Silicon metal: Are the good times coming back?

Silicon metal: Are the good times coming back? Kevin Fowkes Managing Consultant Metal Bulletin 30 th International Ferroalloys Conference Barcelona, 11 th November 2014

For discussion Silicon metal supply, demand & prices Assessment of demand by consumption sector Production costs Conclusion

Silicon metal prices have significantly outperformed Mn alloys & FeCr since 2008, and have maintained a very close correlation with FeSi 4,000 Silicon metal prices (US$/t) 200 European bulk ferroalloy prices (Index, Jan 2008=100) 3,500 3,000 180 160 140 Si metal SiMn HC FeCr FeSi HC FeMn 2,500 120 2,000 100 1,500 1,000 500 EU USA China export 80 60 40 20 Source: AlloyConsult

Silicon metal is consumed in three main sectors the growing importance of solar has been the main story of the past 5-10 years 60% 30% Share of world silicon metal consumption by end-use sector (%) 59% 37% Silicones Aluminium 50% 32% Solar & semiconductors 17% 0% 3% Source: AlloyConsult, Roskill

The ups and downs of the solar industry have had the biggest influence on silicon metal demand trends since 2009 the tail has wagged the dog! 3 2 World silicon metal consumption by end-use sector (Mt) 2009-2011 Solar mania 2011-2013 Solar depression 2013- Solar recovery? Solar & semiconductors Silicones 1 Aluminium 0 Source: AlloyConsult, Roskill

World silicon metal production is expected to reach 2.6Mt in 2014, with China now accounting for nearly two thirds of global output 3 World silicon metal production (Mt) Other Germany Spain 2 Canada S.Africa Thailand Russia Australia 1 64% France USA 0 29% 46% 56% Brazil Norway China Source: AlloyConsult

Unlike most other ferroalloys, China s recent production growth in silicon metal has primarily been export driven 1,800 Chinese silicon metal production (kt) Cancellation of export tax (1 st Jan 2013) 1,200 Exports 600 Domestic sales 0 Source: AlloyConsult

Chinese exports have risen by 80% between 2012 and 2014 significantly higher volumes are going to S.Korea, Other Asia, Europe & Middle East 900 800 Chinese silicon metal exports (kt) Cancellation of export tax (1 st Jan 2013) Other 700 Middle East 600 500 Europe 400 Other Asia 300 200 S.Korea 100 Japan 0 Source: AlloyConsult

Outside of China, the main development in silicon metal production has been reduced Brazilian output, due to electricity shortages 300 Silicon metal production (kt) Brazilian output nearly halved since 2011, due to electricity shortages Brazil USA Norway Expiry of long-term power contracts at end-2014 throws up significant uncertainty for 2015 and beyond Higher production in Norway, partly due to furnace conversion from FeSi 0 29% 46% France New furnace in Australia, on-stream since 2012 64% Overall, non-chinese output has 56% been broadly stable for 15 years New projects proposed in Canada and Iceland Source: AlloyConsult

Aluminium production has significantly outpaced silicon metal consumption in aluminium despite a declining silicon scrap usage rate 220 Index (2000=100) 30% % of silicon in global aluminium production deriving from scrap 200 180 160 World aluminium production (CAGR=5.4%) 20% 140 120 100 World consumption of silicon metal in aluminium (CAGR=4.0%) 10% Linear regression trend line 80 0% Source: AlloyConsult, World Aluminium

The transport sector accounts for about 60% of the silicon metal used in aluminium Division of aluminium alloys by sector and type Silicon metal used in aluminium by estimated end-use 100% 75% 50% 25% 0% Transport alloys Nontransport alloys China Mill products 39% (avg 0.5% Si) China Cast products (avg 8% Si) NON- TRANSPORT (Machinery, consumer durbs, electrical, construction etc) TRANS- PORT (Other) TRANSPORT (Motor vehicles) Source: AlloyConsult, Roskill

Permissable CO 2 emissions from vehicles will decline substantially in the next 10 years, especially in regions where limits are less strict at present 300 200 100 0 Permissable CO 2 emissions from passenger cars (g CO 2 per car per km) EU Japan USA China The EU and Japan have so far led the world in terms of automotive fuel efficiency / CO 2 emission standards Over the next 10 years, standards in China and the USA will become much more strict, and will close the gap with the EU and Japan Lower CO 2 emissions requires greater fuel efficiency, which requires a lighter automobile Other pressures on automakers add weight to cars eg. greater crash resistance & better specification Using lighter materials with same strength is the best solution (good for aluminium, bad for iron & mild carbon steels) Source: Roskill, ICCT

The average aluminium content of a European car has nearly tripled since 1990, and will rise by a further 15-30% by 2020 200 100 0 Average aluminium content of cars produced in Europe (kg per car) High case Low case Aluminium s superior strengthto-weight ratio makes it more effective for building fuelefficient cars than steel or iron Main disadvantage of aluminium is higher cost but legislation forces auto makers to act Average aluminium content of European-produced cars has nearly tripled since 1990 There will be a further increase of 15-30% by 2020, and faster increases in other regions Automotive-related alloys account for the highest amount of silicon used in aluminium Source: Roskill, European Aluminium Association

