Iron Ore Commodity Research: BI Commodities, Global Dashboard

This document is being provided for the exclusive use of PHANTICH BVSC at BAOVIET SECURITIES JOINT STOCK CO.
Not for redistribution.
Iron Ore Commodity Research

BI Commodities, Global Dashboard
Andrew Cosgrove Grant Sporre
Team: Metals & Mining Team: Metals & Mining
BI Senior Industry Analyst BI Senior Industry Analyst
1. Iron-Ore Run to $200 Not Out Question in Short Run: BI Commodity
(Bloomberg Intelligence) -- The near-term case for Table of Contents

more iron-ore buoyancy is alive and well, with a run Key Indicators Key Topics
to $200 a ton likely should 2021 supply Supply China Drill-Down
expectations keep disappointing, in our view. Demand
Though Vale started with a 20-million ton cut in 4Q20 + Model Adjustments
guidance, Australian producers -- namely Rio Tinto -- could be next as a revamped mining-
application process delays key replacement projects set to come online. Demand is holding up as
steel inventories normalize and downstream activity stays strong. (12/11/20)
Key Indicators
Supply
Iron-Ore Supply Expansion Set for Stronger Showing in 2021
Seaborne iron-ore supply, on track for just over 30 million metric tons (mt) of net additions in 2020,
may almost triple that figure in 2021, with the major suppliers contributing more than 85% of the
growth. Vale could again garner extra attention, given that its growth accounts for almost 70% of
next year's total. (10/27/20)
2. Laser-Focused on Vale; India Back to Key Swing Supplier
Vale accounts for over 60%, or 104 million metric tons, of anticipated net supply growth through
2023. Achieving or coming close to 2H guidance (183 million) would put our baseline shipment
scenario of 359 million in 2021 within reach; that's 12 million above our prior forecast. As for BHP,
Rio, Fortescue and Anglo American, our analysis remains in-line with our May model update. That
said, risks are skewed to the downside for Rio, given heightened uncertainty about potential output
restrictions after the company's destruction of a sacred site in Australia's Juukan Gorge region.
The surprising strength in Chinese steel output has prompted an upward revision to our Indian
export target, given the nation's renewed role as a key swing supplier of low-grade fines. (10/27/20)
Major Supplier Shipment Outlook
Source: Bloomberg Intelligence
3. Eyes on Southeastern, Southern Systems as Northern on Track
Improvement at the Southeastern and Southern systems is needed for Vale to reach its 400 million-
metric ton target by 2022, in our view. Next year's growth drivers for the Southeastern system are
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Bloomberg® 12/14/2020 21:35:16

This document is being provided for the exclusive use of PHANTICH BVSC at BAOVIET SECURITIES JOINT STOCK CO. Not for redistribution.
Brucutu (14 million additional tons), Timbo (8.5 million) and Fazendao (3 million). For Brucutu, the
expected 2Q21 startup of the Torto dam and final authorization by Brazil's National Mining Agency
to dispose tailings at the Timbo pit (1Q21) are key milestones. In the Southern system, we expect
growth from Paraopeba to be driven by Fabrica (6 million) coming back online in 2Q21, while
Vargem Grande gets a lift that quarter when Maravilhas III dam construction concludes.
A volume pickup in the Northern system next year should be driven by the continued ramp-up at
S11D and the return of Serra Leste (6 million) in the Eastern Range. (10/27/20)
Vale Iron-Ore Production Breakdown
4. Minor-Supplier Bucket Set for Growth
With supply from the "major" bucket set to increase about 90 million tons (Mt), we similarly see
supply from the "minor" cohort picking up by 15 Mt as virus-induced disruptions fade and demand
recovers, namely in steel markets excluding China. Shipments from Russia, Kazakhstan and Chile
should remain strong, as they continue satisfying higher levels of Chinese import demand. At the
company level, we expect increased shipments from CSN (Brazil) as the lack of weather-related
disruptions improves performance. The continued ramp-up at Scully (Tacora Resources), along with
improved run-rates at Iron Valley & Koolyanobbing (Mineral Resources), similarly bode well for
growth as the year starts. (10/27/20)
Minor Iron Ore Supplier Outlook
5. Less Likely Miners' Value Over Volume Will Be Tested in 2021
While large-cap miners' value-over-volume strategies may be put to the test, 2021 could prove too
early. A lower surplus, which incorporates a higher 2021 shipment figure at Vale of 359 million tons
vs. 347 million (2Q estimate), means Rio Tinto and BHP may not need to exercise outsized levels of
restraint, especially if Vale can't replicate prospective 2H performance next year.
Another potential involuntary downgrade to future shipments from Australian producers, namely
Rio, BHP and Fortescue, could come from the fallout of Rio's mishandling of indigenous heritage
sites. While it's likely sustaining capital costs will increase, albeit to varying degrees, medium-term
output trajectories are still unclear, but risks squarely tilt to the downside. (10/27/20)
Bloomberg® 12/14/2020 21:35:16

