Changing market dynamics of iron ore -brands, grade and VIU

Alina Wills

Senior Commodities Research Analyst

Private & Confidential 2

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BRAND PERFORMANCE

Metals

Others

8.63 10.52

SSFG

PBL

51.46 47.43

Newman L5.38

10.13

Carajas FinesBRBF

2015 2016

Newman F

PBF

Yandi

JimblebarMNP

Private & Confidential 4

Brands traded on spot market – PBF continues to be most liquid trade with more brands participating

Source: Platts

BRBF2.89 Newman

Fines1.41

PBF8.10

Yandi Fines0.54

2017 Jan-Feb

2017 so far…

PBF remains most liquid trade

BRBF continues to increase103.3

113.8 10%

PBF production up 8%

Traded volume on spot

down 8%

Newman and Jimblebar

almost doubled in 2016

17.7 mt traded in 2017 YTD

Unit: Mt

Metals

Private & Confidential 5

Floating price trades at highest level ever in 2016, could be a sign of market maturation

Source: Platts

19.514.0

8.7

5.6 6.1

9.5

8.5

9.6 9.1

8.4

11.2

5.6

0.4 1.6 1.6 1.2 1.8 2.7 2.8 1.9 1.70

5

10

15

20

25

30

35

Q1

20

15

Q2

20

15

Q3

20

15

Q4 2

015

Q1

20

16

Q2

20

16

Q3

20

16

Q4

20

16

Ja

n-F

eb

20

17

Q1

20

15

Q2

20

15

Q3

20

15

Q4

20

15

Q1

20

16

Q2

20

16

Q3

20

16

Q4

20

16

Ja

n-F

eb

20

17

Fines Lump

Volume Traded Fixed

Floating

Unit: MT

205.9 mt 17.4 mt

Could see floating price trades continue to

increase in 2017 as a tool to manage price

volatility

Floating – 29.7

Fixed – 65.3

Floating – 38.7

Fixed – 58.3

Fines Lump

Metals

0.46

-0.06

0.19

-0.100.000.100.200.300.400.50

Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Jan-Feb 2017 May2015-Feb2017

US$

Average PBF

Brand Premium

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

0.010.020.030.040.050.060.070.080.090.0

100.0

Private & Confidential 6

Pilbara blend fines – most liquid trade on spot at average $0.19/t above IODEX for the last 22 months

PB Fines (LHS)US$ US$

IODEX 62 (LHS)

PBF spot trades mostly higher than IODEX

Diff PBF– IODEX (RHS)

Source: Platts

Brand Assessed VS IODEX– PB Fines

Metals

-0.64

-0.32

-0.8

-0.6

-0.4

-0.2

0.0Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Jan-Feb 2017 May2015-

Feb2017

US$ Brand Assessed VS IODEX– Newman Fines

Average Diff

Newman – IODEX

-6.00

-5.00

-4.00

-3.00

-2.00

-1.00

0.00

1.00

2.00

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0US$ US$

Private & Confidential 7

Newman fines – almost doubled volume trading on spot in 2016, performance against IODEX improving H2 2016

Diff Newman –

IODEX (RHS)

IODEX 62

(LHS)

Newman Fines

(LHS)

Weighted average of Diff Newman-IODEX remains negative. Seen more trades in the market in 2016.Source: Platts

Metals

Private & Confidential 8

Value in use of Pilbara Fines vs IODEX 62% Fe results in delta of $0.22/t

Source: Platts

Fe SiO2 Al2O3 P S

IODEX 62.00 4.50 2.00 0.080 0.020

Pilbara Blend Fines 61.67 3.57 2.27 0.100 0.040

Metals

Private & Confidential 9

Value in use of Newman Fines vs IODEX 62% Fe results in delta of $0.63/t

Source: Platts

Fe SiO2 Al2O3 P S

IODEX 62.00 4.50 2.00 0.080 0.020

Newman Fines 62.70 4.40 2.20 0.080 0.020

Metals

3.1%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

10

20

30

40

50

60

70

80

Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Feb-15 Feb-16

China Iron Ore Fines Imports

- Market Share of Imported Indian Fines

World Total (LHS)

Australia (LHS)

Unit:% world supply

Brazil (LHS)India (LHS)

India/World (RHS)

?

Unit: MT

Private & Confidential 10

Indian ore re-enters market but stability of supply not guaranteed

High impurity and low Fe iron ore

+ Changing Indian government policies

+ High coke price

= potentially undesirable product.

Large discounts and stable supply - currently competitive to other low Fe products in the market

Source: Mysteel

Metals

BRBF - Malaysia blending facility losing favour as more costly than China, less efficient

and cannot accept Valemax

Qindao will blend up to five fines products to customer requested specifications

Private & Confidential 11

Qingdao (Dongjiakou) Port to blend 20mtpa BRBF and offer bespoke blending service to steel mills and traders

Fe SiO2 Al2O3 P S

IODEX 62.00 4.50 2.00 0.080 0.020

BRBF 62.3 6.00 1.60

PRODUCT MARKET TRENDS

Metals

0.00

0.05

0.10

0.15

0.20

0.25

0.30

6

7

8

9

10

11

12 Lump % in BF

Lump premium

$/dmtu

?

Private & Confidential 13

Australian lump exports increase to China, use in blast furnace stable with upside potential

Source: Australian Government Department of Industry,

Innovation and Science, China Customs, GTJIA, CISA, PLATTS

0

10

20

30

40

50

60

70

80

90

100

2006 H1 2008 H1 2010 H1 2012 H1 2014 H1 2016 H1

Others Malaysia MyanmarPeru Venezuela MongoliaIran Brazil South AfricaAustralia

Unit: Mt Lump exported to China by Country

0

51015

2025

3035

6

7

8

9

10

11

12

Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17

Lump % in BF

BF Pellet Premium

CFR China

?

