Steelmaking raw materials in a Two-Speed-World · Steelmaking raw materials in a "Two-Speed-World"...
Transcript of Steelmaking raw materials in a Two-Speed-World · Steelmaking raw materials in a "Two-Speed-World"...
Steelmaking raw materials in a "Two-Speed-World"
New York, June 20, 2012Steel Success Strategies Conference
CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited
McKinsey & Company | 1
Content
▪ Setting the stage – macroeconomics and steel growth
▪ Raw materials perspective
▪ Impact of Mega Trends – choices and considerations
McKinsey & Company | 2
Global scenarios – a "Two-Speed-World scenario" most likely
SOURCE: Center For Managing Uncertainty; McKinsey Global Growth Model, v3.5
Strong developed economies
Moderate to strong emerging markets Strong emerging markets
Weak developed economies
"Cooling Down"
▪ Global recession continuing and shaping investment actions
▪ Demand radically dropping and financial stress on customers and suppliers
▪ Commodities continue losing base of revenues, raw material oversupply in market
"Regaining Speed"
▪ Fast recovery from the crisis globally
▪ Increasing demand worldwide for steel and raw materials
▪ Reacceleration of growth in China (also for indirect steel export)
▪ Raw material scarcity and price fly-ups likely
Unlikely
▪ Recovery in growing regions, but mature regions remain weak (stagnating)
▪ Moderate global GDP development and regional demand growth
▪ Raw materials demand and supply in balance "Two-Speed-World"
McKinsey & Company | 3
▪ Commodity countries exposed to external factors
▪ Cost base for raw materials inflating
▪ The rationale that inflation results in devaluation does no longer seem to hold
Macro economic evolutions favor cost inflation for raw materials sold on the seaborne market
SOURCE: Global Insights, OANDA, McKinsey
36
191515
BrazilAustraliaEuropeUS
1 Eurozone countries
38
23
9
AUS/USD
Brazil/USD
EUR/USD
Currency development of "commodity countries"
Exchange rates changes (2006 - 12) Percent
Inflation evolution
Consumer Price Index growth (2006 - 12)Percent
McKinsey & Company | 44
Low case
Base case
High caseSteel demand likely to grow further at ~3% per year
1,800
1,600
1,400
1,200
1,000
800
6000
1.2% pa
7.0% pa
2030252015
2,600
0520009590 101981
2,400
2,200
2,000
85
Apparent demand for finished steel productsMillion metric tons, CAGRs 1981 - 2000, 2000 - 08
l
Historical Forecast
SOURCE: WSA; McKinsey steel demand model
Base case CAGR 2010-30 of ~3% pa
McKinsey & Company | 5
Content
▪ Setting the stage – macroeconomics and steel growth
▪ Raw materials perspective
▪ Impact of Mega Trends – choices and considerations
McKinsey & Company | 6SOURCE: AMM (Oct 27); Eurofer; SBB; Consensus Economics, McKinsey analysis
Raw materials prices are likely to remain high
2010
Raw material basket per ton of HRCUSD/t
2011 2012E
52 67 87 102136
182135 117
207248 234 256
305 306 306 281
32 31 3340
5076
79
86
174
11385
135
145131
141
203 194 176167
414143
12
431436444
54
Q2
401
58
Q1
251
49
09
28437
08
423
67
07
269
48
