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CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®

Client-Driven Solutions, Insights, and Access

09 April 2013

Asia Pacific/Japan

Equity Research

Steel / Non Ferrous Metals (Steel (Japan)/Non Ferrous Metals (Japan)) /

MARKET WEIGHT/MARKET WEIGHT

Steel & Non Ferrous Metals SECTOR REVIEW

Urge shift to non-price-driven stocks as steel

and nonferrous metal prices have peaked

■ Steel and nonferrous metal prices following spring peak trend: Steel

and nonferrous metal prices have started to soften in Asia. Historically, steel

and nonferrous metal prices have tended to peak in spring and soften into

summer/fall. We estimate that behind this lies the fact that amid declining

consumption of steel and nonferrous metals, demand from China, which

accounts for nearly half of global consumption, peaks after the Chinese New

Year. That prices have already started to soften suggests that they are

probably following the seasonal trend, and we therefore need to exercise

caution with regard to investing in price-driven stocks, specifically Nippon

Steel & Sumitomo Metal, JFE Holdings, Kobe Steel, Sumitomo Metal Mining,

Mitsubishi Materials, Mitsui Mining & Smelting, and Dowa Holdings. The

business structures of Kyoei Steel, Yamato Kogyo and other electric furnace

steelmakers make them also price-driven to some extent, but their share

prices correlate only weakly with steel scrap and steel prices, and we do not

classify them as price-driven stocks.

■ Impact of electricity rate hikes: Nonferrous metal smelting and electric

furnace steelmaking are leading heavy power-consuming industries. As such,

they will not be able to avoid cost increases due to electricity rate hikes in

FY3/14. We look for electric furnace steelmakers that manufacture ordinary

steel to be able to absorb these higher costs by hiking their own prices, as

they have narrow areas of operation and demand is firm. In contrast, we

think that higher costs will directly depress profits at specialty steel

manufacturers and nonferrous metal smelters. We think that companies

such as Sanyo Special Steel, Osaka Titanium Technologies, and Pacific

Metals, that have works in areas supplied by Kansai Electric Power and

Tohoku Electric Power will be especially hard hit, as these companies have

substantially hiked electricity rates.

■ Stock calls: We maintain our OUTPERFORM rating on Sumitomo Electric

Industries, Daido Steel, Aichi Steel, Kyoei Steel, Maruichi Steel Tube, and

Daiseki, whose share prices are weakly correlated with steel and nonferrous

metal prices. However, we maintain our UNDERPERFORM rating on Kobe

Steel, Dowa, Osaka Titanium, Toho Titanium, in light of their weak finances,

high valuations, electricity rate hikes, and sluggish sales of titanium.

Research Analysts

Shinya Yamada

81 3 4550 9910

[email protected]

Kazumasa Okumoto

81 3 4550 7266

[email protected]

09 April 2013

Steel & Non Ferrous Metals 2

Steel and nonferrous metal investment strategy

Steel and nonferrous metal prices tend to follow a seasonal trend, being high in March and

April, softening in summer/fall, and rising from winter (Figure 1). Blast furnace steelmaker

and nonferrous metal stocks therefore tend to peak in spring and bottom in summer/fall

(Figure 2–3). This seasonality will likely remain in place, as long as Chinese consumption

continues to peak after the Chinese New Year and demand continues to dry up in the

summer due to summer holidays around the world. We could see a change in this

seasonality if global economic overheating, especially in China and emerging economies,

such as that seen through 2007, were to arise again, but China and India are currently far

from overheating, and we think that the abovementioned seasonality will be on display

again in 2013. Prices of Chinese iron ore, hot-rolled coils, and nonferrous metals have

turned downwards (Figure 4–5). We think that steel scrap prices will also soften from now

on.

