Alloy Production Is Brazil Back Online?

Transcription

1 Alloy Production Is Brazil Back Online? Singapore, March 23 rd, 2016 No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means electronic, mechanical, photocopying, recording, or otherwise without the permission of COMERCIAL COMETA.

2 Who We Are Comercial Cometa Founded in 1983, Comercial Cometa is a leading ferro alloy and metal trader in Brazil Strategically located with 3 warehouses at the main casting and steel centers to serve customers in 24h One-stop shop to customers by offering a complete portfolio along with technical assistance Over 500 active customers Diversified and cost effective portfolio of top tier suppliers Key Partners Strategic Located Main Steel and Casting Centers One-Stop Shop for Steel and Casting Silicon Alloys & Metals Manganese Alloys & Metals Chrome Alloys Special Alloys MgFeSi, Inoculants Base Metals Cometa Minas Gerais Cometa São Paulo Cometa Joinville 1

3 Is Brazilian Alloy Production Back Online? Key Factors for Brazilian Ferro Alloy Industry Understanding how the 3 variables affect Brazilian Alloy production is key to the question Global Demand for Steel Brazilian Demand for Steel and Casting Ferro Alloy Industry Cost Structure 2

4 Chinese Demand for Steel Decelerating as Economy Slows Down Chinese GDP Growth (%) Main Economy Drivers Past vs. Future 12% 10% 8% 6% 10.40% 9.40% 7.90% 7.80% 7.40% 6.90% 6.60% 6.30% 5.90% 5.70% 5.50% Infrastructure Driven More Steel Intensive 4% 2% 0% E 2017E 2018E 2019E 2020E Consumption Driven Less Steel Intensive Chinese Steel Consump. Growth Past vs. Future (%) 15% -2% 2% IBGE, BCB Itaú 3

5 Chinese Demand Decelerating Chinese Steel Production (in million Ton) Chinese Steel Exports (in million Tons) Chinese Steel Apparent Consumption (in million Ton) Chinese efforts to change economy focus from Infrastructure investment to consumption resulted in lower internal steel apparent consumption and increasing steel exports IBGE, BCB Itaú, COMETA 4

6 jan abr jul-08 out jan abr jul-09 out jan abr jul-10 out jan abr jul-11 out jan abr jul-12 out jan abr jul-13 out jan abr jul-14 out jan abr jul-15 set-12 nov-12 jan-13 mar-13 mai-13 jul-13 set-13 nov-13 jan-14 mar-14 mai-14 jul-14 set-14 nov-14 jan-15 mar-15 mai-15 jul-15 Demand Out of China Is Also Weak Global GDP Growth (%) 7% 5% 3% 1% Industrial weakness out of China % -3% -5% USA World GDP Japan Euro Area Japan PMI USA PMI -7% E 2016E 2017E 40 Eruro zone PMI Clear Problem of Oversupply Excess Capacity (mt) China 417 Asia (ex-china) 115 CIS 96 Europe 68 Central & South America 19 NAFTA -3 Total 712 New Capacity ( ) China 40 MENA 23 India 16 Southeast Asia 8 CIS 6 South America 5 Turkey 5 NAFTA 3 Total 106 World Steel Capacity Utilization (%) 95% 90% 85% 80% 75% 70% 65% 60% 55% 50% Itaú, Bloomberg and World Steel Association 5

7 Although Brazil GDP Is Below Average, History Says Recovery Is Expected Crisis in Asia 1997 September Subprime 2008 Political Turmoil What is next? Plano Real FHC FHC (Election) (reelection) Lula (election) Lula (reelection) Dilma (election) Dilma (reelection) 1994/ % 5.3% 4.4% 2.2% 3.4% 4.3% 1.3% 3.1% 1.2% 5.7% 3.2% 4.0% 6.1% 5.0% 3.9% 1.8% 2.3% 0.0% 0.3% -0.2% 0.1% Market Driven Agenda More State-Owned Agenda -3.8% E 10 Years Average GDP Growth Economática, BTG Pactual

8 Brazilian New Economic Matrix Didn t Achieve Expected Result Inflation vs. Interest Rate Artificial Price Control, Higher Government Spending and Low Interest Rates to Boost Demand Public Service Price Adjustment 6 4 Inflation Target Interest Rate Inflation br.advfn.com/indicadores; BCB, Itaú 7

9 Drop in economy is reflected in main economic indicators Public Finance (% GDP) Unemployment rate year avg (%) E 2017E E 2017E Primary Balance - % GDP Nominal Balance - % GDP Net Debt - % GDP IBGE, BCB Itaú 8

