CURRENT DYNAMICS OF THE NICKEL MARKET: ON THE PATH TO RECOVERY Asian Stainless Conference, Hong-Kong June 4-5 th, 2014 ALLOYS, ORES & PEOPLE DES ALLIAGES, DES MINERAIS ET DES HOMMES.
DISCLAIMER This presentation has been prepared by the Eramet Nickel Research team for delivery at the Asian Stainless Steel Conference in Hong Kong, on June 5 th 2014. The presentation is intended solely for the benefit of the attendees of the afore-named event and its contents and conclusions may not be disclosed to any other person or companies or republished without Eramet s prior written permission. The information upon which this presentation is based either comes from our own experience, knowledge and databases, or has been supplied to us. The opinion expressed in this presentation are those of Eramet. They have been arrived at following careful consideration and enquiry but we do not guarantee their fairness, completeness or accuracy. The opinions, as of this date, are subject to change. We do not accept any liability for your reliance upon them. Asian Stainless Steel Hong Kong June 2014 2
ERAMET: A GLOBAL PLAYER IN LONG-TERM GROWTH BUSINESSES ERAMET profile ERAMET global footprint ERAMET is a developing mining and metallurgical group The Group employs around 14,000 people in 20 countries The three divisions of the Group ERAMET Nickel, ERAMET Manganese and ERAMET Alloys generated a combined 3.2 billion in turnover in 2013 Eramet is a historical nickel player with more than 130 years of mining in New Caledonia (130th anniversary of the Thio mine and 100th anniversary of the Doniambo smelter in 2010) ERAMET is the 7 th largest nickel producer and the 2 nd ferronickel producer worldwide Asian Stainless Steel Hong Kong June 2014 3
AGENDA 1. Nickel market fundamentals 2. 2003-2013, major developments 3. 2014, a turning point for the industry 4. 2015 and beyond, the need for new nickel supply Asian Stainless Steel Hong Kong June 2014 4
Nickel salts Nickel metal FeNi DIVERSIFIED RANGE OF MARKET APPLICATIONS Nickel consumption, which grew at an average 4% over the past decade, represented 1.7 million tons in 2013 : Nickel forms Main applications Main market drivers Share of nickel consumption (2000) Share of nickel consumption (2013) Stainless steel Transport Construction Hygiene & healthcare 65% 67% Nickel-based alloys Aerospace Energy 14% 12% Casting and alloy steels Construction Railway 8% 7% Plating Automobile Aeronautics Industrial molds Data storage Household equipment Railway 6% 9% Rechargeable batteries Automobile Electronics 3% Catalyst industry Refinery Oil & gas 1% 1% Asian Stainless Steel Hong Kong June 2014 5
NICKEL CONSUMPTION STILL AT AN EARLY STAGE OF DEVELOPMENT Inflection point not yet reached for many commodities Percentage of saturation level * Source: Rio Tinto Société Générale Asian Stainless Steel Hong Kong June 2014 6
CYCLICAL NICKEL MARKET Like other base metals such as zinc, tin, lead, aluminum and copper, nickel has been traded on the London Metal Exchange (LME) since 1979. The nickel price, which responds to market fundamentals of supply and demand, is subject to boom and bust periods. LME nickel price yearly average in USD/lb * YTD average as of May 27, 2014 Asian Stainless Steel Hong Kong June 2014 7
REFLECTING INDUSTRY CHARACTERISTICS OF HIGH CYCLICITY Capital intensity The capital intensity of an average nickel project is higher than for comparable industries, making it difficult to invest during the downturn of the industry cycle. Long lead times 10-year lead time from deposit discovery to plant commissioning makes it difficult for the supply to match the demand. Project size each wave of new capacities arriving on the market leads to a significant increase of global production, thus, creating risk of over-supply. Technological constraints Technical expertise for new players requires a significant learning curve. During the last decade, major projects failed to deliver their promises and experienced delays in commissioning. Above characteristics of the nickel industry make it difficult for supply to match demand, generating alternative periods of boom-and-bust of nickel prices Asian Stainless Steel Hong Kong June 2014 8
