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Iron ore

We forecast falling iron ore prices.

1)Low-cost supply continues to grow as Vale, Samarco, BHP, Rio Tinto and Minas Rio ramp up.

2)Steel prices have fallen to levels that put pressure on steel company margins. This could lead to capacity curtailments and weigh on demand for steelmaking materials.

3)Chinese iron ore port inventories are still at highly elevated levels of around 38 days of consumption.

4)Steel demand growth could be lacklustre as the Chinese property market cools down and stimulus slows. A decline in Chinese steel intensity per capita to developed consumer economy levels such as the US poses a potential structural headwind over the longer term.

5)We see the potential for scrap substituting iron ore as China matures.

6)We forecast longer-term cost support around the 90th percentile at $60/t, and calculate incentive prices at $80/t.

Renaissance Capital

14 January 2019

Metals & Mining

Iron ore cost curve (1,724mnt)

Figure 42: 2018E iron ore cash costs plus sustaining capex, $/t

100
90
80	Incentive price: $80/t
	Spot price: $74/t*
70
60
$/t
50
40	Average cash cost: $40/t				43
	25Vale,	31Tinto,Rio	33BHP,	Kumba, 38
30					Assmang,
20
10

*Priced as at 8 January 2019.

Figure 43: Iron ore Chinese port inventory days compared with the iron ore price (RHS) over time, $/t
50						48
45					43	4138
			36	36
40		34			34
35
	29	29	31
30
	Average Chinese stock days, 32			25
25
20	17
15

07-Jan 07-Jun 07-Nov 08-Apr 08-Sep 09-Feb 09-Jul 09-Dec 10-May 10-Oct 11-Mar 11-Aug 12-Jan 12-Jun 12-Nov 13-Apr 13-Sep 14-Feb 14-Jul 14-Dec 15-May 15-Oct 16-Mar 16-Aug 17-Jan 17-Jun 17-Nov 18-Apr 18-Sep

Note: Calculated as Chinese inventory/Chinese iron ore demand*1.6*365.

Source: Bloomberg, Renaissance Capital

90th percentile: $62/t

51	70th percentile: $47/t
Fortescue,	50th percentile: $33/t

Source: Bloomberg, CRU, Renaissance Capital estimates

Chinese port inventories are still at elevated levels, which supports our view of falling prices in the medium term

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Renaissance Capital

14 January 2019

Metals & Mining

We calculate that only 8% of iron ore producers are cash-burning at current spot prices, which is not enough to provide cost support in a weakening demand environment, in our view.

Figure 44: Percentage of iron ore cost curve that is cash-burning over time

	200							% Cash burning										Iron ore fines (62% Fe, CIF China), $/t														Average LT cash burn														50.0%
								189											184
	180																															37.5%														45.0%
	160	32.5%								32.5%														136				33.5%																		40.0%
																																	29.5%
	140																														26.0%															35.0%
	120																													20.0%				24.0%	21.5%											30.0%
	100																																				86									25.0%
	80				13.0%																																								74	20.0%
	60																																													15.0%
	40				61										Average LT cash burn, 9.4%																															10.0%
$/t			18.5%	15.0%	19.5%	5.0%	1.5%				12.0%	16.0%	4.0%	2.5%							3.5% 3.5%		3.5%	2.5% 2.5%	3.0%	6.0%	13.5%		16.0%							10.0%	1.5%	8.5%	4.5%	8.5%	6.5%	11.5%	12.0%	7.0%	4.5%
	20							0.0% 0.0% 0.0%	0.5%						1.0%	0.5%	1.0%	0.5% 0.5% 0.5% 0.5% 1.0%		0.5% 0.5%		1.0%																								5.0%
	-0	Mar 06		Sep 06	Mar 07		Sep 07	Mar 08	Sep 08		Mar 09		Sep 09		Mar 10		Sep 10	Mar 11	Sep 11	Mar 12	Sep 12	Mar 13		Sep 13	Mar 14		Sep 14		Mar 15		Sep 15		Mar 16		Sep 16		Mar 17		Sep 17		Mar 18		Sep 18		Spot	0.0%

Source: Bloomberg, CRU, Renaissance Capital estimates

Our long-term iron ore price forecast of $60/t is 8% below the estimated 90th percentile of the cost curve, which reflects our cautious view on longer-term iron ore demand.