Figure 1: Steel and nonferrous metal prices tend to follow a seasonal trend

80

85

90

95

100

105

110

115

120

125

Jan1W

Jan3W

Jan5W

Feb2W

Feb4W

Mar

2w

Mar

4w

Apr

2w

Apr

4w

May 2

w

May 4

w

Jun 1

w

Jun 3

w

Jul 1w

Jul 3w

Aug 1

w

Aug 3

w

Aug 5

w

Sep 2

w

Sep 4

W

Oct

2w

Oct

4w

Nov 1

w

Nov 3

w

Dec

1w

Dec

3w

Cu

Zn

Ni

China HRC

JPN Scrap

Note: 2010-2013 avg. Source: Thomson Reuters

Figure 2: Blast furnace steelmaker and steel prices tend

to follow a seasonal trend

Figure 3: Nonferrous metal stocks and prices tend to

follow a seasonal trend

70

75

80

85

90

95

100

105

110

80

85

90

95

100

105

110

115

120

125

Jan

1W

Jan

3W

Jan

5W

Feb

2W

Feb

4W

Mar

2w

Mar

4w

Ap

r 2

w

Ap

r 4

w

May

2w

May

4w

Jun

1w

Jun

3w

Jul 1

w

Jul 3

w

Au

g 1

w

Au

g 3

w

Au

g 5

w

Sep

2w

Sep

4W

Oct

2w

Oct

4w

No

v 1

w

No

v 3

w

Dec

1w

Dec

3w

China HRC (LHS)

Japan scrap (LHS)

3 BFs MV (RHS)

Note: 2010-2013 avg.

80

85

90

95

100

105

110

115

120

Jan1W

Jan3W

Jan5W

Feb2W

Feb4W

Mar

2w

Mar

4w

Apr

2w

Apr

4w

May 2

w

May 4

w

Jun 1

w

Jun 3

w

Jul 1w

Jul 3w

Aug 1

w

Aug 3

w

Aug 5

w

Sep 2

w

Sep 4

W

Oct

2w

Oct

4w

Nov 1

w

Nov 3

w

Dec

1w

Dec

3w

Cu

Zn

Ni

4 Nonferrous cos' MV

Note: 2010-2013 avg. Source: Thomson Reuters Source: Thomson Reuters

09 April 2013


Figure 4: Prices of Chinese iron ore and hot-rolled coils

nonferrous metals have turned downwards

Figure 5: Prices of nonferrous metals have turned

downwards

60

70

80

90

100

110

120

130

140

150

160

500

550

600

650

700

750

12/01 12/03 12/05 12/07 12/09 12/11 13/01 13/03

(USD/t)

China HRC price (LHS)

China Iron ore price (RHS)

(USD/t)

10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

'12/1 '12/3 '12/5 '12/7 '12/9 '12/11 '13/1 '13/3

(USD/t) (USD/t)Cu (LHS)

Zn (LHS)

Ni (RHS)

Source: Thomson Reuters Source: Thomson Reuters

We think that due in part to economic downturns in China and India there is a strong

likelihood of the usual seasonal trend being seen in 2013, and that price-related stocks will

thus likely remain flat or even start to lose ground. Accordingly, we downgraded the

nonferrous metals sector from Overweight to MARKET WEIGHT in January, and the steel

sector from Overweight to MARKET WEIGHT on 2 April. For details about the steel sector,

see Steel sector: Spring looks disappointing as steel prices peak, issued on 2 April. Here,

we shall re-examine the relationship between nonferrous metal prices and nonferrous

metal sector share prices.

The ranking of sector stocks in our coverage by correlation between share price and

prices of nonferrous metals (average of copper, lead, and nickel) over the past five years

is: Mitsui Mining & Smelting (0.86), Dowa (0.82), Toho Zinc (0.83), Sumitomo Metal Mining

(0.82), Mitsubishi Materials (0.70), and Pacific Metals (0.69) (Figure 6). Note that Mitsui

Mining & Smelting and Dowa have higher correlation coefficients than Sumitomo Metal

Mining, which investors often regard as a straight price-related stock. However, recently

(over the past two years) Dowa's correlation coefficient with nonferrous metals prices has

fallen to 0.37. The recent rise in Dowa's share price, therefore, is in our view due to the

stock's relativity within the nonferrous metals sector. In particular, we think that it has

accompanied a softening in the share price of Sumitomo Metal Mining, with which it has a

strong reverse correlation (Figure 7). Given that the nonferrous metals segment will likely

continue to affect Dowa's earnings (thanks in part to yen weakness, we expect the

nonferrous metals segment to account for 74% of the rise in Dowa's profits in FY3/14), if

nonferrous metals prices weaken further, we think that the company's currently high P/E

(our FY3/14 forecast 15.3x, Bloomberg consensus forecast 13.4x) will fall. In terms of

performance relative to the TOPIX over the past 10 years, we see a polarization between

sluggish Mitsui Mining and Dowa and outperformers such as Sumitomo Metal Mining and

Mitsubishi Materials (Figure 8). As such, we think that Mitsui Mining & Smelting and Dowa

will likely face stronger calls to improve their business and earnings structures.

