CRU Consulting - OECD

[Pages:28]CRU Consulting

Steelmaking raw materials ? key trends

Prepared for the 82nd Session of the OECD Steel Committee 23rd March 2017

Prepared by CRU Consulting

Laura Brooks, Principal Consultant e: laura.brooks@ t: +44 (0) 20 7903 2239

Agenda ? Recent trends for the bulks ? Snapshot of base case long-run forecasts ? 4 key trends to watch ? Why are these trends important? ? Conclusion

OECD Steel Committee

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OECD Steel Committee

2014 - 2015: prices crashed due to over-investment in supply

CRU uses super cycles to justify expectations for long-run price trends 1. Super cycles typically take about 25 years peak to peak or trough to trough

2. High capital cost commodities (hard rock or bulks) have a wide amplitude, while less capital- intensive industries have a narrow amplitude

3. Super cycles come about because of an overreaction of investment following a price spike

Price versus volume change

Upstream steel market 100

50

% Price 2015/2011 % Volume 2015/2011

0

-50

-100

-150

Source: CRU

3

Lower costs also helped to drive prices down

CRU Business Cost Curve x axis: cumulative production, Mt y axis: Business Cost (normalised to 62% Fe fines, CFR China, $/t

Downwards pressure from lower oil prices, currency depreciation, lower contractor costs, reduction in headcounts, change in mine plans etc.

OECD Steel Committee

Are the cost reductions sustainable?

....this is critical for CRU's price forecasts

Source: CRU

4

5

Source: CRU

Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17

0

Average quarterly price

Australian quarterly contract HCC

50

100

150

200

250

300

350

Hard coking coal price

Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17

0

50

100

150

200

Average monthly price

Monthly price, 62% Fe fines, CFR China

250

Iron ore price

A recovery ensued in 2016, followed by sharp gains in 2017. Why?

OECD Steel Committee

OECD Steel Committee

An improved demand side picture stabilisation in global crude steel production...

Global crude steel production 2000

1500

1000 500

ROW China

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

...and higher sC6a%treboen lcrupdreiscteeelsproadunctdion mgrowathr,gy/iyn%s

A slight in4%crease in demand and expectati2o%ns of production cuts in China drove ste0e%l prices higher

-2%

-4%

Steel ma-6r%gins fattened despite the

increase-s8%in iron ore and coking coal

prices

Q1

Q3

Q1

Q3

Q1

Q3

2014 2014 2015 2015 2016 2016

Rest of world

China

HR coil EBITDA margin for Chinese producers, %

20% 10%

0% -10% -20% -30%

China

North America

Europe

Source: CRU, WSA

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OECD Steel Committee

For iron ore = a Chinese import boom, not a demand boom, drove prices higher

Chinese crude steel production and iron ore consumption, 2016, y/y change, Mt

80

78

55

30

5 -4

-20 Crude steel

The result of a sharper cut in Chinese domestic iron ore production

-4 Hot metal

-9 Iron ore consumption

Iron ore imports

Source: CRU, WSA

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OECD Steel Committee

For coking coal = the Chinese government's policies played a central role in price movements

China coal capacity, annualised, bn t 5

276 working day policy in China

Implementation

Relaxation

Global prices

Global prices

+13%

4

3

2

1

0

15

16 Q1

16 Q2

16 Q3

Operating new capacity Permanently closed capacity

NB. Total capacity figures exclude idled capacity.

Source: CRU

16 Q4 Operating capacity

17 Q1 8

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