Photo: Marcelo Coelho The structural value of higher grade ore Rogerio Nogueira Iron Ore and Coal Marketing Director Singapore Iron Ore Week 2018 24 May 2018
Disclaimer This presentation may include declarations stating Vale s expectations concerning future events or results. All declarations, when based on future expectations rather than historical facts, involve various risks and uncertainties. Vale cannot guarantee that such declarations will prove to be accurate. Such risks and uncertainties include factors related to the following: (a) countries where we have operations, especially Brazil and Canada; (b) the global economy; (c) the capital markets; (d) mining and metals businesses and their dependence on global industrial production, which is cyclical by nature; and (e) the high degree of global competition in the markets in which Vale operates. To obtain additional information about factors that could give rise to results different from those estimated by Vale, please consult the reports filed with the Brazilian Securities Commission (CVM), the Autorité des Marchés Financiers (AMF), the US Securities and Exchange Commission (SEC), The Stock Exchange of Hong Kong Limited, and, in particular, the factors discussed in the Estimates and projections and Risk factors sections of Vale s Annual Report Form 20F.
Agenda 1. Structural changes in Chinese steel production and iron ore consumption patterns 2. Cost and productivity benefits of using high grade ores 3. Trends in iron ore product quality and Vale s commitment to the steel industry
Agenda 1. Structural changes in Chinese steel production and iron ore consumption patterns 2. Cost and productivity benefits of using high grade ores 3. Trends in iron ore product quality and Vale s commitment to the steel industry
Beijing opera house November 2015
Beijing opera house November 2017
From this to this!
Chinese steel industry capacity utilization increased with additional plant closures and higher pig iron production 7 Steel industry capacity utilization % 95% Pig iron production Mt 7 Mt +1.0% 12 Mt +1.8% 90% 85% 80% 691 698 711 75% 70% 65% 60% 2014 2015 2016 2017 2018 2019 2020 2021 2015 2016 2017 Source: NBS, CRU 7
Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Increased capacity utilization drove up demand of higher grade ores Share of high grade ores in burden mix 1 Breakdown of inventory at Chinese Ports 2 % Lower Grade Higher Grade 100% 100% 100% Mt 80 70 60 Lower Grade Higher Grade 50 40 30 20 35% 36% 40% 10 0 2015 2016 2017 Notes: 1Excludes pellets and Chinese Concentrate; 2 Data from twelve (12) main Ports; High Grade Ores in these charts are 63% Fe and up Source: NBS, Mysteel 8
And reinforced the relative value of higher grade ores Iron ore price spreads: 65 to 58% Fe MBIO US$/t xx Yearly Average Differentials 30 20 MB65 10 0 MB62-10 -20-30 MB58-40 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 9 Source: Metal Bulletin 19 41 47 9
Agenda 1. Structural changes in Chinese steel production and iron ore consumption patterns 2. Cost and productivity benefits of using high grade ores 3. Trends in iron ore product quality and Vale s commitment to the steel industry 10
The cost reduction associated with the use of high grade ores is significant Impact on hot metal costs¹ (high x low grade ores²) US$/t Flux and burnt lime consumption Coke breeze consumption BF metallic burden consumption Slag rate RDI (Reduction degradation index) 14,6 $/dmt of iron ore 20,5 19,4 5,9 Metallic burden impact Coke consumption impact Value impact on hot metal costs Value impact on high grade ores Notes: 1) Cost differentials based only on transformation costs, not on acquisition costs; assuming coke cost of $280/t (HCC CFR at Chinese mills of $215/t, SSCC of $125/t) and PCI of $140/t 2) High grade ore: Fe: 65%; Low grade ore: Fe: 56.6% 11
Additionally, the use of high grade ores increase blast furnace productivity Schematics of a blast furnace Impact on productivity 25% Slag rate reduction COKE SINTER 8% Volume effect x COHESIVE ZONE HEATED AIR ~20% Increase in blast furnace productivity + 30% Slag volumetric share in BF burden Increase in slag reduces blast furnace productivity 12% Permeability effect Notes: High grade ore: Fe: 64.5~65%; Low grade ore: Fe: 56.6%; slag rate of low grade ores @ 395 kg/t vs 292 kg/t for high grade ore. Considering 75% of sinter in metallic burden 12
High grade ores have a significant financial impact even in scenarios of more stringent steel margins Productivity value of high vs low-grade ores 1 Historical rebar margins in China 2 US$/dmt of high grade iron ore US$/t 300 Yearly Average Margins 1 109 94 200 11,7 19,7 27,8 100 0 50 100 150 Steel margin ranges (US$/t) -100 2016 2016 2017 2017 2017 2018 2018 Notes: 1 High grade ore: Fe: 65%; Low grade ore: Fe: 56.6%. 2 Margins = Rebar spot price raw materials cost average conversion costs (Mysteel) 13
Coke Prices $/t (cost driver) 180 230 280 330 Combined benefits of higher x lower grade ores Relative values of high to low grade ores (US$/dmt of iron ore) Assumptions Low demand scenarios High demand scenarios 22.5 34.2 42.2 50.3 Blast furnace capacity as the bottleneck for the calculation of productivity gains ~45 19.4 31.1 39.1 47.2 Based on the operation of a typical Chinese mill 1 16.2 27.9 35.9 44.0 Steel mills working mostly with imported ores with restrictions in Al 2 O 3 ~20 13.1 24.8 32.8 40.9 Availability of high & low grade ores as per current supply 0 50 100 150 Steel Margins $/t (productivity driver) Note: 1 Typical Operation: 75% Sinter + 10% Aussie Lump + 15% Domestic pellet, BF Slag: B2: 1.13, MgO: 9.0%, Al 2 O 3 : 15.5% max 14
Agenda 1. Structural changes in Chinese steel production and iron ore consumption patterns 2. Cost and productivity benefits of using high grade ores 3. Trends in iron ore product quality and Vale s commitment to the steel industry
Investment in mining has decreased and mine depletion rate is now poised to go up FAI 1 in ferrous mining industry in China RMB billion 200 20 Iron ore CAPEX by major Australian players USD bi 150 15 100 10 50 5 0 2010 2011 2012 2013 2014 2015 2016 20172018A 0 2010 2011 2012 2013 2014 2015 2016 2017 1 FAI = Fixed Asset Investments Source: NBS, Miner s reports and Vale 16
Vale s role in improving overall ore quality in China has gained importance China iron ore imports average Fe content 1 % Fe 62,00 61,50 61,00 60,50 60,00 61,7 61,5 61,4 61,2 61,0 60,8 Gap Fe content imported ore into China Fe content imported ore ex-iocj into China 60,7 60,7 60,5 60,4 60,9 60,9 61,0 60,5 60,5 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2020E 60,4 61,2 60,6 61,1 60,3 1,00 0,90 0,80 0,70 0,60 0,50 0,40 0,30 0,20 0,10 0,00 1 Excluding direct charge ore Source: NBS, Metal Bulletin and Vale 17
Vale is committed to supplying high quality products to the market 18 Vale Sales 1, Higher Grade Ore % Share Carajás Blend 40% 40% 42% 40% 35% 23% 14% 5% 2015 2016 2017 2018E 1 Does not include pellets and pellet feed for pelletizing 18
Final remarks The Chinese supply side reform not only successfully tackled pollution but also accelerated structural changes in iron ore consumption patterns The cost reductions and productivity benefits of using high grade ores became more evident and drove up price differentials between low and high grade ores Vale s product portfolio will deliver even higher value as depletion rates intensify 19