 1520 Alain Gabriel 3+ 44 (0)20 7425 8959 Mean Phil Chong 5+ 65 6834 6194 Hannah Kirby 3+ 44 (0)20 7425 6014 John Lam 5+ 852 2848 5412 EMEA Metals & Mining, Steel (Moscow) Asia Oil & Gas Coal (Hong Kong) Dmitriy Kolomytsyn 9+ 7 (495) 287 2309 Wee-Kiat Tan 5+ 852 2848 7488 Timur Salikhov 9+ 7 (495) 287 2118 Sara Chan 5+ 852 2848 5292 Josh Du 5+ 852 2239 7593 EMEA Metals & Mining, Steel (Johannesburg) Simon G. Kendall 10+ 27 11 282 4932 Japan Metals & Mining, Steel (Tokyo) Leigh Bregman 10+ 27 11 282 8969 Harunobu Goroh 7+ 81 3 5424 5343 Akira Morimoto 7+ 81 3 6422 8650 Australia Metals & Mining, Steel (Melbourne/Sydney) Leigha Miyata 7+ 81 3 6422 8671 Craig Campbell 6+ 61 3 9256 8936 Li Luo 5+ 86 21 2326 0032 Cameron Judd 6+ 61 3 9256 8904 Sarah Lester 6+ 61 3 9256 8436 Global Commodities (New York) Hussein Allidina 1 1 212 761 4150 India Metals & Mining, Steel (Mumbai) Christopher Corda 1 1 212 761 6005 Vipul Prasad 4+ 91 22 2209 7807 Tai Liu 1 1 212 761 3585 Ketaki Kulkarni 4+ 91 22 2209 7925 North America Metals & Mining, Steel (New York) Mark Liinamaa 1 1 212 761 3537 Evan L. Kurtz 1 1 212 761 7583 Paretosh Misra 1 1 212 761 3590 Wes Sconce 1 1 212 761 6004 1 Morgan Stanley & Co. Incorporated 2 Morgan Stanley C.T.V.M. S.A. 3 Morgan Stanley & Co. International plc 4 Morgan Stanley India Company Private Limited 5 Morgan Stanley Asia Limited 6 Morgan Stanley Australia Ltd 7 Morgan Stanley MUFG Securities 8 Morgan Stanley Taiwan Ltd 9 OOO Morgan Stanley Bank 10 RMB Morgan Stanley (Proprietary) Ltd + Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. 3
  4. 4. MORGANSTANLEYRESEARCH October 6, 2010 Global Metals Playbook, 4Q10 Executive Summary Economic recovery continues, amid persistent uncertainty  Base metals: Following the recent correction, we are positive towards base metals and have strengthened our price forecast profile through 2012. This reflects our expectation that modest growth and continued supply constraints will be reflected in falling inventories and strengthening prices. While we are cautious on those metals with a forecast market surplus over the 2010-2012 period (aluminium, lead and zinc), we continue to prefer the deficit markets of copper, nickel and tin.  Precious metals: Fiat currency concerns have reappeared as the US Federal Reserve contemplates renewed QE to confront sluggish growth and persistently high levels of unemployment. This development, with associated downside risk to the US dollar, is likely to underpin continued growth in investment demand for gold and silver. Auto demand recovery remains a positive for the PGM complex.  Bulk commodities: Despite lingering concerns over construction sector demand in China and consequences for Chinese steel inventory, production and prices, the longer-term outlook for steel-making raw materials remains strong as emerging market growth continues to underpin demand for all types of steel. China’s Manufacturing PMI and Export Growth, Global Manufacturing PMI and OECD Leading 2005-2010 Indicators, 2002-2010 65.0 yoy % chg 50.0 66.0 yoy % 14.0 h 40.0 61.0 10.0 60.0 30.0 56.0 6.0 55.0 20.0 51.0 2.0 50.0 10.0 46.0 -2.0 0.0 41.0 45.0 -6.0 -10.0 36.0 40.0 -20.0 31.0 -10.0 35.0 -30.0 26.0 -14.0 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Chinese Manufacturing PMI (LHS) China Export Grow th, 3mma (RHS) Global Manufacturing PMI (LHS) OECD Composite Leading Indicator (RHS) Source: Thomson Reuters, Morgan Stanley Research Source: Thomson Reuters, OECD, Morgan Stanley Research 4
  5. 5. MORGANSTANLEYRESEARCH October 6, 2010 Global Metals Playbook, 4Q10 Executive Summary Sector strategy evolution going into 2011 1H 09: Strong policy stimulus, 2H 09: Expansionary policies better credit conditions, rising maintained; further rise in leading liquidity, turn in leading indicators indicators; coincident activity lagging (except in China); USD weakening 1H 09: Attractive sector re-entry point: Base 2H 09: Shift of metals rally on Chinese emphasis: Precious restocking metals rally on US dollar weakness 2H 2010/1H 2011: Increase exposure 1H 10:Broaden sector to base metals, add exposure on silver to gold and strengthening growth, palladium in but caution on gold as precious metals, but US dollar strengthens be more selective in bulk commodities 2H 2010/1H 11: Real economic recovery 1H 10: Emerging markets drive continues, but bounce-back factors fade; growth; sub-par recovery in OECD; private sector activity grows modestly with USD strengthening in response to increasing measures to address structural European sovereign debt crisis imbalances; China hard landing fears abate, but below-trend US recovery is a key risk 5
