LME presentation for ALFED

Oscar Wehtje, Head of Product Development September 2015 Agenda

• Introduction to the LME

• Hedging concepts

• Warehouse reforms and pricing impacts

• New LME products and services – Focus on the LME Premium contracts

• Questions

• Ring tour (4:30 – 5:00 pm)

• Refreshments

1

Introduction to the LME

2 The London Metal Exchange

LME was established in 1877 in response to • High metal consumption relying on imports from abroad • The need to risk of price fluctuations during long shipping voyages • Shipping of from Chile and Tin from Malaysia took three months to arrive in London

LME was acquired by Hong Kong Exchanges and (HKEx) in December 2012

3 The London Metal Exchange New contracts have been added to the initial Copper and Tin, over the past ~100 years

1877 1920 1978 1979 1992 2002 2008 2010 2015 Copper & Primary Aluminium NASAAC Billet Cobalt & Aluminium & Tin Aluminium Alloy Molybdenum Premiums & Ferrous suite

4 LME Volumes • LME trading represents c. 80% of the global exchange traded base metals volume • In 2014 a total of 177.2 million lots were traded (3.5% increase vs. 2013) – $14.9 trillion notional value, or – 4 billion tonnes of metal

LME trading volume, 2002 – 2014

5 Primary services of the LME

1 2 3

Pricing Hedging Delivery

Terminal Market

Price Convergence

6 Hedging concepts

7 Exchange – LME pricing LME prices reflect the material activities of the market

Supply & Robust demand

Regulated LME prices Daily

Trans- Trusted parent

8 What does the LME price represent?

The LME price represents material:

• of an LME registered brand

• stored in an LME approved warehouse

• duty unpaid – no taxes / VAT etc

• buyer to pay for delivery out of warehouse

9 The metals value chain It does not matter what stage of the metals value chain you are – the LME price is relevant!

LME price LME price LME price plus production LME price minus discount minus discount costs and profit margin

Semi Mining Concentration Smelting Fabricated Metal Products Products

Cathode Billet Low Metal Content Ingot Wire Rebar

Cans

10 How to use an LME price Metal consumers and producers use the LME price as the reference basis for physical transactions

LME price

+ / – value chain adjustment

+ / – grade differential versus LME grade

+ / – differential for favoured brand

+ / – differential for favoured location versus the LME approved delivery point

+ / – packaging differential

+ / – delivery differential to consumer works

+ / – timing differences

+ / – volume or other discounts / premiums etc.

= Physical sales price

11 What stops you hedging?

Pressure off Speculation Complicated sourcing

Shareholder Liquidity Cost exposure

Creating Pricing not hedging hedging team

12 What is hedging? Establishing a position in a futures market (LME) which is equal and opposite to a risk on a physical market

• Protects against adverse price movements – By hedging you reduce the uncertainty and your exposure to price movements • Locks in an agreed profit margin – The financial hedge allows the buyer/seller to lock in a certain price to be paid/received in the future • Protects inventory value – If hedged, any losses on the physical market (affecting the inventory value) are offset by an increased value in the financial position

13 Warehouse reforms and pricing impact

14 Stock levels demonstrate LME market relevance

9.00

8.00

7.00

6.00

5.00

4.00

3.00 Million Million tonnes

2.00

1.00

0.00

North America Europe Asia Other

LME closing stock (23-Apr-92 – 31-Jul-15) 15 LME warehouse reforms 12 item reform package announced in 2013

LILO Rule Best-practice information barrier policy

Enhanced LME investigation and action powers Enhanced LME investigation and action powers Commitments of Traders transparency for artificial queues for artificial queues

Publication of queues and stock data by Creation of Physical Market Committee Separate loadwarehouse-out rate for steel plus ongoing six-monthly reviews

Premium contracts (rule changes to facilitate Separate load-out rate for steel Already delivered Already premium hedging solutions)

Legal review of the LME Warehouse Agreement Logistical review

Separate load-out rate for aluminium alloys

Cap rents in queues Assess structural solutions to high charges

Further load-out rate increase In In progress

16 Queue development and projected decay1 Cancellation represents the key driver of queues. Data for primary aluminium as of 31-Jul-15

“Incumbent” queues – development driven almost exclusively by warrant cancellation, given flat load-in by operators

800

700

600

500

400

300

Waiting time (calendardays) Waitingtime 200

100

0

Impala Antwerp Pacorini Johor Pacorini Vlissingen Metro Detroit Pacorini New Orleans “Aspirant” queues now appear to have fallen away

Key: Consultation announcement 1-Jul-13 1Projected queue decay. For important information as to Decision announcement 7-Nov-13 Initial Court Judgment 27-Mar-14 modelling approach and assumptions, please see Notices Court of Appeal Judgment 7-Oct-14 15/071 : A070 : W024 and 15/191 : A187 : W063. Supreme Court decision 17-Dec-14 Projected data based on mid case scenario. 17 Development of market premiums Significant fall in premiums over 2015

• Early January 2014 spike in North American premiums moderated but then continued to climb • February and H1 2015 saw a sharp fall in premiums which continued until prices stabilised in July/August • Various explanations have been provided, included a shift in supply / demand fundamentals (including increased exports from China), impact of LME warehouse reform including greater outflow from LME warehouses, a contraction of the LME forward curve and expected increase in interest rates

Premium development

550 25% 500 450 20% 400 350

300 15%

250 US$ / tonne / US$ 200 10% 150

100 Premium %age of LME price + + premium price LME of %age Premium 50 5%

Alum. CIF Japan 99.7% Prem 3Mth Aluminium Min 99.7% Europe US$/MT Alum. US Midwest P1020 Prem Ind Alum. Percentage US Midwest premium

