Ferro-nickel / NPI Production from LateriteNickel Ore in China

Jiang Xinfang– Tsingshan Holding Group

1. Nickel Ore Importation in China

World Land Based Nickel Resource

Laterite72%

Sulfide28%

Resource(M Ton)

Ni Content% Ni MT % of total

Sulfide 10,500 0.58 62 27.8

Laterite 12,600 1.28 161 72.2

Total 23,100 0.97% 223 100

With Vast deposit, Laterite nickel ore will be a promising and predominant resource of nickel in future;

World Laterite Nickel Ore Resource

World Nickel Laterite Resource

others2%

As ia & Europe3%New CAL

24%

Austrlia13%

Africa8%

C&S Am erica11%

Carribean7%Indones ia

16%

Philipinne16%

Laterite nickel ore is mainly distributed in countries close to equator, as Philippine, Indonesia, New CAL, etc. which are also close to China.

Laterite Nickel Ore Distribution

China Nickel Ore Import Quantity

Nickel ore imported in China is mainly from Indonesia and Philippine. Indonesia usually provide higher nickel grade, with nickel content over 1.6%, Philippine mostly supply lower grade , with nickel content less than 1.5%.

Nickel ore importation is mainly influenced by LME Nickel price. Stimulated by high nickel price and NPI production boom, nickel ore import dramatically increased in 2007 and reached historical peak in July over 2.2M ton/m, and then dropped untill end of 2007. In 2007, total annual importation around 15,610,000ton;

Slight recovery of nickel price in Q1 2008 created high expectation and excessive importation appeared again in Q2 2008; the total importation until July 2008 reached 9,150,000 ton.

0

500

1000

1500

2000

2500

Jan-

07

Feb-

07

Mar

-07

Apr-

07

May

-07

Jun-

07

Jul-0

7

Aug-

07

Sep-

07

Oct

-07

Nov

-07

Dec

-07

Jan-

08

Feb-

08

Mar

-08

Apr-

08

May

-08

Jun-

08

Jul-0

8

'000

T

0

10,000

20,000

30,000

40,000

50,000

60,000

Indonesia Philippine New Caledonia Others LME Nickel

Laterite Nickel Ore Monthly Import Quantity & LME Nickel

Nickel ore stock

Laterite nickel ore are mainly unloaded in Rizhao, Lanshan, Tianjin and Lianyungang, which are close to the NPI production province like Shandong, Henan, Hebei, and Shanxi.

Stock keep increasing at the main ports from Q4 2007, indicating that domestic demand continuously weaken.

Congestion and demurrage during unloading continued from Q2 till now in main ports as LianYungang, Rizhao and Lanshan.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08

'000

T

Jingtang

Zhanjiang

Fangcheng

Lanshan

Rizhao

Tianjin

Lianyungang

Laterite Nickel Ore Monthly Stock in China Main Ports

Nickel Ore FOB Price & LME

0

10000

20000

30000

40000

50000

60000Ja

n-07

Feb-

07

Mar

-07

Apr-

07

May

-07

Jun-

07

Jul-0

7

Aug-

07

Sep-

07

Oct

-07

Nov

-07

Dec

-07

Jan-

08

Feb-

08

Mar

-08

Apr-

08

May

-08

Jun-

08

Jul-0

8

Aug-

08

LME

Nic

kel C

ash

Settl

emen

t usd

/ton

0

20

40

60

80

100LME Cash Settlement Ave. FOB Ni=1.6

FOB price of Nickel ore: Ni = 1.6%, moisture = 30%

FOB price is normally defined through formula based on LME nickel price, nickel content, moisture and price discount ratio;

FOB price of nickel ore ( Ni = 1.6%, Fe < 15%, Moisture < 30%) reached peak at 94 usd/wt in June 2007, and drop down to around 20 usd/ton in August 2008, mainly due to over supply and weak NPI production.

Sea Freight

22

3338 40

4550

4238

3234

3935

42

3530

2722

0

10

20

30

40

50

60

Jan-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov -07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May -08 Jun-08 Jul-08 Aug-08 Sep-08

$ U

SD

Besides FOB price, sea freight was another major factor influencing nickel ore market price.

