Published on March 11, 2014
AJMs Global Iron Ore & Steel Forecast Presentation Ted Williams 11 & 12 March 2014
Multi User Iron Ore Facility BOOT MODEL FOR ESPERANCE EXPANSION Commercial in Confidence2
Key Messages • Esperance is strategically important for long term state growth in the Yilgarn and South West • There is an increasing need and role for private finance in the development of economic infrastructure • Risk allocation is a key concern • A Build, Own Operate and Transfer (BOOT) is an appropriate procurement model and a sound process delivers optimal outcomes • Supply chain interaction must be understood even if not managed completely • Access and Pricing regime is core to protection of public interests (ports are potential natural monopolies) Commercial in Confidence
Overview of Esperance Port Strategic deep water port mainly iron ore and –with container export traffic rising Current iron ore exports over berth 3 around 11 million tonnes per annum (Koolyanobbing operations of Cliffs Asia Pacific) An expansion may be largely achieved within existing logistic parameters. MUIOF contemplated to meet demand from emerging Yilgarn miners Demonstrated ability to expand from 1-11 Mtpa iron ore exports over the past 15 years 4
Exports by Major Port (Tonnes6) 5
Why Esperance Opportunities No channel congestion Existing SG rail Operating port Underutilised berth Access to Yilgarn iron ore province Port actively seeking expansion Cape class berth is underutilised Challenges Extra sailing days to north Asia 23 tonne axle load Long road/rail mine connections Numerous small miners Multiple products Limited port storage in sheds Has followed State sanctioned procurement model taking longer Commercial in Confidence
7 Commercial in Confidence
Port Access Corridor
Esperance –underutilised cape class port 9
Standard Gauge rail connection
But at 23 t axle load
MUIOF and Port expansion challenges 12 Each port is unique Common challenges in expansion projects: – Existing commercial arrangements and rights of existing users (potential sterilisation) – Demand risk – Revenue risk – Environmental / social matters Port expansions are not just about the port. With multiple users and vast distances to projects, port expansions need to consider the total supply chain.
Global Export Cost Curve 13 Rio & BHP Est Yilgarn region Miners
Situation at end of 2011 Yilgarn Miners clamouring for port access to catch market high prices for iron ore of US$ 180/t Esperance port input limited by input through a Rotary Car Dumper owned by the only principal customer Deloitte had concluded a study of un met port demand of ~ 20 Mtpa over next 20 years between Esperance and Kwinana Recommended Market Sounding study Ministerial announcement in January 2012 nominating Esperance to be the port for the Yilgarn supported by State 14
Funding on a sustainable basis in WA How will port infrastructure be funded on a sustainable basis in WA? Government has moved from traditional development funded from budget to – Recycling capital; sale of one berth to fund another or – Long term lease or – PPPs or – Landlord port or – Full Privatisation Role for the Private sector emerging as – Long term lessee – Owner 15
Funding and development options 16 Privatisation Brownfield concession (‘asset recycling’) without port sale Build, Own, Operate and Transfer (BOOT) Design, Build, Operate and Maintain (DBOM) / Build, Operate and Transfer (BOT) Service contracts Design and Construct (D&C) PPP models Degreeofrisktransfertoprivatesector Risk transfer and private sector involvement Availability PPP Off balance sheet opportunity Funding responsibility and risk allocation depends on the procurement model used for infrastructure development
What is the role of Government in developing economic infrastructure? Facilitation of trade Regional development – port as gateways Management of monopoly asset Regulation of access and pricing (critical) Establish a process Ultimately, should Government be taking on development, demand and revenue risk to fund economic infrastructure or can this be managed by the private sector more efficiently? 17 Role of Government
Role of Port Authority Facilitation of trade. Commercial focus – should be entitled to make a profit and generate a return on assets. Recover full cost of port infrastructure including operational costs and return on capital. Transparent access and pricing regime. Minimize disruption to existing port users. Not inhibit expansion. 18
