Australia Metals Report Q1 2013

BMI View: Across all types of metals, we expect subdued growth in both production and consumption inAustralia as a weakening global economic outlook, notably China, continue to take its toll on Australia'scommodity driven economy. While significant additional global monetary stimulus should help to boostmetal prices in the near term, the bout of loosening measures will be insufficient to stem the slowdownand the medium-term outlook for metals remain weak.

The slowdown in the metals industry in Australia is best exemplified by the country's monthly crude steelproduction, which has continued to slide into negative territory following positive growth in 2010. Weakdemand from slowing domestic construction and a cooling export market will continue to undermineAustralia's steel industry in 2013. Crude steel production is expected to contract by 6.5% in 2013 andnational production is unlikely to approach pre-crisis levels for many years. The country's two dominantsteel producers, BlueScope Steel Ltd and Arrium Ltd (previously known as OneSteel Ltd), hasembarked on a series of consolidation plans and restructuring programmes aimed at reducing operatingcosts and curbing overcapacity amid an environment of weak demand and declining steel prices.

The majority of Australia's refined metal output is for export, with Asia and particularly China accountingfor the largest share. We therefore assign downside risks to our forecasts on the back of a continuedslowdown in China's economy. Although economic data out of China has improved slightly in Q412, webelieve that this is a temporary phenomenon and expect the downturn for Australia's largest tradingpartner to resume in 2013. The impact of falling export demand from China in 2012 hinted at thedevastating impact that further weakness in the Chinese economy will have on the Australian metalsector, as companies fire workers to keep operations profitable and postpone or cancel investmentplans. Moreover, domestic demand for Australia's refined metal production is dependent on the country'seconomic growth rate, which we forecast will be modest until at least 2016. Hence, any reduction in thegrowth rate would have a detrimental effect on the consumption of metals.