FeCr – short to medium term outlook Mauri Kauppi

Vice President – Sales and Marketing

Outokumpu Chrome Oy

26 February 2015

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Outokumpu Ferrochrome Integrated operating model

Mine

Works

Sales

2,7 Mt ore

850 kt FinCon

400 kt Lumpy ore

530kt FeCr

370MNm3 CO-gas

625kt slag product

~430kt internal

~100kt external

Key figures H1 2014 – World production (in million tonnes, source ICDA)

• From H1 2013 to H1 2014, chrome ore and ferrochrome production expanded

sharply (by 8 and 18% respectively)

• The huge growth in ferrochrome production following the trend of stainless steel

output volume (+ 10.3% over the same period according to ISSF)

Chrome ore and concentrate

H1 2014: 15.2 MT

H1 2013: 14.1 MT

2013: 30.3 MT

Ferrochrome

H1 2014: 5.9 MT

H1 2013: 4.7 MT

2013: 10 MT

+8% +18.8%

Business Fundaments

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• Slow growth expectations (Until H2?)

• Eurozone crisis not yet over

• Weakening of Euro vs USD

• Oil prices down

• Risk for deflation or is this a ’good’ deflation

• Restructing stainless steel continues

• Import duties against Chinese and Taiwanese stainless steel?

Europe

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• Strong USD, healthy economy but how is the budget deficit?

• Cheap energy fuelling the economy as well as monetary policy

• Lower oil prices discouraging investments on oil and gas?

Thus hurting also FeCr.

USA

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• Tightened monetary policy, credit issues

• New environmental targets

• A change from investment driven to consumer driven economy

• The ’new normal’ in China means lower growth

China

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• Duopoli China vs SA

• World economy

• Different growth scenarios area by area

• Oil prices

• Currency rates; at worst currency war

Fundamental factors related to FeCr

China and South Africa axis

• The Rand crashed against the dollar in 2014.

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• Geopolitical risks; Ukraine, MENA

• HC vs charge chrome

• Pricing mechanisms

Fundamental factors related to FeCr

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• Significant price gap in favor of HC thanks to consolidation when

Yildirim over Mechel

• ENRC is ramping up capacity; 2 out of 4 x 70 MVA DC furnaces already

started, this means more supply. Because of the price gap many customers

are now using more charge chrome instead of HC => the price gap will be

narrowing

HC vs charge chrome

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• Bench mark; widely used in Europe and Japan as a reference for long term

deals. Today heavily criticized because of un disciplined discount practice

• Ryan`s Notes; more common in the US markets

• Metal Bulletin, Platts also used

• Fix price deals

Pricing models

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Ferrochrome & Nickel prices Similar development as both predominantly used in stainless steels

Indexed (year 2000 = 100) Ferrochrome & Nickel prices development 1970-2014

• Ferrochrome outperforming Nickel after 2000, and recovered better from the latest financial crisis.

Source: Heinz Pariser

Battle of the giants China (Dragon) vs South Africa (Lion)

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China and South Africa FeCr axis

• China’s ferrochrome imports totalled 1.13 million tonnes in H1 2014 (1.84 million

tonnes in 2013),

• Including almost 740,000 tonnes from South Africa (up 76.2% from H1 2013).

• In H1 2014, South Africa now represents 65% of total China’s HC FeCr imports.

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• Most of the Chinese FeCr smelters (60…70 producers) use out dated technology

• Essentially all producers in China are losing money with current price level

• Is the government policy changing? Import duty of FeCr was removed

• Modernizing FeCr industry started 3…4 years ago but now quiet

• Essentially no domestic chromite but cheap ore helps

• A lot of un utilized capacity, at least 2 Mmts

• Power prices in par with SA producers, reductants cheaper

• SA producers have a cost advantage over Chinese producers; 5…10 Usc/lb Cr

• RMB continues to be strong

• A swing producer

• Investments abroad; Thingshan in Zimbabwe

• Cr pig iron?

China

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Japan ferrochrome industry collapse Similarly China has invested in self-sufficiency but will it be sustainable?

Ferrochrome and stainless steel output in Japan & China [Mtonnes, Ktonnes]

Source: Heinz Pariser

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• The power shortage still having an impact 2015-2016, altough in limited scale, no

buy back deals expected => increasing production

• Is ESKOM capable of solving the problem? The SA government plans to sell non core

assets to finance ESKOM investments

• No new investments announced since LION 2

• SA posessing more than 70% of world chromite ore

• Depriciation of ZAR has helped, but for how long?

• Clearly need for consolidation, too many players

• Export duties on chromite?

South Africa

Ferrochrome supply

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• Production increased:

oChina: 2.2 MT in H1 2014 (+17% YoY)

4 MT in 2013 (+14% from 2012),

o SA: 1.9 MT in H1 2014 (+40% YoY)

3.2 MT in 2013 (+7% from 2012),

o Finland and Turkey following Outokumpu

and Eti Krom investments in extra

production capacity last year

• Oman enter the ferrochrome industry in

July 2013. 3 ferrochrome projects

announced as of 2013 with a combined

production capacity of 420,000 tonnes by

the end of 2015.

• Production decreased in Russia, as well

as in Brazil, Japan and Germany.

• China remained the top ferrochrome producer in H1 2014, though South Africa is

catching up

• China produced around 2.1 MT of ferrochrome (up 17% YoY),

• While South Africa smelted about 1.9 million tonnes of FeCr (up 40%).

China and South Africa axis

China and South Africa Cr axis

• Last year, China imported more than 12 million tonnes of chrome ore and

concentrate, including UG2 (up 30% from 2012).

• In H1 2014, China’s chrome ore imports were over 5 million tonnes, down 9.5%

from H1 2013.

• Including 3.05 million tonnes from South Africa (representing 61% of China’s total

chrome ore imports).

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• The yellow bar represents

chrome ore production, the

green bar chrome ore exports,

and the red bar chrome ore

imports.

• Most countries produce more

chrome ore than they use, and

export the production surplus

to China.

Surplus of chrome ore production exported by country in 2013 (in million tonnes)

Chrome ore imported

138

702

-842

232 223 -52 209 59

137 147 56

-187

-15%

-10%

-5%

0%

5%

10%

15%

-1,000

-800

-600

-400

-200

0

200

400

600

800

1,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

[Ktonnes] Balance (lhs) Balance, % of consumption (rhs)

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Currently well supplied ferrochrome markets, no

tightening before 2017 Ferrochrome market balance1 2007-2018 [Ktonnes2]

1 CRU Market Outlook (September 2014) 2 Gross weight, charge chrome & high-carbon ferrochrome

Forecast

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• No price hikes expected during 2015

• China still the biggest FeCr producer in the world but acting as ’swing producer’

• South Africa continues to produce flat out but can we see pullouts from FeCr business?

• The power situation is gradually easing in SA but it will still take 3…4 years to fully recover

• Currency rates vs USD play an important role when forecasting BM or spot price

• Periodical imbalances can exist; f.ex. China vs, R.O.W

• The price gap between HC and charge is narrowing

• Much critized Bench Mark system continues to be there

• There is need for consolidation for both ferrochrome and stainless steel consumption to avoid remaining in an oversupply state.

• Over capacity within FeCr industry will prevail until at least 2018

Conclusions

Thank you!

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