09 April 2013


Figure 6: Correlation between share price and prices of

nonferrous metals

Figure 7: Strong reverse correlation between DOWA and

Sumitomo Metal Mining

0.85

0.81

0.88

0.88

0.70

0.43

0.69

0.70

0.82

0.83

0.83

0.86

0.89

0.75

0.92

0.91

0.40

0.90

0.0 0.2 0.4 0.6 0.8 1.0

PACIFIC METALS

MITSUBISHI MATERIALS

SUMITOMO METAL MINING

TOHO ZINC

DOWA HDG.

MITSUI MNG.& SMELT.

2yrs (since '11)

5yrs (since '08)

10yrs (since '03)

Correlation with metal prices

30

50

70

90

110

130

150

0

100

200

300

400

500

600

700

'03/1

'03/7

'04/1

'04/7

'05/1

'05/7

'06/1

'06/7

'07/1

'07/7

'08/1

'08/7

'09/1

'09/7

'10/1

'10/7

'11/1

'11/7

'12/1

'12/7

'13/1

Avg. metal price in JPY (RHS)SMM rel. to nonferrous sectorDOWA rel. to nonferrous sector


Figure 8: Polarization between sluggish Mitsui Mining and Dowa and decent Sumitomo

Metal Mining and Mitsubishi Materials

0

100

200

300

400

500

600

'03/1

'04/1

'05/1

'06/1

'07/1

'08/1

'09/1

'10/1

'11/1

'12/1

'13/1

(rel. to TOPIX)

Mitsui M&S

DOWA

Mitsubishi Mtrls

SMM

Toho Zinc

Pacific Metals

Source: Thomson Reuters

09 April 2013


Nonferrous metals price forecasts

We have revised our nonferrous metal price forecasts in Commodity Forecasts: The

Setting Of The Sun…, issued by our global team on 3 April. We lower our forecasts for

prices of copper, nickel, zinc, and gold. We expect the downtrend in copper prices to

become particularly marked (Figure 9–10). Our bearish forecasts (Figure 11–13) are

based on the fact that easier supply–demand conditions have become established, with

copper and nickel apparently in considerable oversupply due to fresh increases in

production. LME inventories of nonferrous metals are on a notable uptrend (Figure 14–16).

Figure 9: Copper and nickel price assumptions Figure 10: Gold and zinc price assumptions

8.9

7.8

7.4

7.7 7.8

7.5 7.5

7.7 7.7 7.7 7.7 7.7

3.8

3.6 3.5

3.6 3.6

3.5

3.3

3.2 3.1

3.1 3.0

2.9

2.6

2.8

3.0

3.2

3.4

3.6

3.8

4.0

7.0

7.5

8.0

8.5

9.0

9.5

12/1Q 12/3Q 13/1QE 13/3QE 14/1QE 14/3QE

Ni (LHS)

(USD/lb) (USD/lb)

1,689

1,612

1,653

1,725

1,630

1,580 1,570

1,540

1,520 1,520

1,480 1,470

2,031 1,930

1,892 1,963

2,034 2,050 2,050

2,150

2,250 2,300

2,350

2,450

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

1,450

1,500

1,550

1,600

1,650

1,700

1,750

12/1Q 12/3Q 13/1QE 13/3QE 14/1QE 14/3QE

Gold (LHS)

Zn (RHS)

(USD/Toz) (USD/t)

Source: Credit Suisse estimates Source: Credit Suisse estimates

Figure 11: Global copper supply and demand estimates

(kt) 2008 2009 2010 2011 2012 2013f 2014f 2015f 2008 2009 2010 2011 2012 2013f 2014f 2015f

MINE PRODUCTION STOCKS

North America 1,952 1,695 1,646 1,732 1,715 1,995 2,159 2,142 LME + COMEX Stocks 371 592 437 459 384

Western Europe 198 205 253 285 334 364 367 383 SHFE Stocks 18 96 132 93 205

CIS & other E Europe 1,788 1,798 1,759 1,776 1,747 1,789 1,797 1,839 Total Exchange Stocks 389 688 569 552 589

China 1,157 1,056 1,258 1,375 1,550 1,651 1,692 1,740 Weeks Cons (Exch Stks) 1.1 2.1 1.5 1.4 1.5

Chile 5,402 5,453 5,480 5,291 5,482 5,869 6,132 6,215 Commercial Stocks 417 388 407 417 488

Australia 875 845 861 943 913 1,000 999 983 Total Reported Stocks 806 1,076 976 969 1,077

