AME Group Engineering Economics

London, New York, Hong Kong, Beijing, Sydney

Steel raw materials: Supply-demand trends and upcoming projects

Engineering Trends and Projects

• Demand: Steel Market Outlook

• Supply: Metallurgical Coal

• Supply: Iron Ore

Aluminium(Additional Slides)

Steel Market Outlook

Steel margins sustainable in China and production holding up

Source: AME

• Demand at the moment OK for Iron Ore and Coal – Global growth at 3.1 – 3.8% over next 24 months

• Demand is not going to be the challenge over the medium term.

• Competition for coal producer ramping up in China – more production and possible lower power prices.

• Economic backdrop improving – the focus now shifts to supply and project analysis.

Margins remain thin but the regional outlook differs

Source: AME

Steel production costs and margins, 1991 - 2012

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AME Cash Cost

Average Coi l P riceUti li sa tion Rate (RHS)

US HRC vs. Cash Costs and Utilisation rates, 2007 - 2013

India is significant but not China

• The Indian Ministry of Steel plans to nearly double national crude steel production capacity by the March 2015-April 2016 fiscal year.

• Currently 4th largest steel producing country, forecast to be 2nd as early as 2015/16.

• Indian ore quality poor, especially Alumina, leading to additional process costs.

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Burnt Lime (kg/t HM - seconday Axis)

Burnt Dol omite (kg/t HM - secondary axis)

India – Steel production and slag

Indian Crude Steel Production (Mt) Slag rate and flu x consumption

Source: AME

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• Current average Chinese BF capacity around 1.1Mtpa, average PCI consumption rate 140kg/t hot metal (HM).

• Indian BF capacity around 1Mtpa, average PCI consumption rate PCI 59kg/t HM

• Chinese PCI rate is significantly above Indian and world averages, hence starts from a different split compared to India.

• As furnace size increases PCI usage also increases – South Korea average BF capacity of 3.2Mtpa utilising 225kg PCI/t HM

• If however, PCI usage trends to a Japanese Model the pressure on semi-soft usage is expected to be much lower

Coal demand impact of larger Blast Furnaces in Asia

Semi-soft to be squeezed in the future in favour of PCI

Source: AME

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Blast Furnace Capacity (Kt/yr)

PCI Semi-Soft HCC

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Blast Furnace Capacity (Kt/yr)

PCI Semi -soft HCC

Coke blend/PCI scenario for a Chinese based BF

Coke blend/PCI scenario for an Indian based BF

The competition from mini-mills and the EAF route is not a medium term threat to coal and iron ore

• Historically, EAF production in China averaged around 30% of production until the early 1990’s.

• When steel production boomed from the early 90’s until the present the share of EAF production declined to less than 10%.

• The current share of scrap utilisation will be maintained over the next two decades.

• The dominance of the BOF steelmaking route over EAF means Chinese steel producers can only use a limited portion of scrap in their feed.

• Steelmaking in China will remain largely blast furnace based as there is a structural shift towards higher quality steels, mandated by Government policy.

EAF uptake is limited by the availability of scrap and installed BOF capacity

Historical Steel Production in China

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B ase Case Scrap Share -High Case S crap Share - Low Case

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Modelled Scrap Steel Utilisation

Source: AME, WSA

(Mt) (%)

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Chinese EAF Produc tionChinese BOF ProductionLHS: E AF Share of Total Steel Production %

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Metallurgical Coal Outlook

Chinese steel production technology will impact coal demand in varying ways

• China now commands 45% of world steel production. Moderating growth will see this market share stabilise.

• Major new growth markets will be Brazil and especially India, forecast to produce around 40Mt and 130Mt, respectively, in 2020.

• The Chinese Steel Industry will continue to have the most important impact on iron ore and metallurgical coal markets for the foreseeable future through the production technology it will employ.

• We need to consider not only production volumes, but also technology

Coke volumes are down but quality lifting

Source: AME

Furnace size vs. fuel rates

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Blast Furnace Capacity (Kt/yr) Coke Rate P CI Rate

Japan

South Korea

PR China

India

Germany

USAPR China

Japan

France

Germany

India

USA

Chinese coking coal imports will grow faster than total coking coal demand

• Only a small portion of Chinese coking coal consumption is sourced from export markets – currently around 10%.

• Chinese domestic coking coal production has increased rapidly from less than 200 Mt in 2003 to close to 500Mt in 2012.

• Chinese coal imports are price sensitive

• However this will not impact China’s steel production, which has and will continue to grow independently of coking coal imports.

• On the supply side, the professionalization of the Chinese coal sector a risk to seaborne coal exporters.

Chinese coking coal imports will grow faster than total coking coal demand

Chinese Coking Coal Sources Chinese Steel Production vs Imports

Source: AME, Customs Data

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Chi na Steel Demand (Mt)

Chi na Coking Coal Consumption (Mt)

Chi na Coking Coal Imports (Mt) - RHS

Despite productivity gains in recent quarters, there is still significant strain in the industry

• Despite the recent higher December quarter contract price of US$152/t FOB, current Premium HCC spot price is still trading around the US$146/t FOB mark.

• Fewer operations again are covering depreciation and earning a return on capital

• Gujarat has stopped paying miners at its two operations for the last 6 weeks. Market is currently unsure as to what will happen to these two operations.

• So far in 2013 operations that have been cut include Anglo American’s 0.5 Mtpa Aquila operation, Yancoal’s 1.3 Mtpa Stratford, and Glencore Xstrata’s 4 Mtpa Collinsville. 150 pit have been closed in the US Appalachian region in the last 18 months.

