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Kirill Kozenyashev, Head of Strategy and Business Development, Mining Business, Severstal Resources delivered this presentation at the 2013 Russian & CIS Coal Summit. Co-organised with Informa's Adam Smith Conferences, the Summit provides top CEOs, investors, analysts and officials with a platform for debate, analysis and networking with the key representatives from Russia's major coal producing companies. For more information about the annual event, please visit the conference website: http://www.immevents.com/russiaciscoal
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1
Coking coal market perspectives Adam Smith Summit
Moscow, May 15, 2013
Kirill Kozenyashev
Head of Strategy and Business Development, Mining Business
2
Disclaimer
These materials are confidential and have been prepared by OAO Severstal (Severstal) solely for your
information and may not be reproduced, retransmitted or further distributed to any other person or
published, in whole or in part, for any other purpose.
These materials may contain projections and other forward-looking statements regarding future events
or the future financial performance of Severstal. You can identify forward-looking statements by terms
such as “expect,” “believe,” “estimate,” “intend,” “will,” “could,” “may” or “might”, or other similar
expressions. Severstal cautions you that these statements are only predictions and that actual events
or results may differ materially. Severstal will not update these statements to reflect events and
circumstances occurring after the date hereof. Factors that could cause the actual results to differ
materially from those contained in projections or forward-looking statements of Severstal may include,
among others, general economic and competitive environment conditions in the markets in which
Severstal operates, market change in the steel and mining industries, as well as many other risks
affecting Severstal and its operations.
These materials do not constitute or form part of any advertisement of securities, any offer or invitation
to sell or issue or any solicitation of any offer to purchase or subscribe for, any securities of Severstal in
any jurisdiction, nor shall they or any part of them nor the fact of their presentation, communication or
distribution form the basis of, or be relied on in connection with, any contract or investment decision. No
representation or warranty, express or implied, is given by Severstal, its affiliates or any of their
respective advisers, officers, employees or agents, as to the accuracy of the information or opinions or
for any loss howsoever arising, directly or indirectly, from any use of these materials or their contents.
3
Contents
• Coking coal industry – global perspective
• Russian coking coal industry
• Severstal new coking coal projects update
4
Main trends in global coking coal industry
Limited new
supply
Costs escalation
Weak demand in
the mid-term
• High quality coking coal is hard to find
• Prices are likely to increase in the mid- to long-term due to gradual depletion
of quality coals
• New growth projects are predominantly located in remote regions with no
infrastructure
• Australian and US coal producers are facing significant escalation of cash costs
• High-cost producers are “squeezed out” from the cost curve or need to reduce
production volumes
• Coal companies margins are eroding
• Coal players are cutting production
• Delay of new projects implementation
• China steel production demonstrates lower growth rates
Trends
1
2
3
Shale gas
development
4
Implications and comments
• Steam coal is substituted by shale gas
• Coal players need to focus more on met coal and not steam coal which at
times re mined together– not always sustainable
5
Coking coal capacity additions outlook
• Main exports’ growth will come from Australia (53 mmt)
• New regions Mongolia and Mozambique unlikely to provide significant amount of coal to the market
(15 and 5 mt respectively)
Source: Severstal analysis
Notes: 1) Ex-China
3631
24
2017 2012 2006
Canada
6462
25
2017 2012 2006
ROW 196
142124
2017 2012 2006
Russia 1817
10
2017 2012 2006
Australia
36
21
2
2017 2012 2006
Mongolia
7
2
0
2017 2012 2006
Mozambique
8
6
2
2017 2012 2006
Indonesia
11
5
22
2017 2012 2006
World Total
381
286
2017 2012
+33%
+37%
2006
209
USA
0-5
5-10
10-20
20-30
>30
Coking Coal Capacity
Additions, 2012-17, mmt
6
Global coking coal supply demand balance and capacity
additions forecast
7
Mozambique & Mongolia – not so fast as expected!
