© 2013 Platts, McGraw Hill Financial. All rights reserved.

Steelmaking and iron ore dynamics in the Asian region

Paul Bartholomew, Managing Editor, Australia, Platts

Mining the Pilbara, Port Hedland

July 9-10, 2014

Disclaimer

Platts has taken all reasonable steps to ensure that all the information included in this presentation (including, without restriction, facts, opinions and predictions) is correct, accurate and reliable but nevertheless excludes, to the fullest extent permitted by law, any liability for any incorrect, inaccurate or incomplete information. To the fullest extent allowed by applicable law, this presentation is provided on the basis that Platts will not be liable to any individual, organisation or business under any circumstances whatsoever (whether in contract, negligence or any other tort, breach of statutory duty or otherwise) for any loss of profits or income, business interruption, deficiency of information or for increase in any costs, liabilities or expenses or any other loss, damage, cost, expense or liability whatsoever and/or however arising directly or indirectly out of or in connection with or relating to the information in this presentation including, but not restricted to, its use in making any decision

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Introduction to Platts

Platts is a publishing company • Wholly owned subsidiary of McGraw-Hill Financial

• Standard & Poor’s is sister company

• NYSE listed

• Specialized in publishing news and prices for markets since 1909

• Platts acquired Steel Business Briefing (SBB) in July 2011 – The Steel Index (TSI) was part of that deal and continues to operate independently

• Our assessments are widely used as benchmarks in oil, gas, petrochemical, agribusiness, shipping and metals markets

• We assess the value of physical commodities and financially-settled derivatives (swaps and futures)

Agenda

Macro & fundamentals • The iron ore supply picture

• Chinese steel demand

• Potential impact of China’s environmental plans on steel/iron ore

• A few market observations

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Where is this supply coming from? Iron ore production

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60

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80

90

100

Jan-Mar2012

Apr-Jun2012

Jul-Sep2012

Oct-Dec2012

Jan-Mar2013

Apr-June2013

Jul-Sep2013

Oct-Dec2013

Jan-Mar2014

Vale

Rio Tinto

BHP

Fortescue

Source: Company reports

• Decade long expansion program in Australia bearing fruit • Fortescue major new player – new tons from Rio and BHP • Vale has struggled to lift output

Mil Mt

(Mil Mt) 2013

output Growth % y-o-y

Output end-2014

Output end-2015

Output end-2018

Vale 307.9 -3% 300 320 400

Rio 267.7 7 295 320 350

BHP 186.2 15 225 245 270

FMG 126.5 86 155 170 170

Anglo 42.4 -2 45 50 70

Roy Hill - - - 15 55

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What’s next in the supply pipeline?

• Vale the big question mark – approval delays at S11D (90 mil mt/year) • BHP, Fortescue expansion incremental tons from next year • Supply takes a breather from end of next year…until 2018? • More project delays, struggles elsewhere…

Source: Company reports, analyst reports, Platts estimates

Weak steel markets, plentiful iron ore has squeezed prices – “It’s a buyer’s market!”

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62%

58%

Platts 62% and 58% Fe iron ore fines US$/mt CFR

Source: Platts

• Supply glut hit sooner than expected • Iron ore prices have fallen by 25-30% this year • Very active spot market in March-May, producers discounting, some non-performance of contracts • High port stocks (116 mil mt on July 4) • Impacting restocking cycles – supply is always there

Iron ore market dynamics

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Will Modi’s India return to the iron ore export market?

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2011 2012 2013

Australia

Brazil

India

• India no longer a major contributor to seaborne market due to mining, export bans • Post-election signs supportive of steel, but 300 mil mt/year capacity by 2025 unlikely

(needs $200 bn investment!!) • Steel lobby remains strong - Export tax on pellet exports (5%) • Could import more this year (JSW, Tata)

Source: China Customs

Mil mt China’s iron ore import sources

What about Chinese domestic iron ore?

• Small miners account for 40% of output (CISA); 65% of Chinese mines have capacity below 1 mil mt/year (SMM); 70% of output is controlled by steel mills (Citi); SME miners produce 80%, and larger miners 20% (China Hanking)

• More production underground, more expensive and more difficult to mine, grades falling (31% Fe in 2004, 21.5% Fe now, CISA), wages rising; miners subject to environmental pressures

• Inland mines more protected from the import market

• So where is cost curve? It was $120/mt…then $100/mt…now $95/mt?!! How much is ‘sticky’?

• Small mines, concentrators closing – Time will tell if support around $95/mt

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15.8

6.9 6.4 5.4

4.9

29.4

184.8

Anshan

Panzhihua

Benxi

Taigang

Baogang

Other major mines

Small mines

Source: MLR, CISA, SBB

% of total output

What about ‘next generation’ supply?