Indonesia 650 995 871 543 427 626 635 785 Price (US$/t) 6,932 5,149 7,547 8,813 7,956 7,482 6,675 6,200

ROW 3,691 3,898 4,057 4,278 4,537 5,280 5,914 6,404 TC (US$/t) 45 75 47 56 64 68 75 85

World Mine Production 15,713 15,947 16,184 16,222 16,705 18,574 19,695 20,491 RC (¢/lb) 4.5 7.5 4.7 5.6 6.4 6.8 7.5 8.5

Highly Probable Growth - - - - - - 91 265

Probable & Possible Growth - - - - - - 46 167 COPPER CONSUMPTION BY COUNTRY (Mt)

Disruption Allowance - - - - - (1,115) (1,190) (1,256) North America 2.19 1.78 1.90 1.90 2.01 2.05 2.11 2.17

SX/EW 3,071 3,274 3,335 3,444 3,640 3,572 3,941 4,149 Western Europe 3.37 2.77 3.03 2.90 2.75 2.71 2.71 2.70

Concentrate 12,646 12,677 12,853 12,782 13,070 13,891 14,705 15,522 Eastern Europe 1.11 0.77 0.85 1.11 1.11 1.13 1.16 1.20

World Mined Copper 15,713 15,947 16,184 16,222 16,705 17,459 18,642 19,667 China 5.10 6.38 7.20 7.93 8.34 8.84 9.34 9.80

% Change 3.6% 1.5% 1.5% 0.2% 3.0% 4.5% 6.8% 5.5% India 0.53 0.55 0.58 0.59 0.62 0.67 0.71 0.73

Conc. avail after direct use 12,630 12,656 12,831 12,760 13,048 13,869 14,683 15,500 Japan 1.20 0.88 1.06 1.01 1.03 1.04 1.05 1.05

Smelter Capacity 16,597 17,078 17,554 17,986 18,856 19,730 20,709 21,181 Middle East 0.74 0.76 0.92 0.95 0.97 1.02 1.07 1.12

Smelter Production 14,292 14,178 14,786 15,425 15,902 17,815 19,120 19,761 Other Asia 2.35 2.23 2.43 2.23 2.20 2.27 2.36 2.46

Required Adjustment - - - - - (950) (1,800) (1,800) Oceania 0.15 0.13 0.13 0.12 0.12 0.13 0.13 0.13

Scrap/Remelted Blister (2,067) (1,937) (2,618) (2,867) (3,021) (3,204) (3,224) (3,281) Africa 0.30 0.31 0.30 0.28 0.29 0.30 0.31 0.33

Smelter loss 482 440 471 456 445 455 471 474 Latin America (inc Mexico) 0.89 0.77 0.92 0.88 0.91 0.94 0.98 1.02

Primary Feed Required 12,707 12,681 12,639 13,015 13,326 14,116 14,675 15,423 World Consumption 17.93 17.32 19.33 19.89 20.34 21.09 21.92 22.71

SURPLUS/(DEFICIT) CONC (77) (25) 192 (255) (278) (247) 8 77 % Change -0.3% -3.4% 11.6% 2.9% 2.3% 3.7% 3.9% 3.6%

China 9.2% 25.0% 13.0% 10.0% 5.2% 5.9% 5.7% 4.9%

REFINED COPPER PRODUCTION World ex China -3.6% -14.7% 10.7% -1.3% 0.3% 2.1% 2.6% 2.7%

North America 1,710 1,496 1,405 1,282 1,284 1,340 1,422 1,425 COPPER CONSUMPTION BY SECTOR (Mt)

Western Europe 1,932 1,812 1,904 1,964 2,045 2,167 2,185 2,184 Building & Construction 6.03 5.47 5.57 5.66 5.79 5.97 6.18 6.38

Eastern Europe 1,558 1,567 1,692 1,736 1,744 1,757 1,829 1,835 % Change -1.6% -9.4% 1.9% 1.6% 2.2% 3.0% 3.7% 3.1%

China 3,795 4,109 4,534 5,197 5,665 7,227 8,656 9,485 Transport 2.01 2.34 1.94 1.93 2.02 2.12 2.26 2.41

Other Asia & Oceania 4,593 4,383 4,424 4,372 4,504 4,813 4,937 4,967 % Change -0.1% 16.5% -17.0% -0.8% 4.5% 5.2% 6.6% 6.6%

Africa 608 727 883 964 1,080 1,428 1,670 1,750 Electrical 5.84 5.80 6.71 6.94 7.11 7.35 7.63 7.90

