20080512-Citi-Aluminium – The Balance of Power

Commodity Outlook
 Shifting Competitive Landscape — An emerging power crunch and a shortage of
high quality bauxite will cause a shift in the competitive landscape in the
aluminium industry, and drive aluminium and alumina prices higher.
 Aluminium prices above US$2/lb — Aluminium prices are expected to average
US$2/lb in 2009, and rise further in 2010.
 Higher long term prices — We have also increased our long term price to US$1.30
in real terms, and the aluminium:alumina long term contract rate to 13.5%.
 Electricity Supply Security — Electricity capacity reserve margins are falling in
many countries with large smelting industries putting security of supply at risk.
Most vulnerable are smelters in China, South Africa, Brazil, and the USA.
 Electricity Prices — Electricity prices are increasing at 10%/yr on a production
weighted basis. In China, the electricity supply balance is expected to tighten
further and tariff discounts to smelters are being removed.
 Bauxite Supply Tightening — Alumina producers will be affected by rising power
costs and shortages of high quality bauxite.
 Winners and Losers — There will be clear winners and losers as the scenario unfolds.
Winners are companies with captive hydro power and high quality bauxite.