Annual report 2015

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Annual report 2015

Four success factors

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Results
overview

Despite the drop in global iron ore prices, the Company’s EBITDA margin remains consistently high

Despite the drop in global iron ore prices, the Company’s EBITDA margin remains consistently high

Market overview

Metalloinvest sells its products in all of the world’s largest markets. Russia, Eastern and Western Europe, Asia and the Middle East are priority regions for the company.

The Company’s wide range of products, consistent efforts to increase product quality and long-term partnerships with key consumers enable us to maintain our sales margins even in a highly volatile market environment.

Nazim Efendiev
First Deputy CEO, Sales Director

Iron ore market

The global iron ore market remains highly consolidated. Four leading companies (Vale, BHP Billiton, Rio Tinto, and FMG) control over 72% of the world iron ore trade. The leading countries that produce commercial iron ore are Australia, Brazil, China, India and Russia, together accounting for around 80% of total global output. In 2015, global iron ore production fell to 2 billion tonnes, down 3% y-o-y due to lower global demand for steel and pig iron. However, taken separately, Australia and India recorded higher output, while other countries saw relative stabilisation (Brazil, Russia) and considerable decline (China, others) in output.

Metalloinvest continues to assess the factors influencing the iron ore raw materials market to take them into account for the purpose of mid-term and long-term growth planning.

Iron ore production of leading producing countries, million tonnes

Key fundamentals such as lower global demand for steel and an unprecedented ramp-up of iron ore output by major producers contributed to further iron ore price decreases, aggravated by a sharp decline in energy and ferroalloy prices and currency depreciation in producing countries. Higher supply of iron ore with low iron content resulted in the deterioration of the average quality of iron ore raw materials. The drop in global metal prices constrains midterm investment in commodity assets. In addition, the global slump in rolled steel prices and weaker financial performance of the majority of steel producers had a negative impact on the premium paid for high quality raw materials.

Price for iron ore 62% Fe, CFR China (USD/t)

In 2015, the average annual price for iron ore dropped from USD 97 to USD 55 per tonne CFR China as compared to 2014. On 15 December 2015, the price dipped to its lowest level of USD 38.5 per tonne.

In Q1 2016, global prices returned to growth and exceeded USD 40 per tonne CFR China.

Iron ore market

Various factors affect the iron ore market in the long term. On the one hand, ore quality in the global market is gradually deteriorating. Lower quality raw materials increase the cost of steel production and lead to higher harmful emissions by steelmakers. On the other hand, environmental requirements are becoming more stringent. In particular, China, the driving force of the world’s demand for iron ore, has set the course for tougher environmental requirements purporting to mitigate the harmful environmental impact of metallurgical facilities, inter alia, by improving the quality of consumed iron ore.

Stricter environmental requirements looming over the ferrous metals industry and lower iron ore quality will lead to higher margins for raw materials with high iron content.

Steel output in Chin a, million tonnes

At present, price levels are determined by spot market prices in China, using the Steel Index, MetalBulletin or Bloomberg indices. The transition to price formation on the spot market continues as price-related information becomes more accessible. Metalloinvest closely monitors the physical markets on a daily basis as well as commodity trading across global exchanges.

Hot briquetted and direct reduced iron market

HBI/DRI is an important component in the production of high-quality steel grades that help to cut the cost of steel production. HBI/DRI is a multi-purpose, high-quality and viable alternative to pig iron and scrap metal that can be used at integrated facilities in blast, basic-oxygen and electric arc furnaces and at mini plants.

HBI – key benefits:

  • Stable homogeneous chemical composition, low content of harmful elements
  • High bulk density (ca. 5 g per cubic cm) and homogeneous size
  • Energy-efficient and environmentally-safe production process
  • No seasonality factor influencing supplies

Global HBI/DRI production is highly concentrated. According to preliminary data from the World Steel Association (WSA), HBI/DRI produced in 2015 totalled 70.0 million tonnes, two thirds of which was manufactured by five countries (India – 25%, Iran – 20%, Mexico – 8%, Saudi Arabia – 7%, and Russia – 7%). At present, the majority of metallised raw materials (over 90%) are consumed by captive integrated metal manufacturers with only a limited amount shipped to third-party consumers.

In 2015, lower production of HBI/DRI was observed in traditional producing counties such as India, Saudi Arabia, Egypt, and Trinidad and Tobago. Output stabilised in Venezuela. Lower supply of HBI/DRI allowed Metalloinvest to strengthen its position in the global merchant HBI market.

Global production and export of HBI/DRI, million tonnes

Metalloinvest has at its disposal high quality iron ore resources and access to a gas pipeline to secure uninterrupted supply of natural gas used in the direct iron reduction process.

This enables the Company to ensure the high quality of its products, while also keeping its environmental impact to a minimum.

Metalloinvest not only possesses the required resources, but also the necessary expertise and technologies for HBI/DRI production. The Company’s long-term strategy is largely focused on the development of production of iron ore products with high added value, primarily HBI.

In 2015, its HBI/DRI output reached 5.4 million tonnes, up 3.1%. HBI production volumes amounted to 2.6 million tonnes, 12% of which was shipped to the Company’s own steel segment. The largest consumers are steelmaking companies in Russia and Western Europe. With a 50% share of the world’s commercial HBI market in 2015*, Metalloinvest pursues all available opportunities to meet the growing demand from high-grade steel producers.

*Source: Company’s estimates.

Steel market

According to the WSA, steel output in 2015 declined by 2.9% to 1,599.5 million tonnes. In Asia, the largest steel producing region in absolute terms, output declined by 2.3% y-o-y (1,096.3 million tonnes). The highest production decline rate was recorded in North America, where steel output in 2015 dropped by 8.6% to 110.7 million tonnes.

Output in the EU, South America and the Middle East, declined by 1.8%, 2.5% and 2.4%, respectively. In China, it dropped by 2.3% to 803.8 million tonnes. Lower domestic consumption of rolling steel and China’s currency policy aimed at yuan depreciation contributed to higher steel exports totalling 112.0 million tonnes in 2015.

Steel output by major producing countries, 2011–2015, million tonnes

Empty
2011
2012
2013
2014
2015
Russia
68.9
70.2
69.0
71.5
71.1
China
702.0
731.0
822.0
822.8
803.8
Japan
107.6
107.2
110.6
110.7
105.2
USA
86.4
88.7
86.9
88.2
78.9
India
73.5
77.3
81.3
87.3
89.6
South Korea
68.5
69.0
66.0
71.5
69.7
Others
430.1
415.6
413.2
395.2
381.2


Steel output growth by region, 2011–2015, %

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