China steel and iron ore outlook

Transcription

1 China steel and iron ore outlook Graeme Train Macquarie Capital Securities February 215 In preparing this research, we did not take into account the investment objectives, financial situation and particular needs of the reader. Before making an investment decision on the basis of this research, the reader needs to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of their particular investment needs, objectives and financial circumstances. Please see disclaimer.

2 China steel and iron ore outlook Steel demand conditions in China have slowed but haven t collapsed. Several indicators are pointing to a cyclical trough - low inventory, some signs of monetary easing and some stabilisation in the property market. China s steel exports look at risk in 215 should global scrap prices fall in line with iron ore so far, though, this is not happening. Iron ore has outpaced demand, forcing displacement of high-cost tonnes both in China and outside. Inventory has still risen most notably at the Chinese domestic miners. This material is now being liquidated, contributing to price weakness. 215 will see more supply come to market, requiring further displacement. With the cost curve deflated and marginal producers already out, the pricing needed to bring the market back to balance could be very low. Page 2

3 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4q11 1Q12 2Q12 3Q12 4q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 Real steel demand, mtpa YoY Chinese steel demand turned negative in 4Q14 although this is not unprecedented a cyclical trough? Chinese steel demand 9 "Real" Consumption YoY 25% 8 7 2% 6 15% 5 4 1% 3 5% 2 1 % -5% Source: NBS, Macquarie Research, February 215 Page 3

4 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 The 214 cycle bears many similarities with 212 YoY % Outstanding Social Finance Property investment - RHS YoY %, 3mma YoY % Outstanding Social Finance YoY % 4 National housing prices - RHS H12 is comparable to now for a few reasons: a major step-down in IP growth, contraction in the land market and a tick-up in liquidity growth. If liquidity growth picks up further, the property market could see some improvement if the case of 212 is anything to go by. Source: CEIC, Macquarie Research, February 215 Page 4

5 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Sep-13 Nov-13 Mar-14 May-14 Sep-14 Nov-14 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Monthly chagne in off-balance-sheet lending, Rmb bn A tick-up in liquidity growth may signal a trough in the current cycle YoY % 25 Outstanding Rmb Loans Outstanding Social Finance 1, , The growth of outstanding Social Finance and RMB Loans reversed the previous downtrend in Nov-Dec. What matters to market expectations is whether the current easing will continue, and the likelihood to us is above 5%. Source: CEIC, Macquarie Research, February 215 Page 5

6 Jan-1 Mar-1 May-1 Jul-1 Sep-1 Nov-1 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Sep-13 Nov-13 Mar-14 May-14 Sep-14 Nov-14 YoY change in steel stocks (Traders, mills and SHFE), mt Total deliverable inventory (mills, traders, SHFE), weeks of use basis YoY Not all of 214 s steel demand was met by new steel production Tighter liquidity conditions and years of losses forced the closure of a large number of steel traders. Steel inventory is now at multi-year lows. 6 China steel stock changes 7.5 Deliverable steel inventory (weeks of use) 8% % % 2% % % -4% Source: NBS, CISA, SHFE, Macquarie Research, February 215 Page 6 Total deliverable inventory YoY

7 1Q5 3Q5 1Q6 3Q6 1Q7 3Q7 1Q8 3Q8 1Q9 3Q9 1Q1 3Q1 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q Net steel exports, crude basis, mtpa Net steel exports as % of crude steel production India BF/BOF (top 3) CIS (export) Korean BF/BOF Hot rolled production costs, $/t US BF/BOF Europe BF/BOF Japan EAF Europe EAF Turkey / Mid East EAF SE Asia EAF US EAF Exports provided a useful outlet for production in 214, but this is at risk in 215 China net exports of steel 12 Net Exports Share of steel production 25% 65 Selected steel cost curve - 2H14 1 2% % % 5 World steel export price - $53/t 4 2 5% 45 % 4 China export BF/BOF Japan BF/BOF -2-5% 35 Cumulative volumes, mtpa Source: China Customs, Platts, Company data, Macquarie Research, February 215 Page 7

