The Good, the Bad and the Ugly:

Transcription

1 The Good, the Bad and the Ugly: The Story of 7 Years in the Chromium Industry 29 th AMM Stainless & Its Alloys Sheraton O'Hare Hotel, Chicago, USA October 2015

2 Disclaimer This document does not constitute or form part of and should not be construed as, an offer to sell or issue or the solicitation of an offer to buy or acquire securities of YILDIRIM Group or any of its subsidiaries in any jurisdiction or an inducement to enter into investment activity. No part of this document, nor the fact of its distribution, should form the basis of, or be relied on in connection with, any contract or commitment or investment decision whatsoever. No representation, warranty or undertaking, express or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, completeness or correctness of the information or the opinions contained herein. None of the YILDIRIM Group or any of its affiliates, advisors or representatives shall have any liability whatsoever (in negligence or otherwise) for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection with the document. This document contains forward-looking statements, which include all statements other than statements of historical facts, including, without limitation, any statements preceded by, followed by or that include the words targets, believes, expects, aims, intends, will, may, anticipates, would, could or similar expressions or the negative thereof. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors beyond YILDIRIM Group s control that could cause the actual results, performance or achievements of YILDIRIM Group to be materially different from future results, performance or achievements expressed or implied by such forward-looking, including, among others, the achievement of anticipated levels of profitability, growth, cost and synergy of recent acquisitions, the impact of competitive pricing, the ability to obtain necessary regulatory approvals and licenses, the impact of developments in the Turkish economic, political and legal environment, volatility in stock markets or in the price of our shares or GDRs, financial risk management and the impact of general business and global economic conditions. Such forward-looking statements are based on numerous assumptions regarding YILDIRIM Group s present and future business strategies and the environment in which YILDIRIM Group will operate in the future. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. These forward-looking statements speak only as at the date as of which they are made, and YILDIRIM Group expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any change in YILDIRIM Group s expectations with regard thereto or any change in events, conditions or circumstances on which any such statements are based. Neither YILDIRIM Group, nor any of its agents, employees or advisors intend or have any duty or obligation to supplement, amend, update or revise any of the forward-looking statements contained in this document. The information contained in this document is provided as at the date of this document and is subject to change without notice. 2

3 Content 4 YILDIRIM GROUP 8 MACRO CONDITIONS 11 CHROME ORE & FERROCHROME MARKETS 19 THE GOOD, THE BAD & THE UGLY 20 FORECAST & EXPECTATIONS 3

4 YILDIRIM GROUP: Overview 4 CONTINENTS & 21 COUNTRIES ACTIVE SECTORS 11 EMPLOYEES >10,000 YILDIRIM GROUP s business philosophy is always to be not a revenue-driven but a profit-driven company. 4

5 YILDIRIM GROUP: Overview

6 METALS & MINING DIVISION : Structure The One & Only Company to Produce Cr Ore & HC FeCr in 4 Countries HC FECR & FESI PRODUCTION 4 Furnaces in Vargön, Sweden HC FeCr Annual Production Capacity: 255,000 tpy 1x105 MVA: 110,000 tpy FeCr 1x48 MVA: 65,000 tpy FeCr / 24,000 tpy FeSi 2x24 MVA: 55,000 tpy FeCr Slag Recovery: 25,000 tpy FeCr SWEDEN HC FECR PRODUCTION 4 Furnaces in Tikhvin, Russia HC FeCr Annual Production Capacity: 130,000 tpy 4x25 MVA: 120,000 tpy FeCr Slag Recovery: 10,000 tpy FeCr RUSSIA CHROME ORE MINES 31 Chrome Ore Mining Licenses 24 of Them in Operation Reserve: over 130 mn tons Resources: over 150 mn tons HC FECR PRODUCTION 4 Furnaces in Elazig, Turkey HC FeCr Annual Production Capacity: 165,000 tpy 2x17 MVA: 50,000 tpy FeCr 2x30 MVA: 100,000 tpy FeCr Slag Recovery: 15,000 tpy FeCr TURKEY KAZAKHSTAN CHROME ORE MINES Reserve: around 21 mn tons Resources: around 22 mn tons Beneficiation Capacity: 1.3 mn tpy One of the Highest Cr/Fe Ratios in the World: Cr 2 O 3 Concentrate: 48-56% Total Production Capacity: 2,500,000 tpy of Cr Ore 550,000 tpy of HC FeCr Head office FeCr Plant Mine 6

