china & india: rising demand or falling interest?
TRANSCRIPT
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Delivering commercial insight
Iron Ore: the end of the golden age?
Paul Gray, Principal Analyst, Wood Mackenzie
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Agenda
Assessing China’s future iron ore requirements:
• How much?
• Where from?
• At what cost?
3
1Setting the scene:
Lessons learnt from 2012 and what to expect from 2013.
2 The rise of China and India: comparative analysis.
3
Some longer term considerations:
• Capital intensity.
• Ore degradation.
• Chinese overseas investment.
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Setting the scene (1).Iron ore is the ultimate “China play”.
Key data on Iron Ore
million tonnes 2012 (F) 2020 (F)
Global Exports 1195 1833
Australia’s share (global) 40% 43%
Chinese Imports 730 1125
Australia’s share (of Chinese imp.) 46% 55%
% of Australian exports destined to China 70% 78%
China accounts for entire growth since 2000.
Source: Wood Mackenzie
0
200
400
600
800
1000
1200
1980 1985 1990 1995 2000 2005 2010
Seab
orn
e t
rad
e:
mil
lio
n t
on
nes
1980s: 1.6% pa
1990s: 1.9% pa
2000s: 7.8% pa
Red segment =
Chinese
imports.
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Setting the scene (2).China’s raw material conundrum.
0
20
40
60
80
100
120
140
160
180
200
2000 2006 2008 2010
Valu
e o
f C
hin
ese I
mp
ort
s:
US
$ B
n
Crude Oil
Iron
Ore
Copper
Coal
The spiralling cost of Chinese imports…..
Source: Wood Mackenzie
China’s iron ore import bill:
$100bn in 2011.
5x bigger than coal.
Beijing response:
“Go Out” policy - since 1999!
“Two-ways” strategy – limited success.
Is there a domestic alternative?
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Lessons learnt from 2012 (1): Anatomy of a price correction.
Correction #1
� Global Financial Crisis!
Correction #2
� Eurozone sovereign debt crisis (part 1)
Correction #3
� Liquidity squeeze – especially in China.
Correction #4
� Chinese steel “crisis” – margin squeeze.
A rollercoaster ride for iron ore.
Source: Wood Mackenzie
0
20
40
60
80
100
120
140
160
180
200
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
TS
I 62%
Fe U
S$/t
, C
FR
1 2 3
4
Annual Average Price ($/t CFR)'08: 145 | '09: 86 | '10: 147 | '11: 168 | '12: 127?
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Lessons learnt from 2012 (2): Iron ore does have a mind of its own!
Iron ore and copper – strongly correlated:
� Similar dynamics. Proxies for Chinese growth.
BUT – correlation broke down in Aug/Sep:
� Cu too high or Fe too low?
Limitations of index pricing:
� Exposed during recent correction.
Iron ore’s demise is “China steel specific”.
� Malaise of steel is amplified in iron ore price.
The myth of marginal cost support?
� Lagged response. Need a functioning market!
Cu and Fe – the end of the affair?
© Wood Mackenzie 6
Source: Wood Mackenzie
0
2,000
4,000
6,000
8,000
10,000
12,000
Jul-
09
Jan-
10
Jul-
10
Jan-
11
Jul-
11
Jan-
12
Jul-
12
Jan-
13
0
50
100
150
200
250
copper, $/t,(LHS) iron ore, $/t (RHS)
Cu and Fe
diverge!
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0%
10%
20%
30%
40%
50%
60%
70%
80%
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
H1
-12
H2
-12
201
3
EB
ITD
A M
arg
in f
or
Iro
n O
re (
%)
Vale Rio Tinto BHP Billiton
What to expect from 2013 (and beyond).A more cautious approach from investors and corporates.
Margin compression:
� Commodity price impact, currency impact.
Existing supply response:
� Withdrawal of marginal suppliers.
Future supply response:
� Project delays/deferrals/scale backs.
� Driven by reduced appetite for investment – and pressure from shareholders!
Opportunistic acquisitions:
� Chinese buyers of distressed assets?
Margin compression – albeit from a high level.
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Source: Wood Mackenzie
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-120
-100
-80
-60
-40
-20
0
20
40
60
80
100
2009 2010 2011 2012 2013Fye
ar-
on
-ye
ar
ch
an
ge
ho
t m
eta
l p
rod
'n (
Mt)
China Rest of World
lowest growth since 2008!
What to expect from 2013 (and beyond).Brace yourself for slowest growth for five years!
