Panorama Global do Mercado de
Minério de Ferro
Previsão de Produção, Demanda e Preço
Novembro 2012
André Pinheiro
+55-11-3...
2
Agenda
SECTION 1 SUPPLY SIDE: WHAT IS “ACTUALLY” EXPECTED TO COME ON STREAM?
SECTION 2
PRICES: WHAT IS THE OUTLOOK? HOW ...
SECTION 1
SUPPLY:
WHAT IS “ACTUALLY” EXPECTED TO COME ON STREAM?
0
100
200
300
400
500
600
700
Guided 2010-12 Growth Actual Growth?
(mtpy)
4
SUPPLY GROWING LESS-THAN-EXPECTED
Australian i...
522
470
~400
355
0
100
200
300
400
500
600
700
(mtpy)
2011 Capex Plan 2012 Capex Plan 2013E Capex Plan Itaú BBA Forecast
5...
6
SUPPLY GROWING LESS-THAN-EXPECTED
The Chinese have invested heavily to expand iron ore capacity;
However, production has...
7
SUPPLY GROWING LESS-THAN-EXPECTED
India’s Government has increased restrictions on iron ore exports over the past few ye...
8
WHY IS GUIDANCE DIFFERENT FROM REALITY?
Environmental Licenses;
Logistics Constraints;
Lack of Infrastructure;
Declining...
9
SUPPLY: WHO DELIVERED THE CAPACITY INCREASES?
The Australians delivered more capacity than the Brazilians;
0
100
200
300...
10
SUPPLY: WHO DELIVERED THE CAPACITY INCREASES?
2005 2006 2007 2008 2009 2010 2011
Vale Australians (Rio, BHP and Fortesc...
SECTION 2
DEMAND:
IS THERE STILL DEMAND GROWTH?
WHERE WILL IT COME FROM?
12
DEMAND: WHERE DID IT COME FROM?
Apparent Steel Use, Finished Steel (mn tons)
2007 2008 2009 2010 2011
423
435
548
576
6...
13
DEMAND: WHERE DID IT COME FROM?
Apparent Steel Use, Finished Steel (mn tons): 2007-2011
+137 mn tons
+188 mn tons
Rest ...
14
DEMAND: WHERE DID IT COME FROM?
Chinese went from 10% to 50% of global steel production;
15%
17%
20%
23%
27%
31%
35%
37...
2010 2011 2012 11/10 12/11
World 1,286.2 1,365.3 1,448.8 6.2 6.1 118.4
European Union (27) 144.1 153.8 159.6 6.8 3.8 80.6
...
16
DEMAND: HAS CHINESE STEEL CONSUMPTION PEAKED?
Source: Vale, Rio Tinto and Itaú BBA
17
DEMAND: WHERE WILL IT COME FROM?
(UrbanizationRate%)
0
10
20
30
40
50
60
70
80
90
100
1950
1955
1960
1965
1970
1975
198...
18
DEMAND: WHERE WILL IT COME FROM?
Source: BHP and Itaú BBA
19
Middle-Class – by region (in millions)
Source: AngloAmerican, OECD and Itaú BBA
Europe
Middle East &
North Africa
Sub S...
SECTION 3
PRICES:
WHAT IS THE OUTLOOK? HOW WILL THEY BEHAVE?
21
PRICES: WHY WON’T THEY DROP TOO MUCH IN THE LT?
Iron Ore
Capex/ton USD/ton 110
Lead Time years 6
LT Iron Ore Price (FOB...
22
PRICES: HIGHER CHINESE DEPENDENCY = + VOLATILITY!
China became the most important buyer;
The Chinese behave like trader...
23
PRICES: WHAT IS OUR FORECAST?
Supply will continue to increase at a slower-than-expected pace;
New projects won’t advan...
THANK YOU
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Global market outlook – Iron ore outlook including cost implications for new and existing mines with iron ore production and demand

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Marcos Assumpção, Equity Research – Steel & Mining & Pulp & Paper, from Itau BBA 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

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Global market outlook – Iron ore outlook including cost implications for new and existing mines with iron ore production and demand

  1. 1. Panorama Global do Mercado de Minério de Ferro Previsão de Produção, Demanda e Preço Novembro 2012 André Pinheiro +55-11-3073-3028 andre.pinheiro@itaubba.com Marcos Assumpção, CFA +55-11-3073-3021 marcos.assumpcao@itaubba.com
  2. 2. 2 Agenda SECTION 1 SUPPLY SIDE: WHAT IS “ACTUALLY” EXPECTED TO COME ON STREAM? SECTION 2 PRICES: WHAT IS THE OUTLOOK? HOW WILL THEY BEHAVE?SECTION 3 DEMAND SIDE: IS THERE STILL DEMAND GROWTH? WHERE WILL IT COME FROM?
  3. 3. SECTION 1 SUPPLY: WHAT IS “ACTUALLY” EXPECTED TO COME ON STREAM?