06
21939
05
19733
04
15438
03
11284
2000
8813
58
1521
02
89
01 Q3 Q4 Q1
72
469447
Q4
494
63
Q3
511
75
Q2
521
77
Q1
424
69
Q4
548
66
Q3
571
71
Q2
580
72 517
Iron oreCoking coalScrapBasket based on iron ore forward curve
Additional basket cost if iron ore at analyst consensus
RAW MATERIALS PORTFOLIO
McKinsey & Company | 7
REAL DEMAND AS OF 2012NOT INCLUDING STOCKING
SOURCE: McKinsey Iron ore supply model, McKinsey Steel Raw Materials Demand Model
In the short term there is sufficient iron ore available and …Iron ore supply1 demand2 balanceMillion metric tons, Rich ore equivalent
1 2011 supply modeled at full capacity2 2005 - 11 apparent demand figures, 2012 real demand figures
3,000
2,700
2,400
2,100
1,800
151413121110090807062005
Existing production
C1C2C3
C4
1,500
1,200
900
600
300202019181716
Low demand
Base case demand
IRON ORE OUTLOOK
McKinsey & Company | 8SOURCE: McKinsey Iron ore supply model
1 Including closure of marginal capacity in China
… the iron ore pipeling is sufficiently richFull iron ore pipeline (as announced) Rich ore equivalent, million metric tonnes
221 350 231369
955
496
2020capacity
Depletion1Ramp-up of current production
Under imple-mentation
Feasible prjects
Concep-tional projects
114
Potential projects
4,008
1,971
Probable projects
2010 supply
IRON ORE OUTLOOK
McKinsey & Company | 9SOURCE: Factiva, Company reports and presentations, abare, CISA, Unctad, Tex report, ISSB, Indian bureau of mines, Chinamining.org
Low case supply scenarioHigh case supply scenarioAs announced
835
476
22552
866685
515416
2871667223
623
63230
19
538
1,037
2,157
18
453
2,109
17
377
1,949
16
306
1,664
15
214
1,240
14
128
13122011
1,149
2020
2,166
Expected cumulative project capacity1 according to different scenariosMillion metric tonnes
1 Including C1, C2, C3, C4 projects and not including additional ramp-up volume of project that already started by Q3 2010
Several iron ore supply scenarios corresponding to different realization rates of the projects
Possible scenarios affecting project pipeline
C1
C2
C3
C4
RealizationPercent
100
100
100
90
85
75
80
70
50
60
40
25
DelayMonths
6
6
12
12
18
24
24
30
36
36
36
48
Base
High
Base
Low
High
Base
Low
High
Base
Low
Low
High
IRON ORE OUTLOOK
McKinsey & Company | 10
Key considerations on the iron ore market
Reducing industry concentration
▪ Current market share of 59% for top 3 iron ore producers expected to reduce by ~ 5 -10% points, mainly driven by growth of other miners, international acquisitions by Chinese miners and further vertical integration of major steel players
A
Increasing reliance of China on seaborne ore
▪ Chinese domestic iron ore production expected to decline by 2015 driven by depletion and closure of high cost mines
▪ Given increasing reliance on seaborne iron ore, China is gradually strengthening its global position in the iron ore industry
B
Reducing share of Indian iron ore exports
▪ Indian iron ore supply is expected to increase by ~ 7% p.a. between 2010 and 2015, mainly to satisfy increasing domestic demand (~ 10% p.a.)
