China Steel MillsStep Through
Imported Ores Dependency
Mar 12, 2014
Prepared by
Agenda
1 Hot Topics
2 China Steel Sector Review and Forecast
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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
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Environmental Impacts to Steel Mills
Iron Ore Financing
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Environmental and Safety Issues for Iron
Ore Industry
Part I
4
PRODUCTIONOR
Pollution
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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
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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%
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§ 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
Data Sources: SMM &Steelease
SMM Insights
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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
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§ 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
Data Sources: SMM &Steelease
Market Insights
2011 2012 2013
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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
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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
Data Sources: SMM &Steelease
~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
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§ 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
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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)
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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
Data Sources: SMM &Steelease
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)
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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
Data Sources: SMM &Steelease
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
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90
100
16
0
4
8
Data Sources: SMM &Steelease
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)
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0%
6%
12%
0
250
500
2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E
17
Data Sources: SMM &Steelease
China Iron Ore Sector Review and Forecast
Iron Production Cost and Profit
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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
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00 450Adjusted Conc. Capacity, 62% Fe, dMt)
(US
$/dm
t, 62
% F
e, C
FR E
quiv
alen
t)
19
Data Sources: SMM &Steelease
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
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0Lump proportion
0Lump proportion
Data Sources: SMM &Steelease
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
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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.
Data Sources: SMM &Steelease
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
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0SOE Private
22
Data Sources: SMM &Steelease
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
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002011 2012 2013 2014E 2015E 2016E 2017E 2018E
23
Data Sources: SMM &Steelease
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
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0%
25%
50%
2011 2012 2013 2014E 2015E 2016E 2017E 2018E
24
Data Sources: SMM &Steelease
SMM China Metal Expert
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Founded in 1999, Shanghai Metal Market Consulting (SMM Consulting) has provided professional service to ore, metal and customers from application side.
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Ore Process Metal Application
26
SMM would be the best partner for those who explore China market
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Ace TeamAce Team
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