Is there a limit to the market share of South African chrome units?

Kevin FowkesManaging Consultant

Metal Bulletin 7th South African Ferroalloys Conference

Johannesburg, 4th September 2014

World FeCr supply and demand – increasing domination by China(though it remains a substantial net importer)

Global FeCr production Global FeCr apparent consumption

China

India9%

Others11%

Japan 6%

S.Korea 5%

Taiwan 2% Others9%

China

Total – 10.4 million tonnes (2013)*

China39%

South Africa30%

Kazakhstan11%

China55%

Europe14%

USA 4%

India 4%

Japan 6%

* excludes medium and low carbon grades

South Africa as % of world production*

40%

45%

50%

55%

Over the past 10 years, South Africa’s share of global chrome unit supply has risen just marginally…its share of world FeCr output has collapsed

Cr ore

Grade differential? Rising

export of

25%

30%

35%

FeCr

* gross weight basis

export of Cr ore

Globally, South Africa’s share of chrome unit supply does not appear to be rising inexorably…but China shows a somewhat different picture

5

6

7

8

Imports

Supply of HC & charge FeCr in China looks to be approx. 7Mt in 2014, 70% from domestic producers and 30% from imports

Chinese HC & charge FeCr supply(Mt, gross weight)

0

1

2

3

4

2000 2005 2010 2011 2012 2013 2014E*

Domestic production

* annualised data from Jan-Jul 2014

8

10

12

14

Other

India

Oman

Iran

South Africa’s share of Chinese chrome ore imports has risen from 36% in 2010 to 60% in 2014*

Chinese chrome ore imports(Mt, gross weight)

0

2

4

6

2000 2005 2010 2011 2012 2013 2014E*

Iran

Pakistan

Australia

Turkey

S.Africa36%

48%

56% 60%

* annualised data from Jan-Jul 2014

50%

1.5

2.0

2.5

Other

India

Chinese imports of FeCr have risen by approx. 20% so far in 2014*, with higher imports from South Africa responsible for the increase

Chinese HC & charge FeCr imports(Mt, gross weight)

0.0

0.5

1.0

2000 2005 2010 2011 2012 2013 2014E*

Kazakhstan

S.Africa

55%54%

54%

66%

* annualised data from Jan-Jul 2014

63%

44

48

South African ores are not devalued per se by a low Cr content, but by their very low Cr to Fe ratio

Average/typical Cr2O3 content of selectedchrome ore concentrates (%)

2.5

4.0

Average/typical Cr:Fe ratio of selectedchrome ore concentrates (%)

40 1.0

60

70

The Cr:Fe ratio within a chrome ore is the key determinantof the grade of FeCr which can be produced from it

Maxim

um

Cr

co

nte

nt

of

FeC

r HC FeCr(Cr>60%)

Grey area HC/charge (Cr 55-60%)

40

50

1 2 3Cr:Fe ratio within ore

Maxim

um

Cr

co

nte

nt

of

Normal Charge FeCr(Cr 50-55%)

Low Grade Charge FeCr

(Cr <50%)

Kazakh/Turkish

oreS.AfricaUG2 ore

S.Africaprimary ore

60

70

Due to the increasing use of South African ores, the average Cr content of FeCr produced in China has fallen from 63% in 2005 to 56% in 2014

HC FeCr(Cr>60%)

Grey area HC/charge (Cr 55-60%)

Implied average Cr content of FeCr in China* (%)

FeCr produced in China

FeCr consumed in China

40

50

2000 2005 2010 2011 2012 2013 2014E

Normal Charge FeCr(Cr 50-55%)

Low Grade Charge FeCr

(Cr <50%)

(Cr 55-60%)

* excludes medium and low carbon grades

in China

Does declining Cr content of FeCr matter to a stainless steel producer?

Answer: “It depends”

Key factors are:

− Ability to obtain Cr units from scrap

− Grade of stainless steel produced− Grade of stainless steel produced

− Trade off higher impurities (especially Si) versus more free iron units

− Remember approx 15%* of FeCr used in non-stainless steels

* excludes medium and low carbon grades

4

8Typical stainless steel

Si max. specifications (%)Typical Si content range (%)

FeCr has a much higher Si content than scrap and the max. specification of stainless steels. Charge FeCr has by far the highest Si content

0

4

Austenitic SS(200/300)

Ferritic SS(400)

Typicalscrap charge*

HC FeCr ChargeFeCr

ChargeFeCr

(prereduced)

* incorporating a typical blend of both stainless and carbon steels

• Charge FeCr naturally has a much higher silicon content than HC FeCr

(FeCr produced from ores with a low Cr:Fe ratio generate a less vicious slag)

• It follows that stainless steel producers using high amounts of scrap are the most flexible to be able to use large volumes of charge FeCr

