Iron Ore the new financial market

Credit Suisse / Glencore Commodity Trading Alliance

Illiquid Commodity Trading Capability

Iron ore - a new financial market begins May 2008

Credit Suisse and Deutsche Bank Launch Over-the-Counter Market in Spot Iron Ore
London, May 23, 2008

Currently I can only hedge against the price fluctuation risk of 13% of my input costs. I welcome being able to hedge my iron ore costs
- Chinese mill

"This initiative will facilitate effective risk management in this product for the first time. This is an exciting industry development, which we expect will become the benchmark for the industry going forward.
Adam Knight, Managing Director and Co-Head of Global Commodities at Credit Suisse

This is the last unlisted commodity of any substantial size. It's only a matter of time...
- Investment banker

This market is poised for change. Iron ore will eventually trade like coal or other major commodities
- Industry Analyst

The iron ore index will result in increased market transparency & improve liquidity for the benefit of both buyers and sellers
- Merrill Lynch releases report opining that market prices [for iron ore] will prevail

but is there justification for starting a financial market in iron ore?

Source: BCG

1. The natural emergence of a Chinese spot market in iron ore

China accounts for virtually all of global growth in iron ore demand Chinese spot market projected to approach 500 Mt by 2010

Source: BCG

2. Divergence and volatility

Wide variety of landed product prices 2007 saw high volatility and wide divergence in spot and benchmark prices Price distortions led players to challenge the pricing mechanism.
Iron ore prices, C&F China (US$) (Dec-05 to Sept-08)
283 *China Spot - Shandong 243 India C&F 203 163 BZ C&F 123 OZ C&F 83 43 12-05 03-06 06-06 09-06 12-06 03-07 06-07 09-07 12-07 03-08 06-08 09-08 China Spot

*China spot: Shandong, higher grade reference.

Source: Mysteel.net, Credit Suisse estimates

Iron ore spot market in China meets most prerequisites for a liquid physical and financial market
Success factor Large market size Price volatility Fragmentation Description Notional trading volume should exceed a minimum threshold ($3-10B) to interest financial players High price volatility to encourage hedging/proprietary trading Market not concentrated with a few big producers or dealers Est. Timing Exists Exists Exists China spot market Strong interest Started H2 08

Intermediary participation Participation of physical merchants and others Standardization Reliable price index Standardized grade, quality and delivery of commodity Established price index by reputable provider that servers as a reference for trades

Source: BCG

Evolution
II. Supported by financial markets
Development of financial market usually follows physical spot, driven by a volatile spot market Intermediaries enter to facilitate transactions As a liquid financial forward/futures market develops, larger suite of exotic instruments developed by investment banks, e.g. options, swaps

I. Rise of spot sales

Trend for fixed priced commodities to break down to more 'market based' pricing Shift from fixed to spot pricing accompanied by greater volatility Single reference product emerges as the pricing standard to simplify trades

III. Development of adjacent markets

Vibrant spot and financial market further encourage adjacent markets to develop both upstream and downstream

Source: BCG

Potential iron ore market evolution

Q2 2008

Q4 2008

2009-10

2011-12

Source: BCG

Much progress has been made

Prior to Dec 2007
No providers were planning to launch a robust IO index IO standard spec did not exist

Today (Sep 2008)

Three publishing houses launch detailed IO indices IO standard spec published

Robust index

Market making with ibanks Exchange traded products

No active market makers No paper market and IO limited to physical trades

Two i-banks offer OTC swaps and marketmake Forward curves published on Bloomberg

No IO contract listed Standard contract did not exist

At least one exchange considering a clearing mechanism for iron ore otc swaps Developed initial version of std. contract Willingness to report physical trades to index Interest in paper market

Intermediary participation

Traders and brokers limited to dealing with physical spot trades from India

Robust index launch likely to attract more participants and increase financial market activity

Source: BCG

10

Iron Ore indices from journalistic to reference indices

Metal Bulletin
Price Fe Content Silica Alumina Phosphorous Sulphur Moisture Granularity Trade size Delivery port Delivery period Data collection Publication Fines - US$/metric tonne 62% 3.5% 2.0% 0.05% 0.02% 8% >90%<6.3mm 30-350kt Qingdao-LizhaoLianyungang Within 8 weeks Weekly Fri 08:00 London 8% minimum up to 10.0mm for up to 90% 35kt min parcel Qingdao 4-8 weeks from publication Daily Daily 09:00 Singapore

Platts
Fines - US$/metric tonne 62% 4.5% 2.0% 0.075%

The Steel Index

Fines - US$/metric tonne 62% 4.0% 3.5% 0.070% 0.05% 8% up to 10.0mm for up to 90% 20kt min parcel Tianjin Loading with 4 weeks Weekly Fri 12:00 London

11

How much volume has traded?

Mt

5 4 3 2 1 0
Other Private Banks Pension Funds Hedge Funds Physical Merchants Steel Mills Producers

Source: BCG

12

What do you trade? Fixed Rate Swap Linked to Iron Ore

Description Credit Suisse pays/buys Iron Ore at a fixed price based on a notional volume of iron ore for a given period Client pays the floating Iron Ore reference price over the same period The floating (reference) price: Iron Ore Fines, cfr China - unweighted arithmetic average of the monthly iron ore prices stated in USD per metric tonne published by: Metal Bulletin (MBFOFO01 Index) under the heading World Steel: China: China Import: cfr main China Port, $/tonne: Iron ore fines Steel Business Briefing (SBBSCIIO Index) under the heading Steel Prices: Steel Raw Materials Prices: China import: Indian Iron Ore 63% Fe dry - CFR N.China port $/t Bloomberg ticker MBFOFO01 <INDEX> and SBBSCIIO <INDEX>) Settlement occurs monthly and the swaps are financially settled - there is no physical delivery of iron ore, just a net payment of cash (i.e. the difference between the fixed and floating price)
13

CS Iron Ore Forward Curve

14

So what now? 1. Price correction now leading in inquiries

Iron ore prices, C&F China (US$) (Dec-05 to Sept-08)

283 *China Spot - Shandong 243 India C&F 203 163 BZ C&F 123 OZ C&F 83 43 12-05 03-06 06-06 09-06 12-06 03-07 06-07 09-07 12-07 03-08 06-08 09-08 China Spot

*China spot: Shandong, higher grade reference.

