cristina xu, shanhai metals market (smm) - supply & demand of chinese iron ore market in...

China Steel MillsStep Through

Imported Ores Dependency

Mar 12, 2014

Prepared by

Agenda

1 Hot Topics

2 China Steel Sector Review and Forecast

© SMM & Steelease. All rights reserved.

2 China Steel Sector Review and Forecast

3 China Iron Ore Sector Review and Forecast

4 SMM and Steelease Brief

2

Hot Topics

Environmental and Safety Issues for Iron Ore Industry

© SMM & Steelease. All rights reserved. 3

Environmental Impacts to Steel Mills

Iron Ore Financing


Environmental and Safety Issues for Iron

Ore Industry

Part I

4

PRODUCTIONOR

Pollution


Pollution

Tighter regulation in environmental and safety regulation will push up the cost of existing players

5%

10% Environmental CostSafety Cost

5

10 Environmental costSafety Cost

Unit: USD/mtUnit: Mt

Proportion in Ex-mine Cost Maximum Increases in Cost


Market Insights

6

Data Sources: SMM &Steelease

§ In order to maintain operation, the mines have to pay an additional cost in environment and safety respects by USD 1-7/mt.

§ Miners only spent 9% on environmental protection and safety concerns. The proportion will largely increase to 18% based on the existing ex-mine cost.

0%Lump proportion

0Lump proportion

~30-40 million mt Conc. capacity will be eliminated by government policy

§ Illegal Mining► Without mining license ore safety permission

§ Mining capacity below standard► For open-pit mining smaller than 50kt/a► For underground mining smaller than 30kt/a

Mines Shutting Down Criteria

Conc. Capacity Distribution by Size

Above 100kt,65%

Below 100kt,35%


§ Mines with Conc. capacity smaller than 100kt is mostly fitting the criteria settled down by the government.

§ By our estimation, approximately 20 million me Conc. capacity will be forced to shut down by government.

§ Safety permission standard lower than 4th level

§ Tailing pit smaller than one million cubic meter


SMM Insights


Environmental Impacts to Steel Mills

Part II

8

Lump Proportion

Higher environmental protection requirement forced steel mills in Hebei to increase consumption of lump

8%

10%

12%

14%

16%

120130140150160170

Lump PremiumMac Fines 61%Mac Lumps 62.5%Unit: USD/mt

Sample: Lump Consumption in Hebei

Lump Premium


§ Environmental cost per ton in China is usually less than USD 10/mt, less than the cost in Korea and Japan.§ The desulfurization system in sintering machine will push up the steel production cost by USD 5-16/mt.§ The proportion of lump consumed in Hebei rose to 13.7% in 2013, much higher than in previous years.

0%

2%

4%

6%

Lump proportion8090

100110120

2012年3月19日 2013年3月19日

9


Market Insights

2011 2012 2013


Iron Ore Financing

Part III

10

90

100

110

What’s the insights for port inventories surging to 100 million mt again in 2014

Imported Iron Ores Dependency Rate


60

70

80

Jan-

12

Feb-

12

Mar

-12

Apr-

12

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Feb-

13

Mar

-13

Apr-

13

May

-13

Jun-

13

Jul-1

3

Aug-

13

Sep-

13

Oct

-13

Nov

-13

Dec

-13

Jan-

14

Feb-

14

11


~30-40% of iron ore stocks in ports are imported for financing, compared to 10% proportion before 2013

Steel Mills in China

Banks in China

Sign L/C in Day 0, Receive Iron Ore in Day 10

Steel Mills get 80

Benefit from interest rate

Payment for Iron Ore in Day 90

General Process of Iron Ore Financing


§ Importing licenses system was ended in second half of 2013, resulting in more than 800 entities importing iron ore.§ Loan availability for the steel sector from banks has been decreasing due to overcapacity and macroeconomic

policies.§ Enterprises can use the capital for nearly three months with only 2% cost on commission charges and financial

costs.§ Steel plants can earn interest margin.

