how is the iron ore supply pipeline shaping up?

Iron ore: supply in the spotlight Laura Brooks – Senior Consultant, CRU

Prepared for:

AJM 16th Annual conference Wednesday 20th March, 2013

Key questions: • It’s all about supply…why?

• What happened to supply potential when prices crashed in Q3 2012?

• Who’s new and what are their chances?

• Will traditional supply hubs maintain market share?

• Can the drive for self-sufficiency in China translate into increasing ore production?

Agenda

2

North America Europe

Asia-Pacific, advanced

Latin America

China

Asia-P

acific, developing India Rest of world

0

300

600

900

0 5000 10000 15000 20000 25000 30000 35000 40000 45000

x axis: 2011 GDP per capita, US$(1)

y axis: 2011 consumption of finished steel per capita, kg

Data: CRU. Chinese data based on Chinese reported finished steel production. Note: (1) constant 2005 prices at market exchange rates.

We expect China’s steel consumption per capita to peak around the mid-2020s…

3

2011

2035

2025 Peak steel consumption = 1.1bn

30%

60%

90%

05 10 15 20 25 30 35

Primary iron ratio, %

Data: CRU.

… while global scrap generation is also likely to increase substantially by this point, driven by China

4

The requirement for primary iron units relative to crude steel production will fall

0

1,000

2,000

3,000

2010 2013 2016 2019 2022 2025 2028 2031 2034

Pellets Fines and concentrates Lump China

Despite this, demand has much further to run and even when China tails off, global levels hold steady

5

World demand for iron ore, Mt

Data: CRU.

0

2,000

4,000

2012 2015 2018 2021 2024 2027 2030 2033

Possible Probable Committed Demand

Supply potential is enormous, significantly overshooting demand expectations

6

Gap analysis; iron ore demand and planned supply, Mt

Data: CRU. Note: demand excludes Chinese demand satisfied from domestic production. Supply excludes Chinese production.






Agenda

7

0 20 40 60 80

100 120 140 160 180 200 220

J A J O J A J O J A J O J A J O J A J O

Sentiment plummeted… investment jitters soared… cautiousness emerged… cost controls grew

8

Spot prices for iron ore fines (62% Fe), CFR China, $/t

Data: CRU. Note: Prices assessed at one point mid-month.

2008 2009 2010 2011 2012

Prices fell to 3-year low WHY? Destocking Plentiful supply on spot Bearish sentiment

• “The global boom in commodity prices is over”

(Martin Ferguson, Australian Resource Minister, Sept 12)

CRU view: Depends who you are

• “Commodities: Supercycle jitters slow projects”

(Jack Farchy, FT, Oct 12)

CRU view: In agreement

• Project postponements

• Cutbacks in future targets

….as cost controls kick in

• Majors not exempt - refocusing

• ‘Price v cost’ concerns in Australia are particularly intense given strength of Aus$

• Despite prices now over 60% higher than September’s low, CRU assesses that attitudes towards financing have not improved…

There has been a widespread re-assessment of projects

9

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2010 2011 2012 2013 2014 2015 2016

Aus juniors' share of Aus exports (Jan '13) Aus juniors' share of Aus exports (Oct '12)

Australian juniors' (1) share of total Australia exports, %

Data: Company reports, GTIS. Note: (1) non BHPB, Rio Tinto, FMG

Securing finance = main hurdle for new projects, both for majors and juniors

10

Equity raised, $M

0

25,000

50,000

2008 2009 2010 2011 2012

AIM ASX TSX TSXV

Data: TSX, ASX (mining & metals), AIM ($M).






Agenda

11

Since 2008, export growth has been dominated by Australia – these gains have offset recent declines from India Exports of iron ore by selected country, Mt

Data: CRU, GTIS.

0

200

400

600

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Australia

Brazil

India

Australia • Healthy growth from 2 majors • Exceptional growth from FMG

Brazil • Environmental regulation • Procedural delays • Port capacity

India • Mining/export bans • Export tax hike • Drive to keep ore domestically

At the same time, the volume of ‘Other’ exporters to China has ramped up

13

Iron ore imports to China by origin, Mt

Data: CRU, GTIS. Note: (1) ‘Other’ excludes Australia, Brazil, South Africa and India.