Source: Mysteel.net, Credit Suisse estimates

15

Price correction has encouraged two-way interest

Estimated Iron Ore Cash Costs for 2009
US$/ton
Marginal Indian Spot Chinese Marginal Prod.

100 70 60 50
BHP Billition Ferrominera Orinoco Vale Pellets NMDC Cleveland Cliffs Rio Tinto Pellets LKAB Pellets

40
Kumba

20 10 0 0 150

Vale

200 Labour Fuel

CSN

300 Electricity

FMG

30

400 Supplies

Rio Tinto

500 Maintenance

600 Transport

700 Royalty

800

900

Port Loading

Source: FMG, Credit Suisse estimates

16

CS Research looks for robust, if volatile outlook, over next 4 years

Tight markets will keep iron ore prices high in 2009-12. Pricing mechanisms will support higher prices: index or a revived benchmark system Having moved into greenfield with higher capex levels, projects may require US$50/t to fly.
Iron ore price curve Carajs fines benchmark to Europe (USDc/Fe Unit)
200 180 160 140 120 100 80 60 40 20 0 SFC to EUR Curve US$/t 2000 2001 2002 2003 2004 2005 2006 2007 84.70 52.77 2008 2009 2010 2011 2012 2013 2014 2015 86.63 53.98 -18% 139.75 167.70 87.08 104.5 71% 20% 176.08 176.08 176.08 132.06 105.65 109.7 109.7 109.7 82.29 65.83 5% 0% 0% -25% -20%

Source: TEX, Credit Suisse estimates

17

Whats next? Creating a synthetic FOB Benchmark

Use readily available China CFR spot Iron Ore Fines data; China Import Indian Iron Ore 63% Fe (CFR China) Quoted on Bloomberg SBBSCIIO <index>, MBFOFO01 <INDEX> Remove freight component via observable spot ocean freight rates; C3: Tubarao (Brazil) -> Beilun/Baoshan (China) via Capesize C5: Western Australia -> Beilun/Baoshan (China) via Capesize

Source: Credit Suisse Research, Bloomberg

18

DISCLAIMER
These materials have been provided to you by Credit Suisse ("CS") in connection with an actual or potential mandate or engagement and may not be used or relied upon for any purpose other than as specifically contemplated by a written agreement with CS. In addition, these materials may not be disclosed, in whole or in part, or summarized or otherwise referred to except as agreed in writing by CS. The information used in preparing these materials was obtained from or through you or your representatives or from public sources. CS assumes no responsibility for independent verification of such information and has relied on such information being complete and accurate in all material respects. To the extent such information includes estimates and forecasts of future financial performance (including estimates of potential cost savings and synergies) prepared by or reviewed or discussed with the managements of your company and/or other potential transaction participants or obtained from public sources, we have assumed that such estimates and forecasts have been reasonably prepared on bases reflecting the best currently available estimates and judgments of such managements (or, with respect to estimates and forecasts obtained from public sources, represent reasonable estimates). These materials were designed for use by specific persons familiar with the business and the affairs of your company and CS assumes no obligation to update or otherwise revise these materials. Nothing contained herein should be construed as tax, accounting or legal advice. You (and each of your employees, representatives or other agents) may disclose to any and all persons, without limitation of any kind, the tax treatment and tax structure of the transactions contemplated by these materials and all materials of any kind (including opinions or other tax analyses) that are provided to you relating to such tax treatment and structure. For this purpose, the tax treatment of a transaction is the purported or claimed U.S. federal income tax treatment of the transaction and the tax structure of a transaction is any fact that may be relevant to understanding the purported or claimed U.S. federal income tax treatment of the transaction.

This document was produced by and the opinions expressed are those of CREDIT SUISSE as of the date of writing and are subject to change. It has been prepared solely for information purposes and for the use of the recipient. It does not constitute an offer or an invitation by or on behalf of CREDIT SUISSE to any person to buy or sell any security. Any reference to past performance is not necessarily a guide to the future. The information and analysis contained in this publication have been compiled or arrived at from sources believed to be reliable but CREDIT SUISSE does not make any representation as to their accuracy or completeness and does not accept liability for any loss arising from the use hereof. The issuer of the securities referred herein or a CREDIT SUISSE GROUP company may have acted upon the information and analysis contained in this publication before being made available to clients of CREDIT SUISSE. A CREDIT SUISSE GROUP company may, to the extent permitted by law, participate or invest in other financing transactions with the issuer of the securities referred herein, perform services or solicit business from such issuers, and/or have a position or effect transactions in the securities or options thereof. Neither this document nor any copy thereof may be sent to or taken into the United States or distributed in the United States or to a US person, in certain other jurisdictions the distribution may be restricted by local law or regulation. This document may not be reproduced either in whole, or in part, without the written permission of CREDIT SUISSE. 2006 CREDIT SUISSE

CS has adopted policies and guidelines designed to preserve the independence of its research analysts. CSs policies prohibit employees from directly or indirectly offering a favorable research rating or specific price target, or offering to change a research rating or price target, as consideration for or an inducement to obtain business or other compensation. CSs policies prohibit research analysts from being compensated for their involvement in investment banking transactions.

19