Developments in production costs and competitiveness in ...

Developments in production costs and competitiveness in ferrochrome

Kevin FowkesManaging Consultant

Metal Bulletin 6th South African Ferroalloys Conference

Johannesburg, 18th September 2013

1. Overview of FeCr production costs

2. Country focus:

- Kazakhstan

- India

Structure

- China

- South Africa

3. Conclusions

World HC/charge FeCrproduction, 2012

90% of global FeCr production is accounted for by four countries –China, South Africa, Kazakhstan and India

Kazakhstan

India11% China

35%

Others10%

production, 2012

China

Kazakhstan12%

South Africa32%

Total ~9 million tonnes

100%

HC/charge FeCr cash cost, global average ex-plant, 2013

50-80% of ex-plant FeCr cash costs are typically denominated in localcurrency, making exchange rates important drivers of the market

Reductant*

Labour

Currency denomination

Local

Mostly US dollar17%

22%

0%

Electricity

Chrome ore

* Also includes other raw material costs eg. electrode paste, flux **excludes Zimbabwe

Local – most captive productionUS dollar – purchased ore

Local(some link to world energy prices)

29%

32%

of cash costs denominated in local currency** 50-80%

Exchange rate vs US dollar (index, 2008=100)

90

100

110

120

The South African rand and Indian rupee have both depreciated significantly in 2013, with implications for FeCr production costs

China RMBincreasing

strength

2008 2012Sep 2013

S.AfricaRand

8.28 8.22 10.17

India Rupee

43.81 53.76 66.09

60

70

80

90

S.AfricaRand

IndiaRupee

Kazakh Tenge

increasingweakness

Rupee43.81 53.76 66.09

China RMB

6.96 6.32 6.17

Kazakh Tenge

122.38 151.38 155.33

Global average HC/charge FeCr cash costs (FOB basis, US cents per lb FeCr)

50

100

Total

Electricity

Global average FeCr cash costs declined slightly in both 2012 and 2013. Electricity is now close to becoming the largest cost component

79

0

50 Ore

Reductants

Labour

Transport to port

Global average HC/charge FeCr cash costs (FOB basis, US cents per lb FeCr)

100

150

South African cash costs have now increased to the level of the global average, whilst Chinese and Indian cash costs have fallen since 2011

ChinaIndia

S.Africa

Global average

0

50

S.Africa

Kazakhstan


2. Country focus:

- Kazakhstan

- India

Structure

- China

- South Africa

3. Conclusions

• Single major producer (ENRC) – 2 large smelters

• Fully integrated; large reserves of domestic high-grade ore, facilitating output of high-grade HC FeCr

• Low electricity costs; competitive labour and reductant costs

• Transport – long distances over land

Kazakhstan – FeCr industry characteristics

• Transport – long distances over land

• Subject to significant mineral extraction tax

• Overall production costs low – most competitive major FeCr producer

• Gradually increasing production; entirely export-focused

• Major corporate changes at ENRC in 2013

Global average HC/charge FeCr cash costs, 2013 (FOB basis, US cents per lb FeCr)

100

Kazakhstan has the lowest cost FeCr plants in the world

Kazakh

00 5 10

Global FeCr production (Mt)

Kazakh plants


2. Country focus:

- Kazakhstan

- India

Structure

- China

- South Africa

3. Conclusions

• Many small players, but larger producers dominate (Jindal, IMFA, Facor, Tata..)

• Increasingly integrated, through consolidation of assets; 60-70% of Indian FeCr output now integrated, including most major producers

• Ore and alloy quality mixed: average FeCr grade ~60% Cr

• High and increasing electricity costs – producers increasingly building captive power stations – however, captive power not necessarily cheap power

India – FeCr industry characteristics

power stations – however, captive power not necessarily cheap power(often need to purchase coal or oil to generate it)

• Low labour costs, but mining restrictions becoming strict

• Average production costs quite high, but integrated players competitive, greatly assisted by weak rupee in 2013

• Rising production, driven by exports; increasing interest from Indian players in new overseas FeCr capacity and ore sources (eg. Oman)


100Indian plants –captive ore &

power

Indian plants –non integrated

Indian FeCr plants with captive ore and energy rank quite competitively; most non-integrated producers are right at the top of the cost curve

00 5 10



2. Country focus:

- Kazakhstan

- India

Structure

- China

- South Africa

3. Conclusions

• Large number of small producers, focused on domestic market

• Most producers non-integrated – domestic ore production very low(~98% of chrome ore imported)

• Mix of ores used – balance shifting towards lower grades from S.Africa

• High and increasing electricity costs

China – FeCr industry characteristics

• High and increasing electricity costs

• “North-south divide” with respect to electricity prices

• Low labour, reductant and interest/depreciation costs

• Overall production costs high, but falling since 2011

• Rapidly increasing production; net importer, but FeCr imports declining

11%

Chinese FeCr capacity clusters around Sichuan and Inner Mongolia –quite evenly on either side of the country’s north-south power divide

BEIJINGInner Mongolia

SHANGHAI

Hydro-based power –54% of Chinese FeCr capacity

Sichuan

Coal-based power – 46% of Chinese FeCr capacity

100

Power in northern China, predominantly generated from coal, is 20% cheaper than in the hydro-powered provinces of the south

100

Average

Power prices in Northern China,Jan-Aug 2013 (US$/MWh)

Power prices in Southern China,Jan-Aug 2013 (US$/MWh)

85% 67%

36%50%60

Average85%

36%50%60

Source: MySteel

8

10

12

14

Other

India

Oman

Iran

Chinese FeCr producers have benefitted from falling chrome ore prices since 2011, and from increasingly purchasing cheaper South African ores

