© Minerals Value Service GmbH 2014
Americas Iron Ore, Rio de Janeiro
November, 2014
1
[email protected] www.mvs-corp.com
Disclaimer
Whilst every effort has been made to ensure the accuracy of the information in this document, the content of this document is provided without any guarantees, conditions or warranties as to its accuracy, completeness or reliability. It is not to be construed as a solicitation or an offer to buy or sell iron ore, related products, commodities, securities or related financial instruments. To the extent permitted by law, we, other members of our group of companies and third parties connected to us hereby expressly exclude: All conditions, warranties and other terms which might otherwise be implied by statute, common law or the law of equity. Any liability for any direct, indirect or consequential loss or damage incurred by any person or organisation reading or relying on this document including (without limitation) loss of income or revenue, loss of business, loss of profits or contracts, loss of anticipated savings, loss of goodwill and whether caused by tort (including negligence), breach of contract or otherwise, even if foreseeable. MVS Research Team Nick Pickens [email protected] Isabel Tang [email protected] Alex Griffiths [email protected] Tamer Guner [email protected] Martin Pachtner [email protected] Alexandra Vachnadze [email protected] Congmin Wang [email protected]
Minerals Value Service (MVS) Company Profile Data and analysis for the global iron ore market
• Founded in 2011, by mining experts and commodities
traders.
• MVS entered into a strategic partnership with McGraw
Hill Financial (Platts) in September 2013.
• A growing team of 22 researchers, developers and
market professionals.
• Offices and team members in London, Munich,
Singapore, Moscow and Shanghai.
• Over 50% of the global seaborne iron ore market
subscribes to MVS’ online analytics application.
• MVS frequently delivers presentations at international
conferences and is invited to comment on market
events.
“RPT-POLL-LIMITED UPSIDE FOR IRONORE IN H2, MORE RISKS IN 2015 - RTRS 02-Jul-2014 00:52 By Manolo Serapio Jr and Maytaal Angel SINGAPORE/LONDON, July 1 (Reuters) - Iron ore prices are expected to steady in the second half of the year after a plunge in the first six months on a flood of new supply to top buyer China, but further weakness is seen in 2015, a Reuters poll showed. A decade of short supply is coming to an end as an expansion binge by global miners increases output, knocking the price of the steelmaking raw material down 30 percent in the first half and forcing high-cost Chinese producers to curb production. While the commodity rebounded quickly from a similar price slump in 2012, it has struggled to regain its footing after this year's fall. "The dynamic has shifted to a buyers' market," said James Rilett, chief executive of consultancy Minerals Value Service.”…
“Platts and Commercial Partner MVS Expand Iron Ore Value Analytics Platform
LONDON, April 9, 2014 / -- Platts, with its commercial partner Minerals Value Service GmbH, today announced several enhancements to the Minerals Value Service (MVS) online analytics platform, which allows traders and miners of iron ore to calculate and compare grade-specific values of the commodity under varying buying and selling scenarios...”
June 27, 2014 8:56 am
Surplus iron ore spells trouble for miners
Smaller producers are suffering as ore prices continue to drop
As the half year end approaches one commodity stands out from the others – and not in a good way.
Iron ore has slumped 30 per cent in 2014 as a wave of new supply has crashed on to the market overwhelming demand…But it is not just the spot price that has
captured the attention of investors, analysts and traders. So too has the widening price differential between benchmark and lower grade ore. The spread between
62 per cent and 58 per cent ore is currently about $17 a tonne, versus an average of 10 last year. Above and beyond the market moving into surplus James Rilett, of
MVS, a research house, says a couple of factors are driving the widening “quality spread”….
MB IRON ORE: Third of China's iron ore port stocks could be linked to irregular finance
Nearly a third of all Chinese iron ore port stocks could be tied up in irregular financing deals, according to Mineral
Value Services (MVS) ceo James Rilett….
