AMM 9 th Steel Scrap Conference Economic Fundamentals of Scrap and Iron Ore Prices 11-12 September, Chicago, IL, USA Atilla Widnell Senior Metals Analyst 2015 Metal Bulletin Research www.metalbulletinresearch.com1 1
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Introduction Latest Developments: What US and global indicators tie into scrap prices? How are steel makers adapting to take advantage of low iron ore prices? Forecasts: What factors will affect the iron ore price? How long will this continue? What impact will this have on scrap demand and prices? Conclusions MBR products: MBR Steel Scrap & Metallics Forecaster MBR Steel Raw Materials Weekly Market Tracker 2015 Metal Bulletin Research www.metalbulletinresearch.com 3
Introduction Latest Developments Forecasts Conclusions 2015 Metal Bulletin Research www.metalbulletinresearch.com 4
Steel news, prices & analysis Market analysis and forecasts Company data for metal and mining industries Prices for the physical spot iron ore market 2015 Metal Bulletin Research www.metalbulletinresearch.com 5
Introduction Latest Developments Forecasts Conclusions 2015 Metal Bulletin Research www.metalbulletinresearch.com 6
300 Big 4 Iron Ore Output (Mt) 250 BHP Rio Tinto 200 Vale FMG Major Australian and Brazilian iron ore suppliers expanded production of their assets since H1 2013, following substantial investment programmes. 150 As a result, the Big Four (Rio Tinto, Vale, BHP Billiton and FMG) accounted for almost 998Mt of the world s iron ore production in 2014. 100 These miners have continued to ramp-up output through the first three quarters of 2015 and are on course to produce almost 1.1bn tonnes this calendar year. 50 0 Source: MBR, Company Reports 2015 Metal Bulletin Research www.metalbulletinresearch.com 7
120 Major Iron Ore Export Volumes (Mt) 100 80 Brazil Australia Markedly higher iron ore production, particularly in Australia and Brazil, has resulted in these volumes being exported, particularly to China, to feed steel raw materials requirements. 60 At the same time, persistently high iron ore supply availability has removed substantial support from major seaborne benchmarks since Dec-2013. 40 20 0 Source: MBR, GTIS, ISSB 2015 Metal Bulletin Research www.metalbulletinresearch.com 8
100 90 80 70 60 50 40 30 20 10 0 Key Producer Breakeven Price ($/t - 62% Fe - CFR) Sep-14 Mar-15 Nearly all seaborne iron ore suppliers have lowered breakeven prices, following the substantial declines in benchmarks since the end of 2013. External factors such as lower oil prices and local currency fluctuations have been fundamental in reducing overall costs. But so has active cost-cutting measures - focusing on efficiency of existing assets with many new projects and expansion plans put on hold. Fewer international producers have fallen victim to market conditions than expected, although significant volumes appear to have been displaced in China. Source: MBR, Company Reports 2015 Metal Bulletin Research www.metalbulletinresearch.com 9
450 Hot Metal Proxy ($/t) 400 350 300 250 200 150 100 50 0 Source: MBR 2015 Metal Bulletin Research www.metalbulletinresearch.com 10
60% Floor Space Under Construction and Real Estate Investment (% Y/Y) 50% Floor Space Under Construction 40% Real Estate Investment 30% 20% 10% 0% Source: MBR, CEIC 2015 Metal Bulletin Research www.metalbulletinresearch.com 11
80 70 China Monthly Crude Steel Output (Mt) 60 50 40 30 20 10 0 More recently, however, Chinese mills have scaled-back crude steel output partly in response to quite substantial financial losses due to relatively low finished steel prices. At the same time, the Chinese government has also instructed local steel producers, particularly in northern China, to reduce output to meet numerous blue skies initiatives to improve air quality, particularly in Hebei province, ahead of key political events. As a result, domestic crude steel output has declined almost 1% between January-September 2015, compared with the same period a year earlier. Source: MBR, WSA 2015 Metal Bulletin Research www.metalbulletinresearch.com 12
