Ferrochrome Market Overview 2017

Presented by:
Mark Beveridge
Principal Consultant
CRU Nickel, Chrome, Stainless Steel Group
Key Themes
▪ Which factors define the chrome market?
1. Chinese demand and the stainless steel cycle
- Chinese credit creation
- Inventory levels
- Trade
- Real demand
2. Chinese Production costs
3. South African Cr ore supply and price
▪ Explaining recent events
▪ Outlook global demand and supply
▪ Conclusions
Recent History
Chinese delivered price (ex-VAT) US c/lb (LHS axis) • 2017 looks like a high-side
Chinese delivered price (ex-VAT), ZAR-terms (RHS axis) outlier in terms of pricing
180 1,800
160 1,600 • Too much ore stock in China,
but otherwise current market
140 1,400
fundamentals fairly neutral
120 1,200
100 1,000 • Market defined by Chinese
80 800 FeCr production costs over the
60 600
long term. Chinese production
costs dependent on chrome ore
40 400
price
20 200
0 0 • Risks to ore supply likely to
2004 Q1
2005 Q1
2006 Q1
2007 Q1
2008 Q1
2009 Q1
2010 Q1
2011 Q1
2012 Q1
2013 Q1
2014 Q1
2015 Q1
2016 Q1
2017 Q1

grow—but barrier to entry into

chrome mining fairly low
 Understanding China: Real demand, apparent
demand and production
Manufacturing FAI
30 Real Estate FAI 30%
Infrastructure FAI
25 Stainless Steel production, y-y % growth (RHS) 25%

20 20%

15 15%

10 10%

5 5%

0 0%

-5 -5%

-10 -10%
Mar-15

Mar-16

Mar-17
Jan-15

Jan-16

Jan-17
Sep-15

Sep-16
Nov-15

Nov-16
May-16

May-17
May-15

Jul-15

Jul-16

Jul-17
Data: CRU, NBS

Source: CRU,NBS
 Chinese apparent stainless steel demand and the
credit cycle
Allowing for some lag, there is correlation between credit creation growth and
apparent consumption of stainless steel in China
y/y % change
22 40
Stock of TSF + Local govt bonds (LHS)

20 Qtrly Crude SS Apparent Consumption (RHS) 30

18 20

16 10

14 0

12 -10

10 -20
Oct-12

Oct-13

Oct-15

Oct-16
Oct-14
Apr-12

Apr-13

Apr-14

Apr-15

Apr-16

Apr-17
Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17
Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17
Source: CRU
 Understanding China: real vs. apparent demand
China’s stainless steel inventory cycle—not yet carrying excessively high stock
Stainless steel stocks, crude steel basis, week's supply in hand
16

14

12

10

4 Long-term average stock levels

0
2010 Q1

2010 Q3

2011 Q1

2011 Q3

2012 Q1

2012 Q3

2013 Q1

2013 Q3

2014 Q1

2014 Q3

2015 Q1

2015 Q3

2016 Q1

2016 Q3

2017 Q1

2017 Q3
Source: CRU
 Understanding China: stainless steel production
and the stocking cycle
Q-Q volatility in Chinese stainless steel production well reflected in the changing stock levels
16 30%

14 25%

20%
12
15%
10
10%
8
5%
6
0%
4
China, stainless steel stocks, wks supply on hand (LHS axis) -5%
2 -10%
China, quarterly crude SS apparent consumption, y-y % change (RHS)
0 -15%
2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017 2017
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

Source: CRU
Chinese stainless steel production less dependent
on exports…and that’s before Indonesia starts up
LHS axis: y-y change in global stainless steel production, tonnes, split by export/domestic
market; RHS axis: % y-y change
1,500,000 Export Differential (LHS) 30
Domestic Production Differential (LHS)
Total Crude Production (RHS)
1,000,000

15
500,000

0
0

-500,000

-1,000,000 -15

Source: CRU
Explaining recent events in the chrome market

140
China HC FeCr domestic spot, ex-VAT
• Market fundamentals played
an important role in the price
120
volatility of late-2016 and
100 mid-2017

• Latest price rally harder to

US cents/lb

80
justify in terms of market
60 fundamentals
Sentiment-
Cr ore stocks
40 driven price
Low Cr ore
stocks, fast
recovered,
rally; • A deeper look at recent price
severe SS
rising SS output Chinese SS volatility suggests
20 destocking
restocking
circumstances of 2016/17
0 were exceptional

Source: CRU
Explaining recent events: Chrome ore stocks
• Late 2016/early 2017 prices defined by critically-low ore stocks in China
and surge in demand (liquidity-driven)
• Pull back in prices in Q2 2017 coincided with collapse in demand, credit
creation slowdown
LHS: Weeks Consumption in 30% China HC FeCr consumption y-y %
12 Hand, 1,800 change
RHS: '000 tonnes Chrome Ore 1,600 25%
10 (Gross Weight)
1,400 20%
8 1,200
15%
1,000
6 10%
800
4 600 5%
Cr Ore Stocks: Weeks consumption 400 0%
2 in hand
200
Chinese Monthly Cr Ore Imports -5%
0 0
Mar-16