7 METALS & MINING DIVISION : Structure CHROMIUM MARKET SHARE (2015): 5% WORLD RANKING (2015): 2nd HC FeCr Producer 4th Chromium Player CR ORE RESERVES: 150+ million tons in Turkey & Kazakhstan NUMBER OF FURNACES: 12 in Turkey (4), Sweden( 4), Russia (4) PRODUCTION CAPACITY (ANNUAL): Chrome ore: 2.5 million tpy HC FeCr: 550,000 tpy 7

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9 Contraction Expansion Macroeconomic Trends: Growth Rates & PMIs are Still Weak 15% 10% 5% 0% -5% -10% 14.2% Real GDP Growth Rates 7.4% 6.8% 6.3% 3.0% 2.4% 2.2% 1.8% 0.9% (E) China Japan United States Euro-zone 3.1% 2016 (F) Negative Signals PMI - Post Crisis Development Crisis Positive Changing Signals Environment Post-Crisis China Euro-zone Japan United States Source: IMF Source: HSBC, Markit Good: The Euro-zone & Japan are struggling with slow growth rates but Japan s Abenomics and the EU s quantitative easing expected to help gradually to grow with pre-crisis levels. The US GDP growth is getting stronger. FED s decision in December will be decisive for Bad: Even though China s macroeconomic indicators show a slowdown, the measures taken by other major countries can hardly help China to support its growth around 7% in the next years. PMIs signal that the major economies strengthening is expected to be slow in 2016 and later. Ugly: Moreover, low oil prices will continue to persist, along with deflationary effects, in

10 Dec 2013=100 Macroeconomic Trends: Share Prices Like It is Composite Share Price Index st Drop nd Drop Diversified Mining Companies US Steel Producers Asian Steel Producers (Excl. China) European Steel Producers (Incl. Russia) Source: Bloomberg, Eti Krom Research Bad: The commodities markets story is significantly different from the macro conditions. All market players are affected from the slowing demand of China and oversupply problems. Ugly: Commodities prices, along with shares prices, have been falling and hit 2009 levels (Global Crisis period). Good: Production cuts in different sectors have to mature to influence market dynamics positively. China s demand is not expected to grow strongly, but a new normal will be found in 2016/17 to support market prices. 10

11 Chrome Ore Market: Cr Ore Prices will Continue to Fall USD/dmt Chrome Ore Prices - South Africa and Turkey 279 Falling Demand Falling Demand 100 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Source: Asian Metal, Ferroalloynet Cr Ore: Turkish, 48%, Conc. Cr Ore: S. African, 42%, Conc. 5-Month Strike Period Cr Ore: Turkish, 42%, Lumpy Cr Ore: S. African, 38%, Lumpy Turkish 42% grade lumpy chrome ore prices have been falling since mid-2014 from $280/dmt level to $190/dmt level due to the narrowed demand of Chinese ferrochrome producers. Turkish concentrate prices are relatively more resilient to price fall (from $300/dmt to $230/dmt in the same period). South African chrome ore prices were relatively stable since the last strikes in South Africa but China s ferrochrome production started to slow in August-September period which resulted with falling prices for South African chrome ore from $185/dmt to $133/dmt for 42% grade concentrate chrome ore. 11

12 Chrome Ore Market: Chrome Ore Port Stocks Started to Increase mn tons 000 tons China's Imported Chrome Ore Port Stocks 1,398 1,400 1,300 1,200 1,100 1, Source: Ferroalloynet Port Stocks: Cr Ore Imports (RHS) China is expected to import around 9.6 million tons chrome ore in 2015, increased by 3.0% YoY. China s chrome ore stocks at ports started to increase with the highest rate since 2011 and surpassed 2-million level at the end of September. Combination of the slowing imports market and the increasing stocks are strong signals of decreasing Chinese ferrochrome production, which is resulted with lower price conditions. 12