▪ Share of seaborne supply (current export level at 50%) expected to decline by half
▪ Majority of incremental production capacity going forward is captive
C
Increasing share of concentrates
▪ Global iron ore production profile is expected to evolve to less concentrates by 2015 driven by closures of high cost Chinese mines
▪ On the seaborne market, the increasing number of magnetite export projects is expected to increase the share of concentrates
D
Share of captive iron slightly increasing
▪ The share of integrated iron ore supply is expected to slightly increase compared to non-integrated iron ore, representing ~ 25% of the global iron ore production in 2015
E
SOURCE: McKinsey
IRON ORE OUTLOOK
McKinsey & Company | 11
341271643151
818
2020
1,081
Net otherEuropeMenaSouth America
IndiaChina2010
SOURCE: McKinsey Integrated Steel Making Raw Materials Demand model Q1/2012, McKinsey Metallurgical Coal Supply Model Q1/2012
4829383869125
161
2020
1,383
1,200
183
Other (net)
CanadaMozam-bique
MongoliaCISAustraliaChina2010
876
Base caseAs announced
The global coking coal market will likely be more than balanced by 2020 if projects come online as assumed in the base case
1 Production data refer to saleable volumes after washing including capacity utilization
Implications▪ Limited risk of shortage
going forward ▪ China, India and South
America will add ~ 210 Mt or 80% of the demand growth
▪ Growth in China will be largely met by increasing local supply
▪ Significant capacity expansions in China, Australia, CIS and new major producing regions (Mongolia, Mozambique) required to meet demand
Demand base case
Supply1
METALLURGICAL COAL OUTLOOK
Global coking coal demand and supplyMillion tons
McKinsey & Company | 12
Key considerations on the metallurgical coal markets
SOURCE: McKinsey
METALLURGICAL COAL OUTLOOK
▪ Development of new coking coal assets particularly in Mozambique, Mongolia, and potentially Indonesia and Russia, quality profiles and distribution
▪ Speed of expansions in Australia ▪ Impact of deteriorating local coking coal qualities on role of China on the
seaborne market ▪ Impact of governmental considerations on speed of expansion, trade flow
management
A Expansion options of supply base
▪ Development of production cost of marginal producers in China and in North America
▪ Underlying cost inflation as primary cost driver
B Cost position of the marginal supplier
Technical substitution
▪ Optimization of blast furnace operations resulting in decreasing overall coke rates
▪ Impact of increasing PCI rates on reducing coking coal needs▪ Efficiency gains in coke batteries through technology upgrades, pre-treatment
and revision of met coal blends
C
Substitution ▪ Impact of growing scrap availability in China potentially resulting in increasing share of EAF steel production (post 2020)
▪ Implications of low cost shale gas on the steel industry in North America, e.g., shift to gas-based DRI production
D
McKinsey & Company | 13SOURCE: McKinsey global coking coal model Q2 2011; McKinsey coking coal cost model Q2 2011
U.S. coal is likely to be the price setting mechanism for the global market
90th percentile ex. US cost
Brownfield pricing regime – including U.S.+5/+25% premium over C90 seaborne cash cost incl. U.S.
Greenfield pricing regime – including U.S.+25/+45% premium over C90 seaborne cash cost incl. U.S.
Brownfield pricing regime – excluding U.S.+5/+25% premium over C90 seaborne cash cost e.x. U.S.
Greenfield pricing regime – excluding U.S.+25/+45% premium over C90 seaborne cash cost e.x. U.S.
SupplyMtpy
METALLURGICAL COAL OUTLOOK
Washed seaborne coking coal cost curve FOB 2010Cash cost U.S.$/ton, real 2010
90th percentile cash cost incl. US
76
13012011010090807060403020 230220210200190180170160150140100
175
150
130115
95
AUS-
T4
93
CAN
-T2
91
NZ
89
AUS-
T3
88
AUS-
T2
50
RU
S
64
CO
L
83
IND
O110
AUS-
T1
65
84
CAN
-T1
McKinsey & Company | 14
SCRAP OUTLOOK
SOURCE: McKinsey
0