Nov-16
Jan-16

Mar-17
Jan-17
May-16

Sep-16

May-17

Sep-17
Jul-17
Jul-16

-10%
2016 2016 2016 2016 2017 2017 2017
Q1 Q2 Q3 Q4 Q1 Q2 Q3

Source: CRU
 Explaining recent events: Stainless steel stocks

Stainless steel stocks, crude steel basis, week's supply • China’s stainless steel
in hand inventories also had a role to
16
play—they grew rapidly in Q4
14 2016/Q1 2017; then fell in Q2
12 2017
10
• CRU doesn’t believe that
8 stocks are currently close to
6 problematic levels—even with
4 Long-term average large SS output in Q3,
stock levels stainless steel stock only
2 slightly higher than the long-
0 term average
2010 Q1
2010 Q3
2011 Q1
2011 Q3
2012 Q1
2012 Q3
2013 Q1
2013 Q3
2014 Q1
2014 Q3
2015 Q1
2015 Q3
2016 Q1
2016 Q3
2017 Q1
2017 Q3

Source: CRU
 Explaining recent events: China’s credit cycle
• Recent price rally influenced by sentiment—credit creation eased in July 2017
• Positive sentiment on raw material prices, supplemented favourable inventory
position
y/y % change
y/y % change, wide indicator of credit creation in
China (TSF=Total Social Finance) Stock of TSF + Local govt bonds (LHS)

18 Qtrly Crude SS Apparent Consumption (RHS)

Stock of TSF + Local govt bonds…
17 22 40

16 20 30
15
18 20
14
16 10
13
12 14 0
11 12 -10
10
Apr-15

Apr-16

Apr-17
Jan-15

Oct-15

Jan-16

Oct-16

Jan-17

10 -20
Jul-15

Jul-16

Jul-17

Data: CRU, NBS

Source: CRU
 Explaining recent events: BM price moves
EU charge chrome benchmark has stuck to established trend
180
EU BM (gross)
160
China HC FeCr domestic spot, ex-
140 VAT
120

100

80

60

40
Feb/16

Feb/17
Mar/17
Mar/17
Mar/16
Mar/16

Sep/16

Aug/17
Sep/17
Aug/16

Nov/16
Dec/16

Apr/17
Apr/16

Jul/17
Jul/16

Oct/16

Oct/17
Jan/17

Jun/17
Jan/16

Jun/16

May/17
May/16

Source: CRU
Outlook on FeCr demand: China
• Credit tightening, FAI slowdown contribute to slowing stainless steel demand growth
• Output growth to move in range between 3-5% y-y, 2018-21

7.5 18

7.0 16
Chinese IP
14
6.5

Y-y % change
12
6.0 10
y-y % change

5.5 8
6
5.0
4
4.5 Chinese IP 2
4.0 0
2016Q2

2017Q1

2017Q3

2018Q2

2018Q4
2016Q1

2016Q3
2016Q4

2017Q2

2017Q4
2018Q1

2018Q3

Source: CRU
Outlook on FeCr demand: China’s trade

LHS axis: y-y change in global stainless steel production, tonnes, split by export/domestic
market; RHS axis: % y-y change

Export Differential (LHS)

1,500,000 Domestic Production Differential (LHS) 30
Total Crude Production (RHS)
1,000,000

15
500,000

0
0

-500,000

-1,000,000 -15

Source: CRU
Outlook on FeCr demand: Eurozone
• Steady growth forecast: investment growth to trend up in short-term, IP down
• Stainless steel output growth projected to be flat 2018-21—import competition to
intensify
8
3.0 Eurozone IP
6 Investment (Gross capital
2.5 formation)
4

y-y % change
2.0
2
y-y % change

1.5
0
1.0
-2
Eurozone IP
0.5
-4
0.0
-6
2016Q2

2017Q1

2017Q4

2018Q3
2016Q1

2016Q3
2016Q4

2017Q2
2017Q3

2018Q1
2018Q2

2018Q4

Source: CRU
Outlook on FeCr demand: USA
• IP, investment growth forecast to increase in 2018; decline thereafter
• Stainless steel production growth range forecast at 1-1.7% y-y 2018-21—running
up against effective capacity limitations

3.0 7 USA IP
2.5 6 Investment (Gross capital
2.0 formation)
5
1.5
Y-y % change

Y-y % change
1.0 4
0.5 3
0.0
2
-0.5
-1.0 1
North American IP
-1.5 0
-2.0 -1
-2.5
-2
2017Q1
2017Q2

