Future trends

Xstrata’s revenues and earnings depend in large part upon the prevailing prices for the commodities it produces. Commodity prices are significantly affected by global economic conditions and industrial production. In recent years, commodity prices have exhibited a broadly upward trend, reflecting demand generated by global economic growth, particularly in China and India as those countries urbanise and industrialise. Commodity prices have also been influenced by the growth of exchange-traded commodities futures markets.

Recently, however, the rapid deterioration in global economic conditions has led to reduced global demand, stock drawdowns, increased use of scrap or recycled materials and the unwinding of speculative trading positions. As a result, the prices of many of Xstrata’s commodities have fallen significantly from their previous highs.

Although the short-term outlook for 2009 is uncertain, many major governments have announced and implemented monetary and fiscal stimulus packages which will increase investment in commodity-intensive infrastructure during 2009 and 2010. In the medium term, a shortage of capital and poor short-term visibility is leading to the delay or cancellation of organic growth projects by major producers and the inability of the junior mining sector — which traditionally identifies new supply — to raise new finance. As a result, new production capacity to replace ageing mines with falling grades and increasingly difficult mining conditions is likely to be delayed, contributing to significant future supply constraints.

Xstrata’s Board continues to believe that demand for commodities and consequently commodity prices will continue to be influenced by a long-term positive trend, driven by the ongoing industrialisation of developing economies and the urbanisation of over 65 to 70 million people globally each year. When OECD economies return to growth, the impact of synchronised demand growth from developed and emerging economies, coupled with constricted commodity supply, has the potential to lead to a rapid increase in commodity demand and prices. This is likely to result in substantial cash flows and margin expansion for those metals and mining companies which have weathered the current challenging conditions.