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Steel and iron ore outlook
Cicero Machado – April 2019
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China: steel consumption to peak in 2020
0
100
200
300
400
500
600
700
800
900
2005 2010 2015 2020 2025 2030 2035
Mt
Other Shipbuilding
Household Appliances Automotive
Machinery Construction
Source: Wood Mackenzie
Construction to modestly grow, then decline
Steel consumption by sector Decline in construction activities will undermine steel
demand in the long term.
Property:
Short-medium term: credit easing and
‘old home’ renovation program to
support growth.
Long term: growth from lower-tier cities
will not support steel demand
expansion.
Infrastructure:
Short-medium term: highway
construction to be the main contributor
for growth until mid-2020s.
Long term: efforts to curb public debt
risk will negatively impact infrastructure.
Manufacturing: government stimulus will support
medium-term growth. Trade wars may bring
uncertainties to the export of manufacturing goods
over the long term.
Largest growth in steel demand will come from the
automotive sector as vehicle ownership increases
and domestic-manufactured vehicles are promoted.
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China: steel production to remain resilient until mid-2020s
Exports will maintain production high in the medium-long term
Demand contraction to be partially offset by an
increase in exports in the long term
Net capacity decline of <5Mt will allow China to fill
out the global supply gap in the long term
0
20
40
60
80
100
120
140
0
100
200
300
400
500
600
700
800
900
1000
2005 2010 2015 2020 2025 2030 2035
Mt
Mt
Hot metal production
Crude steel production
Finished steel exports (RHS)
Source: Wood Mackenzie
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India: steel demand has scope to grow significantly
Growth will speed up as economic reforms set in Real potential for steel demand growth!
Lack of investment has constrained growth over the past few years
0
100
200
300
400
500
600
2000 2016 2025 2035
Japan
Per capita steel consumption, kg
US
India
China
Germany
Source: Wood Mackenzie, WSA, World Bank, United Nations
0
50
100
150
200
0
50
100
150
200
250
2005 2010 2015 2020 2025 2030 2035
Pro
du
cti
on
by m
eth
od
(M
t)
Dem
an
d b
y s
ecto
r (M
t)
Others
Automotive
Machinery
Construction
EAF-based crude steel production (RHS)
BOF-based crude steel production (RHS)
Source: Wood Mackenzie
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0%
5%
10%
15%
20%
25%
30%
0
20
40
60
80
100
120
140
Mt
Semis net imports
Finished net imports
Domestic production
Net imports as a share of demand (RHS)
Source: Wood Mackenzie
USA: At first glance, American steel is great again!
High price premium will keep imports attractive!
Higher prices followed by import restrictions have not (yet) led to demand destruction
0
10
20
30
40
50
60
70
0
20
40
60
80
100
120
2005 2010 2015 2020 2025 2030 2035
Pro
du
cti
on
by m
eth
od
(M
t)
Dem
an
d b
y s
ecto
r (M
t)
OtherMachineryAutomotiveConstructionBOF-based crude steel productionEAF-based crude steel production
Source: Wood Mackenzie
Commercial construction and infrastructure to lead
demand growth; automotive sector to disappoint
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Brazil: the worst is over but the recovery will be a drawn-out affair
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
% above 2013 peak
2019 2023 2030
Source: Worldsteel, Wood Mackenzie
AFSU
Brazilian steel demand and production (bubble size = Mt)
Apparent finished
steel demand
Crude steel
production -20
-15
-10
-5
0
5
10
2010 2015 2020 2025 2030 2035
Total exports Total imports Net exports
Source: Wood Mackenzie, WSA
Brazilian steel trade (Mt)
Production is structurally geared towards exports