Mozambique Mongolia
Current coal
production (2012, mt)
Players in the region
Existing bottlenecks
Key themes
• Rio Tinto has recently
written off 3 bn. USD for
investment in Riversdale
• Anglo decided not to invest
into Revuboe project
• Most progress conducted by
Vale
• Tavan Tolgoi project has not
progressed as originally
expected
• Infrastructure negotiations not
materialized into concrete
actions
2,1 21,0
• Rio Tinto
• Vale
• ENRC
• Beacon Hill
• Nicondezi
• Mongolian Mining Company
• Gobi Coal
• Erdenes TT
• South Gobi Coal
• Infrastructure
• Quality of coal
• Africa risk
• Rail infrastructure and power
sources
• High geopolitical risks
Sources: Severstal analysis
8
Global met coal demand is expected to weaken
• Metallurgical coal consumption is expected to grow in line with the steel production
• CAGR for metallurgical coal consumption is expected to be around 2% in the next decade
Sources: Worldsteel, Severstal Strategic Marketing Department,
9
Why the price is not growing?
$100
$200
$300
$400
Au
g
Se
p
Oct
No
v
De
c
Ja
n
Fe
b
Ma
r
Ap
r
Ma
y
Ju
n
Ju
l
Au
g
Se
p
Oct
No
v
De
c
Ja
n
Fe
b
Ma
r
Ap
r
2011 2012 2013
Premium HCC price
spot, FOB Australia
contract, FOB Australia
spot, FOB USA
Premium HCC, USD/t, FOB
Sources: CRU, Platts, Severstal Strategic Marketing Department, MySteel
• The significant price decrease for HCC can be mainly explained by weak demand from Asia
(mostly China)
• In the current market environment significant number of US players had to idle their capacities
10
Dramatic escalation of cash costs
•Average Australian
costs escalated 34%
from 2009-2012 due
to:
-Labor increases
-Australian dollar
appreciation
-Opex and Capex
inflation
-Depletion of
existing mines
• US costs pushed
by producers’ shift
from steam coal to
HCC production
• Wages increase
• Existing quality coal
seams depletion
40
20
110 109 108 104 100
82
81 64
60
58
56
USD/t
130
0 50 100 150
140
120
200 250 300
112
Mt 0
100
80
60
Ø 104 41
0 Mt
125 120 115 110 105 100 95 90 85 80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0
USD/t
99 92 90 88 86 82
61
120 120
100
80
60
40
20
Ø 84 47
Czech Republic
USA
Australia
New Zealand
Poland
Canada
Russia
Indonesia
Mozambique
Venezuela
South Africa
Mongolia
Colombia
Ukraine
2009 FOB
2012 FOB
Sources: Severstal analysis
11
Metallurgical coal – costs versus price correlation
Source: Example BHP, company analysis
228232222
98
162
114109108
8166
170
142
8276
62
0
50
100
150
200
250
2007 2008 2009 2010 2011 2012
95
112
56
Costs Underground Prices Costs Surface
Price and OPEX (USD/t) Example - Australia
12
Industry discussions and themes
“…that means we would have to demonstrate to
the government and to Erdenes Tavan Tolgoi that
we would be a partner choice for them”
Graeme Hancock, Chief Representative and
President in Mongolia
“…a lack of fiscal discipline and overproduction
when prices rise from senior miners…”
Ivan Glasenberg, Glencore CEO
13
Contents
• Coking coal industry – global perspective
• Russian coking coal industry
• Severstal new coking coal projects update
14
Russian coal market overview (1/2)
*Reserves include coking and steam coal
