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Steel and iron ore outlook

Cicero Machado – April 2019

Trusted commercial intelligence woodmac.com

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Agenda

1. Steel outlook

2. Iron ore outlook

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China: steel consumption to peak in 2020
Construction to modestly grow, then decline

Steel consumption by sector  Decline in construction activities will undermine steel

demand in the long term.
900
 Property:
800  Short-medium term: credit easing and
‘old home’ renovation program to
700 support growth.

600  Long term: growth from lower-tier cities

will not support steel demand
500 expansion.
Mt

 Infrastructure:
400
 Short-medium term: highway
300 construction to be the main contributor
for growth until mid-2020s.
200
 Long term: efforts to curb public debt
100
risk will negatively impact infrastructure.
 Manufacturing: government stimulus will support
0 medium-term growth. Trade wars may bring
2005 2010 2015 2020 2025 2030 2035
uncertainties to the export of manufacturing goods
Other Shipbuilding over the long term.
Household Appliances Automotive
 Largest growth in steel demand will come from the
Machinery Construction
automotive sector as vehicle ownership increases
Source: Wood Mackenzie and domestic-manufactured vehicles are promoted.
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China: steel production to remain resilient until mid-2020s
Exports will maintain production high in the medium-long term
Demand contraction to be partially offset by an Net capacity decline of <5Mt will allow China to fill
increase in exports in the long term out the global supply gap in the long term
1000 140

900
120
800

700 100

600
80

Mt
Mt

500

60
400

300 40

200
20
100

0 0
2005 2010 2015 2020 2025 2030 2035

Hot metal production

Crude steel production
Finished steel exports (RHS)
Source: Wood Mackenzie

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India: steel demand has scope to grow significantly
Lack of investment has constrained growth over the past few years

Growth will speed up as economic reforms set in Real potential for steel demand growth!
250 200
Per capita steel consumption, kg
Others
Automotive
Machinery 600
Construction Germany
200 EAF-based crude steel production (RHS)
BOF-based crude steel production (RHS) 150
500

Production by method (Mt)

China
Demand by sector (Mt)

150
400
Japan
100
US
300
100

200
50
India
50

100

0 0 0
2005 2010 2015 2020 2025 2030 2035 2000 2016 2025 2035

Source: Wood Mackenzie Source: Wood Mackenzie, WSA, World Bank, United Nations

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USA: At first glance, American steel is great again!
Higher prices followed by import restrictions have not (yet) led to demand destruction
Commercial construction and infrastructure to lead High price premium will keep imports attractive!
demand growth; automotive sector to disappoint
120 70 140 30%

60 120
100 25%

50 100
Demand by sector (Mt)

Production by method (Mt)

80 20%

40 80
60 15%

Mt
30 60

40 10%
20
40

20
10 5%
20

0 0
2005 2010 2015 2020 2025 2030 2035 0 0%

Other
Machinery Semis net imports
Automotive Finished net imports
Construction
BOF-based crude steel production Domestic production
EAF-based crude steel production Net imports as a share of demand (RHS)
Source: Wood Mackenzie Source: Wood Mackenzie
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Brazil: the worst is over but the recovery will be a drawn-out affair
Production is structurally geared towards exports
Demand will remain below its pre-crisis peak until Most of Brazilian exports to remain competitive
the end of the next decade even with Section 232 tariffs
Brazilian steel demand and production (bubble size = Mt) Brazilian steel trade (Mt)
% above 10
2013 peak
2019 2023 2030
Total exports Total imports Net exports
50%
5
40%

30%
0
20%

10%
-5
0%

-10%
-10

-20%

-30% -15

-40%

ApparentAFSU
finished Crude steel
-50% -20
steel demand production
2010 2015 2020 2025 2030 2035

Source: Worldsteel, Wood Mackenzie Source: Wood Mackenzie, WSA

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Global demand: recovering, but slowly
USA EU28 Russia Japan China
176 817 833 823
167 169
150 -1.5% 694
107 106 111 1.2%
102

68 66 64 61
1.0% 43 40 40 42 -0.3%
1.2%

2014 2018 2019 2023 2014 2018 2019 2023 2014 2018 2019 2023 2014 2018 2019 2023 2014 2018 2019 2023