  6. 6. MORGANSTANLEYRESEARCH October 6, 2010 Global Metals Playbook, 4Q10 Top Picks Global Highest Conviction Equity Overweights Kobe Steel Solid earnings recovery driven by specialty steel and non-steel business; ITmk3 iron making business in EM could be an additional growth driver US Steel Attractive risk-reward on a 12-month view; leverage to iron ore, energy drilling and US SAAR to drive upside Fortescue Leverage to tight iron ore markets as high-cost Chinese supply has difficulty maintaining production Implats Our top pick in platinum due to its industry-leading operating costs and deeply discounted Zimbabwe growth opportunity Tata Steel Steel prices shaping up well; improvement in Corus operations to surprise positively; Indian operations approaching a step up in growth Xstrata Diversified producer with leverage to several favored commodities – copper, nickel, platinum/palladium, thermal coal POSCO Global steel markets look to be recovering into 2011-12 from cycle trough levels in 2009; recent Chinese steel production cuts are lifting prices and reducing exports Kazakhmys Play on copper, plus benefits from stake in ENRC (ferrochrome, iron ore, aluminum) Mechel Attractively valued steel and coal producer; should continue to benefit from strong coking coal demand in Asia 120% 100% 80% BULL 60% 44% 42% 40% 31% 31% 30% 27% 24% 22% 19% 20% BASE current price -20% PT -40% BEAR -60% Kobe Steel US Steel Implats Fortescue Tata Steel Xstrata Posco Kazakhmys Mechel Source: FactSet, Morgan Stanley Research 6
  7. 7. MORGANSTANLEYRESEARCH October 6, 2010 Global Metals Playbook, 4Q10 Key Changes Fundamentals and easy money are key to metals forecasts • Base metals: Mark-to-market impacts Base Metals: Period Aluminium Copper Zinc Nickel Alumina (contract) have been positive for our CY 2010 New Old Chg New Old Chg New Old Chg New Old Chg New Old Chg forecasts. We have also reinforced our US$/lb US$/lb % US$/lb US$/lb % US$/lb US$/lb % US$/lb US$/lb % US$/t US$/t % rising profile of prices through 2012 based 2009 0.75 2.30 0.74 6.54 208 on our forecasts of a continued cyclical 2010e 0.97 0.94 3% 3.31 3.21 3% 0.96 0.95 2% 9.90 9.46 5% 314 306 3% 2011e 0.98 0.96 2% 3.60 3.41 5% 0.99 0.99 0% 10.75 9.86 9% 318 312 2% recovery in industrial production. 2012e 1.15 1.10 5% 3.80 3.45 10% 1.10 1.10 0% 11.20 10.30 9% 372 356 5% 2013e 1.20 1.20 0% 3.60 3.60 0% 1.12 1.12 0% 10.80 10.50 3% 395 388 2% • Copper, nickel and tin remain our 2014e 1.18 1.18 0% 2.90 2.90 0% 1.05 1.05 0% 9.25 9.25 0% 393 380 3% preferred exposures in the complex based 2015e 1.15 1.15 0% 2.50 2.50 0% 0.98 0.98 0% 9.00 8.13 11% 385 372 3% on resilient Chinese demand, improved LT 1.15 1.15 0% 1.95 1.95 0% 0.90 0.90 0% 7.50 7.50 0% 385 372 3% OECD off-take, and constrained supply in Precious Metals: all of these metals. Period Gold Silver Platinum Palladium Rhodium New Old Chg New Old Chg New Old Chg New Old Chg New Old Chg • Precious metals: We have made the US$/oz US$/oz % US$/oz US$/oz % US$/oz US$/oz % US$/oz US$/oz % US$/oz US$/oz % 2009 974 14.70 1,198 261 1,556 most material positive changes to our 2010e 1,203 1,203 0% 18.47 18.57 -1% 1,622 1,653 -2% 493 500 -1% 2,467 2,479 0% forecasts for gold and silver. This reflects 2011e 1,315 1,150 14% 20.23 18.03 12% 1,624 1,675 -3% 541 526 3% 2,276 2,513 -9% our perception of the strong and 2012e 1,250 1,100 14% 19.53 17.00 15% 1,783 1,814 -2% 594 580 2% 3,406 3,544 -4% 2013e 1,200 1,050 14% 18.75 16.10 16% 1,906 1,941 -2% 746 697 7% 4,956 5,940 -17% continuing impact on investment demand 2014e 1,150 1,000 15% 18.25 15.25 20% 2,070 2,047 1% 912 889 3% 5,911 8,089 -27% of currency concerns relating to the 2015e 1,050 950 11% 16.67 14.40 16% 2,147 2,211 -3% 1,135 1,087 4% 7,439 8,738 -15% possibility of renewed Quantitative Easing LT 750 750 0% 12.10 12.10 0% 1,700 1,700 0% 682 682 0% 5,112 5,112 0% in the US and a prolonged period of expansionary monetary policy elsewhere in the OECD. • In the platinum group metals, we continue to favour palladium over platinum on expectations of reduced Russian stockpile disposals of palladium. Modest forecast price adjustments in both metals are designed to reinforce this call. Source: Morgan Stanley Research estimates 7
