rudi vann, wood mackenzie - china’s steel production and the impact on iron ore project...

Trusted commercial intelligence www.woodmac.com

China's steel production

and the impact on iron ore

project development

Rudi Vann

Manager – Iron Ore and Steel Cost Research


2

Agenda

1. Raw material consumption patterns at Chinese steel plants

2. Key issues impacting China's domestic iron ore supply

3. Assessing the global iron ore project pipeline


3

Agenda





4

Chinese “peak steel” is 14 years away although hot metal

production will peak sooner because of increased scrap

2014 scrap rates of key BOF steel producers China crude steel and hot metal forecast

Source: Wood Mackenzie Steel Market Service, Steel Cost Service

100

120

140

160

180

200

220

240

260

0

200

400

600

800

1000

1200

2000 2005 2010 2015 2020 2025 2030

Sc

rap

ra

te (

kg

pe

r to

nn

e s

tee

l)

Ste

el &

ho

t m

eta

l p

rod

uc

tio

n (

Mt)

Crude steel

Hot metal

Scrap rate (RHS)

0

40

80

120

160

Sc

rap

(kg

/tcs

)


5

Chinese steel industry is under pressure to reduce pollution

Source: Wood Mackenzie Steel Cost Service

China waste water per tonne of steel produced China air pollutant emission

0

1

2

3

4

5

6

2005 2006 2007 2008 2009 2010 2011 2012

ton

ne

/to

nn

e-s

tee

l

0

0.5

1

1.5

2

2.5

3

3.5

2005 2006 2007 2008 2009 2010 2011 2012

kg

/to

nn

e-s

tee

l

Dust and soot emission (kg/tonne-steel)

SO2 emission (kg/tonne-steel)


6

But there is a huge gap in spending and emissions levels to match

counterparts in Japan and Korea

Source: Wood Mackenzie Steel Cost Service

Dust and soot emission comparison Environmental opex (US$/tonne crude steel)

0

5

10

15

20

25

Posco JFE NipponSteel

CISA keyenterprises

Baosteel

Op

ex

fo

r e

mis

sio

n r

ed

uc

tio

n (

US

$/t

on

ne

-ste

el)

0

1

2

3

4

5

6

Du

st

an

d s

oo

t e

mis

sio

n (

kg

/to

nn

e-s

tee

l)


7

Chinese BF burden mix hasn’t changed much at the country average

but Hebei plants slowing sinter usage

Iron ore usage vs steel production growth Lump imports by country

Source: Wood Mackenzie Iron Ore Market Service, CISA, GTIS

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

CISA members Top tencompanies

Hebei mills

Pro

du

cti

on

gro

wth

20

13

/20

12

Steel Sinter Pellet

0

10

20

30

40

50

60

70

80

90

100

Australia India Brazil South Africa

Ch

ina i

mp

ort

s o

f lu

mp

(M

t)

2008 2009 2010

2011 2012 2013


8

China’s future iron ore requirement – how much and where from?

Consumption peaks in 2023 at 1.46Bn tonnes Import dependency 85% post 2020 vs 68% in 2013

Low cost Australian and Brazilian supply will displace high cost Chinese production

Source: Wood Mackenzie Iron Ore Market Service, GTIS

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

200

400

600

800

1000

1200

1400

1600

2000 2005 2010 2015 2020 2025 2030

Ch

ines

e C

on

su

mp

tio

n o

f Ir

on

Ore

(M

t)

Production Imports Import Ratio (RHS)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

200

0

200

2

200

4

200

6

200

8

201

0

201

2

201

3*

2020

F

Co

mp

osit

ion

of

Ch

ine

se

Iro

n O

re Im

po

rts

Other

S.Africa

India

Brazil

Australia

*2013 = Jan-Oct.


