Document

Report
Production Cost of Pig Iron and Steel,
Competition and Market in 2011
Presented by Dr. V. Vlasjuk
UPE Co. Research&Consulting, Ukraine
CIS Steel and Raw Materials in the World Markets
Kyiv, 19 April 2011
I. Production cost and demand for steel
1. Growth of pig iron and crude steel production cost
600
567
543
Production cost, $/t
500
486
crude steel
400
424
pig iron
Increase by
370-400 $/t
300
or
4 times
200
100
161
116
0
2003
2004
2005
Source: UPE Co.
2006
2007
2008
2009
2010
20111Q
During 2003 - 2011 years the production cost of pig iron and crude steel grew rapidly
by almost 4 times from 116$/t (pig iron 2003) to 486$/t (pig iron 1Q-2011)
I. Production cost and demand for steel
2. World steel production growth
1800
Fundamental factors dominate.
Robust demand in developing countries
pushes up steel production
Crude steel production, Mt
1600
1400
1500
1424
1328
1200
1218
1000
840
836
800
797
600
652
400
World
World (w/o China)
200
0
1951
1961
1971
Source: WSA, UPE Co. est.
1981
1991
2001
2011
forecast
However, steel remains the main structural material and steel consumption continues to grow at an
unprecedented rate. This year crude steel production in the world will reach a new record 1 500 million tons
due to the further consumption increase in the developing countries (especially in China +38-40 million tons)
and further recovery of production to pre-crisis level in the advanced economies
II. Rising prices for raw materials
3. Iron ore: market reconfiguration in 2001-2009
under the influence of China
A decade ago …
Companies, production 2001, Mt
Countries, import 2001, Mt
CVRD
132
EU15
130
Rio Tinto 108
BHP Billiton
JAPAN
132
67
Flat market trend until 2004 was provided by limited number of buyers and low
consolidation of suppliers
II. Rising prices for raw materials
3. Iron ore: market reconfiguration in 2001-2009
under the influence of China
Nowadays …
Companies, production 2009, Mt
Vale
Rio Tinto
172
BHP
Billiton
118
Countries, import 2009, Mt
229
EU15
82
CHINA
628
JAPAN
106
Consolidation of iron ore suppliers and the emergence of China as the largest
consumer has caused a fundamental reconfiguration of market and the surge in prices
II. Rising prices for raw materials
4. As a coal market tightens, prices are rocketing
70
2001
Mt
56
60
46
50
net import
65
2010
80
70
Mt
+1
60
40
50
26
30
20
other
40
10
30
+71
China,
India,
Japan
10
20
0
10
-10
-20
-12
China
0
India
Japan
import increase in 2001-2010
Source: International Energy Agency, UPE Co. est.
The growth of import demand for coking coal, provided by China, India and Japan, has led
to increased tensions in the market
II. Rising prices for raw materials
5. Raw material prices continue to increase
200
Vale Carajas fines (CJF) 66% Fe
$/t fob Brazil (to Asian market)
183,5
Hard coking coal, Peak Downs
$/t fob Australia (to Asian market)
350
328,0
180
160
140
120
300,0
300
147,4
10-times
increase
7-times
increase
250
200
225,0
100
82,6
150
80
60
37,1
40
20
125,0
59,3
18,3 17,0 17,3
0
129,0
100
50
50,9
39,8
48,1
0
1998 2000 2002 2004 2006 2008 2010 2010 2011
(1Q) (3Q) (1Q)
1998 2000 2002 2004 2006 2008 2010 2010 2011
(1Q) (3Q) (1Q)
Source: UPE Co.
Average annual prices in 2011 are expected to be 168 $/т fob Brazil for iron ore and 280 $/т fob Australia for
coking coal. Further increasing demand has lead to prices growth in 2nd quarter against 1st quarter of 2011 :
 iron ore
+23.5% up to 184 $/т fob Brazil
 coking coal
+42.6% up to 328 $/т fob Australia
III. Growth of the production cost
6. Further increase of steel cost in 2011
Billet production cost ($/t ExW) in Ukraine (for non-integrated mills)
+105$
600
+138$
500
465
51
400
327
300
200
49
22
29
18
26
30
32
100
26
29
17
24
39
61
53
other costs
27
33
18
labour
27
43
84
122
123
Ferroalloys
Raw materials delivery
Scrap
163
Coking coal
Iron ore
0
2009
el/energy
Natural gas
96
47
75
571
2010
2011 forecast
Source: UPE Co. est.
In 2011 the rise of steel cost (appx. +105$/t) is expected mostly due to increased price for
iron ore, coking coal and scrap
III. Growth of the production cost
7. Cost of steel in the main exporting countries in 2011
Billet, $/t
700
2010
2011F
657
600
500
400
590
571
518
465
535
498
419
300
200
100
0
Ukraine
Russia
China
Turkey (EAF)
Source: UPE Co. est.