120 China Steel Exports (Mt) 120% 100% 100 80% 80 60 40 Volumes [LHS] % Y/Y [RHS] 50% 60% 40% 20% 0% -20% That said, production volumes of Chinese semifinished and finished steel have far exceeded apparent domestic consumption. This has resulted in the exportation of excess supply volumes to overseas markets, both near and farther afield. In fact, annualised export data indicates China is on course to ship in excess of 110Mt of semifinished and finished steel in 2015. 20-40% -60% 0-80% Source: MBR, ISSB, GTIS 2015 Metal Bulletin Research www.metalbulletinresearch.com 13
450 Hot Metal Proxy vs. Scrap ($/t) 400 350 300 Hot Metal Scrap 250 200 150 100 50 0 Source: MBR 2015 Metal Bulletin Research www.metalbulletinresearch.com 14
950 900 850 800 750 700 650 600 China BOF/EAF Scrap Consumption Rates (kg/tls) EAF [LHS] BOF [RHS] 150 140 130 120 110 100 90 80 Chinese scrap consumption via the BOF and EAF steelmaking process has failed to climb in tandem with domestic crude steel production. In fact, we understand that Chinese BOFs and EAFs have continued to consume relatively high proportions of hot metal in 2014/15 compared to previous years. Therefore, the scrap consumption rate per tonne of liquid steel produced in both steelmaking processes in China has declined towards historically low levels. 550 70 500 60 Source: MBR, CAMU 2015 Metal Bulletin Research www.metalbulletinresearch.com 15
450 Hot Metal Proxy vs. Scrap ($/t) 400 350 300 Hot Metal Scrap 250 200 150 100 50 0 Source: MBR 2015 Metal Bulletin Research www.metalbulletinresearch.com 16
180 Turkish Construction Index (Base = 2010) 160 140 120 100 Q1 Q2 Q3 Q4 80 60 40 20 0 Source: MBR, Turkish Statistical Institute 2015 Metal Bulletin Research www.metalbulletinresearch.com 17
4.0 Iron Unit Ratio: Iron Ore vs. Scrap 3.5 3.0 2.5 2.0 1.5 Ratio Average The declines in iron ore and coking coal prices have been large factors in the competitiveness of hot metal production costs through 2014 and 2015 compared to relatively costlier scrap. The long-term average of the iron unit price ratio for steel scrap is typically 2.0x costlier than the iron units in iron ore and this relationship has been out of sync since early 2014. 1.0 0.5 0.0 Source: MBR 2015 Metal Bulletin Research www.metalbulletinresearch.com 18
60 US Manufacturing PMI 50 Chicago Busheling/Shredded Spread ($/t) 58 40 56 30 Spread 20 Average 54 10 52 0 50-10 Source: MBR, Markit, AISI 2015 Metal Bulletin Research www.metalbulletinresearch.com 19
120 Major Iron Ore Benchmarks ($/t) CFR Qingdao 30 Implied Pellet Premium ($/t) 100 25 80 20 60 15 40 10 62% Fines 66% Concentrate 65% Pellet 20 5 0 0 2015 Metal Bulletin Research www.metalbulletinresearch.com 20
Introduction Latest Developments Forecasts Conclusions 2015 Metal Bulletin Research www.metalbulletinresearch.com 21
60% Floor Space Under Construction and Real Estate Investment (% Y/Y) 50% Floor Space Under Construction 40% Real Estate Investment 30% 20% 10% 0% Source: MBR, CEIC 2015 Metal Bulletin Research www.metalbulletinresearch.com 22
1000 900 800 700 600 500 400 300 200 100 China Crude Steel Output by Process (Mt) EAF BOF Looking forward, MBR anticipates that Chinese crude steel production will display more modest growth over our forecast period. Domestic electric arc furnace output will marginally increase its share of overall production, particularly in light of recent stringent environmental policies and the replacement of outdated/inefficient capacity. We believe this will place some increased demand on the Chinese scrap recycling industry to process sufficient volumes to meet domestic consumption requirements. 0 Source: MBR, WSA 2015 Metal Bulletin Research www.metalbulletinresearch.com 23
