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China & India: Rising demand or falling interest?
 

China & India: Rising demand or falling interest?

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Paul Gray, Principal Iron Ore Analyst, from Wood Mackenzie delivered this presentation at the 2012 Americas Iron Ore conference. Americas Iron Ore is one of the most respected annual gatherings for ...

Paul Gray, Principal Iron Ore Analyst, from Wood Mackenzie 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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    China & India: Rising demand or falling interest? China & India: Rising demand or falling interest? Presentation Transcript

    • www.woodmac.com Delivering commercial insight Iron Ore: the end of the golden age? Paul Gray, Principal Analyst, Wood Mackenzie
    • Delivering commercial insight www.woodmac.comIron Ore: the end of the golden age? © Wood Mackenzie 2 Agenda Assessing China’s future iron ore requirements: • How much? • Where from? • At what cost? 3 1 Setting the scene: Lessons learnt from 2012 and what to expect from 2013. 2 The rise of China and India: comparative analysis. 3 Some longer term considerations: • Capital intensity. • Ore degradation. • Chinese overseas investment.
    • Delivering commercial insight www.woodmac.comIron Ore: the end of the golden age? © Wood Mackenzie 3© Wood Mackenzie 3 Setting the scene (1). Iron ore is the ultimate “China play”. Key data on Iron Ore million tonnes 2012 (F) 2020 (F) Global Exports 1195 1833 Australia’s share (global) 40% 43% Chinese Imports 730 1125 Australia’s share (of Chinese imp.) 46% 55% % of Australian exports destined to China 70% 78% China accounts for entire growth since 2000. Source: Wood Mackenzie 0 200 400 600 800 1000 1200 1980 1985 1990 1995 2000 2005 2010 Seabornetrade:milliontonnes 1980s: 1.6%pa 1990s: 1.9%pa 2000s: 7.8%pa Red segment = Chinese imports.
    • Delivering commercial insight www.woodmac.comIron Ore: the end of the golden age? © Wood Mackenzie 4© Wood Mackenzie 4 Setting the scene (2). China’s raw material conundrum. 0 20 40 60 80 100 120 140 160 180 200 2000 2006 2008 2010 ValueofChineseImports:US$Bn Crude Oil Iron Ore Copper Coal The spiralling cost of Chinese imports….. Source: Wood Mackenzie China’s iron ore import bill: $100bn in 2011. 5x bigger than coal. Beijing response: “Go Out” policy - since 1999! “Two-ways” strategy – limited success. Is there a domestic alternative?
    • Delivering commercial insight www.woodmac.comIron Ore: the end of the golden age? © Wood Mackenzie 5© Wood Mackenzie 5 Lessons learnt from 2012 (1): Anatomy of a price correction. Correction #1 Global Financial Crisis! Correction #2 Eurozone sovereign debt crisis (part 1) Correction #3 Liquidity squeeze – especially in China. Correction #4 Chinese steel “crisis” – margin squeeze. A rollercoaster ride for iron ore. Source: Wood Mackenzie 0 20 40 60 80 100 120 140 160 180 200 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 TSI62%FeUS$/t,CFR 1 2 3 4 Annual Average Price ($/t CFR) '08: 145 | '09: 86 | '10: 147 | '11: 168 | '12: 127?
    • Delivering commercial insight www.woodmac.comIron Ore: the end of the golden age? Lessons learnt from 2012 (2): Iron ore does have a mind of its own! Iron ore and copper – strongly correlated: Similar dynamics. Proxies for Chinese growth. BUT – correlation broke down in Aug/Sep: Cu too high or Fe too low? Limitations of index pricing: Exposed during recent correction. Iron ore’s demise is “China steel specific”. Malaise of steel is amplified in iron ore price. The myth of marginal cost support? Lagged response. Need a functioning market! Cu and Fe – the end of the affair? © Wood Mackenzie 6 Source: Wood Mackenzie 0 2,000 4,000 6,000 8,000 10,000 12,000 Jul- 09 Jan- 10 Jul- 10 Jan- 11 Jul- 11 Jan- 12 Jul- 12 Jan- 13 0 50 100 150 200 250 copper, $/t,(LHS) iron ore, $/t (RHS) Cu and Fe diverge!