Stockholm 26 June 2014 11:49
MVS in the Press 2014
5 Copyright: MVS
MVS Research & Analytics Key presentation themes
1. Global Market context
• Price & Value cycle, the MVS approach
• Demand summary
• Iron ore supply growth
2. Pricing
• Fe grade premiums
• Impurity discounts technical and market observed values
• Quality premiums – Lump ore
• Chinese supply side response and price elasticity
• Chinese demand and pricing-in of environmental uncertainty
3. China Focus
6 Copyright: MVS
Value maximization and price discovery cycle for iron ore MVS’ core competency in technical modelling and market analytics and research
7 Copyright: MVS
Demand summary Overall pricing under pressure, as weakening demand growth meets new supply
• Chinese steel production is still growing, up 2.7% in the first seven months of this year, according to
official figures.
• However, estimates from CISA suggest that demand growth in the first half of this year was just 0.4%.
• Accelerating steel product exports, up 37% ytd 2014; this has helped alleviate changes in underlying
domestic demand, but indicates shift in demand patterns.
• Concerns over weaker manufacturing and property slowdown
40
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120
0
20
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180
Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14
Invento
ries
at
Chin
ese
port
s (M
t)
Iron o
re p
rice
62%
Fe ($/t
)
Inventories Iron Ore Price 62% Fe
-4
-2
0
2
4
6
8
10
12
Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14
% y
-o-y
Chinese House Prices, Newly Built Y-o-Y
Iron ore inventories remain high Concerns of sustainability of property market
8 Copyright: MVS
Iron ore supply growth Imminent wall of supply is “de-risked”
• Rio Tinto’s recent report states 290Mt a year
production rate reached and ahead of schedule.
Also on track to 2015 360Mt target.
• BHP Billiton upgraded production guidance for the
full year. For iron ore bulls in the market, we
suggest hope of a second half falter in planned
supply are fading fast.
• Vale moving ahead with expansion plans and FMG
has reached target production of 155Mtpa on time.
• Other metals markets such as copper, it is common
practice for analysts to build in a “disruption
allowance” on supply forecasts. So, why should the
supply outlook for iron ore be comparatively “de-
risked”?
9 Copyright: MVS
China’s domestic supply Will higher cost production be displaced?
• The top three producers occupy the lowest positions, significant volumes of Chinese domestic supply are sitting at the top
end. Assuming global demand growth for iron ore of 3% in each of 2014 and 2015 we estimate and additional iron ore
requirement of 59Mt this year, or 119Mt to 2015.
• On the supply side, we estimate planned additions to the global market to be just over 140Mt this year, accumulating to
over 290Mt next year. This implies that to maintain a balanced market, 84Mt of marginal production would need to come
out of the market, increasing to 175Mt the following year.
• How price inelastic is Chinese
supply?
• It is estimated apparent
Chinese domestic ore
production fell by around 5%
in the first half of this year,
but the trend accelerated in
the second quarter.
• Rio Tinto’s Sam Walsh as gone
on record saying 125Mt has
been closed.
143294
-109 -225
-400
-200
-
200
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600
800
1,000
1,200
1,400
2013 2014E 2015E
Mil
lion T
onnes
China Domestic Ore Supply Current Iron Ore Imports to China
Cumulative New Seaborne Supply Displacement of China's Domestic Ore
China's Iron Ore Demand
10 Copyright: MVS
Quality spreads are becoming tradable Price action leads to volatile inter-grade, inter index movements
11 Copyright: MVS
Quality considerations: Not just about % Fe differential. Implied pricing for chemical specs based on mark-to-market technical value in use versus market observed pricing
• Based on current input prices, the market is currently trading above the average Fe, silica and phosphorous differential that is implied by technical value in use analysis for Chinese steel mills.
