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Paul Bartholomew - Platts - Steelmaking and iron ore dynamics in the Asian region

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Paul Bartholomew delivered the presentation at the 2014 Mining the Pilbara Conference. …

Paul Bartholomew delivered the presentation at the 2014 Mining the Pilbara Conference.

The 2014 Mining the Pilbara Conference explored current projects and regulatory updates in the Pilbara region.

For more information about the event, please visit: http://www.informa.com.au/pilbaramining14

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  • 1. © 2013 Platts, McGrawHill Financial. All rights reserved. Steelmaking and iron ore dynamics in the Asian region Paul Bartholomew, Managing Editor, Australia, Platts Mining the Pilbara, Port Hedland July 9-10, 2014
  • 2. Disclaimer Platts has taken all reasonable steps to ensure that all the information included in this presentation (including, without restriction, facts, opinions and predictions) is correct, accurate and reliable but nevertheless excludes, to the fullest extent permitted by law, any liability for any incorrect, inaccurate or incomplete information. To the fullest extent allowed by applicable law, this presentation is provided on the basis that Platts will not be liable to any individual, organisation or business under any circumstances whatsoever (whether in contract, negligence or any other tort, breach of statutory duty or otherwise) for any loss of profits or income, business interruption, deficiency of information or for increase in any costs, liabilities or expenses or any other loss, damage, cost, expense or liability whatsoever and/or however arising directly or indirectly out of or in connection with or relating to the information in this presentation including, but not restricted to, its use in making any decision 2
  • 3. 3 Introduction to Platts Platts is a publishing company • Wholly owned subsidiary of McGraw-Hill Financial • Standard & Poor’s is sister company • NYSE listed • Specialized in publishing news and prices for markets since 1909 • Platts acquired Steel Business Briefing (SBB) in July 2011 – The Steel Index (TSI) was part of that deal and continues to operate independently • Our assessments are widely used as benchmarks in oil, gas, petrochemical, agribusiness, shipping and metals markets • We assess the value of physical commodities and financially-settled derivatives (swaps and futures)
  • 4. Agenda Macro & fundamentals • The iron ore supply picture • Chinese steel demand • Potential impact of China’s environmental plans on steel/iron ore • A few market observations 4
  • 5. Where is this supply coming from? Iron ore production 5 0 10 20 30 40 50 60 70 80 90 100 Jan-Mar 2012 Apr-Jun 2012 Jul-Sep 2012 Oct-Dec 2012 Jan-Mar 2013 Apr-June 2013 Jul-Sep 2013 Oct-Dec 2013 Jan-Mar 2014 Vale Rio Tinto BHP Fortescue Source: Company reports • Decade long expansion program in Australia bearing fruit • Fortescue major new player – new tons from Rio and BHP • Vale has struggled to lift output Mil Mt