Chinese chrome ore imports(Mt, gross weight)

400

500

600

700Turkish lump 40-42%

S.Africa conc 44%

S.Africa UG2 42%

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

0

2

4

6

Iran

Pakistan

Australia

Turkey

S.Africa36%

50% 48%

56%

* annualised data from Jan-Jul 2013

0

100

200

300


100

Chinese FeCr plants, on average, remain at the top end of the cost curve. Lower power costs make costs in the north lower than the south

00 5 10

China North

China South


Global average HC/charge FeCr full costs, 2013 (FOB basis, US cents per lb FeCr)

100

On a “full cost” comparison (includes depreciation, interest etc), Chinese FeCr plants are slightly more competitive on the global cost curve

00 5 10

China North

China South



100

Chinese domestic FeCr prices (basis 50-55% Cr) have been 2-8 cents/lb below average Chinese cash production costs year-to-date in 2013

China domestic FeCr 50-55 price exc VAT – avg 2013

00 5 10

China North

China South


• Published Chinese FeCr prices are generally basis 50-55% Cr charge chrome and include VAT

• Excluding VAT, Chinese charge chrome prices are substantially lower than spot prices in the west (current difference ~10%) and often below calculated average Chinese production cost

• Average grade of FeCr produced in China is somewhat higher than 50-55% Cr

High cash costs, low prices yet sharply rising output – the ChineseFeCr industry seems to defy conventional wisdom. Thoughts…

• Average grade of FeCr produced in China is somewhat higher than 50-55% Cr(but now perhaps <60% Cr due to increased use of South African ore)

• Therefore it is possible that average prices in China are slightly understated by using just reported charge chrome prices, which represents a lower grade product than the Chinese average

• Perhaps it is more useful to view the economics of Chinese FeCr output as part of the total competitiveness of the Chinese stainless steel value chain


100

China’s cost position and export tax ensures that the countrycannot be sustainably competitive as an exporter of FeCr

China domestic FeCr 50-55 price exc VAT – avg 2013

Export tax

Export tax

Western FeCr 50-55 spot price (FOB China basis)- avg 2013

00 5 10

China North

China South



2. Country focus:

- Kazakhstan

- India

Structure

- China

- South Africa

3. Conclusions

• Two large players dominate (Glencore-Xstrata, Samancor), six other producers of a medium size

• Almost entirely integrated; rising exports of ore

• Ore low grade, suitable for charge chrome only – increasing proportion of UG2

• Electricity costs have increased rapidly, though stabilised in 2013 due to weak

South Africa – FeCr industry characteristics

• Electricity costs have increased rapidly, though stabilised in 2013 due to weak rand and buy-back agreements; further significant increases seem inevitable

• Production costs very varied between plants – driven by technology and capacity utilisation

• Depressed production and low capacity utilisation in 2012 and 2013 due to poor market fundamentals – this has impacted on unit costs


100

South African FeCr plants range widely from low to quite high cost –key factors are furnace technology and capacity utilisation

South African plants

00 5 10



100

On average, South African FeCr plants should have been cash profitable in 2013. Current prices are below cash cost for the highest cost plants


Western FeCr 50-55 spot price (FOB South Africa basis) - avg 2013

- Sep 2013

00 5 10



100

On a “full cost” comparison (includes depreciation, interest etc), South African plants range even more widely across the cost spectrum


00 5 10



100

About half of South African FeCr production doesnot cover “full costs” at current price levels


Western FeCr 50-55 spot price (FOB South Africa basis) - avg 2013

- Sep 2013

00 5 10


3

4

Average capacity utilisation at South African FeCr plants has been only 70-75% in 2012 and 2013, impacting on unit costs at affected plants

World HC/charge FeCr production(Mt, gross weight)

Average capacity utilisation,South African FeCr plants

China

S.Africa

75%

100%

0

1

2

Kazakh.India

Rest of world

50%

75%

Estimated average electricity prices in FeCr production (US$/MWh)

100

The weaker rand and power buy-back agreements have stabilised power prices in USD terms for South African FeCr producers in 2013

China South

China North

S.Africa

0

Kazakhstan

There are wide variations in electricity and reductant consumption at South African FeCr plants, driven by furnace technology

2,000kWh/t

4,500kWh/t

Pre-reduction(Premus)

DC arcSintering & pelletising(Outotec)

Electricity consumption in South African FeCr production:

Reductant consumption in South African FeCr production:

• Pre-reduction and DC arc processes can use cheaper reductants

• Significant substitution out of coke and into coal/anthracite across the South African FeCr industry in recent years


2. Country focus:

- Kazakhstan

- India

Structure

- China

- South Africa

3. Conclusions

• China remains, on average, a higher cost FeCr producer than South Africa, though the gap has narrowed (partly due to falling ore prices)

• The competitiveness of China’s FeCr industry within the stainless steel value chain may be greater than implied by a FeCr cost curve. China can be expected to continue to increase FeCr output in the foreseeable future

• The position of South African FeCr plants on the cost curve varies significantly,

Conclusions

• The position of South African FeCr plants on the cost curve varies significantly, based on technology and capacity utilisation

• The South African FeCr industry has an over-capacity problem….utilisation stuck at 70-75% in a poor market. Capacity still scheduled to increase (eg. Lion Phase II project). An eventual shake-out seems inevitable

• Future outlook: much depends on power prices and availability, and whether rising chrome ore exports are allowed to continue – exchange rates also very important

Thank you for your attentionThank you for your attention

Developments in production costs and competitiveness in ...

Documents

Transcript of Developments in production costs and competitiveness in ...