Possible differential price direction, on the
assumption of mean reversion to VIU
Market Observed
Chinese Steel Mill Category Coastal Large Coastal Medium Coastal Small Inland Large Inland Medium Inland Small Index/Spot Trades
Representative Blast Furnace BF106201 BF020306 BF025501 BF025401 BF01710 BF018201
Anshan I&S
Bayuquan-Yingkou Nanjing I&S
Minmetal
YingkouBaotou
Shougang
ShuichengSichuan Desheng Spot Market/Platts
Fe $ per 1% change $0.90 $0.87 $0.87 $1.21 $1.17 $1.55 $1.45
SiO2 $ per 1% change $0.51 $0.46 $0.49 $0.56 $0.50 $0.66 $1.60
Al2O3 $ per 1% change $0.53 $0.49 $0.57 $0.59 $0.55 $0.73 $0.50
S $ per 0.01% change $0.43 $0.59 $0.43 $0.53 $0.48 $0.50 $0.50
P $ per 0.01% change $0.30 $0.41 $0.30 $0.37 $0.33 $0.35 $0.50
MVS Mark-to-Market Value In Use Sensitivities
12 Copyright: MVS
Impurity discount: Implied silica penalties what can we extrapolate from a limited spot market data set? Average $2/dmt per 1% silica over 4.5%
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
0
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180
Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14
Sil
ica P
enalt
y $
/dm
t
Pri
ce $
/t
Implied Penalty for SiO2 > 4.5%, 60-63% % Fe [RHS] IODEX 62 [LHS] Trades 60-63 % Fe, >7% SiO2 [LHS]
13 Copyright: MVS
A fundamental case for VIU pricing – the relationship between adjacent markets in the steel complex Is there/should there be a coke price correlation?
100
150
200
250
300
350
0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50
Coke P
rice
$/t
Implied Silica Penalty $/dmt
14 Copyright: MVS
China’s domestic supply Grades do appear to be declining…
0%
10%
20%
30%
40%
50%
0
400
800
1200
1600
2000
2007 2008 2009 2010 2011 2012 2013 Q1 2014
Impli
ed F
e G
rade %
Mil
lion T
onnes
Cru
de O
re
Implied Fe Grade "Crude Ore" Output
• Implied grades are now sub-20% as implied by NBS pig iron production, total crude ore output and iron ore import data.
• Impacts implied cost of production and beneficiation to higher grade sinter and pellet feed concentrates
• Supports “marginal” production argument for seaborne iron ore players
15 Copyright: MVS
China’s domestic supply …but not just about Fe grade
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
45% 50% 55% 60% 65% 70%
Sulp
hur
%
Fe %
China Brazil Australia China Average Brazil Average Australia Average
• Sinter feed impurity content should also be a factor with drive to environmental performance
• Sinter plants have stringent criteria for SO2 emissions
• MVS products specification database indicates generally higher S content for Chinese domestic feed
• Sample includes 43 Chinese sinter feed products, 12 Australia fines, 16 Brazilian fines/sinter feed
China Average
Brazil Average
Australia Average
16 Copyright: MVS
Mid-Oct, Tangshan (Hebei) Tangshan city issues the “Tangshan City Air Quality and Production Restrictions for APEC”, informing that in the Tangshan region, over 40 Iron and Steel (I&S) businesses are required to stop/reduce sintering and coking activities by one-third.
Oct 21st, Bazhou & Dachang (Hebei) Steel plants in Langfang Region’s Bazhou and Dachang Autonomous Region receive notice that from November 1st-12th, all sintering plants and rolling lines in these regions must completely stop production.
Nov 2nd, Beijing To uphold the air quality standards for the Beijing APEC summit, the Environmental Protection Agency (EPA) will shortly establish 16 supervisory small groups, for Beijing and its respective neighboring regions.
Nov 3rd, Anyang (Henan); Liaoning; Hebei EPA announces that it is it is supervising the pollution reduction in Anyang, to eliminate illegal polluting businesses with law enforcement. Relevant change measures must be reported to the EPA. At Anshan Steel, 3 blast furnaces stop production. In Handan (Hebei), many steel plants were inspected, and requested to stop production. During the night, 5 cities of Hebei Province begin to implement the “Level I heavy air pollutant reduction measures for the APEC summit” - highest pollutant reduction measure taken for APEC.
