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.
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
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
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% 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E Consumption Driven Less Steel Intensive Chinese Steel Consump. Growth Past vs. Future (%) 15% -2% 2% 2000-2014 20015-2020 IBGE, BCB Itaú 3
Chinese Demand Decelerating Chinese Steel Production (in million Ton) Chinese Steel Exports (in million Tons) 637.4 683.3 707.9 815.4 822.7 816.9 93.8 119.9 42.6 49.9 55.8 62.3 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015 Chinese Steel Apparent Consumption (in million Ton) 753 728.9 697.1 634.4 652.1 594.8 Chinese efforts to change economy focus from Infrastructure investment to consumption resulted in lower internal steel apparent consumption and increasing steel exports 2010 2011 2012 2013 2014 2015 IBGE, BCB Itaú, COMETA 4
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 65 60 55-1% -3% -5% USA World GDP Japan Euro Area 50 45 Japan PMI USA PMI -7% 2008 2009 2010 2011 2012 2013 2014 2015E 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 (2015 17) 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
Although Brazil GDP Is Below Average, History Says Recovery Is Expected Crisis in Asia 1997 September 11 2001 Subprime 2008 Political Turmoil What is next? Plano Real FHC FHC (Election) (reelection) Lula (election) Lula (reelection) Dilma (election) Dilma (reelection) 1994/95 1999 2003 2007 2011 2015 7.6% 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% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 10 Years Average GDP Growth Economática, BTG Pactual
Brazilian New Economic Matrix Didn t Achieve Expected Result Inflation vs. Interest Rate 18 16 14 12 10 8 Artificial Price Control, Higher Government Spending and Low Interest Rates to Boost Demand Public Service Price Adjustment 6 4 Inflation Target 2-2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Interest Rate Inflation br.advfn.com/indicadores; BCB, Itaú 7
Drop in economy is reflected in main economic indicators Public Finance (% GDP) Unemployment rate year avg (%) 50 4 14 45 40 35 2 0 12 10 10.2 11.9 30 25 20-2 -4-6 8 6 7.9 8.1 6.7 6 5.5 5.4 4.9 6.9 15 10 5-8 -10 4 2 0 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E -12 0 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E Primary Balance - % GDP Nominal Balance - % GDP Net Debt - % GDP IBGE, BCB Itaú 8
Economy Slowdown Pressured Brazilian Currency to Strong Devaluation Brazilian exchange rate (R$/USD) 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5-2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 However, new currency level is celebrated by the industry EXPORT BOOSTER BCB 9
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
Severe Impact on Main Steel and Casting Customers Automotive Sales in Brazil (in million) 1.7 2.1 2.4 2.4 2.8 3.1 3.1 3.4 3.4 3.4 3.7 3.1 2.4 2 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 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 12,953 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E IBGE, BCB Itaú, COMETA 11
Steel and Casting Has Been Under Significant Pressure Since 2011 Steel Consumption (in mtons) 33.9 35.2 34.5 34.2 33.9 33.3 31.9 26.6 25.2 25.4 26.5 25.2 21.4 13.7 8.5 10 9.2 9.4 7.3 Downside risk: 1) Global Dumping measures 2) Brazilian GDP slowdown 2010 2011 2012 2013 2014 2015 2016E 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 2,200 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E Primary Balance - % GDP Nominal Balance - % GDP How does Steel and Casting production impact Ferro Alloy & Metal industry? IBGE, BCB Itaú, COMETA 12
Ferro Alloys & Metals Production Declining Ferro Alloy Production (Kton) Ferro Alloy - Trade Balance (Kton) 450 400 Exports Have a Large Impact 450 400 175 168 8 173 156 17 31 181 72 35 52 37 350 300 350 300 145 174 189 250 250 247 211 204 158 127 200 200 150 150 100 100 306 296 330 311 303 50 50 2010 2011 2012 2013 2014 0 2010 2011 2012 2013 2014 0 Mn Alloys Si Alloys Cr Alloys Ni Alloys Special Alloys Exports Imports Trade balance Surplus Mining and Energy Ministry 13
Drought in 2014 Caused Energy Price Spike Reservoir Level vs Power Rate (R$/MWh & USD/MWh) 120 100 Drought period Plants stop production to resell energy into the free market 900 800 700 80 600 60 500 400 40 300 20 200 100 - 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
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$200/MWh (USD40 USD55/MWh) Is that competitive??? Plants at Minas Gerais state negotiating similar parameters for new contract Is Price Competitive? CEMIG Power Concession Area ABRAFE, Comercial Cometa
New Capacity and Recession Have Brought Rates Down Supply and Demand Balance (GW avg) Long Term Power Rate Forecast in real term 100 90 80 70 60 30% 25% 20% 180 160 140 120 159 157 155 154 157 155 156 158 158 149 147 148 148 145 146 147 50 15% 100 40 80 30 10% 60 20 10 5% 40 20 35 35 34 34 35 34 35 35 35 33 33 33 33 32 32 33 0 2016 2017 2018 2019 2020 2021 2022 2023 0% - 2015 2017 2019 2021 2023 2025 2027 2029 Supply Demand Oversupply R$/MWh USD/MWh ONS, CCEE, BTG Pactual, Itaú 16
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 2010 2014: 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 1,084 723 1,019 990 680 660 826 855 551 570 1,105 893 1,148 766 768 565 569 2010 2011 2012 2013 2014 2015 2016 2017 Cost range estimation Oversupply Note: FeSi Price Avg in US in-warehouse CCEE, BCB,Ita,Platts, Cometa 17
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 2013 18