In recent years, Ukraine's advantage in steel production costs has decreased.
This has resulted in complication of Ukrainian sales in the Middle East and North Africa
III. Growth of the production cost
8. Faster growth of the production cost in comparison with the
market price for steel products
800
export price, $/t fob Black Sea
billet
700
600
production cost, $/t ExW
billet
500
600
400
500
300
400
300
200
200
100
100
0
0
2003 2004 2005 2006 2007 2008 2009 2010 20111Q
2003 2004 2005 2006 2007 2008 2009 2010 20111Q
Source: UPE Co. est.
While the current production cost has already exceeded the peak level, steel product
prices are still below the pre-crisis level 2007-2008
IV. Post-crisis changes in the world market
9. Millstones of competition
Capacity utilization %
Overcapacity
84%
82%
80%
78%
83,1
%
76%
75,3
%
74%
72%
70%
before crisis
(2007)
Production cost
increase
nowadays
(2011)
Steel cost $/t
600,00
570
500,00
400,00
300,00
365
200,00
100,00
0,00
before crisis
(2007)
nowadays
(2011)
Post-crisis situation in the global steel market is quite different from the pre-crisis one. The main distinction consists in the
availability of two factors unfavorable for producers, namely “excess” of capacities and high production costs. This
situation intensifies competition dramatically and bears substantial risks for numerous outdated and non-efficient mills,
especially for those not integrated with raw material producers
IV. How does the production cost impact on pricing?
10. Increased impact of production costs on the steel product pricing
700
Pig iron
$/t
591
market price, fob Black Sea
production cost+transport
600
514
500
429
400
342
288
300
200
160
100
256
444
275
218
219
2004
2005
2006
506
527
2011-1Q
2011-2Q
422
275
307
280
235
530
136
0
2003
160
140
120
100
80
60
40
20
0
-20
-40
-60
$/t
Trade
margin
Market balance as a
dominant factor in pricing
70
56
24
2003
2007
2008
147
2009
2010
Production cost as a
dominant factor in pricing
62
21
2004
2005
2006
2007
2008
2009
7
8
3
2010
2011-1Q
2011-2Q
-32
Source: UPE Co. est.
Since 2009, production cost has affected steel pricing much more intensive
IV. How does the production cost impact on pricing?
11. Decrease in profit of steelmakers
600
550
Pig iron, $/t
500
450
production cost+transport
400
market price, fob Black Sea
350
300
250
200
Market balance as a
dominant factor in pricing
150
100
2003
2004
2005
2006
2007
Production cost as a
dominant factor in pricing
2008
2009
2010
2011-1Q
2011-2Q
800
700
Billet, $/t
600
500
production cost+transport
market price, fob Black Sea
400
300
200
Source: UPE Co. est
100
2003
2004
2005
2006
2007
2008
2009
2010
2011-1Q
2011-2Q
Since 2010 steelmakers operate with a much more moderate margin comparing with the pre-crisis years
IV. How does the production cost impact on pricing?
12. Quarter contracting for raw materials enhances volatility
of steel prices
1250
Billet
Price $/t fob Black Sea
1150
1050
950
2006
2008
850
2007
750
2008
2011
650
2009
2010
550
2010
2007
450
2011
2006
350
2009
250
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
1150
HRC
1050
2008
950
2006
850
2007
2011
750
2008
2010
650
2009
550
450
2010
2006
2007
2011
350
2009
250
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
After the transition to quarterly contracts for the supply of raw materials, the rate of steel price growth has
increased considerably at the beginning of year in anticipation of rising prices for iron ore and coal
V. Market Outlook
13. Key macroeconomic and financial indicators still favorable for
global economy
Indicators
Jul 08
Jan 09
Jun 10 Apr 11
Interest rate of Federal Reserve System (USA), %
2,0
0,25
0,25
0,25
Interest rate of European Central Bank (EU), %
4,25
2,0
1,0
1,25
Interest rate of Bank of Japan, %
0,5
0,1
0,1
0,0
3 month USD LIBOR/OIS spread, b.p.
70
120
33
16*
Commercial bank deposits at ЕCB, $ bn
0,6
360
214
24
Price per share JP Morgan Chase on NYSE, $
41
23
39
45
* Correspond to pre-crisis level which made up 10-15 (June 2007)
Source: ECB, Bloomberg
Today's global financial situation looks to be quite stable owing to the governmental monetary policy (low interest
rates and free access to liquidity). In 2011 quite comfortable conditions for crediting can be expected due to
economic growth and lending renewal in developed countries
V. Market Outlook
14. …Nevertheless alarms of the looming threat are coming …
1600
Over the 2008-2010 the
FED issued aprox. 10 trln. $
which began to appear on
the commodity market
Soft monetary (easy-money)
policy by the FED
(during 2005-2007 interest rate
decreased from 6% till 1%)
1400
140
120
New
bubbles?