Contraction or stagnation
Global
Compound annual
1734 1797
% growth rate
1694
1531

Major seaborne
0.9%
iron ore importer

Major seaborne
met coal importer
2014 2018 2019 2023

Steel demand growth >2% per year growth

4.2% 3.8%
122
97 95 102
82 88
78 76 72 76 2.0% 76
69
4.7%
26 22 23 24

2014 2018 2019 2023 2014 2018 2019 2023 2014 2018 2019 2023 2014 2018 2019 2023

SE Asia MENA Brazil India 8

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Higher raw materials prices lifted production costs in 2018
Costs to shrink until 2020, when BOF and EAF will take different paths
Despite lower scrap prices, higher gas and electricity …while BOF producers will continue benefiting
will take a toll on EAF steelmakers… from weaker coking coal and iron ore prices
BOF vs EAF crude steel costs, US$/tonne 62% Fe sinter fines, CFR China, US$/tonne
180
550
160
Actual Forecast
140

500 120
EAF BOF 100
80
450 60
40
2009 2011 2013 2015 2017 2019 2021 2023 2025
400 Source:
QLDWood Mackenzie
HCC, FOB Australia, US$/tonne
300
Actual Forecast
350 250

200

300 150

100

250
50
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025
2009 2011 2013 2015 2017 2019 2021 2023 2025
Source: Wood Mackenzie
Source: Wood Mackenzie
Nominal until current year and then real thereafter
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Prices to drop, then stabilise
Stronger-than-expected demand, capacity closures and protectionism have pushed prices
up
Big drop on margins to occur in 2021 pushed by
…and (still) declining steel prices
stable production costs…
Weighted average rebar costs and margins, US$/tonne Hot-rolled coil, US$/tonne
Forecast
600 200 1200
N.Europe Domestic, ex mill
1100
USA US Midwest, ex mill
180 1000
China Domestic Shanghai
500 900
160 800
700
140
400 600

120 500
400
300 100 300
2000 2005 2010 2015 2020 2025 2030 2035 2040
80
200 Rebar, US$/tonne
60 1100 Forecast
1000 N. Europe Domestic ex
40
100 900 mill
USA US Midwest ex mill
20 800
700
0 0 600
2010 2012 2014 2016 2018 2020 2022 2024
500
Other Costs Scrap Coking coal
400
Iron Ore Margins (RHS)
300
Source: Wood Mackenzie 2000 2005 2010 2015 2020 2025 2030 2035 2040
Nominal until current year and then real thereafter Source: Wood Mackenzie
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Agenda

1. Steel outlook

2. Iron ore outlook

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2019 seaborne supply/demand outlook
Vale to withdraw close to 55Mt from the seaborne market – at least for now!

The big question: who can fill the supply gap?

Global exports Global imports

Roy Hill FMG Vale
BHP
Rio +5Mt +2Mt -55Mt
+8Mt
Anglo +12Mt 2019 Europe Asia (ex.
2018 +15Mt 1550Mt +5Mt China) China Others 2018
1540Mt 2019 +3Mt +0.5Mt +1.5Mt 1540Mt
1526Mt Supply gap

 Chinese domestic?

 Non-traditional/’swing
suppliers’?
 Scrap?

Source: Wood Mackenzie

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Chinese iron ore demand is nearing its peak!
Higher scrap availability and growing EAF to constrain demand in the long term
A surge in “obsolete” scrap supply – a matter of “when”
EAF share to increase from 10% to 16% by 2040
not “if”
Scrap supply, Mt
BOF steel output
350 1000 18%
EAF steel output
EAF share in steel production (RHS)
Obsolete scrap 900 16%
300
Prompt scrap
800
14%
Home scrap

EAF share in steel production (%)

250

Production by method (Mt)

700
12%
600
200
10%
500
150 8%
400
6%
100 300

4%
200
50
100 2%

0 0 0%
2010 2015 2020 2025 2030 2035 2040

Source: Wood
Source: Mackenzie
Wood Mackenzie
Source: Wood Mackenzie

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Vale’s dam disaster: quantifying the price impact
woodmac.com

Price is a moving target!