• Mills seeking vertical integration, diversify away from majors

• Posco, NSSMC; Tata Steel more efficient in India than EU

• New projects come with more risk, remote regions, fewer brownfield sites, lack infrastructure

• Capital costs estimated at around $250/mt – What’s the incentive long-run iron ore price? (Depends how big and how cost-effective you are…)

• Simandou

• Is Chinese SOE appetite waning? (Baosteel)

“China seems to have turned the

investment tap off this year”

Australian coal company CEO

“We’re not seeing the Chinese anymore”

Australian iron ore developer chairman

11 CITIC Pacific’s Sino Iron magnetite project in Australia

Chinese steel – the demand side

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Baosteel’s Shanghai works

Steel output, iron ore surprised in 2013

• Chinese steel output grew 7.5% y-o-y in 2013

• Easily absorbed new import volumes

• Domestic iron ore production unscathed

• Property-sector restocking over H2 supported prices (62% Fe averaged $133/mt CFR)

• Leadership change helped sentiment

13 Source: China customs

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Jan

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-12

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-12

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-12

No

v-12

Jan

-13

Mar

-13

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-13

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-13

No

v-13

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-14

Mar

-14

May

-14

Iron ore imports

China monthly iron ore imports (Mil Mt)

But a different story so far in 2014…

Mil Mt Additional tons y-o-y Growth y-o-y %

Jan-May 2012 308.7 25.3 9

Jan-May 2013 322.2 13.5 4.4

Jan-May 2014 384.7 62.5 19.4

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Mil Mt Growth y-o-y %

2012 725 4.1

2013 779 7.5

2014 e 800 2.7

May 2014 821 annualized 5.4

But crude steel production weak…recovery in May, June

Iron ore imports surged over Q1 this year

Source: NBS

Steel output, prices normally soften in Q3

2012 Y-o-Y change Q-o-Q change 2013 Y-o-Y change Q-o-Q change 2014

Y-o-Y change

Q-o-Q change

Jan-Mar 4253 -8.6 1 4075 -4.2 6 3413 -16.2 -2.1

Apr-Jun 4209 -11.7 -1 3593 -14.6 -11.8

Jul-Sep 3648 -21.1 -13.3 3582 -1.2 -0.3

Oct-Dec 3843 -8.7 5.3 3485 0.05 -2.7

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2012 Y-o-Y change Q-o-Q % change 2013 Y-o-Y change

Q-o-Q % change 2014

Q-o-Q % change

Jan-Mar 149.7 -16.8 5.6 148.4 -1 21 120.4 -10.5

Apr-Jun 141.2 -20.4 -5.7 116.2 -17.7 -21.6

Jul-Sep 113.2 -36.2 -19.8 132.7 17.2 14.2

Oct-Dec 122.3 -13.8 8 134.6 10 1.4

Chinese domestic HRC prices (RMB/mt)

Quarterly average iron ore prices ($/mt CFR)

2012 Q-o-Q change Y-o-Y change 2013 Q-o-Q change Y-o-Y change 2014 Q-o-Q change Y-o-Y change

Jan-Mar 175.6 10 4 191.7 9 9.1 194 3.2 1.2

Apr-Jun 185.8 5.8 4 197.3 2.9 6.2

Jul-Sep 179.4 -3.4 1.6 197.2 0 9.9

Oct-Dec 175.7 -2.1 9.8 188.3 -4.5 7.2

Total 716.5 774.5 8.1

Chinese crude steel production (Mil mt)

Source: Platts, NBS

• Last year abnormally strong – crash didn’t happen

Weak sentiment in China

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an 1

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b 1

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HRC prices softer this year

HRC

RMB/Mt

• End-user markets patchy – manufacturing, auto, shipbuilding - property especially • Sales of new homes fell 10% y-o-y in January-April; real estate investment hit a 57-month low • Construction (35% of steel consumption) weak going into hot months • Credit tight, shadow banking clampdown • No expectation of much government help, mini-stimulus only to meet GDP target of 7.5% • Difficult to see why the rest of the year will replicate 2013 – 2% output growth in 2014

Source: Platts, SBB

Platts China Steel Sentiment Index - July

The Platts China Steel Sentiment Index Survey - July 2014 (a figure over 50 indicates expansion; under 50 indicates contraction)

July Change from

June

June

Platts China Steel Sentiment Index (Reflects New Orders) 45.90 -6.03 51.93

New Domestic Orders 46.71 -5.99 52.70

New Export Orders 36.42 -5.31 41.73

Additional Sentiment Categories:

Steel Production 46.43 -12.95 59.38

Inventories

Mill Inventories 46.43 5.80 40.63

Trader Inventories 39.35 4.18 35.17

Price Expectations

Domestic Long Steel Products Prices 50.00 4.55 45.45

Domestic Flat Steel Products Prices 62.73 27.10 35.63

Export Steel Prices 47.72 7.91 39.81 17

• Chinese steel market expects fewer orders this month; steel output to fall; inventories to rise – though is oddly bullish on near-term steel prices.