8 Iron ore fines - 58% Fe Iron ore fines - 62% Fe Jan-1 Apr-1 Jul-1 Oct-1 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Oct-13 Apr-14 Oct-14 Jan-15 Iron ore lump HCC - China Domestic Iron ore pellet Semi soft CC - FOB Aus Met coke - CFR India HCC - FOB Aus HM Scrap - SE Asia HM Scrap - China HM Scrap - CFR Turkey Shrdd scrap - US Japan scrap China s steel cost curve position is the result of uneven raw material price changes % Raw material price changes, Jan Dec x Scrap to iron ore ratio, iron units basis 3.x -1% 2.8x -2% 2.6x -3% -4% 2.4x 2.2x 2.x LR average -5% Iron Ores Coking Coals/Coke Scrap 1.8x 1.6x -6% 1.4x 1.2x 1.x Source: Platts, Mysteel, SXCoal, Macquarie Research, February 215 Page 8

9 CIS (export) Korean BF/BOF Japan EAF India BF/BOF (top 3) Hot rolled production costs, $/t Turkey / Mid East EAF Japan BF/BOF Europe EAF SE Asia EAF China export BF/BOF US EAF Europe BF/BOF US BF/BOF Should scrap prices drop in line with iron ore, China s cost curve position looks less favourable Selected steel cost curve - 215F 42 4 China with VAT export rebate removed Cumulative volumes, mtpa Source: China Customs, Platts, Company data, Macquarie Research, February 215 Page 9

10 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Aug-14 Sep-14 Oct-14 Nov-14 China crude steel production, mtpa 214 did see growth in Chinese steel production data reporting remains a serious issue Reported output Macq estimate Crude steel production Official data suggests 214 steel output of 822mt, up just.9% YoY. Accounting for trade and inventory changes, this would imply real demand dropped 1.8% YoY. We estimate crude steel production was actually up nearly 5% at 836mt, with real demand up 2%. Source: NBS, CISA, Macquarie Research, February 215 Page 1

11 1Q9 2Q9 3Q9 4Q9 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14F Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Sep-13 Nov-13 Mar-14 May-14 Sep-14 Nov-14 China steel capacity utilisation Profit per tonne, CISA mills - RMB/t Mill profitability index (>5=majority of mills making money) Iron ore price ($/t) Assuming some growth in output helps to explain rising steel mill profitability China steel capacity utilisation and profitability Steel mill profitability and iron ore prices 9% 88% 86% 84% Mill profitability index (Macq steel survey) Iron ore spot price (RHS) % 2 5 8% 4 78% % % 8 1 Capacity utilisation 5 72% Pre tax profit per tonne - CISA mills 6 7% Source: Mysteel, CISA, Platts, Macquarie Research, February 215 Page 11

12 Pig iron production was also under-reported, but still didn t seem to grow as much as steel Falling pig iron-to-crude steel ratio appears to reflect a geographical shift in steel output away from Hebei 95% 9% Pig iron to crude steel ratio % 14% 12% YoY growth in steel output 85% 1% 8% 8% 6% 4% 75% 2% % 7% Total China Hebei Jiangsu -2% Hebei Jiangsu Source: NBS, Macquarie Research, February 215 Page 12

13 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Sep-13 Nov-13 Mar-14 May-14 Sep-14 Nov-14 There has been significant imbalance in the iron ore market for the last 18 months YoY growth in iron ore exports and pig iron production 25% 2% Iron ore exports Pig iron production - iron ore importers 15% 1% 5% % -5% Source: GTIS, worldsteel, Macquarie Research, February 215 Page 13

14 Million tonnes Supply additions from the majors have been strong and are expected to remain so 18 Supply additions from major producers Anglo - Minas Rio Hancock Mining - Roy Hill Kumba Vale FMG BHP (Australia) Rio Tinto F 216F 217F 218F 219F Source: Company data, Macquarie Research, February 215 Page 14