Demand will remain below its pre-crisis peak until
the end of the next decade
Most of Brazilian exports to remain competitive
even with Section 232 tariffs
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Major seaborne
met coal importer
Major seaborne
iron ore importer
Compound annual
growth rate
Steel demand growth >2% per year growth
SE Asia MENA Brazil India
EU28 Japan China
150 167 169 176
2014 2018 2019 2023
107 102 106 111
2014 2018 2019 2023
76 72 76 88
2014 2018 2019 2023
68 66 64 61
2014 2018 2019 2023
694
817 833 823
2014 2018 2019 2023
76 95 102
122
2014 2018 2019 2023
4.7%
1.2%
3.8%
1.0%
-1.5%
-0.3%
69 78 82
97
2014 2018 2019 2023
4.2%
%
Russia
43 40 40 42
2014 2018 2019 2023
1.2%
26 22 23 24
2014 2018 2019 2023
2.0%
USA
1531
1694 1734 1797
2014 2018 2019 2023
Global
0.9%
Contraction or stagnation
Global demand: recovering, but slowly
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40
60
80
100
120
140
160
180
2009 2011 2013 2015 2017 2019 2021 2023 2025
62% Fe sinter fines, CFR China, US$/tonne
Actual Forecast
Source: Wood Mackenzie
Despite lower scrap prices, higher gas and electricity
will take a toll on EAF steelmakers…
…while BOF producers will continue benefiting
from weaker coking coal and iron ore prices
BOF vs EAF crude steel costs, US$/tonne
250
300
350
400
450
500
550
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025
EAF BOF
Source: Wood Mackenzie
50
100
150
200
250
300
2009 2011 2013 2015 2017 2019 2021 2023 2025
QLD HCC, FOB Australia, US$/tonne
Actual Forecast
Source: Wood Mackenzie
Nominal until current year and then real thereafter
Higher raw materials prices lifted production costs in 2018
Costs to shrink until 2020, when BOF and EAF will take different paths
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0
20
40
60
80
100
120
140
160
180
200
0
100
200
300
400
500
600
2010 2012 2014 2016 2018 2020 2022 2024
Weighted average rebar costs and margins, US$/tonne
Other Costs Scrap Coking coal
Iron Ore Margins (RHS)
Source: Wood Mackenzie
Prices to drop, then stabilise
Stronger-than-expected demand, capacity closures and protectionism have pushed prices
up
Nominal until current year and then real thereafter
Big drop on margins to occur in 2021 pushed by
stable production costs… …and (still) declining steel prices
300
400
500
600
700
800
900
1000
1100
2000 2005 2010 2015 2020 2025 2030 2035 2040
Forecast
N. Europe Domestic exmillUSA US Midwest ex mill
Rebar, US$/tonne
Source: Wood Mackenzie
300
400
500
600
700
800
900
1000
1100
1200
2000 2005 2010 2015 2020 2025 2030 2035 2040
Forecast
N.Europe Domestic, ex mill
USA US Midwest, ex mill
China Domestic Shanghai
Hot-rolled coil, US$/tonne
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Source: Wood Mackenzie
2019 seaborne supply/demand outlook
The big question: who can fill the supply gap?
Global exports Global imports
Chinese domestic?
Non-traditional/’swing
suppliers’?
Scrap?
2018
1540Mt
Anglo
+15Mt
Rio
+12Mt
BHP
+8Mt
Roy Hill
+5Mt
FMG
+2Mt
Vale
-55Mt
2019
1526Mt
2019
1550Mt Europe
+5Mt
Asia (ex.
China)
+3Mt
China
+0.5Mt Others
+1.5Mt 2018
1540Mt
Supply gap
Vale to withdraw close to 55Mt from the seaborne market – at least for now!
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Source: Wood Mackenzie
A surge in “obsolete” scrap supply – a matter of “when”
not “if” EAF share to increase from 10% to 16% by 2040
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
0
100
200
300
400
500
600
700
800
900
1000
BOF steel output
EAF steel output
EAF share in steel production (RHS)
Source: Wood Mackenzie
Pro
du
cti
on
by m
eth
od
(M
t)
EA
F s
hare
in
ste
el p
rod
ucti
on
(%
)
0
50
100
150
200
250
300
350
2010 2015 2020 2025 2030 2035 2040
Obsolete scrap
Prompt scrap
Home scrap
Source: Wood Mackenzie
Scrap supply, Mt
Chinese iron ore demand is nearing its peak!