Latin America (inc Mexico) 4,064 4,197 4,135 4,145 3,938 4,112 4,353 4,356 % Change 0.9% -0.7% 15.7% 3.4% 2.4% 3.3% 3.9% 3.5%

Probable Growth - - - - - - 109 269 Consumer Goods 1.80 1.69 2.44 2.56 2.60 2.73 2.83 2.94

Adjustments to refined prod - - - - 61 (1,580) (2,954) (3,017) % Change 0.6% -6.1% 44.8% 4.6% 1.5% 5.2% 3.7% 3.7%

Scrap/Blister 897 840 856 790 779 826 837 875 Machinery & Equipment 2.25 2.02 2.65 2.80 2.83 2.92 3.01 3.09

Electro Refined 15,189 15,018 15,642 16,216 16,681 17,692 18,266 19,105 % Change -0.7% -9.9% 30.9% 5.5% 1.3% 3.2% 2.8% 2.7%

Net SX/EW 3,071 3,274 3,335 3,444 3,640 3,572 3,941 4,149 Total 17.93 17.32 19.33 19.89 20.34 21.09 21.92 22.71

World Production 18,260 18,291 18,977 19,660 20,321 21,264 22,207 23,254 Annual Substitution (468) (394) (450) (550) (450) (450) (400) (400)

% Change 5.6% 0.2% 3.8% 3.6% 3.4% 4.6% 4.4% 4.7% SURPLUS/(DEFICIT) 332 968 (349) (228) (21) 176 288 540 Source: Brook Hunt, Credit Suisse estimates

09 April 2013


Figure 12: Global zinc supply and demand estimates

(kt) 2008 2009 2010 2011 2012 2013f 2014f 2015f 2008 2009 2010 2011 2012 2013f 2014f 2015f

MINED ZINC SUPPLY STOCKS

North America (inc Mexico) 1,927 1,868 1,873 1,980 2,045 1,952 1,975 2,022 LME 253 457 701 822 1,221

C & S America 615 696 698 688 690 688 700 669 SHFE Stocks 63 172 311 364 311

Europe 838 788 780 798 842 900 881 885 Weeks Cons. (Exch. Stks) 1.5 3.2 4.5 4.9 6.1

CIS 657 612 657 630 713 827 870 852 Producer Stocks 365 317 313 366 315

China 3,160 3,198 3,703 4,307 4,734 5,036 5,223 5,296 Consumer Stocks 128 105 97 204 126

India 626 688 719 745 719 878 886 904 Merchant & US strategic 25 21 19 42 21

Other Asia 398 434 495 516 562 617 702 727 Reported stocks 834 1,072 1,441 1,798 1,994

Australia 1,508 1,316 1,481 1,483 1,438 1,598 1,603 1,514 Weeks Consumption 3.9 5.5 6.4 7.4 8.0

Africa 289 295 309 324 329 418 423 420 Price (US$/t) 1,874 1,543 2,094 2,193 1,952 2,071 2,338 2,600

Peru 1,550 1,430 1,403 1,185 1,213 1,287 1,384 1,439 ZINC CONSUMPTION BY COUNTRY

Highly Probable Projects - - - - - - - - USA 981 902 948 1,012 1,062 1,110 1,143 1,172

Probable Projects - - - - - 17 199 464 % Change -10.6% -8.0% 5.1% 6.7% 5.0% 4.5% 3.0% 2.5%

Disruption Allowance - - - - - (426) (439) (442) Other North America 356 279 298 311 320 334 346 356

World Mined Zinc Production 11,567 11,324 12,117 12,655 13,284 13,790 14,404 14,748 % Change -10.7% -21.7% 7.0% 4.4% 2.7% 4.4% 3.5% 3.2%

% Change 5.8% -2.1% 7.0% 4.4% 5.0% 3.8% 4.5% 2.4% C & S America 466 381 433 456 468 491 512 512

REFINED ZINC SUPPLY % Change 2.8% -18.2% 13.6% 5.5% 2.7% 4.9% 4.2% 0.0%

North America (inc Mexico) 1,334 1,224 1,266 1,236 1,274 1,284 1,374 1,374 Western Europe 1,931 1,466 1,838 2,040 1,959 1,961 1,974 1,984

C & S America 470 417 536 630 651 671 681 701 % Change -17.8% -24.1% 25.4% 11.0% -4.0% 0.1% 0.7% 0.5%

Europe 2,135 1,804 2,090 2,165 2,149 2,225 2,248 2,278 Eastern Europe 467 326 385 446 449 469 489 489

