THE STEEL INDEX (TSI) Asian production costs Tim Hard – TSI Managing Director
www.thesteelindex.com
DISCLAIMER
All INFORMATION PRESENTED IN THIS REPORT IS AGREED TO BE CONFIDENTIAL AND CANNOT BE REPRODUCED WITHOUT THE EXPRESSED PERMISSION OF THE STEEL INDEX This document does not constitute an offer or solicitation to buy or sell any investment product(s). It does not take into account the specific investment objectives, financial situation or particular needs of any person. Investors should seek advice from a financial adviser before investing in any investment products or adopting any investment strategies. In the event that the investor chooses not to seek advice from a financial adviser, he/she should consider whether the product in question is suitable for him/her. The investment product(s) discussed herein are subject to significant investment risks, including the possible loss of the principal amount invested. Past performance of investment products is not necessarily a guide to future performance. Unless expressly stated, we do not make any representations nor give any warranties in respect of the information contained in this presentation. To the extent permitted by the applicable law, we hereby exclude all warranties, conditions, representations or duties whatsoever and howsoever arising (whether express or implied) including but not limited to any representations or warranties as to the ownership of intellectual property or other rights in the presentation, or the satisfactory quality, merchantability or fitness for a particular purpose of, any goods or services referred to at any time in this presentation, any express or statutory warranties, and any warranties or duties regarding accuracy, timeliness, completeness, performance, availability, lack of negligence or of workmanlike effort. To the fullest extent allowed by applicable law, you agree that we will not be liable to you or your business under any circumstances whatsoever (whether in contract, negligence or any other tort, breach of statutory duty or otherwise) for any loss of profits, income, business interruption, loss of business information or for increase in any costs, liabilities or expenses or any other loss whatsoever and however arising directly or indirectly out of or in connection with or relating to the information in this presentation and we shall not be liable for any loss, damages, costs, expenses or other liability which you incur or suffer as a result of your use of the information in this presentation. We take all such steps as are reasonably necessary to provide information that is accurate and reliable, but exclude to the fullest extent permitted by law any liability for the inaccuracy of the information in this report.
The Steel Index (TSI) used all reasonable endeavours to certify the correctness of the information contained in this presentation. Without limiting the above, you acknowledge and agree that we shall not be liable for matters beyond our reasonable control including but not limited to information gathered during field visits, third party information presented or the acts of third parties. You understand and expressly agree that use of the information presented here is at your sole risk, that any content, material and/or data presented or verbalised or otherwise obtained through your use of the information in this presentation is at your own discretion and risk and that you will be solely responsible for any damage to you personally or your company or organization or business associates whatsoever which in any way results from the use, reliance or application of such content material and/or data and/or information.
ABOUT THE STEEL INDEX (TSI)
An international pricing service, dedicated to the iron and steel market. Founded in 2006; pricing the iron ore spot market since 2008. Pioneer of transaction-based pricing for ferrous markets. •
• •
•
Index used as the settlement price for over 99% of cash-settled iron ore derivatives. TSI scrap indices used by NASDAQ, LCH and LME. Physical benchmark in coking coal, as well as a growing market for derivatives. Growing uptake of steel indices, notable CFR ASEAN HRC import index.
TSI provides transaction-based spot prices for the whole ferrous value chain…
Steel
Coking Coal
Iron Ore
Scrap
AGENDA
I.
Steelmaking costs
II. Steelmaking competitiveness III. Margin competitiveness
Scrap prices on the wane…
Scrap prices delivered into Turkey have fallen by 59.9% since 2013.
400 350 300 250 200 150 100
50 0 2013
2014
2015
Turkish 80:20 imports
2016
…Everywhere…
And it’s not just in Turkey. As everyone knows, Turkey is the world’s largest scrap importer. Other global markets move together with Turkey’s, whether on an annual basis…
450 400 350 300 250 200 150 100 50 0 2013 Turkish 80:20 imports
2014 US Shred
2015 Taiwan 80:20
2016 Indian Shred
…In a globally coordinated fashion ….Or a monthly one.
450
400 350 300 250 200
150 100 50
Monthly Correlations to Turkish 80:20 Scrap US Shred
Indian Shred
Taiwan 80:20
Japanese H2
95.5%
94.6%
95.9%
87.1%
US Shred
Indian Shred
0
Turkey 80:20
Taiwanese 80:20
Japanese H2
Scrap feedstock competitiveness weakened against ore… Iron ore prices have fallen by 59.8% since 2013: almost exactly the same as scrap prices (scrap has followed ore lower). Nevertheless, the ore/scrap ratio (how much more expensive an ‘iron unit’ from scrap is, than from ore) has been rising higher.