Sea freight of vessels with capacity over 50,000 ton from Indonesia to China main ports reached 50 usd/ton in Oct. 2007, down to 32 usd/ton in Jan. 2008, increased again to 42 usd/ton in May 2008, and back to 22usd/ton, same as the price level in beginning of 2007.

Sea Freight: vessel 50,000 ton, Indonesia to China Main Ports

Market Prices of Different Grades

0

300

600

900

1200

1500

Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08

RM

B/T

0.9%-1.1% 1.4%-1.6% 1.8-1.9% 2.00%

With increasing stockpile, decreasing FOB price and sea freight and weak demand, the market prices of various grades have been decreasing from beginning of 2008.

For low grade with Ni less than 1.1%, market price dropped around 25%; while for other high grades with Ni over 1.4%, market price dropped around 50%.

Market Price of Nickel Ore with Different Ni Content

Importation Cost & Market Price

Importation cost at unloading port = FOB + sea freight + VAT + port charges;

When nickel price skyrocketed in May 2007, spot market price of nickel ore reached historically zenith and unit margin around 500 RMB/Ton; Starting from August until end of 2007, market price stayed lower than importation cost;

Slightly increase of nickel price in Q1 2008 encouraged the production of NPI and stimulated the demand of nickel ore, which warm the nickel ore market and end the loss of nickel ore trader; Following nickel price drop in Q2 and Q3 bellow break-even point of NPI, NPI producers mostly stopped production, nickel ore demand shrink, and market price significantly dropped to level lower than importation cost again.

(RM

B/t)

0

200

400

600

800

1000

1200

1400

1600

1800

Jan-07 Mar-07 May-07 Aug-07 Oct-07 Nov-07 Jan-08 Mar-08 May-08 Aug-07-600

-400

-200

0

200

400

600

Mar

gin

Importing cost Spot Market Price

Import Cost & Market Price of Nickel Ore: Ni = 1.6%, moisture = 30

Outlook of Nickel Ore Price in 2008

Over supply of nickel ore:

– Nickel mines in medium & small scales started production in 2008;– Fierce competitions from various nickel ore miners queeze the mining margin and result in

lower FOB;– Higher stock level to be maintained in China main ports, over 7,000,000 ton till end of 2008;

Restrained Demand of nickel ore:

Even major local stainless steel producers overcome technical problems of NPI application and started to accept NPI in 2008, but the production of NPI is limited due to

– stainless steel production cut esp. 300 series from major stainless steel producers will continue from Q2 till end of 2008;

– most of blast furnaces were shut down due to high production cost and low nickel price;

– electric furnaces mostly turned to the production of other Ferro-alloys esp. Fe-Cr, Fe-Mn etc.;

In conclusion, nickel ore will be in oversupply in 2008, and market price will be kept in low level close to importation cost.

2. NPI Production in China

44%

3%29%

5% 11%

8%

NPI Cost Structure - BF

Nickel ore, coke and electricity are main factors influencing NPI production cost.

In January, nickel ore account for 44% of total production cost of NPI, while coke for 29%;

In August, with surging price of coke and decreasing price of nickel ore, coke account for 46% of total cost of NPI, and ore account for 27%;

In general, even nickel ore price dropped greatly, but due to coke price dramatically increase, NPI total production cost stay in relatively same level from January to August 2008.

27%

8%3%46%

5% 11%

Nickel ore cost

Inland transportation

Electricity

Coke

Coal

Others

Jan. 2008 Aug. 2008

Preconditions:

1) Ni % in ore = 1.6%; Ni % in NPI = 5%; Inland Transportation = 150 RMB/WT;

2) January 2008: Ni ore market price = 650 RMB/WT, Coke market price = 2050 RMB/KWH

4) August 2008: Ni ore market price = 400 RMB/WT, Coke market price = 2300 RMB/KWH

Cost structure of NPI Production in China

Market Price of Coke

From beginning of 2007, average coke prices have been tripled until July 2008, which contributes a dramatic increase in nickel pig iron production costs.

Due to production cut of NPI and pig iron, coke price started to decrease in August 2008.

