The outlook for steel raw materials Prepared for: Congreso Alacero-56, Buenos Aires, Argentina November 2015 Dr. Paul Butterworth Research Manager - Steel Raw Materials, Steel Costs and Thermal Coal
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The outlook for steel raw
materials
Prepared for:
Congreso Alacero-56,Buenos Aires, Argentina
November 2015
Dr. Paul ButterworthResearch Manager - Steel Raw Materials, Steel Costs and Thermal Coal
Agenda
• Crude steel and raw materials demand to 2019
• Iron ore: market dynamics and pricing
• Metallurgical coal: market dynamics and pricing
• Conclusions
Agenda
• Crude steel and raw materials demand to 2019
• Iron ore: market dynamics and pricing
• Metallurgical coal: market dynamics and pricing
• Conclusions
Crude steel production driven by growth outside of China
4
(0.4)%
5.4%
-0.9%0.0%
2.0%
-1.5%
4.3% 3.7% 3.2% 2.6%
2.5%
14.2% 8.9%
7.4%
11.7%
2.0%
-1.5% -1.1%0.0% 0.6% 0.7%
-15%
-10%
-5%
0%
5%
10%
15%
0
500
1,000
1,500
2,000
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Other Other Asia CIS L. America Other N. America US Europe China
LHS: Global crude steel production by country/region, Mt
RHS: Crude steel production growth, China (red) and RoW (black), y/y, %
Data: CRU.
Steel raw materials demand increases beyond 2015
5
60
70
80
90
100
110
120
07 08 09 10 11 12 13 14 15 16 17 18 19
Met. coal Met. coke Metallics Ore
Global consumption of key raw materials, index, 2014 = 100
Data: CRU.
Agenda
• Crude steel and raw materials demand to 2019
• Iron ore: market dynamics and pricing
• Metallurgical coal: market dynamics and pricing
• Conclusions
Low-cost supply continues to be added to the market…
7
-40
-20
0
20
40
60
80
100
120
140
160
180
2014 2015 2016 2017 2018 2019
Other ME Bahrain Sweden Ukraine India South Africa Brazil Australia
Iron ore additions, y/y, Mt
Data: CRU.
Displacement requirements are heavier in 2016 than
previously expected…
Data: CRU.
Iron ore displacement required to balance the market, Mt
8
-120
-100
-80
-60
-40
-20
0
2014 2015 2016 2017 2018 2019
Old New
Exits from non-traditional exporters continued through H1…
Data: CRU, GTIS.
Reduction in exports from non-traditional exporters, Mt
0 10 20 30 40 50
2014
2015 YTD
0 2 4 6 8
Iran
Mexico
Malaysia
Indonesia
year-to-date reduction in exports from non-traditional
exporters split by country, 2015, Mt
ytd July
ytd June
ytd June
ytd April
9
…but, fresh announcements of exits from junior miners
ceased in Q3…
Data: CRU, represents saleable production.
10
Summary: company specific closure announcements
Country Company Site/project Production, Mt/y * Fe grade Status
Australia Arrium Southern Iron 4.0 62% Closed due to uncompetitive status.
Australia IMX Resources Cairne Hill 1.8 53% Initial 2015 closure brought forwards to 2014
Australia Kimberly Metals Group Ridges 1.8 61% Mine put on care and maintenance due to "commodity price, market conditions and exchange rates"
Australia Mineral Resources
Phils Creek and
Poondano 6.3 Unknown End of life of mines.
Australia Sinosteel
Blue Hills (fines and
lump) 1.5 58% Closed due to uncompetitive status.
Australia Western Desert Resources Roper Bar 1.0 54% Closed. Lenders did not extend debt facility.
Australia Mount Gibson Koolan Island 3.4 64% Flooding has forced operations to shut.
Brazil MMX Serra Azul 6.6 65%
Suspended operations for 30 days through September - did not restart after this period. Owner in
financial difficulties and environmental licensing problems.
Brazil Bahia Mineracao Limitada Pedra do Ferro 0.6 66% Closed due to uncompetitive status.
Brazil Zamin Ferrous Zamapa, Amapa 0.5 Unknown Closed due to uncompetitive status. Some production continuing for domestic sales.
Canada Cliffs Natural Resources
Bloom Lake and
Wabush 8.6 66% Closed due to uncompetitive status and company's focus on US operations.
Canada Labrador Iron Mines Silver Yards 1.7 54.2% (1)
Did not resume operations after 2014 winter.
Guinea Bellzone Forecariah Phase I 0.5 Closed due to uncompetitive status.
Morocco Earthstone Iron Queen 0.3 58% Closed due to uncompetitive status.
North Korea Musan Musan mines 6.0 Unknown Closed due to uncompetitive status.