13 Ferrochrome Market: Hot Topics in 2015 UGLY Slowing Demand Low oil prices and slowing end-user demand distort future prospects for stainless steel markets. Global stainless steel production in 2015 is expected to grow less than 1% YoY. UGLY Falling Prices The slowing demand and lacking FeCr production cuts are resulted with lower market prices in chrome ore and HC FeCr/ChCr markets. BAD Companies in "Trouble" A market correction hit the weakest links and this was expecting in the chromium market before IFM s bankruptcy. We believe this trend will also continue in GOOD Production Cuts IFM, Tata in South Africa and Jindal in India fully stopped their HC FeCr/ChCr production. Some others cut production, i.e. YILDIRIM, Zimasco. 13

14 mn tons Ferrochrome Market: Stainless Steel is not Shining Anymore Source: CRU, Eti Krom Research Global Stainless Steel Production (E) 2016 (F) China India Japan Europe United States Others 43.5 Global S. Steel Production Growth Rate in 2015 < 1% Ugly: The global stainless steel production in 2015 expected to grow only by 0.4% YoY to 42.4 million tons. Bad: The stainless steel production growth, excluding China, is almost zero in 2015 due to low oil prices, China s strong exports and slowing end-user demand. Good: In 2016, anti-dumping cases against China will be one of the major decisive factors which can determine the trajectory of global stainless steel production. 14

15 Number of rig counts Ferrochrome Market: OCTG Markets Hit 2009 Lows Jan-00 Aug-00 Mar-01 Oct-01 May-02 Dec-02 Jul-03 Feb-04 Sep-04 Apr-05 Nov-05 Jun-06 Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sep-11 Apr-12 Nov-12 Jun-13 Jan-14 Aug-14 Mar-15 USD/bbl 4,500 No. of Rig Counts vs. Brent Prices ,000 3,500 3,000 2,500 2, OCTG demand decreased by 51% YoY in the US in , Total Rig Counts Brent Prices (RHS) Source: Baker Hughes, EIA Brent oil price collapsed to 2009-lows in 2015 and stabilized in the last months around $50-55/bbl. The average monthly oil price fall since August 2014 was 40% YoY. Concurrently, number of rig counts also collapsed due to the weak crude oil prices. Number of rig counts collapsed from 3,000-4,000 per month range to 2,000-2,500 per month range in September Channel checks suggest that in 2016 crude oil prices and, eventually, OCTG demand will be subdued. 15

16 Ferrochrome Market: Price Downtrend will Persist in 2016 USD/lb HC Ferrochrome Prices by Regions Lowest HC FeCr/ChCr Benchmark Price Since Q Benchmark Price HC FeCr EU HC FeCr USA HC FeCr China Imports Source: Merafe, Metal Bulletin ChCr benchmark price has been falling since Q and hit $1.04/lb, lowest level since Q The price conditions has not reached bottom in the EU and China. The price levels in the US are still attractive for some producers but the prices in the US may also retreat below $1.0/lb level for Ryan s Notes Low in the next 3 months. This trend could persist in

17 mn tons Ferrochrome Market: Further Production Cuts are Inevitable Global HC FeCr/ChCr Production (E) 2016 (F) South Africa China Kazakhstan India Finland Others HC FeCr/ChCr Production Cuts Expected to Reach in ktons Source: Eti Krom Research The major production cut materialized in S. Africa. IFM and Tata (S. Africa) halted production in The other producers in Turkey, South Africa, Zimbabwe, India and Russia also reduced their production levels. China s HC FeCr production has been slowing since mid-2015 and the trend expected to continue in Nevertheless, the market inevitably requires more production discipline. Otherwise, the chromium market will continue to suffer from unsatisfactory pricing conditions. 17

