Iron Ore Value-In-Use: Benchmarking and Application Peter Hannah Analyst
Agenda 1. Metal Bulletin Indices 2. What is Value In Use? 3. Value In Use Indices 4. Value In Use Trends 5. Iron Ore Market Outlook
Metal Bulletin Indices Objective and mathematical calculations not assessments Robust methodologies all MB indices share the same tried and tested methodological template Compliant with industry regulation - designed for use in physical and derivative contracts
Metal Bulletin Iron Ore Index 58% Fe Premium Index is primary settlement index for lower-grade physical market 58% Fe Premium Index is also used by SGX to settle 58% iron ore derivatives contract 65% Fe Fines Index is primary settlement index for higher-grade fines physical market Daily Indices: Weekly Indices: MBIOI-58 MBIOI-58-PI MBIOI-62 MBIOI-65-BZ MBIOI-CPS MBIOI-PT MBIOI-CO MBIOI-IR 65% Fe Pellet & 66% Fe Concentrate are increasingly important settlement benchmarks for physical pellet and concentrate markets Monthly Indices: Fe-VIU Fe-65-VIU Si-VIU Al-VIU P-VIU
1. Metal Bulletin Indices 2. What is Value In Use? 3. Value In Use Indices 4. Value In Use Trends 5. Iron Ore Market Outlook
What is Value In Use? Value that an asset generates for a specific owner under a specific use In the case of iron ore: How much steel can be produced from the ore, at what quality, and at what cost? Al S Si P Fe VALUE Physical character
Why is Value In Use Becoming More Important? 40 Q/Q Percentage Change in MBIOI-62 Impact of low price environment 30 20 Every cent counts 10 0 2008 2009 2010 2011 2012 2013 2014 2015 Increased attention to detail -10-20 Growing importance of Value In Use in price negotiations -30-40 -50-60
How are Metal Bulletin VIUs Calculated? Market-implied approach Transaction + Specification Transaction + Specification Transaction + Specification True to reality products are worth what buyer pays, not what seller thinks it s worth Benchmarks easy to apply in contracts - calculated with transparent and consistent methodology o o Market-average values, nonspecific Can require further negotiation in specific cases REGRESSION MODEL Reflects all market factors not just mill s costs VIU-Fe VIU-Si VIU-Al VIU-P
1. Metal Bulletin Indices 2. What is Value In Use? 3. Value In Use Indices 4. Value In Use Trends 5. Iron Ore Market Outlook
Metal Bulletin Value-In-Use Indices VIU indices for mid- and high-grade Fe, Silica, Alumina and Phosphorous Objective calculations from regression analyses of real transaction data Market-implied values - Not assessments * Silica & alumina shown here for example. MB also publishes VIU indices for iron (mid-grade), iron (high-grade), and phosphorous. Each component is isolated and the effect of corresponding change in chemistry is accounted for - i.e. all other factors held equal
Metal Bulletin Value-In-Use Indices Development of Metal Bulletin s Value In Use Indices
1. Metal Bulletin Indices 2. What is Value In Use? 3. Value In Use Indices 4. Value In Use Trends 5. Iron Ore Market Outlook
Value In Use Trends As well as being an integral part of contract pricing, the VIU indices are also indicators of market dynamics. Changes in the levels of VIU Indices can be driven by: - Changing market product mix - Prices of related commodities, eg. coking coal - Environmental policies
$/tonne per % unit Value In Use Trends 0-0.2-0.4-0.6-0.8 MBIOI Silica & Alumina VIU Trend Why has silica become a relatively less costly impurity? Low price forcing Chinese domestic iron ore concentrate (high Si) to exit market means Chinese mills have greater tolerance for higher Si material -1-1.2-1.4-1.6 Si-VIU Al-VIU Implication is higher Si, low Al material (eg. most Brazilian ores) now obtaining stronger price relative to low-si, mid-al material (eg. most Australian ores) -1.8
1. Metal Bulletin Indices 2. What is Value In Use? 3. Value In Use Indices 4. Value In Use Trends 5. Iron Ore Market Outlook
Demand 80 70 60 50 40 30 20 10 0 China Monthly Crude Steel Output (Mt) Chinese monthly steel output falling. Down 2.2% between January-October 2015, compared with same period a year earlier. Affecting demand and sentiment MBR view is for steel output to continue falling in short term before gradually stabilizing, as exports are still increasing Source: MBR, WSA
Jan/11 Apr/11 Jul/11 Oct/11 Jan/12 Apr/12 Jul/12 Oct/12 Jan/13 Apr/13 Jul/13 Oct/13 Jan/14 Apr/14 Jul/14 Oct/14 Jan/15 Apr/15 Jul/15 Oct/15 Supply 300 250 200 150 Big 4 Iron Ore Output (Mt) BHP Rio Tinto Vale FMG 40% 30% 20% Chinese domestic ROM iron ore output year-on-year (%) 100 10% 50 0% 0-10% -20% Source: China NBS Big 4 output still increasing Source: MBR, Company Reports Additional seaborne supply from Roy Hill and S11D to hit the market in 2016 Still significant volume being displaced from Chinese domestic production Down 7% y/y in Q3 2015
Pellet & Lump Premiums 20% Pellet vs. Lump Blast Furnace Usage Rates 60 MBIOI Implied Pellet & Lump Premiums 35 50 30 16% 40 30 25 20 15 12% 20 10 Pellet Premium Lump Premium 10 5 0 0 8% 4% Pellet Lump Pellet premiums and usage rates at historical lows Low steelmaker profit margins affecting appetite for premium ore types Source: MBR, National Survey
THANK YOU FOR YOUR ATTENTION phannah@metalbulletin.com www.mbioi.com