Rudi Vann, Wood Mackenzie - China’s Steel Production and the Impact on Iron Ore Project Development

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Rudi Vann, Manager, Steel and Iron Ore Cost Research, Wood Mackenzie 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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Rudi Vann, Wood Mackenzie - China’s Steel Production and the Impact on Iron Ore Project Development

  1. 1. Trusted commercial intelligence www.woodmac.com China's steel production and the impact on iron ore project development Rudi Vann Manager – Iron Ore and Steel Cost Research
  2. 2. Trusted commercial intelligence www.woodmac.com 2 Agenda 1. Raw material consumption patterns at Chinese steel plants 2. Key issues impacting China's domestic iron ore supply 3. Assessing the global iron ore project pipeline
  3. 3. Trusted commercial intelligence www.woodmac.com 3 Agenda 1. Raw material consumption patterns at Chinese steel plants 2. Key issues impacting China's domestic iron ore supply 3. Assessing the global iron ore project pipeline
  4. 4. Trusted commercial intelligence www.woodmac.com 4 Chinese “peak steel” is 14 years away although hot metal production will peak sooner because of increased scrap 2014 scrap rates of key BOF steel producersChina crude steel and hot metal forecast Source: Wood Mackenzie Steel Market Service, Steel Cost Service 100 120 140 160 180 200 220 240 260 0 200 400 600 800 1000 1200 2000 2005 2010 2015 2020 2025 2030 Scraprate(kgpertonnesteel) Steel&hotmetalproduction(Mt) Crude steel Hot metal Scrap rate (RHS) 0 40 80 120 160 Scrap(kg/tcs)
  5. 5. Trusted commercial intelligence www.woodmac.com 5 Chinese steel industry is under pressure to reduce pollution Source: Wood Mackenzie Steel Cost Service China waste water per tonne of steel produced China air pollutant emission 0 1 2 3 4 5 6 2005 2006 2007 2008 2009 2010 2011 2012 tonne/tonne-steel 0 0.5 1 1.5 2 2.5 3 3.5 2005 2006 2007 2008 2009 2010 2011 2012 kg/tonne-steel Dust and soot emission (kg/tonne-steel) SO2 emission (kg/tonne-steel)
  6. 6. Trusted commercial intelligence www.woodmac.com 6 But there is a huge gap in spending and emissions levels to match counterparts in Japan and Korea Source: Wood Mackenzie Steel Cost Service Dust and soot emission comparisonEnvironmental opex (US$/tonne crude steel) 0 5 10 15 20 25 Posco JFE Nippon Steel CISA key enterprises Baosteel Opexforemissionreduction(US$/tonne-steel) 0 1 2 3 4 5 6 Dustandsootemission(kg/tonne-steel)
  7. 7. Trusted commercial intelligence www.woodmac.com 7 Chinese BF burden mix hasn’t changed much at the country average but Hebei plants slowing sinter usage Iron ore usage vs steel production growth Lump imports by country Source: Wood Mackenzie Iron Ore Market Service, CISA, GTIS 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% CISA members Top ten companies Hebei mills Productiongrowth2013/2012 Steel Sinter Pellet 0 10 20 30 40 50 60 70 80 90 100 Australia India Brazil South Africa Chinaimportsoflump(Mt) 2008 2009 2010 2011 2012 2013
  8. 8. Trusted commercial intelligence www.woodmac.com 8 China’s future iron ore requirement – how much and where from? Consumption peaks in 2023 at 1.46Bn tonnes Import dependency 85% post 2020 vs 68% in 2013 Low cost Australian and Brazilian supply will displace high cost Chinese production Source: Wood Mackenzie Iron Ore Market Service, GTIS 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 0 200 400 600 800 1000 1200 1400 1600 2000 2005 2010 2015 2020 2025 2030 ChineseConsumptionofIronOre(Mt) Production Imports Import Ratio (RHS) 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2000 2002 2004 2006 2008 2010 2012 2013* 2020F CompositionofChineseIronOreImports Other S.Africa India Brazil Australia *2013 = Jan-Oct.
  9. 9. Trusted commercial intelligence www.woodmac.com 9 Agenda 1. Raw material consumption patterns at Chinese steel plants 2. Key issues impacting China's domestic iron ore supply 3. Assessing the global iron ore project pipeline
  10. 10. Trusted commercial intelligence www.woodmac.com 10 Chinese domestic production is facing increasingly challenging mining conditions Supply is moving underground Raw ore grades are declining Source: Wood Mackenzie Iron Ore Cost Service 15% 25% 35% 0 20 40 60 80 100 120 China UG China Surface % UG * Represents 108 individual assets 0 5 10 15 20 10 20 30 40 50Rawproduction(Mtpa) Raw Ore Grade (%) Concentrator SOE Private Projects Weighted average raw grade of data set * Represents 108 individual assets
  11. 11. Trusted commercial intelligence www.woodmac.com 11 C1 cash costs are on the rise although offset by lower royalties China 2012-2013 cost change* Rise in Chinese iron ore industry salaries Source: Wood Mackenzie Iron Ore Cost Service, China Government Statistics , *Excluding pelletising - 10 20 30 40 50 60 National Sichuan Liaoning Hebei Chinaironoreindustrysalary (‘000CNY/capita) 2008 2013 83.3 84.6 0.9 1.1 1.1 -1.7 80 81 82 83 84 85 86 87 2012 Mining Processing Overheads Royalties 2013 US$/wmt * Represents 108 individual assets