  8. 8. MORGANSTANLEYRESEARCH October 6, 2010 Global Metals Playbook, 4Q10 Key Changes Bulk commodities – an unchanged but positive price profile • Steel-making raw materials: Despite some persistent market concerns about the strength of demand for steel-making raw materials in 2011/12 and fears regarding the growth in new capacity over this timeframe, especially in iron ore, our fundamental analysis highlights continued strength in premium products (hard coking coal and high-grade iron ore) as seaborne markets struggle to provide sufficient supply to match the anticipated growth in steel production, at least until 2012. We have left our rising price profile for these products unchanged as a result. Weaker coking and direct injection coals are likely to trade at the lower end of their historical discount range to hard coking coal to reflect easier supply conditions in these markets in the near term. • Thermal coal continues to be the quiet achiever in the bulk commodities markets. Recent resilience in seaborne prices in Asia during the 3Q correction and anticipated moderate increases in prices over the forecast period reflect our view that the tightening impact of strong demand in the traditional East Asian markets, the continued growth in Chinese net imports, and the growth in Indian imports will deliver higher prices over the forecast period out to 2013. We have made no changes to our rising forecast price profile over this time frame. Period Iron Ore Contract Coking Coal Contract LV PCI Coal Semi Soft Coal Thermal Coal New Old Chg New Old Chg New Old Chg New Old Chg New Old Chg US$/t US$/t % US$/t US$/t % US$/t US$/t % US$/t US$/t % US$/t US$/t % 2009 62 129 90 80 70 2010e 122 122 0% 191 191 0% 147 147 0% 140 141 -1% 98 98 0% 2011e 135 135 0% 236 238 -1% 189 189 0% 182 182 0% 105 105 0% 2012e 140 140 0% 250 250 0% 199 199 0% 191 191 0% 110 110 0% 2013e 135 135 0% 260 260 0% 207 207 0% 199 199 0% 115 115 0% 2014e 130 130 0% 235 235 0% 187 187 0% 180 180 0% 105 105 0% 2015e 125 125 0% 210 210 0% 167 167 0% 161 161 0% 90 90 0% LT 61 61 0% 110 110 0% 95 95 0% 90 90 0% 70 70 0% Period Global HRC US HRC China HRC Japan HRC Europe HRC Russia HRC Brazil HRC New Old Chg New Old Chg New Old Chg New Old Chg New Old Chg New Old Chg New Old Chg US$/t US$/t % US$/t US$/t % US$/t US$/t % US$/t US$/t % US$/t US$/t % US$/t US$/t % US$/t US$/t % 2009 540 531 520 622 573 505 1,031 2010e 645 655 -2% 670 710 -6% 623 620 0% 727 870 -16% 647 716 -10% 659 614 7% 1,202 1,202 0% 2011e 705 695 1% 740 770 -4% 675 635 6% 780 900 -13% 693 809 -14% 750 667 12% 1,299 1,299 0% 2012e 720 720 0% 770 850 -9% 685 655 5% 800 915 -13% 710 828 -14% 807 720 12% 1,244 1,244 0% 2013e 740 735 1% 770 895 -14% 700 670 4% 800 930 -14% 750 840 -11% 855 764 12% 1,252 1,252 0% 2014e 715 715 0% 735 895 -18% 655 635 3% 750 910 -18% 761 819 -7% 833 743 12% 1,228 1,228 0% 2015e 685 685 0% 695 850 -18% 620 600 3% 750 880 -15% 741 798 -7% 715 715 0% 1,184 1,184 0% LT 600 600 0% 520 500 500 0% 600 994 Source: Morgan Stanley Research estimates 8
  9. 9. MORGANSTANLEYRESEARCH October 6, 2010 Global Metals Playbook, 4Q10 Key Changes Morgan Stanley forecasts compared with consensus MS Market MS Market MS Market Calandar Year Unit 2010e 2010e % Diff 2011e 2011e % Diff 2012e 2012e % Diff MS LT Market LT % Diff Base Metals Aluminium US$/lb 0.97 0.95 2% 0.98 1.03 -5% 1.15 1.08 7% 1.15 1.16 -1% Copper US$/lb 3.31 3.18 4% 3.60 3.45 4% 3.80 3.47 9% 1.95 2.29 -15% Zinc US$/lb 0.96 0.93 4% 0.99 1.01 -2% 1.10 1.13 -2% 0.90 0.91 -1% Lead US$/lb 0.95 0.90 5% 0.97 1.02 -4% 1.10 1.11 -1% 0.85 0.77 11% Nickel US$/lb 9.90 9.37 6% 10.75 9.38 15% 11.20 9.34 20% 7.50 7.72 -3% Precious Metals Gold US$/oz 1,203 1,192 1% 1,315 1,237 6% 1,250 1,232 1% 750 934 -20% Silver US$/oz 18.47 17.38 6% 20.23 18.23 11% 19.53 18.09 8% 12.10 13.20 -8% Platinum US$/oz 1,622 1,625 0% 1,624 1,722 -6% 1,783 1,775 0% 1,700 1,813 -6% Palladium US$/oz 493 485 2% 541 548 -1% 594 564 5% 682 561 22% Bulks Alumina US$/t 314 302 4% 318 324 -2% 372 326 14% 385 360 7% Iron Ore US$/t 122 110 11% 135 117 15% 140 114 23% 61 58 6% Coking Coal US$/t 191 192 -1% 236 221 7% 250 206 21% 110 140 -21% Thermal Coal US$/t 