Laura Brooks - CRU Analysis - Iron ore; Battle for the bottom of the curve
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Transcript of Laura Brooks - CRU Analysis - Iron ore; Battle for the bottom of the curve
IRON ORE Battle for the bottom of the curve
Prepared for:
Americas Iron Ore Conference November 2014
Laura Brooks Senior Consultant - Steel Raw Materials
Agenda • Is Chinese supply responding? • Is there more pain for producers in the next 5 years? • What are the prevailing risks to our forecast? • Focus: prospects for Brazilian producers • Conclusion
Buy-side: China, where are we today? Chinese crude steel production, Mt
Data: CRU, CEIC. Note: (1) CRU assessed from the Steel Cost Review.
160
170
180
190
200
210
10 12 14 16 18 20 22 24
Jan-
12
Mar
-12
May
-12
Jul-1
2
Sep-
12
Nov
-12
Jan-
13
Mar
-13
May
-13
Jul-1
3
Sep-
13
Nov
-13
Jan-
14
Mar
-14
May
-14
Jul-1
4
Sep-
14
Chinese FAI, year-on-year, nominal, %
2400 2600 2800 3000 3200 3400 3600 3800 4000
1-Ju
l-13
1-Au
g-13
1-Se
p-13
1-
Oct
-13
1-N
ov-1
3 1-
Dec
-13
1-Ja
n-14
1-Fe
b-14
1-
Mar
-14
1-Ap
r-14
1-
May
-14
1-Ju
n-14
1-
Jul-1
4
1-Au
g-14
1-Se
p-14
1-
Oct
-14
SHFE rebar price, RMB/t
-10.0% -5.0% 0.0% 5.0%
10.0% 15.0% 20.0% 25.0%
Jan-
10
Apr-
10
Jul-1
0 O
ct-1
0 Ja
n-11
Ap
r-11
Ju
l-11
Oct
-11
Jan-
12
Apr-
12
Jul-1
2 O
ct-1
2 Ja
n-13
Ap
r-13
Ju
l-13
Oct
-13
Jan-
14
Apr-
14
Margin Annual average
Average Chinese steel mill EBITDA margin (1), %
3
Sell-side: Australian majors show no mercy Australian iron ore shipments by selected company, Mt
Data: CRU, GTIS.
0
50
100
150
200
12 Q1
12 Q2
12 Q3
12 Q4
13 Q1
13 Q2
13 Q3
13 Q4
14 Q1
14 Q2
14 Q3
Rio BHP FMG Others
59.4%
59.8%
60.2%
60.6%
12 12 12 12 13 13 13 13 14 14
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
Australian weighted average Fe grade, %
Global Business Cost curve, 2014, nominal x axis: Cumulative production, Mt y axis: Business Costs, $/t
- Australian producers
4
Prices currently sit at the 74th percentile on cost curve... LHS: Iron ore price as a percentile on the global Business Cost curve, % RHS: Iron ore price, $/t
Data: CRU. 5
50
70
90
110
130
150
170
190
30%
40%
50%
60%
70%
80%
90%
100%
Percentile Fines, 62% Fe, CFR China, SPOT (CRU assessed)
...meaning that ~26% of production is not generating cash. CRU assesses that supply is responding.
Data: CRU.
There are 3 groups of producers where
cutbacks have already emerged
Brazil China Australia India Other
Country break-down of those producers in loss-making territory in 2015, according to CRU’s Iron Ore Cost Model, %
6
1. Several Chinese mines have stopped producing under the low prices. Government support is not present and...
y/y change in 2014 Chinese iron ore concentrate production, 64% Fe, Mt
Data: CRU, WSA.
-15
-10
-5
-
5
10
Jan Feb Mar Apr May Jun Jul Aug Sep
y/y change
Includes • stock change • changes seen in import grades and research on average domestic grades
From CRU’s Beijing office on APEC conference closures: “Some iron ore mines are being closed as the authorities want to limit transportation around the Beijing area”.