200
400
600
2025201510052000
0
200
400
600
0
200
400
600
14
Growth in global scrap supply will come mainly from increasing obsolete scrap volumes, certainly after 2020Global scrap supply by typeMillion metric ton
MEDIUM-DEMAND SCENARIO
3,5%
Drivers
▪ Volumes driven by steel production
▪ Collection rates near maximum already
▪ Volumes driven by steel consumption
▪ Limited potential for improvement in collection rates
▪ Volumes driven by historical (10 - 30 year) steel consumption
▪ Improvement for obsolete scrap rates possible in developing regions
1 Home scrap (generated in steelmaking)
2 Prompt scrap (generated in steel trans-formation)
3 Obsolete scrap (end-of-life recovery)
Historical Forecast
3,5%
4,7%
McKinsey & Company | 15SOURCE: World Steel Association, McKinsey steelmaking raw material demand model
63%69%69%66%65%62%62%58%55%57%
37%31%31%34%35%38%38%42%45%43%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
90
752
95
848
20001980
716
85
719 770 1.146
15
2.331
20
2.0801.798
10
1.417
05 2025
The long-term global trend towards more iron ore based steel production is only expected to reverse beyond 2015 - 20Global crude steel production by iron source1
Million metric tons
MEDIUM DEMAND SCENARIO
Iron ore based
Scrap based
Historical Forecast
SCRAP OUTLOOK
McKinsey & Company | 16
Most steel scrap is exported from developed countries, and imported into developing countries
SOURCE: ISSB, McKinsey
Steel scrap trade volumes by countryMillion metric tons
2010
Main exporting countries1 Importing countries1
Sweden 1.0
Hungary 1.0
South Africa 1.2
Czech Republic 1.4
Denmark 1.4
Australia 1.6
Netherlands 1.8
Romania 2.3
Russia 2.4
Canada 3.8
France 4.4
Germany 4.8
Japan 5.9
United Kingdom 6.9
USA 16.5
Pakistan 0.8
Greece 0.8
Indonesia 1.2
0.5
Vietnam 1.9
Luxembourg 2.5
Egypt 2.7
Italy 3.9
India 4.1
Spain 4.6
Taiwan 4.7
China 7.5
South Korea 8.0
Turkey 16.7
Malaysia 1.8
Thailand
1 Net trade flows
McKinsey & Company | 17
2020 scrap outlook
SOURCE: McKinsey Metallics Practice
2020 expectations RationaleChina becomes balanced
▪ China will gradually decrease its scrap imports as its internal scrap generation is steeply rising
▪ In case that the global economy slows down and scrap prices drop accordingly (compared to iron ore and coking coal prices), China will be an opportunistic buyer of scrap, similar as in 2009
CIS will remain balanced but no longer export
▪ CIS will give preference to internal use over exports▪ Imports will not be significant due to local availability of iron
ore and coking coal
Europe and North America will remain at similar levels of net scrap exports as today
▪ Total scrap generation is likely to remain similar over the next decade (historical steel consumption is more or less flat)
▪ Very few investments in new EAF steelmaking capacity expected in either region; Hence, internal consumption (and exports) will remain very similar
India and Latin Americawill not become major importers
▪ Availability of local iron ore will keep demand for scrap at low levels
▪ Temporay imbalances likely, due to growth patterns but also due to local prices
MENA, South-East Asia (and Africa) will remain net importers of scrap
▪ Scrap required to feed minimills, with the balance addressed with DRI
SCRAP OUTLOOK
McKinsey & Company | 18
Inhalt
▪ Setting the stage – macroeconomics and steel growth
▪ Raw materials perspective
▪ Impact of Mega Trends – choices and considerations
McKinsey & Company | 19
Three hypotheses going forward
SOURCE: McKinsey
Emerging Regionswill shape demand and competition
▪ Chinese demand will continue and sourcing behavior of China will shape the market
▪ Without China’s seaborne demand as engine for commodity exploration the raw materials supercycle would be over fast
1
"Multiple inflation factors" will dramatically change the economics of mines
▪ Cost inflation will continue to drive prices up but will not be fully passed through to customers
