Metals & Mining ABN AMRO ECT Metals

ABN AMRO Group Economics |

Iron Ore Prospects Sector & Commodity Research

Singapore, 7th of May 2013

 Economic Risks & Opportunities around the Globe
EU - sovereign debt crisis
US - economy is increasingly pointing (PIGS) and slow EU economic Russia - recovery remains
into the direction of a stronger recovery; modest acceleration fragile; favourable confidence
recovery; labour market recovery is of growth in Emerging EU data are in contrast with recent
continuing; increasingly strengthening hard economic data pointing to
recovery of housing market an ongoing slowdown

Asia - Asia was not

Mexico - inflation
still on the rise, but
medium term outlook
is bright
Colombia - period of
sluggish growth, but
economic tide is turning
Chile - business confidence
at elevated level and
economic outlook positive
LatAm - economic
fundamentals
remain healthy
spared from the
eurozone crisis; trade
lines were significantly
cut; going forward,
urbanisation process
will support
Middle consumption and
East -
additional investments
vulnerable
to swings in
are needed
oil markets
South Africa - structural
Australia - resources
imbalances remain sector remains important
(poverty, crime, corruption,
Brazil - driver for economy, but
high unemployment);
Inflation stays
mining sector suffers of the reliance on China’s
elevated, but
recent unauthorized economic development is
pressures will
strikes; this also hampers (perhaps too) high
ease
private investment

Source: ABN AMRO Macro & Emerging Markets Research

Macro Economic Context – GDP forecasts ABN AMRO
9%

PIGS
8% China

BRICS
7%
Regions India Emerging Asia

6% Vietnam
Indonesia
UAE Turkey
5%
Brazil Mexico
world GDP growth Norway Latin America
4% (2014): 3.9% (yoy) Emering Europe Russia
Sweden US South Africa
3% Poland South Korea
Australia
Germany Canada
2% Ireland
Eurozone Japan
UK
GDP growth (y-o-y) 2014

Switzerland
1% Netherlands Denmark
Portugal France
Spain
0%

Greece Italy
-1%
world GDP
growth (2013):
-2% 3.2% (yoy)
-5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9%
GDP growth (y-o-y) 2013
 Economic Development of Countries

Urbanisation rate & GDP per capita Steel consumption per capita

GDP per capita (USD)

60,000 16,000
Size b ub b le = crude steel use per capita (kg)
Australia
US 14,000 Russia (2012)
50,000 Germany
Netherlands 12,000
Japan Brazil (2012)
40,000 France
10,000

South Africa
30,000 Spain 8,000
(2012)
China (2012)
GDP per capita (USD)

6,000
20,000

Russia South Africa

Turkey 4,000 Brazil (2000)
(2000)
10,000 China South
Brazil India (2012)
Africa Mexico 2,000 Russia (2000)
Indonesia
India Ukraine China (2000)
0
0
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% India (2000)
0 100 200 300 400 500
Urbanisation ratio (%) Apparent steel use per capita (kg)

Transformation emerging economies will continue

 In the typical path of development, demand for industrial goods will soar over time
 Highways, railways, buildings and ports have to be built
 High volumes of construction materials (such as steel, copper and cement) are required
Patterns in Commodity Trade have shifted
100%
13%

28%
90%
80%
70%
60%
52%

50%
73%
40%
30%
20%
20%

10%
0%
14%
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Coal, iron ore, grains import into EU
Coal, iron ore, grains import into Asia
Coal, iron ore, grains import into Others

Global seaborne trade patterns changed significantly in 20 years

 Imports into Asia increased strongly by 274% in 20 yrs (cagr 14% pa)
 Iron ore and coal (seaborne) trade main drivers of growth

Source: Clarkson Research Services, ABN AMRO Sector & Commodity Research
China Remains Key for Metal Market Developments
World share of China in metals supply and demand (Q1-2013):