12

Data S ources: SMM &Steelease

an 80 day cash flow

interest rate

Market Insights

China Steel Sector Review and Forecast

Steel PMI


China GDP and Shibor

Pig Iron Production

45%

50%

55%

60%Steel PMI

Steel consumption has been improving from Sep 2012 to Sep 2013, but down again afterwards.

Steel PMI with Seasonal-Adjustment (Aug 2009 – Fe 2013)


30%

35%

40%

45%

Aug

-09

Oct

-09

Dec

-09

Feb-

10

Apr

-10

Jun-

10

Aug

-10

Oct

-10

Dec

-10

Feb-

11

Apr

-11

Jun-

11

Aug

-11

Oct

-11

Dec

-11

Feb-

12

Apr

-12

Jun-

12

Aug

-12

Oct

-12

Dec

-12

Feb-

13

Apr

-13

Jun-

13

Aug

-13

Oct

-13

Dec

-13

Feb-

14

According to Steelease’s Steel-PMI survey, the downtrend of steel demand from 2H 2010 to 1H 2012 had changed. Comparing with our last conclusion, steel consumption had been confirmed to be improving from 2H 2012 to now, as the bottom of index had increased continuously.

14


40.15

32.12

47.16

35.35

51.93

38.68

56.8812.1%

11.1%

10.6%10.4%

9.8% 9.6% 10%

11%

12%

13%

40

60China's GDP YoYUnit: Trillion RMB <Nominal GDP and real growth rate>

China economic growth did not accelerate, but remained relatively stable after Q2 2012 instead

China’s Quarterly GDP and Growth Rate, (2010 1Q——2013 4Q)


8.26

17.49

27.26

9.71

20.58

32.12

10.80

22.71

11.89

24.80

9.6%9.5% 9.3%

8.1%7.8% 7.7% 7.8%

7.7%

7.6% 7.8% 7.7%

6%

7%

8%

9%

10%

0

20

2010 1Q

2010 2Q

2010 3Q

2010 4Q

2011 1Q

2011 2Q

2011 3Q

2011 4Q

2012 1Q

2012 2Q

2012 3Q

2012 4Q

2013 1Q

2013 2Q

2013 3Q

2013 4Q

15


110

120

Unit: Trillion RMB

Decreasing GDP deflator pushes China government to stimulating economy. But cash of steel market is still tight

8

12

16O/N 1W 2W 1M

GDP Deflator, (2009 1Q——2014 4Q) Movements of Shibor


90

100

16

0

4

8


18%

24%

30%

750

1000 Pig Iron Production GR YoYUnit: Million mt

Steelease believes the growth rate of pig iron production going to decrease afterwards.

China Pig Iron Production and Growth Rate (2007-2018E)


0%

6%

12%

0

250

500

2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E

17


China Iron Ore Sector Review and Forecast

Iron Production Cost and Profit


Operation Rate and Ore Price

Ore Production and Dependency

Cost of 50% Conc. capacity is higher than USD 110/mt while SOE mines are less influenced by market.

200

, 62%

Fe,

CFR

Equ

ival

ent)

China Iron Ore Concentrate Production Cost Curve


00 450Adjusted Conc. Capacity, 62% Fe, dMt)

(US

$/dm

t, 62

% F

e, C

FR E

quiv

alen

t)

19


Private cost increased by avg. 4.9% in 2013 compared with 2012

50

100

50

100Unit: USD/mtUnit: USD/mt

Ex-mine Cost of Private Mines Profit of Private Mines


0Lump proportion

0Lump proportion


2012 2013 2012 2013

§ Production cost increased sharply in 2013 due to the increase in explosive, beneficiating cost, tax&fees and environmental&safety cost.

