Dr Richard Flook - Shinagawa Refractories Australasia Pty Ltd. Refractories in the Asian century

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1 Dr Richard Flook - Shinagawa Refractories Australasia Pty Ltd Refractories in the Asian century March 2012

2 Refractories in the Asian century March 2012

3 Agenda The Asian Century- long term view The Asian Century- short term view Key refractory markets Minerals for refractories

4 Agenda The Asian Century- long term view Yue Minjun and the Symbolic Smile

5 Economists view global l top 10 economies Rank China USA China 2 India Japan USA 3 United Kingdom China India 4 USA Germany Japan 5 Germany United Kingdom Germany 6 France France United Kingdom 7 Italy Italy Brazil 8 Japan India Mexico 9 Spain Brazil France 10 Indonesia Canada Canada Source: HSBC February 2012

6 Economists view Asian top 10 economies* Rank * Global 1 China (1) Japan (2) China (1) rank in brackets 2 India (2) China (3) India (3) 3 Japan (8) India (7) Japan (4) 4 Indonesia (10) South Korea (11) South Korea (13) 5 South Korea (24) Indonesia (21) Philippines (16) 6 Vietnam (28) Thailand (29) Indonesia (17) 7 Thailand (33) Singapore (31) Malaysia (21) 8 Philippines (35) Malaysia (38) Thailand (23) 9 North Korea (36) Philippines (43) Pakistan (30) 10 Sri Lanka (39) Pakistan (44) Bangladesh (31) Source: HSBC February 2012

7 Di Drivers are population & urbanisation Source: UN World Urbanisation Prospects 2010

8 Demographics will also influence demand d Source: Holcim January 2012

9 and dthen the rise of fafi Africa Asian population 4.5B 2100 African population 3.5B 2100 Source: UN World Population

10 Global l construction ti market - up 67% by 2020 Source: Holcim January 2012

11 Construction ti market global l ranking Rank (E) 1 China China 2 USA USA 3 Japan India 4 India Japan 5 Germany Canada 6 France Indonesia 7 Canada France 8 Spain Germany Italy Australia United Kingdom Spain Source: Holcim October 2011

12 Agenda The Asian Century- long term view The Asian Century- short term view

13 IMF- Global l recovery stalls, downside risks intensify if Global GDP Growth (Percent; quarter over quarter, annualized) Source: IMF WEO Outlook January 2012

14 Slow recovery to lower levels l US housing starts ('000) Source: McGraw Hill December 2011

15 Structural t drivers of demand d remain intact t Cautious on the short term economic outlook for the developed world and Europe in particular No simple solution for the structural imbalances and high levels of sovereign indebtedness in the OECD China needs to implement a new development strategy in its next phase of development The longer term structural drivers of industrialisation and urbanisation in the developing world remain intact Summary: Short term will be volatile but long term demand is unchanged Source: BHP Billiton February 2012, World Bank China 2030

16 Agenda The Asian Century- long term view The Asian Century- short term view Key refractory markets 7% Steel Cement & lime 70% Nonferrous Ceramic Glass Other

17 Average key market growth forecasts growth forecast Steel Cement EU 0% -7% NAFTA 5% 0% China 5% 5% RoW 6% 5% China slowing but soft landing expected Global l 5% 25% 2.5% Source: Arcelor Mittal, LaFarge February 2012

18 Steel applications in China & the world 20% China World 32% 14% 6% 13% 49% 18% 24% 24% House building Engineering construction Machinery Motor vehicle Other Construction Machinery Motor vehicle Other Source: KPMG, OECD & Eurofer

19 Ub Urbanisation & power are steel lintensive i Source: Rio Tinto November 2011

20 World steel production - growth 2016 ~5% pa Source: World Steel Association, IMF and author estimates

21 China steel growth to continue Source: BHP Billiton September 2011

22 China steel consolidation - top 10 = 70% 80% eel n otal ste duction % of to prod 60% 40% 20% 0% Top 5 producers Top 10 producers Source: CISA

23 China steel production 5% CAGR to CA AGR(% %) th Five Year 11th Five Year 12th Five Year Plan ( ) 2005) Plan ( ) 2010) Plan ( ) 2015) Source: KPMG May 2011