The Build, Own, Operate and Transfer (BOOT) model chosen for Esperance 19 BOOT procurement regimes – Private sector assumes price and volume risk Private sector assumes D&C and operations risks – Interface and other risks Access and Pricing contracted regime – No Priority rights of access – Safety net under negotiate arbitrate Optimal ‘whole-of-port’ management and future expansions – Probable demand growth – Strategy for future infrastructure development – Existing commercial arrangements may inhibit infrastructure growth Port Expansion Viable? Investor Appetite Risk allocation Time of Delivery User needs Options at Other Ports Global Customer Demand Portside Constraints Commodity prices BOOTs require private sector proponents to navigate complex issues to ensure commercial viability and bankability
Government supported and facilitated 20 Commercial in Confidence
21 Esperance Ports Sea and Land © 2014 Deloitte Touche Tohmatsu and provided a process 2011 2012 2013 2014 J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D Deloitte Forecast Demand Market Sounding EOI & Shortlisting Request for Proposal Assessment and Announcement
Process provides a better outcome Improved knowledge of the market Identifies risk and risk transfer Distils serious players from “tyre kickers” on both proponent and customer sides Avoids misdemeanours of the past Promotes multiple users But it takes time! 22 Commercial in Confidence
EPSL MUIOF as a BOOT 23 The EPSL MUIOF has been designed to be flexible, while having regard to Government policy and National PPP guidelines Flexibility required due to: – Brownfield and existing stakeholder complexities – User ability to provide certainty / guarantees to facilitate private sector investment (i.e. demand and revenue risk) – Supply chain issues – mine gate to customer The MUIOF procurement process is about creating competitive tension, driving innovation and delivering a commercial and value for money outcome The MUIOF did not seek a fixed price, fixed design bid at this stage which would have been costly for the private sector and a likely detractor Concept designs were requested informed by reference design developed by the Port.
EPSL MUIOF as a BOOT 24 The MUIOF sought to assess bids that: – Do not disadvantage the port and existing users – That have fair and reasonable access and pricing conditions – EPSL provided a proposed Third Party Access Regime to consortia to guide their thinking – Demonstrate certainty around financing ability and commitments (debt and equity) – Clearly demonstrate how the MUIOF will be delivered in a timely manner, having regard to the complex issues noted above The private sector bid back: – Committed commercial positions (EPSL provided draft legal documents) – proposed concept design – Project development and implementation plans – Estimated capital costs – Term
Investor seeking a “Deal” Long Term sustainability Singular opportunity to access limited market Receive reasonable and fair return on investment The investor was also able: – Brings operational skills – Demonstrated supply chain management ability 25
Conflict in the supply chain
Supply as pieces of a jigsaw 27 Commercial in Confidence
In Competitive world - I AM 28 Commercial in Confidence
My piece is bigger! 29 Commercial in Confidence
And more important 30 Commercial in Confidence
Contrast with port operator 31 Commercial in Confidence
Owner favours rural railroad 32 Commercial in Confidence
Follows the hills up and down 33 Commercial in Confidence
Bad news for the train operator
Burns heaps of fuel and so costs more
Train operator flat or downhill 36 Commercial in Confidence
Pieces all together 37 Commercial in Confidence
All pulling together
Dealing with Monopoly assets 39
Access and Pricing 40 Ports are gateways and are critical to regional development There is a key role for the private sector, given the limitations on Government funding However, ports are monopoly assets and this risk needs to be actively managed Access and Pricing options: – Regulated; has it been effective in the Pilbara, is it timely – Negotiate and arbitrate; provides a safety net Complex issues that must be considered when considering private sector investment in ports. For MUIOF Safety Net will be included in contract between proponent and Port
Negotiate and Arbitrate Concept of sharing cost of resources used by customers Typically an access fee and a throughput charge components Provides a safety net Incorporated in contractural obligation in agreed Access and Pricing regime Issues around startup and ramp up while throughputs are well under funding assumptions and even further under facility capacity 41
Capacity – what is it? Likely to be viewed differently by the players in the supply chain And the supply chain should be considered as including mine to customer (and so includes shipping) 42 Commercial in Confidence
The straw the breaks the camel‘s back
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