Sources: Severstal estimates and analysis, Rosinformugol
Pechorsky basin
Grade – Zh, GZhO, K
Production – 10 mt
Reserves: 7.2 bnt
Yakutsky basin
Grade – K, KZh, Zh
Production – 8mt
Reserves: 4.2 bnt
Kuznetsky basin
Grade – K, KS, KO, Zh, GZh,
GZhO, G, TS, O
Production – 47 mt
Reserves: 51.5 bnt
Major coking coal producing basins in Russia, 2012*
• Russia has one of the largest world resources of coal concentrated in several basins
• Main coal basin is Kuznetsky (accounting for 72% of coking coal production)
• Mezhegei basin can become the next large coal production center in the following decade
Mezhegei Basin
15
Russian coal market overview (2/2)
11%
4%
7%
8%
11%
11%
Others 14%
Kuzbassugol 3%
Prokopievskugol 3%
Stroyservis
Belon
Yuzhniy Kuzbass Uzhkuzbassugol
8% KRU
9%
Raspadskaya 9%
Vorkutaugol
Sibuglemet Yakutugol
Russian coking coal producers
*Reserves include coking and steam coal
Sources: Severstal estimates and analysis, Rosinformugol
• The Russian coking coal market is consolidated – 6 of the largest producers have a 59% share in the total
production
• More than 65% of coking coal produced in Russia is attributed to vertically integrated steel producing
companies
• Low and mid volatile coals are expected to be in deficit in the upcoming years
Production of coking coal by grade, 2012
ОS GZHO GZH Zh КSN KO KS K
2011
62.1
2010
65.7
2009
56.9
2008 2007
70.8
2006
65.9
2005
68.3
2004
73.9 70.4
70.8
2012
12%
16%
7%
2%
21%
29%
2%
11%
16%
20%
10%
4%
24%
16%
5%
5%
16
Steel demand and coking coal production
58,6
56,157,3
49,4
55,757,4
52,9
46,0
43,742,4
38,038,941,241,7
2010 2011 2009 2012 2007 2006 2008
Coking Coal Production Convertor Steel Production
Coking coal and convertor steel production in Russia*, mt
Sources: World steel, CRU, Rosinformugol, Severstal analysis
42,6 44,142,1
36,239,2
10,3
13,313,6
13,2
18,2
43,842,0
14,814,2
58,6
2012
56,1
2011
57,3
2010
49,4
2009 2006
52,9
2008 2007
57,4 55,7
Domestic Export
Russian coking coal production by destination*, mt
Russian coking coal production was historically in line with the steel
production
17
Key new Russian coking coal projects
South-Yakutsk basin
Ulug-Khem basin
Kuznetsky basin
Pechora basin
Centralny
Mezhegey
Elegest
Usinskoe – 3
Zhernovskaya - 1
Elga
Sarbalinskaya
Sibirginskaya
Erunakovsky-8
S.D.Tihova Mine, Butovskaya
Inaglinskaya mine, Inaglinsky
open cut mine
Basin Project
Severstal
Evraz
EPK
NLMK
NLMK
Mechel
OMK
Yuzhny
Kuzbass
YuzhKuzbass
Koks
Colmar
Operator Reserves
(mt)
1760
120
895
765
639
163
154
90
85
45
227
Main coal
grade
Zh
Zh, KZh
Zh
Zh, GZh
Zh
Zh
Zh, KZh
OS
Zh, GZh
KS, OS
Zh
Estimated
production
(mt)*
13,0
3,0
2,4
2,0-3,0
2,5
4,5
7,5
3,0
3,0
15,0
1,3
Start of
production*
2018
2014
2018
2016
2014
2015
2013
2018
2018
2014
2013
Source: Company information, Rosinformugol
Note: (*) Based on company information and estimations, press reports
Usinskoe Severstal 621 2Zh 2,5 2018
18
Contents
• Coking coal industry – global perspective
• Russian coking coal industry
• Severstal new coking coal projects update
19
Strong, Global, Integrated
Moscow