2018Q3
2018Q4
2016Q1
2016Q2
2016Q3
2016Q4

2017Q3
2017Q4
2018Q1
2018Q2

2011

2013

2016

2018

2020
2010

2012

2014
2015

2017

2019

2021
Source: CRU
Outlook on Global HC FeCr demand
• The combination of Chinese, Indonesian and Indian demand will define HC
FeCr market in coming years
• HC FeCr demand growth forecast to be relatively flat over forecast period
HC FeCr consumption, '000 tonnes gross weight HC FeCr consumption, y-y % change
China India
14,000 30%
RoW Indonesia China
25% India
12,000 RoW (ex-Indonesia)
20%
RoW including Indonesia
10,000 15%
10%
8,000
5%
6,000
0%

4,000 -5%
-10%
2,000
2010 2012 2014 2016 2018 2020

Source: CRU
Outlook on Global FeCr supply

• Our forecasts expects supply growth from South Africa, Indonesia and India
• Chinese supply will swing into the market in response to pricing signals

15,000 RoW (excluding Indonesia)

Indonesia 20% S. Africa
India China
Kazakhstan RoW (including Indonesia)
China 15%
S. Africa
10,000 10%

5%

5,000
0%

-5%
0
2011 2013 2015 2017 2019 2021 -10%
2016 2017 2018 2019 2020 2021

Source: CRU
Global HC FeCr supply/demand balance

600 Market balance • Global HC FeCr will tend

500 towards oversupply over
400 the forecast period
300
200 • However, deficits will be
100 required in order to
prevent excessive stock
0
accumulation
-100
-200
• Chinese supply will swing
-300 in and out of the market
-400 depending on pricing
-500 signals
2010 2012 2014 2016 2018 2020

Source: CRU
Production costs
• Rising power costs in South Africa (ZAR-terms) will push up
production costs; effect will be offset by depreciating currency

• But South African marginal production costs will not be as important

for global prices as Chinese production costs
ZA power price increase in US$ terms (15% 100 ZA FeCr producers, delivered costs, US c/lb
LC y-y increase post-2017)
ZAR nominal ex-rate vs US$ (RHS)
90 (ex-VAT), 2021 projection
14% 16.00 80
12% 15.50 70
10%
8% 15.00 60
6% 14.50 50
4%
14.00 40
2%
0% 13.50 30
-2% 13.00 20
-4%
-6% 12.50 10
-8% 12.00 0
2016 2017 2018 2019 2020 2021 0 1,000 2,000 3,000 4,000
Data: CRU Thousands
Source: CRU
Chinese production costs and ore
• Chinese supply will balance the HC FeCr market in the long term;
cost of production is vital—and is largely defined by price of South
African chrome ore
5,000 ('000 tonnes
gross weight)
4,500

4,000

3,500

3,000
Chinese Production
2,500
S.African Production

2,000
2011 2013 2015 2017 2019 2021

Source: CRU
China’s dependence on ZA ore supply

m tonnes, ZA Cr ore production requirement • South African ore

30 ZA UG2 production production projected to
ZA conventional Cr ore required need to rise by about
25 2.5mtpy by 2021

20 • Outlook for PGM prices

is not particularly
15
positive—yet more UG2
concentrate is needed,
or else expansion will
10
have to be entirely
conventional ore
5
• Costs will rise, but
0 barriers to entry are low
2017 2018 2019 2020 2021

Source: CRU
China’s dependence on ZA ore supply
• ZA chrome ore exports responded quickly to the acute shortage of
material in late 2016
• RoW supply also shows signs of being reasonably elastic

China's monthly Cr ore imports, 000t 2015-2017 monthly

1,800 total imports average
1,600
1,400 RoW
1,200 South Africa
1,000
800
600
400
200
0
Jun-16

Jun-17
Jan-16

Apr-16

Jan-17

Apr-17
Oct-15

Oct-16
Feb-16

Feb-17
Nov-15
Dec-15

Nov-16
Dec-16
Sep-15

Aug-16
Sep-16

Aug-17
Sep-17
Mar-16

May-16

Mar-17

May-17
Jul-16

Jul-17
Source: CRU
China’s dependence on ZA ore supply
• South African ore production projected to need to rise by about
2.5mtpy by 2021
• CRU’s outlook for PGM prices is bearish; risks to supply are acute

6 60,000
Δ 7.5m tpy
Δ 1.2m tpy
5 50,000
m tonnes UG2 concs capacity

m tonnes UG2 ore milled

4 40,000

3 30,000

2 20,000
Total Eastern Limb
10,000 Total Western Limb
1

0
0 2016 2017 2018 2019 2020 2021
2015 2016 2017 2018 2021
forecast forecast
Source: CRU
Conclusions:
• Short-term outlook dominated by chrome ore stocks in China
• Chinese stainless steel stock levels not overly worrying at the
moment—but there is the twin threat posed by bullish nickel market and
Indonesian imports
• Long-term trend towards lower global stainless steel production growth,
but it retains late-cycle commodity characteristics
• Chinese stainless steel cycle will determine when domestic Chinese HC
FeCr production is required to swing into the market.
• HC FeCr production cost in China will be key—and that will be
determined by ore availability and price
• South African chrome ore is the key variable in the Chinese production
cost calculation

26