Published on March 12, 2014
China Steel Mills Step 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
© SMM & Steelease. All rights reserved. Environmental and Safety Issues for Iron Ore Industry Part I 4
PRODUCTION OR Pollution © SMM & Steelease. All rights reserved. 5 Pollution
Tighter regulation in environmental and safety regulation will push up the cost of existing players 5% 10% Environmental Cost Safety Cost 5 10 Environmental cost Safety Cost Unit: USD/mtUnit: Mt Proportion in Ex-mine Cost Maximum Increases in Cost © SMM & Steelease. All rights reserved. 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 0 Lump 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% © SMM & Steelease. All rights reserved. 7 § 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
© SMM & Steelease. All rights reserved. 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% 120 130 140 150 160 170 Lump Premium Mac Fines 61% Mac Lumps 62.5% Unit: USD/mt Sample: Lump Consumption in Hebei Lump Premium © SMM & Steelease. All rights reserved. § 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 proportion 80 90 100 110 120 2012年3月19日 2013年3月19日 9 Data Sources: SMM &Steelease Market Insights 2011 2012 2013
© SMM & Steelease. All rights reserved. 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 © SMM & Steelease. All rights reserved. 60 70 80 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 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 © SMM & Steelease. All rights reserved. § 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 © SMM & Steelease. All rights reserved. 13 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) © SMM & Steelease. All rights reserved. 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 56.88 12.1% 11.1% 10.6% 10.4% 9.8% 9.6% 10% 11% 12% 13% 40 60 China'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) © SMM & Steelease. All rights reserved. 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 16 O/N 1W 2W 1M GDP Deflator, (2009 1Q——2014 4Q) Movements of Shibor © SMM & Steelease. All rights reserved. 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) © SMM & Steelease. All rights reserved. 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 © SMM & Steelease. All rights reserved. 18 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,CFREquivalent) China Iron Ore Concentrate Production Cost Curve © SMM & Steelease. All rights reserved. 0 0 450Adjusted Conc. Capacity, 62% Fe, dMt) (US$/dmt,62%Fe,CFREquivalent) 19 Data Sources: SMM &Steelease
Private cost increased by avg. 4.9% in 2013 compared with 2012 50 100 50 100 Unit: USD/mtUnit: USD/mt Ex-mine Cost of Private Mines Profit of Private Mines © SMM & Steelease. All rights reserved. 20 0 Lump proportion 0 Lump 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 © SMM & Steelease. All rights reserved. 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 2012-2013 2013-2018 Unit: Mt Net Increases in SOE and Private Mines © SMM & Steelease. All rights reserved. 0 SOE 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.
180400 Domestic 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 © SMM & Steelease. All rights reserved. 00 2011 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 © SMM & Steelease. All rights reserved. 0% 25% 50% 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 24 Data Sources: SMM &Steelease
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