CIS 655 543 600 620 670 675 675 695 % Change -11.0% -30.1% 17.8% 15.9% 0.7% 4.5% 4.3% 0.0%

China 3,905 4,246 5,100 5,109 4,920 5,910 6,435 6,995 China 3,795 4,100 4,705 5,257 5,568 6,026 6,451 6,874

India 595 646 727 821 810 933 933 933 % Change 7.5% 8.0% 14.8% 11.7% 5.9% 8.2% 7.1% 6.6%

Japan 622 541 593 546 590 607 625 635 India 479 495 561 597 615 658 707 760

South Korea 738 722 779 859 920 960 1,010 1,010 % Change 2.1% 3.3% 13.5% 6.3% 3.0% 7.0% 7.5% 7.5%

Other Asia 204 223 247 252 283 283 283 283 Japan 562 421 538 497 485 499 507 512

Oceania 498 525 499 517 507 539 539 539 % Change -6.2% -25.0% 27.8% -7.6% -2.5% 3.0% 1.5% 1.0%

Africa 268 279 275 256 253 185 185 185 South Korea 528 426 522 547 569 580 595 610

Highly Probable Growth - - - - - - - - % Change -1.3% -19.3% 22.3% 4.9% 4.0% 2.0% 2.5% 2.5%

Disruption Allowance - - - - - (428) (450) (469) Other Asia 1,085 820 956 1,045 1,060 1,114 1,167 1,177

Adjustments to refined zinc - - - - - - - - % Change 7.8% -24.4% 16.6% 9.2% 1.5% 5.1% 4.8% 0.8%

World Refined Production 11,424 11,169 12,712 13,009 13,027 13,843 14,538 15,159 Oceania 284 217 223 226 230 238 246 246

% Change 2.3% -2.2% 13.8% 2.3% 0.1% 6.3% 5.0% 4.3% Africa 181 150 165 173 176 185 193 193

Incl. Scrap/secondary 888 773 925 956 976 1,026 1,076 1,126 China SRB & Provinces - 494 (50) 100 - - - -

Process losses/pipeline stocks 647 637 705 711 703 748 785 819 Restocking - - 200 50 - - - -

Required mined zinc 11,183 11,033 12,492 12,764 12,754 13,565 14,247 14,851 World Consumption 11,114 10,136 11,681 12,608 12,959 13,665 14,331 14,886

Concentrate Balance 384 291 (375) (109) 529 225 157 (103) % Change -2.9% -8.8% 15.2% 7.9% 2.8% 5.4% 4.9% 3.9%

World Consumption 11,114 10,136 11,681 12,608 12,959 13,665 14,331 14,886 World Refining Capacity 14,299 15,286 15,480 15,768 16,159 16,524 16,949 16,799

REFINED SURPLUS/(DEFICIT) 310 1,033 1,031 401 68 179 207 273 Capacity Utilisation (%) 79.9% 73.1% 82.1% 82.5% 80.6% 83.8% 85.8% 90.2% Source: Brook Hunt, Credit Suisse estimates

09 April 2013


Figure 13: Global nickel supply and demand estimates

(kt) 2008 2009 2010 2011 2012 2013F 2014F 2015F (kt) 2008 2009 2010 2011 2012 2013F 2014F 2015F

Mine Production 1,597 1,450 1,657 1,946 1,902 2,012 2,151 2,246 Stainless production by CountryDisruption allowance (60) (65) (67) Europe 8,079 6,113 7,756 7,870 7,820 7,844 7,966 8,039

Mine Output 1,597 1,450 1,657 1,946 1,902 1,951 2,086 2,179 % change -4% -24% 27% 1% -1% 0% 2% 1%

REFINED Ni AND FeNi PRODUCTION China 7,200 9,158 12,415 14,000 14,490 15,722 16,979 18,168

Canada 164 117 107 148 150 132 137 122 % change -8% 27% 36% 13% 4% 9% 8% 7%

Western Europe 234 187 222 246 238 240 249 247 Japan 3,566 2,607 3,427 3,256 3,158 3,253 3,286 3,286

CIS 279 269 281 280 277 265 268 267 % change -8% -27% 31% -5% -3% 3% 1% 0%

Japan 157 144 166 157 168 183 196 206 South Korea 1,743 1,644 2,022 2,116 2,095 2,158 2,222 2,267