▪ Commodity suppliers will need to adopt to more efficiency and need to keep prices up to keep growth economics intact
2
Recycling and secondary marketswill provide more opportunities to grow
▪ Increasing returns on steel scrap likely to promote growth and investments
▪ EAF route and other new technologies will become a favourable investment, due to CO2 emmission advantages and energy discontinuities (e.g., shale gas)
3
McKinsey & Company, Incwww.mckinsey.com
[email protected]+32 477 536 [email protected]+33 (1) 4069 [email protected]+49 (211) 136-4142
McKinsey & Company | 21
BACKUP
McKinsey & Company | 22
Economic development and urbanization of the developing world will be the largest driver for steel demand growth
1 CIS, MENA, Latin America, Subsaharan Africa, Other Asia
Sources: WSA; McKinsey steel demand model
139
139
138
137
98
127
144
151
158
154
181
198
203
203
144
893
708
271
North America
2,180
886
586
217
China
ROW 1
25
India
Developed Asia
Europe
2030
2,370
20
1,936
820
474
160
15
1,632
710
373
102
2010
1,335
605
27162
Apparent demand for finished steel productsMillion metric tons CAGR
2010 - 15 2015 - 20 2020 - 30
5.410.5 9.3
0.23.2 1.9
0.95.3 2.6
-0.1-0.7 0.0
4.16.6 4.9
0.93.2 2.9
4.1 3.5 2.0Global
McKinsey & Company | 23
Synthesis – key discussion points
Iron ore ▪ Risk of oversupply short term, while in the medium to long term new investments are needed to address global demand
▪ Industry concentration (top-3) expected to reduce from 59% in 2010 to 50 - 54% in 2020▪ Chinese domestic production expected to decline by 2015▪ Evolving towards " Greenfield incentive pricing "
Coking coal
▪ Strong announced capacity pipeline could push coking coal production to ~ 1.2 bn tons by 2020 (from recent market tightness and price hikes)
▪ Global coking coal market will likely be more than balanced by 2020 if projects come online as assumed in our base case, which means only a part of projects is required to meet base case demand; additional projects would put downward pressure on prices
▪ U.S. coal is likely to be the price setting mechanism for the global market
Scrap ▪ Strong growth in global scrap supply will come mainly from increasing obsolete scrap volumes, mainly after 2020
▪ Long-term global trend towards more iron ore based steel production is only expected to reverse beyond 2015 - 20
▪ Most steel scrap is exported from developed countries, and imported into developing countries
▪ Scrap prices are set based on substitution logic with hot metal (but can deviate from this in cycle peaks and troughs)
McKinsey & Company | 24SOURCE: Factiva, Company reports and presentations, abare, CISA, Unctad, Tex report, ISSB, Indian bureau of mines, Chinamining.org
Low case supply scenarioHigh case supply scenarioAs announced
835
476
22552
866685
515416
2871667223
623
63230
19
538
1,037
2,157
18
453
2,109
17
377
1,949
16
306
1,664
15
214
1,240
14
128
13122011
1,149
2020
2,166
Expected cumulative project capacity1 according to different scenariosMillion metric tonnes
1 Including C1, C2, C3, C4 projects and not including additional ramp-up volume of project that already started by Q3 2010
Several iron ore supply scenarios corresponding to different realization rates of the projects
Possible scenarios affecting project pipeline
C1
C2
C3
C4
RealizationPercent
100
100
100
90
85
75
80
70
50
60
40
25
DelayMonths
6
6
12
12
18
24
24
30
36
36
36
48
Base
High
Base
Low
High
Base
Low
High
Base
Low
Low
High
McKinsey & Company | 25
In our base case, potential iron ore supply capacity could amount to ~ 3 billion tons by 2020Potential iron ore supply capacity by regionmillion metric tonnes, rich ore equivalent
BASE CASE
SOURCE: McKinsey Iron ore supply model, UNCTAD
2015 - 202010 - 15
CAGR Percent
8.4 4.2
-5.8 -3.7
6.8 5.4
7.2 3.6
9.1 1.4
1.6 1.2
5.9 1.2
7.8 5.8
11.2 3.6
204
221235
469
348
289
434
649
795
32287240
2,476
15
4750
503
123
296
2010
50 53
352
655
141
1,971
85 35
209
362
+4% p.a.
