Developments in production costs and competitiveness in ferrochrome

Developments in production costs and competitiveness in ferrochrome Kevin Fowkes Managing Consultant Metal Bulletin 29 th International Ferroalloys Conference Barcelona, 12 h November 2013

Structure 1. Overview of FeCr production costs 2. Country focus: - Kazakhstan - India - China - South Africa 3. Conclusions

90% of global FeCr production is accounted for by four countries China, South Africa, Kazakhstan and India Others 10% World HC/charge FeCr production, 2012 China India 11% China 35% Kazakhstan 12% South Africa 32% Total ~9 million tonnes

50-80% of ex-plant FeCr cash costs are typically denominated in local currency, making exchange rates important drivers of the market 100% HC/charge FeCr cash cost, global average ex-plant, 2013 22% Labour Currency denomination Local 17% Reductant* Mostly US dollar 32% Chrome ore Local most captive production US dollar purchased ore 0% 29% Electricity Local (some link to world energy prices) 50-80% of cash costs denominated in local currency** * Also includes other raw material costs eg. electrode paste, flux **excludes Zimbabwe

The South African rand and Indian rupee have both depreciated significantly in 2013, with implications for FeCr production costs Exchange rate vs US dollar (index, 2008=100) 120 110 100 increasing strength China RMB S.Africa Rand 2008 2012 Nov 2013 8.28 8.22 10.17 90 80 70 increasing weakness S.Africa Rand Kazakh Tenge India Rupee India Rupee China RMB Kazakh Tenge 43.81 53.76 62.00 6.96 6.32 6.14 122.38 151.38 156.55 60

Global average FeCr cash costs declined slightly in both 2012 and 2013. Electricity is now close to becoming the largest cost component 100 Global average HC/charge FeCr cash costs (FOB basis, US cents per lb FeCr) 79 Total Electricity 50 Ore Reductants Labour 0 Transport to port

South African cash costs have now increased to the level of the global average, whilst Chinese and Indian cash costs have fallen since 2011 150 Global average HC/charge FeCr cash costs (FOB basis, US cents per lb FeCr) 100 Global average China India S.Africa 50 Kazakhstan 0

Structure 1. Overview of FeCr production costs 2. Country focus: - Kazakhstan - India - China - South Africa 3. Conclusions

Kazakhstan FeCr industry characteristics Single major producer (ENRC) 2 large smelters Fully integrated; large reserves of domestic high-grade ore, facilitating output of high-grade HC FeCr Low electricity costs; competitive labour and reductant costs Transport long distances over land Subject to significant mineral extraction tax Overall production costs low most competitive major FeCr producer Gradually increasing production; entirely export-focused Major corporate changes at ENRC in 2013

Kazakhstan has the lowest cost FeCr plants in the world Global average HC/charge FeCr cash costs, 2013 (FOB basis, US cents per lb FeCr) 100 Kazakh plants 0 0 5 10 Global FeCr production (Mt)

Structure 1. Overview of FeCr production costs 2. Country focus: - Kazakhstan - India - China - South Africa 3. Conclusions

India FeCr industry characteristics Many small players, but larger producers dominate (Jindal, IMFA, Facor, Tata..) Increasingly integrated, through consolidation of assets; 60-70% of Indian FeCr output now integrated, including most major producers Ore and alloy quality mixed: average FeCr grade ~60% Cr High and increasing electricity costs producers increasingly building captive power stations however, captive power not necessarily cheap power (often need to purchase coal or oil to generate it) Low labour costs, but mining restrictions becoming strict Average production costs quite high, but integrated players competitive, greatly assisted by weak rupee in 2013 Rising production, driven by exports; increasing interest from Indian players in new overseas FeCr capacity and ore sources (eg. Oman)

Indian FeCr plants with captive ore and energy rank quite competitively; most non-integrated producers are right at the top of the cost curve Global average HC/charge FeCr cash costs, 2013 (FOB basis, US cents per lb FeCr) 100 Indian plants captive ore & power Indian plants non integrated 0 0 5 10 Global FeCr production (Mt)

