China and its impact on theglobal ferrosilicon market

Kevin FowkesManaging Consultant

Metal Bulletin 28th International Ferroalloys Conference

Berlin, 13th November 2012

• A ferroalloy of iron and silicon (FeSi), normally ~75% Si

• Used extensively in molten crude steel as a de-oxidising agent

• Also used to add electrical conductivity and corrosion-resistance properties to steel

What is ferrosilicon?

• Average Si content of steel is 0.3%. Many individual grades are much higher in Si – stainless steel (up to 1% Si), electrical steels (up to 7% Si)

• Around 65% of global FeSi output is used in steel

• Other important applications are for de-carburising molten grey iron for the production of foundry castings and for producing magnesium metal in China

Global FeSi consumption(million tonnes 75% basis)

Global FeSi demand has doubled over the past decade. China’s share has risen from 21% in 2000 to 63% in 2012

6

8

10

Rest of world

Other Asia

7.9M

0

2

4

Other Asia

China

CIS

N.America

Europe

11%24%

21%

63%3.7M

FeSi apparent consumption (kg) per tonne of crude steel output

Consumption of FeSi per tonne of steel in China is 75% higher than in most other countries

7

8

9

China

3

4

5

6

EuropeJapan

USA

World average

60%

80%

100%

Rest of world

Share of global total, 2012

Hence Chinese share of global FeSi consumption is far higher than its share of global steel production

0%

20%

40%

FeSiconsumption

Crude steelproduction

Stainless steelproduction

China

63%

46% 44%

100%

Other

Magnesium

Foundry

FeSi consumption by end-use sector, 2012Around 65% consumed in steel

0%Europe China World

Steel - other carbon

Steel - electrical

Steel - stainless

Chinese FeSi consumption by end use (%)

60%

Chinese FeSi consumption by end-use sectorFurther growth potential limited overall if carbon steel growth stays low

Other carbon steel

0%Stainless

Foundry

Magnesium

Electrical & alloy steel

Growth of Chinese crude steel production

15%

20%

25%

3

4

5

Th

ou

san

ds

Extra annual FeSi demand by 2020under various China steel growth rates*

mill

ion tonnes, 75%

basis

21.2%

Industry long-term

Demand level for FeSi over the next decade depends most onsteel growth rate in China, which has fallen sharply in 2012

85% 67%61%

36%50%

0%

5%

10%

0

1

2

1% 2% 3% 5% 8%

?

Annual Chinese steel productiongrowth rate, 2013-20

mill

ion tonnes, 75%

basis

1.5%

9.4%Industry

long-term expectation

long-term expectation

2012 growth rate

* assumes Chinese FeSi consumption per tonne of steel at 2012 level

8

10

12

11%

Assumptions on Chinese steel consumption/production growth make a huge difference to FeSi demand forecast for 2020

Global consumption of FeSi(million tonnes, 75% basis)

16%

12.2

7.9

10.3

9.28.88.3

(8%pa)

(5%pa)

(3%pa)

(2%pa)(1%pa)

0

2

4

6

11%

8%

52%

3.7

Forecasts assume Chinese FeSi consumption per tonne of steel at 2012 level

China

Russia

China

Rest of Asia

World FeSi consumption and productionBoth completely dominated by China

Global FeSi production,2012

Global FeSi consumption,2012

Norway/Iceland

Brazil

USA

Other

Europe

N.America

CIS

Other total

7.8 million tonnestotal

7.9 million tonnes

63% 72%

(total FeSi production capacity in China is ~10 million tonnes)

60%

80%

100%

Rest of world

Global production, 2012

Of all the main steel-related ferroalloys, FeSi output isby far the most dominated by Chinese producers

0%

20%

40%

FeSi SiMn HC FeMn MLC FeMn HC/Ch FeCr

Rest of world

China

72%

53%

42% 46%31%

Chinese FeSi producers are mostly quite low on the cost curve, before export taxes or anti-dumping duties are added

1000

1200

1400

1600

1800

FeSi ex plant cash production cost (US$ per tonne, 2012)

0

200

400

600

800

1000

0 1 2 3 4 5 6 7 8

China low cost

China average

cost

China high cost

Million tonnes

This contrasts with Mn alloys and FeCr, where Chinese are the high-cost marginal producers even before export taxes

1,000

1,200

1,400

1,600

1,800

90

100

110

SiMn ex plant cash production cost (US$ per tonne, 2012)

HC/Ch FeCr ex plant cash production cost (US$ per tonne, 2012)

0

200

400

600

800

1,000

0 2 4 6 8 10 12

China average

cost

50

60

70

80

0 2 4 6 8 10

Million tonnesMillion tonnes

100%

Labour & other

Reductants

The key difference in FeSi is the composition of the cost structure in China, with ore (quartz) being of little importance

Ex-plant cash production costs by component, 2012

0%FeSi SiMn HC FeMn

(EAF)HC FeMn

(BF)HC/Ch FeCr

Ore / Quartz

Electricity

US$ per tonne

In the long term, Chinese FeSi prices track production costs closely….but plants making a loss in 2012

1,000

1,100

1,200

1,300

Average Chinesedomestic FeSi price

Average Chinese FeSiproduction cost (ex-plant)

600

700

800

900

FeSi price

US$ per tonne (average for 2012)

Sales to most export markets are also currently unprofitablefor the average Chinese FeSi producer, if exported legally

1,500

2,000

2,500

EU anti-dumping duty Export tax Cost to supply domestic customers

Price EUPrice USA

Price Japan

0

500

1,000

Most competitive Chinese plants

Average Chinese plant

Less competitive Chinese plants

Price China domestic

Chinese FeSi exports(thousand tonnes 75% basis)

This has provoked an epidemic of smuggling. Smuggled material via Vietnam accounts for almost 50% of total Chinese FeSi exports

1,000

1,200

1,400

1,600

1,800

0

200

400

600

800

1,000

via Vietnam

Official

Estimated Chinese FeSi export via Vietnam(thousand tonnes 75% basis)

For 2012, around 350,000mt of Chinese FeSi is beingsmuggled through Vietnam to avoid export tax

250

300

350

400

USA

India

Thailand

to

0

50

100

150

200

250

2010 2011 2012e

Thailand

Turkey

S.Korea

Japan

Taiwan

Indonesia

(thousand tonnes 75% basis)

Chinese FeSi exports by destination, including smuggled material

1,000

1,200

1,400

1,600

1,800

Other

EU

to

0

200

400

600

800

1,000

2007 2008 2009 2010 2011 2012e

USA

S.Korea

Japan

1500

2000

2500

3000

EU US Japan China domestic

US$ per tonne

Poor demand and oversupply have resulted in falling FeSi prices globally through 2012

0

500

1000

1500

• Extent of recovery in Chinese domestic consumption

• Potential lowering / removal of export taxes due to weak domestic market and WTO pressure

• Epidemic smuggling through Vietnam

Points to watch

• Anti-dumping duty expiry in EU

• Potentialfor increase in Chinese exports if domestic demand remains weak and export taxes / duties are lowered