24 Indian Steel Capacity- 5% CAGR to Million 300 Mtpa 200 5% CAGR Capacity Production Source: OECD Steel Committee December 2011

25 More 100Million MT pa steel companies World top 5 steel producers(million MT) Rank Nippon Steel 34.6 Nippon Steel US Steel 28.5 US Steel British Steel Bethlehem Steel Nippon Kokan 18.7 FINSIDER 13.7 Nippon Steel USINFOR SACILOR Nippon Steel POSCO 27.7 Arcelor Mittal Hebei Steel POSCO 16.2 Arbed 24.1 Baosteel 44.5 British Steel 13.8 LNM 22.4 Anben Steel Nippon Bethlehem h Wuhan USX 12.4 Usinor 21.0 Kokan Steel Steel Average Source: & KPMG

26 Cement Top Three 2010 (Million MT) World Production World Consumption 2010 Exports China 1851 Turkey India 212 China USA 69 Thailand 14 World Capacity China Capacity Growth to 2025 Lafarge 215 CNBM 200 East Asia 1561 Holcim 212 Anhui 150 SW Asia 285 Heidleberg 116 Jidong 90 SE Asia 139 Source: Lafarge

27 India- the next cement giant Source: Lafarge

28 Agenda The Asian Century- long term view The Asian Century- short term view Key refractory markets Minerals for refractories

29 World refractory consumption-forecast t Key assumptions: previous steel forecasts & China reduces refractory consumption to 15Kg/tonne steel Author estimates

30 Refractories global l consolidation Source: PRE

31 World refractory sales 2010 ( B) Author estimates

32 Chinese refractory sales 2010 ( B) Author estimates

33 The refractory difference- steel is key driver 2010 China Japan Total refractory consumption (million Mt) 26 1 % monolithic refractories 38% 67% % steel refractories 61% 79% Steel production (million Mt) Kg refractory/ Mt steel Author estimates

34 China steel consumption to 2040 Source: Rio Tinto November 2011

35 Japan refractory history = China future? Refractory pro oduction ( 1000 t) 4,000 3, ,000 1,000 Shaped Refractory Unshaped Crude Steel Total Refractory Crude steel pr roduction( 106t) China 2012? Source: Shinagawa Technical Report

36 China refractory production & trade Refractory Products (Million MT) Production Exports Imports Apparent consumption Source: Trademap & Refwin

37 China total t refractory exports 2010 ~US$1.6B 14% Bricks 12% Shapes 74% Monolithics Source: Trademap

38 China refractory brick exports '00 00tonne es % 45% China Rest of world Source: Austrade Trade Map

39 China refractory production-the th issues Inefficient - too many, too small Over 2000 refractory companies(2009) Only 6 companies out of 1400 with sales over CNY300Million in 2003 High energy consuming, high polluting operations, Many use coal for fuel Many with minimal dust collection for crushing and grinding Most are labour intensive with future OH&S issues Rapidly increasing labour (15%pa) and energy costs (4c/KwH cf EU 19c/KwH) Unsustainable Exhaustion of high quality raw material resources Overcapacity leading to intense local competition, marginally costed exports and Inadequate profit margins Source: Jie-Hua Liu, Refractories Worldforum Volume

40 Agenda The Asian Century- long term view The Asian Century- short term view Key refractory markets Minerals for refractories continued

41 Major world refractory raw material sources Source: PRE MagMin 2011

42 China refractory raw material exports Tonnes ( 000) Fireclay Raw materials for ~25% of refractory production outside China BFA & FA DB magnesia Fused magnesia Silicon carbide Flake graphite These materials are ~ 85% of total refractory raw material exports of ~4M tpa Source: Trademap

43 China refractory raw material exports-issues Inefficient Over 1600 companies exported refractory raw materials from China Only 4 companies exported more than 100,000 tonnes in 2010 High energy consuming, high polluting resources resulting in, export tax rebate benefit cancelled for all 11 types of raw materials 7 types of raw materials charged export tax with a tax rate from 5% to 20% export quotas required for magnesite, clay and silicon carbide Unsustainable Decreased high h grade resources mainly due to over-mining i (eg graphite and magnesite) Large amount of export beyond the capacity of reserves in China Government policy of exporting value added products rather than raw materials Competition from alternative uses for raw materials Source: Wang Yuanjiang, 1st China International Refractory Production & Application Conference May 2011

