Ian Roper's presentation at #refinitiv iron ore event, laying out SMM's latest views on the #ferrous complex in #china #ironore #presentation

1. The return of $100 iron ore, how long will it last?

2. Confidence waning, industry still strong while
consumer still lagging
2
➢ Onshore confidence towards the 2019 demand started the year strongly, however real data is lagging this
confidence and to a degree it seems some disappointment has been creeping in as the consumer continues to
struggle. Worries over the trade dispute also remain an overhang to sentiment.
➢ Infrastructure spending is clearly picking up, and government has been enabling easier financing conditions to
support this with strong local govt bond issuance numbers in particular.
➢ Property has made a strong start to the year. After weakening in 2H18, prices and volumes in tier recovered
since March on loser mortgage policies and rising macro confidence. However we still worry about wider
construction activity into the second half and 2020 as tier 1&2 are only 20% of construction activity, so
weakness in tier 3 and beyond will weigh on growth.
➢ A further drag will come from a winding down of “shanty house redevelopment” with MoF recently confirming a
50% cut from 5.8m units last year to 2.83m units in 2019. This alone should reduce total construction volumes
by 10% this year, while poor demographics will pressure the volumes lower in the long term.
➢ The strength in Infra and Housing has resulted in a split in commodity price performance, with ferrous clearly
outperforming non-ferrous, as metals like copper, nickel etc continued to suffer from a weak consumer
environment.

3. Financial conditions are supportive, but housing likely
to become an increasing drag on demand
3
New lending much stronger in 2019 Housing volumes set to decline on policy changes
Data Source: SMM, Wind, NBS
◼ Financial conditions have been eased more rapidly in early 2019, boosting sentiment
◼ Beijing has pushed local govt to issue bonds more rapidly to fund infrastructure
◼ Housing remains at risk of second half slowdown: YTD through Apr Land sales are down 34% yoy, new home sales -0.3% but new starts +13.1%.
0
500
1000
1500
2000
2500
3000
3500
4000
2017-01
2017-02
2017-03
2017-04
2017-05
2017-06
2017-07
2017-08
2017-09
2017-10
2017-11
2017-12
2018-01
2018-02
2018-03
2018-04
2018-05
2018-06
2018-07
2018-08
2018-09
2018-10
2018-11
2018-12
2019-01
2019-02
2019-03
Unit： billion yuan
43.6%
10.6%
4.4%
1.8%
17.3%
-7.6%
6.5%
22.5%
7.7%
1.3%
-20%
-10%
0%
10%
20%
30%
40%
50%
0
20000
40000
60000
80000
100000
120000
140000
160000
180000
200000
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
10,000 ㎡
China Housing Sales

4. Iron ore remains tight near term, year end pricing
will depend on how steel margins hold up
4
➢ Iron ore continues to look tight near term due to a lack of supply elasticity at Chinas domestic
mines. Domestic iron ore supply is only up 2.3% YTD despite high margin incentives. Much
traditionally marginal capacity has been permanently closed due to a tightening in licensing and
required operating standards and we only look for around 15mt of supply increase this year.
➢ The key question for iron ore short term is where can an immediate supply response to higher
prices come from, and how will Chinese mills react as Brazilian volumes into China start to fall. Iron
ore inventory has been drawn at ports and mills through 2Q, so buying activity has to increase.
➢ Met coal will remain tight with domestic restrictions on coke ovens and smaller mines spreading in
2019. Scrap supply availability will continue to rise in line with generation, though higher prices may
encourage more supply short term.
➢ Steel output was up 7.7%ytd through April according to our estimates, not the 12% reported by NBS.
Iron ore imports are down 3.3%, and even with destocking and increased scrap usage, we struggle
to see how else China could have produced so much steel.
➢ Steel prices and margins have done well as steel demand has clearly absorbed the higher supply.
The key for price direction into year end will be how quickly construction activity slows, and whether
infrastructure stimulus and private housing recovery are enough to offset the cut to shanty house
development activity. Steel margins will remain key to iron ore prices.

5. Steel inventory, demand support prices near term
5
Pace of steel inventory draw in line with seasonal norms Steel demand remains solid according to our PMI data
Data Source: SMM, Wind, NBS
◼ Despite higher steel supply over 1Q19 on reduced winter cuts, steel inventory is still in line with normal trends showing steel demand remains solid.
◼ Our steel PMI shows demand is reasonable, but not spectacular.
30
35
40
45
50
55
60
65
70
Apr-17
Jul-17
Oct-17
Jan-18
Apr-18
Jul-18
Oct-18
Jan-19
Apr-19
composite PMI composite PMI(seasonally adjusted)
0
3,000
6,000
9,000
12,000
15,000
18,000
01 02 03 04 05 06 07 08 09 10 11 12
2017 2018 2019
1,000 mt

6. Steel margins the key risk to higher iron ore prices
6
Grade differentials very dependent on steel margins Steel margins did well into peak season, but now fading
Data Source: SMM
◼ Steel prices and margins were improving through April, but have struggled to keep pace with the recent iron ore rally.
◼ Grade differentials remains volatile and closely linked to steel margins
250
350
450
550
650
750
850
950
IOPI62 IOPI58 IOPI65

7. Iron ore supply is clearly tight, with inventory low
7
Iron ore Inventory at Chinese ports at 2yr lows Steel output up 7.7%, not 12%
Data Source: SMM
◼ Iron ore inventory at Chinese ports kept dropping since from April and according to SMM, the inventory at 35 ports recorded new low since Jan 2017.
◼ Import volumes have been declining YoY and are unlikely to pick up until at least 4Q
60,000
80,000
100,000
120,000
140,000
160,000
01 02 03 04 05 06 07 08 09 10 11 12
2015 2016 2017 2018 2019
1,0001,000 mt