    • Delivering commercial insight www.woodmac.comIron Ore: the end of the golden age? 0% 10% 20% 30% 40% 50% 60% 70% 80% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 H1-12 H2-12 2013 EBITDAMarginforIronOre(%) Vale Rio Tinto BHP Billiton What to expect from 2013 (and beyond). A more cautious approach from investors and corporates. Margin compression: Commodity price impact, currency impact. Existing supply response: Withdrawal of marginal suppliers. Future supply response: Project delays/deferrals/scale backs. Driven by reduced appetite for investment – and pressure from shareholders! Opportunistic acquisitions: Chinese buyers of distressed assets? Margin compression – albeit from a high level. © Wood Mackenzie 7 Source: Wood Mackenzie
    • Delivering commercial insight www.woodmac.comIron Ore: the end of the golden age? -120 -100 -80 -60 -40 -20 0 20 40 60 80 100 2009 2010 2011 2012 2013Fyear-on-yearchangehotmetalprod'n(Mt) China Rest of World lowest growth since 2008! What to expect from 2013 (and beyond). Brace yourself for slowest growth for five years! Hot metal production growth only 15Mt? But we have become accustomed to 50Mtpy! Slower growth in crude steel production and the “scrap effect”. For iron ore it’s not as bad as it sounds! Accelerated displacement effect. Repeat of 2009 – but on a smaller scale? Rest of the world: Hot metal production unlikely to return to pre- GFC levels before 2014. A sharp slowdown in Chinese hot metal production. © Wood Mackenzie 8 Source: Wood Mackenzie
    • Delivering commercial insight www.woodmac.comIron Ore: the end of the golden age? © Wood Mackenzie 9 Agenda Assessing China’s future iron ore requirements: • How much? • Where from? • At what cost? 3 1 Setting the scene: Lessons learnt from 2012 and what to expect from 2013. 2 The rise of China and India: comparative analysis. 3 Some longer term considerations: • Capital intensity. • Ore degradation. • Chinese overseas investment.
    • Delivering commercial insight www.woodmac.comIron Ore: the end of the golden age? China: Population by Province (Millions) > 100 80 - 100 60 - 80 40 - 60 < 40 Scale Key Facts GDP: $4.16 trillion (2000 US$) GDP per capita: $2,827 (2012) Land area: 9.6 million square km Population: 1,354 million (2012), 1,393 million (2030) Number of employed: 773 million Life expectancy: 73 years Literacy rate: 96% Access to electricity: 99% Source: Wood Mackenzie, China Bureau of Statistics, World Bank © Wood Mackenzie 10
    • Delivering commercial insight www.woodmac.comIron Ore: the end of the golden age? Maharashtra Madhya Pradesh Andhra Prad esh Chhatt- Isgarh Orissa Gujarat Rajasthan Uttar Prades h Delhi Haryana Punjab Jammu & Kashmir Himachal Pradesh Uttarakhand Bihar Sikkim Assam Meghalaya Arunachal Prade sh Nagaland Manipur Tripura West Beng al Jharkhand Karnataka Puducherry Tamil Nad u Goa Kerala Mizoram 70 62 115 63 87 74 7 10 1 26 43 74 34 1 94 205 34 106 1 2 3 4 1 3 32 1 17 26 28 13 Andaman & Nicobar Islands 0 > 100 80 - 100 60 - 80 40 - 60 < 40 Scale India: Population by State (Millions) Key Facts GDP: $1.1 trillion (2000 US$) GDP per capita: $875 (2012) Land area: 3.3 million square km Population: 1,258 million (2012), 1,524 million (2030) Number of employed: 446 million Life expectancy: 65 years Literacy Rate: 63% Access to electricity: 68% Source: Wood Mackenzie, India Census 2011, World Bank © Wood Mackenzie 11