FeCr has a much higher Si content than scrap and the max. specification of stainless steels. Charge FeCr has by far the highest Si content

• The silicon content of charge FeCr can be reduced to a similar range to

HC FeCr using ore pre-reduction technology (eg. Premus)

• Silicon can also enter stainless steel from addition of manganese alloys

(LC SiMn typically added to stainless steel in many countries in place of EMM)

% of Cr consumption deriving from scrap

40

60

In developed regions, 40-50% of total Cr consumption derives from scrap. In China, scrap currently accounts for only 18% of Cr consumption

Europe

USA

Japan

0

20China

• Stainless steel scrap prices relative to the price of virgin nickel

Factors affecting the amount of chromium consumed from scrap (1)

25,000

30,000

35,000

40,000

Spot prices(US$/t, annual average) − The prices of both nickel and

stainless steel scrap can exhibit

considerable volatility

− Nickel is approx. 8 times more

0

5,000

10,000

15,000

20,000

25,000 Ni (LME cash)

HC FeCr

− Nickel is approx. 8 times more

valuable than ferrochrome

(2014 prices)

Stainless steel scrap is therefore primarily collected/valued for its nickel content, not its chromium content

• Stainless steel grade mix

Factors affecting the amount of chromium consumed from scrap (2)

75%

100%

400 - no Ni

200 - low Ni

Stainless steel output by grade, 2013− 300 series grades (austenitics) are

by far the most extensive users of

stainless steel scrap

− 400 series grades (ferritics) tend to

0%

25%

50%

World China

200 - low Ni

300 - high Ni

− 400 series grades (ferritics) tend to

be produced with little or no scrap,

because most bundles of stainless

scrap tend to be nickel-containing

− 200 series grades are more limited

users of scrap, partly due to

geography (China dominates global

output of these grades)

• Availability of “obsolete” stainless steel scrap

Factors affecting the amount of chromium consumed from scrap (3)

30

40

Rest of world

Japan

USA

World stainless steel consumption (Mt) − The largest source of stainless steel

scrap comes from obsolete/expired

products being scrapped

− Stainless steel products generally

0

10

20

1993 2003 2013

USA

Europe

China

− Stainless steel products generally

have a long life. They are only

typically scrapped 10 to 30 years

after being consumed

China’s generation of stainless steel scrap is currently severely limited, because its stainless steel consumption 10-30 years ago was very low

% of Cr consumption deriving from scrap

40

60

China’s scrap consumption rate will gravitate to Western levels as stainless steel products consumed in recent years begin to be scrapped

Europe

USA

China

Japan

forecast

“Peak chrome”

?

0

20

forecast by Hatch (2013)

…but in the medium term there may be limited scope for China to increase the proportion of its FeCr consumption deriving from South African units (already over 60%)

Arguably due to rising supply from South Africa, higher grade ores have regained a high price premium. UG2 discount has narrowed to only 5%

30%

40%

50%

60%

70%

80%

Chrome ore prices(US$/Mt, CIF China)

400

500

600

700Turkish lump 40-42%

S.Africa conc 44%

S.Africa UG2 42%

Chrome ore premiums (%)

Turkish vs. SA conc

36%

50% 48%

56%

-30%

-20%

-10%

0%

10%

20%

30%

0

100

200

300

UG2 vs. SA conc

HC FeCr has also re-established a clear price premium over charge chrome, with Chinese prices trading at a widening discount

10%

20%

30%

40%

50%

FeCr prices(US c/lb)

200

250

300Europe 60-65 (spot)

Europe 50-55 (spot)

China 50-55 exc VAT

FeCr premiums (%)

Europe 60-65 vs. 50-55

36%

50% 48%

56%

-50%

-40%

-30%

-20%

-10%

0%

0

50

100

150

China 50-55 vs. Europe 50-55

• HC FeCr & higher grade ore re-establishing a stronger price premium is

related to differing supply/demand dynamics over the past year

− Over-supply most concentrated on charge chrome grades

(especially China)

− Some consolidation in HC FeCr (Eti – Tikhvin)

Why have premiums for HC FeCr and high grade ore widenedsince 2013, and will they be sustained?

• Can premiums be expected/sustained longer term?

− Constrained supply base of high grade ores

(Kazakhstan, Turkey, India, Zimbabwe…)

− China will need more higher grade ore in line with FeCr production growth

(until scrap availability widens considerably)

− Constrained by strong purchasing power of stainless steel industry

• This appears to be becoming a consensus view

• UG2 output won’t recover to much beyond previous peak levels

(cf. Anglo presentation, 03/09/2014)

• Primary chrome ore production will become capacity constrained without new

developments

The growth of chrome unit supply from South Africa maynow begin to slow considerably

developments

• Logistical constraints

• Medium term potential for somewhat higher prices for both chrome ore and FeCr

Thank you for your attentionThank you for your attention