The Rising Influence of Rising Affluence

[Democritus_of_Abdera]

Re: CLF & scrap metal replacement of iron ore ....

My expectation that that there might be decreased use of iron ore as more scrap becomes available coupled with the planned increases in iron ore capacity by the big iron ore players (BHP, Vale, etc) have been major concerns when I look at CLF's long-range prospects, i.e in the 2015-2020 time frame.

That is why I was encouraged by the Investor Day Presentation highlighting the prospect that Cliff's Chrome Project will take up my feared slack in its iron ore demand in the 5-10 year time-frame (see #msg-78258185).

With respect to the scrap metal issue: William Boor (VP-Global Ferroalloys) addressed the increasing use of scrap metal in his 2012 Analyst and Investor Day presentation; a presentation that focused on Cliff's chromite project. See Dew's msg for slide set (#msg-78037739, slides 59-61). Boor argued that ferritic stainless steel production, which does not rely upon scrap metal, will roughly follow the stainless steel growth and demand despite the projected increased use of scrap metal. And, he argued that stainless steel demand will increase as developing economies seque from a focus upon infrastructure to a focus upon consumables.

What I’m going to do in the slides today is first give a little background about the stainless steel industry and how that drives our view of ferrochrome and also the industry dynamics and how the cost structure is changing, because this plays very heavily into how we think about pricing and the economics and then I’ll get into some specifics about our project.

But to start out here just select one on in the slide but it shows just the breakdown of where chrome ore ultimately ends up. And you can see that 94% goes to metallurgical applications and off that well over 90% goes to stainless steel and alloy steels. And those are the markets really that we’d be accessing with this project.

The end use markets, I’ll talk about a little bit further here, they tend to be driven by increasing income and so when you think about the cycles, particularly in developing economies, carbon steel comes first to build a lot of infrastructure, stainless steel tends to be on a little bit different cycle coming in a little on the heels of that and it’s driven by people’s increasing use of consumables or consumer demand. And so you see the types of applications and the growth rates that are expected in these different areas ranging from food and beverage, which is a big driver actually. Household goods, everything from dishwashers to silverware and transportation and then also the factories and equipment that go into making these consumer products. Those are really the drivers here

And when you boil this all down, we’ve got a view of stainless steel growing a little over 4% over this five-year timeframe. And when we compare that to external numbers that we see in projections, people are actually – this would be the low end of what you see. You see four to six for most of the outlooks that we’ve seen on the outside world, so right in line and we’re pretty optimistic about stainless steel growth. And this is how that plays out moving from about 33.5 million tons in 2010 to a 42 million ton level by the time these projects approaching startup. And again as I said in the developing economies what’s really driving this is the increase in income and economic growth.

I want to touch just briefly on this because it gets into little bit of the details about stainless steel, but as showed on the first slide, there are really two major components or types of stainless steel and the reason for getting into this is because it tells you little bit about the trends so you can make the connection from stainless steel growth and demand to what ferrochrome demand will be.

Austenitic use the bulk of stainless steel, historically about two-thirds of all stainless steel is austenitic and this goes into some of the higher quality applications. You could see examples, the aeronautics, food processing equipment. And the characteristic about austenitic is it has nickel as well and therefore it tends to be a bit higher priced, higher cost and ferritic.

The materials for both the nickel and the chromite in austenitic grades comes largely from scrap, about 40% worldwide is coming from scrap. And the trend here actually is that use of scrap is increasing, which means its intensity with virgin ferrochrome is going down on a percentage basis even though austenitic is growing as a grade.

Ferritic is starting to make inroads into these austenitic applications. And because of the cost difference, you’re seeing ferritic grades take more and more share from austenitic. And there are no recycled materials used in ferritic and so it’s a much higher intensity demand for ferrochrome. So when you couple these three trends of rising stainless steel, increasing use of scrap in austenitic, which is necessarily a good thing for virgin ferrochrome, but then the trend toward ferritic grades, what you net out is that ferrochrome will roughly follow the stainless steel growth and demand.