The structural value of higher grade ore

Transcription

1 Photo: Marcelo Coelho The structural value of higher grade ore Rogerio Nogueira Iron Ore and Coal Marketing Director Singapore Iron Ore Week May 2018

2 Disclaimer This presentation may include declarations stating Vale s expectations concerning future events or results. All declarations, when based on future expectations rather than historical facts, involve various risks and uncertainties. Vale cannot guarantee that such declarations will prove to be accurate. Such risks and uncertainties include factors related to the following: (a) countries where we have operations, especially Brazil and Canada; (b) the global economy; (c) the capital markets; (d) mining and metals businesses and their dependence on global industrial production, which is cyclical by nature; and (e) the high degree of global competition in the markets in which Vale operates. To obtain additional information about factors that could give rise to results different from those estimated by Vale, please consult the reports filed with the Brazilian Securities Commission (CVM), the Autorité des Marchés Financiers (AMF), the US Securities and Exchange Commission (SEC), The Stock Exchange of Hong Kong Limited, and, in particular, the factors discussed in the Estimates and projections and Risk factors sections of Vale s Annual Report Form 20F.

3 Agenda 1. Structural changes in Chinese steel production and iron ore consumption patterns 2. Cost and productivity benefits of using high grade ores 3. Trends in iron ore product quality and Vale s commitment to the steel industry

4 Agenda 1. Structural changes in Chinese steel production and iron ore consumption patterns 2. Cost and productivity benefits of using high grade ores 3. Trends in iron ore product quality and Vale s commitment to the steel industry

5 Beijing opera house November 2015

6 Beijing opera house November 2017

7 From this to this!

8 Chinese steel industry capacity utilization increased with additional plant closures and higher pig iron production 7 Steel industry capacity utilization % 95% Pig iron production Mt 7 Mt +1.0% 12 Mt +1.8% 90% 85% 80% % 70% 65% 60% Source: NBS, CRU 7

9 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Increased capacity utilization drove up demand of higher grade ores Share of high grade ores in burden mix 1 Breakdown of inventory at Chinese Ports 2 % Lower Grade Higher Grade 100% 100% 100% Mt Lower Grade Higher Grade % 36% 40% Notes: 1Excludes pellets and Chinese Concentrate; 2 Data from twelve (12) main Ports; High Grade Ores in these charts are 63% Fe and up Source: NBS, Mysteel 8

10 And reinforced the relative value of higher grade ores Iron ore price spreads: 65 to 58% Fe MBIO US$/t xx Yearly Average Differentials MB MB MB58-40 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 9 Source: Metal Bulletin

11 Agenda 1. Structural changes in Chinese steel production and iron ore consumption patterns 2. Cost and productivity benefits of using high grade ores 3. Trends in iron ore product quality and Vale s commitment to the steel industry 10

12 The cost reduction associated with the use of high grade ores is significant Impact on hot metal costs¹ (high x low grade ores²) US$/t Flux and burnt lime consumption Coke breeze consumption BF metallic burden consumption Slag rate RDI (Reduction degradation index) 14,6 $/dmt of iron ore 20,5 19,4 5,9 Metallic burden impact Coke consumption impact Value impact on hot metal costs Value impact on high grade ores Notes: 1) Cost differentials based only on transformation costs, not on acquisition costs; assuming coke cost of $280/t (HCC CFR at Chinese mills of $215/t, SSCC of $125/t) and PCI of $140/t 2) High grade ore: Fe: 65%; Low grade ore: Fe: 56.6% 11

13 Additionally, the use of high grade ores increase blast furnace productivity Schematics of a blast furnace Impact on productivity 25% Slag rate reduction COKE SINTER 8% Volume effect x COHESIVE ZONE HEATED AIR ~20% Increase in blast furnace productivity + 30% Slag volumetric share in BF burden Increase in slag reduces blast furnace productivity 12% Permeability effect Notes: High grade ore: Fe: 64.5~65%; Low grade ore: Fe: 56.6%; slag rate of low grade 395 kg/t vs 292 kg/t for high grade ore. Considering 75% of sinter in metallic burden 12

14 High grade ores have a significant financial impact even in scenarios of more stringent steel margins Productivity value of high vs low-grade ores 1 Historical rebar margins in China 2 US$/dmt of high grade iron ore US$/t 300 Yearly Average Margins ,7 19,7 27, Steel margin ranges (US$/t) Notes: 1 High grade ore: Fe: 65%; Low grade ore: Fe: 56.6%. 2 Margins = Rebar spot price raw materials cost average conversion costs (Mysteel) 13

15 Coke Prices $/t (cost driver) Combined benefits of higher x lower grade ores Relative values of high to low grade ores (US$/dmt of iron ore) Assumptions Low demand scenarios High demand scenarios Blast furnace capacity as the bottleneck for the calculation of productivity gains ~ Based on the operation of a typical Chinese mill Steel mills working mostly with imported ores with restrictions in Al 2 O 3 ~ Availability of high & low grade ores as per current supply Steel Margins $/t (productivity driver) Note: 1 Typical Operation: 75% Sinter + 10% Aussie Lump + 15% Domestic pellet, BF Slag: B2: 1.13, MgO: 9.0%, Al 2 O 3 : 15.5% max 14

16 Agenda 1. Structural changes in Chinese steel production and iron ore consumption patterns 2. Cost and productivity benefits of using high grade ores 3. Trends in iron ore product quality and Vale s commitment to the steel industry

17 Investment in mining has decreased and mine depletion rate is now poised to go up FAI 1 in ferrous mining industry in China RMB billion Iron ore CAPEX by major Australian players USD bi A FAI = Fixed Asset Investments Source: NBS, Miner s reports and Vale 16

18 Vale s role in improving overall ore quality in China has gained importance China iron ore imports average Fe content 1 % Fe 62,00 61,50 61,00 60,50 60,00 61,7 61,5 61,4 61,2 61,0 60,8 Gap Fe content imported ore into China Fe content imported ore ex-iocj into China 60,7 60,7 60,5 60,4 60,9 60,9 61,0 60,5 60, E 2020E 60,4 61,2 60,6 61,1 60,3 1,00 0,90 0,80 0,70 0,60 0,50 0,40 0,30 0,20 0,10 0,00 1 Excluding direct charge ore Source: NBS, Metal Bulletin and Vale 17

19 Vale is committed to supplying high quality products to the market 18 Vale Sales 1, Higher Grade Ore % Share Carajás Blend 40% 40% 42% 40% 35% 23% 14% 5% E 1 Does not include pellets and pellet feed for pelletizing 18

20 Final remarks The Chinese supply side reform not only successfully tackled pollution but also accelerated structural changes in iron ore consumption patterns The cost reductions and productivity benefits of using high grade ores became more evident and drove up price differentials between low and high grade ores Vale s product portfolio will deliver even higher value as depletion rates intensify 19

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