    • Delivering commercial insight www.woodmac.comIron Ore: the end of the golden age? When will China and India catch up with the developed world? Source: IMF (WEO, Sept 2006), World Bank, Hausmann et al (2005) Growth takeoff years based on IMF (WEO, Sept 2006) and Hausmann et al (2005), Growth Accelerations. Dating was based on an assessment of significant and sustained increase in per-capita growth post-turning point. In addition, growth acceleration periods were found to be correlated with trade and investment positions as well as government policies. GDP per capita was comparable between China and India during the 1970s but significant economic reform pushed China ahead in the 1980s and 1990s • China’s GDP per capita increased ~ 13 fold between 1980 and 2010 • India’s GDP per capita increased ~3 fold, 1980 – 2010 India’s lack of economic reform has left it approximately 20 years behind China on the development curve Both countries still have a long way to go to reach the developed world. Per capita wealth in China would have to almost double to match that of Brazil today and increase 6 fold to catch South Korea today 2010 Real GDP per capita Thailand Taiwan Brazil Argentina Israel USA Japan Hong Kong Singapore Malaysia Indonesia India China Vietnam South Korea China (1979) India (1982) Pakistan Poland Egypt Australia New Zealand 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 0 10 20 30 40 50 60 Years since beginning of growth takeoff ConstantUS$2000prices x © Wood Mackenzie 12
    • Delivering commercial insight www.woodmac.comIron Ore: the end of the golden age? Capital stock per person (2010) The stock of capital in both China and India remains extremely low 20 40 60 80 100 120 140 160 India China Korea 1990 Korea Japan 1965 Japan USA ThousandUS$(2000$) The ‘stock of capital’ measures the total amount of assets in an economy – both tangible e.g. machines and buildings; and intangible e.g. patents and software China’s investment (and level of capital stock) has grown rapidly over the past decade. But that does not mean China has over-invested, and cannot sustain further investment growth. China’s capital stock per person is still very low compared with Korea, Japan and the USA • China’s current level of capital stock per worker is approx. 8.7% of the US’ level today • This is less than Japan’s level in 1965 and Japan continued to invest rapidly up to the mid-1970s India’s capital stock per person is even lower – just 40% of China’s level. Today, India is close to where China was in 2002 Source: Wood Mackenzie estimates 0 © Wood Mackenzie 13
    • Delivering commercial insight www.woodmac.comIron Ore: the end of the golden age? The World in 2030: How will China and India fare? Source: IMF (WEO, Sept 2006), World Bank, Hausmann et al (2005), Wood Mackenzie forecast Growth takeoff years based on IMF (WEO, Sept 2006) and Hausmann et al (2005), Growth Accelerations. Dating was based on an assessment of significant and sustained increase in per-capita growth post-turning point. In addition, growth acceleration periods were found to be correlated with trade and investment positions as well as government policies. China’s GDP per capita is forecast to treble by 2030 • China will reach $US10,000 by 2030 (in real year 2000, US$ terms) – comparable to South Korea in 1995 • China’s GDP per capita is forecast to be higher than other emerging economies such as Brazil and Malaysia India’s GDP per capita will increase 2.7 fold by 2030 • India will reach $US2,300 by 2030 – comparable to China in 2010 • This would leave India in 2030 at only 50% of the per capita wealth of Brazil today Real GDP per capita in 2030 (constant US$) Years since beginning of growth take-off Thailand Taiwan Brazil Argentina Israel Japan Hong Kong Singapore Malaysia Indonesia India 2030 China 2030 Vietnam South Korea China 1979 India 1982 Pakistan Poland Egypt Australia New Zealand USA 0 10,000 20,000 30,000 40,000 50,000 60,000 0 10 20 30 40 50 60 70 80 China 2010 India 2010 © Wood Mackenzie 14
    • Delivering commercial insight www.woodmac.comIron Ore: the end of the golden age? © Wood Mackenzie 15 Agenda Assessing China’s future iron ore requirements: • How much? • Where from? • At what cost? 3 1 Setting the scene: Lessons learnt from 2012 and what to expect from 2013. 2 The rise of China and India: comparative analysis. 3 Some longer term considerations: • Capital intensity. • Ore degradation. • Chinese overseas investment.