1200
100
1000
80
800
60
600
40
400
20
200
Billet $/т fob Black Sea (left axis)
Crude oil, WTI $/bbl (right axis)
2002
2004
2007
2009
Jul
Oct
Jan
Apr
Jul
2010
Oct
Apr
Jan
Oct
Jul
Jan
Apr
Jul
2008
Oct
Jan
Apr
Oct
Jul
Apr
Jan
Jul
2006
Oct
Jan
Apr
Jul
2005
Oct
Apr
Jan
Oct
Jul
Jan
Apr
Jul
2003
Oct
Jan
Apr
Oct
Jul
Apr
0
Jan
0
2011
Source: Bloomberg, IMF, UPE Co.
FED can not change its nature. Bail-out programs and huge amount of liquidity issued by the
FRS during 2008-2010 cause risks of new bubbles in post-crisis global economy.
Rocketing price for oil and gold are the first warning signs
V. Market Outlook
15. Expected average prices for raw materials in Ukraine
Iron ore concentrate (65% Fe),
$/t fca
160
250
140
120
147
Coking coal charge
(K 30%, Zh 30%, G&PS 40%)
$/t fca
152
138
200
214
193
123
100
183
196
150
80
100
60
40
50
20
0
0
1Q-2011
2Q-2011
3Q-2011
4Q-2011
1Q-2011
2Q-2011
3Q-2011
4Q-2011
Source: UPE Co. est.
This year the peak in raw materials prices fell on 2 quarter. As predicted, in the 3-4 quarters
coking coal prices will be lower, thereby reducing the cost of Ukrainian steel
V. Market Outlook
13. Forecast of production cost and market price for
billet in 2011
650
fact
forecast
600
550
500
•Seasonal activity
•Restocking
•Psychological
expectation of
further price growth
for steel and raw
materials
•Seasonal activity
•Restocking
price, fob Black Sea
cost + transport & port charges
450
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2010-IV
2011-I
2011-II
2011-III
2011-IV
Prices have peaked in January-February on production cost rises and speculative buying caused by coal
shortage from Australia (heavy rains). This was the top point of the year. In the second half of year prices
will rise in September due to increase of demand, but owing to decreasing production cost
the seasonal price peak will be lower than in February
Source: UPE Co. est.
V. Market Outlook
14. Forecast of production cost and market price for
hot-rolled coil in 2011
750
fact
forecast
700
650
•Seasonal
activity
•Restocking
•Psychological
expectation of
further price
growth for steel
and raw
materials
600
•Seasonal activity
•Restocking
price, fob Black Sea
cost + transport & port charges
550
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: UPE Co. est.
2010-IV
2011-I
2011-II
2011-III
2011-IV
Prices have peaked in January-February on production cost rises and speculative buying caused by coal
shortage from Australia (heavy rains). This was the top point of the year. In the second half of year prices
will rise in September due to increase of demand, but owing to decreasing production cost
the seasonal price peak will be lower than in February
V. Market Outlook
15. Effect of steel production cost on the market
 Dominant influence of production costs
on the pricing in the steel market
 Change of the seasonal price variations,
namely more intensive price increase in
1st quarter
 Acceleration of vertical integration
V. Market Outlook
16. Doubling of the annual steel consumption in China
for the needs of industrialization 2010-2025
Mt
1400
1200
accumulated steel (right axis)
crude steel consumption (left axis)
20 000
Mt
18 000
16 000
1000
14 000
12 000
800
10 000
600
8 000
6 000
400
4 000
200
2 000
0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
2042
2044
2046
2048
2050
0
Source: UPE Co. est.
China will continue its industrialization until 2030 at least . Max annual steel consumption will
reach about 1,200 million tons in 2025. Thus, the current annual steel consumption is only half
of the expected maximum
V. Market Outlook
17. Deceleration of the growth rate in the iron ore import
and its further reduction
1800
1600
Mt
1400
1200
Iron Ore Import to China
1000
800
600
400
Iron Ore Production in China
200
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010est
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
0
Source: UPE Co. est.
The growth of the domestic iron ore production will result in the reduction of the import growth
rate up to 2.5% per year between 2011-2019 . Since 2019 further decrease in the import
demand is expected
V. Market Outlook
18. China as a cooler of iron ore market in the next 15 years
III. Cooling the market by China
The cooling
effect of China
II. Warming up
the market
I. Quiet period
140
Carajas fines 67% Fe,
$/t , FOB, Brazil,
120
100
80
Warming up effect
of oligopoly
60
40
20
China’s demand growth Producers consolidation
0
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
From 2011 we will witness the change of China`s role in the global market. Instead of warming up the prices
China will become a factor of prices cooling and stabilization. The future configuration of the market will be
casted by confrontation of China`s cooling effect and oligopoly exporters` warming up one
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