Market Price of Coke in Shandong Province: Ash < 12.5%, S <0.8%

RMB/t

1000

1500

2000

2500

3000

3500Ja

n-07

Feb-

07

Mar

-07

Apr

-07

May

-07

Jun-

07

Jul-0

7

Aug

-07

Sep

-07

Oct

-07

Nov

-07

Dec

-07

Jan-

08

Feb-

08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-0

8

Aug

-08

NPI Cost Structure – Existing EF

Preconditions:

1) Ni % in ore = 1.8%; moisture = 30%, Ni % in NPI = 10%;

2) Nickel ore price ( Ni % = 1.8%) = 550 RMB/WT; Inland transportation cost = 250 RMB/WT

3) Electricity price = 0.5 RMB/KWH

Compared with major electric furnaces for Fe-Ni production in the world, the existing electric furnaces in China are in small capacity and have

• no rotary kiln - higher electricity consumption;

• mostly designed for other Ferro-alloy – lower production, lower nickel recovery;

•short life time of refractory lining – higher maintenance cost, lower production time;

Compared with blast furnace, the production cost of NPI from existing electric furnaces in China is slightly cheaper than blast furnace.

37%

28%

17%

8% 1% 9%Nickel ore costElectricityInland TransportationCoalCalcium limeRefractory Electode, labor, tax and others

Cost structure of NPI Production by electric furnace in China

Cost Structure – New Project EF

19%

6%6%2%14%

53%Laterite OreElectricityFuel coalReductant coalRefractoryLabor, tax and others

Preconditions:

1) Ni % in ore = 1.8%; moisture = 30%, Ni % in NPI = 10%;

2) Nickel ore price ( Ni % = 1.5%) = 550 RMB/WT

3) Electricity price = 0.50 RMB/KWH

Compared to blast furnaces and existing electric furnaces, electric furnaces of newly established projects are cost saving and environmental-friendly, with

• rotary kiln – lower electricity consumption;

•dedicatedly designed and big capacity - higher production & nickel recovery, lower maintenance;

•close to sea ports – no inland transportation cost;

Except sea freight as additional cost, newly built electric furnaces in China have no disadvantages comparing with other Fe-Ni production furnaces in other countries.

Cost structure of NPI New Projects in China

Major NPI Projects in China

Investor Location Nickel Capacity(tpa)

Process ProductionTime

Sinosteel & Baosteel Hebei 16,000 2*33000 kva 2009 Q2

Fujian Desheng NickelProducts Co. Ltd Fu Jian 50,000 2*450 M3

4*25000 kva2009 Q3

Qinzhou Heng XinNickel Products Co. Ltd Guangxi 10,000 4*12500kva 2009 Q1

Tsingshan Holding Group Fu Jian 20,000 2*33000 kva 2009 Q2

Qin Hai Aokai Coal Development Group Co.ltd Qing Hai 20,000

4*125000 kva6*25000 kva 2009 Q2

3. NPI Demand Analysis

Stainless Steel Production In China

In 2007, the total stainless steel production reached over 7,550,000 ton, which was 15 times the production of 2000.

In 2008, even stainless steel market stays weak, but the production will continue the growth rate as 1.5 x GDP as around 15% to reach 8,600,000 ton;

Continuous growth of stainless steel production in China will create lasting growth of Ni consumption.

500 6001050

1800 2084

3290

5292

7550

8683

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

2000 2001 2002 2003 2004 2005 2006 2007 2008

kt

Stainless Steel Production in China

Stainless Steel Product structure

72% 73.0% 73.0% 72.0% 68.0% 64.0% 64.0%56.0% 58.0% 58.0% 56.00%

23% 22.0% 21.0% 21.0% 23.0% 25.0% 23.0%27.0% 25.0% 26.0% 27.00%

5% 5.0% 6.0% 7.0% 9.0% 11.0% 13.0% 17.0% 17.0% 16.0% 17.00%

0%

20%

40%

60%

80%

100%

120%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

200

400

300

From 2000 to 2006, 200 and 400 series percentage increased due to high growth rate and substitution of 200 & 400 in applications as automobile, household appliance, and architectures, etc.

