Slide 1: Ferrochrome Market Overview 2017
Ferrochrome Market Overview 2017 Presented by: Mark Beveridge Principal Consultant CRU Nickel, Chrome, Stainless Steel Group
Slide 2: Key Themes
Key Themes ▪ Which factors define the chrome market? 1. Chinese demand and the stainless steel cycle - Chinese credit creation - Inventory levels - Trade - Real demand 2. Chinese Production costs 3. South African Cr ore supply and price ▪ Explaining recent events ▪ Outlook global demand and supply ▪
Slide 3: Recent History
Recent History Chinese delivered price (ex-VAT) US c/lb (LHS axis) • 2017 looks like a high-side Chinese delivered price (ex-VAT), ZAR-terms (RHS axis) outlier in terms of pricing 180 1,800 160 1,600 • Too much ore stock in China, but otherwise current market 140 1,400 fundamentals fairly neutral 12
Slide 4: Understanding China: Real demand, apparent demand and production
Understanding China: Real demand, apparent demand and production Manufacturing FAI 30 Real Estate FAI 30% Infrastructure FAI 25 Stainless Steel production, y-y % growth (RHS) 25% 20 20% 15 15% 10 10% 5 5% 0 0% -5 -5% -10 -10% Mar-15 Mar-16 Mar-17 Jan-15 Jan-16 Jan-17 Sep-15 Sep-16 Nov-15 Nov-16 May-
Slide 5: Chinese apparent stainless steel demand and the credit cycle
Chinese apparent stainless steel demand and the credit cycle Allowing for some lag, there is correlation between credit creation growth and apparent consumption of stainless steel in China y/y % change 22 40 Stock of TSF + Local govt bonds (LHS) 20 Qtrly Crude SS Apparent Consumption (RHS) 30 18 20
Slide 6: Understanding China: real vs. apparent demand
Understanding China: real vs. apparent demand China’s stainless steel inventory cycle—not yet carrying excessively high stock Stainless steel stocks, crude steel basis, week's supply in hand 16 14 12 10 8 6 4 Long-term average stock levels 2 0 2010 Q1 2010 Q3 2011 Q1 2011 Q3 2012 Q1 2012 Q3 2013 Q1
Slide 7: Understanding China: stainless steel production and the stocking cycle
Understanding China: stainless steel production and the stocking cycle Q-Q volatility in Chinese stainless steel production well reflected in the changing stock levels 16 30% 14 25% 20% 12 15% 10 10% 8 5% 6 0% 4 China, stainless steel stocks, wks supply on hand (LHS axis) -5% 2 -10% China, quarterly
Slide 8: Chinese stainless steel production less dependent on exports
Chinese stainless steel production less dependent on exports…and that’s before Indonesia starts up LHS axis: y-y change in global stainless steel production, tonnes, split by export/domestic market; RHS axis: % y-y change 1,500,000 Export Differential (LHS) 30 Domestic Production Differential (LHS)
Slide 9: Explaining recent events in the chrome market
Explaining recent events in the chrome market 140 China HC FeCr domestic spot, ex-VAT • Market fundamentals played an important role in the price 120 volatility of late-2016 and 100 mid-2017 • Latest price rally harder to US cents/lb 80 justify in terms of market 60 fundamentals Sentiment- Cr ore st
Slide 10: Explaining recent events: Chrome ore stocks
Explaining recent events: Chrome ore stocks • Late 2016/early 2017 prices defined by critically-low ore stocks in China and surge in demand (liquidity-driven) • Pull back in prices in Q2 2017 coincided with collapse in demand, credit creation slowdown LHS: Weeks Consumption in 30% China HC FeCr cons
Slide 11: Explaining recent events: Stainless steel stocks
Explaining recent events: Stainless steel stocks Stainless steel stocks, crude steel basis, week's supply • China’s stainless steel in hand inventories also had a role to 16 play—they grew rapidly in Q4 14 2016/Q1 2017; then fell in Q2 12 2017 10 • CRU doesn’t believe that 8 stocks are currently clo
Slide 12: Explaining recent events: China's credit cycle
Explaining recent events: China’s credit cycle • Recent price rally influenced by sentiment—credit creation eased in July 2017 • Positive sentiment on raw material prices, supplemented favourable inventory position y/y % change y/y % change, wide indicator of credit creation in China (TSF=Total Soci
Slide 13: Explaining recent events: BM price moves
Explaining recent events: BM price moves EU charge chrome benchmark has stuck to established trend 180 EU BM (gross) 160 China HC FeCr domestic spot, ex- 140 VAT 120 100 80 60 40 Feb/16 Feb/17 Mar/17 Mar/17 Mar/16 Mar/16 Sep/16 Aug/17 Sep/17 Aug/16 Nov/16 Dec/16 Apr/17 Apr/16 Jul/17 Jul/16 Oct/16 Oc