8. Seaborne supply down in 2018, and now looks
unlikely to rise this year
8
62%fe spot iron ore sustainable above $100 near term Seaborne ore supply finally at its peak?
Data Source: SMM, Mmi, Customs data
◼ Seaborne iron ore supply was down slightly in 2018 for the first time in near 20 years, and supply disruptions this year mean it will likely decline again.
◼ MMi IOPI62% CFR Equiv. price reached 105.95$, back above $100 for the first time in 5yrs
◼ High prices are starting to incentivize supply from previously closed or new projects. 15mt+ of supply from smaller mines looks set to come in from
Canada, Australia and elsewhere before year end.
0
500
1000
1500
2000
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Aus Brz S. Africa India
Canada Euro/Black Sea W. Africa Iran
Chile & Peru Others
45
55
65
75
85
95
105
115
125
135
IOSI62 IOSI65

9. Domestic mines are suffering many HSE challenges
which will limit their elasticity
9
Limited supply response so far beyond seasonality Domestic ore output declined 7% in 2018
Data Source: SMM, Wind, NBS
▪ SMM’s cost model showed that there were close to 280 million mt of capacity of iron ore concentrates in China with costs below $70/mt, but China’s
output of iron ore concentrates fell to only 240 million mt in 2018, already below economically viable levels
▪ At $90/t supply could theoretically approach 400mt this year, however we only look for 15-20mt to return at most given the environmental/licencing
barriers involved now
-14%
-1%
-2%
-5%
4% -10%-25%
15% -12%
-7% 8% -14%4% -20%19%-31%-23%
-10
0
10
20
30
40
50
60
70
Hebei
Liaoning
Sichuan
Shanxi
Anhui
InnerMongolia
Others
Xinjiang
Shandong
Yunnan
Gansu
Hubei
Guangdong
Fujian
Henan
Jiangxi
Beijing
2017 2018
20%
25%
30%
35%
40%
45%
50%
55%
65%
70%
75%
80%
85%
90%
2016-07
2016-11
2017-03
2017-07
2017-11
2018-03
2018-07
2018-11
2019-03
soe private(right) total(right)

10. Capacity replacement biased to EAF, scrap remains the
long term threat to iron ore
10
Steel capacity replacement the next leg in supply side reforms
Data Source: SMM
New Projects
Unit: million mt Blast Furnace - Pig Iron
Crude Steel Capacity
Converter EAF
Nb Capacity Nb Capacity Nb Capacity
Northeast 4 4.81 2 2.60 2 1.36
North 32 46.36 37 49.48 6 2.99
East 18 25.29 16 14.07 18 14.70
South 8 18.76 13 25.04 5 5.00
Central 6 8.20 3 4.55 17 9.93
Northwest 1 0.71 1 0.70 1 0.58
Southwest 16 20.39 11 14.70 28 21.79
Total 85 124.52 83 111.14 77 56.34
Outdated Projects
Unit: million mt Blast Furnace - Pig Iron
Crude Steel Capacity
Converter EAF
Nb Capacity Nb Capacity Nb Capacity
Northeast 8 4.83 4 3.40 2 0.60
North 88 66.47 73 70.47 5 3.67
East 37 29.85 25 19.25 17 9.80
South 7 10.75 17 19.80 6 2.60
Central 13 7.88 8 5.61 32 9.44
Northwest 1 0.60 3 0.70
Southwest 35 23.50 32 24.78 28 14.16
Total 188 143.27 160 143.91 93 40.97
Note：The table above shows all the public capacity replacement by region by Jul 17 2018

11. Copyright Metals Market Index 2019 11
MMi’s daily iron ore price indices are distributed free-of-charge via a variety of channels, including:
MMi Iron Ore Publications
SMM Website: www.metal.com
Data Aggregators
SMM App (metal.com)
Instant Communication Platforms
MMi Website (www.mmiprices.com) and emails
WeChat WhatsApp Eikon
Bloomberg Tickers: IRCNQ001, 2, 3, 4, 5, 6

12. Copyright Metals Market Index 2019 12
MMi Iron Ore Publications
Daily Iron Ore Index Report published on MMi and SMM
websites and available by email, containing:
- 62%/58%/65% Fe iron ore port index and CFR equivalents
- 62%/58%/65% Fe iron ore seaborne index
- 62.5% Fe iron ore port lump index (weekly)
- Iron ore domestic Chinese mine concentrate price assessments
- Market commentary
- Platform trades and tenders
- Premiums/discounts to base 62% Fe specifications
- Iron ore port inventories
- Iron ore DCE and SGX futures data
- C3/C5 freight rates
- Iron ore brand assessments
- Monthly iron ore import volumes
- Chinese steel inventories
- Chinese steel domestic assessments
- Chinese steel export assessments
- Chinese steel mill profitability
- Iron ore normalization differentials
- Iron ore index specifications, rationale and data exclusions

13. SMM is a leading domestic consulting and
research firm dedicated to providing the kind of
insight and knowledge that helps companies find a
clear path to success. The firm has served the
management consulting and market research
needs of organizations in the non-ferrous metal
industries for nearly 10 years. For more information,
visit www.smm.cn.
If you require additional information about the
contents of this document or the services that SMM
provides, please contact:
Ian Roper
28-01 PWC Building, 8 Cross Street, Singapore
048424
Tel: +65 90056682
Email: Ian@smm.cn
This document is confidential and subject to our
disclaimer, details of which can be found on our
website: www.metal.com