Hot metal production growth only 15Mt?
� But we have become accustomed to 50Mtpy!
� Slower growth in crude steel production and the “scrap effect”.
For iron ore it’s not as bad as it sounds!
� Accelerated displacement effect.
� Repeat of 2009 – but on a smaller scale?
Rest of the world:
� Hot metal production unlikely to return to pre-GFC levels before 2014.
A sharp slowdown in Chinese hot metal production.
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Source: Wood Mackenzie
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Agenda
Assessing China’s future iron ore requirements:
• How much?
• Where from?
• At what cost?
3
1Setting the scene:
Lessons learnt from 2012 and what to expect from 2013.
2 The rise of China and India: comparative analysis.
3
Some longer term considerations:
• Capital intensity.
• Ore degradation.
• Chinese overseas investment.
Delivering commercial insight
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China: Population by Province (Millions)
> 10080 - 10060 - 8040 - 60
< 40
Scale
Key Facts
GDP: $4.16 trillion (2000 US$)
GDP per capita: $2,827 (2012)
Land area: 9.6 million square km
Population: 1,354 million (2012), 1,393 million (2030)
Number of employed: 773 million
Life expectancy: 73 years
Literacy rate: 96%
Access to electricity: 99% Source: Wood Mackenzie, China Bureau of Statistics, World Bank
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Maharashtra
Madhya Pradesh
Andhra�Pradesh
Chhatt-Isgarh Orissa
Gujarat
Rajasthan Uttar�Pradesh
DelhiHaryana
Punjab
Jammu &�Kashmir
Himachal Pradesh
Uttarakhand
Bihar
SikkimAssam
Meghalaya
Arunachal�Pradesh
Nagaland
Manipur
Tripura
West�Bengal
Jharkhand
Karnataka
PuducherryTamil�Nadu
Goa
Kerala
Mizoram
70
62
115
63
87
74
7
10
1
2643
74
34
1
94
205
34
106
1
2
3
4
1
3
32
1
17
26
28
13
Andaman & Nicobar Islands
0
> 10080 - 10060 - 8040 - 60
< 40
Scale
India: Population by State (Millions)
Key Facts
GDP: $1.1 trillion (2000 US$)
GDP per capita: $875 (2012)
Land area: 3.3 million square km
Population: 1,258 million (2012), 1,524 million (2030)
Number of employed: 446 million
Life expectancy: 65 years
Literacy Rate: 63%
Access to electricity: 68%Source: Wood Mackenzie, India Census 2011, World Bank
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When will China and India catch up with the developed world?
Source: IMF (WEO, Sept 2006), World Bank, Hausmann et al (2005)
Growth takeoff years based on IMF (WEO, Sept 2006) and Hausmann et al (2005), Growth Accelerations. Dating was based on an assessment of significant and sustained increase in per-capita growth post-turning point. In addition, growth acceleration periods were found to be correlated with trade and investment positions as well as government policies.
GDP per capita was comparable between China and India during the 1970s but significant economic reform pushed China ahead in the 1980s and 1990s
• China’s GDP per capita increased ~ 13 fold between 1980 and 2010
• India’s GDP per capita increased ~3 fold, 1980 –2010
India’s lack of economic reform has left it approximately 20 years behind China on the development curve
Both countries still have a long way to go to reach the developed world. Per capita wealth in China would have to almost double to match that of Brazil today and increase 6 fold to catch South Korea today
2010 Real GDP per capita
Thailand
Taiwan
Brazil
Argentina
Israel
USA
Japan
Hong Kong
Singapore
Malaysia
IndonesiaIndia
China
Vietnam
South Korea
China (1979)India (1982)
Pakistan
PolandEgypt
Australia
New Zealand
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
0 10 20 30 40 50 60
Years since beginning of growth takeoff
Co
ns
tan
t U
S$
2000
pri
ces
x
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Capital stock per person (2010)
The stock of capital in both China and India remains extremely low
20
40
60
80
100
120
140
160
India China Korea
1990
Korea Japan
1965
Japan USA
Th
ou
sa
nd
US
$ (
2000$
)
The ‘stock of capital’ measures the total amount of assets in an economy – both tangible e.g. machines and buildings; and intangible e.g. patents and software
China’s investment (and level of capital stock) has grown rapidly over the past decade. But that does not mean China has over-invested, and cannot sustain further investment growth.