  • 6. (Mil Mt) 2013 output Growth % y-o-y Output end- 2014 Output end- 2015 Output end- 2018 Vale 307.9 -3% 300 320 400 Rio 267.7 7 295 320 350 BHP 186.2 15 225 245 270 FMG 126.5 86 155 170 170 Anglo 42.4 -2 45 50 70 Roy Hill - - - 15 55 6 What’s next in the supply pipeline? • Vale the big question mark – approval delays at S11D (90 mil mt/year) • BHP, Fortescue expansion incremental tons from next year • Supply takes a breather from end of next year…until 2018? • More project delays, struggles elsewhere… Source: Company reports, analyst reports, Platts estimates
  • 7. Weak steel markets, plentiful iron ore has squeezed prices – “It’s a buyer’s market!” 7 0 20 40 60 80 100 120 140 160 180 3/05/2012 3/06/2012 3/07/2012 3/08/2012 3/09/2012 3/10/2012 3/11/2012 3/12/2012 3/01/2013 3/02/2013 3/03/2013 3/04/2013 3/05/2013 3/06/2013 3/07/2013 3/08/2013 3/09/2013 3/10/2013 3/11/2013 3/12/2013 3/01/2014 3/02/2014 3/03/2014 3/04/2014 3/05/2014 3/06/2014 62% 58% Platts 62% and 58% Fe iron ore fines US$/mt CFR Source: Platts • Supply glut hit sooner than expected • Iron ore prices have fallen by 25-30% this year • Very active spot market in March-May, producers discounting, some non-performance of contracts • High port stocks (116 mil mt on July 4) • Impacting restocking cycles – supply is always there
  • 8. Iron ore market dynamics 8
  • 9. Will Modi’s India return to the iron ore export market? 9 0 50 100 150 200 250 300 350 400 450 2011 2012 2013 Australia Brazil India • India no longer a major contributor to seaborne market due to mining, export bans • Post-election signs supportive of steel, but 300 mil mt/year capacity by 2025 unlikely (needs $200 bn investment!!) • Steel lobby remains strong - Export tax on pellet exports (5%) • Could import more this year (JSW, Tata) Source: China Customs Mil mt China’s iron ore import sources
  • 10. What about Chinese domestic iron ore? • Small miners account for 40% of output (CISA); 65% of Chinese mines have capacity below 1 mil mt/year (SMM); 70% of output is controlled by steel mills (Citi); SME miners produce 80%, and larger miners 20% (China Hanking) • More production underground, more expensive and more difficult to mine, grades falling (31% Fe in 2004, 21.5% Fe now, CISA), wages rising; miners subject to environmental pressures • Inland mines more protected from the import market • So where is cost curve? It was $120/mt…then $100/mt…now $95/mt?!! How much is ‘sticky’? • Small mines, concentrators closing – Time will tell if support around $95/mt 10 15.8 6.9 6.4 5.4 4.9 29.4 184.8 Anshan Panzhihua Benxi Taigang Baogang Other major mines Small mines Source: MLR, CISA, SBB % of total output
  • 11. What about ‘next generation’ supply? • Mills seeking vertical integration, diversify away from majors • Posco, NSSMC; Tata Steel more efficient in India than EU • New projects come with more risk, remote regions, fewer brownfield sites, lack infrastructure • Capital costs estimated at around $250/mt – What’s the incentive long-run iron ore price? (Depends how big and how cost-effective you are…) • Simandou • Is Chinese SOE appetite waning? (Baosteel) “China seems to have turned the investment tap off this year” Australian coal company CEO “We’re not seeing the Chinese anymore” Australian iron ore developer chairman 11 CITIC Pacific’s Sino Iron magnetite project in Australia
  • 12. Chinese steel – the demand side 12 Baosteel’s Shanghai works
