Long term iron ore outlook – Where do the challenges and opportunities lie?

1,956 views
1,596 views

Published on

Laura Brooks, Senior Consultant - Steel Raw Materials, from CRU delivered this presentation at the 2012 Americas Iron Ore conference. Americas Iron Ore is one of the most respected annual gatherings for North and South American iron ore markets and its agenda features: iron ore industry and market developments; new project developments and expansions in North and South America; overview of steel demand; iron ore spot market price; infrastructure and transport challenges and investment opportunities. For more information on the annual event, please visit www.immevents.com

Published in: Business, Technology
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
1,956
On SlideShare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
63
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Long term iron ore outlook – Where do the challenges and opportunities lie?

  1. 1. Long term iron ore outlook Laura Brooks – Senior Consultant, CRU Prepared for: Informa Americas Iron Ore Conference Tuesday 6th November 2012
  2. 2. Key questions for the long term • Are the “boom” years nearing an end? • When will Chinese steel demand peak? • Have recent investment jitters severely impacted supply prospects? • Where and what are the supply-side risks? • Are prices above $100/t sustainable in the long term? Agenda 2
  3. 3. 0 500 1,000 1,500 2,000 2000 2004 2008 2012 China Western Europe Japan Other China has been, and is still, the engine of growth driving rapid increases in iron ore prices over the last decade… Globaldemandforiron ore, Mt Price for 62% Fe fines,CFR China,$/t Data: CRU. Note: Real prices are in 2012 money values. 0 50 100 150 200 2000 2004 2008 2012 Real Nominal
  4. 4. -40% -20% 0% 20% 40% 60% J A J O J A J O J A J O J A J O J A J …but recently, economic conditions have deteriorated and a bearish sentiment has engulfed steel and iron ore markets 4 y/y changesin Chinese exports,% y/y changesin real estate floorspace started(1), % Data: CRU. Note: (1) % change based on data for the 3 month moving average. 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 -50% 0% 50% 100% J A J O J A J O J A J O J A J O J A J
  5. 5. 0 50 100 150 200 250 300 350 J A J O J A J O J A J O J A J O J A J CRUspiflatproducts CRUspilong products The upshot has been a persistent downward pressure on steel prices… 5 CRU steelprice index(CRUspi),index,April 1994 = 100 Data: CRU. 2008 2009 2010 2011 2012 Q3 2013 Chinese steel market: 1. Weak underlying demand 2. Crude steel production at near record highs 3. Acute situation of oversupply  Poor market fundamentals and bearish sentiment
  6. 6. 0 20 40 60 80 100 120 140 160 180 200 220 J FMAMJ J ASONDJ FMAMJ J ASONDJ FMAMJ J ASONDJ FMAMJ J ASONDJ FMAMJ J ASO …while iron ore prices have plummeted, reaching almost 3- year lows in early September 6 Spotprices foriron ore fines (62% Fe), CFR China,$/t Data: CRU. Note: Prices assessed at one point mid-month. 2008 2009 2010 2011 2012 POINTS TO NOTE: • Daily spot prices dropped to under $90/t in early September • Post-Chinese holidays in October, some Chinese mills have returned to the market, boosting demand and lifting prices to over $120/t (for 62% Fe fines, cfr China) • Uncertainty remains IRON ORE:  Destock  Plentiful supply on spot
  7. 7. The downward shift in iron ore prices has contributed to the emergence of a bearish sentiment in commodity markets… 7 • “The global boom in commodity prices is over” (Martin Ferguson, Australian Resource Minister, Sept 12) • “Commodities: Supercycle jitters slow projects” (Jack Farchy, FT, Oct 12)
  8. 8. 0 20 40 60 80 100 120 140 0 200 400 600 800 1,000 1,200 2008 2009 2010 2011 2012 2013 2014 2015 2016 Imports Indexed production Our view is that there is still considerable growth to come from China… 8 LHS:Chinese imports of iron ore, Mt RHS:Chinese productionof iron ore(1) , index,100 = 2008 Data: CRU. Note: (1) Refers to saleable production of sinter fines, pellets and lump.
  9. 9. -4% 0% 4% 8% 12% 16% 0 500 1,000 1,500 2,000 2008 2009 2010 2011 2012 2013 2014 2015 2016 Seaborneimports Growth in seaborne imports Growth in globaliron ore demand …leading to robust increases in global seaborne trade, although growth rates are likely to ease 9 LHS:Seaborneimports in iron ore, Mt RHS:y/y changesin seaborne imports and globaliron ore demand,% Data: CRU.
  10. 10. • Are the “boom” years nearing an end?  Prices not expected to reach 2011 levels again  Prices will remain high by historic standards through next 5 years as further significant growth from China is forecast  In answer to the question – it depends who you are…  CRU assesses that the commodity boom is not over for low cost miners  CRU assesses that the commodity boom is probably over for high cost miners 10
  11. 11. Key questions for the long term • Are the boom years nearing an end – 5 year view? • When will Chinese steel demand peak? • Have recent investment jitters severely impacted supply prospects? • Where are the main gains in production and what are the risks? • Are prices above $100/t sustainable in the long term? Agenda 11