Silicone consumption is driven by disposable income significant growth potential exists from developing countries growing their middle class World silicone consumption by end-use (value basis) China Extremely wide array of consuming sectors; approx 10,000 individual applications more constantly being developed Many are driven by consumer disposable income (eg. beauty, health, home renovation) most consumption still in west, but substantial growth potential from developing countries building a bigger and richer middle class (especially China) Construction & renovation Health & medicine Energy & electronics Textiles Other Chemical industry Automotive Plastics Paper Complex upstream & downstream production process silicon metal most important raw material (approx 0.5kg/t of silicone) Source: Roskill

The silicone industry is highly consolidated, with the top 5 producers accounting for approx. 85% of world output World silicone production by company (value basis) World silicone production is extremely consolidated the top 5 producers control approx. 85% of world output Others BlueStar Shin Etsu Momentive China Dow Corning Wacker Until recent years, most upstream capacity was in US, Europe & Japan, with developing world largely served from exports Massive investment in integrated silicone plants in China in recent years much of it JVs with big 5 Increased efforts to integrate upstream into silicon metal production over past 15 years (DC, Holla, Simcoa, Elkem-BS) Source: Wacker Factbook, Roskill

We are just emerging from 2-3 years of massive oversupply in polysilicon, during which time polysilicon prices fell by 80% 500 250 0 World polysilicon capacity & production (kt) Global capacity Global production The solar sector has been very prone to hype.the hype of 2008-2011 resulted in a sevenfold increase in polysilicon capacity between those years! Demand suddenly hit the buffers after 2011, resulting in a massive global glut of unused capacity, and polysilicon prices falling by 80% Solar hype (good or bad) rubs off on sentiment in the silicon metal market, despite it still being the smallest of the three consuming sectors Source: Roskill

The solar / polysilicon sector has picked up strongly in 2014, and will probably remain the fastest growth sector for silicon metal long-term Photovoltaic solar installations need to be assessed cumulatively because of their extremely long life-span (20-40 years). It is the rate of increase that drives polysilicon & silicon metal consumption Solar market massively impacted by government incentives & subsidies Europe led the 2008-2011 solar boom, fuelled by generous government incentives to install solar panels. The widespread removal of these due to spending cutbacks post-2011 arguably drove the solar bust of 2011-2013 New PV solar installations are growing strongly again expected growth of approx 25% in 2014. Asia leading the growth Europe now accounts for less than 30% of new installations Forecast growth rate of 7% to 23%pa (EPIA), heavily dependent on degree of incentives/subsidies, will continue to be very cyclical

Average silicon metal production costs have roughly doubled over the past decade Chinese cost structure is very different to elsewhere 100% Ex-plant cash costs by component (2014) 350 Silicon metal cash costs by component (Index, 2000=100) 300 75% 250 50% 200 150 25% 100 0% Si metal (global avg) Si metal (Europe) Si metal (China) FeSi (global avg) Labour & other Quartz Electrodes Reductants Electricity 50 Electricity Reductants Labour Electrodes Quartz Total cash cost Source: AlloyConsult

Geography (ie. power price) largely determines the competitiveness of Chinese plants the majority are still in the high-cost southern provinces 3,000 Silicon metal cash cost curve, 2014 (US$/t, ex-plant) 2,000 1,000 China North China South 0 0.0 0.5 1.0 1.5 2.0 2.5 Cumulative production Source: AlloyConsult

Silicon metal has been a consistently profitable business in the European and US markets partly this reflects AD duties against Chinese imports 4,000 US$/t 3,000 Average cash cost, exc. China (ex plant) Average cash cost +10% 2,000 1,000 EU silicon metal price (DDP basis) US silicon metal price (ex-w basis) 0 Source: AlloyConsult

It is a different story for Chinese producers, who only seem to encounter profitable market conditions during temporary boom periods 3,000 2,000 US$/t 2007-8 commodities boom Solar boom Average cash cost, China (ex plant) Average cash cost +10% 1,000 Chinese silicon metal price (CIF Japan basis) 0 Export tax rebates Source: AlloyConsult

Concluding thoughts The price correlation between silicon metal and FeSi is often overlooked, but remains very strong The continued substantial growth of Chinese silicon metal output & exports is now unique amongst the bulk ferro alloys Developments in Brazil a potential source of volatility for 2015 and beyond Solar will continue to grow its share of silicon consumption, though subject to more volatility than the other sectors. Inevitably the hype that surrounds this sector rubs off on silicon metal too (both good and bad) The growth of silicon consumption in aluminium will pick up, largely due to favourable trends in the automotive sector The difference between prices in USA/Europe and China/elsewhere is increasingly not reflected in the cost curve could changes to AD duties narrow the difference in the future?

Thank you for your attention