Slide 14: Outlook on FeCr demand: China
Outlook on FeCr demand: China • Credit tightening, FAI slowdown contribute to slowing stainless steel demand growth • Output growth to move in range between 3-5% y-y, 2018-21 7.5 18 7.0 16 Chinese IP 14 6.5 Y-y % change 12 6.0 10 y-y % change 5.5 8 6 5.0 4 4.5 Chinese IP 2 4.0 0 2016Q2 2017Q1 2017Q3
Slide 15: Outlook on FeCr demand: China's trade
Outlook on FeCr demand: China’s trade LHS axis: y-y change in global stainless steel production, tonnes, split by export/domestic market; RHS axis: % y-y change Export Differential (LHS) 1,500,000 Domestic Production Differential (LHS) 30 Total Crude Production (RHS) 1,000,000 15 500,000 0 0 -500,00
Slide 16: Outlook on FeCr demand: Eurozone
Outlook on FeCr demand: Eurozone • Steady growth forecast: investment growth to trend up in short-term, IP down • Stainless steel output growth projected to be flat 2018-21—import competition to intensify 8 3.0 Eurozone IP 6 Investment (Gross capital 2.5 formation) 4 y-y % change 2.0 2 y-y % change
Slide 17: Outlook on FeCr demand: USA
Outlook on FeCr demand: USA • IP, investment growth forecast to increase in 2018; decline thereafter • Stainless steel production growth range forecast at 1-1.7% y-y 2018-21—running up against effective capacity limitations 3.0 7 USA IP 2.5 6 Investment (Gross capital 2.0 formation) 5 1.5 Y-y % chan
Slide 18: Outlook on Global HC FeCr demand
Outlook on Global HC FeCr demand • The combination of Chinese, Indonesian and Indian demand will define HC FeCr market in coming years • HC FeCr demand growth forecast to be relatively flat over forecast period HC FeCr consumption, '000 tonnes gross weight HC FeCr consumption, y-y % change China Ind
Slide 19: Outlook on Global FeCr supply
Outlook on Global FeCr supply • Our forecasts expects supply growth from South Africa, Indonesia and India • Chinese supply will swing into the market in response to pricing signals 15,000 RoW (excluding Indonesia) Indonesia 20% S. Africa India China Kazakhstan RoW (including Indonesia) China 15% S.
Slide 20: Global HC FeCr supply/demand balance
Global HC FeCr supply/demand balance 600 Market balance • Global HC FeCr will tend 500 towards oversupply over 400 the forecast period 300 200 • However, deficits will be 100 required in order to prevent excessive stock 0 accumulation -100 -200 • Chinese supply will swing -300 in and out of the mark
Slide 21: Production costs
Production costs • Rising power costs in South Africa (ZAR-terms) will push up production costs; effect will be offset by depreciating currency • But South African marginal production costs will not be as important for global prices as Chinese production costs ZA power price increase in US$ terms (1
Slide 22: Chinese production costs and ore
Chinese production costs and ore • Chinese supply will balance the HC FeCr market in the long term; cost of production is vital—and is largely defined by price of South African chrome ore 5,000 ('000 tonnes gross weight) 4,500 4,000 3,500 3,000 Chinese Production 2,500 S.African Production 2,000 201
Slide 23: China's dependence on ZA ore supply
China’s dependence on ZA ore supply m tonnes, ZA Cr ore production requirement • South African ore 30 ZA UG2 production production projected to ZA conventional Cr ore required need to rise by about 25 2.5mtpy by 2021 20 • Outlook for PGM prices is not particularly 15 positive—yet more UG2 concentrat
Slide 24: China's dependence on ZA ore supply
China’s dependence on ZA ore supply • ZA chrome ore exports responded quickly to the acute shortage of material in late 2016 • RoW supply also shows signs of being reasonably elastic China's monthly Cr ore imports, 000t 2015-2017 monthly 1,800 total imports average 1,600 1,400 RoW 1,200 South Africa
Slide 25: China's dependence on ZA ore supply
China’s dependence on ZA ore supply • South African ore production projected to need to rise by about 2.5mtpy by 2021 • CRU’s outlook for PGM prices is bearish; risks to supply are acute 6 60,000 Δ 7.5m tpy Δ 1.2m tpy 5 50,000 m tonnes UG2 concs capacity m tonnes UG2 ore milled 4 40,000 3 30,000 2 2
Slide 26: Conclusions
Conclusions: • Short-term outlook dominated by chrome ore stocks in China • Chinese stainless steel stock levels not overly worrying at the moment—but there is the twin threat posed by bullish nickel market and Indonesian imports • Long-term trend towards lower global stainless steel production grow