15 Australia Brazil Sierra Leone Ukraine Liberia Chile Mauritania Myanmar Laos New Zealand Malaysia Venezuela Kazakhstan Vietnam India Canada Russia Mexico Philippines All others (net) Indonesia Iron ore exports (excl Aus and Brz), mt YoY growth Supply additions have forced some displacement of higher-cost tonnes Displacement has occurred both in China and among non-major seaborne suppliers 38 Iron ore exports, excluding Aus and Brz 4% 116mt 15 Change in China's iron ore imports - Nov 14 vs Jan India bans exports/mining 3% 2% 1% % % -2% % Oct-14 Apr-14 Oct-13 Apr-13 Jan-13 Oct-12 Jul-12 Apr-12 Jan-12 Oct-11 Jul-11 Apr-11 Jan-11 Source: GTIS, Macquarie Research, February 215 Page 15

16 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Sep-13 Nov-13 Mar-14 May-14 Sep-14 Nov-14 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Sep-13 Nov-13 Mar-14 May-14 Sep-14 Nov-14 Jan-15 Consumption of domestic ore, mtpa Imports from non major suppliers, mtpa Concentrate inventory, mt Concentrate inventory, days of production In China, production has been cut, but inventory has been built at the mines as well Consumption of domestic iron ore appeared to decline by ~1mtpa over 214. However, a 4mtpa stock build in 2H14 suggest that production was probably only cut by 6mtpa Marginal iron ore supply to China Iron ore concentrate inventory held by Chinese mines Implied total China inventory Implied total inventory - days of production China domestic (excluding mine stock changes) (LHS) China's imports from non-major suppliers (RHS) Source: Mysteel, NBS, China Customs, Macquarie Research, February 215 Page 16

17 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Sep-13 Nov-13 Mar-14 May-14 Sep-14 Nov-14 Millsiron ore inventory, days of use Traders and domestic mines inventory, daysof use Destocking at the mills and stock building at traders and mines has changed the distribution of inventory Iron ore inventory in China Distribution of iron ore inventory in China Mill owned stocks - days of consumption "Deliverable" iron ore inventory - days of consumption (RHS) % 9% 8% 7% 6% 5% 4% Mines Traders Mills % 3 9 2% % % 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 Source: Mysteel, Macquarie Research, February 215 Page 17

18 YoY growht, million tonnes Further displacement of incumbent production will be required in 215 and beyond YoY growth in iron ore volumes Total iron ore demand (China + ex-china) Seaborne iron ore supply - majors (gross weight) F 216F 217F 218F 219F Source: GTIS. Company data, Macquarie Research, February 215 Page 18

19 $/t CFR China, 62% basis A deflating cost curve only serves to lower the price needed to force further production cuts Evolution of iron ore cost curve f In an oversupplied market in which tonnes need to be replaced, cost curves provide little price support million tonnes With much of the marginal production already taken out of the market, the next exits will need to come from more structural mining operations. As such, it is likely to be balance sheet strength that determines who lives and who dies more than just cost curve position. Source: GTIS. Company data, Macquarie Research, February 215 Page 19

20 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return > 3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return > 3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield. Macquarie Asia/Europe Outperform expected return >+1% Neutral expected return from -1% to +1% Underperform expected <-1% Macquarie First South - South Africa Outperform return > 1% in excess of benchmark return Neutral return within 1% of benchmark return Underperform return > 1% below benchmark return Macquarie - Canada Outperform return > 5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return > 5% below benchmark return Macquarie - USA Outperform return > 5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return > 5% below benchmark return Volatility index definition* This is calculated from the volatility of historic price movements. Very high highest risk Stock should be expected to move up or down 6-1% in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 4-6% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 3-4% in a year. Low medium stock should be expected to move up or down at least 25-3% in a year. Low stock should be expected to move up or down at least 15-25% in a year. * Applicable to Australian/NZ stocks only Recommendation 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit /efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 Dec 214 AU/NZ Asia RSA USA CA EUR Outperform 51.8% 58.6% 45.7% 44.42% 6.54% 46.81% (for US coverage by MCUSA, 5.29% of stocks followed are investment banking clients) Neutral 31.8% 27.37% 3.99% 5.1% 35.37% 33.51% (for US coverage by MCUSA, 3.8% of stocks followed are investment banking clients) Underperform 16.39% 14.57% 23.94% 5.48% 4.8% 19.68% (for US coverage by MCUSA,.44% of stocks followed are investment banking clients) Page 2

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