Figure 45: Iron ore price vs cash costs* at the 90th percentile, $/t

Figure 46: Iron ore price premium (discount) to the 90th percentile

Cash costs, $/t

Iron ore average price. $/t

80%

200
180					175										60%
160															40%
140	91	100		98	101	111	95			Forecasts
120															20%
100			77		108			70	70	71 66	62	62	63	60	0%
80
60										61					-20%
40	2007	2008	2009	2010	2011 2012	2013	2014	2015	2016	2017 2018E	2019E	2020E	2021E	LT (real)	-40%
*Cash costs net of by-product credits plus sustaining capex.
							Source: Bloomberg, CRU, Renaissance Capital estimates

	52%	55%	63%
34%	9%		31%	22%	2%	16%	6%
					Historical average, 23%

								-21%	-16%			-4%	-7%	-8%
2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018E	2019E	2020E	2021E
							Source: Bloomberg, CRU, Renaissance Capital estimates

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Manganese ore

Manganese ore cost curve (18.3mnt contained metal)

Figure 47: 2018E manganese lump cash costs plus sustaining capex, $/dmtu (44%, CIF China)

8.0

7.0Spot price: $6.88/dmtu*

6.0Incentive price: $5.9/dmtu

$/dmtu	5.0	Average cash cost: $4.7/dmtu	5.08Assmang,
	4.0
	3.0	2.94
		(AU),
	2.0	Samancor
	1.0
*Priced as at 8 January 2019.

Figure 48: Manganese – Chinese port inventory days (LHS) and manganese price, $/mtu (RHS)

70	58 58																	8.65																						10
																																								9
60	57	57																												7.40
			53
			51						49																														6.88	8
				49
					48																					6.55
						47		47												45		45
50							47																																	7
																					42				39								38						39
	Average exchange stock days, 37																																							6
																				34			38							33		36		37				39
40										33				30		32											32													5
											27																			26
30
										24			28				26		31				37			33	24		25						36		37			4
										21		25			29			24						36		31		22			33					35
20																																								3
10														2.80																										2
																																								1
										1.83
0	Jan-15	Mar-15	May-15	Jul-15		Sep-15		Nov-15		Jan-16 Mar-16		May-16		Jul-16		Sep-16		Nov-16		Jan-17	Mar-17		May-17	Jul-17		Sep-17	Nov-17	Jan-18		Mar-18	May-18		Jul-18		Sep-18		Nov-18		Jan-19	-

Note: Calculated as Chinese port stocks/Chinese consumption*365.

Source: Bloomberg, CRU, Renaissance Capital

Renaissance Capital

14 January 2019

Metals & Mining

90th percentile: $5.57/dmtu

Vale,5.46	70th percentile: $5.16/dmtu
	5.57
	Samancor (SA),

Source: Bloomberg, CRU, Renaissance Capital estimates

Manganese ore inventory days have reduced to long-term average levels

Figure 49: Percentage of manganese ore cost curve that is cash-burning over time

	9.00						% Cash burning						Manganese ore (44%, CIF China), $/mtu										Average LT cash burn								70%
																		63.0%
	8.00																				7.76
																	50.0%														60%
																														6.88
	7.00
	6.00						5.71																								50%
$/mtu	5.00																														40%
	4.00														18.0%	22.0%															30%
	3.00	14.0%	14.0%								11.0%	11.0%	11.0%																		20%
														8.0%							Average LT cash burn,
	2.00									6.5%									6.5%	6.5%						7.5%	7.5%	7.5%	7.5%	7.5%
																							10.2%
				3.0%	3.0%				2.5%
	1.00					1.5%	1.0%	1.5%										2.07			0.0%	1.0%	1.5%	1.0%	1.0%						10%
	0.00	Mar 12	Jun 12	Sep 12	Dec 12	Mar 13	Jun 13	Sep 13	Dec 13	Mar 14	Jun 14	Sep 14	Dec 14	Mar 15	Jun 15	Sep 15	Dec 15	Mar 16	Jun 16	Sep 16	Dec 16	Mar 17	Jun 17	Sep 17	Dec 17	Mar 18	Jun 18	Sep 18	Dec 18	Spot	0%

Source: Bloomberg, CRU, Renaissance Capital estimates

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Renaissance Capital

14 January 2019

Metals & Mining

Figure 50: Manganese price vs cash costs* at the 90th percentile

Figure 51: Manganese price premium (discount) to the 90th percentile

			Cash costs, $/t					Manganese average price. $/t					80%
10													70%
									Forecasts
	9
													60%
	8							7.1					50%
$/t	7	5.1	5.0	4.5			6.0		5.5	5.3	5.5	5.2	40%
	6												30%
	5												20%
					3.6	3.5
	4												10%
	3						3.6						0%
													-10%
	2
		2012	2013	2014	2015	2016	2017	2018E	2019E	2020E	2021E	LT (real)	-20%
*Cash costs net of by-product credits plus sustaining capex.
							Source: Bloomberg, CRU, Renaissance Capital estimates

68%

				24%		28%
	8%					Historical average, 14%
		0%
2012 -3%	2013	2014	2015-12%	2016	2017	2018E	2019E -5%	2020E-10%	2021E-10%

Source: Bloomberg, CRU, Renaissance Capital estimates

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