98 90 9% 105 103 2% 110 102 8% 70 84 -17% Morgan Stanley versus Consensus, 2010e Morgan Stanley versus Consensus, 2011e 15.0% 20.0% 15.0% 14.6% 11.0% 15.0% 9.1% 11.0% 10.0% 10.0% 7.4% 6.3% 6.3% 4.2% 5.6% 5.4% 5.0% 2.4% 5.0% 4.2% 4.1% 3.6% 1.9% 1.7% 0.0% 0.9% -1.2% -1.9% -5.0% -2.2% 0.0% -4.2% -4.9% -0.2% -0.6% -5.7% -10.0% -5.0% -15.0% al al l l um um um um l l a a m m oa d re re oa r d r er nc er nc ke ad ke ad pe pe in in Co ol Co ol iu iu O O lv lv C Zi di C di Zi in ic um in ic Le um Le G G op in op in Si Si N n at l la N n at al l la g al g um um Iro Iro C C in Al in Al m Pl m Pl Pa Pa ok ok er Al er Al C Th C Th e = Morgan Stanley Research estimates and Bloomberg for market consensus estimates Source: Bloomberg, Morgan Stanley Research 9
  10. 10. MORGANSTANLEYRESEARCH October 6, 2010 Global Metals Playbook, 4Q10 Economic Outlook A soft patch in 2H 2010 followed by reacceleration in 2011  Global Outlook: A soft patch in 2H 2010, clearly evident in the trend in the global purchasing managers’ index (PMI), should give way to renewed acceleration in growth in 2011 and into 2012 as ongoing policy stimulus in advanced economies offsets much of the negative growth effects of household, corporate and government deleveraging in an extended period of global healing after the crisis of 2008-09.  Emerging Markets are a key to this global growth recovery and to demand for industrial raw materials and energy. Robust emerging market growth is increasingly being driven by domestic demand, with a diminishing reliance on exports. By contrast, developed economies are more slowly transitioning away from debt-driven consumption and construction demand towards exports and capital expenditure. The difference in the pace of growth between emerging markets and developed markets is driving a two-speed global economy.  Liquidity and inflation risks favour commodities as an asset class: With central banks in major developed economies fearful of weakening growth and deflation, we now expect a super expansionary policy of low interest rates and abundant liquidity for an extended period, skewing global inflation risks to the upside. Low interest rates, ample liquidity, and medium-term inflationary risks provide a strong cocktail of support for commodities in general, and gold in particular, as investors fear the impact of this environment on the value of fiat currencies. Global Industrial Production, 2008-15e 2008 2009 2010e 2011e 2012e 2013e 2014e 2015e China 12.6 11.0 15.5 14.0 12.5 12.5 11.0 10.6 India 4.4 6.6 10.6 8.3 9.0 10.0 7.6 6.7 Japan -3.4 -21.9 17.1 0.8 5.0 2.3 2.7 1.4 South Korea 3.4 -1.3 15.1 5.4 7.1 7.5 6.2 4.0 Russia 2.4 -10.9 0.6 4.8 4.8 4.7 4.8 3.5 Canada -5.3 -12.6 4.6 2.0 4.0 3.0 2.9 3.2 United States -2.2 -9.7 5.8 5.7 5.4 3.5 2.6 2.1 Germany 0.0 -16.0 4.3 2.3 3.5 3.6 3.0 2.0 United Kingdom -3.1 -10.3 3.8 2.6 2.6 1.2 1.4 0.7 Global 1.2 -3.9 6.8 5.1 5.3 5.1 4.4 4.1 e = Morgan Stanley Research estimates Source: IMF, Brook Hunt, Morgan Stanley Research 10
  11. 11. MORGANSTANLEYRESEARCH October 6, 2010 Global Metals Playbook, 4Q10 Economic Outlook China’s PMI is pointing to a reacceleration in output in 2011 US ISM Manufacturing PMI vs G3 Industrial Production, 1996-2010 yoy % chg Index • Global PMIs are our favoured leading indicator of demand 40.0 65.0 for industrial raw materials. 30.0 60.0 • In late 2Q and 3Q 2010, global and key regional PMIs 20.0 55.0 softened following a period of unsustainably high readings 10.0 in late 2009 and 1Q 2010. 50.0 0.0 • While the correction started in China in response to -10.0 45.0 policy-tightening measures introduced to cool an 40.0 -20.0 overheating property sector in Tier 1 cities, it has since 35.0 become evident in other emerging and developed markets. -30.0 -40.0 30.0 • In our view, the transition to lower but sustainable growth Sep-96 Sep-98 Sep-00 Sep-02 Sep-04 Sep-06 Sep-08 Sep-10 rates is a reflection of the waning effects of stimulus-driven US IP Japan IP EU IP US ISM (RHS) restocking in developed markets and the impact of moderate policy-tightening measures in emerging markets. Key Growth and Inflation Indicators in China, 2005-2010 24.0 yoy % chg yoy % chg 60.00 • We expect this corrective phase in global industrial output to linger through 4Q 2010 before an extended period of 50.00 monetary easing in developed markets and an easing of 19.0 40.00 cyclical inflationary pressures in emerging markets result in renewed strength in industrial output in 2011. 14.0 30.00 • We already see signs of this trend in the renewed growth in China’s industrial output, despite the intensification of 20.00 9.0 measures against the top end of the property sector; this 10.00 augurs well for continued commodity demand growth going into 2011. 4.0 0.00 Sep-00 Sep-02 Sep-04 Sep-06 Sep-08 Sep-10 Retail Sales Industrial Production Fixed Asset Investment Grow th(RHS) Source: Thomson Reuters, Morgan Stanley Research 11