0

200

400

600

800

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

From 'Others' From Australia, Brazil, South Africa and India

The ‘Others’ occupy the second half of the cost curve and can only survive given that prices are historically high

14

Cost curve, all products economic costs

Data: CRU. Note: (1) ‘Others’ exclude Australia, Brazil, South Africa and India.

Dominated by Rio Tinto, BHP Billiton and Vale

All

prod

ucts

eco

nom

ic c

osts

, c/d

mtu

Cumulative production, Mt

Potential production – where next? West Africa and Canada

Data: CRU.

What underpins the cost competitiveness of a mine operation?

• Quality of ore deposit • Geology of ore deposit • Economies of scale • Infrastructure and logistical considerations

15

CRU’s gateway system

16

Project status checklist 1 2 3 4 5

Speculative Possible Probable Committed Operating

Geology

Metallurgy/ technology

Engineering

Social and environmental

Marketing/ commercial

Transportation

Ownership/ management

Financial

West Africa and Canada have significant reserves and resources, both of a similar magnitude…

Data: CRU, MEG.

Reserves and resources for a selection of production hubs, Mt

0

20000

40000

60000

80000

100000

120000

West Africa Canada Europe

Total reserves and resources tonnage Fe contained total reserves and resources

17

…yet West Africa has two key advantages: (1) Fe grade, and (2) distance to China. But what about political stability?

Data: CRU, MEG.

Weighted average grade, % Fe

0% 10% 20% 30% 40%

West Africa

Canada Origin Distance, km Units 2012 2020

Canada 14,675 $/wmt 24.6 37.4

West Africa 9,727 $/wmt 18.9 28.8

COST TO CHINA:

18

Investment is critical in West Africa given large-scale capex requirements…

Data: CRU.

0

10000

20000

30000

40000

50000

2014 2015 2016 2017 2018 +

Capex of selected key projects by anticipated start date of project, $M

19

…with the key to unlocking this region being the co-operation of producers in close proximity

Data: CRU.

Potential capacity by infrastructure corridor, Mt

0 20 40 60 80 100 120

Kalia-Matakan, Guinea

Pepel-Tonkolili, Sierra Leone

Kribi-Mgarga, Cameroon

Trans-Congo line

Western Range-Buchanan

20

0%

20%

40%

60%

80%

100%

0

50

100

150

200

250

300

350

2010 2012 2014 2016 2018 2020 2022 2024

Possible

Probable

Committed

% share of total production which is 'Committed'

INDICATES RISK

2017 production forecast

West Africa: fast short term growth from low base but volumes remain limited LHS: Iron ore potential production in Other Africa, Mt RHS: Share of total potential production in Other Africa which is ‘Committed’(1), %

Data: CRU. Note: (1) Committed in accordance with the CRU Gateway System. 21

0

50

100

150

200

2010 2012 2014 2016 2018 2020 2022 2024

Total potential production

Canada: New entrants will spur on short term growth but rising proportion of new greenfield projects lifts long run risk Iron ore production potential in Canada, Mt

Data: CRU.

2017 production forecast

22

5 year outlook: West Africa and Canada will not increase their market share to any significant degree Share of global seaborne exports by country/region, %

Data: CRU.

0%

25%

50%

75%

100%

2012 2017

Other

Canada

West Africa

23






Agenda

24

Demand is set to post y/y increases (yet growth is set to slow)…

25

LHS: Consumption of iron ore, Mt RHS: y/y change in global consumption of iron ore, %

Data: GTIS, CRU.

-40%

-30%

-20%

-10%

0%

10%

20%

30%

0

500

1,000

1,500

2,000

2,500

3,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

China Other East Asia South Asia Europe North America

CIS C & S America Other World y/y change

…which will predominantly be met by rising supply from low-cost traditional hubs. India’s role will shrink further.

26

Data: GTIS, CRU.

0%

25%

50%

2008 2010 2012 2014 2016

Australia Brazil India

Share of global iron ore exports by selected country, %

-60

-30

0

30

60

2012 2013 2014 2015 2016 2017

Australia Brazil India

Y/y change in exports of iron ore, Mt

CRU expects the majors to hold market share despite the vast number of potential new entrants. Costs are key.