18 Ferrochrome Market: FeCr Companies are on the Edge of the Cliff. Rohit Ferro-Tech planned to sell its Jajpur ferro-alloy plant in India... Zimasco cut ferrochrome production to 40% capacity. Yildirim cut 30% of its chrome ore and. ferrochrome production. IFM entered rescue plan in South Africa.. Glencore plans to reduce net debt and adapt the business accordingly. Jan 2015 Feb-2015 Mar-2015 Apr-2015 May-2015 Jun-2015 Jul-2015 Aug-2015 Sep-2015 Oct-2015?. Cliffs sold Ring of Fire chromite assets to Noront for $20mn. Cliffs spent around $550mn since Tata Steel's ferrochrome plant in Gopalpur faced delays.. Jindal Ferro Alloys announced lockout in Kothavalasa plant in India.. Source: Bloomberg, Metal Bulletin, Metal-Pages, Ferroalloynet Rohit Ferro-Tech suspended operations at its Haldia plant. Tata shut Richards Bay ferrochrome plant in South Africa for winter season. Increasing number of negative news since Jun

19 The Good, The Bad & The Ugly: The Sides of the Game Reliable Chrome Ore & Ferrochrome Producers Fair market pricing (i.e. no dependency on hot sales) Sustainable production strategy Long-term supply dependability Wide-range logistics capability and global presence Disruptive Chrome Ore & Ferrochrome Producers No mid & long term supply reliability No consideration for overall market stability Promptly penetrate to short run price rallies Disrupting price conditions without any solid strategy Troublemaking Chrome Ore & Ferrochrome Producers Producers with cash-flow generation dependency No determination to gain profit Lack of production sustainability and product quality Desperate spot market players without any price consideration

20 Forecast & Expectations: Ready to Hit the Bottom in 2016 Chrome Ore China s chrome ore appetite is expected to be weak in 2016 compared to previous years due to "slowing ferrochrome markets in China". We will witness "slowing chrome ore imports" trend along with "stock increases in Chinese ports" in Chrome ore prices are expected to "continue their downtrend and hit the bottom" in the first half of It is expected that UG2 supply will be limited in the next years due to the "weakening capacity increase project pipeline in South Africa". Currently, there are no capacity increase projects in Turkey and "there are no capacity increase expectations for the foreseeable future for Turkey". As a result, investment environment in chrome ore business will be significantly weak and can only come to life again if "sustainable and fair market prices" arise. 20

21 Forecast & Expectations: Ready to Hit the Bottom in 2016 Ferrochrome "The oversupply market conditions will persist in 2016" but the impact on prices will gradually decrease in It is still clear that "supply discipline is a must" for every market player. Otherwise the upturn will be deferred. As witnessed in 2015, the "weakest links of the chromium market" will vanish in 2016 & after. "China is not a growth giant anymore" and will start to normalize. Therefore, ferrochrome consumption of China, along with production, will continue to mature in 2016 & later. Slowing domestic demand and low prices are directing Chinese producers to exports. Without "prompt and effective new trade measures", China s influence will be vast on prices. The consumers of ferrochrome have to re-access their supply allocations. Relying on one supplier in not the optimum option anymore. "ONE supplier might be NO supplier in 2016 & later. Two reliable suppliers will significantly absorb the risks". The tough price conditions will eliminate minor suppliers from the markets in the next term. Therefore, the consumers should rely on "reliable producers". 21

22 Forecast & Expectations: Ready to Hit the Bottom in 2016 Definition: "One should not presume to know the outcome of an event which is still in progress." Commodity prices, like a hot knife though the butter, are falling along with cost curves, a never finding equilibrium. Commodity currencies are in a deep-dive and this trend will to come an end, eventually. Energy prices are relatively cheap today but it will not be like this forever. Oversupply problems will persist for too long. Permanent supply cuts are still very weak. Global upstream CAPEXs peaked in 2012 to $134bn but another CAPEX super cycle is very unlikely in the near-term. "The Fat Lady still sings" but are we ready for the next stage of new normal? 22

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