OtherNorth AmericaMENAEuropeCIS
India
Brazil
China
Oceania
2020
2,879
164
McKinsey & Company | 26
A Industry concentration is expected to reduce from 59% in 2010 to 50 - 54% in 2020
Concentration in seaborne market will remain high, allowing major producers to adjust supply to demand and avoid over-capacity and price pressure
63
15 2020
50 - 54155 - 561
2005
~ 59
10
1 Range driven by different supply scenarios
SOURCE: UNCTAD, raw material database; McKinsey iron ore supply model
ESTIMATESEXCLUDING M&A
Share of the three largest producers in seaborne market (controlled or influenced)Percent
McKinsey & Company | 27
289301313326335348361
409450470469
417405395
336
266
202019181716151413121110090807062005
B Chinese domestic iron ore production is expected to decline by 2015 driven by depletion of existing production and closure of high cost mines, increasing reliance on seaborne iron ore
SOURCE: McKinsey Iron ore supply model
China landed cost assumptionUSD/tonne
110140175200220
Chinese domestic Iron ore productionMillion metric tons rich ore equivalent
CHINA
McKinsey & Company | 28
By 2015, iron will move towards "greenfield incentive" pricing
Demand
Industry structure
2015
Greenfield incentive pricingCash cost Brownfield Fly up
FOR DISCUSSION
Secondary supply
Scrap sufficient to serve significant part of steel demand in China/other emerg. econ.
Scrap sufficient to serve largest part of steel demand
Scrap sufficient to serve large part of steel demand
Very little scrap available in China/other emerging econ.
Project pipelineBalanced supply due to realization of reasonable part of planned greenfields projects in line with demand growth
Significant oversupply due to realization of large majority of planned greenfields
Oversupply due to realization of substantial part of planned greenfield projects
Supply shortage due to insufficient availability of greenfield projects
Frequent issues esp. in new locations, causing some disruption at times
Political/environ./ legal issues
No major issues arise Some issues arise, but not disruptive to industry
Industry is constantly disrupted by large array of issues
Lead time of 7-9 years due to stronger shift to non-traditional locations with significant new challenges (e.g., infrastructure development)
Lead timeLead time of 5-6 years as most new projects are devel-oped in traditional locations/ challenges
Lead time of 6-7 years due to gradual shift to non-traditional locations with new challenges
Lead time of 8-10 years due to strong shift to non-traditional locations and substantial bottlenecks in equipment supply
Strong move to magnetite-based reserves
Grade erosion/ depletion
Hematite-based reserves remain dominant
Gradual move to magnetite-based reserves
Rapid depletion of hematite reserves
"Big three" continue to be act as industry leaders
Industry concentration
Sufficient number of new entrants to lead to a frag-mented industry structure
"Big three" remain most relevant players, but not acting as industry leaders
"Big three" are able to expand current market participation due to acquisition of new entrants
Steel demand growth of 3-4% p.a. short-term/2-3% p.a. long-term, driven by robust urbanization and industrialization in China and other emerging economies (e.g., India, Brazil), but increasingly served through scrap buildup in China
Demand growth drivers
Stagnation of steel demand due to economic slowdown and subsequent halt in urbanization/indus-trialization of emerging economies (esp. China)
Steel demand growth of 2-3% p.a. short-term/1-2% p.a. long-term, driven by slowing urbanization and industriali-zation in China/other emer-ging economies (e.g., India)
Steel demand growth of 3-5% p.a., driven by strong urbanization and industrialization in China and other emerging economies (e.g., India, Brazil), with Chinese scrap not yet playing a significant role
Supply
Main deter-minant of short term price regime
Substitutes Not relevant as there are no substitutes for iron ore in steel production
