Michael Dixon - AME Mineral Economics Limited

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Information about Michael Dixon - AME Mineral Economics Limited
News & Politics

Published on March 11, 2014

Author: informaoz

Source: slideshare.net

Page 1Page 1 Iron Ore Production Costs Michael Dixon AME Group March 2014

Page 2Page 2 Outlook for Iron Ore Production Costs Agenda • Introducing AME • Market outlook and what this means for production costs • Impact of iron ore demand changes for costs • Medium term cost influences & the Outlook for production costs

Page 3Page 3 Relationship Support Research Engineering London    New York    Hong Kong     Beijing   Sydney     Engineering Economics – AME Group Overview of AME Structure

Page 4Page 4 Advanced Exploration • Geological Modelling to Prefeasibility Project Development • Feasibility Studies to Commissioning Production • Completion test, Debottlenecking, Expansions Infrastructure & Transport Logistics • Ports, rail, barges, shipping & trucking Beneficiation • Smelters, Refineries, Steel Mills, Hydrometallurgical/Pyrometallurgical. General Commercial Marketing • Trading, Sales, Contracts Manufacturing • Company Demand, Specifications End User Analysis • Consumer real demand (not apparent demand) AME Group Supply and Value Chain

Page 5Page 5 Outlook for Iron Ore Production costs Agenda • Introducing AME • Market outlook and what this means for production costs • Impact of iron ore demand changes for costs • Medium term cost influences & the Outlook for production costs

Page 6Page 6 Iron Ore Market at a Glance Q1 2014 2014 Supply Growth -4.8% +6.8% Demand Growth +3.0% +2.5% Inventories (Mt) +1.7 +30 Price (US$/t)* 122 118 Snapshot for AME’s 2014 Iron Ore Market Outlook Source: AME * 62% Fe Fines CFR North China Price

Page 7Page 7 Iron ore production costs increased 55% between 2005 and 2012 Iron Ore Smoker Cost Curve, 2005 v. 2012 Source: AME - 20 40 60 80 100 120 0 500 1,000 1,500 2,000 2,500 Cumulative Iron Ore Production, '000 tonnes 2005 Iron Ore Smoker Cost Curve 2012 Iron Ore Smoker Cost Curve US$/t

Page 8Page 8 Cyclical costs over the next few years will be more moderate Australian Mining Sector Employment, 1974 - 2013 Source: ABS, AME 50 100 150 200 250 300 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 '000s

Page 9Page 9 A battle of two forces – structural vs cyclical. Commodity prices will be higher. Canada: average nominal weekly earnings 1991-2013 (January 1991=100) Source: Australian Bureau of Statistics, AME Australia: mining output per worker 1984-2013 (constant prices) Source: Statistics Canada, AME 0 50 100 150 200 250 300 350 1985 1989 1993 1997 2001 2005 2009 2013 A$ '000s per worker 100 120 140 160 180 200 220 240 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Index Industrial average Mining

Page 10Page 10 Iron Ore miners are still well positioned relative to other commodity producers 25th / 50th / 75th /95th Cash Cost vs. Spot Price, 2013 Source: AME 0 50 100 150 200 250 300 350 Copper USc/lb 0 20 40 60 80 100 120 140 160 Iron Ore USD/t 0 20 40 60 80 100 120 Thermal Coal USD/t 0 20 40 60 80 100 120 Aluminium USc/lb 95th percentile 75th percentile 50th percentile 25th percentile spot price

Page 11Page 11 • Supply growth is regional, China up ~9% y-o-y for the ~9 months to September, slowing 2014. Japan up ~2%. • Supply has contracted in many regions, South Korea down 4.5% for the year squeezed by China (production) and Japan (lower Yen). • Demand in China remains strong, EU remains weak, US on an upswing, 2.6% 2014. • Inventories are relatively unimportant to steel market dynamics, less spot selling and more product made to order. • A continued pickup in demand in the short term will support prices, even as cash costs ease through 2014. Steel Production Outlook We are entering a new stage of the steel demand cycle

Page 12Page 12 Outlook for Iron Ore Production costs Agenda • Introducing AME • Market outlook and what this means for production costs • Impact of iron ore demand changes for costs • Medium term cost influences & the Outlook for production costs