§ As the costs increased, the profit of the mines decreased accordingly.SMM Insights

80%

90%

160

180 Price Operating Rate

Operating rate remained low in 2013 as ore prices did not rebound as much as 2012

Operating rate improved after ore prices increased

Unit: USD/mt

Private Iron Ore Mine Operating Rate VS Ore Prices


50%

60%

70%

100

120

140

Operating rate decreased significantly in 2012

Seasonal impacts

21

Operating rate is always low in Lunar New Year and the two meeting.


SOE mines are expanding faster than private iron ore mines in next 5 years

25

50

2012-20132013-2018

Unit: Mt

Net Increases in SOE and Private Mines


0SOE Private

22


Market Insights

§ The expansion projects will be assessed by five criteria, which included chemical, composition, infrastructure, mining depth , and law issue.

§ SOE mines are expanding in a larger scale than private iron ore mines, mainly because:► SOE mines have access to iron ore resources.► SOE have rich resources for deep mining.

180400Domestic Conc. Production Imported Ore Prices

The ore prices will remain high above USD 120/mt in 2014, resulting in a lower China iron ore supply.

Unit: Million mt

Domestic Ore Production


002011 2012 2013 2014E 2015E 2016E 2017E 2018E

23


75%

100%

Domestic Conc. Production Iron Ore Imports

The dependency rate of imported ores is expected to increase according with the decreases in domestic ore supply.

Imported Iron Ores Dependency Rate


0%

25%

50%

2011 2012 2013 2014E 2015E 2016E 2017E 2018E

24


SMM China Metal Expert


Founded in 1999, Shanghai Metal Market Consulting (SMM Consulting) has provided professional service to ore, metal and customers from application side.


Ore Process Metal Application

26

SMM would be the best partner for those who explore China market

SMM Core Competences

Industry Focus

n SMM team members major in metal, finance, etc. They are well educated in industry related knowledge and demand minimum training time.n Every analyst in SMM consulting has good reputation in his/her industry and he/she maintains stable network with whole value chain.n Company founders and management level are very senior experts in metal

Ace Team

Network

Authority

EducationD

iver

sity

Ace TeamAce Team


n SMM consulting focus on metal industry only. n We are specialized in metal industry and its whole value chain.n SMM has15 years experience in Chinan We have accumulated 100+ projects in various metals

level are very senior experts in metal industry.n SMM consulting team is capable in various professional service

Authority

Exclusive Facility

n SMM’s TLD (www.metal.com) has sufficient real-time information from internal and external sourcen SMM database is the most integrated and updated in Chinan SMM has the largest member pool in China metal industry across various industries.n SMM has established relationship with government through project cooperation.

Exclusive facilityExclusive facilityIndustry focusIndustry focus

27

http://www.metal.com

SMM consulting provide business value to our clients via 4 types of service

SMM Consulting Services

n Customer demand analysis

n Satisfaction analysis and performance

n M&A strategyn Customer strategyn Product strategyn Distribution scale assessmentn Supply channel reevaluation

Customer AnalysisCustomer Analysis

Strategic SolutionsStrategic Solutions


and performance benchmarking

n Brand and corporate reputation measurement

n Win/loss analysis

n Due diligencen New product/concept assessmentn Product value and positioning studiesn Market sizingn Value chain studiesn New market opportunity evaluations

n Cost curven Profitability modelingn Strategic positioningn Technology benchmarkingn Manufacturing capabilities

assessment

Opportunity AssessmentOpportunity Assessment

Business IntelligenceBusiness Intelligence

28

SMM & Steelease 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 steel and

non-ferrous metal industries for more than 10 years.

We are committed to delivering consistently high quality in all the services we provide; to building

and maintaining strong, long-term relationships with our clients; and to upholding the highest

standards of competence, integrity, and professionalism in our people.

www.steelease.com

www.smm.cn

If you require additional information about the contents of this

document or the services that SMM provides, please contact:

Cristina XuSenior Analyst

[email protected]

23rd west, No. 2000, North Zhongshan Road, Shanghai, PC 200063, China

http://www.steelease.com

http://www.smm.cn

mailto:[email protected]

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