Photo: Marcelo Coelho

The structural value of higher grade ore

Rogerio Nogueira – Iron Ore and Coal Marketing Director
Singapore Iron Ore Week 2018
24 May 2018
Disclaimer
This presentation may include declarations stating Vale’s expectations concerning future events or results.
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could give rise to results different from those estimated by Vale, please consult the reports filed with the
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discussed in the “Estimates and projections” and “Risk factors” sections of Vale’s Annual Report – Form 20F.
Agenda

1. Structural changes in Chinese steel production and

iron ore consumption patterns

2. Cost and productivity benefits of using high grade ores

3. Trends in iron ore product quality and Vale’s

commitment to the steel industry
Agenda

1. Structural changes in Chinese steel production and

iron ore consumption patterns

2. Cost and productivity benefits of using high grade ores

3. Trends in iron ore product quality and Vale’s

commitment to the steel industry
 Beijing opera
house November
2015
Beijing opera
house November
2017
From this… …to this!
 7

Chinese steel industry capacity utilization increased with

additional plant closures and higher pig iron production
Steel industry capacity utilization Pig iron production
% Mt
7 Mt 12 Mt
95% +1.0% +1.8%
90%
711
85%
698
80% 691
75%

70%

65%

60%
2014 2015 2016 2017 2018 2019 2020 2021
2015 2016 2017
Source: NBS, CRU
7
Increased capacity utilization drove up demand of higher
grade ores
Share of high grade ores in burden mix1 Breakdown of inventory at Chinese Ports2
% Mt
Lower Grade Lower Grade
Higher Grade 80
Higher Grade
70
100% 100% 100%
60
50
40
30
20
10
35% 36% 40%
0

Jan-16

Jan-17

Jan-18
Apr-16

Apr-17

Apr-18
Oct-16

Oct-17
Jul-16

Jul-17
2015 2016 2017

Notes: 1Excludes pellets and Chinese Concentrate; 2 Data from twelve (12) main Ports; High Grade Ores in these charts are 63% Fe and up
Source: NBS, Mysteel
8
 And reinforced the relative value of higher grade ores
Iron ore price spreads: 65 to 58% Fe MBIO Yearly Average
US$/t xx Differentials

30

MB65
20

10

0 MB62

-10

-20

-30
MB58
-40
Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18

19 41 47
9 Source: Metal Bulletin
9
 Agenda

1. Structural changes in Chinese steel production and

iron ore consumption patterns

2. Cost and productivity benefits of using high grade ores

3. Trends in iron ore product quality and Vale’s

commitment to the steel industry

10
The cost reduction associated with the use of high grade ores
is significant
Impact on hot metal costs¹ (high x low grade ores²)

US$/t
▪ Slag rate
▪ RDI (Reduction
▪ Flux and burnt lime degradation index)
$/dmt of
consumption
iron ore
▪ Coke breeze
consumption
▪ BF metallic burden
consumption 14,6
20,5 19,4

5,9

Metallic burden impact Coke consumption Value impact on hot Value impact on high
impact metal costs grade ores

Notes: 1) Cost differentials based only on transformation costs, not on acquisition costs; assuming coke cost of $280/t (HCC CFR at Chinese mills of $215/t, SSCC of $125/t) and PCI of $140/t
2) High grade ore: Fe: 65%; Low grade ore: Fe: 56.6% 11
Additionally, the use of high grade ores increase blast furnace
productivity
Schematics of a blast furnace Impact on productivity

Slag rate
25% reduction
COKE
SINTER

COHESIVE
8% Volume effect
x
ZONE

HEATED
AIR
Increase in blast
~20% furnace
productivity
+ Slag volumetric
30% share in BF
burden
Permeability
12% effect
Increase in slag
reduces blast furnace
productivity

Notes: High grade ore: Fe: 64.5~65%; Low grade ore: Fe: 56.6%; slag rate of low grade ores @ 395 kg/t vs 292 kg/t for high grade ore. Considering 75% of sinter in metallic burden
12
High grade ores have a significant financial impact even in
scenarios of more stringent steel margins
Productivity value of high vs low-grade ores1 Historical rebar margins in China2

US$/dmt of high grade iron ore US$/t Yearly Average Margins

300 1 109 94

200

27,8
100
19,7
11,7
0

50 100 150
-100
Steel margin ranges (US$/t) 2016 2016
2016 20172017
2017 2018
2018

Notes: 1High grade ore: Fe: 65%; Low grade ore: Fe: 56.6%. 2Margins = Rebar spot price – raw materials cost – average conversion costs (Mysteel)
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Combined benefits of higher x lower grade ores
Relative values of high to low grade ores Assumptions
(US$/dmt of iron ore)

Low demand scenarios High demand scenarios

▪ Blast furnace capacity as the bottleneck
330

22.5 34.2 42.2 50.3 for the calculation of productivity gains

~45
Coke Prices $/t (cost driver)

▪ Based on the operation of a typical

280

19.4 31.1 39.1 47.2 Chinese mill1

▪ Steel mills working mostly with imported

230

16.2 27.9 35.9 44.0 ores with restrictions in Al2O3

~20 ▪ Availability of high & low grade ores as
180

13.1 24.8 32.8 40.9 per current supply

0 50 100 150

Steel Margins $/t (productivity driver)

Note: 1Typical Operation: 75% Sinter + 10% Aussie Lump + 15% Domestic pellet, BF Slag: B2: 1.13, MgO: 9.0%, Al2O3: 15.5% max
14
Agenda

1. Structural changes in Chinese steel production and

iron ore consumption patterns

2. Cost and productivity benefits of using high grade ores

3. Trends in iron ore product quality and Vale’s

commitment to the steel industry
Investment in mining has decreased and mine depletion rate
is now poised to go up
FAI1 in ferrous mining industry in China Iron ore CAPEX by major Australian players

RMB billion USD bi

200 20

150 15

100 10

50 5

0 0
2010 2011 2012 2013 2014 2015 2016 2017 2018A 2010 2011 2012 2013 2014 2015 2016 2017
1 FAI= Fixed Asset Investments
Source: NBS, Miner’s reports and Vale
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Vale’s role in improving overall ore quality in China has gained
importance
China iron ore imports average Fe content1
% Fe

62,00 1,00
Gap
61,7 Fe content imported ore into China 0,90
Fe content imported ore ex-IOCJ into China 0,80
61,50 61,4
61,5 61,2 0,70
61,1 0,60
61,0 61,0
61,00 61,2 60,9 60,9 0,50
60,7 60,7 0,40
60,8 0,30
60,50 60,6
60,5 60,5 0,20
60,5 60,4 60,4
60,3 0,10
60,00 0,00
2010 2011 2012 2013 2014 2015 2016 2017 2018E 2020E

1Excludingdirect charge ore

Source: NBS, Metal Bulletin and Vale 17
 18

Vale is committed to supplying high quality products to the

market
Vale Sales1, Higher Grade Ore
% Share

Carajás Blend

40%

40%
42%
40%
35%
23%
14%
5%
2015 2016 2017 2018E

1 Does not include pellets and pellet feed for pelletizing

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Final remarks
▪ The Chinese supply side reform not only successfully tackled
pollution but also accelerated structural changes in iron ore
consumption patterns

▪ The cost reductions and productivity benefits of using high grade

ores became more evident and drove up price differentials
between low and high grade ores

▪ Vale’s product portfolio will deliver even higher value as

depletion rates intensify

19