  12. 12. MORGANSTANLEYRESEARCH October 6, 2010 Global Metals Playbook, 4Q10 Key Sector Themes Currency impacts: Quantitative Easing and the US dollar Gold and Platinum Spot, ZAR/oz and USD/oz, • With investors increasingly inclined to expect a Relative Performance Base: reintroduction of quantitative easing (QE) by the US 1 Jan 09 = 100 Federal Reserve, renewed downward pressure on the 200.0 US dollar has increased markedly, with benefits to a 180.0 wide range of US dollar-priced commodities. 160.0 • As we expect an extended period of expansionary 140.0 monetary policy to combat the risks of deflation and 120.0 weak growth in developed markets, even though we are 100.0 less certain on the likelihood of the formal adoption of QE2, a weaker dollar is likely to persist into 2011. 80.0 Jan- Mar- May- Jul- Sep- Nov- Jan- Mar- May- Jul- Sep- • However, the key risk for commodity markets is that 09 09 09 09 09 09 10 10 10 10 10 growth in H2 2010 and 1H 2011 exceeds market Gold ZAR/oz Platinum ZAR/oz Gold US$/oz Platinum US$/oz expectations and results in less expansionary monetary China Spot Iron Ore (fob) in USD/t, AUD/t and BRL/t, policy and a sharply higher US dollar. Relative Performance Base: • This risk is unlikely to be realized before the end of 1Q 1 Jan 09 = 100 2011, however, providing a clear opportunity for 260.0 240.0 sustained strength in US dollar commodity prices, 220.0 especially if the dollar comes under further downward 200.0 pressure from stronger Chinese and commodity 180.0 producer currencies. 160.0 140.0 • The obverse of a weak dollar, against the backdrop of 120.0 strong commodity prices, is also expected to be the 100.0 80.0 continuation of strong producer currencies such as the 60.0 A$, the C$, the Brazilian real and the South African Jan- Mar- May- Jul- Sep- Nov- Jan- Mar- May- Jul- Sep- rand (ZAR). 09 09 09 09 09 09 10 10 10 10 10 Spot Iron Ore FoB US$/t Spot Iron Ore FoB A$/t Spot Iron Ore FoB BRL/t Source: Thomson Reuters, Morgan Stanley Research 12
  13. 13. MORGANSTANLEYRESEARCH October 6, 2010 Global Metals Playbook, 4Q10 Key Sector Themes China’s crackdown on property and energy-inefficient sectors • Throughout much of 2010, investors have struggled to measure the demand impact of two key policies in China: the crackdown on high-end property speculation and inefficient energy practices. • In our view, fears of a policy-induced hard landing in the broader economy as a result of policy-tightening measures directed at the high-end property market are starting to fade, and such fears never formed a key part of our base case. • Two consecutive months of rising manufacturing PMI readings in August and September suggest that the worst effects of slowing construction demand on output and new orders are passing. • As part of the 11th Five-Year Plan, China ordered the closure, by the end of September 2010, of thousands of outdated and inefficient plants in an effort to reach ambitious energy consumption-reduction targets in 18 industries. In an intensification of this campaign, at the beginning of September, the central government ordered some provinces to cut power to meet emission targets, given the limited time available to meet these targets. • The table below details our estimate of total 2010 output affected by the measures. Iron and steel have been the hardest hit, and we believe this will translate into slightly stronger steel pricing. The very modest declines in copper and aluminium smelting should have little-to-no effect on global markets, as base metal smelters are already operating in an environment of low utilization rates as capacity build has exceeded mine production levels. • While the impact of these measures on some of these industries has been notable in the short term, its impact as measured by industrial output is showing signs of fading now that the deadline for implementation has passed. Chinese capacity to be phased out by 3Q10 Capacity to be % of 2010 capacity phased out capacity Iron (Mt) 35.2 705 6.2% Steel (Mt) 8.8 Copper smelting (Kt) 145 4,200 3.5% Aluminum (Kt) 745 21,992 3.4% Source: CEIC, Brook Hunt, CRU, Morgan Stanley Research 13