Note: Numbers are presented for 2012 sales volumes, for steel – total capacity (1) consolidated volumes of pellets and concentrate (2) EBITDA represents profit / (loss) from operations plus depreciation and amortization of productive assets adjusted for gain / (loss) on disposals of property, plant and equipment and intangible assets
Coking/Thermal Coal
Steel Mill/DRI Plant
Iron Ore
VORKUTAUGOL (RUSSIA) 8.0mt (reserves – 246.8mt)
Coking and Steam Coal
OLKON (RUSSIA) 4.7mt (reserves – 276.2mt)
Iron Ore Concentrate
KARELSKY OKATYSH (RUSSIA) 10.4mt (reserves – 415.3mt)
Iron Ore Pellets
PBS COALS (US) 3.3mt (reserves – 77mt)
Coking and Steam Coal DEARBORN (US) 2.1mt Crude Steel Capacity
COLUMBUS (US) 3.1mt
High-quality Crude Steel Capacity
CHEREPOVETS STELL MILL (RUSSIA) 11.6mt – steel output Crude Steel Capacity
2010 2011 2012
Crude steel production, mln tonnes 14.7 15.3 15.1
Coal sales volumes, mln tonnes 11.7 10.6 10.5
Iron ore sales volumes, mln tonnes1 13.8 14.8 15.2
Revenues, $ bln 12.8 15.8 14.1
EBITDA(2), $ bln 2.9 3.6 2.1
20
Usinskoye – Key Highlights
RUSSIA
Komi
Republic
Syktyvkar Vorkutaugol and Usinskoye
deposit
THE PROJECT’S KEY PARAMETERS
LOCATION • North Russia, Komi Republic
COAL PROPERTIES
• Hard mid-vol, grade 2Zh in the Russian
classification, regarded as a premium coal
grade, similar to the Vorkuta coals. The coking coal is relatively high-ash, average sulphur
CAPACITY
• Resources in the Russian classification – 621
mt
• Planned annual capacity 2.0-2.5 mtpa of hard coking coal concentrate
COST POSITION • Production costs estimated at $40-50/t exw
PROJECT’S DEVELOPMENT
• Overall CAPEX estimated at c. $0.9bn • Production anticipated to start in 2018
INFRASTRUCTURE
• As the deposit is located close to Severstal’s
legacy Vorkuta mines, no significant
infrastructure needs to be constructed
• The existing railway passes c. 5 km from the deposit
OWNERSHIP • Severstal (100%)
21
Alt
ai
Mongolia
Republic of Tyva
Irkutsk region Krasnoyarsk region
Ulug-Khem coal basin
and Tsentralniy
coalfield
Kuragino
Tyva – Key Highlights
THE PROJECT’S KEY PARAMETERS
LOCATION • Russia, Southern Siberia, Republic of Tyva, 35
km to the south-west of the capital Kyzyl
COAL PROPERTIES
• Semi-hard high-vol, grade Zh in the Russian
classification. The coking coal is low-ash, low-
sulphur, average coal rank (Ro), has unique
fluidity features
CAPACITY
• Resources in the Russian classification – 639
mt (C1+C2), JORC resources estimated at 565
mt
• Planned annual capacity 7.5 mtpa of coking
coal concentrate
COST POSITION • Production costs estimated at $20-30/t
PROJECT’S
DEVELOPMENT
• Overall CAPEX estimated at $1.2-1.5bn
• Production anticipated to start in 2019
INFRASTRUCTURE
• 401km railroad to the mainline Transsib needs
to be built. The Russian Government has
committed to construct 147 km and launched
the construction in Jan’12, but later it was
stopped
• Power could be supplied from the existing
transmission line or a new power plant may be
built
OWNERSHIP • Severstal (100%)
CHINA
RUSSIA
JAPAN
INDIA
Kyzyl
22
Thank you for
your attention
23
Russian steelmakers self sufficiency in coking coal
Capacity, mt Self-sufficiency, %
3,3
11,6
0
44
139
0
5.3 97 Severstal
MMK
EVRAZ
NLMK
MECHEL 9,8 285