Major-Supplier Bucket Growth Breakdown
Demand
Iron-Ore Demand May Cool Off in 4Q Before Climbing Again in 2021
While seaborne iron-ore imports may ebb sequentially in 4Q amid seasonally weaker Chinese
imports, we expect an increase in 2021, namely as rest-of-world demand recovers. Another
increase in China's steel production -- possibly as much as 2% -- should at least keep Chinese
imports in-line with 2020 levels, in our view. (10/21/20)
6. Outlining Key 2021 Iron-Ore Model Assumptions
The following assumptions are core to our view of a potentially oversupplied seaborne iron-ore
market in 2021, with 2020 figures in parentheses for reference. Key demand drivers include 2%
steel-production growth in China (vs. 6%), 75% electric-arc-furnace (EAF) steel-mill utilization
(72%), 7 million tons (Mt) of new EAF capacity (5 Mt), 267 Mt of steel-industry scrap usage (252
Mt), a 2-Mt rise in China's iron-ore imports (96 Mt gain) and 43 Mt of import growth from markets
excluding China (50-Mt decline).
Key supply-side estimates include: 91 Mt of growth from major suppliers in 2021 (vs. 10 Mt), 15 Mt
of increases from other suppliers (22 Mt) and 272 Mt of domestic iron-ore production (274 Mt).
(10/21/20)
Demand Assumption Buildup
7. China's Steel Demand Still on Track for 4% Growth
After a strong recovery across all end-markets in 3Q, China's steel demand is on track to expand by
3.5-4.5% in 2020, with our scenario incorporating a modest slowdown in 4Q. We have revised our
Bloomberg® 12/14/2020 21:35:16

midyear scenario upward by 3%. The main driver continues to be infrastructure spending as the
government extends countercyclical support, with our recovery case pointing to a 7% increase --
similar to 2016. However, property-related expansion may slow to 5% from 9% in 2019, though
this was better than we anticipated. Auto-sector steel demand is likely to increase 1% after last
year's 5% decrease, as vehicle sales have recovered sharply.
Manufacturing and machinery growth is expected to remain steady as domestic demand outweighs
the decline in export demand, with the rest of the world trailing China's rebound. (10/21/20)
China Steel Demand Breakdown and Forecast
Source: CISA, MPI, Bloomberg Intelligence
8. Chinese Steel Model: Production Growth Accelerates
China's crude-steel production could increase by 6-7% in 2020, based on our scenario analysis,
with the year-to-date growth close to 6% as of the end of September. Though 4Q is seasonally
weaker, even if monthly production rates fall closer to 90 million metric tons from the peak of 95
million in August, output would still be up 6% for the full year. Hot-rolled coil prices are down 3%
from peak levels and rebar 5%, yet our analysis shows utilization rates remain close to 90%,
suggesting limited downside in pricing.
Blast furnace margins remain positive but there's a buildup of inventory across the supply chain,
which is why we expect production growth may slow to 1.5-2.5% in 2021. (10/21/20)
China Steel Supply-Demand Model
Source: CISA, MPI, Bloomberg Intelligence
9. Steel-Demand Proxies Point to Slowing Momentum
The August composite reading of 51.2 on our China steel-demand heat map is just a shade lower
than the 2020 high of 53.8 in July, suggesting that recovery momentum is slowing. However, given
the strength of credit growth, the slowdown in some of the steel-demand indicators is partly
seasonal but also reflects a period of normalization following a surge of pent-up demand after the
March low, in our view. China's aggregate social financing, including local-government bond
issuance, is up more than 60% in 2020, with the credit impulse typically leading the country's steel
prices by 3-6 months.
Weakening demand sentiment, with the new-orders component of the steel purchasing managers'
index falling to 36.5 in September -- the second-lowest reading this year -- suggests a softer
composite reading in September and October. (10/21/20)
Bloomberg® 12/14/2020 21:35:16