In 2007, due to high and unstable nickel price, 300 series dramatically decreased by 8%; in the coming years, due to technical reasons, the percentage of 300 will maintain over 55%;

Percentage of 300 and 200 & 400 series stainless steel production in China

Nickel Demand of Stainless Steel Production

103

151

247

317

0

100

200

300

2004 2005 2006 2007

kt

60.3%62.6%

67.2%

38.9% 39.7%37.4%

32.8%

61.1%

30.0%

50.0%

70.0%

2004 2005 2006 2007

kt

Nickel consumption of Stainless Steel in China Percentage between primary and secondary Ni for stainless steel production in China

Figures proved the continuously increase of Nickel consumption from stainless steel production; but the increase rate is mild in 2007, due to stainless steel production cut and 400 & 200 percentage increase;

Percentage between primary and secondary nickel shown that primary nickel was more and more preferable to stainless steel producers;

In 2007, NPI contribute around 90,000 nickel for stainless steel production in China, as major driver of primary nickel percentage increase.

Primary Ni

Secondary Ni

Market Prices of NPI

NPI with Ni content 10% was slightly increased by 9% in March 2008, then dramatically dropped by 40% and close to production cost from March to Sept. 2008.

NPI with Ni content 5% was also increased by 14% in March, then dropped by 20% till Sept. 2008 with no margin for producers.

For NPI with Ni content less than 2%, it was mainly used as major resource of Iron for stainless steel, esp. 200 series. Due to increasing iron price, NPI with nickel less than 2% increased greatly in August, and some blast furnace turned to produce low grade NPI for better margin. But in Sept. when iron price start to drop, low grade NPI price also started to drop.

1500

1700

1900

2100

2300

2500

2700

2900

3100

Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08

Ni:1.6%-1.7% Ni:4%-6% Ni:10%-15%

Yuan/1%Ni

NPI Market Price in China

Comparison of Primary and Secondary Nickel Price

The curves explained nickel cost difference from various resources as nickel, imported Fe-Ni, local NPI, and SS scrap;

Deduct the cost of iron and chrome from Fe-Ni, NPI and SS scrap, NPI was shown a big cost advantage comparing with other nickel resources in 2007 and first half of 2008;

With nickel price further down in Q3 and increasing production cost of NPI, market price of NPI has no room to decrease further, and gradually lost cost advantages comparing with Fe-Ni import and Nickel.

100,000

130,000

160,000

190,000

220,000

250,000

280,000

Jan Feb Mar Apr May Jun Jul Aug Sep

(RM

B/M

T)

Nickel Imported FeNi Nickel pig iron Domestic scrap

Nickel cost comparison

Comparison of Primary and Secondary Nickel Price

The curves explained nickel cost difference from various resources as imported nickel, local nickel, imported Fe-Ni, local NPI, and local SS scrap based on data on Sept. 15, 2008.

As a resource of nickel, NPI has lost cost advantage comparing with Fe-Ni imported, and slightly cheaper than nickel.

153,500

145,630

132,245

142,135

151,249

120000

125000

130000

135000

140000

145000

150000

155000

160000

2008/9/15

RM

B/T

on

Nickel Import Domestic Nickel Imported FeNi Nickel Pig iron Domestic 304 scrap

Nickel cost comparison on Sept. 15, 2008

NPI Consumption

NPI application will be temporarily threatened by low LME nickel price below 18,000. Diminishing cost advantage will limit the consumption to certain degree, but NPI will not disappear.

Production cost cut from ore, coke, sea freight and technical improvement to reduce consumption have supported producers left in the market;

NPI Consumption Estimated in 2008:

• 180,000 – 250,000 ton/m

• Mostly with nickel content 5 – 8%, 1-2% mainly for 200 series

• 120,000 – 150,000 ton

Challenges and Opportunities

Challenges

– Nickel price below break even point;– Production facilities and process to be upgraded;– Sea freight increase and instability;– Export policy changes of nickel ore;– More and more strict requirements of environmental protection and energy

saving;

Opportunities

– Consistent growth of Chinese stainless steel industry create promising demand of NPI;

– New projects with advanced equipment and process will insure thecompetitiveness of production cost, product quality, and environmental protection in the long run;

– Sufficient nickel ore supply secured through active oversea investment;

Thanks for your attention!