Around 20% of the Metallurgical seaborne market is under water on a cash cost basis

Source: AME

Growing appetite for lower quality coking coal in Asia

• In 2013, Chinese appetite for SHCC has grown.

• BMA now produces three blended coal products aimed at this market, Woodlands, Iffram and Windsor.

• BMA’s Gregory is a well known supplier of SHCC, sets benchmark price for SHCC.

• Most Australian SHCC comes from the Rangal coal measures in the Bowen Basin.

• Vale’s Integra coal markets its Liddel seam as a semi hard product.

AME introduces Semi Hard Coking Coal Costs to reflect changes in the coking coal market

Basin Hunte r Valle y

Brand Integra Semi Hard Gregory Curragh Kestrel Millennium

VM 37-39 33 21 32.5 23.5

CSN 5 9 5.5 7.5 7.5

Fluid ity 3000 7500 20 1500 250

CSR 40 57 50 - 50

Bowe n

SHCC FOB cost curve, 2012

Source: AME

At current coal prices, the largest scale operations will have growing cost advantage

Mining Truck Fuel Consumption vs. Payload

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• More mines are replacing their current fleet with a larger fleet..

• Efficiency dividend of larger volume and improved volume of material moved per haul cycle more valuable at lower prices.

Source: AME

Mining Truck Fuel Intensity vs. Payload

Iron Ore Outlook

Chinese steel mills shun pellet in favour of lump

• Pellet is the highest value-in-use product due to its high iron gradeand low impurities and commands the highest premium.

• Lower steel margins and mill utilisation has decreased pelletpremiums as steel producers replace pellet with cheaper feed.

• Pellet premiums close to cost of production in some regions

• Pellet premiums not excepted to lift materially in the short term assteel overcapacity continues to erode steel margins

Pellet demand in Europe and China has fallen amid weaker steel prices

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Sinter Lump Pellets

Average Chinese Blast Furnace Burden Global crude st eel capacity utilisation

Source: AME

A large proportion of Chinese Iron Ore mines are uncompetitive

• Increasing strip ratios are forcing many Chinese iron ore mines to go underground

• The majority of Chinese supply sits in the fourth quartile of the cash cost curve.

• In 2013, 10-15% of Chinese capacity operating at $110/t-$140/t.

• Higher cost Chinese production will be displaced by additional tonnes from Brazil, Australia and India

China’s iron ore industry remains fragmented, comprising numerous small high cost mines

China’s ROM Ore Production by Province, 2012

Source: AME, NBS

Major Iron Ore Operations in China

Declining grade necessitates higher processing cost for production

• Low ore grade in China necessitates additional beneficiation suchas multiple stage grinding and screening and magnetic separation,which drives production costs higher.

• Iron ore deposits in China are generally low grade deposits withhigh impurities, with deposit grade of as low as 5-15% Fe beingmined.

• The aggressive decline of China’s domestic ore grades will meanChinese seaborne demand will outpace China’s total consumptionover the short term.

Falling Chinese domestic iron ore production will provide opportunities to seaborne producers

The Decline of China’s Ore Grades Total Iron Ore Consumption and Seaborne Iron Ore Demand

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W orld Seaborne Iron Ore Demand

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Projects delays to support prices over the medium term

• Supply continues to be dominated by majors despite scale back inexpansion plans.

• More projects delays or scale backs to support prices over themedium terms, preventing it from a steep fall as the market goes intooversupply.

• Producers shifting expansion focus from large Greenfield projectdevelopment to smaller Brownfield expansions or greater productivityto cut cost.

Traditional sources of supply will continue to dominate

Share of Global Iron Ore Exports for the Major Producers

Forecast Incremental Productionfrom the Four Majors, Mt

The ‘Mid-West’ supply story has missed this price cycle

Mid-West Supply Forecast, Mt Pilbara Juniors Supply Forecast, Mt

• More projects will be shelved or scaled back

• Project delays will support prices over the medium term

Source: AME

Emerging and established regions will face significant supply risk over the forecast

West African Iron Ore Supply, Mt Canadian Iron Ore S upply, Mt

• West African production faces substantial risks. Rio Tinto’s Simandou (95Mtpa)delayed due to disagreement on infrastructure financing

• There is 300Mtpa of potential supply capacity in West Africa, although the largemajority of this won’t commission given a lack of available infrastructure and highpolitical risk.

• Proposed West African projects need around 11 ports and 5,000km of new rail

Source: AME

Forward looking information Certain statements and graphics contained in this presentation may contain forward-looking information within the meaning of various securities laws. Such forward-looking information are identified by words such as "estimates", "intends", "expects", "believes", "may", "will" and included, without limitation, statements regarding the company's plan of business operations, production levels and costs, potential contractual arrangements and the delivery of equipment, receipt of working capital, anticipated revenues, mineral reserve and mineral resource estimates, and projected expenditures. There can be no assurance that such statements will prove to be accurate; actual results and future events could differ materially from such statements. Factors that could cause actual results to differ materially include, among others, metal prices, risks inherent in the mining industry, financing risks, labour risks, uncertainty of mineral reserve and resource estimates, equipment and supply risks, regulatory risks and environmental concerns. Most of these factors are outside the control of the company. Investors are cautioned not to put undue reliance on forward-looking information. Except as otherwise required by applicable securities statutes or regulation, the company expressly disclaims any intent or obligation to update publicly forward-looking information, whether as a result of new information, future events or otherwise.Copyright @ AME Group 2013

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