AGENDA 1. Nickel market fundamentals 2. 2003-2013, major developments 3. 2014, a turning point for the industry 4. 2015 and beyond, the need for new nickel supply Asian Stainless Steel Hong Kong June 2014 9
THE PAST DECADE AS BEEN OF MANY CHALLENGES FOR THE NICKEL MARKET Despite the demand crisis of 2007-2008, nickel consumption has increased at a 4% average growth rate over the past decade. However, increasing demand for refined nickel has not always been met by the growth of supply. Nickel market balance in thousand tonnes Refined nickel production vs. apparent consumption of primary nickel, in thousand tonnes Asian Stainless Steel Hong Kong June 2014 10
PEAK OF THE NICKEL PRICE IN 2007 Nickel prices and market balance 2003-2007: Lack of supply development and major project delays leading to market deficit and nickel price fly up Asian Stainless Steel Hong Kong June 2014 11
DEMAND CRISIS IN 2008 Nickel prices and market balance 2007-2009: Market surplus due to brutal demand crisis from H2 2007 Asian Stainless Steel Hong Kong June 2014 12
MARKET RECOVERY IN 2009-2010 Nickel prices and market balance 2009-2011: Demand recovery and supply disruption allowing for the nickel price to recover on the back of market deficit Asian Stainless Steel Hong Kong June 2014 13
DEGRADING MARKET FROM MID-2011 Nickel prices and market balance 2011-2013: Large stock build-up due to accumulation of excess supply with development of NPI RKEF (+200 kt from 2011 to 2013) Asian Stainless Steel Hong Kong June 2014 14
2006-2010, THE EMERGENCE OF NICKEL PIG IRON From 2006, the Chinese stainless steel industry developed exponentially, in turn driving the demand for refined nickel. Nickel Pig Iron (NPI) developed in China to meet the increasing demand for refined nickel that was not otherwise met by traditional production or new projects. Refined nickel production vs. real consumption of primary nickel, in thousand tonnes Asian Stainless Steel Hong Kong June 2014 15
2011-2013, EXPONENTIAL DEVELOPMENT OF NPI RKEF NPI was first produced in old blast furnaces with low capacities. It then developed significantly over the past 3 years, with a wave of investments into rotary kiln electric furnace (RKEF*) projects. RKEF capacity developments, launched in 2010-2011 when the nickel price traded around USD 10.0 /lb (22,000 USD/t), hit the market in 2012-2013, reaching a peak of production in 2013. NPI production breakdown by type In thousand tonnes 2006 26 kt 2007 85 kt 2008 68 kt 2009 98 kt 2010 158 kt 2011 248 kt 2012 353 kt 2013 455 kt * RKEF Rotay Kiln Electric Furnace is a process similar to that of PT Antam, Pamco or SLN Asian Stainless Steel Hong Kong June 2014 16
SUPPORTED BY MASSIVE NICKEL ORE IMPORTS IN CHINA Almost all NPI production has been fed by nickel ore imports from the Philippines and Indonesia: Philippines ore imports largely consist of iron ore substitute (over 50% iron content) and low nickel ore grade (0.9% nickel content), which is consumed in the production of BF NPI. The development of the NPI RKEF production created exponential demand for high grade nickel ore (1.8% nickel content and above), which is most suited to the process and mostly comes from Indonesia. Imports of nickel ore in China in million wet metric tonnes Ʃ 2010-2013 Phil = 93 Mt Indo = 115 Mt 2010 25 Mt 2011 48 Mt 2012 64 Mt 2013 71 Mt Asian Stainless Steel Hong Kong June 2014 17
PUSHING THE CHINESE NICKEL ORE MARKET INTO OVERSUPPLY Record high volumes of Indonesian nickel ore exports into China over the past 3 years contributed to the creation of significant stock build-up in China (estimated at 8 months of NPI production beginning of 2014). In turn, this buildup of nickel ore stock put downward pressure on the nickel ore price throughout 2012-2013. Nickel ore stocks in China (ports + inland) usable for the production of NPI (in million wmt) Indonesian nickel ore price (1.8% Ni) FOB price, in USD/wet metric tonnes Asian Stainless Steel Hong Kong June 2014 18
ALLOWING FOR COMPETITIVE SUPPLY OF NPI Lower nickel ore prices allowed Chinese NPI RKEF producers (+some EF producers) to remain competitive in a degrading market environment. A change of +/- 10 USD/wmt on the FOB nickel ore price, translates into a likewise change of +/- 1 000 USD/t on NPI RKEF production costs. Production cost of Chinese NPI RKEF in USD/lb and associated nickel ore price in USD/wet metric tonne Asian Stainless Steel Hong Kong June 2014 19