  4. 4. 0 100 200 300 400 500 600 700 Guided 2010-12 Growth Actual Growth? (mtpy) 4 SUPPLY GROWING LESS-THAN-EXPECTED Australian iron ore production was expected to increase by more than 500 million tons in 2010-12; ? But less than 100 million tons was actually delivered… Source: Rio Tinto and Itaú BBA
  5. 5. 522 470 ~400 355 0 100 200 300 400 500 600 700 (mtpy) 2011 Capex Plan 2012 Capex Plan 2013E Capex Plan Itaú BBA Forecast 5 SUPPLY GROWING LESS-THAN-EXPECTED Brazilian players have consistently revised their production guidance; The new targets are always lower numbers… Source: Vale and Itaú BBA Vale’s 2015 Production Target
  6. 6. 6 SUPPLY GROWING LESS-THAN-EXPECTED The Chinese have invested heavily to expand iron ore capacity; However, production has not risen at the same pace… Source: World Steel Dynamics and Itaú BBA 0 5 10 15 20 25 0 200 400 600 800 1000 2006 2007 2008 2009 2010 2011 2012 (USD bn)(mtpy) Production (mn tons) Capital Outlays (USD bn) 0% 10% 20% 30% 40% 50% 0 20 40 60 80 100 120 140 Sep-05 Feb-07 Jul-08 Dec-09 May-11 (mn tons) Chinese Iron Ore Production Chinese Iron Ore Grades
  7. 7. 7 SUPPLY GROWING LESS-THAN-EXPECTED India’s Government has increased restrictions on iron ore exports over the past few years; As a result, India’s share of seaborne supply has decreased… 29% 1% 0% 5% 10% 15% 20% 25% 30% 35% Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 (mn tons) India Source: Bloomberg and Itaú BBA
  8. 8. 8 WHY IS GUIDANCE DIFFERENT FROM REALITY? Environmental Licenses; Logistics Constraints; Lack of Infrastructure; Declining Ore Grades; Funding – Price Volatility; Political Risk/Higher Taxes; Lack of Skilled Labor; Capex Inflation. Source: Itaú BBA
  9. 9. 9 SUPPLY: WHO DELIVERED THE CAPACITY INCREASES? The Australians delivered more capacity than the Brazilians; 0 100 200 300 400 500 600 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (mn tons) Brazil Australia 0 50 100 150 200 250 300 350 2005 2006 2007 2008 2009 2010 2011 (mn tons) Vale Rio Tinto BHP Fortescue Iron Ore Production: Brazil vs. AustraliaIO Production: Vale, Rio, BHP and Fortescue Source: BHP, Rio Tinto, Fortescue, Vale and Itaú BBA
  10. 10. 10 SUPPLY: WHO DELIVERED THE CAPACITY INCREASES? 2005 2006 2007 2008 2009 2010 2011 Vale Australians (Rio, BHP and Fortescue) 20% 25% 30% 35% 40% 2005 2006 2007 2008 2009 2010 2011 (mn tons) 33% 30% 20% 25% 30% 35% 40% 2005 2006 2007 2008 2009 2010 2011 (mn tons) 31% 37% IRON ORE SEABORNE MARKET SHARE % The Australians delivered more capacity than the Brazilians; Source: Bloomberg, World Steel Association and Itaú BBA
  11. 11. SECTION 2 DEMAND: IS THERE STILL DEMAND GROWTH? WHERE WILL IT COME FROM?