7
...primary research backs up our calculations Examples from CRU’s Beijing office...
Data: CRU, MySteel.
Main cutbacks at: privately-owned, small-scale, coastal miners
Ratio of imported fines in sinter Region Location April Oct
Hebei Tangshan North 88% 91% Hebei Handan North 77% 84% “Private steel mill in
Chengde, Hebei province. Previously used 100% domestic which could satisfy
their demand. Have had to start using imported
ores since July.” “Mine located in
Shandong province, private,
which has a concentrate
capacity at 200-300kt/y, has shut
down”
8
2. Non-mainstream exporters are uncompetitive and less attractive
Iranian iron ore exports, Mt
Data: CRU, GTIS.
Russian iron ore exports, Mt
Malaysian iron ore exports, Mt
0.5 1.0 1.5 2.0 2.5 3.0 3.5
1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8
0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 % change year-to-date*
Iran -3%Russia -12%Malaysia -2%Mexico -64%Indonesia -86%
Non-mainstream iron ore exporters
Note: * Latest monthly data varies by country
9
3. Swift exits from some small-scale juniors
Data: CRU.
Closures at existing operationsCountry Company Project Production* StatusAustralia IMX Resources Cairne Hill 1.7 Mt/y Initial 2015 closure brought forwards to 2014Australia Western Desert Resources Roper Bar 3.0 Mt/y Closed. Lenders did not extend a debt facility.Canada Labrador Iron Mines Silver Yards 1.7 Mt/y Did not resume operations after the winterBrazil MMX Serra Azul 6.0 Mt/y Suspended operations for 30 days through September. Uncertain of re-start.Sweden Northland Resources Kaunisvaara 4.3 Mt/y Ongoing financial difficulties has forced operations to cease.Note: *Production at full capacity.
Australia: majors start to force out their neighbours
0 20 40 60 80
100 120 140
0 200 400 600
Australia-only cost curve X-axis: Cumulative Australian iron ore production, Mt Y-axis: Value adjusted cost curve, $/t, CFR China
November ‘14 price level
10
Agenda • Is Chinese supply responding? • Is there more pain for producers in the next 5 years? • What are the prevailing risks to our forecast? • Focus: prospects for Brazilian producers • Conclusion
Combined growth from Australia and Brazil is set to persist - but rates to slow
y/y change in combined exports from Australia and Brazil, Mt
Data: CRU, GTIS. Note: *Shipments have begun.
0
20
40
60
80
100
120
140
160
11 12 13 14 15 16 17 18
58%
60%
62%
64%
66%
68%
70%
11 12 13 14 15 16 17 18
MAJORS’ MARKET SHARE Vale, Rio Tinto, BHPB and FMG share of global export market, %
12
China is not checking out – but growth to ease
Chinese steel consumption, Mt
Data: CRU.
700
750
800
850
900
950
1000
1050
1100
1150
LHS: Global iron ore demand by product, Mt RHS: y/y growth in global iron ore demand, %
N.B. Demand from construction to peak
sooner than total
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
0
500
1000
1500
2000
2500
13 14 15 16 17 18
Lump Pellets
Fines Growth
13
Our price forecast is based on continued responses from the marginal players Iron ore exports from selected countries, Mt
Data: CRU, GTIS.
0
20
40
60
80
100
120
12 13 14 15 16 17 18
Mexico Russia Malaysia Indonesia Iran
x axis: Quarterly Chinese domestic ore production, saleable basis, Mt y axis: Iron ore price, 62% Fe fines, CFR China, 2013 real
0
50
100
150
200
250
300
0 10 20 30 40 50 60 70 80 90 100 110
Historic
14
Agenda • Is Chinese supply responding? • Is there more pain for producers in the next 5 years? • What are the prevailing risks to our forecast? • Focus: prospects for Brazilian producers • Conclusion
Risk to CRU’s price forecast lies to the downside in the short- to medium-term
Data: CRU.