China’s capital stock per person is still very low compared with Korea, Japan and the USA
• China’s current level of capital stock per worker is approx. 8.7% of the US’ level today
• This is less than Japan’s level in 1965 and Japan continued to invest rapidly up to the mid-1970s
India’s capital stock per person is even lower – just 40% of China’s level. Today, India is close to where China was in 2002
Source: Wood Mackenzie estimates
0
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The World in 2030: How will China and India fare?
Source: IMF (WEO, Sept 2006), World Bank, Hausmann et al (2005), Wood Mackenzie forecast
Growth takeoff years based on IMF (WEO, Sept 2006) and Hausmann et al (2005), Growth Accelerations. Dating was based on an assessment of significant and sustained increase in per-capita growth post-turning point. In addition, growth acceleration periods were found to be correlated with trade and investment positions as well as government policies.
China’s GDP per capita is forecast to treble by 2030
• China will reach $US10,000 by 2030 (in real year 2000, US$ terms) – comparable to South Korea in 1995
• China’s GDP per capita is forecast to be higher than other emerging economies such as Brazil and Malaysia
India’s GDP per capita will increase 2.7 fold by 2030
• India will reach $US2,300 by 2030 – comparable to China in 2010
• This would leave India in 2030 at only 50% of the per capita wealth of Brazil today
Real GDP per capita in 2030 (constant US$)
Years since beginning of growth take-off
Thailand
Taiwan
Brazil
Argentina
Israel
Japan
Hong Kong
Singapore
Malaysia
Indonesia
India 2030
China 2030
Vietnam
South Korea
China 1979India 1982
Pakistan
Poland
Egypt
Australia
New Zealand
USA
0
10,000
20,000
30,000
40,000
50,000
60,000
0 10 20 30 40 50 60 70 80
China 2010India 2010
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Agenda
Assessing China’s future iron ore requirements:
• How much?
• Where from?
• At what cost?
3
1Setting the scene:
Lessons learnt from 2012 and what to expect from 2013.
2 The rise of China and India: comparative analysis.
3
Some longer term considerations:
• Capital intensity.
• Ore degradation.
• Chinese overseas investment.
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China’s future raw material requirements – how much?Challenging the base case view.
Base Case:
� Steel cons. peaks at 907Mt (650kg/capita) in 2028.
� Hot metal production peaks at 862Mt in 2025.
Low Case Scenario:
� Steel cons. peaks at 835Mt (600kg/capita) in 2027.
� Hot metal production peaks at 800Mt in 2022.
Impact on Iron Ore:
� Avg. “loss” (low case vs base case) = 30Mtpy 2015-2020; 100Mtpy post 2020.
A possible downside scenario for China.
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Source: Wood Mackenzie
1000 120
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China’s future iron ore requirements – where from? Domestic production - running to stand still!
Raw ore production running at 1.3Bn tpy ….
Source: Wood Mackenzie
…. but China’s import dependency is also rising!
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China’s future iron ore requirements – where from? Domestic production ...... limited potential.The map shows the major provinces producing iron ore: 2011 total raw ore production = 1.33 Bn tonnes.
Limited reserves:
� “Basic” reserves = 22Bn tonnes. 15yrs of prod’n at current rate.
� Hebei, Liaoning, Sichuan a/c for 65% of reserves.
� Key prospective zones for iron ore are in central and far west provinces, far away from the high consuming coastal belt.
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Source: Wood Mackenzie
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China’s future iron ore requirements – where from?The changing composition of Chinese imports.
47%
21%
21%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%2000
2002
2004
2006
2008
2010
Co
mp
osit
ion
of
Ch
inese I
ron
Ore
Im
po
rts Other
S.Africa
India
Brazil
Australia
Jan-Sep '12
0%
10%
20%
30%
40%
50%
60%
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Jan-
12
India's share of Chinese imports.
Australia's share of Chinese imports.
“Non-core” suppliers gaining share in China …. …. while India is squeezed out.
Source: Wood Mackenzie
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China’s future iron ore requirements – where from?Australia should be the big long term winner.
The Australia/China bond – China to account for almost 80% of Australian exports by 2020!
India squeezed out.
Brazil & Africa – small gain in share.
Risk – cost pressures in Australia prohibit development on the scale required by Chinese importers!
Australian exports to China – could double by 2020!
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Source: Wood Mackenzie
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China’s future iron ore requirements – at what cost? 2012 Global Cost Curve: 154 mines across 14 countries..