  12. 12. 12 DEMAND: WHERE DID IT COME FROM? Apparent Steel Use, Finished Steel (mn tons) 2007 2008 2009 2010 2011 423 435 548 576 611+45% Source: World Steel Association and Itaú BBA
  13. 13. 13 DEMAND: WHERE DID IT COME FROM? Apparent Steel Use, Finished Steel (mn tons): 2007-2011 +137 mn tons +188 mn tons Rest of the World -51 mn tons Source: World Steel Association and Itaú BBA
  14. 14. 14 DEMAND: WHERE DID IT COME FROM? Chinese went from 10% to 50% of global steel production; 15% 17% 20% 23% 27% 31% 35% 37% 38% 47% 45% 46% 47% 00% 05% 10% 15% 20% 25% 30% 35% 40% 45% 50% 0 100 200 300 400 500 600 700 800 00 01 02 03 04 05 06 07 08 09 10 11 12E (%ofGlobalSteelProduction) (SteelProdutionmntons) China Became The Largest Steel Player Source: World Steel Association and Itaú BBA
  15. 15. 2010 2011 2012 11/10 12/11 World 1,286.2 1,365.3 1,448.8 6.2 6.1 118.4 European Union (27) 144.1 153.8 159.6 6.8 3.8 80.6 Other Europe 29.6 32.8 35.2 11.0 7.3 111.4 C.I.S. 48.4 52.2 56.8 7.7 8.8 100.8 N.A.F.T.A. 110.3 122.0 129.8 10.6 6.4 92.3 Central & South America 45.5 49.3 53.5 8.4 8.5 129.6 Africa 25.9 25.0 27.4 -3.2 9.3 124.6 Middle East 45.3 46.5 49.9 2.6 7.3 113.0 Asia and Oceania 837.2 883.7 936.7 5.6 6.0 135.8 China 576.0 610.5 641.1 6.0 5.0 151.7 mmt % 2012 as % of 2007 15 DEMAND: WHERE DID IT COME FROM? Apparent Steel Use, Finished Steel Source: World Steel Association and Itaú BBA
  16. 16. 16 DEMAND: HAS CHINESE STEEL CONSUMPTION PEAKED? Source: Vale, Rio Tinto and Itaú BBA
  17. 17. 17 DEMAND: WHERE WILL IT COME FROM? (UrbanizationRate%) 0 10 20 30 40 50 60 70 80 90 100 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Brazil Korea China India Source: Vale, Rio Tinto and Itaú BBA Urbanization Rate (%) Shanghai Pudong Financial District
  18. 18. 18 DEMAND: WHERE WILL IT COME FROM? Source: BHP and Itaú BBA
  19. 19. 19 Middle-Class – by region (in millions) Source: AngloAmerican, OECD and Itaú BBA Europe Middle East & North Africa Sub Saharan AfricaCentral & South America North America Asia Pacific 2009 2030 100mn 500mn 1bn DEMAND: CHINESE MIDDLE-CLASS
  20. 20. SECTION 3 PRICES: WHAT IS THE OUTLOOK? HOW WILL THEY BEHAVE?
  21. 21. 21 PRICES: WHY WON’T THEY DROP TOO MUCH IN THE LT? Iron Ore Capex/ton USD/ton 110 Lead Time years 6 LT Iron Ore Price (FOB) USD/ton 75 Mining Royalty % 5% LT Iron Ore Price (FOB) - (ex-royalty) 71 Cash Cost/ton USD/ton 47 Cash Cost Breakdown (USD/ton) SG&A/ton USD/ton 3 Mining 20 EBITDA/ton USD/ton 21 Railroad 12 Depreciation/ton USD/ton 4 Port 15 Maintenance CAPEX/ton USD/ton 4 Effective Tax Rate % 34% Perpetual Grow th % 0% WACC % 7% Years 1 2 3 4 5 6 7 8 9 10 Perpetuity CAPEX USD/ton (18) (18) (18) (18) (18) (18) - - - - EBITDA USD/ton - - - - - - 21 21 21 21 Depreciation USD/ton - - - - - - (4) (4) (4) (4) EBIT USD/ton - - - - - - 17 17 17 17 Taxes USD/ton - - - - - - (6) (6) (6) (6) Revenues - - - - - - 75 75 75 75 FCF CAPEX USD/ton (18) (18) (18) (18) (18) (18) - - - - EBITDA USD/ton - - - - - - 21 21 21 21 Taxes USD/ton - - - - - - (6) (6) (6) (6) WK USD/ton - - - - - (4) - - - CAPEX Maintenance USD/ton - - - - - - (4) (4) (4) (4) FCF USD/ton (18) (18) (18) (18) (18) (18) 7 11 11 11 159 Discount Factor 1.1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 2.0 2.0 PV FCF (17) (16) (15) (14) (13) (12) 5 6 6 6 81 NPV 16 IRR 9% + Mining Cash Cost: USD20/ton + Logistics Cost: USD 12/ton + 3rd Party Port Cost: USD 15/ton + SG&A Expenses: USD 3/ton + Royalties: USD 4/ton
  22. 22. 22 PRICES: HIGHER CHINESE DEPENDENCY = + VOLATILITY! China became the most important buyer; The Chinese behave like traders; Changes in inventories could have a strong impact on prices. -10 -8 -6 -4 -2 0 2 4 6 8 10 nov-08 abr-09 set-09 fev-10 jul-10 dez-10 mai-11 out-11 mar-12 ago-12 (USD/ton) Daily Price Variations Source: Bloomberg and Itaú BBA -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% nov-08 abr-09 set-09 fev-10 jul-10 dez-10 mai-11 out-11 mar-12 ago-12 (%) Daily Price Variations
  23. 23. 23 PRICES: WHAT IS OUR FORECAST? Supply will continue to increase at a slower-than-expected pace; New projects won’t advance if prices drop too much; Demand is expected to increase gradually (China, India and EMs); Prices sustained by high-cost producers (in China and out of China). 128.0 120.0 110.0 100.0 95.0 95.0 0 20 40 60 80 100 120 140 2012E 2013E 2014E 2015E 2016E Long-term (mn tons) Itaú BBA Itaú BBA – Iron Ore Price Curve
  24. 24. THANK YOU

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