  14. 14. MORGANSTANLEYRESEARCH October 6, 2010 Global Metals Playbook, 4Q10 Key Sector Themes Inventory financing deals • Inventory financing deals, in which producers and financial intermediaries take advantage of contango markets, persistently low interest rates, and abundant warehousing facilities, have been an important feature of base metal markets over the past two years. • While such deals have been evident in nickel and zinc, they have been most persistent in aluminium, where oversupply has largely supported a full cost-of-carry contango term structure since late 2008. • In our view, although these deals have tended to defer the necessity of eliminating excess capacity, they have provided ongoing price support by reducing metal availability. However, with expiry of some of these term financing arrangements, or as a result of flattening in the forward curve due to producer selling, the signs of change in aluminium financing deals are increasing as longer-term yields start to decline. • In our view, continued oversupply and falling financing yields are driving a transition in the aluminium industry to an environment in which a small number of large physically backed exchange traded funds (ETFs) replace the current plethora of financing deals. We expect this development to start in late 4Q 2010 or 1H 2011. Yield on 3m, 15m and 27m Aluminium Financing Deals Yield on 3m, 15m and 27m Nickel Financing Deals 10.0% 25.0% 20.0% 0.0% 15.0% 10.0% -10.0% 5.0% 0.0% -20.0% -5.0% -30.0% -10.0% -15.0% -40.0% -20.0% -25.0% -50.0% -30.0% Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 3-month 15-month 27-month 3-month 15-month 27-month Source: Thomson Reuters, Morgan Stanley Research Source: Thomson Reuters, Morgan Stanley Research 14
  15. 15. MORGANSTANLEYRESEARCH October 6, 2010 Global Metals Playbook, 4Q10 Commodities Outlook Base metal fundamentals to differentiate performance Relative Performance of LME Metals since Jan 2009 • Base metals, having undergone a significant Base: 1 Jan 09 = 100 correction in 2Q and early 3Q 2010, are likely to 250.0 show continued price appreciation in 2011-12. 230.0 210.0 • In our view, this reflects the combined influence 190.0 of improving physical market fundamentals, 170.0 continued investment demand, and, in some 150.0 cases, inventory financing arrangements or ETFs. 130.0 • Our preference in this sector remains for those 110.0 metals where the potent combination of sustained 90.0 emerging market demand growth, limited refined 70.0 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 production growth, and low inventories provides Copper Lead Zinc Nickel Tin Aluminium the basis for a sustained backwardation in nearby prices and elevated cash prices. Source: Thomson Reuters, Morgan Stanley Research • In order of preference, the metals that will most Morgan Stanley Base Metals Outlook in Order of Preference 2010 2011 likely meet these criteria are copper, tin and nickel. Market Market Balance Price Balance Price • We are more cautious, at the present time, on Kt US$/lb Kt US$/lb those metals such as aluminium, lead and zinc Copper -119 3.31 -106 3.60 whose markets will be slower to return to deficit and where supply discipline or restraint is Tin 23 8.97 -15 10.43 noticeably less evident. Nickel -37 9.90 -1.4 10.75 • However, we are cognisant that inventory Lead 93 0.95 90 0.97 financing deals in aluminium, or their successor in the form of physically backed exchange traded Aluminium 1382 0.97 658 0.98 funds, will provide price tension and support, despite weaker fundamentals. Zinc 933 0.96 279 0.99 Source: WBMS, ICSG, INSG, ILZSG, Morgan Stanley Research estimates 15