Page 13Page 13 Source: AME, WSA 0 100 200 300 400 500 600 700 800 900 1000 1970 1980 1990 2000 2010 2020 Overtakes US Steel Production Overtakes Japan Steel Production Overtakes EU-15 Steel Production per Capita Consumption > UK/France 2008 - 2009 US Steel Consumption Dips 323 - 192 China increases 336 to 412 (kg/capita) Chinese Government Target Steel Production CAGR = 7.5% CAGR = 4.1% CAGR = 10.7% CAGR = 15.2% CAGR = 3.4% (Mt) “Open Door” Policy Chinese steel production (1970 – 2020) Slower Steel Production Outlook for China

Page 14Page 14 • Historically, EAF production in China averaged around 30% of production until the early 1990’s. • When steel production boomed from the early 90’s until the present the share of EAF production declined to less than 10%. • The current share of scrap utilisation will be maintained over the next two decades. • Dominance of BOF steelmaking route over EAF means Chinese steel producers can only use a limited portion of scrap in their feed. • Chinese steelmaking will remain mainly blast furnace as there is a structural shift towards higher quality steels, by Government policy. Will scrap displace Coal and Iron Ore? Mini-mills do not pose a threat to demand over the next 20 years

Page 15Page 15 Historical Steel Production in China 0% 10% 20% 30% 40% 50% 60% 70% 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Base Case Scrap Share - High Case Scrap Share - Low Case % Modelled Scrap Steel Utilisation Source: AME, WSA (Mt) (%) 0 5 10 15 20 25 30 35 0 100 200 300 400 500 600 700 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Chinese EAF Production Chinese BOF Production LHS: EAF Share of Total Steel Production % Mt % Will scrap displace Coal and Iron Ore? Scrap Availability and Installed BOF Capacity will limit recycling rate Source: AME

Page 16Page 16 • Rio and BHP agreed on lump premiums with Chinese steelmakers for Q4 at 18- 19¢/dmtu – higher than 3Q premiums of 13- 14¢/dmtu. • Japanese steelmakers negotiated lump premiums at 16¢/dmtu with one miner and 19¢/dmtu with another for the December quarter. • North Asian mills were offered higher premiums in previous quarters with miners citing different demand conditions from China. • Spot premiums have lifted above 20¢/dmtu as conc. output in China’s NE mines dropped, operating at 70% capacity due to colder weather. • Higher concentrate prices, driven by lower supply, have prompted stronger lump demand. Lump Premiums Lifting Shortage of Cargoes and Strengthening Demand as Sinter Plants Stop

Page 17Page 17 0 5 10 15 20 25 Jan-2013 Feb-2013 Mar-2013 Apr-2013 May-2013 Jun-2013 Jul-2013 Aug-2013 Sep-2013 Oct-2013 Rizhao Tianjin Qingdao US¢/dmtu Australian Spot Lump Premiums into Northern Chinese ports Source: AME Lump Premiums Lifting Cutback in Chinese Concentrate Output also Supports Premiums

Page 18Page 18 Outlook for Iron Ore Production costs Agenda • Introducing AME • Market outlook and what this means for production costs • Impact of iron ore demand changes for costs • Medium term cost influences & the Outlook for production costs

Page 19Page 19 Outlook for iron ore production costs – structural vs. cyclical drivers 0 200 400 600 800 1000 1200 1400 1600 1800 2000 2200 2400 1950 1960 1970 1980 1990 2000 2010 2020 MJ/tonne 1959: 2,130MJ/t 1988: 1,200MJ/t 2014: 1,139MJ/t Sintering energy efficiency: (MJ/t), 1950-2020 Source: AME

Page 20Page 20 At lower commodity prices, the largest scale operations will have growing cost advantage Mining Truck Fuel Consumption vs. Payload • More mines are replacing their current fleet with a larger fleet. • Efficiency dividend of larger volume and improved volume of material moved per haul cycle more valuable at lower prices. Source: AME Mining Truck Fuel Intensity vs. Payload 0 50 100 150 200 250 300 350 0 50 100 150 200 250 300 350 400 L/hr Payload (t) Payload (tonne) Fuel Consumption (L/hr) Fuel Consumption per tonne (L/hr per t) 0 - 100 52 1.02 100 - 200 125 0.85 200 - 300 202 0.83 300 - 400 279 0.81