9

Agenda





10

Chinese domestic production is facing increasingly challenging

mining conditions

Supply is moving underground Raw ore grades are declining

Source: Wood Mackenzie Iron Ore Cost Service

15%

25%

35%

0

20

40

60

80

100

120

China UG China Surface % UG

* Represents 108 individual assets

0

5

10

15

20

10 20 30 40 50R

aw

pro

du

cti

on

(M

tpa

)

Raw Ore Grade (%)

Concentrator SOE Private Projects

Weighted average raw

grade of data set



11

C1 cash costs are on the rise although offset by lower royalties

China 2012-2013 cost change* Rise in Chinese iron ore industry salaries

Source: Wood Mackenzie Iron Ore Cost Service, China Government Statistics

, *Excluding pelletising

-

10

20

30

40

50

60

National Sichuan Liaoning Hebei

Ch

ina i

ron

ore

in

du

str

y s

ala

ry(‘

00

0 C

NY

/ca

pit

a)

2008 2013

83.3

84.6

0.9

1.1

1.1-1.7

80

81

82

83

84

85

86

87

2012 Mining Processing Overheads Royalties 2013

US

$/w

mt



12

Segmenting China’s iron ore industry

Regional breakdown of key producing regions split by mine type and company type


Surface Underground

Private SOE


13

Top half of China cost curve primarily private mines

Composition of 3rd & 4th Quartile China 2014 US$/dmt 62% equivalent cost curve


Private SOE

Surface Underground0

250

0 400

US

$/d

mt

62

% F

e e

qu

iva

len

t

Mwmt

Private SOE


14

Stickiness of domestic supply will depend on cost reduction

3rd & 4th quartile average cost China 2014 cost curve response scenarios


-

40

80

120

3rd and 4th Quartile

Ave

rag

e c

os

t U

S$

/dm

t 6

2%

Fe

eq

uiv

BASE

-50% Salary

-50% Salary & No Grey cost

0

250

0 400

US

$/d

mt

62

% F

e e

qu

iva

len

t

Mwmt

Base -50% Salary -50% Salary & No Grey Cost


15

Even with drastic cost reductions Chinese producers are still

uncompetitive with seaborne imports

2014 Delivered cost curve US$/dmt 62% equivalent cost curve


0

180

0 1500

US

$/d

mt

62

% e

qu

iva

len

t

Mwmt

Other China (-50% Salary & No Grey Cost)


16

Agenda





17

1.9 billion tonnes per annum of capacity in global project pipeline

Source: Wood Mackenzie Iron Ore Market Service, Iron Ore Cost Service

0

100

200

300

400

500C

ap

ac

ity (

Mtp

a)

Highly Probable Probable Possible

Hematite

Magnetite

Magnetite/Hematite

Itabirite


18

Trade balance in surplus over medium term although gap will open

up longer term

Quantifying the long run “supply gap” Iron ore long run trade balance

Source: Wood Mackenzie Iron Ore Market Service

0

3,500

2000 2005 2010 2015 2020 2025 2030

Mil

lio

n T

on

nes

Operating

Highly Probable

Probable

Possible

Consumption


19

Viability of projects under potential price shocks supports

displacement of Chinese production

Iron ore greenfield project valuation (nominal, 10%, 01/01/2014)

Source: Wood Mackenzie Iron Ore Global Economic Model

-4000

0

4000

8000

12000

16000

20000

Re

ma

inin

g P

V P

os

t Ta

x (

US

$M

)

Base case -15% Price -30% Price


20

Summary

Chinese iron ore consumption will continue growing well into the next decade. Peak

steel production is still 14 years away and increased scrap rates aren’t expected to

impact hot metal production until post 2025.

Environmental pressure on steel producers is unlikely to curb growth in steel

production. Implementation of emissions controls will require additional investment and

increase operating costs for an industry already in bad financial health.

Chinese domestic iron ore has scope to reduce costs but those in the 3rd and 4th

quartile will struggle to compete with low cost imports from Australia and Brazil.

Assessment of project pipeline against potential low price environment indicates much

of the capacity is still viable at prices that make Chinese supply uneconomic.


21

Contacts

Rudi Vann Manager – Steel and Iron Ore Cost

Research

T +44 203 060 0539

E [email protected]


22

Disclaimer

This report has been prepared for Global Iron Ore & Steel Forecast Conference on 11-

12 March 2014 in Perth by Wood Mackenzie Limited. The report is intended solely for

the benefit of attendees and its contents and conclusions are confidential and may not

be disclosed to any other persons or companies without Wood Mackenzie’s prior

written permission.

The information upon which this report comes from our own experience, knowledge

and databases. The opinions expressed in this report are those of Wood Mackenzie.

They have been arrived at following careful consideration and enquiry but we do not

guarantee their fairness, completeness or accuracy. The opinions, as of this date, are

subject to change. We do not accept any liability for your reliance upon them.

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rudi vann, wood mackenzie - china’s steel production and the impact on iron ore project...

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