Sierra Leone African Minerals Tonkolilli (2)
14.5 58% Operations placed on care and maintenance due to lack of working capital.
Sierra Leone London Mining Marampa Phase I 5.0 64% Closed due to uncompetitive status.
South Africa Kumba Thabazimbi 1.0 62% Closed due to uncompetitive status.
South Africa Foscor, Palabora, Dino Resources Various 2.9 60% Closed due to uncompetitive status.
Swaziland Salgaocar Ngwenya 1.0 58% Closed due to uncompetitive status.
Sweden Dannemora Mineral Dannemora 1.2 55% Closed due to uncompetitive status.
Sweden Northland Resources Kaunisvaara 1.2 69% Ongoing financial difficulties have forced operations to cease.
Venezuela CVG Ferrominera Ciudad Piar (part) 5.5 66% Proportion of exports have ceased due to uncompetitive status.
TOTAL 76.9 60.9%
Notes: *Production at 2013/2014 run rates. Vale's production cut at its Southern and Southeastern Systems has been incorporated in Vale's forecasts and not included in the above list as overall production volumes from the company are not impacted.
(1) This is the grade for Knob Lake. (2) Currently not producing. CRU assesses that this production will restart in the future.
…and, by and large, the same can be said for Chinese iron
ore miners
Data: CRU, represents saleable production.
Change in Chinese iron ore production, y/y, ‘000 t
11
-30,000
-25,000
-20,000
-15,000
-10,000
-5,000
-
5,000
10,000
15,000
20,000
Current supply cuts are not sufficient to balance the market.
However, instead of further closures materialising...
Data: CRU.
Iron ore displacement achieved and yet to be achieved, 2014 & 2015, Mt
• A price of $55/t appears
sufficient for the bulk of
production to continue
Already
exited
Not yet
exited
0
50
100
150
200
250
2014 and 2015 displacement status
Additional displacement needed
Non-traditional exporters
Juniors
China
12
2016 sets the cost floor: cost expectations have lowered…
Data: CRU.
Weighted average global Business Costs, normalised to
62% Fe fines, CFR China, real 2014, $/t
0
10
20
30
40
50
60
70
80
2013 2014 2015 2016 2017 2018 20190
20
40
60
80
100
120
0.0
0.2
0.4
0.6
0.8
1.0
1.2
2013 2014 2015 2016 2017 2018 2019
Australian Dollar Brazilian Real
Canadian Dollar Oil price
LHS: Mining currencies, $/local currency
RHS: Oil price, Brent, $/bbl
13
…port stocks will rise to absorb excess material in Q4;
prices to average $50/t, down $4/t q/q
Data: CRU.
Iron ore price, 62% Fe fines, CFR China, $/t
40
50
60
70
80
90
100
110
120
130
140
J F M A M J J A S O N D J F M A M J J A S O N D
2014 2015
60
70
80
90
100
110
120
130
140
Scope for an additional
30 Mt to build at port side
Chinese iron ore port stocks, Mt
14
Displacement requirements are heavier in 2016 than
previously expected…
Data: CRU.
Iron ore displacement required to balance the market, Mt
15
-120
-100
-80
-60
-40
-20
0
2014 2015 2016 2017 2018 2019
Old New
…and our forecasts are reliant on more substantial exits
from China next year
Data: CRU, calculation does not account for change in stocks.
Change in Chinese iron ore production, y/y, Mt saleable ore
16
-90
-80
-70
-60
-50
-40
-30
-20
-10
0
2014 2015 2016 2017 2018 2019
Old New
…but this is a risk to our forecast
Risk 3 Likelihood Price
pressure
Resilience of Chinese domestic production
We should be cautious in assuming that China’s good supply-
response will persist, especially given that the Chinese steel
industry is in the unfavourable position of becoming increasingly
reliant on the seaborne majors.
High
The Chinese government reduced the resource tax earlier this
year. We estimate that this resulted in an equivalent cost
reduction of $2-5/t, depending on province.
17
Agenda
• Crude steel and raw materials demand to 2019
• Iron ore: market dynamics and pricing
• Metallurgical coal: market dynamics and pricing
• Conclusions
Indications of over-supply: H2 price low on the cost curve
0
50
100
150
200
250
0 50 100 150 200 250 300 350
Co
sts
($/t)
Cumulative production
0
50
100
150
200
250
0 50 100 150 200 250 300 350
x-axis: seaborne metallurgical coal supply, Mt
y-axis: Business Costs(1), $/t, FOB, nominal
Data: CRU Metallurgical Coal Cost Model 2014. Note: (1) Cash costs including royalties, sustaining capital and value adjustments to benchmark HCC price for freight and
quality differentials.