Structure 1. Overview of FeCr production costs 2. Country focus: - Kazakhstan - India - China - South Africa 3. Conclusions

China FeCr industry characteristics Large number of small producers, focused on domestic market Most producers non-integrated domestic ore production very low (~98% of chrome ore imported) Mix of ores used balance shifting towards lower grades from S.Africa High and increasing electricity costs North-south divide with respect to electricity prices Low labour, reductant and interest/depreciation costs Overall production costs high, but falling since 2011 Rapidly increasing production; net importer, but FeCr imports declining

Chinese FeCr capacity clusters around Inner Mongolia, Shanxi and Sichuan. 56% of FeCr capacity is now in the north of the country 11% BEIJING Inner Mongolia Shanxi Gansu Coal-based power 56% of Chinese FeCr capacity (2013) SHANGHAI Sichuan Guizhou Source: Tsingshan Hunan Hydro-based power 44% of Chinese FeCr capacity (2013)

Power in northern China, predominantly generated from coal, is around 20% cheaper than in the hydro-powered provinces of the south 100 Power prices in Northern China, Jan-Nov 2013 (US$/MWh) 100 Power prices in Southern China, Jan-Nov 2013 (US$/MWh) Average Average 85% 67% 85% 60 36% 50% 60 36% 50% Source: MySteel

Lower power prices have fuelled a significant shift in FeCr capacity towards northern China in recent years 3 Chinese FeCr production capacity, (million tonnes) North South 2 1 0 2010 2013

Chinese FeCr producers have benefitted from falling chrome ore prices since 2011, and from increasingly purchasing cheaper South African ores 14 12 Chinese chrome ore imports (Mt, gross weight) Other 700 600 Chrome ore prices (US$/Mt, CIF China) Turkish lump 40-42% S.Africa conc 44% S.Africa UG2 42% 10 India 500 8 Oman Iran 400 6 Pakistan 300 4 2 36% 50% 48% 56% Australia Turkey S.Africa 200 100 0 0 * data annualised for year-to-date

Chinese FeCr plants, on average, remain at the top end of the cost curve. Lower power costs make costs in the north lower than the south Global average HC/charge FeCr cash costs, 2013 (FOB basis, US cents per lb FeCr) 100 China North China South 0 0 5 10 Global FeCr production (Mt)

On a full cost comparison (includes depreciation, interest etc), Chinese FeCr plants are slightly more competitive on the global cost curve Global average HC/charge FeCr full costs, 2013 (FOB basis, US cents per lb FeCr) 100 China North China South 0 0 5 10 Global FeCr production (Mt)

Chinese domestic FeCr prices (basis 50-55% Cr) have been 2-8 cents/lb below average Chinese cash production costs year-to-date in 2013 Global average HC/charge FeCr cash costs, 2013 (FOB basis, US cents per lb FeCr) 100 China domestic FeCr 50-55 price exc VAT avg 2013 China North China South 0 0 5 10 Global FeCr production (Mt)

High cash costs, low prices yet sharply rising output the Chinese FeCr industry seems to defy conventional wisdom. Thoughts Published Chinese FeCr prices are generally basis 50-55% Cr charge chrome and include VAT Excluding VAT, Chinese charge chrome prices are substantially lower than spot prices in the west (current difference ~10%) and often below calculated average Chinese production cost Average grade of FeCr produced in China is somewhat higher than 50-55% Cr (but now perhaps <60% Cr due to increased use of South African ore) Therefore it is possible that average prices in China are slightly understated by using just reported charge chrome prices, which represents a lower grade product than the Chinese average Perhaps it is more useful to view the economics of Chinese FeCr output as part of the total competitiveness of the Chinese stainless steel value chain

China s cost position and export tax ensures that the country cannot be sustainably competitive as an exporter of FeCr Global average HC/charge FeCr cash costs, 2013 (FOB basis, US cents per lb FeCr) 100 Western FeCr 50-55 spot price (FOB China basis) - avg 2013 Export tax Export tax China domestic FeCr 50-55 price exc VAT avg 2013 China North China South 0 0 5 10 Global FeCr production (Mt)