Risk
Likelihood
Price pressure
Majors at loggerheads High (But in the long-
term this provides upside)
Iron ore to follow metallurgical coal Medium
Chinese demand hits a wall Medium (downgrade from High)
Start dates of large-scale projects Medium (downgrade from High)
16
1. Competition between the majors heats up greater volumes growing market share lower unit costs
Data: CRU. Note: (1) Includes Vale, BHPB, Rio Tinto (Pilbara only), FMG and Samarco. CRU view on export volumes in 2018.
BHBP “We are targeting unit cast costs of $20/t (excludes freight and royalties) in the medium-term”
Near-term: prices will fall further and investor appetite will plummet Long-term: upside price potential emerges
Scenario: majors(1) deliver stronger growth by x% in 2018 Additional tonnages on to seaborne market, Mt
0
50
100
150
200
0 3,000
x axis: Cumulative production, Mt y axis: Business costs in 2018, $/t real 2013
STRETCH
17
0
20
40
60
80
100
120
2% production gain
5% production gain
10% production gain
2. Could iron ore follow coal’s stickiness next year and beyond? “Easy wins” achieved...what next?
Data: CRU. CRU Metallurgical Coal Cost Model 2014.
0
50
100
150
200
250
0 50 100 150 200 250 300 350
Co
sts
($/t)
Cumulative production (mt)
0
50
100
150
200
250
0 50 100 150 200 250 300 350
Australia USA
Canada Russia
Mozambique
Mongolia
X-axis: Cumulative production, Mt Y-axis: Business Costs, $/t, FOB
Hard coking coal Business Cost curve, excl. China
Equivalent for iron ore? 50th percentile on cost curve >$60/t
18
Current price level
3. Chinese demand hits a wall
Data: CRU. 19
....recent statements from Premier Li have led us to “downgrade” this risk
4. Another +170 Mt will hit the market in the coming 5 years – the important question is “when?” (not including Rio Tinto and BHPB expansions)
Company Project Country Product Capacity Quartile on cost curve at full capacity
Company announced start date
CRU assessed start date
Vale S11D Brazil Sinter fines 90 Mt/y 1st 2016 2017
Hancock Prospecting
Roy Hill Australia Sinter fines and lump
55 Mt/y 2nd
2015 2016
Anglo American
Minas Rio Brazil Pellet feed 26.5 Mt/y 1st – 2nd 2014 - achieved
2014
Agenda • Is Chinese supply responding? • Is there more pain for producers in the next 5 years? • What are the prevailing risks to our forecast? • Focus: prospects for Brazilian producers • Conclusion
90% of Brazilian production is generating cash at today’s prices
Data: CRU.
CRU Iron ore business cost curve x axis: Cumulative production, Mt y axis: Business costs, all products, $/t, nominal 2014
- Brazilian producers
Current price level
21
How do the Brazilian non-majors stack up against those in Australia?
Data: CRU.
Weighted average Business Cost of Brazilian and Australian producers, excluding the majors Business Cost, nominal 2014, $/t
Theoretical standpoint Brazilian producers are likely to be more resilient to falling prices This will not always be the case in practice!
22
0
20
40
60
80
100
120
Brazil non-majors Australia non-majors
For those producers targeting the domestic market, we forecast strong underlying growth in the long-term
Data: CRU.
LHS: Latin America steel consumption, Mt RHS: Latin America steel intensity of use, kg/capita
0
50
100
150
200
250
0
20
40
60
80
100
120
140
160 Steel consumption
Intensity of use
23
CONCLUSIONS
Conclusions
1. Marginal production is responding in China and elsewhere
2. Prices set to anchor around $80/t in medium-term – current levels represent “very weak market”
3. Actions of majors present critical downside price risk in short-medium term
4. ~10% of Brazilian production is vulnerable at today’s prices
5. Strong prospects for domestic demand in Latin America in the long-run
25
Thanks for your attention
Laura Brooks Senior Consultant – Steel Raw Materials T: +44 (0)20 7903 2239 E: [email protected] Marcio Goto Business Development Manager - South America T: +55 11 5051 8124 E: [email protected]