How does the investment community view the manganese industry? IMnI Annual Conference 2010 June 2010

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1 How does the investment community view the manganese industry? IMnI Annual Conference 21 June 21 Jim Lennon / Duncan Hobbs / jim.lennon@macquarie.com / duncan.hobbs@macquarie.com In preparing this research, we did not take into account the investment objectives, financial situation and particular needs of the reader. Before making an investment decision on the basis of this research, the reader needs to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of their particular investment needs, objectives and financial circumstances. Please see disclaimer.

2 How does the investment community view the manganese industry? How does manganese compare with other metals markets? What has been happening in the manganese industry? Where are we in manganese and steel markets today? What is the outlook for manganese and steel markets? Conclusions Page 2

3 How does the investment community view the manganese industry? How does manganese compare with other metals markets? What has been happening in the manganese industry? Where are we in manganese and steel markets today? What is the outlook for manganese and steel markets? Conclusions Page 3

4 The Mn market is comparable in size to most of the LME metals markets LME metals, steel and manganese - market size compared US$bn C.steel Fe ore Cu S.steel Al Ni Zn Pb Mn alloys Mn ore Mo Sn Co Source: CRU, IMnI, ISSF, LME, WSA, Macquarie Research, June 21. Note: 29 data based on annual average prices. Mn alloys exclude EMM Page 4

5 How does the investment community view the manganese industry? How does manganese compare with other metals markets? What has been happening in the manganese industry? Where are we in manganese and steel markets today? What is the outlook for manganese and steel markets? Conclusions Page 5

6 In 29 the deepest downturn in world steel output for over 35 years led to a sharp drop in demand for Mn ferroalloys YoY changes in world crude steel output World Mn ferroalloys consumption 15 1% 1 5% m tonnes 5-5 YoY changes, gross weight basis % -5% -1% -15% -1-2% % HC FeMn MLC FeMn SiMn Source: IMnI, WSA, Macquarie Research, June 21 Page 6

7 Differential drops in demand for Mn ferroalloys reflect regional differences in steel product mix and alloy usage Industrial countries China Shares of steel output and Mn alloys use 18% 29% 32% 36% 37% 41% 43% 54% % 1% 2% 3% 4% 5% 6% Share of world total Steel output HC FeMn usage MLC FeMn usage SiMn usage The industrial countries of Europe, Japan, Korea and USA produce a similar share of world steel output to China 36% in 27 However, industrial countries use >5% of MLC FeMn but <3% of SiMn. China uses <2% of MLC FeMn but >4% of SiMn These data reflect differences in steel product mix of industrial countries compared with China. Industrial countries produce more high-grade steels (higher Mn, lower C content), which use more MLC FeMn Mn ferroalloy selection is first and foremost a function of steel product chemistry The fact that steel production in industrial countries fell steeply, whereas Chinese steel output increased, in 29 explains why use of MLC FeMn fell furthest, whereas use of SiMn was less affected Source: IMnI, WSA, Macquarie Research, June 21. Note: chart based on data for 27. Industrial countries are Europe, Japan, Korea and USA Page 7

8 But Great Recession should not distract attention from bigger picture markets much larger than a decade ago Growth in world industrial production, steel output and ferroalloys consumption, World steel output growing faster than industrial production World Mn consumption growing faster than steel output Indices 21 = % +44% +36% +14% +91% +59% 5 Industrial production Crude steel production HC FeMn consumption MLC FeMn consumption SiMn consumption Mn units in steelmaking Source: Ecowin, IMnI, WSA, Macquarie Research, June 21. Note: Mn units in steelmaking exclude direct-charged Mn ore and EMM Page 8

9 And Mn intensity of use in steelmaking is increasing Unit Mn usage in crude steel production World Mn ferroalloys consumption Increased Mn usage from rise in intensity of use YMA, kg Mn / tonne steel m tonnes, Mn contained Increased Mn usage from rise in steel production Mn used in steelmaking in Source: IMnI, WSA, Macquarie Research, June 21. Note: Mn units in steelmaking exclude direct-charged Mn ore and EMM Page 9

10 As demand for high-mn steel products increases, notably high strength auto steels, energy steels and stainless 2 Mn content of selected steel products Main Mn alloy(s) C content Si content Stainless 2 series 9.% EMM*, HC FeMn* Low High Extra high-strength auto sheet 2.% MLC FeMn, EMM Low Low High strength plate 1.5% HC FeMn API-grade plate 1.4% HC FeMn Low Rail 1.2% HC FeMn High API seamless 1.% HC FeMn Low Stainless 3 / 4 series 1.% LC SiMn, EMM Low High Engineering steels.9% HC FeMn, SiMn High-strength auto sheet.9% MLC FeMn Low Low Mild carbon steel long products.7% SiMn Mild carbon steel flat products.5% SiMn Mild auto sheet - exposed.4% MLC FeMn Low Low Mild auto sheet - non-exposed.4% SiMn Low % 2% 4% 6% 8% 1% Average Mn content Source: Macquarie Research, June 21. Note: *For 2 series stainless Chinese producers use mainly EMM; Indian producers use mainly HC FeMn and vacuum degassing Page 1

