Laura Brooks - CRU Analysis

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Information about Laura Brooks - CRU Analysis
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Published on March 11, 2014

Author: informaoz

Source: slideshare.net

Iron ore price: staying power >$100/t in medium term? Laura Brooks – Senior Consultant, CRU Prepared for: AJM - Global Iron Ore Tuesday 11th March 2014

Key topics • What’s driving weekly price movements? • How resilient is Chinese production and what does this mean for price? • Implication of CRU's long run price range on developments in Australia • Conclusion: staying power > $100/t? Agenda 2

2013: Prices remained in a narrow range from Q2 3 Average quarterly price for 62% Fe fines, CFR China, $/t Data: CRU. 100 110 120 130 140 150 160 Q1 Q2 Q3 Q4 CRU October 2012 forecast Actual 2013 2013 average price Actual = $136/t CRU forecast in October 2012 = $129/t

2014 prices have fallen from the $130-140/t range seen for the majority of 2013. What’s changed? 4 SLOWDOWN IN CHINESE ECONOMY FAI in China, % y/y growth, nominal Data: CRU. Source: Mysteel, Umetal. TIGHTER CREDIT AVAILABILITY IN CHINA Chinese interbank offered interest rate, 3 months, % pa 15 17 19 21 23 25 MALAISE IN CHINESE STEEL MARKET SHFE, May 2014 contract, RMB/t BUILD IN IRON ORE PORT STOCKS IN CHINA Chinese port stocks, 000 t 2 4 6 8 10 3000 3200 3400 3600 3800 4000 40 60 80 100 120

What’s in store for 2014? Global demand remains strong and, although China slows, no collapse 5 y/y industrial production growth by country or region, % Data: CRU. y/y change in crude steel production, % -30% -20% -10% 0% 10% 20% 30% 08 Q1 09 Q3 11 Q1 12 Q3 14 Q1 China Eurozone World US -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 11 12 13 14 China Global, excluding China CHINA: Economy to slow in 2014 WHY? Decelerating credit growth CRU VIEW: Construction bears the brunt RISKS: Firmly to downside

Ore supply: Australia is set to add another >90 Mt of low- cost ore and Brazil and India pick up their game... 6 y/y change in iron ore exports by selected country, Mt Data: CRU. 0 20 40 60 80 100 120 Australia Brazil India Other Africa DRIVERS: African Minerals (Sierra Leone), London Mining (Sierra Leone) DRIVERS: Vale and Samarco DRIVERS: 3 majors account for 93% of additional tonnages 0 20 40 60 80 100 120 06 07 08 09 10 11 12 13 14 Indian iron ore exports, Mt 2009 - 2013 India LOST: 100 Mt Australia more than compensated DRIVERS: Goa to export stockpiled ore and mining to resume

...loosening the supply balance and squeezing out higher cost production. Prices are set to fall by $16/t y/y in 2014... 7 62% Fe fines, CFR China, $/t, nominal Data: CRU. 40 60 80 100 120 140 160 180 08 09 10 11 12 13 14 RISKS IMPACT ON PRICE Indian and Brazilian supply undercut forecast UPSIDE Chinese demand falters DOWNSIDE Non-core producers are more resilient than expected DOWNSIDE

...under the assumption that "other" producers are fast to cut output. If not, further downside price pressure is likely. 8 Chinese imports by exporting country 2008: 2013: Data: CRU. Note: (1) Includes Australia, Brazil, South Africa and India. 88% 12% Traditional (1) Non-traditional 76% 24% Iron ore exports from Iran, Indonesia and Mexico, Mt 0 10 20 30 40 50 60 12 13 14

Key topics • What’s driving weekly price movements? • How resilient is Chinese production and what does this mean for price? • Implication of CRU's long run price range on developments in Australia • Conclusion: staying power > $100/t? Agenda 9

0 500 1,000 1,500 2,000 2,500 3,000 3,500 2012 2015 2018 2021 2024 2027 2030 2033 Possible Probable Committed Demand Long run picture = simply too much iron ore 10 Gap analysis; iron ore demand and planned supply, Mt Data: CRU. Note: Gap analysis excludes Chinese domestic production and includes Chinese import demand only.

