Seaisi 2016 tsi asean hrc

THE STEEL INDEX (TSI)
ASEAN Steel Import Competition
Oscar Tarneberg, Regional Head, Asia
www.thesteelindex.com

SEAISI May 31st 2016, Hanoi, Vietnam

Agenda
- TSI (The Steel Index) Introduction
- How many tonnes will China export in 2016?
- N. Asian steel export strategies: time to re-examine?
- ASEAN buyer regret: is price everything?
- A changing ASEAN bloc 2016-2020 (internal + Aus)
- The TSI ASEAN index
- Indexing and hedging

TSI Introduction
The Steel Index is a specialised pricing service, that has
served the steel industry since 2006.
TSI pioneered a methodology which uses actual spot
transaction data to produce price indexes for use by the
ferrous market. The methodology employed provides a
high degree of confidence for many different types of
use. For example:
◊ Our 62% Fe iron ore index is used by numerous
exchanges to settle the overwhelming majority of all
global iron ore derivatives trade.
◊ TSI’s scrap indices are used by NASDAQ, LCH & LME
◊ Our FOB Australia Premium coking coal price is
entered into the majority of all index-linked supply
contracts between producers and customers.
◊ Our steel indices are entered into supply-contracts
in Europe for stable supply at spot market linked
prices. In ASEAN they are entered into floating price
deals (i.e. “we will sell at TSI ASEAN June average”).
Iron Ore
Coking
Coal
Scrap
Steel

How many tonnes will China export in 2016?
It’s a pressing question for ASEAN. China is the most proximate
country to large parts of ASEAN.
Freight rates are low by historical standards.
Overcapacity and falling domestic Chinese demand has been
clearly evident from 2014 onwards.
China (and N.Asia in general) is predominantly a BOF-based
producer, procuring raw materials on a spot basis and selling
finished products on a spot basis, too.
By contrast, ASEAN producers are largely EAF-based. Scrap supply is less
price-elastic than virgin raw materials. As a result of many years of booming
Chinese demand, raw material supply has been rising sharply for Blast
Furnace consumption, reducing prices. Essentially, EAF production is
handicapped by cost in comparison to BF production.
Despite fast growing steel demand in ASEAN, local producers have been stymied over recent years
competing with a lower cost of production, low freight rates and a combination of structural export
strategy from North to South, along with China using exports to balance production/demand.

History is rarely a good guide to the future in equity markets, but it is instructional to recall
recent trends in Chinese exports.
2,500,000
3,500,000
4,500,000
5,500,000
6,500,000
7,500,000
8,500,000
9,500,000
10,500,000
11,500,000
2010
Source: China customs data
tonnes

2,500,000
3,500,000
4,500,000
5,500,000
6,500,000
7,500,000
8,500,000
9,500,000
10,500,000
11,500,000
2010 2011
tonnes

2,500,000
3,500,000
4,500,000
5,500,000
6,500,000
7,500,000
8,500,000
9,500,000
10,500,000
11,500,000
2010 2011 2012
tonnes

2,500,000
3,500,000
4,500,000
5,500,000
6,500,000
7,500,000
8,500,000
9,500,000
10,500,000
11,500,000
2010 2011 2012 2013
tonnes

2,500,000
3,500,000
4,500,000
5,500,000
6,500,000
7,500,000
8,500,000
9,500,000
10,500,000
11,500,000
2010 2011 2012 2013 2014
tonnes

2,500,000
3,500,000
4,500,000
5,500,000
6,500,000
7,500,000
8,500,000
9,500,000
10,500,000
11,500,000
2010 2011 2012 2013 2014 2015
tonnes

So…How does China look in context with other steel
producing exporters?
(Net exports minus imports). South Korea saw the shipbuilding crown move to China in 2010, followed
by a new build collapse. Germany and Italian exports are variable, but on a downward trend,
while Turkey sees continual shrinkage of exports as others target their export markets.
-2
0
2
4
6
8
10
2009 2010 2011 2012 2013 2014
Germany South Korea Italy Turkey
Source: Import/Export Data World Steel Statistics
Milliontonnes

producing exporters?
-10
0
10
20
30
40
50
60
70
80
2009 2010 2011 2012 2013 2014
Japan Germany South Korea Italy Turkey
(Net exports minus imports). Japanese exports over this period can be characterised as ‘the great
moderation’ – After a 2010 surge, net exports remain remarkably stable.
Milliontonnes

producing exporters? Huge.
-10
0
10
20
30
40
50
60
70
80
2009 2010 2011 2012 2013 2014
China Japan Germany South Korea Italy Turkey
(Net exports minus imports). China, however, sees exports take a very different path. Data here does
not even cover 2015 - China’s ‘breakout’ year, where exports rose by 20.3% year-on-year from
those of 2014, to over 112 million tonnnes.
Where previously there were two different ‘orders’ of exporter magnitude,
2014 began to show the emergence of three different orders.
0-10mtpy
30-40mtpy
90-?mtpy
Milliontonnes