China 205 250 334 453 449 513 513 524 % change -21% -6% 23% 5% -1% 3% 3% 2%

Australia 109 131 101 110 129 122 125 125 Taiwan 1,313 1,357 1,526 1,191 1,108 1,174 1,227 1,252

Other 232 235 240 258 281 368 413 475 % change -12% 3% 12% -22% -7% 6% 5% 2%

Highly Probable Growth 0 1 5 8 India 1,550 1,690 2,170 2,365 2,507 2,682 2,897 3,129

Disruption Allowance 0 (55) (57) (59) % change -13% 9% 28% 9% 6% 7% 8% 8%

Required Adjustment - - - - USA 1,925 1,618 2,201 2,074 2,033 2,236 2,325 2,390

Total Production 1,380 1,333 1,451 1,652 1,693 1,768 1,849 1,913 % change -11% -16% 36% -6% -2% 10% 4% 3%

% change -2.4% -3.4% 8.8% 13.9% 2.5% 4.4% 4.6% 3.5% Brazil 450 339 464 499 519 555 577 601

Capacity Utilisation % 73% 66% 67% 65% 64% 65% 66% 68% % change -8% -25% 37% 8% 4% 7% 4% 4%

NPI 77 96 167 265 250 285 270 260 Other 809 625 467 410 500 549 570 587

CONSUMPTION Total World 26,635 25,151 32,448 33,781 34,229 36,173 38,051 39,718

Nth America 132 109 132 135 142 151 156 160 % change -8% -6% 29% 4% 1% 6% 5% 4%

Europe 422 361 408 414 415 421 429 435 Austenitic ratio 70.7% 73.7% 72.0% 71.5% 72.7% 73.0% 73.2% 73.3%

China 298 443 541 666 668 707 755 800 Scrap ratio 46.1% 40.3% 40.9% 37.6% 38.6% 39.4% 39.6% 39.7%

Japan 176 154 170 167 168 176 178 179

India 34 42 50 56 59 63 69 75

Other Asia 142 142 155 137 137 143 146 149

Other World 86 77 75 67 79 84 87 91

Total consumption 1,289 1,325 1,529 1,642 1,668 1,745 1,821 1,889

% change -6.1% 2.8% 15.4% 7.4% 1.6% 4.6% 4.3% 3.8%

For Stainless 779 834 1,010 1,103 1,106 1,156 1,209 1,255

% change -10.6% 7.2% 21.0% 9.2% 0.3% 4.6% 4.6% 3.8%

For Non-Stainless 511 491 519 541 562 589 611 634

% change 1.7% -4.0% 5.8% 4.3% 3.8% 4.8% 3.8% 3.7%

Restocking - - - - - - -

SURPLUS/(DEFICIT) 90 8 (78) 10 25 23 29 24

LME stocks 79 158 136 90

Producer Stocks 103 89 91 98

Estimated Total Stocks 389 402 331 329 354 377 405 429

Weeks Consumption 15.7 15.8 11.3 10.4 11.0 11.2 11.6 11.8

Price (US$/t) 21,204 14,651 21,806 22,843 17,536 16,823 17,000 18,500

0

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Nickel Production (bars) versus Consumption (kt Ni)

Nth America Europe China Japan India Other Asia Other World

Canada Western Europe CIS Japan China Australia Other

Source: Brook Hunt, Credit Suisse estimates

Figure 14: Copper inventories increasing

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nds

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(kt) (USD/t)

Source: Thomson Reuters

09 April 2013


Figure 15: Zinc inventories increasing Figure 16: Nickel inventories increasing

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With copper production costs at around $6,500/t ($2.9/lb) versus current $7,400/t, there is

12% potential downside. This is why we see copper prices as the most likely to decline.

Meanwhile, although nickel remains in oversupply, because Chinese pig iron makers'

production costs by our estimates are $16,500–22,000/t ($7.5–10.0/lb), we look for the

price of nickel to remain within its current range, and as such, we forecast that there will be

little scope for a major decline in the price of nickel compared with the current level

($16,000/t).

Figure 17 shows RP sensitivity to forex and nonferrous metal prices. Mitsubishi Materials

is highly sensitive to copper prices, Pacific Metals to forex and nickel prices, and Toho

Zinc to zinc and lead prices. We have a NEUTRAL rating on Mitsubishi Materials, as

although the company is highly sensitive to copper prices, which we expect to fall the

farthest, it also has robust business segments such as cement.