  16. 16. MORGANSTANLEYRESEARCH October 6, 2010 Global Metals Playbook, 4Q10 Commodities Outlook Precious Metals – the US dollar and gold back in focus US Treasury Inflation-linked Securities vs Gold Price • We expect gold and silver to benefit strongly from INVERTED SCALE 1350 -0.50 continued investment demand for products that provide returns in either a deflationary or inflationary environment. 1250 0.00 • In our view, investors have become increasingly 1150 concerned about the continued decline in consumer price 0.50 inflation in the US and some other major developed 1050 economies, raising fears of a protracted period of deflation 1.00 950 and low growth. 1.50 850 • This has raised demand for investments that retain real purchasing power in a period of falling prices and weak 750 2.00 demand, while also providing protection against the return Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 of future price inflation. Gold Price US$/oz (LHS) US 5-year TIP, yield % (RHS) • This simultaneous fear of deflation and future inflation has Relative Performance of Gold, Silver, its roots in the anticipated policy response to the current Platinum and Palladium since Jan 2009 US growth environment, renewed quantitative easing (QE). Base: The feared expansion in liquidity and currency devaluation 1 Jan 09 = 100 340.0 that might accompany QE are also viewed as potentially inflationary, fuelling the demand for real assets such as 290.0 gold and silver that preserve purchasing power. 240.0 • We continue to expect PGMs to benefit strongly from improved industrial usage in the automotive and chemical 190.0 industries in the medium term, and from residual strength in 140.0 the jewellery fabrication market in China, and constrained South African production. We also continue to favour 90.0 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 palladium over platinum, given the growing signs of reduced Russian palladium sales from inventory. Palladium Platinum Silver Gold Source: Thomson Reuters, Morgan Stanley Research 16
  17. 17. MORGANSTANLEYRESEARCH October 6, 2010 Global Metals Playbook, 4Q10 Commodities Outlook Bulk Commodities – steel-making raw materials the key focus Daily Blast Furnace Operating Rates • In steel-making raw materials, the close tonnes/day 3,000 US$/t 350 relationship between the Chinese steel price, the 300 inventory cycle, and raw material prices has been 2,500 cemented by the move to index-linked quarterly 250 2,000 pricing. In turn, this has resulted in significantly more 200 volatility in iron ore and coking coal quarterly price 1,500 150 outcomes during 2010. 1,000 100 • Despite enhanced volatility, the trend of China’s 500 rising dependence on imports for supplies of 50 premium iron ore and coking coal products 0 0 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 continues, as growing automotive production, further EU (27) US Brazil infrastructure growth, and expanding social housing China India Japan programs have underpinned demand for crude steel. South Korea Spot Iron Ore (RHS) Taiw an Export Spot Coking Coal (RHS) • We expect that these trends, supplemented by China’s Net Coal Imports by Coal Type developments in other emerging market domestic 6,000 steel markets, will provide the basis for continued '000 tonne 4,000 growth in iron ore and metallurgical coal demand and production over the 2010-2015 period. 2,000 • Anticipated delays in adding to future mine and 0 logistics capacity are likely to underpin an elevated (2,000) pricing environment in iron ore and coking coal for significantly longer than the current market (4,000) consensus anticipates. (6,000) • Logistical constraints will also feature prominently (8,000) Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 in an elevated price environment for thermal coal, at Anthracite Coking Coal Steam coal least until 2013, we expect. Source: WSA, CEIC, Morgan Stanley Research 17
  18. 18. MORGANSTANLEYRESEARCH October 6, 2010 Global Metals Playbook, 4Q10 Commodities Outlook Key risks to our view Base Metals: • Growth risks in China: While a soft Period Aluminium Copper Nickel Zinc landing scenario in China is now considered Bull Base Bear Bull Base Bear Bull Base Bear Bull Base Bear consensus, the most recent tightening US$/lb US$/lb US$/lb US$/lb 2010e 0.99 0.97 0.95 3.38 3.31 3.25 10.10 9.90 9.70 0.98 0.96 0.95 measures designed to cool urban property 2011e 1.09 0.98 0.78 4.14 3.60 3.06 12.36 10.75 9.14 1.10 0.99 0.79 markets indicate that spill-over risks to the 2012e 1.32 1.15 0.98 4.56 3.80 3.34 13.44 11.20 9.86 1.27 1.10 0.94 broader economy remain. 