  • 13. Steel output, iron ore surprised in 2013 • Chinese steel output grew 7.5% y-o-y in 2013 • Easily absorbed new import volumes • Domestic iron ore production unscathed • Property-sector restocking over H2 supported prices (62% Fe averaged $133/mt CFR) • Leadership change helped sentiment 13 Source: China customs 0 10 20 30 40 50 60 70 80 90 100 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Iron ore imports China monthly iron ore imports (Mil Mt)
  • 14. But a different story so far in 2014… Mil Mt Additional tons y-o-y Growth y-o-y % Jan-May 2012 308.7 25.3 9 Jan-May 2013 322.2 13.5 4.4 Jan-May 2014 384.7 62.5 19.4 14 Mil Mt Growth y-o-y % 2012 725 4.1 2013 779 7.5 2014 e 800 2.7 May 2014 821 annualized 5.4 But crude steel production weak…recovery in May, June Iron ore imports surged over Q1 this year Source: NBS
  • 15. Steel output, prices normally soften in Q3 2012Y-o-Y change Q-o-Q change 2013Y-o-Y change Q-o-Q change 2014 Y-o-Y change Q-o-Q change Jan-Mar 4253 -8.6 1 4075 -4.2 6 3413 -16.2 -2.1 Apr-Jun 4209 -11.7 -1 3593 -14.6 -11.8 Jul-Sep 3648 -21.1 -13.3 3582 -1.2 -0.3 Oct-Dec 3843 -8.7 5.3 3485 0.05 -2.7 15 2012Y-o-Y change Q-o-Q % change 2013Y-o-Y change Q-o-Q % change 2014 Q-o-Q % change Jan-Mar 149.7 -16.8 5.6 148.4 -1 21 120.4 -10.5 Apr-Jun 141.2 -20.4 -5.7 116.2 -17.7 -21.6 Jul-Sep 113.2 -36.2 -19.8 132.7 17.2 14.2 Oct-Dec 122.3 -13.8 8 134.6 10 1.4 Chinese domestic HRC prices (RMB/mt) Quarterly average iron ore prices ($/mt CFR) 2012Q-o-Q change Y-o-Y change 2013Q-o-Q change Y-o-Y change 2014Q-o-Q change Y-o-Y change Jan-Mar 175.6 10 4 191.7 9 9.1 194 3.2 1.2 Apr-Jun 185.8 5.8 4 197.3 2.9 6.2 Jul-Sep 179.4 -3.4 1.6 197.2 0 9.9 Oct-Dec 175.7 -2.1 9.8 188.3 -4.5 7.2 Total 716.5 774.5 8.1 Chinese crude steel production (Mil mt) Source: Platts, NBS • Last year abnormally strong – crash didn’t happen
  • 16. Weak sentiment in China 16 3200 3250 3300 3350 3400 3450 3500 3550 2Jan14 7Jan14 10Jan14 15Jan14 20Jan14 23Jan14 28Jan14 7Feb14 12Feb14 17Feb14 20Feb14 25Feb14 28Feb14 5Mar14 10Mar14 13Mar14 18Mar14 21Mar14 26Mar14 31Mar14 3Apr14 9Apr14 14Apr14 21Apr14 24Apr14 29Apr14 6May14 9May14 14May14 19May14 22May14 27May14 30May14 5Jun14 HRC prices softer this year HRC RMB/Mt • End-user markets patchy – manufacturing, auto, shipbuilding - property especially • Sales of new homes fell 10% y-o-y in January-April; real estate investment hit a 57-month low • Construction (35% of steel consumption) weak going into hot months • Credit tight, shadow banking clampdown • No expectation of much government help, mini-stimulus only to meet GDP target of 7.5% • Difficult to see why the rest of the year will replicate 2013 – 2% output growth in 2014 Source: Platts, SBB
  • 17. Platts China Steel Sentiment Index - July The Platts China Steel Sentiment Index Survey - July 2014 (a figure over 50 indicates expansion; under 50 indicates contraction) July Change from June June Platts China Steel Sentiment Index (Reflects New Orders) 45.90 -6.03 51.93 New Domestic Orders 46.71 -5.99 52.70 New Export Orders 36.42 -5.31 41.73 Additional Sentiment Categories: Steel Production 46.43 -12.95 59.38 Inventories Mill Inventories 46.43 5.80 40.63 Trader Inventories 39.35 4.18 35.17 Price Expectations Domestic Long Steel Products Prices 50.00 4.55 45.45 Domestic Flat Steel Products Prices 62.73 27.10 35.63 Export Steel Prices 47.72 7.91 39.81 17 • Chinese steel market expects fewer orders this month; steel output to fall; inventories to rise – though is oddly bullish on near-term steel prices. • Wishful thinking?