Traders No large impact by trading on price regime for iron ore
Exploration costs Not relevant as exploration cost is <1% of revenues in iron ore
SOURCE: McKinsey Iron Ore Supply model
McKinsey & Company | 29
Volume Mt2.2002.0001.6001.4001.2001.0008006004002000
6571
85
99
1.800
Based on typical premiums over the 90th percentile seaborne cash cost, a LT FOB price range of 70 - 100 USD/t is expected
SOURCE: McKinsey Iron ore supply model
2020 Seaborne FOB cash costs for 62% standard sinter feed equivalent2010 USD (real)
Greenfield pricing regime:+25/+40% premium over C90 seaborne cash cost
C90
Brownfield pricing regime:+5/+25% premium over C90 seaborne cash costCash cost pricing: -5/+5 % premium
MEDIUM DEMAND
McKinsey & Company | 30
Type of expansions
SOURCE: McKinsey Metallurgical Coal Supply Model Q1/2012
1 Ramp-up of current production in China (i.e. mines already operating but upgrading capacity)2 Depletion of currently operating mines (ex-China)3 Top down capacity accounted starting 2020
Coking coal – Strong announced capacity pipeline could push coking coal production to ~ 1.2 bn tons by 2020 (from recent market tightness and price hikes)
▪ C0: Current production, including ramp up of projects which already came on stream in 2009; depletion of current operations
▪ C1: Expansions which have been fully agreed, under construction and proceed according to plan to finish more or less in time (only minor delays due to technical issues)
▪ C2: Expansions/new projects that are agreed and technically defined (reserves, product flow …) but to happen with possible delays due to political issues, social and environmental issues, equipment shortage …
▪ C3: Uncertain future projects, close to existing infrastructure or in political instable regions having more risk to get licensing
▪ C4: Uncertain future projects with no supporting infrastructure but more details defined than exploration phase (possible reserves and possible production volumes …)
74 70 125
81
876
+323
2020 capacity
1,200
C53
18
C4
50
C3
44
C2C1Deple-tion2
Ramp-up1
2010 supply
BASE CASE
Full coking coal pipeline – saleable productionMillion tons
McKinsey & Company | 31
1,5001,4001,3001,2001,1001,000
900800700600500400300200100
0
C0
C1C2C3C4C5
2019181716151413121110090807062005
Low demand
Base demand
High demand
… which means only C2 projects are required until 2020 to meet base case demand; additional C3 and C4 projects would put downward pressure on prices
SOURCE: McKinsey Integrated Steel Making Raw Materials Demand model Q1/2012, McKinsey Metallurgical Coal Supply Model Q1/2012
▪ Assuming a high demand scenario, C3-C4 projects required already in 2013/14 to meet demand
▪ In the base case supply/ demand scenario market is balanced until 2020, limited risk of severe supply shortage until 2020
▪ No C3-C4 projects required to come online
▪ Assuming a low demand scenario all projects fully agreed and already under construction (C1) would be sufficient to meet demand until 2020
Supply base case
Global coking coal demand and supplyMillion tons
McKinsey & Company | 32
Annual hard coking coal contract price FOB Australia1
USD/ton
SOURCE: McCloskey; TEX report; press search, press clippings
1 Annual benchmark contract prices are negotiated for the Japanese fiscal year (Apr - Apr)
For the last 2 years seaborne hard coking coal pricing is in a fly-up pricing regime despite a continuous price decline in the last 4 quarters
210
235
285
315330
225209
225
200
129
300
98116
125
5847494340
06 Q3Q2090807
90th percentile seaborne cash cost (excl. US)
90th percentile seaborne cash cost (incl. US)
Q1Q4Q3Q2Q1Q4 Q20403022000 01 05
10 11 2012
Fly-up pricing regime> 45% premium over C90
Incentive pricing regime:+5/+45% premium over C90 incl. US cost
Incentive pricing regime:+5/+45% premium over C90 excl. US cost
McKinsey & Company | 33SOURCE: World Steel Association, McKinsey steelmaking raw material demand model
63%69%69%66%65%62%62%58%55%57%
