Raw Material Demand and Availability Seaborne market perspective Kees Gerretse, Group Director Supplies and Transport Tata Steel Group
Tata Steel Procurement Vision Tata Steel Group Vision We aspire to be the world steel industry benchmark for value creation and corporate citizenship We make a difference through Our people Our offer Our innovative approach Our conduct And by embracing our performance culture through the Tata Steel Group TSG Procurement Vision To create a World Class Procurement Organisation with Procurement principles as the basis for cross functional working with world class suppliers Multiple tools deployed across categories to create value, minimise costs, secure supply and simplify processes Visibility of spend to enable continuous improvement activity across the total supply chain to realise benefits supported by a common IT platform Sourcing decisions include the cost and impact of safety, health and the environment Culture of learning and talent management
TSG Raw Materials Procurement Single face to the market buying and shipping team based in London with strong network across the group Group wide contracts for portfolio value creation and supplier relationship management Integrated with Group upstream investment Close, long term relationships with suppliers and end users to ensure security of supply, CI and value creation Technical excellence and value through long term strategic partnerships
Iron Ore Demand and Availability Seaborne Supply vs Demand 1800 1600 1400 1200 1000 mt 800 600 400 200 0 2009 2010 2011 2012 2013 2014 2015 ROW Demand Chinese Demand Seaborne Supply Supply side growth is reasonably secure but there is a threat of less supply due to oligopolistic behavior of big three Demand side much more uncertain given increasing % taken by China and China s unpredictable behavior Source: Tata Steel Group Estimates / Macquarie Bank
China impact iron ore Record Chinese crude steel production is being fed by sea-borne iron ore Chinese monthly iron ore consumption (63% Fe, mt) 70 Spot price CIF China ($US/t) 250 60 Spot price CIF China Imports 200 50 40 150 30 100 20 10 Domestic 50 0 0 04 Apr-04 04 Oct-04 05 Apr-05 05 Oct-05 06 Apr-06 06 Oct-06 07 Apr-07 07 Oct-07 08 Apr-08 08 Oct-08 09 Apr-09 09 Source: Tata Steel Group estimates, CRU
Met Coal Demand and Availability Seaborne Met Coal Supply and Demand (mt) 300 280 260 240 220 200 180 160 140 120 100 2007 2008 2009 2010 2011 2012 2013 2014 Demand Supply Source: Tata Steel Group estimates, CRU, Macquarie Market is expected to soften in forthcoming years as supply improves Supply side growth is reasonably secure threats are more around port and rail capacity but these will improve US has latent capacity as well as steam coal capacity which can be switched to balance the market if market is in deficit and prices are attractive Demand from China will be price sensitive and will be affected by government policy
China impact coking coal Chinese monthly met coal consumption (mt) 40 35 30 Domestic met coal consumption Net Imports Coal/Coke HCC spot price Hard Coking Coal spot price (US$/t) 450 400 350 25 Domestic 300 20 15 Spot price FOB Australia 250 200 10 5 0 30mt/yr rate of net imports Net imports 150 100 50-5 0 04 Apr-04 04 Oct-04 05 Apr-05 05 Oct-05 06 Apr-06 06 Oct-06 07 Apr-07 07 Oct-07 08 Apr-08 08 Oct-08 09 Apr-09 09 Source: Tata Steel Group estimates, CRU trade/prices
China Met Coal Trade Net importer until 2009 Domestic consolidation and safety issues at the start of 2009 resulted in increased imports from Australia and Canada Forecasts for 2010 have a wide range from 15mt to 35mt around 10% of the seaborne market Exports Imports 50 40 30 20 10-10 20 Chinese Met Coal Net Trade Annualised exports (inc coal as coke) Annualised imports Net Trade 30 40 50 2000 2002 2004 2006 2008
Raw materials Iron ore spot price currently 10-15% premium on contract; coal spot prices at $170/tonne Iron Ore Fines (US$/tonne) Premium Hard Coking Coal (US$/tonne) 180 450 160 140 400 350 Spot (Australia FOB) 120 100 Indian FOB (63.5% Fe) Spot Sept 09 Spot $61/tonne 300 250 Sept 09 Spot $170/tonne 80 200 60 150 40 Vale Nippon/Posco/AM settlement = 100 20 Brazil FOB contract -28.2% fines Rio Tinto/BHP Japan/Korea/Taiwan settlement = -33% fines 50 Contract (Australia FOB) BMA settlement = $128/t 0 04 04 05 05 06 06 07 07 08 08 09 09 0 Oct- 06 07 Apr- 07 07 Oct- 07 08 Apr- 08 08 Oct- 08 09 Apr- 09 09 Source: CRU, SBB
Raw material costs - Seaborne Customer Raw materials are now a higher share of total costs HRC inputs* (% share) 100% 22% 21% 22% 80% Other =55% Other =51% Other=43% 60% 32% 30% 21% 40% 5% 3% 17% Raw mats 6% 3% 15% Raw mats 4% 5% 24% Raw mats=57% 20% =45% =49% 21% 25% 23% 0% 1996 2000 2009 Iron Ore Coal Scrap Energy/Alloys/Metals Labour Other *Not adjusted for shipping and inventory lags Source: Tata Steel Group Estimates
Iron Ore and Met Coal Issues Iron Ore Over consolidated supply side top three have >70% of the market Proposed BHPB/Rio mining JV would only make it worse Same products, same tonnes, same logistics, joint mine development, - A spot market would lead to higher prices and increased price volatility Coal Middle men take a margin and drive prices higher Consolidated supply side gives a lack of transparency and asymmetry of information Ore is not a commodity (unlike steam coal/aluminium) Slow and uncertain development of rail and ports in Queensland - Over consolidated supply side BHPB has c40% of Seaborne HCC market - Technology developments offer opportunities for cost reduction and BF performance improvement Non-recovery stamp charge ovens
Common Themes for seaborne markets Unpredictability of Chinese demand is creating price volatility and variable availability Over consolidated supply side creates lack of supply and innovation and inflated prices High ore and coal prices restrict the ability of steelmakers to compete with those with own materials The 10% increase in raw materials costs in HRC is not sustainable New entrants offer customer focus, excellent quality and flexibility
Thank you
Backup Slides
Global Steelmaking Capacity Significant excess capacity will exist in 2009-2011 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 Crude steel (mt) Global Capacity Utilisation (effective*) Global Capacity (effective) Effective Capacity Utilisation 350-400mt effective excess capacity 100% 90% 80% 70% 60% 50% 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Global crude steel production 40% Source: World Steel Association, Tata Steel Group. *Effective capacity defined as 90% of nominal stated capacity
Scrap prices Bottomed well above historical averages and has started rising Scrap price (US$/tonne) 750 700 650 600 550 500 450 400 350 300 250 200 150 100 50 +766% +188% Year average 98 99 00 01 02 03 04 05 06 07 08 09 Source: CRU