Base case: new, mainly low-cost supply will displace Chinese marginal production 11 x axis: Global iron ore cumulative production, Mt y axis: Iron ore production business costs in 2018, nominal, $/t Data: CRU, company reports. Note: (1) Iron ore imports as a proportion of iron ore consumption. 65% 70% 75% 80% 85% 90% 95% 0 50 100 150 200 250 300 350 12 13 14 15 16 17 18 Production Import dependency LHS: Chinese iron ore apparent production of fines, lump and pellets, Mt RHS: Chinese import dependency (1), % - Australia - Brazil

Historic data illustrates the relationship between price and Chinese production Data: CRU. Note: (1) This takes into account cost inflation and productivity gains, as illustrated in the above chart. x axis: Chinese iron ore production, quarterly, Mt y axis: 62% Fe fines, CFR China, price, real 2013, $/t 0 50 100 150 200 250 0 10 20 30 40 50 60 70 80 90 Historic Historic trend Historic trend applying 7% cost inflation and 2% productivity gains Less confidence in these early data points. During this period, self-sufficiency was the main motivation for production. 12

Rate of the price erosion in 2017-2018 is set to ease, owing to the flat shape of the left portion of the Chinese cost curve Data: CRU. x axis: Chinese iron ore cumulative production, Mt y axis: Iron ore production business costs of Chinese miners, 2018 nominal, $/t Flat shape to left of the curve 13

However, there is a risk that Chinese ore output will hold at higher levels given government support and new projects 14 Data: CRU, NBS. China: Iron ore projects under construction or planned RoM output Number of projects Total ROM capacity Capacity > 10 Mt/y 12 279.5 Capacity 5-10 Mt/y 16 103.8 Capacity 2-5 Mt/y 38 107.8 Total 66 491.1 Data: MMAC Assuming a ROM grade of 20%, this equates to 105 Mt of saleable ore What is the impact on price? Too much supply = short term downside to price E.G – current conditions in the metallurgical coal market 0 5 10 15 20 25 05 06 07 08 09 10 11 12 China’s economically extractable iron ore reserves, bn t Challenges for Chinese producers: • Complex mineral composition • Deeply buried deposits • Complicated geological conditions • Low Fe grade • High content of impurities

Key topics • What’s driving weekly price movements? • How resilient is Chinese production and what does this mean for price? • Implication of CRU's long run price range on developments in Australia • Conclusion: staying power > $100/t? Agenda 15

FOCUS ON AUSTRALIA: big spread in costs. Some projects are in the 4th quartile. 16 Data: CRU. All products, site cost curve X-axis: Cumulative production, Mt Y-axis: Business costs, nominal 2020, $/t - Australian production All but two of these projects/sites are owned by the majors New entrants hold a less competitive position on the global business cost curve

From a site cost perspective, high mining costs are hurting Australian producers 17 Data: CRU. Stacked cost curve, sinter fines site costs, $/t, 2014 BRAZIL AUSTRALIA GUINEA INDIA

But, from an investor risk perspective, Australia comes out on top 18 Data: CRU. Note: (1) 1 represents the incentive price for the median project. 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 0 50 100 150 200 250 300 350 400 450 500 550 600 650 700 Australia Brazil Africa Canada Ukraine Risk-adjusted incentive price curve for 25 selected iron ore projects at risk-adjusted discount rates X-axis: Cumulative production, Mt Y-axis: Incentive price indexed (1) Red dotted lines indicate long run price range

...driving our expectations for a continuing strong market presence looking ahead, albeit heavily led by the majors 19 Data: CRU, GTIS. Share of global exports by selected country, % 0% 10% 20% 30% 40% 50% 60% 13 14 15 16 17 18 Australian share Brazilian share African share Indian share

Key topics • What’s driving weekly price movements? • How resilient is Chinese production and what does this mean for price? • Implication of CRU's long run price range on developments in Australia • Conclusion: staying power > $100/t? Agenda 20

Staying power >$100/t in the short/medium-term? 21 BEARS • Wall of supply from traditional production zones to new hubs, such as Africa • China’s collapse, just beginning BULLS CRU’s view • New supply? Yes. But, gradual and many won’t make it • China to slow, but not crash

The current environment for new projects is tough for all 22 Australian juniors' (1) share of total Australia exports, % Data: CRU, GTIS. 0 20 40 60 80 100 120 140 2006 2008 2010 2012 Australia Brazil South Africa China Average site costs, $/t 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Mbalam-Nabeba Kalia Askaf Avima Bong Marampa Mayoko Simand. (Rio Tinto) Simand. (Vale) First announced start- up Most-recent announced start-up/CRU estimate

Conclusion • What’s driving weekly price movements? China macro, credit availability, SHFE, stocks = critical • How resilient is Chinese production and what does this mean for price? Historic price v Chinese production relationship is set to hold = output set to drop • Implication of CRU's long run price range on developments in Australia Project specific, but well placed on incentive price curve • Conclusion: staying power > $100/t in short/medium term? Yes, for annual benchmark averages Agenda 23

Thank you for listening www.crugroup.com 11 Please come and speak with me and my colleagues at stand #2 Iron ore analyst – laura.brooks@crugroup.com Business development manager – philip.sewell@crugroup.com Sydney office manager – alex.tonks@crugroup.com 24

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