• Wishful thinking?

Steel margins improving…but!

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Premium HCC + 62% IODEX (bothCFR)

China Domestic HRC

Margin

• Larger coastal mills making RMB100/mt net profit on domestic HRC sales • Some mills believe RMB200/mt is a possibility if steel prices improve • Encourages more production which then dampens prices (Hebei mills lifted utilization

rates to 88% at end-June from 85% at end-May.) • But one major mill described its profits as “meagre” still • Market sentiment is that prices will fade over the back-half of 2014 • But some mills starting to fail

Source: Platts

Indicative margins

China’s perennial steel overcapacity challenge – what’s being done?

Environmental measures

• Consolidation of steel sector no longer driven by BF size or through forced M&A

• Instead, Beijing has tightened supervision of polluting companies to improve air quality – especially steel! China is serious about pollution – It’s a social issue!!

• Higher costs for mills – Eg, New sinter & dust cleaning equipment can add another RMB100/mt to output costs

• Blocking of new land approvals, leases and bank financing

• Shadow banking clampdown – accounts for 1/4 to 1/3 of corporate finance

19 Cyclists brave the Chinese pollution

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Source: NBS

China crude steel output (Mil mt)

Chinese steel capacity….(cont)

Capacity closures

• National target of 80 million mt over six provinces:

• Hebei (close to Beijing!), Liaoning, Shanxi, Jiangsu, Shandong and Jiangxi

• Timeframe vague (5 years?)

• Hebei - 60 million mt by end-2017 (of which 15 million mt by-end 2014)

• Around 24 million mt/year of new BF capacity commissioned in 2013

• More efficient mills could lift utilization rates

• But mills starting to fail - Haixin, Xilin, Tranvic, and Qifeng Steel

• Net result: Not much impact on capacity but should act as a brake on runaway overcapacity

“Some 70% of Chinese mills won’t be able to meet their environmental targets,” Li Xinchuang, China Iron & Steel Association…”but it will happen, slowly”

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Is there demand in Asia outside of China?

Apparent steel consumption among 'ASEAN 6' Metric tons

2012 2013E % change

Indonesia 12,499,875 14,329,194 14.60%

Malaysia 8,921,628 9,975,396 11.80%

Philippines 6,008,075 6,757,528 12.50%

Singapore 3,825,566 4,296,809 12.30%

Thailand 16,380,422 16,773,812 2.40%

Vietnam 10,956,000 11,875,000 8.40%

Total 58,591,566 64,007,739 9.20%

21 Source: SEASI

• SEASI steel consumption expected to keep growing at 4-5% - region imports 50% of steel needs

• Local steel industry hampered by Chinese imports, lack of capital, lots of JV-ing

• Largely EAF environment • S. Korea domestic steel market weak, imports up • Japanese steel demand flat – little impact from earthquake

reconstruction or Olympics

Krakatau-Posco JV Photo: Platts

A few other market observations

• Lump and pellet premiums – should move structurally higher

• Non-traditional iron ore sources (250 mil mt in 2013!) could be impacted

• More trades being done on platforms - globalORE, CBMX

• What about scrap? China produces 10% of steel via EAF, but targeting 25-30% by 2025

• Could replace Fe units

22 Iron ore unloading at Qingdao port Photo: Platts

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62% Fe iron ore fines

Premium low-vol hardcoking coal

Source: Platts

Falling raw materials prices ($/mt)

Do derivatives move physical prices?

• Sentiment indicators

• Chinese retail investors’ influence

• Shanghai rebar futures - Dalian Commodities Exchange iron ore futures

• SGX cleared 216 mil mt of iron ore futures and derivatives in Jan-May, up 111% y-o-y

• 40% of participants are Asian mills and traders – miners watching closely

• Hedging versus speculation

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Mt Volume Last Year % Change Turnover Last Year % Change End-of-Year OI End-of-Last Year OI % Change

Iron Ore 66,287,900 4,378,430 1413.97% 4,935.97 408.87 1107.24% 560,494 129,782 331.87%

Dalian iron ore futures – 2014 (started in October 2013)

93.5

94

94.5

95

95.5

96

96.5

97

97.5

98

98.5

SGX iron ore derivatives

Avg DSP (US$)

Final thoughts

• Australia dominant producer as rivals (Vale aside) offer little new tonnage

• Iron ore supply surge set to slow between 2015 and 2018 – could help support prices

• China is heading down the environmental path – and up the quality and efficiency curve - curbing steel capacity will take a while but capacity expansions slowing

• Chinese steel production is likely to plateau at 850-1.5 billion mt/year by 2025-30

• Both iron ore miners and steel mills will need to improve efficiencies to boost margins

• Derivatives to play a bigger role

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Thank you!!

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Paul Bartholomew Managing Editor, Australia, Platts Editor, Steel Raw Materials Monthly paul.bartholomew@platts.com

www.platts.com