The role of IDC in iron ore beneficiation in South Africa

17 March 2014

Beneficiation – what are we talking about

3

Characteristics of the South African Steel Industry

Ageing Plants

• Most of the steel plants in South Africa were built in the 1940,50 and 60’s. Amsa’s Saldanha steel being the

exception, it was constructed in the late nineties and utilises fairly modern and efficient technology.

Dependence on expensive raw material

• Historically raw materials such as premium iron ore and coking coal were abundantly available. The

technology configurations selected reflect this past reality.

Legacy environmental liabilities and non compliance

• Historically environmental regulations were not as far reaching and strict as today. Furthermore investments

ensuring compliance to the latest environmental regulations were deferred especially post the global

financial crises

Inefficient and costly processes

• Most of the South African steel plants have not kept abreast with latest technology trends and have deferred

equipment upgrades, delayed preventative maintenance programs, and stay in business capex spend

Uneconomical capacity

• Only around half of the installed nameplate capacity is economically feasible due to old plants, old

technology using traditional raw materials. Marked increase in imports during the past few years.

“Catch up” highly unlikely

• For most of the South African steelmakers with ageing plants, catch up on deferred capex spending to

increase efficiency, ensure environmental compliance is becoming increasingly more difficult and in most

cases not possible

Cash Cost to Produce Crude Steel

• The choice of steel making technology determines the key cost components

• Blast Furnace steel making requires coking coal, South Africa does not have adequate coking coal

• The quality of South African coking coal requires blending of imported coking coal

• EAF steel production requires scrap steel which is expensive

5

Source: CRU

Saldahna and Vanderbiljpark position on world cost curve

South African steel producers have progressively moved up the world steel cost curve

• Energy

– Electricity expensive

– Coking coal expensive and scarce

– Gas availability and price

• Environment

– Legacy non compliance

– Legislation / standards

– Carbon tax

– AMSA said impact on 2012 would have been R600m

• Logistic costs

– Largest single cost for South African steel producers

Iron ore, 13%

Soft Coking Coal, 11%

Hard Coking Coal, 16%

Coal, 4% Scrap, 17%

Other, 26%

Raw material Transport,

14%

Cost elements of BF crude steel Source: Hatch

South African steel producers facing cost pressures

7

Profit split is increasingly in favour of the raw material suppliers

Source: McKinsey

Internationally many steel mills are in trouble

“Evraz stock sheds a third of its value

by Mark Allix,

THE market was mostly tight-lipped as Evraz Highveld Steel & Vanadium plummeted nearly 33% on the JSE on Thursday, a day after it reported an operating loss of R293m in the year ended December, compared to a loss of R854m in financial 2012.

In addition to being the second-largest steel producer in South Africa, with capacity of 900,000 tonnes a year, Evraz, with China and Russia, is a big contributor to global vanadium feedstock production.

On Wednesday, Evraz again said there were matters "that may cast significant doubt" about it remaining a going concern. ……….”

Source; BusinessDay 14 March 2014

South African Steel producers face tough challenges

Challenges

• World surplus of 450mtpa

• World cost curve coming down year on year

• South African steel producers costs escalating year on year

• Aging facilities

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2009 2010 2011 2012 2013

Flat Steel Imports & Exports (mtpa)

Export Import

Increasing Steel long product imports

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

2009 2010 2011 2012 2013

millio

n to

n

Steel: Long product, increase in imports

Export

Import

• Since 2009 there has been a steady increase In the volume of long product steel imports.

• This is due to a combination of oversupply in certain global markets and lower prices compared to local prices

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Steel Demand SSA 2020

0

2000

4000

6000

8000

10000

12000

Flat Long Flat Long Flat Long

RSA Other SADC Other SSA

Steel consumption per region

Steel Consumption (2009) kt

Scenario 1 IMF Sep’11

Scenario 2 Steel per capita

12

Opportunity for South Africa - Embrace the trends

Alternative iron making technology

• Emergence of alternative technology that is capable of processing previously overlooked raw materials such as magnetite iron ore and haematite fines that does not require the use of expensive coking coal

Alternative energy instead of expensive electricity

• Harvesting waste process off gases rich in hydrocarbons can be utilised as a cheap and efficient energy source.

Low quality coal as Alternative reductant for iron making

• The application of low quality coal as a iron making reductant.

Leverage modern equipment and technology advancements

• Though the steel industry is considered as a mature industry, recent years has seen a plethora of technology advancements and accompanying process efficiency gains. The focus of the new technology is solely on enabling the steelmaker to reduce its operating cost and to increase its yields and overall efficiency, together with process reliability.

• Iron ore

– Competing with exports

• Coking Coal

– Hard coking coal imported

– Limited soft coking coal

• Scrap

– Expensive

– Quality

– Availability

• Logistics

– Availability and price / cost

• Energy

– Availability and price

• Capital Cost

– Especially greenfield

• Infrastructure

– Rail

– Power

– Port

• Environmental

– EIA duration

– Cost of environmental compliance

There are high barriers to entry into the iron and steel sector in South Africa

Alternate Technology Steel making cost

• Aligning iron making technologies with available resources enables

– Using alternate or even stranded iron ores such as magnetite and haematite fines

– Non coking coals

– Energy efficient processes, utilising process off gas recovery technology

– Optimally locating new production capacity close to market

15

Conclusions

World Steel Industry

• Increasing competitiveness due to flattening cost curve (new technology, energy efficient processes)

• Many ageing plants not viable as a consequence

• Over capacity of 450mt exerting pressure on sales prices

• Slowing demand growth projected for the next ten years

South Africa

• Severe cost pressure

• Ageing equipment increasingly unable match efficiencies of modern equipment

• Delayed and growing Capital Expenditure, “catching up” is becoming more difficult

• Traditional iron making requires expensive coking coal (partially imported)

• Frequent production interruptions, high maintenance costs and idling of Blast Furnaces

• Escalating environmental standards are expensive to adhere to

Shale gas – is this the game changer?

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