Higher scrap availability and growing EAF to constrain demand in the long term
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0
20
40
60
80
100
120
140
0 500 1000 1500
US
$/t
on
ne (
62%
Fe f
ines b
asis
, C
FR
Ch
ina)
Million tonnes
2019 original cost curve
2019 cost curve with 55Mt less exports from Vale
Demand: seaborne import + China domestic
Source: Wood Mackenzie
Price implied by cost curve increases from
~US$73/tonne to ~US$85/tonne
Vale’s dam disaster: quantifying the price impact
Assuming demand remains constant, price
rises to ~$85/tonne with the removal of 55Mt
of exports.
Given the gradient of the curve, any 10Mt
either way can move the interception point to
the mid-US$70/t range or the US$90/t one.
But:
What will be the duration of Vale’s current
curtailments? More to come?
Other producers in Minas Gerais to “join
the boat”?
Will seaborne ‘swing supply’ be able to
quickly respond? What about Chinese
domestic?
What will be the demand response?
Higher scrap use?
*VIU adjusted cost, basis 62% Fe fines, CFR China, including sustaining capex.
Cost curve shifts to the left and becomes steeper with the
removal of part of Vale’s supply
Price is a moving target!
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“Gap” to be filled by greenfield and/or brownfield
expansions that are out of our base case
62% Fe fines price to hover around the US$65/tonne
mark over the long term
1,000
1,500
2,000
2,500
2010 2015 2020 2025 2030 2035 2040
Operating Highly Probable Probable Consumption
Base c
ase
Source: Wood Mackenzie
Iron ore supply and
Balanced
Market
Notional
“supply gap”
0
20
40
60
80
100
120
140
160
180
200
2000 2005 2010 2015 2020 2025 2030 2035
Actual Price: 2000 - 2018
WM f'cast: 2019 - 2024
WM long term price (from 2025)
Avg. price: 1980 - 2000
Source: Wood Mackenzie
62% Fe fines price, US$/t (real 2019)
Long-term – base case supply to meet demand until mid-2020s
“Supply gap” expected as Indian demand grows
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Short term:
High-grade premium – down, then up
Alumina penalty – up (Vale to stop selling
SFLA and IOCJ in the spot market)
Lump – up
Pellet – up (compelling supply/demand
fundamentals!)
Medium-long term:
Tiered pricing is set to endure, but gap
between high and low grade to narrow as
steel margins are squeezed.
Lump and pellets – down (adjusting from a
high base!)
2018: all about price spreads
2019: attention swings back to supply tightness
7% 9%
11% 11%
23%
30%
20%
0%
-12% -10%
-13%
-17% -16% -15%
-20%
-10%
0%
10%
20%
30%
40%
20
13
20
14
20
15
20
16
20
17
20
18
Lo
ng
Term
Pre
miu
m/D
isco
un
t
65% prem.* 58% disc.**
* spread between IODEX 62% and Platts 65% fines index.
** spread between IODEX 62% and Platts 58% (low alumina) index.
Source: Platts-SBB, Wood Mackenzie
Tiered pricing: a structural change
Gap between high and low grade to narrow as steel prices and margins are pressured
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Average total cash cost of iron ore miners
Costs to (modestly) increase year on year
Higher oil prices and unfavorable FX to be (partially) offset by growing productivity levels
Index of selected cost drivers
0
5
10
15
20
25
30
35
40
45
50
US
$/w
et
ton
ne
Royalty and Levies Overheads Port
Pelletising Transport Processing
Mining
Source: Wood Mackenzie
Nominal until current year and then real thereafter
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
BRL AUD
Source: Wood Mackenzie
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
1.1
Actual Forecast
Source: Wood Mackenzie
Nominal until current year and then real thereafter
Brent blend price index
BRL and AUD vs USD index
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Summary of Wood Mackenzie’s view of iron ore and steel
Decline in construction and manufacturing will undermine Chinese steel demand in the long term, despite a small growth in the automotive sector. Exports to increase again in the long term.
Global steel demand will recover, but slowly. India will lead the recovery in the long term.
A massive “supply-shock” has changed iron ore’s S/D dynamics in 2019, with prices now set to remain in US$80-90/tonne range. Change to a two-tier market is structural and set endure.
Iron ore’s production costs to slightly increase year-on-year mainly pushed by higher diesel prices.
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