Laura Brooks, CRU Analysis -Iron ore price: Staying power at >$100/t?
 

Laura Brooks, CRU Analysis -Iron ore price: Staying power at >$100/t?

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Laura Brooks, Senior Consultant, Steel Raw Materials, CRU Analysis delivered this presentation the 2014 AJM Global Iron Ore & Steel Forecast Conference and Exhibition. ...

Laura Brooks, Senior Consultant, Steel Raw Materials, CRU Analysis delivered this presentation the 2014 AJM Global Iron Ore & Steel Forecast Conference and Exhibition.

The annual AJM Global Iron Ore and Steel Conference is the world's largest gathering of iron ore and steel executives. Over the past 16 years thousands of industry personnel have attended, recognising it as the conference that delivers vital information on the status of the global iron ore and steel sectors.

For more information, visit http://www.globalironore.com.au/home

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Laura Brooks, CRU Analysis -Iron ore price: Staying power at >$100/t? Laura Brooks, CRU Analysis -Iron ore price: Staying power at >$100/t? Presentation Transcript

  • Iron ore price: staying power >$100/t in medium term? Laura Brooks – Senior Consultant, CRU Prepared for: AJM - Global Iron Ore Tuesday 11th March 2014
  • Key topics • What’s driving weekly price movements? • How resilient is Chinese production and what does this mean for price? • Implication of CRU's long run price range on developments in Australia • Conclusion: staying power > $100/t? Agenda 2
  • 2013: Prices remained in a narrow range from Q2 3 Average quarterly price for 62% Fe fines, CFR China, $/t Data: CRU. 100 110 120 130 140 150 160 Q1 Q2 Q3 Q4 CRU October 2012 forecast Actual 2013 2013 average price Actual = $136/t CRU forecast in October 2012 = $129/t
  • 2014 prices have fallen from the $130-140/t range seen for the majority of 2013. What’s changed? 4 SLOWDOWN IN CHINESE ECONOMY FAI in China, % y/y growth, nominal Data: CRU. Source: Mysteel, Umetal. TIGHTER CREDIT AVAILABILITY IN CHINA Chinese interbank offered interest rate, 3 months, % pa 15 17 19 21 23 25 MALAISE IN CHINESE STEEL MARKET SHFE, May 2014 contract, RMB/t BUILD IN IRON ORE PORT STOCKS IN CHINA Chinese port stocks, 000 t 2 4 6 8 10 3000 3200 3400 3600 3800 4000 40 60 80 100 120
  • What’s in store for 2014? Global demand remains strong and, although China slows, no collapse 5 y/y industrial production growth by country or region, % Data: CRU. y/y change in crude steel production, % -30% -20% -10% 0% 10% 20% 30% 08 Q1 09 Q3 11 Q1 12 Q3 14 Q1 China Eurozone World US -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 11 12 13 14 China Global, excluding China CHINA: Economy to slow in 2014 WHY? Decelerating credit growth CRU VIEW: Construction bears the brunt RISKS: Firmly to downside
  • Ore supply: Australia is set to add another >90 Mt of low- cost ore and Brazil and India pick up their game... 6 y/y change in iron ore exports by selected country, Mt Data: CRU. 0 20 40 60 80 100 120 Australia Brazil India Other Africa DRIVERS: African Minerals (Sierra Leone), London Mining (Sierra Leone) DRIVERS: Vale and Samarco DRIVERS: 3 majors account for 93% of additional tonnages 0 20 40 60 80 100 120 06 07 08 09 10 11 12 13 14 Indian iron ore exports, Mt 2009 - 2013 India LOST: 100 Mt Australia more than compensated DRIVERS: Goa to export stockpiled ore and mining to resume
  • ...loosening the supply balance and squeezing out higher cost production. Prices are set to fall by $16/t y/y in 2014... 7 62% Fe fines, CFR China, $/t, nominal Data: CRU. 40 60 80 100 120 140 160 180 08 09 10 11 12 13 14 RISKS IMPACT ON PRICE Indian and Brazilian supply undercut forecast UPSIDE Chinese demand falters DOWNSIDE Non-core producers are more resilient than expected DOWNSIDE
  • ...under the assumption that "other" producers are fast to cut output. If not, further downside price pressure is likely. 8 Chinese imports by exporting country 2008: 2013: Data: CRU. Note: (1) Includes Australia, Brazil, South Africa and India. 88% 12% Traditional (1) Non-traditional 76% 24% Iron ore exports from Iran, Indonesia and Mexico, Mt 0 10 20 30 40 50 60 12 13 14
  • Key topics • What’s driving weekly price movements? • How resilient is Chinese production and what does this mean for price? • Implication of CRU's long run price range on developments in Australia • Conclusion: staying power > $100/t? Agenda 9
  • 0 500 1,000 1,500 2,000 2,500 3,000 3,500 2012 2015 2018 2021 2024 2027 2030 2033 Possible Probable Committed Demand Long run picture = simply too much iron ore 10 Gap analysis; iron ore demand and planned supply, Mt Data: CRU. Note: Gap analysis excludes Chinese domestic production and includes Chinese import demand only.
  • Base case: new, mainly low-cost supply will displace Chinese marginal production 11 x axis: Global iron ore cumulative production, Mt y axis: Iron ore production business costs in 2018, nominal, $/t Data: CRU, company reports. Note: (1) Iron ore imports as a proportion of iron ore consumption. 65% 70% 75% 80% 85% 90% 95% 0 50 100 150 200 250 300 350 12 13 14 15 16 17 18 Production Import dependency LHS: Chinese iron ore apparent production of fines, lump and pellets, Mt RHS: Chinese import dependency (1), % - Australia - Brazil