27

Selected companies shares of total iron ore exports, %

Data: GTIS, CRU. Note: only includes BHP Billiton’s Western Australia operations, Rio Tinto’s Western Australia operations and Vale’s Brazilian operations (excluding their Samarco share).

0%

10%

20%

30%

40%

50%

60%

70%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

BHP share of global exports Rio Tinto share of global exports Vale share of global exports Rio Tinto, BHP Billiton and Vale share of global exports

Key questions:

• It’s all about supply…why?





Agenda

28

Private Chinese mines use local labour, transport and utilities to minimise mining costs which, nevertheless, remain high…

30

Mine owner operates central

processing plant

Mine 1

Mine 3

Mine 2

Fixed price paid per tonne of RoM ore delivered

Labour: Use local farmers

Transport: Use local

trucks

Utilities: Use local

sources of power,

fuels etc Data: CRU.

…and, indeed, without the small, private Chinese mines the tail of the cost curve becomes far flatter Representative global cost curve

31

Cumulative production

Ope

ratin

g co

st

Majors

Lower-cost emerging producers

China SOEs/large private mines

China, small private mines

High-cost emerging producers

Data: CRU.

Chinese miners are the marginal producers and are highly price responsive

32

Data: CRU. Note: Prices assessed at one point mid-month.

Assumption = as low cost supply ramps up, Chinese miners will be squeezed from the market and therefore domestic production will fall

Can this change given the drive for self sufficiency?

X-axis: Quarterly production, Mt Y-axis: 62% Fe fines price, CFR China

0

50

100

150

200

0 20 40 60 80

Historic

Forecast

CRU view – Chinese domestic production will fall, albeit gradually…

32

-5%

0%

5%

10%

15%

20%

25%

30%

0.0

0.5

1.0

1.5

2.0

2008

20

10

2012

20

14

2016

20

18

2020

20

22

2024

20

26

2028

20

30

Diesel price y/y change

LHS: China diesel price, US$/l RHS: y/y change in China diesel price, % WHY?

Upwards costs pressures

Little chance of consolidation

Fast rate of growth of low-cost international supply

Attractive opportunities overseas investment opportunities

THE STRUCTURE OF THE CHINESE MINING INDUSTRY IS SET FOR CHANGE

…meaning that growth in seaborne trade will outstrip that for total consumption

33

LHS: Seaborne imports of iron ore, Mt RHS: y/y changes in seaborne imports and global iron ore demand, %

Data: CRU, GTIS.

-10%

0%

10%

20%

30%

0

400

800

1,200

1,600

2010 2011 2012 2013 2014 2015 2016 2017

Seaborne imports y/y change in seaborne imports y/y change in global iron ore demand

To conclude (1): No-where is free from supply-side risks and CRU assesses that these have intensified recently

34

Data: CRU.

AUSTRALIA Strong Aus $ Labour shortage Port access

BRAZIL Particularly strict environmental regulations (i.e. cave law) Uncertainty over increase in royalties Port access AFRICA

Political instability (extent dependent on country) Construction of infrastructure from scratch (West Africa)/restrictions imposed by Transnet (South Africa) Uncertainty around development of mining regulations (West Africa)

CANADA Distance to key markets Weather restrictions Necessary development of new port and rail (potential aid from Plan Nord)

FOR ALL Securing finance Building bulk commodity infrastructure Existing sites – grade depletion

The CRU view: • It’s all about supply…why?

The rate of supply developments will determine price given our expectations that demand has still far further to run

• What happened to supply potential when prices crashed in Q3 2012? Sentiment plummeted… investment jitters soared… cautiousness emerged… cost controls grew… = supply scaled back

• Who’s new and what are their chances? West Africa and Canada are at the heart of new supply potential – barriers to entry have increased of late


Yes, given aggressive project plans and expectations of competitive cost structures


The government drive for self sufficiency is unlikely to stop an overall falling production trend

To conclude (2)

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Thank you for your attention www.crugroup.com

Iron ore analyst [email protected]

Business development manager – Australasia [email protected]

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