China Iron Ore 213 Iron ore markets: long-term game but near-term volatility February 213, Beijing, China Bryanston Resources GmbH * Bahnhofsplatz * 63 Zug * Switzerland
Outlook: Sustained short-term prices but eventual convergence to ~1$/t by 22 The global market balance is set to head gradually into oversupply With new lower-cost supply likely to push prices back to ~$1/t M tons 4 3 2 1-1 -2-3 -4 World demand 212 213 214 215 World Supply 216 217 218 Difference M tons 1 5-5 -1-15 219 22 17 $/t 16 15 14 13 12 11 1 9 212 213 214 215 216 Fines (62% Fe, CFR China) Lumps (64% Fe, CFR China) 217 218 219 22 Weaker industrial production and demand uncertainty in developed markets will decrease iron ore demand growth post-213 to under 3% y-o-y China will slow global demand as the country enters a less steel-intensive period of economic growth Supply will continue to outpace demand on a global level Short-term seasonal supply tightening will maintain elevated prices But underlying Chinese demand is not strong enough for high prices to be sustainable New low-cost supply is expected to lower prices in the mid-long term 1 1. Ex: Vale S11D project in 216 in Brazil. Source: Bryanston research 1 Copyright: Bryanston
Outlook: Chinese demand will continue to grow (esp. fines and pellets) with an increased reliance on seaborne supply China will be increasingly reliant on imports as domestic production gets cut back Chinese demand will shift away from lumps in favor of fines & pellets M tons 14 13 12 11 1 9 Total Iron ore Demand Total Imports +69% +35% High sinter & pellet capacity drives fines demand 1bn tons 1.3bn tons 11% 8% 18% 2% 71% 72% Lumps Pellets Fines 8 7 6 212 213 214 215 216 217 218 219 22 212 22 Imports are set to satisfy as much as 9% of total demand by 22 Chinese domestic production will progressively fall as prices converge back towards ~$1/t Chinese demand has topped 1bn tons in 212, accounting for 56% of global demand China s demand mix will maintain a heavy emphasis on fines, with lumpy demand giving way to pellets Many steel mills are expected to delocalize to the coast to gain access to seaborne supply 1. Ex: Pre-agglomeration technologies. Source: Bryanston research Negative outlook for lumpy premium in China, squeezed by tech development 1 and increased pellet capacity High-cost Chinese production likely to be pushed out by new low-cost supply 2 Copyright: Bryanston
A massive increase in available ore types from new projects will increase complexity of value in use and pricing Example iron ore projects in Africa and ANZ Ouenza and Annaba ArcelorMittal Annual production: 1-3 C1 Cash Cost per t: USD 25-35 Putu Iron Ore project Severstal International Annual production: ~2-25 Production start: 216/17 Nkout Project Afferro Mining Annual production: ~18.5 Production start: 216 Tete Project Baobab Annual production: ~1 Production start: 214-15 Newman BHP Billiton Annual production: ~45 C1 Cash Cost per t: USD 45 Savage River Grange Resources Annual production: ~2 C1 Cash Cost per t: USD ~5 Sishen Mines Anglo American Annual production: ~4 C1 Cash Cost per t: USD 16 Khumani Mine African Rainbow Minerals Annual production: C1 Cash Cost per t: USD Jack Hills Murchison Metals Annual production: ~2-3 C1 Cash Cost depending on OPR project success 3 Copyright: Bryanston
Major African IO volumes to come on stream but there is a history of delays South Africa 212e 213e 214e 215e 216e Pipeline 2 2.5 2 7.4 64 Congo 1 45 1 Guinea 29 6 5 145 9 Sierra Leone 44 3 45 Liberia 5 2 8 Mauretania 8 2 1 34 Cameroon 35 18.5 Gabon 2 Total supply 78 44.5 135 167 16.9 343 1. Western Cluster: 1 final production volume 2. Beyond 216 Sources: Kumba (212); Andrewjohns (211); African-Minerals (211); African Iron (211); Resource Capital Research (211); ICON; Morgan Stanley; Bryanston Resources 4 Copyright: Bryanston