Handan I&S
Anshan Steel
Tangshan I&S
Hebei Qianjin
The visible hand of Chinese market forces Local and regional government clamp down on steel making and sintering Mid October 2014 ahead of Beijing APEC conference
17 Copyright: MVS
Nov 6th, Shandong The highest level of emergency pollutant reduction during the APEC summit period. Geographic scope extends to 6 regions in the Shandong Province: Jinan, Zibo, Dongying, Dezhou, Liaocheng, Binzhou. According to sources, this mainly affected construction steel production plants in these regions. Production output (not stated, presumably hot metal) for the day drops below 50,000 tons.
November 7th, Hebei Hebei Province issues a written notice requesting all iron and steelmaking, coking (amongst other) industries with elevated pollutant-release sources, i.e. overhead chutes, to stop production (furnace standby). Local government release the decision to stop production, that inspection groups must start key inspection, and that these pollutant reduction measures will be in place until further notice.
November 8th, Hebei Many steel plants in Hebei Province have already received the above notice, and are organizing production stoppages.
November 9th, Hebei Over 30 steel plants in several Hebei areas have planned orderly production stoppages, with a portion of blast furnaces already having stopped production.
Zhangdian I&S
Guangfu Group
The visible hand of Chinese market forces Local and regional government clamp down on steel making and sintering Mid October 2014 ahead of Beijing APEC conference
18 Copyright: MVS
So what does this mean for the market? What do short term price swings and knee jerk environmental constraints have to do with long term value and price discovery? Can it explain the new lows?
Blast Furnace Production Stoppages
• 73 steel plants in Hebei 287 blast furnaces Combined volume 265,766 m3
• As of Nov 10th @ 1800h,Blast Furnaces: 236 (82.23%) Volume: 201,786 m3 (75.92%).
Recap of impact of measures taken by Chinese regulators
• Chinese domestic ore production to be decreased. Vehicle land transport from ports being restricted.
Blast furnace, sintering, coking facilities’ production suspended.
• Port stocks at 44 Chinese ports build 1.43 mt+ Oct 31st – Nov 14th
Short term reduced demand… 3.1 - 5.1 Mt iron ore consumption (MVS Estimates)
19 Copyright: MVS
Quality premiums: Lump ore pricing structural shifts? …lump premiums declined against market consensus forecast; 2014 has been volatile and Q3-Q4 has seen a rebound
• Expected restrictions on sintering in China were overdone, mills refused to pay higher premiums and alternative forms of raw material were sourced in alternative locations
3.0%
-2.9%
9.3%
8.5%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
H1 2014 vs H1 2013 (% Change)
Y-o
-Y %
Change
Total China Hebei Province
Jiangsu Province Liaoning Province
• In winter 2013 pressure from government focused on mills in Hebei province, which accounts for over 25% of China’s total steel output.
• Some sinter plants were taken off line and steel production was absorbed by capacity in other provinces, characterised by different regional norms in terms of burden mix, notably scrap and pellet.
20 Copyright: MVS
The move back from lump to fines could be a catalyst for higher Fe grade differential Understanding the forward looking supply side picture for quality
• On our assumption that that the impact of sinter plant closures coinciding with APEC, will be short-lived
and consumers will find alternative feed at lump premiums >$0.20/dmtu, we would expect a move back into
the market for fines to be for higher grade material.
• On our recent visit we asked how easily steel plants could switch between low and high grade fines,
depending on the price spread.
• Two mills suggested they could substitute up to 30% low for high grade fines at times when the price
spread is significant. In terms of volume, this “swing” in demand is potentially even greater than that of
lump.
21 Copyright: MVS
Quality premiums: Lump and pellet supply/demand China’s iron ore pellet imports continue to decline and support direct charge premia
0
0.5
1
1.5
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5
Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14
Month
ly I
mport
s (M
illi
on T
onnes)
• Lump is linked to the availability of pellet, which
remains limited for now.