CONTRIBUTING TO THE CREATION OF LARGE MARKET SURPLUS From 2011, the massive development of NPI RKEF production capacity weighted heavily on the market as refined nickel supply outgrew demand. As a consequence, the market registered an all time surplus of more than 150 kt in 2013. Weight of NPI RKEF capacity developments on the market balance, in thousand tonnes Asian Stainless Steel Hong Kong June 2014 20
BUILD-UP OF EXCESS SUPPLY The gradual build-up of excess supply since mid-2011 explains the degrading nickel prices, which registered a critical level USD 6.31/lb (USD 13,900/t) on average in the second half of 2013. The stock build-up materialized both under the form of refined production (on the LME and at nickel producers) and under the form on nickel ore stocks in China. Asian Stainless Steel Hong Kong June 2014 21
AGENDA 1. Nickel market fundamentals 2. 2003-2013, major developments 3. 2014, a turning point for the industry 4. 2015 and beyond, the need for new nickel supply Asian Stainless Steel Hong Kong June 2014 22
LIMITED SUPPLY ADJUSTMENTS IN 2013 In 2013, over 30% of the industry was cash negative on Wood Mackenzie s C1 TM direct cash cost curve and close to 50% was below breakeven on C2 TM operating costs curve. However, given the high level of uncertainty that prevailed, supply adjustments remained fairly limited in 2013. The closure of Falcondo and Fortaleza smelter combined with the care and maintenance of some minor mining operations removed a mere 50 ktpa of production capacity from the market (intermediate and refined products). This compares to 780 kt of the production being cash negative on C2 TM operating costs curve. 2013 nickel industry C1 TM cash cost grouped by operation and ranked by cash cost C1 TM - direct cash costs (mining, processing and offsite realization costs, including revenues from co/by-products) C2 TM - operating costs (C1 plus depreciation & amortization costs) Source - Wood Mackenzie Ltd, Dataset 2013 Q4 Asian Stainless Steel Hong Kong June 2014 23
JANUARY 12TH 2014: SMART IMPLEMENTATION OF THE INDONESIAN EXPORT BAN In 2009, the Indonesian Parliament voted a Mining Law that would implement a ban on unprocessed minerals exports from January 2014. The law called for greater state benefit from the industry and local metals processing. Uncertainties as to the actual implementation of the law explain the confusion and the status quo that characterized the market in 2013: Feb 2012 May 2012 Aug 2013 Dec 2013 anticipated ban as of May 6, 2012 is announced a 20% export tax is implemented on nickel ore exports and export quotas are introduced export quotas are cancelled The Parliament rejects proposals to modify the 2009 Law As of January 12, 2014, Indonesia implemented the ban on unprocessed mineral ore exports with no major modification for nickel and bauxite: Nickel ore must now be processed and have a minimum purity content of 70% for nickel matte, 10% for ferronickel, 4% for nickel pig iron and 93% for nickel metal to be eligible for export. Indonesia made a smart move as it acted on minerals for which the country owns a significant part of the world resources. For other metals such as copper, lead, zinc and manganese, it introduced some dilution: Based on purity concentrates may be exported up to the end of 2016; An export tax, which increases every 6 months, should however be introduced. The 2 main runners for Presidency are all in favor of the ban and do not promise any softening measures Asian Stainless Steel Hong Kong June 2014 24
A DECISION LIKELY TO HOLD Despite previous skepticism regarding the implementation of the ban, it now appears likely to hold firm: None of the forthcoming election candidates in Indonesia have a review of the ban in their manifestos Indonesia has already proven capable of implementing a strict export ban, as illustrated by the ban of tin ore exports in 2002 The revenue from ore can be easily compensated with higher nickel prices and a limited number of new plants Creation of revenue in Indonesia from nickel mining and processing in billion USD Asian Stainless Steel Hong Kong June 2014 25