Page 21Page 21 A large proportion of Chinese Iron Ore mines are uncompetitive • Increasing strip ratios are forcing many Chinese iron ore mines to go underground • The majority of Chinese supply sits in the fourth quartile of the cash cost curve. • In 2013, 10-15% of Chinese capacity operating at $110/t-$140/t. • Higher cost Chinese production will be displaced by additional tonnes from Brazil, Australia and India

Page 22Page 22 China’s iron ore industry remains fragmented, comprising numerous small high cost mines Hebei 40% Sichuan 13% Liaoning 12% Shanxi 6% Inner Mongolia 6% Anhui 3% Xinjiang 2% Yunnan 2% Others 16% China’s ROM Ore Production by Province, 2012 Source: AME, NBS Major Iron Ore Operations in China

Page 23Page 23 Falling Chinese domestic iron ore production will provide opportunities to seaborne producers The Decline of China’s Ore Grades Total Iron Ore Consumption and Seaborne Iron Ore Demand 0 500 1,000 1,500 2,000 2,500 3,000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 China Iron Ore Demand Rest of World Demand World Seaborne Iron Ore Demand Mt

Page 24Page 24 Declining grade necessitates higher processing cost for production • Low ore grade in China necessitates additional beneficiation such as multiple stage grinding and screening and magnetic separation, which drives production costs higher. • Iron ore deposits in China are generally low grade deposits with high impurities, with deposit grade of as low as 5-15% Fe being mined. • The aggressive decline of China’s domestic ore grades will mean Chinese seaborne demand will outpace China’s total consumption over the short term.

Page 25Page 25 Australian Capex is amongst the most expensive in the world – LNG demonstrates this Source: AME 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 Qatar1 Qatar3and4 UkraineLNG Bayu-Undan PuntuEuropa Darwin FishermanLand'g Arzew(GL3-Z) PuntuEuropaII BOC Vladivostok Pluto NSW Gladstone Curtis(Qld) PLNG Browse Gorgon TangguhExp. Wheatstone Prelude Aust.Pacific Ichthys Arrow US$/t LNG LNG capital costs, US$/tonne LNG, ($2013)

Page 26Page 26 Forward looking information Certain statements and graphics contained in this presentation may contain forward-looking information within the meaning of various securities laws. Such forward-looking information are identified by words such as "estimates", "intends", "expects", "believes", "may", "will" and included, without limitation, statements regarding the company's plan of business operations, production levels and costs, potential contractual arrangements and the delivery of equipment, receipt of working capital, anticipated revenues, mineral reserve and mineral resource estimates, and projected expenditures. There can be no assurance that such statements will prove to be accurate; actual results and future events could differ materially from such statements. Factors that could cause actual results to differ materially include, among others, metal prices, risks inherent in the mining industry, financing risks, labour risks, uncertainty of mineral reserve and resource estimates, equipment and supply risks, regulatory risks and environmental concerns. Most of these factors are outside the control of the company. Investors are cautioned not to put undue reliance on forward-looking information. Except as otherwise required by applicable securities statutes or regulation, the company expressly disclaims any intent or obligation to update publicly forward-looking information, whether as a result of new information, future events or otherwise. Copyright @ AME Group 2014 Contact Details and Important Information For further details, please visit our website at www.amegroup.com Hong Kong Sydney London New York 4/F Lucky Building 39 Wellington Street Central, Hong Kong AME House 342 Kent Street Sydney NSW 2000 32 Hanover Square London W1S 1JB United Kingdom Level 16, 733 3rd Avenue New York NY 10017 United States T: +852 2846 8220 F: +852 2801 5337 E: hk@amegroup.com T: +61 2 9262 2264 F: +61 2 9262 2587 E: ame@amegroup.com T: +44 203 714 8725 E: uk@amegroup.com T: +1 646 790 5770 E: usa@amegroup.com

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