• Market dynamic is currently favourable for lump based
on strong pellet fundamentals.
• Demand side is relatively short direct charge ore
overall, reflected in consistent high pellet premiums.
• According to the steel mills MVS spoke to, Pellets are
preferred method of controlling furnace chemistry.
• With winter approaching domestic production of
concentrate (destined for pellet feed) will also be
affected, supporting demand for seaborne material.
• Supportive near term fundamentals with imports of
pellet into China down by over 35% over the first six
months of the year when compared to 2013.
• Brazil exports declined the most, down by over half
from 3.7Mt to 1.6Mt over the period. Platts’ suggest
demand in China is “steady” and contract premiums for
65% Fe-plus pellets $30-40/t range.
22 Copyright: MVS
China focus: Alternate supply and logistics considerations MVS inland transport cost curve for 150 China’s steel mills
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30
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60
0 100 200 300 400 500 600 700 800Port
to M
ill (C
FR
-DD
P) Tr
ansp
ort
Cost
($/t
)
Cumulative Blast Furnace Capacity in China (Mt)
210 Mt
Current Domestic-Seaborne Spread
5 Year Average Domestic-Seaborne Spread
Additional steel mill capacity potentially in the market for seaborne supply based on widening domestic-seaborne spread and current inland freight costs.
• Spread between domestic prices and seaborne alternatives has now over extended, we think this should switch
up to 300 million tonnes of iron ore purchases to the seaborne market.
• These fundamentals should force domestic prices lower and/or a supply response from domestic miners that
struggle to operate at sub $80 equivalent prices.
• The battleground for higher cost producers is against Chinese market inefficiency.
23 Copyright: MVS
China Pricing: an imperfect market forms the battleground MVS adjusted prices for domestic concentrate at 30 steel mills in China shows a lack of switching to seaborne
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Xin
gta
i
Tangshan…
Laiw
u
Shuic
heng
Jinan
Xin
yu
Lin
gyu
an
Fujian S
anst
eel
Hebei /Y
ansh
an
Fangda
Jinxi
Xia
ngta
n
Baoto
u
Lia
nyuan
Liu
zhou
E'c
heng
Wuhu X
inxin
g
Benxi
New
Fush
un
Hubei X
inyegang
Pin
gxia
ng
2672 P
lant
Anhui C
hangjiang
Handan
Huaiy
in
Tonghua
Shaoguan
Tangsh
an D
elo
ng
Chengde
Tia
njin T
ianti
e
Sic
huan D
azh
ou
US$
/t
Domestic Iron Ore Purchases, normalized to Platts Index CFR Qingdao - Feb '14
Domestic Iron Ore Purchase Prices at the Mill (DDP) - Feb '14
Spot Platts Fe 62 IODEX Price, CFR Qingdao - Feb '14Seaborne
competitive
Domestic competitive
0
20
40
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120
140
160
Xin
gta
i
Tangshan…
Laiw
u
Shuic
heng
Jinan
Xin
yu
Lin
gyu
an
Fujian S
anst
eel
Hebei /Y
ansh
an
Fangda
Jinxi
Xia
ngta
n
Baoto
u
Lia
nyuan
Liu
zhou
E'c
heng
Wuhu X
inxin
g
Benxi
New
Fush
un
Hubei X
inyegang
Pin
gxia
ng
2672 P
lant
Anhui C
hangjiang
Handan
Huaiy
in
Tonghua
Shaoguan
Tangsh
an D
elo
ng
Chengde
Tia
njin T
ianti
e
Sic
huan D
azh
ou
US$
/t
Domestic Iron Ore Purchases, normalized to Platts Index CFR Qingdao - Sept '14
Domestic Iron Ore Purchase Prices at the Mill (DDP) - Sept '14
Spot Platts Fe 62 IODEX Price, CFR Qingdao - Sept '14
Seaborne competitive
Domestic competitive
……February 2014
September 2014……
24 Copyright: MVS
Tough times… get smarter about your value maximisation www.mvs-corp.com [email protected]