    • Delivering commercial insight www.woodmac.comIron Ore: the end of the golden age? China’s future raw material requirements – how much? Challenging the base case view. Base Case: Steel cons. peaks at 907Mt (650kg/capita) in 2028. Hot metal production peaks at 862Mt in 2025. Low Case Scenario: Steel cons. peaks at 835Mt (600kg/capita) in 2027. Hot metal production peaks at 800Mt in 2022. Impact on Iron Ore: Avg. “loss” (low case vs base case) = 30Mtpy 2015-2020; 100Mtpy post 2020. A possible downside scenario for China. © Wood Mackenzie 16 Source: Wood Mackenzie 1000 120
    • Delivering commercial insight www.woodmac.comIron Ore: the end of the golden age? © Wood Mackenzie 17 China’s future iron ore requirements – where from? Domestic production - running to stand still! Raw ore production running at 1.3Bn tpy …. Source: Wood Mackenzie …. but China’s import dependency is also rising!
    • Delivering commercial insight www.woodmac.comIron Ore: the end of the golden age? China’s future iron ore requirements – where from? Domestic production ...... limited potential. The map shows the major provinces producing iron ore: 2011 total raw ore production = 1.33 Bn tonnes. Limited reserves: “Basic” reserves = 22Bn tonnes. 15yrs of prod’n at current rate. Hebei, Liaoning, Sichuan a/c for 65% of reserves. Key prospective zones for iron ore are in central and far west provinces, far away from the high consuming coastal belt. © Wood Mackenzie 18 Source: Wood Mackenzie
    • Delivering commercial insight www.woodmac.comIron Ore: the end of the golden age? © Wood Mackenzie 19© Wood Mackenzie 19 China’s future iron ore requirements – where from? The changing composition of Chinese imports. 47% 21% 21% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2000 2002 2004 2006 2008 2010 CompositionofChineseIronOreImports Other S.Africa India Brazil Australia Jan-Sep '12 0% 10% 20% 30% 40% 50% 60% Jan- 05 Jan- 06 Jan- 07 Jan- 08 Jan- 09 Jan- 10 Jan- 11 Jan- 12 India's share of Chinese imports. Australia's share of Chinese imports. “Non-core” suppliers gaining share in China …. …. while India is squeezed out. Source: Wood Mackenzie
    • Delivering commercial insight www.woodmac.comIron Ore: the end of the golden age? China’s future iron ore requirements – where from? Australia should be the big long term winner. The Australia/China bond – China to account for almost 80% of Australian exports by 2020! India squeezed out. Brazil & Africa – small gain in share. Risk – cost pressures in Australia prohibit development on the scale required by Chinese importers! Australian exports to China – could double by 2020! © Wood Mackenzie 20 Source: Wood Mackenzie
    • Delivering commercial insight www.woodmac.comIron Ore: the end of the golden age? © Wood Mackenzie 21 China’s future iron ore requirements – at what cost? 2012 Global Cost Curve: 154 mines across 14 countries.. Source: Wood Mackenzie 0 100 200 US$/wettonne Million tonnes Australia Brazil China RoW 90th percentile: US$89/tonne
    • Delivering commercial insight www.woodmac.comIron Ore: the end of the golden age? 0 100 200 US$/wettonne Million tonnes Royalties and Levies Direct Cash Cost (C1) © Wood Mackenzie 22 Chinese Cost Curve 58 operations and projects across 21 provinces.. Source: Wood Mackenzie
    • Delivering commercial insight www.woodmac.comIron Ore: the end of the golden age? Base case valuation assumptions 20% of mines have negative operating margins in 2012… © Wood Mackenzie 23 2012 Chinese mines operating margin (base case) -50.0 0.0 50.0 100.0 US$/wetonne Million tonnes 20% Chinese mines with negative margin Source: Wood Mackenzie
    • Delivering commercial insight www.woodmac.comIron Ore: the end of the golden age? ..and the number of negative operating margin mines rises to 40% in 2017. © Wood Mackenzie 24 2017 Chinese mines operating margin (base case) -100 -50 0 50 100 US$/wettonne Million tonnes ~40% Chinese mines with negative margin Source: Wood Mackenzie
    • Delivering commercial insight www.woodmac.comIron Ore: the end of the golden age? © Wood Mackenzie 25 Agenda Assessing China’s future iron ore requirements: • How much? • Where from? • At what cost? 3 1 Setting the scene: Lessons learnt from 2012 and what to expect from 2013. 2 The rise of China and India: comparative analysis. 3 Some longer term considerations: • Capital intensity. • Ore degradation. • Chinese overseas investment.
