iron ore market outlook

Iron Ore & Steel Market Outlook

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March 2013

Illustration: WorldSteel

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China Macro China’s sluggish, narrow-based recovery: As liquidity dries out and property market slows down, the construction sector should see limited growth

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China Construction Cycle TSF (RHS) Floor Sold Steel Output Floor Started

Growth rates 3-month moving average

PBoC hit the brakes on bank loans after the January surge, sending officers around to commercial banks to monitor and restrict lending activities, which usually happens during times of overheating

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25 China Inflation

CPI

CPI Food

CPI Non Food

Inflation is back, and it is one of the biggest risk to China’s recovery, with its extremely high dependence on credit and investment growth

Source: NBS, Citi Source: NBS, Citi

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China Steel China Steel Market Unbalanced: High crude output, negative margins, and high steel inventories facing a slower demand

Property Construction 31%

Infrastructure Construction

19% Heavy Industry/

Machinery 17%

Light Industry/Appliance

5%

Automotive 7%

Shipbuilding/Offshore 3%

Petrochemicals 1%

Container 1%

Others/Unaccounted 16%

China Steel Demand 2010 2011 2012 2013 2014 2015 Property Construction 180 210 207 212 225 235 Infrastructure Construction 115 114 118 132 143 150 Heavy Industry/Machinery 100 110 115 116 117 120 Light Industry/Appliance 26 30 30 32 34 36 Automotive 39 40 43 45 49 52 Shipbuilding/Offshore 25 32 27 24 20 20 Petrochemicals 8 8 9 10 11 12 Container 6 6 7 7 8 8 Others/Unaccounted 105 107 107 107 105 100 Total Ap. Cons. 604 657 663 685 712 733 Growth rate 16.60% 8.77% 0.91% 3.32% 3.94% 2.95% Steel Imports 16 16 14 12 12 12 Steel Exports 43 49 56 47 35 25 Trade Balance 26 33 42 35 23 13 Steel Demand 630 690 705 720 735 746 20.03% 9.55% 2.13% 2.13% 2.08% 1.50% Steel Output 625 685 708 725 740 751

9.02% 9.60% 3.36% 2.40% 2.07% 1.49% Source: Citi

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Daily Steel Output CISA Monthly Steel Output NBS

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Source: CISA, NBS, Citi

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25 Steel Inventories

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Source: Citi, Steelhome

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China Iron Ore High Iron Ore supply: Additional supply outpaces China iron ore requirement growth. Australia mines faster than China can build

Australia Additional Iron Ore Supply Major projects 2013 2014 2015 BHP Billiton RPG5 10 40 50 Rio Tinto Pilbara Mines 10 20 15 FMG Chichester/Solomon 40 30 25 Mount Gibson Extension Hill 2 Atlas Iron Pardoo/Wodgina/Dove 2 5 5 Gindalbie Karara 2 3 3 Citic Pilbara 5 7 8 Brockman Marrilana 2 5 3 Grange Southdown 4 3 Total 77 113 109 Source: Companies data, Citi

Source: Customs Data, Citi

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Iron Ore Exports (Mt)

AUS BRA IND ZAF Others

Source: Customs Data, Companies data, Citi

China Iron Ore Imports

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China Import Requirements Global Iron Ore Export

China Import Requirement % Global Iron Ore Export %

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Outlook 2013

An upbeat start of the year with chances of storm ahead

Where are we now ?

China stimulus through heavy investment in infrastructure

Tight spot supply of iron ore in Q1 2013

High and steady pace of steel production in China

Low iron ore port stocks

Substantial downside risk lies ahead

Curtailment of shadow banking will jeopardize infrastructure financing at local level and delay projects

Inflation risk led to stricter regulation on property market that will slow down new constructions

Negative or weak steel margins due to steel overcapacity and low demand will lead to output cut

High steel inventories at traders’ and mills will flood the market and add pressure to steel prices

Significant supply of iron ore coming on stream this year, mostly from Australia

Increased share of EAF production and scrap use

Lower demand from Europe and other Asian countries

Mills restocking + Stimulus

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Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12

Mill

ions

Oct 2012: SGX launches Iron Ore Options clearing

April 2009: SGX announces

clearing of iron ore swaps

What is setting the Iron ore Price, Physical or Futures?

Nov 2009: ICE launches iron

ore swaps clearing

July 2010: CME launches clearing for iron ore swaps

Nov 2010: NOS launches clearing for iron ore swaps

Aug 2012: SMX starts futures contract settled

against MB Index

May 2009: LCH launches Iron Ore

Swaps clearing

Mar 2011: CME launches Iron Ore Options clearing

Source: SGX, CME, LCH, Citi

Progress to-date

• Iron ore contracts are now 90 % index linked (starting with many variations on pricing periods m-1/m/m+1/q/q-1 and different indexes ).

Liquid Iron ore swaps/option market has developed.

US Steel contracts have migrated to index pricing ( multiple options available with/without raw material escalators).

Outside of the US physical steel market is primarily spot driven with limited long term contracts available ( if long term contracts are available price is negotiated on a frequent basis). New Contracts are being developed linked to key indexes.

Steel futures markets are now well developed in China and the USA.

Physical trading of iron ore is becoming more transparent to validate Iron ore price (CBMX/Global Ore/Platts Window)

The future

Centre’s of expertise will develop for risk management of the industry, likely to be Singapore/Shanghai and London

Steel mills/mines and other consumers will adapt to move price risk from physical to futures exchanges and enhance operational synergy’s for revenue

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Commodities – Contacts

Contact information

Mark Lyons [email protected]

Contacts

Commodity Sales- [email protected]

Singapore: +65 6657 1601 London: +44 20 7986 6062 China: +86 1 3681 923 969 Sydney: +61 2 8225 6402

Lionel Herzberg [email protected]

Mike McGovern [email protected]

Habib Esfahanian [email protected]

Bryan Duncan [email protected]

Michael James [email protected]

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iron ore market outlook

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