2015 H2 HCC price level
19
Indications of over-supply: low Chinese domestic prices
20
-15
-10
-5
0
5
10
15
20
25
30
0
20
40
60
80
100
120
140
160
180
Differential (Shanxi -Australia)
Australian quarterly contract SSCC, CFR China
Linfen, Shanxi 1/3 coking coal, del. coastal mill
LHS: Australia and China hard coking coal prices, $/t
RHS: Differential between Shanxi and Australia price, $/t
Data: CRU; Shanxi coking coal has been Value-in-Use adjusted relative to the benchmark Australian HCC spot price
Chinese Business Costs fell in H1, which has contributed
to the persistent oversupply in the domestic market
21
360
365
370
375
380
385
2014 H1 2015 H1
China met. coal apparent production, Mt
95
100
105
110
115
20
14
Fe
es
Wage
s
En
erg
y
Eff
icie
ncy / m
ine
clo
su
res 2
01
5
China HCC cost change breakdown forecast, $/t, nominal
Data: CRU.
Outside China, Business Costs are expected to hit a floor
this year; macro drivers push costs up in the years ahead
22
60
70
80
90
100
110
120
13 14 15 16 17 18 19
Average Australia hard coking coal Business Costs, $/t
Data: CRU.
0
20
40
60
80
100
120
0.0
0.2
0.4
0.6
0.8
1.0
14 15 16 17 18 19
Australian Dollar
Canadian Dollar
Oil price
LHS: Key mining currencies, $/local currency
RHS: Oil price, Brent, $/bbl
Amid low prices, major suppliers have announced closures
23
Company Mine (s) Announcement Met. coal reduction, 2015, y/y, Mt
US
Patriot Coal Wells Apr-15 0.9
Alpha Natural Resources Tiller, No. 9, Dorchester, North Fork May-15 2.8
Consol Energy Bailey, Enlow Fork, Harvey May-15 0.4
Rhino Resource Partners Rhino Eastern, Rob Fork, Tug River Jun-15 0.3
Canada
Grande Cache Various Jan-15 1.8
Teck Various Jun-15 1.5
Australia
Glencore Various Feb-15 1.5
Peabody North Goonyella Jun-15 0.7
Peabody Metropolitan Jul-15 0.3
Peabody Coppabella Jul-15 0.7
BMA Various Jul-15 2.4
Yancoal Various Mar-15 0.9
New Zealand
Solid Energy Stockton May-15 0.4
After the announced cuts, there will be a significant
contraction in seaborne supply in the next few months…
24
-8
-6
-4
-2
0
2
4
15 Q1
15 Q2
15 Q3
15 Q4
US Australia
US and Australian met. coal exports, y/y change, Mt
Data: CRU, GTIS.
Looking further ahead, seaborne met. coal demand growth
outside of China will be supportive of a market rebalancing
-15%
-10%
-5%
0%
5%
10%
15%
15 16 17 18 19
Brazil India JKT Europe
Data: CRU.
Met. coal seaborne demand growth, y/y, %
25
New supply coming online in Mozambique, Mongolia and
Russia will squeeze out more high cost production
-30
-25
-20
-15
-10
-5
0
5
10
15
15 16 17 18 19
Australia Russia Mongolia US Canada Mozambique
Met. coal exports, y/y change, Mt
Data: CRU, GTIS, company reports.
26
With closures and increased demand, the met. coal market
will return to an equilibrium state
0
50
100
150
200
250
0 50 100 150 200 250 300 350
Co
sts
($/t)
Cumulative production
0
50
100
150
200
250
0 50 100 150 200 250 300 350
x-axis: seaborne metallurgical coal supply, Mt
y-axis: Business Costs(1), $/t, FOB, nominal
Data: CRU Metallurgical Coal Cost Model 2014. Note: (1) Cash costs including royalties, sustaining capital and value adjustments to benchmark HCC price for freight and
quality differentials.
27
Agenda
• Crude steel and raw materials demand to 2019
• Iron ore: market dynamics and pricing
• Metallurgical coal: market dynamics and pricing
• Conclusions
Conclusions:
• Global crude steel production and steel raw materials demand will see growth over the medium-term.
• Costs in the iron ore and met. coal sectors have fallen, but inflationary drivers will lift costs beyond 2016.
• Iron ore and met. coal markets will begin to return to a more balanced position and prices will rise.
• Metallics prices will revert to a more normal level relative to the bulks.
• Chinese costs and Indian demand are two key factors that will determine prices in the medium-term.
29
Thank you for your attention11Dr. Paul Butterworth
Research Manager,
Steel Raw Materials, Steel Costs and Thermal coal
T: +86 10 6510 2206 ext. 312
30
Marcio Goto
Regional Manager,
Latin America & Caribbean
Sao Paulo:
T: +55 11 5051 8124
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