Structure 1. Overview of FeCr production costs 2. Country focus: - Kazakhstan - India - China - South Africa 3. Conclusions

South Africa FeCr industry characteristics Two large players dominate (Glencore-Xstrata, Samancor), six other producers of a medium size Almost entirely integrated; rising exports of ore Ore low grade, suitable for charge chrome only increasing proportion of UG2 Electricity costs have increased rapidly, though stabilised in 2013 due to weak rand and buy-back agreements; further significant increases inevitable Production costs very varied between plants driven by technology and capacity utilisation Depressed production and low capacity utilisation in 2012 and 2013 due to poor market fundamentals this has impacted on unit costs

South African FeCr plants range widely from low to quite high cost key factors are furnace technology and capacity utilisation Global average HC/charge FeCr cash costs, 2013 (FOB basis, US cents per lb FeCr) 100 South African plants 0 0 5 10 Global FeCr production (Mt)

On average, South African FeCr plants should have been cash profitable in 2013. Current prices are below cash cost for the highest cost plants Global average HC/charge FeCr cash costs, 2013 (FOB basis, US cents per lb FeCr) 100 Western FeCr 50-55 spot price (FOB South Africa basis) - avg 2013 South African plants - Nov 2013 0 0 5 10 Global FeCr production (Mt)

On a full cost comparison (includes depreciation, interest etc), South African plants range even more widely across the cost spectrum Global average HC/charge FeCr full costs, 2013 (FOB basis, US cents per lb FeCr) 100 South African plants 0 0 5 10 Global FeCr production (Mt)

About half of South African FeCr production does not cover full costs at current price levels 120 Global average HC/charge FeCr full costs, 2013 (FOB basis, US cents per lb FeCr) 110 100 90 80 Western FeCr 50-55 spot price (FOB South Africa basis) - avg 2013 South African plants - Nov 2013 70 60 50 40 30 20 10 0 0 5 10 Global FeCr production (Mt)

Average capacity utilisation at South African FeCr plants has been only ~75% in 2012 and 2013, impacting on unit costs at affected plants 4 World HC/charge FeCr production (Mt, gross weight) 100% Average capacity utilisation, South African FeCr plants China 3 S.Africa 2 75% 1 Kazakh. India 0 Rest of world 50%

The weaker rand and power buy-back agreements have stabilised power prices in USD terms for South African FeCr producers in 2013 100 0 Estimated average electricity prices in FeCr production (US$/MWh) China South S.Africa China North Kazakhstan Eskom forecast 8-10%pa increase in S.African power prices in Rand until 2018 (MB conference, Sep 2013) Continued depreciation of Rand would lead to higher tariff increases in Rand, due to inputs eg.coal being denominated in USD Stability of 2013 therefore a temporary phenomenon

There are wide variations in electricity and reductant consumption at South African FeCr plants, driven by furnace technology Electricity consumption in South African FeCr production: 2,000 kwh/t 4,500 kwh/t Pre-reduction (Premus) Sintering & pelletising (Outotec) DC arc Reductant consumption in South African FeCr production: Pre-reduction and DC arc processes can use cheaper reductants Significant substitution out of coke and into coal/anthracite across the South African FeCr industry in recent years

Structure 1. Overview of FeCr production costs 2. Country focus: - Kazakhstan - India - China - South Africa 3. Conclusions

Conclusions China remains, on average, a higher cost FeCr producer than South Africa, though the gap has narrowed (partly due to falling ore prices) The competitiveness of China s FeCr industry within the stainless steel value chain may be greater than implied by a FeCr cost curve. China can be expected to continue to increase FeCr output in the foreseeable future The position of South African FeCr plants on the cost curve varies significantly, based on technology and capacity utilisation The South African FeCr industry has an over-capacity problem.utilisation stuck at 70-75% in a poor market. Capacity still scheduled to increase (eg. Lion Phase II project). An eventual shake-out seems inevitable Future outlook: much depends on power prices and availability, and whether rising chrome ore exports are allowed to continue exchange rates also very important

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