Long term outlook for iron ore sales into China driven by steel consumption and scrap ratios Steel consumption in China could peak between 22 and 225 While iron ore consumption will be hit by the emerging scrap cycle 1,2 4 Scrap Available (LHS) % of Steel Production (RHS) 35% 1, 35 3% 8 6 4 3 25 2 15 1 25% 2% 15% 1% 2 5 5% 2 25 21 215 22 225 23 28 29 21 211 F 212 F 213 F 214 F 215 F 216 F 217 F 218 F 219 F 22 F % China Apparent Steel Consumption 5 Copyright: Bryanston
India is the big unknown for the seaborne iron ore market Indian Iron exports have seen a dramatic fall While steel consumption expected to increase strongly 16 14 12 1 8 6 4 2 Jan 3 Jun 3 Nov 3 Apr 4 Sep 4 Feb 5 Jul 5 Dec 5 May 6 Oct 6 Mar 7 Aug 7 Jan 8 Jun 8 Nov 8 Apr 9 Sep 9 Feb 1 Jul 1 Dec 1 May 11 Oct 11 Mar 12 Aug 12 14 12 1 8 6 4 2 India Steel Consumption - 21-24 - ) 126 86 94 59 41 26 24 21 215 22 225 23 235 24 6 Copyright: Bryanston
Pricing structure evolution: Index-linked CFR pricing is now industry norm with base periods becoming ever shorter CFR Index-linked pricing has become common practice since 211 and pricing base periods have become considerably shorter 15-2% 15-2% 2.5% 2.5% 5.% Based on spot FOB benchmarks 8-85% 7-8% Based on spot CFR index 95.% 45.% 5.% 1-15% Spot 29 Index Linked 211 Fixed annual 21 Q2 211 Q4 Less than 1-month 1-month index average (current month or lagged) 3-month index average (current month or lagged 1 month) Most large companies do most of their sales on a CIF basis rare are those who do not Industry Expert Most sales are done on CFR basis now, as the index is CFR and it is transparent enough to be reflective of real pricing Industry Expert Spot trades and short pricing base periods will likely contribute to high price volatility in the future as the market becomes more liquid Source: TSI (The Steel Index) 7 Copyright: Bryanston
Grade differentials in China have been falling dramatically 5 45 4 35 3 25 2 15 1 5 Nov 8 Dec 8 Jan 9 Feb 9 Mar 9 Apr 9 May 9 Jun 9 Jul 9 Aug 9 Sep 9 Oct 9 Nov 9 Dec 9 Jan 1 Feb 1 Mar 1 Apr 1 May 1 Jun 1 Jul 1 Aug 1 Sep 1 Oct 1 Nov 1 Dec 1 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11 Sep 11 Oct 11 Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12 Oct 12 China Iron Ore Fines Fe 62-58% Differential (A-B) 8 Copyright: Bryanston
SGXOTC iron ore swap contract volumes increasing rapidly 18 16 14 12 1 8 6 4 2 9.4 9.5 9.6 9.7 9.8 9.9 9.1 9.11 9.12 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.1 1.11 1.12 11.1 11.2 11.3 11.4 11.5 11.6 11.7 11.8 11.9 11.1 11.11 11.12 12.1 12.2 12.3 12.4 12.5 12.6 12.7 12.8 12.9 12.1 Emerging derivatives markets will allow producers and mills to hedge the backwardated market 9 Copyright: Bryanston
The virtual steel mill could allow market participants to hedge and gain exposure to all aspects of steelmaking Locked-in margin Locked-in margin Locked-in cost Virtual Steel Mill Mining Company Steel Company Steel Customer Iron Ore Coking Coal Scrap Steel Mill Raw materials, semi-finished and finished steel financial products can be used to manage price risk Hot Rolled Strips Plate Rebar Wire Rod Structurals Merchant Bar Available instruments Dark Pools Exchange Traded Forwards Futures Options Swaps ETFs/ETDs Futures Options* Swaps CFDs ü ü û ü û û û ü û *only Options with TSI Iron ore as Underlying 1 Copyright: Bryanston
Thank you for your attention! Bryanston Benedikt Sobotka Managing Director Bryanston Resources GmbH Baarerstrasse 75 63 Zug Switzerland Mobile: +49151 188 598 21 Tel. +41 765626117 www.bryanston.ch Benedikt.Sobotka@bryanston.ch 11 Copyright: Bryanston