44 Refractory producers target t raw materials Magnesita targets 90% raw materials self sufficiency over 3 years November 2010 RHI targets 80% raw materials self sufficiency in 5 years February 2011 Source: IM Magazine

45 China Five Year Plan & nonmetallic minerals Mineral production (million tpa) Growth (%pa) Flake graphite Bentonite Feldspar Wollastonite Limestone (cement) Kaolin Silica (glass) Talc Magnesite Source: Refractories Window January 2012

46 World magnesite reserves~3.6 billion tonnes 2% 3% 5% 9% China 2% DR Korea 15% Russia 23% Slovakia Turkey 21% Australia 20% Brazil India Other Refractories ~ 83% of magnesite; non Chinese resources will be developed Source: Annex V EU Report of the Ad-hoc working Group on defining critical raw materials July 2010

47 China- aluminium i or refractory bauxite? Bauxite mining in China is increasing but only supplies 70% of demand for alumina needed for aluminium production Alumina industry in China competes with bauxite for refractory use - outcome will depend on future Chinese aluminium production Source: Alumina Ltd 2010

48 China- batteries or refractory graphite? Demand for lithium-ionion batteries will increase rapidly for battery powered vehicles Only flake and synthetic graphite (made through an expensive process from petroleum coke) can be used in lithium- ion batteries Source: IM Magazine

49 Zircon for tiles or refractories? Demand for zircon as opacifier for ceramic tiles and for chemicals will exceed supply High zircon price will restrict its application to the higher value markets Source: Alkane & TZMI

50 Vietnam an alumina giant Bauxite reserves in Vietnam may total 8-11 billion tonnes Vietnam s reserves could be the world s largest. The USGS ranked Guinea with 7.4 billion tonnes, while Australia has 6.2 billion tonnes. Crude bauxite reserves in Vietnam are primarily lateritic bauxite and are mainly in the south. Bauxite reserves in south Vietnam are measured at 5 billion tonnes. Government plans are to produce 650,000tpa chemical grade alumina and 6.3m tpa aluminium by Source: Company Reports

51 Indonesia planning refractory grade alumina PT Antam Tbk plan to produce chemical grade alumina from the Tayan bauxite deposit in west Kalimantan Estimated project cost is US$450M Capacity is 300,000tpa chemical grade alumina Joint venture of Antam (80%) and Showa Denko (20%) Commercial production March 2014 STOP PRESS: Indonesia bans metal ore exports from 2014 bauxite exports in 2011 were 40 million MT. Source: Company Reports

52 The refractory outlook Low volume growth in global refractory demand due to reduced specific consumption & higher h performance raw materials Consolidation of Chinese & global refractory producers Excess brick capacity in China and increased Chinese brick exports Increased environmental, power & labour costs in China Reduced refractory raw material exports and at higher prices from China Increased government control and taxation revenue from all raw materials Ongoing backward integration of refractory producers into raw materials Good times ahead for quality refractory raw material producers outside China

53 Thank you Köszönöm!

54 Profile Dr Richard Flook is the Managing Director of Shinagawa Refractories Australasia Pty Ltd, a manufacturer and supplier of quality refractory and insulating materials. Previously, he was the CEO of Omya in Australia and New Zealand. Richard has also been involved in the development of minerals businesses with ACI, Steetley Industries, Anglo American and Normandy Mining. Richard has over 30 years of experience in profit growth and cost control and new business opportunities including trading, planning, strategic analysis, and market development in the minerals industry and has been involved in managing and developing minerals operations and businesses in Australasia and Asia. Ri h di F ll fth A t l i I tit t fmi i & Richard is a Fellow of the Australasian Institute of Mining & Metallurgy, the Australian Institute of Company Directors and the Australian Institute of Energy. He is a graduate of Sydney University (Ph.D) and the University of NSW (M.Comm)