China Steel-Demand Proxy Heat Map
Source: NBS, Bloomberg Intelligence
10. ROW Demand May Not Revisit 2019 Level Until 2022
Our scenario assumes rest-of-world (ROW) seaborne iron-ore imports will take nearly two years to
return to levels witnessed in 2019. Key weak points in our outlook include subdued recovery paths
for Japan and Europe, specifically, as the former battles domestic weakness and a smaller share in
export-demand hubs in Asia. We estimate ROW seaborne imports fell 11% sequentially in 2Q (80
million tons vs. 90 Mt) and may have only rebounded 3.5%, or 3 Mt, in 3Q. The return of idled blast
furnaces throughout 3Q and into 4Q should drive imports up another 4 Mt. (10/21/20)
ROW Seaborne Iron Ore Demand
4Q20 + Model Adjustments
Iron-Ore S&D Model Updates Point to Tighter 2H, 2021 Balances
The updated seaborne iron-ore S&D model, which shows a 2H deficit vs. a previously expected
surplus, implies benchmark 62% prices have a good chance of remaining above $100 a metric ton
through year-end, in our view. A smaller surplus forecast in 2021 means prices may top $90 a ton,
erasing expectations of a break below $80. (10/27/20)
11. Higher China Steel Production Tweaks S&D View
The iron-ore market could close 2020 with an annual deficit of 36 million tons (Mt), vs. our May
view of a 7.3 Mt surplus. Surpluses we previously thought would be 10.2 Mt in 3Q and 22.1 Mt in
4Q, are expected to be deficits of 25.8 Mt in 3Q and 0.3 Mt in 4Q. The revision was driven primarily
by an upward move in Chinese steel production to 6% from 0.5%, and by extension, iron-ore
imports to 1.16 billion tons from 1.07 billion.
Though we expect the market to register a surplus in 2021, our new calculation of 22.4 Mt is
almost 60% lower than May's forecast of 56.6. The adjustment is due primarily to a higher absolute
level of production in 2020, since our year-over-year growth outlook for 2021 was all but
unchanged. (10/27/20)
Bloomberg® 12/14/2020 21:35:16

S&D Summaries: May vs. September Forecasts
12. Smaller Surpluses Seen Beyond 2020
Thinner surpluses beyond 2020 were driven by upward revisions to Chinese steel production in
2020. Now, we expect growth up 6% this year, bringing the annual total to 1.054 billion tons. This
compares with our May calculation of 0% growth, or 986 million tons. We also revised our steel-
output growth outlook to 2% in 2021 vs. our 1% forecast in May, 1.5% in 2022 (0.5%) and 1% in
2023 (0%). These revisions reflect the updated view that traditional infrastructure spending, which
may be driven by urban development and water conservation in 2021-25, could still play a major
role in supporting the economy.
Property-related steel demand may also remain robust because of changes in who can own
property in cities, urban redevelopment and rental apartments. (10/27/20)
S&D Balance Changes, Price Movements
13. Narrower 4Q Deficit Seen as China Steel Ebbs
A 26 million-ton deficit could develop in 2H after an almost identical figure in 1H, our scenario
analysis shows. Prices have been supported in 3Q by a deficit just under 26 Mt, and could remain
so in 4Q -- albeit to a lesser degree -- given our view of the market loosening slightly on stable-to-
increased supply and slightly weaker demand. A near-balanced market in 4Q could be driven by
Chinese steel production potentially dropping 3.6% sequentially due to seasonal trends while Vale's
shipments pick up markedly and touch the 90-Mt mark (360 Mt annualized). (10/27/20)
Bloomberg® 12/14/2020 21:35:16

2020: Quarterly Surplus/(Deficit)
14. Better 2H China Demand Keeps Balances Tight
(10/27/20)
1H vs. 2H Demand Comparisons
Key Topics
China Drill-Down
Look Under China's 2021 Iron Ore, Steel Hood a Bit Hazy
China's steel ouput should rise in 2021, in our primary scenario, yet iron-ore import gains may be
subdued. Better scrap collection and the potential for imports after inbound flows were heavily
restricted in 2020 may mean EAF production steps up notably. Absent a big price decline, elevated
domestic iron-ore output may be problematic. (10/12/20)
15. Output to Rise This Year, Stay Buoyant Next Year
China's production (62% Fe-adjusted) may rise this year to 274 million tons (Mt), we now believe,
vs. our May outlook for a decline to 265 Mt. Growth might have finished the year higher than our
updated estimate had 1Q coronavirus-induced lockdowns not limited labor availability and cut
utilization rates. Though our updated 2021 analysis assumes domestic production will languish by
2 Mt, barring a sizable pullback in iron-ore prices, it's possible for output to deliver an upside
surprise, since more than 40 Mt of new capacity came online in 4Q19-1Q20.
Support for domestic miners, in the form of reduced value-added taxes and a national aid fund, are
two measures being considered by policymakers and industry groups. (10/12/20)
Bloomberg® 12/14/2020 21:35:16