Back to the question: how many tonnes will China export in
2016?
2016 year-to-date shows the first quarter eclipsing Q1 2015 by over 2 million tonnes.
2,500,000
4,500,000
6,500,000
8,500,000
10,500,000
12,500,000
2010 2011 2012 2013 2014 2015 2016
Source: China customs data/TSI
tonnes

2016?
2016 year-to-date shows the first quarter eclipsing Q1 2015 by over 2 million tonnes.
Extrapolating the Q1 trend, adjusted for historic export surges, puts full-year export tonnage at
over 124 million tonnes: 12 million tonnes higher, year-on-year.
2,500,000
4,500,000
6,500,000
8,500,000
10,500,000
12,500,000
2010 2011 2012 2013 2014 2015 2016 2016 trend
tonnes

2016?
2,500,000
4,500,000
6,500,000
8,500,000
10,500,000
12,500,000
2010 2011 2012 2013 2014
2015 2016 2016 trend 2016 low 2016 high
Building in a low-case scenario (-10% to trend) of strong domestic Chinese demand hoovering
up more tonnage, this year could see a minor (2mmt) increase on 2015. A slip in domestic
demand (+10% to trend) could see a larger (19mmt) increase on 2015: net 133 million tonnes.
tonnes

Time for North Asian Countries to re-examine export strategy?
Very different sales strategies exist within the region.
• China is the quintessential ‘spot’ player for both
procurement and sales strategies (or linked to spot
indices).
• All BOF producers, almost without exception.
• This strategy ensures that no individual mill ends up
buying or selling for significantly more than their peers.
• The downside for companies competing against Chinese
producers is that they therefore face an enormous bloc
of mills who are structurally forced to act as a herd.
• This ‘herd’ turns very quickly: when one producer runs for
the exit (looks to export markets). Conversely, when the
domestic market demand is high, all companies seek to
service homeland customers.
• This forces a high degree of competition among
exporters – which is all price-based competition - in a
rapidly moving market.
• Can other N. Asian sellers keep up with Chinese price
fluidity in a “hyper spot” market? Strategies not changed.
Spot
Term

Price moves are sudden and can be very pronounced.
We just witnessed an upward stampede with it’s origins in mid-December. Prices rose US$208/t in
four months: price volatility of 56% of the commodity price.
260
290
320
350
380
410
440
470
500
ASEAN HRC
+74%.
US$/tonne

Non-China origin pricing not as fluid as Chinese prices. Japan.
Japanese-origin material tends to be offered with 1-2 week validity. As prices fell, the constant
readjustments took time to implement. At the same time, when prices rose, offers failed to rise as
fast, with the outcome being Japanese material priced flat to Chinese origin and even at a discount!
-10
-5
0
5
10
15
20
25
260
290
320
350
380
410
440
470
500
Japan-origin premium ASEAN HRC
US$/tonne

Non-China origin pricing not as fluid as Chinese prices. Taiwan.
Premiums for Taiwanese material saw similar shifts as it struggled to keep up with the rapidity of
price movements originating in mainland China.
0
5
10
15
20
25
30
260
290
320
350
380
410
440
470
500
Taiwan Premium ASEAN HRC
US$/tonne

Very different sales strategies exist within the region. S.Korea.
The same was true for S. Korean material.
0
5
10
15
20
25
30
35
40
260
290
320
350
380
410
440
470
500
S. Korea Premium ASEAN HRC
US$/tonne

Very different sales strategies exist within the region. India.
India has been a different case after tariffs shielded their domestic market, making prices more
attractive to those of ASEAN…or elsewhere. However, the price rises in ASEAN have tempted offers
out, particularly as mills run output while awaiting an end of year demand pickup.
0
5
10
15
20
25
30
260
290
320
350
380
410
440
470
500
India Premium ASEAN HRC
US$/tonne

Sell-side export structure currently incoherent. Encourages
buyers to continuously switch sources.
-15
-10
-5
0
5
10
15
20
25
30
35
40
10/2015 01/11/2015 01/12/2015 01/01/2016 01/02/2016 01/03/2016 01/04/2016 01/05/2016
Japan-origin premium Taiwan Premium S. Korea Premium India Premium
N.Asian HRC offer spreads can be as wide as US$45/t and are constantly shifting as
companies look to gain competitive advantage through price.
US$/tonne