Figure 17: Earnings sensitivity to forex and nonferrous metal prices

FY3/13 Sensitivity

Cu Ni Gold Zn Pb FX

($100/t) (10¢/lb) $10/Toz $100/t $100/t \1/$

Mitsui M&S RP 132 800 100 200

Mitsubishi Mtrls RP 2,646 200

SMM RP 1,000 900 400 1,100

DOWA OP 30 260 340

Pacific Mtls OP 440 500

Toho Zinc OP 550 300 170

vs. FY3/13 CoE

Mitsui M&S RP 1.1% 6.7% 0.8% 1.7%

Mitsubishi Mtrls RP 3.8% 0.3%

SMM RP 1.1% 0.9% 0.4% 1.2%

DOWA OP 0.1% 1.1% 1.4%

Pacific Mtls OP 12.5% 14.2%

Toho Zinc OP 23.9% 13.0% 7.4% Source: Company data, Credit Suisse estimates

09 April 2013


Figure 18: Electricity rate hike affects specialty steels and nonferrous metal smelters

0 1,000 2,000 3,000

Toho Zinc

Mitsui Mining & Smelting

Tokyo Tekko

Toho Titanium

Mitsubishi Materials

Yamato Kogyo

Tokyo Steel

Kyoei Steel

Osaka Steel

Godo Steel

Sumitomo Metal Mining

Pacific Metals

DOWA Holdings

Osaka Titanium Technologies

Sanyo Special Steel

0% 100% 200% 300%

ΔElec. Cost

ΔElec. Cost / CoE OP, FY12

(JPY mn)

Source: Company data, Credit Suisse estimates

09 April 2013


Companies Mentioned (Price as of 08-Apr-2013)

Daiseki (9793.T, ¥1,624) Aichi Steel (5482.T, ¥386) Daido Steel (5471.T, ¥530) Dowa Holdings (5714.T, ¥723) JFE Holdings (5411.T, ¥1,869) Kansai Electric Power (9503.T, ¥912) Kobe Steel (5406.T, ¥118) Kyoei Steel (5440.T, ¥1,730) Maruichi Steel Tube (5463.T, ¥2,281) Mitsubishi Materials (5711.T, ¥264) Mitsui Mining & Smelting (5706.T, ¥222) Nippon Steel & Sumitomo Metal (5401.T, ¥233) Osaka Titanium Technologies (5726.T, ¥1,830) Pacific Metals (5541.T, ¥481) SSS (5481.T, ¥344) Sumitomo Electric Industries (5802.T, ¥1,235) Sumitomo Metal Mining (5713.T, ¥1,285) Toho Titanium (5727.T, ¥781) Toho Zinc (5707.T, ¥368) Tohoku Electric Power (9506.T, ¥756) Tokyo Steel Mfg. (5423.T, ¥414) Yamato Kogyo (5444.T, ¥2,763)

Disclosure Appendix

Important Global Disclosures

Shinya Yamada and Kazumasa Okumoto, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's cover age universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the m ost attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Austr alia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors.

09 April 2013


Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 43% (53% banking clients)

Neutral/Hold* 39% (47% banking clients)

Underperform/Sell* 15% (41% banking clients)

Restricted 3%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Under perform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

The subject company (5401.T, 5471.T, 5711.T, 5802.T) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse provided investment banking services to the subject company (5401.T, 5471.T) within the past 12 months.

Credit Suisse provided non-investment banking services to the subject company (5711.T, 5802.T) within the past 12 months

Credit Suisse has received investment banking related compensation from the subject company (5401.T, 5471.T) within the past 12 months

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (5726.T, 5401.T, 5406.T, 5463.T, 5471.T, 5713.T, 5714.T, 5802.T) within the next 3 months.

Credit Suisse has received compensation for products and services other than investment banking services from the subject company (5711.T, 5802.T) within the past 12 months

As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (5707.T).

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (5726.T, 5727.T, 5482.T, 5401.T, 5406.T, 5411.T, 5440.T, 5444.T, 5463.T, 5541.T, 5706.T, 5707.T, 5711.T, 9793.T, 5714.T, 5802.T) within the past 12 months

An analyst involved in the preparation of this report has visited certain material operations of the subject company (5713.T) within the past 12 months

The travel expenses of the analyst in connection with such visits were not paid or reimbursed by the subject company, other than de minimus local travel expenses.

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Principal is not guaranteed in the case of equities because equity prices are variable.

Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the

09 April 2013


NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Credit Suisse Securities (Japan) Limited ..................................................................................................... Shinya Yamada ; Kazumasa Okumoto

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683.

09 April 2013


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