Supply: 在中國
 Aluminium 42% Demand: 中國需求
 Copper 27%  Aluminium 40%
 Nickel 27%  Copper 40%
 Zinc 41%  Nickel 46%
 Crude steel 46%  Zinc 43%
 Iron ore 15%  Finished steel 51%
(converted to world quality avg)
 Iron ore 65%
(of total world imports)

Steel and iron ore = 2011 data

Key issues to monitor:

 Level of Chinese metal consumption by end users (construction, car and industrial manufacturers)
 The structural problem of overcapacity in China
 Chinese policies on exports, overcapacity and energy

Source: IISI, CRU, MB, Brookhunt, UNCTAD, ABN AMRO Sector & Commodity Research
Chinese Share and Influence in Iron Ore Market

China import iron ore accelerated Import China iron ore 2012
80
Iron ore import volume: AUSTRALIA
- % growth China 2002-2012: 569% BRAZIL
70
SOUTH AFRICA
INDIA
60 IRAN
Import China UKRAINE
50 CANADA
RUSSIA
20%
Import volume iron ore (Mln Mt)

40 INDONESIA 2%
PERU
4% 47%
30 CHILE
MALAYSIA
20 MAURITANIA 5%
MONGOLIA
Import Japan 22%
10 KAZAKHSTAN
Import S. USA
Korea RoW
0
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 10,000 Mt 0 10,000 20,000 30,000 40,000

When China shivers the global market shakes

 Since 2001 China’s influence on the international iron ore market accelerated
 Main supplier of high quality iron ore is Australia, followed by Brazil
 Export from India to China keeps declining (due to governmental policies of India)
Current Iron Ore Trade Flows
% = share in global iron ore seaborne trade

3%
2%
8%

6%
9%

29% 35%

22% 38%
4% 2%

China is the main importer of iron ore

 95% of global iron ore trade is seaborne
 Pacific trade 55% and Atlantic trade 45% (in 2001: 45%-55% resp.)
 Output Pilbara region (Aus) approx. 430 mln tonnes/yr and rising

Source: UNCTAD, Metal Bulletin

 Top 10 Iron Ore Producing Countries

Export rates over time Top 10* Iron content of reserves Top 10
100% 99% 40,000 70%
2. Australia 65%
91% 64%
90% 90% 35,000 60%

Fe content (% useable ore of total crude reserves)

9. Canada 89% 56% 56%
55%
80% 30,000
3. Brazil 49% 50%

70% 7. South Africa 25,000

40%
20,000 35% 37%
60%
4. India 31% 30% 30%
export rate (share of production)

50% 15,000
48%
43% 20%
40% 10,000
6. Ukraine
30% 5,000 10%
30%

Mln Mt
5. Russia 23%
20% 21% 0 0%
8. US

i ca

US

n
zil

ia

ne
in a

ali a

da
a

Ira
In d

ssi
Br a
10%

Afr
rai

na
Ch

str

Ru

Uk

Ca
ut h
Au
10. Iran

So
0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Crude iron ore reserves Iron content reserves % iron content (r.axis)

* China not in list; China’s iron ore production is for domestic use only; China’s iron ore volume of production is high, but the quality is very low

Abundant resources of iron ore available

 South Africa increased its export rate significantly from 2008-2011
 India is pulling away from the international iron ore market
 India and South Africa have rich deposits iron content
New Project Developments Iron Ore (~ next 5 yrs)
* Minor selection of total green- and brownfield projects worldwide

15%
(of world iron ore
reserves)
Russia
Ukraine 175-200 Mt
Canada 75-100 Mt 14%
150-175 Mt China (of world iron
ore reserves)
75-100 Mt

Australia
India
< 25 Mt 400-425 Mt
Brazil
275-300 Mt 17%
(of world iron ore 21%
reserves)
Africa
S. Africa (of world iron ore
< 25 Mt
250-275 Mt reserves)