%

% $/dmtu

Metals

Private & Confidential 14

Concentrate imports to China increase in lieu of pellets – innovation in times of scarcity

0

10

20

30

40

50

60

70 Imported Concentrates

Other Pellet

USA Pellet

Peruvian Pellet

Australian Pellet

Indian Pellet

Russian Pellet

Canada Pellet

Ukrainian Pellet

Brazilian Pellet

Unit: Mt

Metals

-

1.00

2.00

3.00

4.00

- 2.00 4.00 6.00 8.00 10.00 12.00

Al2O3

Private & Confidential 15

Indian Pellets Available On Spot Market

• Many Chinese steel makers at upper limits of Al2O3

tolerance

• Samarco not thought to resume until late 2017 at

reduced rate of 19MTPA

• Indian government reduced export duty on pellets from

5% to 0%

• Indian pellets increasingly seen in market, many

Chinese mills happy to use if Fe is reasonable

Generally higher in Al2O3 than other leading pellet brands

SiO2

Metals

Private & Confidential 16

China domestic iron ore reduced from 30% market share in 2010 to 13% in 2016

0%

5%

10%

15%

20%

25%

30%

35%

400

600

800

1,000

1,200

1,400

1,600

2010 2011 2012 2013 2014 2015 2016

China Crude Steel Output

30

40

50

60

70

80

90

100

Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17

China domestic iron

ore production cost

IODEX

$/dmt

Mt

China ROM Iron Ore Output

China Crude Steel Output

Domestic Iron Ore

Market Share (RHS)

China iron ore production cost

considered social responsibility

Source: China Customs

VALUE IN USE ANALYSIS

Metals

Strong steel prices keep steel mill margins strong and total raw material costs high

-50

0

50

100

150

200

250

300

350

Apr-2016 May-2016 Jun-2016 Jul-2016 Aug-2016 Sep-2016 Oct-2016 Nov-2016 Dec-2016 Jan-2017 Feb-2017

Iron Ore Cost

Coking Coal Cost

PCI Cost

Rebar steel mill margin

HRC steel mill margin

Prem Low Vol HCC CFR China

Metals

Private & Confidential 19

VIU analysis – replacing 5% sinter with 5% lump in blast furnace burden mix

$80.31

$4.60

$5.06

$0.41

$0.06

$0.00 $0.00 $0.00 $0.07 $0.00

$0.01

$0.00

$78.00

$79.00

$80.00

$81.00

$82.00

$83.00

$84.00

$85.00

$86.00

Refe

ren

ce

Pric

e

Sin

ter C

osts

Burd

en

Mix

Costs

Iron O

reP

rodu

ctiv

ity

Coke R

ate

PC

I

Oth

er

Inje

cta

nts

Overh

ea

ds

Sla

g R

even

ues

Desulp

h

Deph

os

Inla

nd

Tra

nspo

rtC

osts

Bre

ake

ve

nP

rice

Value In Use Breakdown

$80.23

Higher lump scenario = Coke demand increases by $0.06 THM

VIU Delta -$0.08

Metals

$80.31$0.14

$1.53

$0.13 $0.04$0.00 $0.00 $0.00

$0.01

$0.00

$0.02$0.00

$78.00

$78.50

$79.00

$79.50

$80.00

$80.50

$81.00

Refe

ren

ce

Pric

e

Sin

ter

Costs

Burd

en

Mix

Costs

Iron O

reP

rodu

ctiv

ity

Coke R

ate

PC

I

Oth

er

Inje

cta

nts

Overh

ea

ds

Sla

gR

even

ues

Desulp

h

Deph

os

Inla

nd

Tra

nspo

rtC

osts

Bre

ake

ve

nP

rice

Value In Use Breakdown

Private & Confidential 20

VIU analysis – replacing 10% lump with 10% pellets in blast furnace burden mix

Higher pellet scenario = Coke demand reduces by $0.04 THM

VIU Delta -$1.24

$79.07.

23

Metals

$80.31

$1.72

$0.53

$0.70$0.13

$0.00 $0.00 $0.00

$0.18

$0.00 $0.00$0.00

$79.00

$79.50

$80.00

$80.50

$81.00

$81.50

$82.00

$82.50

$83.00

Re

fere

nce

Pric

e

Sin

ter C

osts

Burd

en

Mix

Costs

Iron O

reP

rodu

ctiv

ity

Coke R

ate

PC

I

Oth

er

Inje

cta

nts

Overh

ea

ds

Sla

gR

even

ues

Desulp

h

Deph

os

Inla

nd

Tra

nspo

rtC

osts

Bre

ake

ve

nP

rice

Value In Use Breakdown

Private & Confidential 21

VIU analysis – comparing 1% Fe difference in sinter head grade

Higher Fe scenario = Coke demand lower in high Fe scenario by $0.13 THM

VIU Delta $0.18

$80.49

Metals

Private & Confidential 22

2016 crude steel production changes by province, China’s typical burden mix remains constant

0

10

20

30

40

50

60

70

80

90

100

2015 J

an

201

5 D

ec

201

6 D

ec

201

5 J

an

201

5 D

ec

201

6 D

ec

201

5 J

an

201

5 D

ec

201

6 D

ec

Hebei Jiangsu Shandong

Pellet Lump Sinter%

Metals

Private & Confidential 23

• Most mid to large sized mills focussed on reducing costs by increasing

longevity of blast furnaces – this means a stable burden mix

• Medium to high grade fines in higher demand in China than lower

grade, this is expected to continue

• Lump usage at more small to mid sized mills may increase while

premiums are low and stocks are high

• Pellet supply expected to remain tight until late 2017 with domestic and

imported concentrate filling the gap

Summary

www.spglobal.com/platts