ASEAN buyer-regret. Is price everything?
When is a bargain buy not a bargain? About 12 weeks later…
Defaults are ticking time bombs. They cost time, reputation and money. Almost every time,
they are related to opportunity cost (prices rise or fall on the run-up to delivery).
How many could have been avoided if indexing had been employed?
260
290
320
350
380
410
440
470
500
ASEAN HRC
Bookings made during the price trough…
…Ran into troubles at delivery time. Reduced
shipment tonnages, re-negotiations , changing
sources, outright defaults etc.
US$/tonne

ASEAN seller-regret. Is price everything?
When is a great sale not great? A few weeks prior to loading…
Default risks are not confined to one origin or destination or the buy or sell side. They occur at
the upside and downside. They are also completely unnecessary.
260
290
320
350
380
410
440
470
500
ASEAN HRC
ASEAN HRC
Russian defaults
Chinese defaults
ASEAN starts to return
the default ‘favour’ to China
US$/tonne

ASEAN seller-regret. Is price everything? In some cases!
Opportunity cost mounted up very quickly, to over US$100/t.
With the spread between historically concluded spot deals and spot prices soaring over
US$100/t, it not surprising to see commercial tension
-100
-50
0
50
100
150
200
200
230
260
290
320
350
380
410
440
470
500
RU Opportunity Cost CN Opportunity cost
ASEAN opportunity cost ASEAN HRC (LHS)
US$/tonne

A changing ASEAN bloc 2016-2020
The ASEAN free-trade-agreement comes on-stream
during this period.
ASEAN’s first integrated operations POSCO/Krakatau in
Indonesia continue their production ramp-up. Operations
here are anticipated to expand to over 6mmtpa in time.
ASEAN’s largest integrated operation Formosa Steel
recently lit furnace 1 in Ha Tinh, Vietnam. A second
furnace is anticipated to light next year, pushing output to
eventually 7+mmtpa post ramp-up.
As these furnaces ramp-up, the balance of regional EAF/BOF
production will alter. The former has a tough balancing act for
buying expensive scrap (relative to ore/cc) or importing (inevitably)
Chinese billet.

So internal price-competitive ASEAN supply is set to be
increasing over near-term.

So internal price-competitive ASEAN HRC supply is set to
be increasing over near-term.
Chinese export output is anticipated to at least keep level
with that of 2015.

with that of 2015.
Russian mills are unlikely to see a resurgence in OCTG
trade and will likely continue to enjoy domestic currency
weakness, making US$ trade attractive.

with that of 2015.
South Korea’s Dongkuk/POSCO has their Brazil JV firing
up now, slab from there will likely be Asia-bound.

with that of 2015.
Australia’s domestic demand looks weaker over this year,
which will likely force exports to rise from recent levels.

with that of 2015.
Japanese exports are likely to remain stable.

with that of 2015.
India has been in and out of the ASEAN market recently, but has come
back in after the price surge. They will prioritise the tariff-protected local
market, but export ‘surplus’ to maintain higher utilisation rates.

with that of 2015.
India has been in and out of the ASEAN market recently, but has come
back in after the price surge. They will prioritise the tariff-protected local
market, but export ‘surplus’ to maintain higher utilisation rates.
Taiwan seems unlikely to export less in the near-term.

ASEAN has all the hallmarks of being a hyper-contested
market over this period.
Will it be (destructive) price-based competition?

The TSI ASEAN HRC index – why should I care?
The index is a Chinese origin price – by far the world’s largest steel exporter.
However, it also includes price inputs from Japan, S. Korea, Taiwan and India.
These countries account for over 66% of 2015 global steel production. Many of these markets have a
strong correlation with domestic prices also.
ASEAN prices are inevitably shaped by the prevailing import prices available from any external source.
0
5
10
15
20
25
30
35
40
45
50
2014 Flat exports
China
Japan
S. Korea
Taiwan
India
Milliontonnes

The TSI ASEAN HRC index
TSI Reference Product for Hot Rolled Coil, ASEAN imports
• Product specification:
- Grade: Prime mild carbon steel SAE 1006, SPHC or SPHT-1 (or equivalent)
- Gauge: up to 3mm; Width: 900-2000mm
- Coil weight: 10-30 metric tonnes
- Order size: 500 metric tonnes minimum
- Excluding surcharges and extras (e.g. non-standard dimensions, order sizes)
• Origin: China
• Pricing point: CFR Singapore Port
• Price units: US$ per metric tonne
Other Permissible Inputs:
• Product specifications:
- Grade: Prime mild carbon steel JIS G 3101 SS400 (SPHC) or Q235 (or equivalent) with
gauge: 3-7mm
• Origins: Japan, South Korea, Taiwan and India
• Destinations: CFR port in Vietnam, Thailand, Singapore, Philippines, Mynamar, Malaysia, Laos,
Indonesia, Cambodia and Brunei
Index Specification
• Normalisation factors applied are:
- Grade: SS400  SAE 1006
- Origin
- Destination (controlled market tariffs)
- Freight rate differentials