11 Case study: 2 series stainless steel production trebles in less than ten years 2 series is <15% of total stainless steel output but now uses more Mn than 3 / 4 series grades World stainless steel output by grade Mn usage in stainless steel production series 3 / 4 series / 4 series 2 series Index 21 = ' tonnes Source: ISSF, Macquarie Research, June 21 Page 11

12 Generating strong growth in demand for Mn ore World Mn ore demand ROW China m tonnes, Mn contained Source: IMnI, Macquarie Research, June 21 Page 12

13 Chinese Mn ore imports are on a rising trend ' tonnes gross weight 1,4 1,2 1, Chinese Mn ore imports China s Mn ore imports have reached ~1m tpm (gross weight), compared with <.5m tpm in 1H 27 Australia is the main supplier with a market share of ~3% (gross weight) in 29, doubling shipments to China the last three years Australia ores are high-grade (>44% Mn) However, Australia s market share has declined as South Africa s exports to China have risen hugely, doubling and again Gabon ranks third in the suppliers league to China (~1% market share) and its ores are high-grade 2 Cote d Ivoire and Namibia have emerged as new suppliers of high-grade ore (~1% market share in 29) J 27 A 27 J 27 O 27 J 28 A 28 J 28 O 28 J 29 A 29 J 29 O 29 J 21 A 21 Myanmar has emerged as an important new supplier of medium-grade ore to China in the last three years, market share rising from <1% in 27 to ~7% in 29 Source: GTIS, IMnI, Macquarie Research, June 21 Page 13

14 Pushing up prices and prompting new supplies of Mn ore to enter the market Spot Mn ore price Mn ore output by origin 2 16 US$/dmtu 44%-45% Mn ore, CIF China m tonnes, Mn contained ROW New India China 2 2 J 27 A 27 J 27 O 27 J 28 A 28 J 28 O 28 J 29 A 29 J 29 O 29 J 21 A Source: CRU Group, IMnI, Macquarie Research, June 21. Note: new suppliers are Indonesia, Ivory Coast, Myanmar and Vietnam Page 14

15 New Mn ore supplies have been important but supplies face future challenges Share of world output, Mn contained 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 2 21 Mn ore output by origin ROW China + India + new entrants Source: IMnI, USGS, Macquarie Research, June 21. Note: new suppliers are Indonesia, Ivory Coast, Myanmar and Vietnam % 41% Page 15 China, India and a number of new suppliers, notably Myanmar and Vietnam, have made a major contribution to rising output of Mn ore However, China s reported Mn ore reserves are limited and will last for less than 15 years at recent operating rates, although it should be recognised that recovery rates of Mn from ore to alloy are reported to be low Moreover, China s Mn ore reserves are low grade and not suited to the FeMn alloys that are likely to be more in demand as the product mix in China s steel market evolves in the coming years New supplies of Mn resources will be required in the coming years, perhaps from a combination of: (1) New mine investment (2) Raising recovery rates in China (3) Possibly from reprocessing Mn-rich slag in China

16 How does the investment community view the manganese industry? How does manganese compare with other metals markets? What has been happening in the manganese industry? Where are we in manganese and steel markets today? What is the outlook for manganese and steel markets? Conclusions Page 16

17 Main manganese market drivers steelmaking and China Manganese consumption by end use Manganese consumption by country Other uses 6% ROW 4% Ferroalloys feedstock 94% China 6% Source: IMnI, Roskill, Macquarie Research, June 21. Note: 29 data based on manganese contained in ore Page 17

18 Strong demand from key steel consuming sectors in China prompt sharp rise in steel production China: output in key steel consumer sectors Chinese crude steel production 12% 1% 8% Motor vehicles Floor space under construction Home appliances 4% 3% 3MMA, YoY change 6% 4% 2% 3MMA, YoY change 2% 1% % % -2% -1% -4% -2% J 28 M 28 M 28 J 28 S 28 N 28 J 29 M 29 M 29 J 29 S 29 N 29 J 21 M 21 J 28 M 28 M 28 J 28 S 28 N 28 J 29 M 29 M 29 J 29 S 29 N 29 J 21 M 21 Source: CEIC, NBS, WSA, Macquarie Research, June 21. Note: Motor vehicles excludes motor bikes. Home appliances: washing machines, refrigerators, freezers and AC units Page 18