Key: Consultation announcement 1-Jul-13 Decision announcement 7-Nov-13 Initial Court Judgment 27-Mar-14 Court of Appeal Judgment 7-Oct-14 Supreme Court decision 17-Dec-14 Data as of 27-Aug-15 18 Composition of premiums

PREMIUMS

Non-queue Queue related related

LME implementing warehouse reforms Outside current scope of LME prices • Queues will fall over time – might go up • Driven by market supply / demand factors first, but eventually will go down – Location • Queue-based premiums will fall – Shape, brand, quality accordingly – FoT charge

LME traded Premium contracts Premium futures contracts may additionally help to manage queue- based premiums while these continue • Region to exist • FoT charge • Queue length

19 LME Product pipeline

20 LME’s commitment to progress Development across the LME landscape

Commitment to • LMEselect 7.4 best-in-class • Warehouse reforms infrastructure

• LMEbullion • Aluminium • Warrants as collateral* New services New products premiums** • Compression* • Ferrous suite** • Warehouse receipts

Liquidity Roadmap

* Subject to regulatory approval ** Subject to consultation and regulatory approval 21 LME’s new aluminium contract suite LME’s leading global aluminium contract will be supplemented with four regional premium contracts

LME’s new aluminium contract suite Premium contracts 1 SOUTH Four regional contracts covering the key US EUROPEAN EAST EAST ASIAN centres of aluminium demand PREMIUM PREMIUM ASIAN PREMIUM PREMIUM 2 Hedging of regional all-in price of aluminium

3 GLOBAL Physical delivery of readily available metal LME ALUMINIUM in Premium Warehouses

4 Monthly contract to concentrate liquidity

5 Comprehensive warehouse reforms Launch 23 November 2015

NOTE: subject to regulatory approval and rule change consultation 22 LME premium contract construction – illustrative Premium contract trading without diluting liquidity from the regular LME market

1 2 Current LME With LME Aluminium Contract Premium Contract

LME standard LME premium LME standard contract contract A contract $1,608 $185 Buyer $1,608

$1,793

LME Regional B LME Warrant Premium Warrant Seller • May be queued • Not in a queue (e.g.Detroit / • In relevant region Vlissingen) (e.g. Baltimore for North America)

Note: LME premium contract indicatively assumed to trade at current surveyed US Midwest Premium level. Data as of 30 July 2015

23 LME premium warehouse locations in the US

Premium warehouse locations St Louis Chicago

Toledo Detroit

Baltimore

Owensboro

Los Angeles

Mobile

Location without queues New Orleans Location with queues

Note: LME US Aluminium Premium covers the Midwest, Northeast and South US regions 24 LME premium warehouse locations in Europe

Helsingborg Premium warehouse locations

Moerdijk Tyne & Wear Netherlands UK Bremen Germany Rotterdam Hamburg Liverpool Netherlands Germany UK

Antwerp Hull Belgium UK Genoa Vlissingen Italy Bilbao Netherlands Trieste Spain Italy

Leghorn Location without queues Barcelona Italy Spain Location with queues

Note: LME Western European Aluminium Premium Futures Contract covers Western Europe as defined by the UN Geoscheme M49 classification 25 LME premium warehouse locations in Asia

Premium warehouse locations Gwangyang Korea Incheon Korea

Busan Korea

Nagoya Japan

Yokohama Japan

Kaohsiung Johor Taiwan Malaysia

Port Klang Malaysia Singapore Location without queues Singapore

Location with queues

Note: LME Eastern Asia Aluminium Premium Futures Contract covers Eastern Asia, and the LME South-Eastern Asia Aluminium Premium Futures Contract covers South-Eastern Asia, both as defined by the UN Geoscheme M49 classification 26 Questions

27 Ring tour

28 Disclaimer

© The London Metal Exchange (the “LME”), 2015. The London Metal Exchange logo is a registered trademark of The London Metal Exchange. All rights reserved. All information contained within this document (the “Information”) is provided for reference purposes only. While the LME endeavours to ensure the accuracy, reliability and completeness of the Information, neither the LME, nor any of its affiliates makes any warranty or representation, express or implied, or accepts any responsibility or liability for, the accuracy, completeness, reliability or suitability of the Information for any particular purpose. The LME accepts no liability whatsoever to any person for any loss or damage arising from any inaccuracy or omission in the Information or from any consequence, decision, action or non-action based on or in reliance upon the Information. All proposed products described in this document are subject to contract, which may or may not be entered into, and regulatory approval, which may or may not be given. Some proposals may also be subject to consultation and therefore may or may not be implemented or may be implemented in a modified form. Following the conclusion of a consultation, regulatory approval may or may not be given to any proposal put forward. The terms of these proposed products, should they be launched, may differ from the terms described in this document. Distribution, redistribution, reproduction, modification or transmission of the Information in whole or in part, in any form or by any means are strictly prohibited without the prior written permission of the LME. The Information does not, and is not intended to, constitute investment advice, commentary or a recommendation to make any investment decision. The LME is not acting for any person to whom it has provided the Information. Persons receiving the Information are not clients of the LME and accordingly the LME is not responsible for providing any such persons with regulatory or other protections. All persons in receipt of the Information should obtain independent investment, legal, tax and other relevant advice before making any decisions based on the Information. LME contracts may only be offered or sold to United States foreign futures and options customers by firms registered with the Commodity Futures Trading Commission (CFTC), or firms who are permitted to solicit and accept money from US futures and options customers for trading on the LME pursuant to CFTC rule 30.10.

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