2013e 1.44 1.20 1.02 4.32 3.60 3.06 12.96 10.80 9.18 1.34 1.12 0.95 2014e 1.35 1.18 1.03 3.34 2.90 2.55 10.64 9.25 8.14 1.21 1.05 0.92 • Growth and deflation risks in the US: 2015e 1.27 1.15 1.04 2.75 2.50 2.25 9.90 9.00 8.10 1.08 0.98 0.88 The risk of sluggish growth and persistently LT 1.27 1.15 1.04 2.15 1.95 1.76 8.25 7.50 6.75 0.99 0.90 0.81 high unemployment amid rising deflation Precious Metals: risks, while not our base case view, could Period Gold Silver Platinum Palladium pose a material challenge to US economic Bull Base Bear Bull Base Bear Bull Base Bear Bull Base Bear US$/oz US$/oz US$/oz US$/oz recovery. The probability of QE 2 and its 2010e 1,263 1,203 1,143 19.40 18.47 17.55 1,703 1,622 1,378 518 493 419 attendant medium-term risks could be higher 2011e 1,512 1,315 1,249 23.27 20.23 19.22 1,786 1,624 1,380 595 541 460 than our base case indicates. 2012e 1,438 1,250 1,125 22.46 19.53 17.58 1,961 1,783 1,516 653 594 505 2013e 1,344 1,200 1,056 21.00 18.75 16.50 2,097 1,906 1,620 821 746 634 • Covert protectionism: The “race to the 2014e 1,288 1,150 1,012 20.44 18.25 16.06 2,277 2,070 1,760 1,003 912 775 bottom” in foreign exchange markets is a 2015e 1,155 1,050 945 18.33 16.67 15.00 2,362 2,147 1,825 1,249 1,135 965 covert form of trade protectionism and a sign LT 825 750 675 13.31 12.10 10.89 1,870 1,700 1,445 750 682 580 of growing anti-globalist sentiment. This Bulks: tendency, when coupled with other Period Iron Ore Contract Coking Coal Contract Global HRC Thermal Coal symptoms such as toughening anti- Bull Base Bear Bull Base Bear Bull Base Bear Bull Base Bear US$/t US$/t US$/t US$/t immigration policies, could harm the 2010e 124 122 119 195 191 187 658 645 610 98 98 98 recovery in global growth and trade. 2011e 155 135 115 272 236 201 753 705 620 121 105 84 2012e 154 140 119 275 250 213 795 720 640 121 110 94 • European sovereign debt crisis: Recent 2013e 149 135 115 286 260 221 845 740 655 127 115 98 developments in the Irish banking sector 2014e 137 130 111 247 235 200 850 715 635 110 105 89 highlight the potential for this contagion risk 2015e 131 125 106 221 210 179 800 685 595 95 90 77 to erupt once again, with negative LT 64 61 52 116 110 94 545 510 550 74 70 60 implications for a broad range of risk assets. e = Morgan Stanley Research estimates Source: Morgan Stanley Research 18
  19. 19. MORGANSTANLEYRESEARCH October 6, 2010 Global Metals Playbook, 4Q10 19
  20. 20. MORGANSTANLEYRESEARCH October 6, 2010 Global Metals Playbook, 4Q10 Commodity Commentary – Base Metals 20
  21. 21. MORGANSTANLEYRESEARCH October 6, 2010 Global Metals Playbook, 4Q10 Aluminium Still underperforming – despite the rise in cancelled warrants  Although prices strengthened in the final stages of 3Q 2010, aluminium remains the clear laggard of the complex in 2010. LME 3-month aluminium ended Q310 at US$1.06/lb (US$2,345/t) while copper was at US$3.65/lb (US$8,035/t). The last time copper traded at this level, aluminium was around US$1.30/lb (US$2,900/t).  Although LME stocks have slowly declined to their lowest level since 2Q 2009, there is more to this story than a simple pick-up in demand. A sharp move in cancelled warrants during September fuelled speculation of an imminent launch of a physically backed ETF. In our view, while such a product may excite some investors, the existence of a physical fund is unlikely to transform the fundamentals of the market despite an anticipated relocation of exchange stocks into these funds. While a successful launch of a physically backed aluminium ETF would, as now, have a price- tensioning impact, over the longer term, we expect the weaker fundamentals of the global aluminium market to undermine absolute and relative performance in aluminium, and ultimately affect investor returns. Primary Aluminium Market Balance vs Price, LME Aluminium Cancelled Warrants 2002-2015e 400000 2.50 USc/lb 140.0 Mt 350000 2.00 120.0 300000 1.50 100.0 250000 1.00 80.0 200000 0.50 60.0 150000 0.00 40.0 100000 -0.50 20.0 50000 -1.00 0.0 0 2002 2004 2006 2008 2010e 2012e 2014e Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Apparent Surplus/Deficit (LHS) Average LME Cash Aluminium Price Tonnage on Cancelled Warrant 2-year Avg e = Morgan Stanley Research estimates Source: CRU, WBMS, Morgan Stanley Research Source: Thomson Reuters, Morgan Stanley Research 21

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