  12. 12. 0% 6% 12% 2000-10 2010-15 2015-20 2020-25 2025-30 2030-35 China India World North America Europe Latin America Expectations for economic growth underpin our long term demand forecast 12 GDP growth,% change period-on-period Data: CRU.
  13. 13. North AmericaEurope Asia-Pacific, advanced LatinAmerica China Asia-Pacific,developing India Rest of world 0 100 200 300 400 500 600 700 800 900 0 5000 10000 15000 20000 25000 30000 35000 40000 45000 x axis: 2011 GDP percapita,US$(1) y axis: 2011 consumption of finished steelpercapita,kg Data: CRU. Chinese data based on reported finished steel production. Note: (1) constant 2005 prices at market exchange rates. Taking into account regional variation, we expect China’s steel consumption per capita to peak around the mid-2020s 13 2011 2035 2025
  14. 14. 30% 40% 50% 60% 70% 80% 90% 05 10 15 20 25 30 35 Recyclingrate Primary iron ratio World recycling rate / primary iron ratio, % Data: CRU. … while global scrap generation is also likely to increase substantiallyby this point, driven by China 14 The requirement for primary iron units relative to crude steel production will fall
  15. 15. 0 500 1,000 1,500 2,000 2,500 3,000 2010 2013 2016 2019 2022 2025 2028 2031 2034 Pellets Fines and concentrates Lump China Post-2025, global demand for iron ore will stabilise, as yearly declines in Chinese consumption set in 15 World demand foriron ore, Mt Data: CRU.
  16. 16. Key questions for the long term • Are the boom years nearing an end – 5 year view? • When will Chinese steel demand peak? • Have recent investment jitters severely impacted supply prospects? • Where and what are the supply-side risks? • Are prices above $100/t sustainable in the long term? Agenda 16
  17. 17. CRU’s gateway system – how CRU assesses all projects 17 Project status checklist 1 2 3 4 5 Speculative Possible Probable Committed Operating Geology Metallurgy/ technology Engineering Social and environmental Marketing/ commercial Transportation Ownership/ management Financial 1: SPECULATIVE– Exploration activity is in progress 2: POSSIBLE – Prefeasibility studies are in progress 3: PROBABLE – Finaland definitivefeasibility studiesare in progress 4: COMMITTED – Construction is in progress 5: OPERATING– Regularand sustainable production of marketable iron ore has been achieved
  18. 18. • Price falls have triggered a wave of nervousness around the viability of some projects • Miners are reviewing/re-assessing • Resulted in the postponement of some projects/some cutbacks in future supply estimations/a focus on flagship projects • Applies to majors and the juniors • ‘Price v cost’ concerns in Australia particularly intense given strength of Aus$ BUT • No cuts to current seaborne production (as seen for coking coal) • Few outright project cancellations at present There has been a widespread re-assessment of projects 18
  19. 19. 0 1,000 2,000 3,000 4,000 2012 2015 2018 2021 2024 2027 2030 2033 Possible Probable Committed BUT supply potential remains strong (although downside risks have mounted) 19 Iron ore globalsupply (1) , Mt Data: CRU. Note: (1) excludes Chinese production. Postponements are expected, pushing start dates back for several projects
  20. 20. 6% 27% 4% 3% 4%2% 9% 11% 33% 3% North America Brazil OtherLatin America South Africa OtherAfrica Europe Russia & CIS India Australia Restof world Which producers will be key in the market looking ahead? 20 Supply scenario in 2035(1) ,% of total supply Data: CRU. Note: (1) excludes Chinese production.
  21. 21. 0 250 500 750 1,000 2008 2010 2012 2014 2016 Jul'12 forecast Oct'12 forecast Despite recent project re-assessments, Australian supply growth remains robust… 21 Exports of iron ore from Australia,Mt Data: GTIS, CRU. Note: This is a demand constrained forecast. y/y changesin production of iron ore, % -5% 0% 5% 10% 15% 20% 2008 2010 2012 2014 2016 Global Australia
  22. 22. …continuing to outstrip potential growth prospects from Brazil in the long term Totalpotentialiron ore production outlookforAustralia and Brazil,Mt Data: CRU. Note: This is a non-demand constrained forecast. 0 400 800 1200 1600 2012 2013 2014 2015 2016 2020 2025 Brazil Australia BRAZIL (lags Australia’s volumes) •Home to only one major •Fewer junior producers at more advanced stages of development •Particularly stringent environmental regulations
  23. 23. 0 250 500 750 1,000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Other Samarco CSN Vale Despite this, Brazil will retain its position as a “heavyweight” producer in this market Iron ore production potentialin Brazil, Mt Data: CRU. Note: This is a non-demand constrained forecast.
  24. 24. 0% 15% 30% 45% 60% 75% 90% 105% 0 50 100 150 200 250 300 350 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Possible Probable Committed % share of total production which is 'Committed' Post-2016, production volumes from West Africa have the potential to ramp up aggressively… LHS:Iron ore potentialproductionin Africa(1) , Mt RHS:Share of total potentialproductionin OtherAfrica which is ‘Committed’(2) ,% Data: CRU. Note: (1) Excludes South Africa. (2) Committed in accordance with the CRU Gateway System. This is a non- demand constrained forecast.