The TSI ASEAN HRC index
• Normalisation differentials are not fixed. They are adjusted
whenever necessary to reflect the prevailing average values
being applied to spot HRC transactions in the ASEAN market
• TSI tracks and updates these values regularly. It analyses the
transaction data submitted into its systems, together with firm
bid and offer data collected, for different grades, origins and
destination ports to determine the latest average differentials
in the market. It then tests its findings by engaging with market
participants before updating the normalisation values applied
• Note: Published tariff rates are not applied directly as the
normalisation differentials for destinations other than
Singapore. This is because spot market behaviour
demonstrates that the tariffs applicable do not necessarily
equate to the price differentials appearing into these markets.
The reasons for this are complex, including in some cases
reflecting the reality that some variable tariffs are applied at
individual mill level, rather than flat rates
SAE 1006 US$0/t
SS400 -US$10/t
Chinese Mill US$0/t
Chinese
(Premium) Mill
US$10/t
India -US$10/t
S.Korea US$10/t
Taiwan US$10/t
Japan US$10/t
Singapore US$0/t
Vietnam US$1/t
Thailand US$2/t
Indonesia US$2/t
Grade Differentials*
Origin Differentials*
Destination Differentials*
* Examples of normalisation differentials applied on May 9, 2016
Normalisation Processes

Indexing and hedging
•Steel sales/purchasing is a difficult task, hampered by uncertainty and volatility.
•Indexing offers a way to tame volatility.
•And provides predictability in an uncertain world.
•Indexing “fixes” a price.
•Over a fixed period.
•Often with fixed tonnages.
•And gives a clearer view on where the price will move in
future.

Indexing and hedging – Indexing example
An example 8 week time period shows that purchasers are at risk several times of buying at ‘peak’
weeks during a month.
US$/tonne

It also shows that sellers are at risk several times of selling at ‘trough’ weeks during a month.
US$/tonne

Using an index on a month-on-month basis neatly truncates week-on-week peaks and troughs…
US$/tonne

If applied the following month, or delivery month, timing related price risk is also eliminated
.
In this example of a rising market, it has offered price protection against the rise via the lag...
US$/tonne
US$/tonne

BUT, the arrangement is “fair” – no party ‘wins’ or ‘loses’ over time. Delay in price change gives both
parties an increased planning horizon.
US$/tonne

/53
Price
t
Service
Quality
JIT delivery
Credit Lines
Single Invoicing Point
Consistency of Material
Price
Service
Quality
JIT delivery
Credit Lines
Single Invoicing Point
Consistency of Material
Secondary benefits flow from price indexing – having secured a price acceptable to both parties, focus
can shift to other areas of the customer-client relationship.
Spot Trade Indexed Trade

Indexing and hedging – 2nd Example
Remember this slide? By the time delivery came around prices were US$115/t above when they were
struck. What if they decided to use a ‘floating price’ i.e. agree to transact at the average price of the
delivery month?
260
290
320
350
380
410
440
470
500
ASEAN HRC
Bookings made during the price trough…
US$/tonne

Indexing and hedging – 2nd Example
By using the index in a floating price for March delivery, the price is no longer US$115/t above current
spot. The furthest spot moves above index (which is average of the month) is US$25/t.
260
290
320
350
380
410
440
470
500
ASEAN HRC Indexed current month
Neither buyers nor sellers can feel ‘cheated’. Orders will be fulfilled, relationships not destroyed,
customers will receive material because the (spot)opportunity cost does not become too great.
US$/tonne

Indexing and hedging – dispelling misconceptions
• Indexing does not commoditise products. It allows for preferences to be built into the index price.
• If a specific material is viewed as ‘premium’ material, it can be sold at index ‘+’ a fixed value, or a
percentage value. Buyers may consider certain mills to produce a physical premium product, for
example.
• If a specific origin is viewed as ‘premium’ origin, it can be sold at index ‘+’ a fixed value, or a
percentage value. Buyers may consider certain origins to be almost certain to reliably deliver on
time, for example.
• If buyers (pipe and tube, for example) buy in bigger volumes, that advantage can be built into the
price, for example index ‘-’ an agreed value. Discounts or premiums can be built in to the index
price for credit lines, or any number of commercial terms buyers or sellers value.
• Companies can also hedge ASEAN HRC prices using the index, too.