19 Driven by China, world steel output has recovered to reach new record levels 1.5bn tonnes annualised in April 21 World crude steel production 1,6 1,452 1,4 1,2 1, Page 19 1,48 F J 28 F 28 M 28 A 28 M 28 J 28 J 28 A 28 S 28 O 28 N 28 D 28 J 29 F 29 M 29 A 29 M 29 J 29 J 29 A 29 S 29 O 29 N 29 D 29 J 21 m tonnes annualised M 21 A 21 Source: WSA, Macquarie Research, June 21

20 In mature markets, steel output is recovering but remains well below previous peaks, especially in Europe 6 Crude steel production in mature markets 5-21% 28 Q1 29 Q1 21 Q1 4 m tonnes 3-14% 2-23% 1 EU-27 Japan USA Source: WSA, Macquarie Research, June 21 Page 2

21 In China and India steel output has reached new peaks. In other emerging markets it is close to full recovery Crude steel production in key emerging markets % 28 Q1 29 Q1 21 Q m tonnes % -11% China India Other EMs Source: WSA, Macquarie Research, June 21. Note: EMs emerging markets Brazil, Egypt, Iran, Indonesia, Malaysia, Mexico, Russia, South Africa, Thailand, Turkey, Vietnam Page 21

22 Restocking has supported recovery in popular thinking but steel inventories remain below average in reality European steel stocks North American steel stocks MMA I-S ratio, months Inventories, m tonnes 3MMA I-S ratio, months Inventories, m tonnes LHS: inventories RHS: I-S ratio..5. LHS: inventories RHS: I-S ratio 1 J 28 M 28 M 28 J 28 S 28 N 28 J 29 M 29 M 29 J 29 S 29 N 29 J 21 M 21 J 28 M 28 M 28 J 28 S 28 N 28 J 29 M 29 M 29 J 29 S 29 N 29 J 21 M 21 Source: EASSC, MSCI, Statistisches Bundesamt, Macquarie Research, June 21. Note: data are for steel sheet inventories held by service centres Page 22

23 China swings from substantial net exporter to near zero in Mn ferroalloys as its domestic demand increases Chinese net exports of Mn ferroalloys SiMn MLC FeMn HC FeMn ' tonnes gross weight China net importer of Mn ferroalloys for the first time August 29-2 J 27 A 27 J 27 O 27 J 28 A 28 J 28 O 28 J 29 A 29 J 29 O 29 J 21 A 21 Source: GTIS, IMnI, Macquarie Research, June 21 Page 23

24 How does the investment community view the manganese industry? How does manganese compare with other metals markets? What has been happening in the manganese industry? Where are we in manganese and steel markets today? What is the outlook for manganese and steel markets? Conclusions Page 24

25 World crude steel production forecast to rise to new records over next three years Crude steel production Changes in crude steel production 1,75 4% China EU-27 Japan USA ROW 1,5 3% 1,25 2% m tonnes 1, 75 ROW USA Japan EU-27 China YoY changes 1% % -1% 5-2% 25-3% F 211F 212F -4% F 211F 212F Source: WSA, Macquarie Research, June 21 Page 25

26 Macquarie s crude steel production forecasts Crude steel production, m tonnes F 211F 212F Japan China India Other Asia North America Western Europe Brazil Other L.America CIS Other Total World 1,355 1,331 1,226 1,393 1,472 1,548 World Ex-China China share 36.5% 37.6% 46.3% 46.2% 46.3% 47.1% YoY changes Japan 3.4% -1.2% -26.3% 2.% 4.%.7% China 16.4% 1.% 13.6% 13.2% 6.% 7.% India 6.6% 5.% 3.7% 9.5% 7.5% 6.% Other Asia 7.2%.% -11.4% 18.9% 5.8% 2.6% North America.6% -6.1% -33.8% 22.1% 6.4% 4.1% Western Europe 2.2% -3.% -26.8% 11.7% 3.3% 2.9% Brazil 9.3% -.2% -21.4% 22.8% 5.% 5.% Other L.America.4% -5.6% -15.2% -2.6% 1.9% 2.1% CIS 3.7% -7.9% -14.6% 7.5% 6.7% 4.9% Other 2.7% -6.8% -16.9% 7.9% 5.5% 4.7% Total World 7.8% -1.8% -7.9% 13.6% 5.7% 5.1% World Ex-China 3.4% -3.4% -2.9% 14.% 5.4% 3.5% Source: WSA, Macquarie Research, June 21 Page 26

