December 20, 2012

Jay Turner, P.Eng. 416-265-2182

jturner@popecompany.com

Member: Toronto Stock Exchange • Investment Industry Regulatory Organization of Canada • Canadian Investor Protection Fund

The World Steel Association has released its estimates for global pig iron production for

November, 2012 and we have revised our forecast accordingly. Year-to-date, global pig

iron production has increased by 1.8%, led by growth in China of 4.1%. As such, pig iron

production in the rest of the world has declined by 1.5%, with North America and the

C.I.S. the only other regions posting positive growth of 2.0% and 5.3%, respectively. Asia

ex-China is up modestly by 0.9% based on higher production from India. Table 1 shows

our forecast of global pig iron production by region.

While we don't forecast a formal supply/demand outlook, we have done some analysis,

especially with respect to China’s expected impact on the market. Tables 2 and 3 show

our breakdown and forecast of both Chinese domestic iron ore production and

imported iron ore demand. Year-to-date to the end of November, Chinese domestic

iron ore production is reported to be 1.257 billion tonnes with an annual run-rate of

1.32 billion tonnes. Assuming a domestic iron ore grade of 17% Fe, we were forecasting

Chinese domestic iron ore production at 1.298 billion tonnes, or 2.0% lower than the

1.324 billion tonnes reported for 2011. The annualized run-rate of 1.32 billion tonnes

represents a 0.3% decline from last year and we have incorporated this into our revised

numbers.

Assuming that Chinese imported iron ore averages 62% Fe, we estimate that the

Chinese import demand at 745.8 million tonnes. Year-to-date until the end of October,

Chinese iron ore imports were 608.7 million tonnes, up 9.0% compared to the same

period in 2011. Our forecast implies that November and December imports would have

to total 137.1 million tonnes, which would be a higher run-rate than the 56.4 million

tonnes reported for October, 2012. Our forecast assumes that the iron ore inventories

at Chinese ports are relatively static compared to the end of 2011, which were reported

as in the 95 million tonne range. However, recent reports indicate that port inventories

in China have declined to approximately 75 million tonnes. Adjusting for the implied 20

million tonne delta, Chinese iron ore imports in November and December would have

to total approximately 117 million tonnes, which is more in line with the run-rate

suggested by the October imports.

The decline in Chinese port inventories has been driven by declining domestic iron ore

production as the decline in iron ore prices that began last August has driven the

closure of high-cost producers. As well, earlier in December, traders and steel mills

were reportedly buying cargoes for delivery just after the Chinese New Year in

anticipation of increased demand driven by new infrastructure spending announced by

the Chinese government last Fall. As a result, iron ore prices have rebounded quite

strongly, with the World Steel Index rising 15.9% since the end of November to

US$135.50 per tonne (62% Fe, 3.5% Al). We expect that iron ore demand and pricing

should improve next year and are maintaining our average iron ore benchmark pricing

of US$130 per tonne in 2013.

Iron Ore Market Update

Figure 1 – Relative Price Performance in 2012 of Domestic

vs. Imported Chinese Iron Ore Prices

Figure 2 – Price Performance in 2011 of Domestic vs.

Imported Chinese Iron Ore Prices

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Source: China Iron & Steel Association, The Tex report

Source: China Iron & Steel Association, The Tex report

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Iron Ore Market Outlook and Pricing 12/20/2012

Table 1 – Global Pig Iron and DRI Production

Source: World Steel Association, Tex Report, Pope & Company forecasts

Table 2 – Iron Ore-Equivalent Demand Forecasts

Source: World Steel Association, Tex Report, Pope & Company forecasts

3

Iron Ore Market Outlook and Pricing 12/20/2012

Table 3 – Chinese Iron Ore Demand Forecast

Source: World Steel Association, Tex Report, Pope & Company forecasts

4

Iron Ore Market Outlook and Pricing 12/20/2012

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Pope has, throughout its history, offered diverse services including acting as a primary dealer of the Bank of Canada.

Through its growing Capital Markets division, the firm continues to provide innovative ideas to its institutional client

base. With a focus on natural resource and commodity sector investments, Pope has a proven track record of identi-

fying undervalued opportunities. Pope is a member of the Investment Industry Regulatory Organization of Canada

(IIROC) and The Canadian Investor Protection Fund (CIPF).

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