 May 2012: Total project pipeline is 796 Mt of new production capacity, to come on
stream between 2012-2014
 Of which: 34% is certain, 28% is probable, 38% is possible

Sources: USGS, UNCTAD, Mining Journal, various public sources

Country and iron ore mine sector characteristics
SHARE IN WORLD SHARE IN WORLD
PRODUCTION RESERVES
25% 21% High quality, high export rate, high
Australia reserves, high dependency on China

21% 17% Also high quality, high export rate, high

Brazil reserves, but diversified client portfolio

Needs iron ore domestically to improve

10% 4% infrastructure; fragmented structure of
India
sector; create large single mining units

6% 15% Highly vertically integrated, steel works

Russia
control iron ore production

4% 4% Nine major iron ore operations, low

Ukraine quality, export to Europe

Largest producer on African continent,

2% 1% large deposits in Northern Cape;
South Africa
potential of new iron ore deposits high

Sources: USGS, UNCTAD, Mining Journal, various public sources

Overcapacity in Global Steel Sector

Steel utilisation rate (global avg) To much steel capacity

100% 180,000 45%

95% Total steel

160,000 capacity 40%
90%
140,000 35%
85% 82%
79% 79%
80% 77% 120,000 30%
75% 78%
71% 100,000 25%
Utilisation rate (%)

70%

65% 80,000 20%

World steel
60% production
60,000 % unused 15%
55% capacity

% overcapacity
40,000 10%
50%

1,000 Mt
2008 2009 2010 2011 2012 2013 20,000 5%

Avg utilisation rate 2008 avg 2009 avg

0 0%
2010 avg 2011 avg 2012 avg
2013 avg 2008 2009 2010 2011 2012 2013

Challenge facing the steel sector: overcapacity

 In Europe many mills have already been idled and furnaces have been closed
 China has an overcapacity of approximately 40 million tons of steel
 Problem will persist and will not be solved on the short term

Sources: IISI, Thomson Reuters Datastream

Country Dependency on Steel Raw Materials
▪ Basis: share in world imports 2011
▪ Necessity for future development and
stage in economic transition
▪ Urbanisation rate and demographics

Developed countries
Newly industrialized How high is need for the commodity to a country?
Developing countries
Least developed countries Low High

High Americas – coal

Australia – iron ore
▪ Basis: share Brazil – iron ore China – coal
in world Russia – iron ore
proven
What is Russia – coal
reserves 2011 Mongolia – coal
the China – iron ore
▪ Domestic Australia – coal India – coal
availability & reserve
base of a India – iron ore EU – coal
self sufficiency
rate country? S. Africa – coal EU – iron ore
▪ External Brazil – coal
dependency S.Korea –coal Japan – coal
S.Korea – iron ore
Low
Indonesia – coal Japan – iron ore

Source: ABN AMRO Sector & Commodity Research (based on data from BP, EIA, UNCTAD)
Upside & Downside to our Views

Demand for iron ore (and coking coal) will remain on relative high level
Asia, and especially China, will show positive growth in dry bulk import volume:
 Ongoing urbanisation and industrialisation will provide a solid base…
 …. but risks remain…

Upsides to steel raw materials demand

Strengthening of economic indicators in developed countries (EU, US)

Recovery of construction sectors worldwide

Raw materials stockpiling strategies by governments at low commodity prices

 Downside risks to steel raw materials demand

Escalation of EU debt crisis

Further tightening of financial policies in emerging markets

Significant disruptions and delays in steel raw materials supplies

Source: ABN AMRO Sector & Commodity Research

 Further information & disclaimer

For question and further information, please contact:

Casper Burgering
Senior sector economist

ABN AMRO Group Economics | Sector & Commodity Research

tel: +31 20 383 26 93
e-mail: casper.burgering@nl.abnamro.com
ABN AMRO Group Economics on the internet
www.abnamro.nl/nl/zakelijk/service/publicaties/economisch_bureau.html

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