62% Fe-Adjusted Iron-Ore Production
16. EAF Output May Fall in 2020, Recover in 2021
An improvement in utilization rates since the 1Q low has helped raise our expectation for electric-
arc furnace (EAF) steel output to 94 million tons (Mt) from just under 80 Mt in our May update.
Barring a similar 1Q dip in 2021, we see EAF output remaining strong, as utilization is still elevated
in the low- to mid-70% range and scrap supply improves on better domestic-collection activities,
along with the potential for more imports. Risks to our output expectation remain skewed to the
downside if scrap prices don't come off 2020 highs.
A net total of 5 Mt new EAF capacity may be added in 2020 after 15 Mt was added in 2019, based
on estimates from SMM, MySteel, Platts and our own project tracking. On average, we see about 7
Mt of net new capacity added over each of the next three years. (10/12/20)
China EAF Capacity & Production Outlook
17. Strong 2020 Imports, Less Certain Thereafter
China's iron-ore imports may pick up in 2020 to 1.16 billion tons (Bt) from 1.064 Bt in 2019, our
scenario analysis shows. This year's buoyancy and potential advance largely stem from a forecast
for a modest bump in EAF steel output and falling domestic mine supply, coupled with a 2.4%
pickup in pig-iron production to 895 million tons (Mt) from an estimated 874 Mt last year. Beyond
2020, the view for continued import health remains relatively robust. Our updated analysis now
assumes imports will creep higher over the coming years as steel production continues to grow,
contrary to our May update calling for a peak in 2020. (10/12/20)
Bloomberg® 12/14/2020 21:35:16

China: Iron Ore Imports vs. Penetration Ratio (%)
To contact the analyst for this research:

Andrew Cosgrove at acosgrove1@bloomberg.net
Bloomberg® 12/14/2020 21:35:16

Iron Ore Commodity Research: BI Commodities, Global Dashboard

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Iron Ore Commodity Research

1. Iron-Ore Run to $200 Not Out Question in Short Run: BI Commodity

(Bloomberg Intelligence) -- The near-term case for Table of Contents

Iron-Ore Supply Expansion Set for Stronger Showing in 2021

2. Laser-Focused on Vale; India Back to Key Swing Supplier

Major Supplier Shipment Outlook

Source: Bloomberg Intelligence

3. Eyes on Southeastern, Southern Systems as Northern on Track

Bloomberg® 12/14/2020 21:35:16

Vale Iron-Ore Production Breakdown

Source: Bloomberg Intelligence

4. Minor-Supplier Bucket Set for Growth

Minor Iron Ore Supplier Outlook

Source: Bloomberg Intelligence

5. Less Likely Miners' Value Over Volume Will Be Tested in 2021

Bloomberg® 12/14/2020 21:35:16

Major-Supplier Bucket Growth Breakdown

Source: Bloomberg Intelligence

Iron-Ore Demand May Cool Oﬀ in 4Q Before Climbing Again in 2021

6. Outlining Key 2021 Iron-Ore Model Assumptions

Demand Assumption Buildup

Source: Bloomberg Intelligence

7. China's Steel Demand Still on Track for 4% Growth

Bloomberg® 12/14/2020 21:35:16

China Steel Demand Breakdown and Forecast

Source: CISA, MPI, Bloomberg Intelligence

8. Chinese Steel Model: Production Growth Accelerates

China Steel Supply-Demand Model

Source: CISA, MPI, Bloomberg Intelligence

9. Steel-Demand Proxies Point to Slowing Momentum

Bloomberg® 12/14/2020 21:35:16

China Steel-Demand Proxy Heat Map

Source: NBS, Bloomberg Intelligence

ROW Seaborne Iron Ore Demand

Source: Bloomberg Intelligence

4Q20 + Model Adjustments

Iron-Ore S&D Model Updates Point to Tighter 2H, 2021 Balances

11. Higher China Steel Production Tweaks S&D View

Bloomberg® 12/14/2020 21:35:16

S&D Summaries: May vs. September Forecasts

Source: Bloomberg Intelligence

12. Smaller Surpluses Seen Beyond 2020

S&D Balance Changes, Price Movements

Source: Bloomberg Intelligence

13. Narrower 4Q Deﬁcit Seen as China Steel Ebbs

Bloomberg® 12/14/2020 21:35:16

2020: Quarterly Surplus/(Deﬁcit)

Source: Bloomberg Intelligence

14. Better 2H China Demand Keeps Balances Tight

1H vs. 2H Demand Comparisons

Source: Bloomberg Intelligence

15. Output to Rise This Year, Stay Buoyant Next Year

Bloomberg® 12/14/2020 21:35:16

62% Fe-Adjusted Iron-Ore Production

Source: Bloomberg Intelligence

16. EAF Output May Fall in 2020, Recover in 2021

China EAF Capacity & Production Outlook

Source: Bloomberg Intelligence

17. Strong 2020 Imports, Less Certain Thereafter

Bloomberg® 12/14/2020 21:35:16

China: Iron Ore Imports vs. Penetration Ratio (%)