37%31%31%34%35%38%38%42%45%43%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
90
752
95
848
20001980
716
85
719 770 1.146
15
2.331
20
2.0801.798
10
1.417
05 2025
The long-term global trend towards more iron ore based steel production is only expected to reverse beyond 2015 - 20Global crude steel production by iron source1
Million metric tons
MEDIUM DEMAND SCENARIO
Iron ore based
Scrap based
Historical Forecast
McKinsey & Company | 34
Most steel scrap is exported from developed countries, and imported into developing countries
SOURCE: ISSB, McKinsey
Steel scrap trade volumes by countryMillion metric tons
2010
Main exporting countries1 Importing countries1
Sweden 1.0
Hungary 1.0
South Africa 1.2
Czech Republic 1.4
Denmark 1.4
Australia 1.6
Netherlands 1.8
Romania 2.3
Russia 2.4
Canada 3.8
France 4.4
Germany 4.8
Japan 5.9
United Kingdom 6.9
USA 16.5
Pakistan 0.8
Greece 0.8
Indonesia 1.2
0.5
Vietnam 1.9
Luxembourg 2.5
Egypt 2.7
Italy 3.9
India 4.1
Spain 4.6
Taiwan 4.7
China 7.5
South Korea 8.0
Turkey 16.7
Malaysia 1.8
Thailand
1 Net trade flows
McKinsey & Company | 35
Scrap prices vary across countries, based on local and regional supply/demand balances
SOURCE: Metal Bulletin Research, Steel Business Briefing, ISSB, McKinsey
438
416
411
483
479
453
441
399
489
456
457
2010
20%
28%
71%
-15%
-28%
11%
-14%
5%
HMS 1 scrap priceUSD/metric ton
Scrap export rateScrap net exports over steel production, volumes Comments
▪ As a large exporting region, scrap prices in North America are relatively low
▪ Demand, and therefore scrap prices, are higher in East Coast
▪ With large importers nearby (e.g. Turkey), scrap prices in Europe are higher than in the USA
▪ Within Europe, domestic scrap prices depend on the local supply/demand balances
▪ Japan’s domestic price is set based on export price, which is supported by imports in larger Asia
493
Spain
West Coast
Midwest
East Coast
UK
France
Germany
Italy
Japan – domestic1
Japan – export1
South Korea import
China – domestic -1%
▪ Being large importers in a scrap-scarce region, prices in South Korea and China are high
1 HMS 2
McKinsey & Company | 36
0
100
200
300
400
500
600
700
0 50 100 150 200 250 300 350 400 450 500 550
11 Q2
10 Q3
10 Q4
11 Q1
Hot metal raw material cost1
USD/metric ton
Domestic European scrap price (E3 classification type)USD/metric ton
08 Q3
08 Q2
09 Q1
08 Q1
09 Q4
09 Q209 Q308 Q4
10 Q110 Q2
In "average" times, scrap prices are set based on substitution logic with hot metal
SOURCE: McKinsey
WESTERN EUROPE
1 Marginal pig iron production costs based on 100 % merchant coke input Also holds for the America’s
▪ In normal quarters scrap prices are closely correlated to pig iron raw materials cost within a narrow equilibrium band
▪ The scrap price is set by intergrated steel mills, that can adapt the BOF scrap rate according the price
▪ Being traded mostly on spot, scrap prices are more volatile than iron ore and coking coal prices
Price fly-up during boom times
Depressed price during crisis times
McKinsey & Company | 37
Equilibrium scrap price forecast
2015 equilibrium prices for scrap expected to land between 310 and 400 USD per metric ton
SOURCE: McKinsey
WESTERN EUROPE
50
100
150
200
250
300
350
400
450
500
131109070503 20152001
Methodology▪ Correlation
between pig iron raw material cost and scrap price
▪ Forecasted pig iron cost based on the 3 steel demand scenarios
Equilibrium price – Domestic European E3 scrapUSD/Metric ton
2011 H1 scrap price: 455 USD/t
Historical Forecast
McKinsey & Company | 38
▪ Commodity country exposed to external factors
▪ Thus the cost base for raw materials increase
Currency developments and country specific inflation will impact the cost base of raw materials significantly
SOURCE: Global Insights, OANDA, McKinsey
Currency development of "commodity countries"
Exchange rates, indexed
Inflation of countries
Consumer Price Index
1 Eurozone countries
80
90
100
110
120
130
140
150
US
20122006
100
110
120
130
140
Australia
Brazil
20122006
USEurope1