  • 18. Steel margins improving…but! 18 0 100 200 300 400 500 600 700 800 Premium HCC + 62% IODEX (both CFR) China Domestic HRC Margin • Larger coastal mills making RMB100/mt net profit on domestic HRC sales • Some mills believe RMB200/mt is a possibility if steel prices improve • Encourages more production which then dampens prices (Hebei mills lifted utilization rates to 88% at end-June from 85% at end-May.) • But one major mill described its profits as “meagre” still • Market sentiment is that prices will fade over the back-half of 2014 • But some mills starting to fail Source: Platts Indicative margins
  • 19. China’s perennial steel overcapacity challenge – what’s being done? Environmental measures • Consolidation of steel sector no longer driven by BF size or through forced M&A • Instead, Beijing has tightened supervision of polluting companies to improve air quality – especially steel! China is serious about pollution – It’s a social issue!! • Higher costs for mills – Eg, New sinter & dust cleaning equipment can add another RMB100/mt to output costs • Blocking of new land approvals, leases and bank financing • Shadow banking clampdown – accounts for 1/4 to 1/3 of corporate finance 19 Cyclists brave the Chinese pollution 0.00 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00 2012 2013 2014 Source: NBS China crude steel output (Mil mt)
  • 20. Chinese steel capacity….(cont) Capacity closures • National target of 80 million mt over six provinces: • Hebei (close to Beijing!), Liaoning, Shanxi, Jiangsu, Shandong and Jiangxi • Timeframe vague (5 years?) • Hebei - 60 million mt by end-2017 (of which 15 million mt by-end 2014) • Around 24 million mt/year of new BF capacity commissioned in 2013 • More efficient mills could lift utilization rates • But mills starting to fail - Haixin, Xilin, Tranvic, and Qifeng Steel • Net result: Not much impact on capacity but should act as a brake on runaway overcapacity “Some 70% of Chinese mills won’t be able to meet their environmental targets,” Li Xinchuang, China Iron & Steel Association…”but it will happen, slowly” 20
  • 21. Is there demand in Asia outside of China? Apparent steel consumption among 'ASEAN 6' Metric tons 2012 2013E % change Indonesia 12,499,875 14,329,194 14.60% Malaysia 8,921,628 9,975,396 11.80% Philippines 6,008,075 6,757,528 12.50% Singapore 3,825,566 4,296,809 12.30% Thailand 16,380,422 16,773,812 2.40% Vietnam 10,956,000 11,875,000 8.40% Total 58,591,566 64,007,739 9.20% 21Source: SEASI • SEASI steel consumption expected to keep growing at 4-5% - region imports 50% of steel needs • Local steel industry hampered by Chinese imports, lack of capital, lots of JV-ing • Largely EAF environment • S. Korea domestic steel market weak, imports up • Japanese steel demand flat – little impact from earthquake reconstruction or Olympics Krakatau-Posco JV Photo: Platts
  • 22. A few other market observations • Lump and pellet premiums – should move structurally higher • Non-traditional iron ore sources (250 mil mt in 2013!) could be impacted • More trades being done on platforms - globalORE, CBMX • What about scrap? China produces 10% of steel via EAF, but targeting 25-30% by 2025 • Could replace Fe units 22Iron ore unloading at Qingdao port Photo: Platts 0 20 40 60 80 100 120 140 160 62% Fe iron ore fines Premium low-vol hard coking coal Source: Platts Falling raw materials prices ($/mt)
  • 23. Do derivatives move physical prices? • Sentiment indicators • Chinese retail investors’ influence • Shanghai rebar futures - Dalian Commodities Exchange iron ore futures • SGX cleared 216 mil mt of iron ore futures and derivatives in Jan-May, up 111% y-o-y • 40% of participants are Asian mills and traders – miners watching closely • Hedging versus speculation 23 Mt Volume Last Year % Change Turnover Last Year % Change End-of-YearOI End-of-Last Year OI % Change Iron Ore 66,287,900 4,378,430 1413.97% 4,935.97 408.87 1107.24% 560,494 129,782 331.87% Dalian iron ore futures – 2014 (started in October 2013) 93.5 94 94.5 95 95.5 96 96.5 97 97.5 98 98.5 SGX iron ore derivatives Avg DSP (US$)
  • 24. Final thoughts • Australia dominant producer as rivals (Vale aside) offer little new tonnage • Iron ore supply surge set to slow between 2015 and 2018 – could help support prices • China is heading down the environmental path – and up the quality and efficiency curve - curbing steel capacity will take a while but capacity expansions slowing • Chinese steel production is likely to plateau at 850-1.5 billion mt/year by 2025-30 • Both iron ore miners and steel mills will need to improve efficiencies to boost margins • Derivatives to play a bigger role 24
  • 25. Thank you!! 25 Paul Bartholomew Managing Editor, Australia, Platts Editor, Steel Raw Materials Monthly paul.bartholomew@platts.com www.platts.com