Source: Wood Mackenzie
0
100
200
US
$ /
we
t to
nn
e
Million tonnes
Australia Brazil China RoW
90th percentile: US$89/tonne
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0
100
200
US
$ /
w
et
ton
ne
Million tonnes
Royalties and Levies Direct Cash Cost (C1)
© Wood Mackenzie 22
Chinese Cost Curve58 operations and projects across 21 provinces..
Source: Wood Mackenzie
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Base case valuation assumptions 20% of mines have negative operating margins in 2012…
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2012 Chinese mines operating margin (base case)
-50.0
0.0
50.0
100.0
US
$ /
we
to
nn
e
Million tonnes
20% Chinese mines with negative margin
Source: Wood Mackenzie
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..and the number of negative operating margin mines rises to 40% in 2017.
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2017 Chinese mines operating margin (base case)
-100
-50
0
50
100
US
$ /
we
t to
nn
e
Million tonnes
~40% Chinese mines with negative margin
Source: Wood Mackenzie
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Agenda
Assessing China’s future iron ore requirements:
• How much?
• Where from?
• At what cost?
3
1Setting the scene:
Lessons learnt from 2012 and what to expect from 2013.
2 The rise of China and India: comparative analysis.
3
Some longer term considerations:
• Capital intensity.
• Ore degradation.
• Chinese overseas investment.
Delivering commercial insight
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Capital intensity (U$/tonne) by ore type.
Some longer term perspectives – spiralling capital intensity.
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Some longer term perspectives - ore degradation.
It’s not just a China issue!
High prices have induced new sources of low quality product into the seaborne market:
Vietnam, Indonesia, Philippines, Honduras!
Traditional suppliers are not immune.
Implications for consumers – reduced blending options (eg with low quality Chinese ore).
Implications for producers – need to supplement existing production with new higher quality sources.
Implications for trade – a 1% decline in Fe between now and 2020 could imply additional 200Mt of seaborne trade!
Ore grade and quality decline.
© Wood Mackenzie 27
Source: Wood Mackenzie
0 20 40 60 80
Newman Fines
Yandi Fines
Vale: South
Vale: Carajas
Newman Fines
Yandi Fines
Vale: South
Vale: Carajas
% Fe; % combined silica/alumina
1999 2011
Fe Grade is FallingImpurities are Rising
% F
e
% a
lum
ina
& s
ilica
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Longer term considerations: China extends its global reach
Source: Wood Mackenzie
The rising share of “captive” foreign ore.
5yr plan – to raise China’s iron ore self sufficiency to 40% (was 50%).
An ambitious target and highly improbable!
“Captive imports” currently ~5% of consumption.
By 2020 could account for ~14%.
Not a “game-changer” for iron ore.
5%14%
35%
64%
72%
51%
31%
14% 14%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2012 2020 (base) 2020 (high)
Co
mp
os
itio
n o
f C
hin
es
e O
re C
on
s.
Imports (captive) Imports (non-captive) Domestic
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Summary …….. the end of the “golden age”?
Demand drivers:
� Hot metal production (slower not lower).
� Displacement of Chinese domestic ore.
Supply side issues:
� Existing expansions remain on track, but appetite for risk is waning.
� Potential for a supply squeeze 5 years forward?
Cost support:
� High cost Chinese mines.
� Ever increasing capital intensity.
Keep an eye on:
Chinese politics/policy.
Steel makers’ profitability (lack of it)!
Chinese overseas investment.
2013 price outlook: down, but not out!
Source: TSI, Wood Mackenzie
0
20
40
60
80
100
120
140
160
180
200
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Jan-
12
Jan-
13
TS
I 6
2%
Fe
US
$/t
, C
FR
Annual Average Price ($/t CFR)'08: 145 | '09: 86 | '10: 147 | '11: 168 | '12: 127?
2013:
$125/t ?
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Wood Mackenzie Disclaimer
This presentation has been prepared by Wood Mackenzie Limited for delivery at the InformaAmericas Iron ore Conference in Belo Horizonte on 6-8 November 2012. It has not been prepared for the benefit of any particular attendee and may not be relied upon by any attendee or other third party. If, notwithstanding the foregoing, this presentation is relied upon by any person, Wood Mackenzie Limited does not accept, and disclaims, all liability for loss and damage suffered as a result.
The information contained in these slides may be retained by attendees. However, these slides and the contents of this presentation may not be disclosed to any other person or published by any means without Wood Mackenzie Limited's prior written permission.
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