Cost curve shifts to the left and becomes steeper with the
removal of part of Vale’s supply
140  Assuming demand remains constant, price
2019 original cost curve rises to ~$85/tonne with the removal of 55Mt
2019 cost curve with 55Mt less exports from Vale of exports.
120 Demand: seaborne import + China domestic
US$/tonne (62% Fe fines basis, CFR China)

 Given the gradient of the curve, any 10Mt

either way can move the interception point to
100 the mid-US$70/t range or the US$90/t one.
But:
80  What will be the duration of Vale’s current
Price implied by cost curve increases from
curtailments? More to come?
~US$73/tonne to ~US$85/tonne
60  Other producers in Minas Gerais to “join
the boat”?
40  Will seaborne ‘swing supply’ be able to
quickly respond? What about Chinese
domestic?
20
 What will be the demand response?
Higher scrap use?
0
0 500 1000 1500
Million tonnes
Source: Wood Mackenzie
*VIU adjusted cost, basis 62% Fe fines, CFR China, including sustaining capex.

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Long-term – base case supply to meet demand until mid-2020s

“Supply gap” expected as Indian demand grows
“Gap” to be filled by greenfield and/or brownfield 62% Fe fines price to hover around the US$65/tonne
expansions that are out of our base case mark over the long term

Iron ore supply and 62% Fe fines price, US$/t (real 2019)
Balanced Notional
Market “supply gap” 200
2,500
180 Actual Price: 2000 - 2018

WM f'cast: 2019 - 2024

160
WM long term price (from 2025)
140 Avg. price: 1980 - 2000
2,000

120

100

Base case
80
1,500

60

40

20
1,000
2010 2015 2020 2025 2030 2035 2040
0
Operating Highly Probable Probable Consumption 2000 2005 2010 2015 2020 2025 2030 2035
Source: Wood Mackenzie
Source: Wood Mackenzie

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Tiered pricing: a structural change
Gap between high and low grade to narrow as steel prices and margins are pressured

2018: all about price spreads

2019: attention swings back to supply tightness
65% prem.* 58% disc.**
40%

 Short term:
30%
30%  High-grade premium – down, then up
23%
20%
 Alumina penalty – up (Vale to stop selling
SFLA and IOCJ in the spot market)
Premium/Discount

20%

 Lump – up
9% 11% 11%
10% 7%  Pellet – up (compelling supply/demand
fundamentals!)
0%
0%
 Medium-long term:
 Tiered pricing is set to endure, but gap
-10% between high and low grade to narrow as
-10% -12% -13%
-15% steel margins are squeezed.
-17% -16%
 Lump and pellets – down (adjusting from a
-20% high base!)
Long Term
2013

2014

2015

2016

2017

2018

* spread between IODEX 62% and Platts 65% fines index.

** spread between IODEX 62% and Platts 58% (low alumina) index.
Source: Platts-SBB, Wood Mackenzie

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Costs to (modestly) increase year on year
Higher oil prices and unfavorable FX to be (partially) offset by growing productivity levels

Average total cash cost of iron ore miners Index of selected cost drivers
50 BRL and AUD vs USD index
1.8
45
1.7
1.6
40
1.5
1.4
35
1.3
US$/wet tonne

30 1.2
1.1 BRL AUD
25 1.0
0.9
20 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Source: Wood Mackenzie
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Brent blend price index
10 1.1
1
5 0.9 Actual Forecast

0.8
0
0.7
0.6
0.5
Royalty and Levies Overheads Port
0.4
Pelletising Transport Processing
0.3
Mining
Source: Wood Mackenzie
Nominal until current year and then real thereafter Source: Wood Mackenzie
Nominal until current year and then real thereafter 17
Summary of Wood Mackenzie’s view of iron ore and steel
woodmac.com

Decline in construction and manufacturing will

undermine Chinese steel demand in the long term,
despite a small growth in the automotive sector. Exports
to increase again in the long term.

Global steel demand will recover, but slowly. India will

lead the recovery in the long term.

A massive “supply-shock” has changed iron ore’s S/D

dynamics in 2019, with prices now set to remain in
US$80-90/tonne range. Change to a two-tier market is
structural and set endure.

Iron ore’s production costs to slightly increase year-

on-year mainly pushed by higher diesel prices.

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