120 China Steel Exports (Mt) 120% 100% 100 80% 80 60 Volumes [LHS] % Y/Y [RHS] 50% 60% 40% 20% 0% We expect to see continued penetration of relatively cheap Chinese semi-finished and finished steel into overseas markets. Unless, countries/regions can impose strict antidumping duties on Chinese-origin steel products to protect local industry. 40-20% 20-40% -60% 0-80% Source: MBR, ISSB, GTIS 2015 Metal Bulletin Research www.metalbulletinresearch.com 24
1400 Iron Ore Production Forecast (Mt) 1200 1000 BHP Vale Rio Tinto FMG MBR anticipates steel raw material prices, particularly iron ore, will remain close to multi-year lows seen in 2015 over the next 12-24 months. 800 600 Roy Hill This means there is modest downside risks for iron ore benchmarks from current levels, as additional supply volumes come on-stream from Roy Hill and Vale s S11D projects. 400 200 0 Source: MBR, Company Reports 2015 Metal Bulletin Research www.metalbulletinresearch.com 25
700 Iron Ore/Scrap Price Forecast ($/t) 600 500 400 300 200 100 Scrap Iron Ore Relatively low cost BF/BOF mills using hot metal and penetrating overseas markets will place pressure on overseas electric arc furnace producers to negotiate further discounts with scrap and metallics suppliers and improve mill margins and competitiveness in the short-to-medium term. Looking further forward, MBR forecasts a rebalancing of mining assets will provide some support to iron ore and alternative iron unit prices over the forecast period. 0 Source: MBR 2015 Metal Bulletin Research www.metalbulletinresearch.com 26
Introduction Latest Developments Forecasts Conclusions 2015 Metal Bulletin Research www.metalbulletinresearch.com 27
Conclusions: What US and global indicators tie into scrap prices? Manufacturing, Turkish Construction Index, Iron Unit Ratio & Chinese Fixed Asset Investment. How are steel makers adapting to take advantage of low iron ore prices? BOFs lowering scrap consumption rates in favour of hot metal What factors will affect the iron ore price? How long will this continue? Australian and Brazilian iron ore output, Chinese steel output, and Samarco disruption. What impact will this have on scrap demand and prices? The new normal relatively low scrap price environment for next 12-24 months. 2015 Metal Bulletin Research www.metalbulletinresearch.com 28
Why MBR? 2015 Metal Bulletin Research www.metalbulletinresearch.com 29
Month Forecast Actual February April Despite the substantial fall in major international scrap benchmarks in February, MBR does not believe these most recent declines will be the end to the overall downward trend We believe that renewed Turkish scrap demand will be sufficient to support benchmarks close to current levels in the short-term. Scrap and metallics prices will experience downside risk as buyers step out of the market towards the end the third quarter. $249/t CFR Turkey 16 th February 2015 $259/t CFR Turkey 22 nd April 2015 July August October We believe seaborne HMS#1&2 (80:20) scrap import benchmarks could fall well below $200/t, CFR Turkey, in the short-term. MBR anticipates major Turkish scrap import benchmarks will experience modest declines through to October, as local buyers curb production schedules. MBR forecasts major seaborne scrap benchmarks will face modest downside risks through the remainder of October, as buyers maintain relatively low purchases. $220/t CFR Turkey 20 th July 2015 $199/t, CFR Turkey 17 th August 2015 $174/t, CFR Turkey 15 th October 2015 Reference Price: Metal Bulletin s North European HMS#1&2(80:20) Turkish Import Price, CFR Turkey 2015 Metal Bulletin Research www.metalbulletinresearch.com 30
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Questions & Answers 2015 Metal Bulletin Research www.metalbulletinresearch.com 34
Contact details for further information: Metal Bulletin Research Straits Trading Building, #12-01, 9 Battery Road, Singapore, 049910 Atilla Widnell Senior Metals Analyst T: +65 6597 7023 M: +65 8318 2835 awidnell@metalbulletinresearch.com 2015 Metal Bulletin Research www.metalbulletinresearch.com 35