10 Economy Slowdown Pressured Brazilian Currency to Strong Devaluation Brazilian exchange rate (R$/USD) However, new currency level is celebrated by the industry EXPORT BOOSTER BCB 9

11 Key Macroeconomic Parameters Discussed GDP Inflation Public Agenda Shift Higher Inflation Higher Interest Rates Increasing Public Debt Higher Unemployment Rate Currency Devaluation What is the impact of these parameters on Industry? 10

12 Severe Impact on Main Steel and Casting Customers Automotive Sales in Brazil (in million) E Launches from Brazilian Listed Homebuilders (in BRL m) 11,275 13,816 11,513 19,817 20,129 15,965 18,939 16,056 10,097 12, E 2016E IBGE, BCB Itaú, COMETA 11

13 Steel and Casting Has Been Under Significant Pressure Since 2011 Steel Consumption (in mtons) Downside risk: 1) Global Dumping measures 2) Brazilian GDP slowdown E Casting Production (in Ktons) Steel Production Steel Exports Internal Apparent Consumption 2,830 2,969 3,087 3,250 3,355 2,297 3,241 3,344 2,860 3,071 2,737 2,316 2, E Primary Balance - % GDP Nominal Balance - % GDP How does Steel and Casting production impact Ferro Alloy & Metal industry? IBGE, BCB Itaú, COMETA 12

14 Ferro Alloys & Metals Production Declining Ferro Alloy Production (Kton) Ferro Alloy - Trade Balance (Kton) Exports Have a Large Impact Mn Alloys Si Alloys Cr Alloys Ni Alloys Special Alloys Exports Imports Trade balance Surplus Mining and Energy Ministry 13

15 Drought in 2014 Caused Energy Price Spike Reservoir Level vs Power Rate (R$/MWh & USD/MWh) Drought period Plants stop production to resell energy into the free market jan-10 jan-11 jan-12 jan-13 jan-14 jan-15 - Reservoir Level R$/MWh USD/MWh Producers were profiting by reselling power instead of Producing ONS, CCEE, BTG Pactual, Itaú 14

16 Brazilian Ferro Alloy Footprint and Status Brazilian Map of Ferro Alloy Plants Power significantly impacted Ferro Alloy production in Brazil Main power contract expired: Dec. 31st, 2014 or Jun. 30th, 2015 Severe drought in 2014 Plants - Over 50% capacity utilization Plants - Under 50% capacity utilization Chesf Power Concession Area New Power Contract Parameters for Plants in Northeast region Valid until 2037 Fund to co-invest in new energy projects Price: aprox. R$150 R$200/MWh (USD40 USD55/MWh) Is that competitive??? Plants at Minas Gerais state negotiating similar parameters for new contract Is Price Competitive? CEMIG Power Concession Area ABRAFE, Comercial Cometa

17 New Capacity and Recession Have Brought Rates Down Supply and Demand Balance (GW avg) Long Term Power Rate Forecast in real term % 25% 20% % % % % Supply Demand Oversupply R$/MWh USD/MWh ONS, CCEE, BTG Pactual, Itaú 16

18 Ferro Alloy Production Is Likely to Remain Cost-Effective in Brazil Assumptions for Sensitive analysis FeSi Cost (excl. Logistic) Simulation vs Price (USD/t) Power rates : Estimated to be R$45/MWh in 2010 (unofficial) 2015: R$295/MWh in 2015 (Average Energy Price in Free market) 2016 onwards: R$160/MWH (unofficial) 1,607 1,690 1,516 1,558 1,626 1,457 Cost % assumption Energy cost in 2010: 20% to 30% of total cost Other costs (excluding logistics) adjusted by inflation All costs converted to USD, considering Year End exchange rate 1, , , , Cost range estimation Oversupply Note: FeSi Price Avg in US in-warehouse CCEE, BCB,Ita,Platts, Cometa 17

19 Conclusion Brazilian economy Currency Devaluation effects: Exports are finally becoming profitable Cost reduction in USD bringing new competitiveness to Brazilian products (ENERGY, LABOR COST & RAW MATERIAL) Change in government can revert economy expectations rapidly Pension, Tax, Political reforms More market friendly approach Weak demand Growth in Brazil, China and Rest of World Challenging environment for Steel Sector Global overcapacity Higher Chinese exports Pressured steel prices Increasing protectionist duties Brazilian Ferro Alloy Industry is back online helped by currency devaluation, besides new power rate contracts and challenging demand environment Gradual Furnace Restart Comercial Cometa