    • Delivering commercial insight www.woodmac.comIron Ore: the end of the golden age? © Wood Mackenzie 26 Capital intensity (U$/tonne) by ore type. Some longer term perspectives – spiralling capital intensity.
    • Delivering commercial insight www.woodmac.comIron Ore: the end of the golden age? Some longer term perspectives - ore degradation. It’s not just a China issue! High prices have induced new sources of low quality product into the seaborne market: Vietnam, Indonesia, Philippines, Honduras! Traditional suppliers are not immune. Implications for consumers – reduced blending options (eg with low quality Chinese ore). Implications for producers – need to supplement existing production with new higher quality sources. Implications for trade – a 1% decline in Fe between now and 2020 could imply additional 200Mt of seaborne trade! Ore grade and quality decline. © Wood Mackenzie 27 Source: Wood Mackenzie 0 20 40 60 80 Newman Fines Yandi Fines Vale: South Vale: Carajas Newman Fines Yandi Fines Vale: South Vale: Carajas % Fe; % combined silica/alumina 1999 2011 Fe Grade is Falling Impurities are Rising %Fe %alumina &silica
    • Delivering commercial insight www.woodmac.comIron Ore: the end of the golden age? © Wood Mackenzie 28 Longer term considerations: China extends its global reach Source: Wood Mackenzie The rising share of “captive” foreign ore. 5yr plan – to raise China’s iron ore self sufficiency to 40% (was 50%). An ambitious target and highly improbable! “Captive imports” currently ~5% of consumption. By 2020 could account for ~14%. Not a “game-changer” for iron ore. 5% 14% 35% 64% 72% 51% 31% 14% 14% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2012 2020 (base) 2020 (high) CompositionofChineseOreCons. Imports (captive) Imports (non-captive) Domestic
    • Delivering commercial insight www.woodmac.comIron Ore: the end of the golden age? © Wood Mackenzie 29 Summary …….. the end of the “golden age”? Demand drivers: Hot metal production (slower not lower). Displacement of Chinese domestic ore. Supply side issues: Existing expansions remain on track, but appetite for risk is waning. Potential for a supply squeeze 5 years forward? Cost support: High cost Chinese mines. Ever increasing capital intensity. Keep an eye on: Chinese politics/policy. Steel makers’ profitability (lack of it)! Chinese overseas investment. 2013 price outlook: down, but not out! Source: TSI, Wood Mackenzie 0 20 40 60 80 100 120 140 160 180 200 Jan- 08 Jan- 09 Jan- 10 Jan- 11 Jan- 12 Jan- 13 TSI62%FeUS$/t,CFR Annual Average Price ($/t CFR) '08: 145 | '09: 86 | '10: 147 | '11: 168 | '12: 127? 2013: $125/t ?
    • Delivering commercial insight www.woodmac.comIron Ore: the end of the golden age? Wood Mackenzie Disclaimer This presentation has been prepared by Wood Mackenzie Limited for delivery at the Informa Americas Iron ore Conference in Belo Horizonte on 6-8 November 2012. It has not been prepared for the benefit of any particular attendee and may not be relied upon by any attendee or other third party. If, notwithstanding the foregoing, this presentation is relied upon by any person, Wood Mackenzie Limited does not accept, and disclaims, all liability for loss and damage suffered as a result. The information contained in these slides may be retained by attendees. However, these slides and the contents of this presentation may not be disclosed to any other person or published by any means without Wood Mackenzie Limited's prior written permission. © Wood Mackenzie 30
    • Delivering commercial insight www.woodmac.comIron Ore: the end of the golden age? © Wood Mackenzie 31 Global Offices Australia Brazil Canada China India Global Contact Details Europe +44 (0)131 243 4400 Americas +1 713 470 1600 Asia Pacific +65 6518 0800 Email energy@woodmac.com Website www.woodmac.com Indonesia Japan Malaysia Russia Singapore South Korea United Arab Emirates United Kingdom United States Wood Mackenzie is the most comprehensive source of knowledge about the world’s energy and metals industries. We analyse and advise on every stage along the value chain - from discovery to delivery, and beyond - to provide clients with the commercial insight that makes them stronger. For more information visit: www.woodmac.com