140
3
120
2.5
100
2
80
Y-o-Y Change (%)
60 40 20 0
Scrap
Ore
2013
-7.4
5.4
2014
-4.9
-28.5
2015
-33.6
-43.1
2016
-5.1
-1.3
2013
2014 62% Fe CFR China
1.5
1 0.5 0 2015 Iron ore/Scrap Ratio
2016
…Until now But, the ability for scrap to fall further may be in peril from rampant coking coal prices. These have been rising incredibly quickly. As of November 4th, Australian premium hard spot prices were at US$270.5/t: up 349% from January 4th this year (US$77.5/t).
160 140 120 100 80 60 40
20 0 2013
2014 PHCC FOB Aus
2015 62% Fe CFR China
2016
Scrap has regained competitiveness
Which has allowed scrap to significantly close the gap on iron ore and coking coal as a steelmaking ingredient.
Costs in steelmaking proportions (US$/t) 300
400 350 300 250 200 150 100 50 0
250 200 150 100 50 0 2013
2014
FOB Aus Premium Coking Coal
2015 62% Fe
2016 Turkish 80:20 Scrap
AGENDA
I.
Steelmaking costs
II. Steelmaking competitiveness III. Margin competitiveness
BOF costs will lead EAF costs as a bigger share of production Input costs at blast furnaces have reversed direction for the first time in years.
Y-On-Y changes in steelmaking costs 40.0 30.0 20.0 10.0 0.0 -10.0
2014
2015
-20.0 -30.0 -40.0 EAF input costs
BOF input costs
2016
And costs have risen rapidly at BOFs
It’s all picked up since H2 and (so far), it’s all been led by coking coal.
Costs in steelmaking proportions (US$/t) 300 250 200 150 100 50 0
300 250 200 150 100 50 0
Turkish 80:20 Scrap
FOB Aus Premium Coking Coal
62% Fe
Immediate and medium term implications
It’s all picked up since H2 and (so far), it’s all been led by coking coal. EAF production costs are now more competitive than BOF costs. But…this is increasing demand for scrap. Integrated mills have reversed cuts in scrap input: moving from 15% to 30% in recent weeks. Buying is picking up everywhere, not just Turkey. China has been repeatedly in the deep-sea scrap import market over the last month as have others. Higher grade iron ore is now being sought after (to reduce the amount of coking coal needed in the burden). This is causing iron ore prices to rise. Steel prices are rising in China: which will benefit EAF producers elsewhere, before it benefits China. Winter is coming…which will contract scrap supply, just as demand is picking up.
In the here and now, Chinese margins are pressured. Steel price rising: yes. Not as fast as costs, though.
Chinese steelmaking costs and implied margins (US$/t) 450 430 410 390 370 350 330 310 290 270 250
300 280 260 240 220 200 180 160 140 120 100
Implied Margin
ASEAN HRC (LHS)
BOF Steelmaking Raw Materials Cost
BOF/EAF margins are fluid Turkish producers have maintained margins better than Chinese producers in 2016.
Chinese and Turkish implied margins (US$/t) 300 280 260 240 220 200 180 160 140 120 100
Chinese Implied Margin
Turkish Implied Margin
Chinese export volumes stabilising? China has exported 2 million tonnes more steel than 2016: but the big export ‘surge’ appears to be over, for now. Export figures have been very choppy month to month.
12.0
3,000,000
10.0
2,000,000
8.0
1,000,000
6.0
-
4.0
(1,000,000)
2.0
(2,000,000)
0.0
(3,000,000)
Y-on-Y Change (RHS)
Chinese Steel Exports Per Month (LHS)
AGENDA
I.
Steelmaking costs
II. Steelmaking competitiveness III. Margin competitiveness
ABOUT THE STEEL INDEX (TSI)
China’s advantage from 2009-2014 has been a faster speed of procurement. Particularly as met coal prices have been falling since 2013 and ore since 2011. From 2015 it’s competitive advantage has been speed of finished steel sales: updating prices more frequently than any other country.
DIFFERENT STAGES, DIFFERENT MATURITIES 2009-2016
Iron Ore Liquid futures and options contracts, concentrated on one number. Financial market>physical Indexation widespread On-shore and off-shore Broad participation in futures by all parts of value chain Hedging widespread Floating prices>fixed
2014-?