  25. 25. 0 250 500 750 1,000 2010 2015 2020 2025 WestAfrica Canada Brazil …although potential volumes in 2025 are still expected to remain some way from Brazilian output today Iron ore potentialproduction in WestAfrica,Canada and Brazil,Mt Data: CRU. Note: This is a non-demand constrained forecast.
  26. 26. 6% 27% 4% 3% 4%2% 9% 11% 33% 3% North America Brazil OtherLatin America South Africa OtherAfrica Europe Russia & CIS India Australia Restof world In summary, Australia and Brazil will retain their lionshare of the market in the long term 26 Supply scenario in 2035(1),% of total supply Data: CRU. Note: (1) excludes Chinese production.
  27. 27. Key questions for the long term • Are the boom years nearing an end – 5 year view? • When will Chinese steel demand peak? • Have recent investment jitters severely impacted supply prospects? • Where and what are the supply-side risks? • Are prices above $100/t sustainable in the long term? Agenda 27
  28. 28. What are the risks on the supply-side? 28 Examples of risks faced in key seaborneproducingregions Data: CRU. AUSTRALIA Strong Aus $ Labourshortage Heightenedenvironmentalregulation BRAZIL Particularly strictenvironmental regulations(i.e.cave law) Uncertaintyoverincreasein royalties Rising labourcosts AFRICA Politicalinstability (extentdependenton country) Construction ofinfrastructure from scratch(West Africa)/restrictionsimposed byTransnet(South Africa) Uncertaintyarounddevelopmentof mining regulations (WestAfrica) CANADA Distance to key markets Weatherrestrictions Necessary developmentof new port and rail (potentialaid from Plan Nord) FOR ALL Building bulk commodity infrastructure Existing sites – grade depletion
  29. 29. In China, supply is forecast to fall; a trend exacerbated by relatively strong upwards cost pressures 0 20 40 60 80 100 120 140 160 180 200 0.0 20.0 40.0 60.0 80.0 Price Quarterly production 2008 - 2011 2005,2006,2007 1. Historicaldata highlights price responsivenessof Chinese production given its typicalhigh coststructure 2. CRU anticipates upwardscosts pressures to be presenton a globalscale but to be relatively strong in China 3. Why are mining costs set to rise? A. 5 year plan focus on quality • Waterand energy costs to rise • Adhering to environmental legislation B. Wage increases C. Appreciation ofRMB Chineseconcentrate production,Mt,versus price, 62% Fe fines CFR China Data: CRU.
  30. 30. Key questions for the long term • Are the boom years nearing an end – 5 year view? • When will Chinese steel demand peak? • Have recent investment jitters severely impacted supply prospects? • Where and what are the supply-side risks? • Are prices above $100/t sustainable in the long term? Agenda 30
  31. 31. Long run price forecasting methodology =  Based on the market eventually converging to long run marginal cost  We assume prices are related to the average cost structure of the marginal projects required to meet future demand  Gap analysis = the market needs just under half of probable and possible projects to meet demand in 2035 What does the market look like in the long term? 31
  32. 32. 0 1,000 2,000 3,000 4,000 2012 2015 2018 2021 2024 2027 2030 2033 Possible Probable Committed Demand 2030+ demand = 2.5 bn t Need to develop under 50% of probable and possible projects to meet demand The gap analysis tells us that we need less than half the probable and possible projects to meet demand in 2035… 32 Gap analysis;iron ore demand and planned supply,Mt Data: CRU. 2011 demand = 1.5 bn t
  33. 33. …and thus we assess the LRMC to be set by the second quartile… Costcurve of incrementalsupply;incrementalproduction,Mt Fe, vs c/dmtu CFR China 0 100 200 300 400 500 600 700 800 c/dmtu Incremental production Marginalcost range
  34. 34. 1. China’s demand to eventually fall  Slowdown in economic growth  Reduced steel intensity of use in the long term  Scrap pool expands, reducing need for primary Fe units 2. Growth elsewhere is unlikely to be strong enough to ensure increases are maintained. Global demand to flatten post-2025. 3. Tight supply to ease due to an extensive new project pipeline. Although increased risk to the downside. …leading us to the conclusion that current price levels (>$100/t) are unsustainable in the long term a Long run market fundamentals: 34
  35. 35. The CRU view - • Are the boom years nearing an end – 5 year view? - It depends who you are. For a large majority of current seaborne producers, NO. • When will Chinese steel demand peak? - Mid 2020s at just above 800kg/capita (finished steel basis). • Have recent investment jitters severely impacted supply prospects? - Supply potential remains strong but risks to the downside have mounted. • Where and what are the supply-side risks? - No regions are risk-free. • Are prices above $100/t sustainable in the long term? - NO, as the supply/demand balance inevitably softens. To conclude… 35
  36. 36. 36
  37. 37. Thank you for your attention www.crugroup.com Iron ore analyst laura.brooks@crugroup.com Regional manager – South America marcio.gotto@crugroup.com 37

×