Hedging – prices that could have been locked in…
We all know how prices have moved…
250
300
350
400
450
500
550
ASEAN HRC
US$/tonne

However, prices would have moved very differently for companies who took positions out in
October (and some did).
250
300
350
400
450
500
550
ASEAN HRC October
US$/tonne

They would have moved very differently for companies who took positions out in March (and
some did).
250
300
350
400
450
500
550
ASEAN HRC October March
US$/tonne

They would have moved very differently for companies who took positions out in April (and
some did).
250
300
350
400
450
500
550
01/10/2015
22/10/2015
13/11/2015
04/12/2015
28/12/2015
19/01/2016
11/02/2016
03/03/2016
24/03/2016
15/04/2016
09/05/2016
24/05/2016
06/08/2016
23/06/2016
07/08/2016
23/07/2016
08/07/2016
22/08/2016
09/06/2016
21/09/2016
10/06/2016
21/10/2016
11/05/2016
20/11/2016
12/05/2016
20/12/2016
ASEAN HRC October March April

They would have moved very differently for companies who took positions out in May, too.
250
300
350
400
450
500
550
01/10/2015
22/10/2015
13/11/2015
04/12/2015
28/12/2015
19/01/2016
11/02/2016
03/03/2016
24/03/2016
15/04/2016
09/05/2016
24/05/2016
06/08/2016
23/06/2016
07/08/2016
23/07/2016
08/07/2016
22/08/2016
09/06/2016
21/09/2016
10/06/2016
21/10/2016
11/05/2016
20/11/2016
12/05/2016
20/12/2016
ASEAN HRC October March April May
US$/tonne

Tight correlations make ASEAN HRC import index ideal for
hedging underlying price exposure
The ASEAN index is for Chinese-origin HRC delivered into China.
China leads pricing regionally, the daily correlations of our non-China origins are as follows.
As ASEAN BOF production rises , it will have to keep up with China too (i.e. strong correlation too).
260
290
320
350
380
410
440
470
500
ASEAN HRC Japan Taiwan S. Korea India
US$/tonne

The absolute $ value of the spread between CFR and FOB has been falling, as well:
TSI ASEAN HRC Monthly Correlations (R²) to:
Platts China HRC Exports (FOB)
Full history (53 months) 99.6%
36 Months 99.7%
24 Months 99.5%
12 Months 99.9%
Annual Spread from TSI ASEAN HRC Index US$/t
Spread to Platts China FOB US$/t
2013 38
2014 32
2015 14
2016 YTD 10
The correlations between TSI’s ASEAN CFR HRC index and FOB China HRC prices are strong.
Over any time period, they remain sustained, too.
Tight correlations make ASEAN HRC import index ideal for
hedging underlying price exposure

Thank you!
If you have any questions please email asean@thesteelindex.com.
The analysts below are connected to the asean@ address & look after the following markets:
Anh Nghiem: Vietnam, Thailand, Singapore,
Eric Zhu: Hong Kong, Taiwan, Singapore
Terry Chuay: Indonesia, Malaysia, Cambodia, Myanmar
Julie Jiang: Mainland China
Oscar Tarneberg: Japan, South Korea
Tim Hard: Australia, India
Vaseem Karbhari: EU Imports of Asian HRC
Kurt Fowler: US Imports of Asian HRC
We look forward to hearing from you soon.

DISCLAIMER
All INFORMATION PRESENTED IN THIS REPORT IS AGREED TO BE CONFIDENTIAL AND CANNOT
BE REPRODUCED WITHOUT THE EXPRESSED PERMISSION OF THE STEEL INDEX
This document does not constitute an offer or solicitation to buy or sell any investment product(s). It does not take into account the specific investment objectives,
financial situation or particular needs of any person. Investors should seek advice from a financial adviser before investing in any investment products or adopting any
investment strategies. In the event that the investor chooses not to seek advice from a financial adviser, he/she should consider whether the product in question is
suitable for him/her. The investment product(s) discussed herein are subject to significant investment risks, including the possible loss of the principal amount invested.
Past performance of investment products is not necessarily a guide to future performance.
Unless expressly stated, we do not make any representations nor give any warranties in respect of the information contained in this presentation. To the extent
permitted by the applicable law, we hereby exclude all warranties, conditions, representations or duties whatsoever and howsoever arising (whether express or implied)
including but not limited to any representations or warranties as to the ownership of intellectual property or other rights in the presentation, or the satisfactory quality,
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Seaisi 2016 tsi asean hrc

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