Coking Coal Fragmented and patchy derivatives markets, albeit growing Indexation in some longterm contracts
Steel Index linking still in infant stages Most transactions take place on a spot basis, or bilateral deals Futures markets exist, but outside of China liquidity is a challenge Limited trust: relationships patchy and fractious Default and price risk very high
Non-China origin pricing struggling to keep up with fluidity of Chinese offers 550
ASEAN HRC imports
120
Japan premium (RHS)
17/10/2016
26/09/2016
02/09/2016
12/08/2016
-20 21/07/2016
200 29/06/2016
0
08/06/2016
250
18/05/2016
20
26/04/2016
300
05/04/2016
40
14/03/2016
350
22/02/2016
60
28/01/2016
400
07/01/2016
80
15/12/2015
450
24/11/2015
100
02/11/2015
US$/tonne
500
Japanese-origin material tends to be offered with 1-2 week validity. As prices fell, the constant readjustments took time to implement. At the same time, when prices rose, offers failed to rise as fast, with the outcome being Japanese material priced flat to Chinese origin and even at a discount!
Sell-side export structure currently encourages buyers to continuously switch sources for best price
US$/tonne 01/10/2015
01/11/2015
01/12/2015
Japan-origin premium
01/01/2016
01/02/2016
Taiwan Premium
01/03/2016 S. Korea Premium
01/04/2016
01/05/2016
India Premium
N.Asian HRC offer spreads can be as wide as US$45/t and are constantly shifting as companies look to gain competitive advantage through price.
40 35 30 25 20 15 10 5 0 -5 -10 -15
Indexing and hedging – Indexing example Secondary benefits flow from price indexing – having secured a price acceptable to both parties, focus can shift to other areas of the customer-client relationship.
Price Price
Service
Service
Quality
Quality
JIT delivery
JIT delivery
Credit Lines
Credit Lines
Spot Trade
Single Invoicing Point
Single Invoicing Point
Indexed Trade Consistency of Material
Consistency of Material t /23
450
400
350
250 US$/tonne
500
01/10/2015 22/10/2015 13/11/2015 04/12/2015 28/12/2015 19/01/2016 11/02/2016 03/03/2016 24/03/2016 15/04/2016 09/05/2016 24/05/2016 06/08/2016 23/06/2016 07/08/2016 23/07/2016 08/07/2016 22/08/2016 09/06/2016 21/09/2016 10/06/2016 21/10/2016 11/05/2016 20/11/2016 12/05/2016 20/12/2016
Hedging – prices that could have been locked in…
550
300
ASEAN HRC October March April May
Financial products already exist which allow locking in of future sales prices in the ASEAN import market
Thank you! (And DISCLAIMER, again) All INFORMATION PRESENTED IN THIS REPORT IS AGREED TO BE CONFIDENTIAL AND CANNOT BE REPRODUCED WITHOUT THE EXPRESSED PERMISSION OF THE STEEL INDEX This document does not constitute an offer or solicitation to buy or sell any investment product(s). It does not take into account the specific investment objectives, financial situation or particular needs of any person. Investors should seek advice from a financial adviser before investing in any investment products or adopting any investment strategies. In the event that the investor chooses not to seek advice from a financial adviser, he/she should consider whether the product in question is suitable for him/her. The investment product(s) discussed herein are subject to significant investment risks, including the possible loss of the principal amount invested. Past performance of investment products is not necessarily a guide to future performance. Unless expressly stated, we do not make any representations nor give any warranties in respect of the information contained in this presentation. To the extent permitted by the applicable law, we hereby exclude all warranties, conditions, representations or duties whatsoever and howsoever arising (whether express or implied) including but not limited to any representations or warranties as to the ownership of intellectual property or other rights in the presentation, or the satisfactory quality, merchantability or fitness for a particular purpose of, any goods or services referred to at any time in this presentation, any express or statutory warranties, and any warranties or duties regarding accuracy, timeliness, completeness, performance, availability, lack of negligence or of workmanlike effort. To the fullest extent allowed by applicable law, you agree that we will not be liable to you or your business under any circumstances whatsoever (whether in contract, negligence or any other tort, breach of statutory duty or otherwise) for any loss of profits, income, business interruption, loss of business information or for increase in any costs, liabilities or expenses or any other loss whatsoever and however arising directly or indirectly out of or in connection with or relating to the information in this presentation and we shall not be liable for any loss, damages, costs, expenses or other liability which you incur or suffer as a result of your use of the information in this presentation. We take all such steps as are reasonably necessary to provide information that is accurate and reliable, but exclude to the fullest extent permitted by law any liability for the inaccuracy of the information in this report. The Steel Index (TSI) used all reasonable endeavours to certify the correctness of the information contained in this presentation. Without limiting the above, you acknowledge and agree that we shall not be liable for matters beyond our reasonable control including but not limited to information gathered during field visits, third party information presented or the acts of third parties. You understand and expressly agree that use of the information presented here is at your sole risk, that any content, material and/or data presented or verbalised or otherwise obtained through your use of the information in this presentation is at your own discretion and risk and that you will be solely responsible for any damage to you personally or your company or organization or business associates whatsoever which in any way results from the use, reliance or application of such content material and/or data and/or information.