  • Historic data illustrates the relationship between price and Chinese production Data: CRU. Note: (1) This takes into account cost inflation and productivity gains, as illustrated in the above chart. x axis: Chinese iron ore production, quarterly, Mt y axis: 62% Fe fines, CFR China, price, real 2013, $/t 0 50 100 150 200 250 0 10 20 30 40 50 60 70 80 90 Historic Historic trend Historic trend applying 7% cost inflation and 2% productivity gains Less confidence in these early data points. During this period, self-sufficiency was the main motivation for production. 12
  • Rate of the price erosion in 2017-2018 is set to ease, owing to the flat shape of the left portion of the Chinese cost curve Data: CRU. x axis: Chinese iron ore cumulative production, Mt y axis: Iron ore production business costs of Chinese miners, 2018 nominal, $/t Flat shape to left of the curve 13
  • However, there is a risk that Chinese ore output will hold at higher levels given government support and new projects 14 Data: CRU, NBS. China: Iron ore projects under construction or planned RoM output Number of projects Total ROM capacity Capacity > 10 Mt/y 12 279.5 Capacity 5-10 Mt/y 16 103.8 Capacity 2-5 Mt/y 38 107.8 Total 66 491.1 Data: MMAC Assuming a ROM grade of 20%, this equates to 105 Mt of saleable ore What is the impact on price? Too much supply = short term downside to price E.G – current conditions in the metallurgical coal market 0 5 10 15 20 25 05 06 07 08 09 10 11 12 China’s economically extractable iron ore reserves, bn t Challenges for Chinese producers: • Complex mineral composition • Deeply buried deposits • Complicated geological conditions • Low Fe grade • High content of impurities
  • Key topics • What’s driving weekly price movements? • How resilient is Chinese production and what does this mean for price? • Implication of CRU's long run price range on developments in Australia • Conclusion: staying power > $100/t? Agenda 15
  • FOCUS ON AUSTRALIA: big spread in costs. Some projects are in the 4th quartile. 16 Data: CRU. All products, site cost curve X-axis: Cumulative production, Mt Y-axis: Business costs, nominal 2020, $/t - Australian production All but two of these projects/sites are owned by the majors New entrants hold a less competitive position on the global business cost curve
  • From a site cost perspective, high mining costs are hurting Australian producers 17 Data: CRU. Stacked cost curve, sinter fines site costs, $/t, 2014 BRAZIL AUSTRALIA GUINEA INDIA
  • But, from an investor risk perspective, Australia comes out on top 18 Data: CRU. Note: (1) 1 represents the incentive price for the median project. 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 0 50 100 150 200 250 300 350 400 450 500 550 600 650 700 Australia Brazil Africa Canada Ukraine Risk-adjusted incentive price curve for 25 selected iron ore projects at risk-adjusted discount rates X-axis: Cumulative production, Mt Y-axis: Incentive price indexed (1) Red dotted lines indicate long run price range
  • ...driving our expectations for a continuing strong market presence looking ahead, albeit heavily led by the majors 19 Data: CRU, GTIS. Share of global exports by selected country, % 0% 10% 20% 30% 40% 50% 60% 13 14 15 16 17 18 Australian share Brazilian share African share Indian share
  • Key topics • What’s driving weekly price movements? • How resilient is Chinese production and what does this mean for price? • Implication of CRU's long run price range on developments in Australia • Conclusion: staying power > $100/t? Agenda 20
  • Staying power >$100/t in the short/medium-term? 21 BEARS • Wall of supply from traditional production zones to new hubs, such as Africa • China’s collapse, just beginning BULLS • New supply? Yes. But, gradual and many won’t make it • China to slow, but not crash
  • The current environment for new projects is tough for all 22 Selection of iron ore projects in West Africa Data: CRU, GTIS. 0 20 40 60 80 100 120 140 2006 2008 2010 2012 Australia Brazil South Africa China Average site costs, $/t 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Mbalam-Nabeba Kalia Askaf Avima Bong Marampa Mayoko Simand. (Rio Tinto) Simand. (Vale) First announced start- up Most-recent announced start-up/CRU estimate
  • Conclusion • What’s driving weekly price movements? China macro, credit availability, SHFE, stocks = critical • How resilient is Chinese production and what does this mean for price? Historic price v Chinese production relationship is set to hold = output set to drop • Implication of CRU's long run price range on developments in Australia Project specific, but well placed on incentive price curve • Conclusion: staying power > $100/t in short/medium term? Yes, for annual benchmark averages Agenda 23
  • Thank you for listening www.crugroup.com 11 Please come and speak with me and my colleagues at stand #2 Iron ore analyst – laura.brooks@crugroup.com Business development manager – philip.sewell@crugroup.com Sydney office manager – alex.tonks@crugroup.com 24
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