27 Driving up demand for Mn ferroalloys World demand for Mn ferroalloys 1 9 HC FeMn MLC FeMn SiMn m tonnes, gross weight F 211F 212F F 211F 212F F 211F 212F Source: IMnI, Macquarie Research, June 21 Page 27

28 However, scope for raising output of Mn ore may be limited especially for high-grade material m tonnes, Mn contained World Mn ore output F 211F 212F ROW Gabon S.Africa Australia China Forecast of world Mn ore output recovering to previous peak assumes: China s Mn ore output continues to climb from 29, to reach new records of over 3.5m tonnes Mn contained in India s Mn ore output continues at new record level of ~9, tpa Mn contained reached in 29 New Mn ore supplies from Myanmar and Vietnam, among others, continue at the rates reached in 29 Production cuts implemented in Australia, Gabon, South Africa and Ukraine last year are fully reversed Only Brazilian and Ghanaian Mn ore output is assumed to continue at lower levels Balance of risks to forecast lies to the downside Source: IMnI, Macquarie Research, June 21 Page 28

29 Keeping balances in markets for Mn ferroalloys in check ' tonnes, gross weight Balances in world markets for Mn ferroalloys 8 HC FeMn MLC FeMn SiMn ' tonnes F 211F 212F Crude steel production 1,355 1,331 1,225 1,393 1,472 1,547 YoY ch. 7.8% -1.8% -7.9% 13.6% 5.7% 5.1% HC FeMn production 4,56 4,795 3,87 4,71 5,4 5,315 HC FeMn demand 4,417 4,622 4,2 4,766 5,37 5,38 HC FeMn balance Refined FeMn production 1,123 1, ,1 1,7 Refined FeMn demand 1,154 1, ,19 1,6 Refined FeMn balance SiMn production 7,88 7,962 7,66 8,12 8,795 9,285 SiMn demand 7,165 7,658 7,359 8,33 8,794 9,284 SiMn balance F 211F 212F Total Mn alloy production 13,59 13,875 11,571 13,775 14,845 15,67 Total Mn alloy demand 12,736 13,357 12,391 14,37 14,85 15,652 Demand growth 5.6% 4.9% -7.2% 13.3% 5.8% 5.4% Mn alloy market balance Source: IMnI, Macquarie Research, June 21 Page 29

30 And supporting high prices for Mn ore 16 Mn ore prices 14 Nominal 44%-45% Mn ore exports, US$/dmtu FOB Real 29 USD average US$4.8/dmtu in 29 USD F 211F 212F Source: CRU Group, Macquarie Research, June 21 Page 3

31 How does the investment community view the manganese industry? How does manganese compare with other metals markets? What has been happening in the manganese industry? Where are we in manganese and steel markets today? What is the outlook for manganese and steel markets? Conclusions Page 31

32 Conclusions Mn market dynamics are attractive and market size is comparable to most LME metals but this may not be well known by investment community Mn ferroalloys demand is forecast to show strong growth as a function of: (1) Rising steel production driven by industrialisation and urbanisation (2) Increasing intensity of Mn use in steelmaking Limited scope for Mn ore supplies to rise over the next two-to-three years. Market balances for Mn ferroalloys likely to be held in check as a result New investment in Mn ore supplies will be needed to meet long-term demand. Potential role for project financing from the investment community Mn ore prices forecast to remain high by historical standards to raise supply. New pricing mechanisms reportedly under review possible role for investors Page 32

33 Appendix: Mn use in steelmaking Mn has three uses in steelmaking (1) As an alloying agent (2) To fix residual sulphur impurities (3) To kill steel (remove dissolved oxygen) Mn as alloying agent to achieve specific metallurgical properties in steel This is the main use of Mn in steelmaking today Mn in steel increases tensile strength; toughness; hardness; wear resistance; and machinability Mn promotes deep hardening in heat-treatable steels However, Mn reduces ductility and weldability in steel Page 33

34 Appendix: Mn use in steelmaking Mn use to fix residual sulphur impurities Mn improves hot-working properties in steel by fixing residual sulphur impurities, forming MnS (solid at hot working temperatures) preferentially to FeS (liquid at hot-working temperatures) With hot metal desulphurisation standard in steelmaking today the use of Mn for fixing residual sulphur has fallen Nonetheless, Mn remains essential for fixing the sulphur that remains in steel and there are no substitutes. Without Mn steel cracks when processed at hotworking temperatures ( hot shortness ) Mn use to kill (de-oxidise) steel Historically Mn has been used to kill steel but has mainly been replaced by Al and Si today. Note killing performance of Si in SiMn is greater than in FeSi Page 34

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