INDONESIAN EXPORT BAN TO AFFECT UP TO 20% OF THE WORLD PRODUCTION In 2013, an estimated 20% of total refined production was reliant on Indonesian ore exports (380 kt). Indonesian nickel ore largely fed the NPI industry in China, but other smelters in the Western world have historically depended on sourcing from Indonesia to feed their production (around 50 ktpa). Source of feed for nickel refined production 2013 = 1,910 kt Refined nickel production (kt) sourced from Indonesian ore in 2013 Asian Stainless Steel Hong Kong June 2014 26
NICKEL ORE PRICE SURGE Ni ore 1.5% and 1.8% FOB price/wmt Ni ore 1.5% and 1.8% value on the LME FOB prices for Filipino nickel ore 1.8% are skyrocketing to levels 80 USD higher than the peak of March 2011, when LME price traded above 26,000 USD/t The current value of 1.8% nickel ore against the LME is again establishing a new historical record at 60 % of the LME 1.5% nickel ore also continued its rally, breaking a new record in value and in % of the LME This explosive situation illustrates increasing supply tension on the ore market and difficulties for ore buyers to compensate for the banned Indonesian ore Asian Stainless Steel Hong Kong June 2014 27
POTENTIAL INCREASE OF NPI RKEF PRODUCTION COST IN CHINA The change in nickel ore feed for the production of NPI should have a significant impact on RKEF production costs in China: The average ore grade should decline from 1.8% Ni content in 2013 to 1.65% Ni content (50-50% mix of 1.8% and 1.5% ore) Indonesian ore inventories should almost be fully depleted by the beginning of 2015 NPI price and production levels should gradually align on theoretical replacement cost of ore Estimated production cost of Chinese NPI RKEF in USD/lb and associated nickel ore price in USD/wet metric tonne * Average purchase price of nickel ore on a CIF basis (mix of 1.5% and 1.8% Ni), in USD/wmt Asian Stainless Steel Hong Kong June 2014 28
WITH DIRECT IMPACT ON LME NICKEL PRICES The anticipation of a potential nickel shortage has pushed nickel prices up (2-year high of 21,200 USD/t on May 13) Even if the market is still in surplus during the first half of 2014, LME nickel prices should cover theoretical costs of RKEF NPI producers based on ore replacement price. Asian Stainless Steel Hong Kong June 2014 29
AGENDA 1. Nickel market fundamentals 2. 2003-2013, major developments 3. 2014, a turning point for the industry 4. 2015 and beyond, the need for new nickel supply Asian Stainless Steel Hong Kong June 2014 30
A MARKET TURNING INTO DEFICIT By the beginning of 2015, all excess nickel ore stocks in China should be depleted and sustained levels of demand will contribute to a decrease of refined nickel stocks both at producers and on the LME. In turn, this should support LME nickel prices until supply from new investment in Indonesia or in other countries reach the market. Asian Stainless Steel Hong Kong June 2014 31
WHERE WILL ADDITIONAL SUPPLY COME FROM? Additional supply to the market should come either from new Western project developments or from Chinese technology developments in Indonesia and/or China. Need for +600/800 kt of refined nickel by 2025 Chinese players Other players 1 NPI 2 NPI 3 Hydro 4 Traditional 5 Committed 6 China Indonesia low cost supply projects (RKEF / BF) (RKEF /BF) 1st wave Uncommitted projects 2nd wave Asian Stainless Steel Hong Kong June 2014 32
POINTING AT STRONGER NICKEL PRICES LME nickel price yearly average in USD/lb New capacity to be developed at a cost * YTD average as of May 27, 2014 Asian Stainless Steel Hong Kong June 2014 33
CONCLUSION The nickel market is cyclical and the past 2 years have been particularly difficult for the industry as mounting oversupply put downward pressure on the nickel price. The Indonesian ore export ban has brought better market perspectives, for it should limit the growth of refined nickel production in the short-term. In parallel, demand continues to be supported by strong fundamentals, which points toward the absorption of nickel stocks and the market turning into deficit. Investments will be made and new capacity will come on stream but such developments will take time, which should support a strong recovery of the nickel price in the short and medium term. Asian Stainless Steel Hong Kong June 2014 34