Analyst Article September 26, 2008

THE NICKEL MARKET

1. Historical Price

Source: Global InfoMine

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

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

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

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

(2) Massive growth in Chinese consumption of nickel, as production of stainless steel increased significantly (stainless
steel and alloys accounts for 87% of nickel consumption). In this period, the world’s economy also witnessed
strong demand growth for stainless steel from North America, Europe and Japan; and

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eResearch The Nickel Market

(3) The role of hedge funds and large institutional traders, as these institutions played a significant
role in triggering a short squeeze on the futures markets. According to MMC Norilsk Nickel, the
spike in nickel prices was also caused by institutional traders who were caught with open bets on
lower prices and then were forced to cover by purchasing the metal.

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

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

Production by Country (Supply)

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

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

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

Nickel production from Russia remains relatively stable at the low 300,000-tonne level. However,
Russia remains the largest nickel supply country, accounting for 19% of global 2007 production.
Production from Canada increased by 45% to 258,000 tonnes between 2002 and 2007, with a
CAGR of 7.7%. This made Canada the world’s second-largest producing country (fourth-largest in
2002). According to the CRU (an independent consultant group focused on mining and metals),
supply over the next few years should keep up with demand growth. Existing nickel projects should
provide an increase in production capacity by approximately 370,000 tonnes per year (tpy) by 2012,
net of replacement. This reflects increases in the number of current laterite projects in primarily
Australia, Indonesia and New Caledonia.

2 September 26, 2008

The Nickel Market Analyst Article

Consumption (Demand)

Nickel Market
Stainless Steel 65%
Other Alloys 22%
Electroplating 8%
Chemicals 5%
Total 100%

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

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

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

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

3. Outlook

Supply and Demand Outlook

(Thousands of Tonnes) 2005 2006 2007 2008E 2009E 2010E CAGR
World Refined Demand 1,264 1,286 1,429 1,571 1,658 1,786 7.2%
World Refine Supply 1,288 1,361 1,463 1,542 1,674 1,809 7.0%
Supply shortfalls (-) 24 75 34 (29) 16 23
(E = estimated)
Source: Deutsche Bank AG/London/Brook Hunt

September 26, 2008 3

eResearch The Nickel Market

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

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

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

• Nickel production from laterite ores will continue to increase. However, costs will increase,
reflecting higher energy prices. This will close the gap in production costs between laterite and
sulphide.

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

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

• The long-term nickel price should reflect supply/demand conditions. However, costs of nickel
production have increased. As a result, we do not foresee the long-term nickel price returning
to the US$5/lb level. We believe a $10/lb-$15/lb range is more likely to be the case for the next
five years.

Eric Eng, BA, MBA

September 2008

4 September 26, 2008