  12. 12. Trusted commercial intelligence www.woodmac.com 12 Segmenting China’s iron ore industry Regional breakdown of key producing regions split by mine type and company type Source: Wood Mackenzie Iron Ore Cost Service Surface Underground Private SOE
  13. 13. Trusted commercial intelligence www.woodmac.com 13 Top half of China cost curve primarily private mines Composition of 3rd & 4th Quartile China 2014 US$/dmt 62% equivalent cost curve Source: Wood Mackenzie Iron Ore Cost Service Private SOE Surface Underground 0 250 0 400 US$/dmt62%Feequivalent Mwmt Private SOE
  14. 14. Trusted commercial intelligence www.woodmac.com 14 Stickiness of domestic supply will depend on cost reduction 3rd & 4th quartile average cost China 2014 cost curve response scenarios Source: Wood Mackenzie Iron Ore Cost Service - 40 80 120 3rd and 4th Quartile Averagecost US$/dmt62%Feequiv BASE -50% Salary -50% Salary & No Grey cost 0 250 0 400 US$/dmt62%Feequivalent Mwmt Base -50% Salary -50% Salary & No Grey Cost
  15. 15. Trusted commercial intelligence www.woodmac.com 15 Even with drastic cost reductions Chinese producers are still uncompetitive with seaborne imports 2014 Delivered cost curve US$/dmt 62% equivalent cost curve Source: Wood Mackenzie Iron Ore Cost Service 0 180 0 1500 US$/dmt62%equivalent Mwmt Other China (-50% Salary & No Grey Cost)
  16. 16. Trusted commercial intelligence www.woodmac.com 16 Agenda 1. Raw material consumption patterns at Chinese steel plants 2. Key issues impacting China's domestic iron ore supply 3. Assessing the global iron ore project pipeline
  17. 17. Trusted commercial intelligence www.woodmac.com 17 1.9 billion tonnes per annum of capacity in global project pipeline Source: Wood Mackenzie Iron Ore Market Service, Iron Ore Cost Service 0 100 200 300 400 500 Capacity(Mtpa) Highly Probable Probable Possible Hematite Magnetite Magnetite/He matite Itabirite
  18. 18. Trusted commercial intelligence www.woodmac.com 18 Trade balance in surplus over medium term although gap will open up longer term Quantifying the long run “supply gap” Iron ore long run trade balance Source: Wood Mackenzie Iron Ore Market Service 0 3,500 2000 2005 2010 2015 2020 2025 2030 MillionTonnes Operating Highly Probable Probable Possible Consumption
  19. 19. Trusted commercial intelligence www.woodmac.com 19 Viability of projects under potential price shocks supports displacement of Chinese production Iron ore greenfield project valuation (nominal, 10%, 01/01/2014) Source: Wood Mackenzie Iron Ore Global Economic Model -4000 0 4000 8000 12000 16000 20000 RemainingPVPostTax(US$M) Base case -15% Price -30% Price
  20. 20. Trusted commercial intelligence www.woodmac.com 20 Summary  Chinese iron ore consumption will continue growing well into the next decade. Peak steel production is still 14 years away and increased scrap rates aren’t expected to impact hot metal production until post 2025.  Environmental pressure on steel producers is unlikely to curb growth in steel production. Implementation of emissions controls will require additional investment and increase operating costs for an industry already in bad financial health.  Chinese domestic iron ore has scope to reduce costs but those in the 3rd and 4th quartile will struggle to compete with low cost imports from Australia and Brazil.  Assessment of project pipeline against potential low price environment indicates much of the capacity is still viable at prices that make Chinese supply uneconomic.
  21. 21. Trusted commercial intelligence www.woodmac.com 21 Contacts Rudi Vann Manager – Steel and Iron Ore Cost Research T +44 203 060 0539 E rudi.vann@woodmac.com
  22. 22. Trusted commercial intelligence www.woodmac.com 22 Disclaimer  This report has been prepared for Global Iron Ore & Steel Forecast Conference on 11- 12 March 2014 in Perth by Wood Mackenzie Limited. The report is intended solely for the benefit of attendees and its contents and conclusions are confidential and may not be disclosed to any other persons or companies without Wood Mackenzie’s prior written permission.  The information upon which this report comes from our own experience, knowledge and databases. The opinions expressed in this report are those of Wood Mackenzie. They have been arrived at following careful consideration and enquiry but we do not guarantee their fairness, completeness or accuracy. The opinions, as of this date, are subject to change. We do not accept any liability for your reliance upon them. Strictly Private & Confidential
  23. 23. Europe +44 131 243 4400 Americas +1 713 470 1600 Asia Pacific +65 6518 0800 Email contactus@woodmac.com Website www.woodmac.com Wood Mackenzie* is a global leader in commercial intelligence for the energy, metals and mining industries. We provide objective analysis and advice on assets, companies and markets, giving clients the insight they need to make better strategic decisions. For more information visit: www.woodmac.com *WOOD MACKENZIE is a Registered Trade Mark of Wood Mackenzie Limited

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