Market Overview

Mining and steelmaking are capital intensive businesses, therefore, the accuracy of decisions taken today will notably affect the Company's performance results in the future. Thus, a long-term macroeconomic and strategic analysis of the sales markets, both Russian and global, is the focus of attention of the Company's management. The Company's management continually examines strategic opportunities and evaluates their "viability", inter alia, taking into account long-term trends in the world and Russian economy.

Iron ore market

The world market of iron ore displays a high level of consolidation. Four leading companies (Vale, BHP Billiton, Rio Tinto, and FMG) control over 70% of the world iron ore trade. The leading countries producing commercial iron ore are Australia, Brazil, China, India and Russia, which together produce over 75% of iron ore. In 2014, different trends in iron ore production volumes were observed across the regions. Production of ore grew in Australia and Brazil only while in output in other regions decreased or remained at the level of 2013. Iron ore production by Russian mining and ore concentrating enterprises in 2014 amounted to 105 million tonnes, slightly above the level of 2013.

Iron Ore Production by Countries,
million tonnes

Global Iron Ore Reserves in 2014, billion tonnes

In 2014, the average annual iron prices dropped to USD 97 per 1 tonne CFR China, less than the price level for 2013 (USD 135 per 1 tonne CFR China); and in fact, the price dropped to a minimum of USD 71 per 1 tonne CFR China at the end of the year. Price continued to slide in Q1 of 2015.

The price mostly declined because of the economic situation of China, the largest steel producer in the world with 2/3 of the world’s iron ore import. Two factors, a considerable additional volume of CIO (crude iron ore) supply from Australia due to the growing production by Rio Tinto, BHP Billiton and FMG, and a slowdown of the Chinese economy, made the most significant impact on the prices.

Limited access to credit resources for the Chinese steel producers in 2014 and a consequent increase in stocks of ore in the harbours, had a further impact on CIO prices.

Long-term development trends in the CIO market take shape under the influence of different factors. On the one hand, ore quality at the world market is gradually deteriorating. Deterioration of the quality of incoming ore increases the costs of steel production and leads to increased volume of harmful emissions by steelmakers. At the same time, a tougher environmental policy is a growing tendency all over the world. In particular, China, which is still a driving force of the world’s demand for CIO follows the example of the developed countries (the USA and European countries), setting the course for toughening of its environmental requirements. A stricter policy implies mitigation of harmful environmental impact of steelmaking facilities, inter alia, by improving the quality of CIO consumed.

The toughening of environmental requirements in the global ferrous metallurgy and deterioration of CIO quality set the stage for increasing margins for raw materials with high ferrum content. At the same time, excessive supply of CIO slows down demand for highquality raw materials. Metalloinvest is conducting targeted work on the assessment of factors influencing the development of CIO market, and considers the findings in the development of mid-term and long-term development plans.

Iron Ore Price in 2010–2014, CFR China, 62% Fe, USD/tonne

At present, the price level is determined by the prices at the spot market in China, using the Platts indices, The Steel Index, or the MetalBulletin index. However, in May 2012, two physical iron ore markets opened in Beijing and Singapore. In 2013, trading in ore futures started at the Dalian Futures Exchange (China). The transition to price formation on the spot market continues as price-related information becomes more accessable.

Steel Production in China in 2010–2014, million tonnes

HBI/DRI market

HBI/DRI (hot-briquetted iron and direct reduced iron) is an important component in the production of high-quality steel grades that helps cut the cost of production of steel products.

The application areas of metallised raw materials vary widely. HBI/DRI may be used at integrated enterprises in blast furnaces and basic-oxygen furnaces, as well as at mini plants in electric arc furnaces. Low concentration of contaminants in HBI/DRI allows to produce high-quality steel, which is a key factor for a number of industries, including automotive and machine-building. In conditions of shortage of high-quality metal scrap, the use of HBI/DRI can ensure stable production of high-quality steel products.

HBI is a high added-value product due to energy efficiency and environmental compatibility of the HBI production process, low concentration of contaminants, stability of chemical composition (the quality of which is better than metal scrap), high bulk density and absence of the seasonal nature of fluctuations of supplies.

High quality of raw iron ore and availability of big volumes of natural gas make for an important prerequisite for the development of HBI/DRI production. The shortage of these resources impedes the growth of HBI/DRI production in many regions of the world.

Metalloinvest has all the necessary resources, and the Company's long-term strategy is focused to a large extent on the development of production of iron ore products with high added value, primarily HBI.

HBI/DRI production is characterised by high concentration. As reported by WSA, HBI/DRI produced in 2013 totalled 74.7 million tonnes, 66.6% of which were manufactured by the five largest producers (India —23.8%, Iran —19.4%, Mexico —8.2%, Saudi Arabia —8.1%, and Russia —7.1%). Most metallised raw materials (up to 80%) are consumed on situ to satisfy internal demands of steelmaking enterprises, and only limited amounts are shipped to external consumers.

According to WSA, between 2010 and 2013 the global production of HBI/DRI grew after a decline in output in 2009. In 2014, the global production of HBI/DRI, as estimated by WSA, decreased by approximately 7% to 69.5 million tonnes. The stagnation of metallised raw material production of the largest producers (India and Iran) was accompanied by notable reduction of HBI production in Venezuela and in Trinidad and Tobago. Decrease in the production by Venezuela, the world leader in the HBI production capacities, allowed Metalloinvest to strengthen its positions at the world market of commercial HBI.

Global HBI/DRI Production, million tonnes

High consumer properties of HBI/DRI favour the promotion of these products at the world market. As reported by Midrex, a reputable source of metallised raw material market statistics, the HBI/DRI production capacities will increase by at least 5 million tonnes a year in the next ten years, and the production volume will grow to 200 million tonnes by 2030.

Global HBI/DRI Exports, million tonnes

In 2014, Metalloinvest produced 5.3 million tonnes of metallised products (HBI/DRI). The HBI production volume amounted to 2.3 million tonnes, 81% of which has been shipped for export (the main consumers are large EU and US steelmaking companies). Metalloinvest is the only producer of metallised products in CIS countries and maintains the leading position in global DRI exports. Metalloinvest with about 40% share of the world commercial DRI market in 2014 uses all available opportunities to meet the growing demand from high-grade steel producers.

Factors supporting HBI/DRI demand:

  • HBI/DRI is a multi-purpose, high-quality and effective alternative to pig iron and metal scrap. HBI/DRI may be used at integrated enterprises in blast furnaces and basic-oxygen furnaces, as well as at and at mini plants in electric arc furnaces.
  • Toughening environmental requirements for the production process. In the light of cheapening of raw material for blast furnaces, requirements for the amount of emissions of harmful admixtures released into the air in the process of production become tougher. Crude steel production in electric arc furnaces excludes the use of coke.
  • Deterioration of quality of metal scrap. A regular cycle "metal scrap —steel making —steel products —metal scrap" causes the accumulation of contaminants in the ready products. In order to control chemical composition, steel manufacturers add HBI/DRI to metal scraps in steel making units, thus reducing the concentration of contaminants.
  • Toughening requirements for the quality of steel products. For the purpose of ensuring quality, reliability and longer service life of steel products (bridge structures, cars, pipelines), the manufacturers of steel structures place high requirements for steel products, which in return results in the need to use high-quality raw material in crude steel production.
  • Reduction of the volume and shortage of high-quality return scrap in CIS countries. As a result of cutting the open-hearth steel making and starting the use of electric arc furnaces, as well as implementing continuous steel casting, the amount of return scrap in CIS countries decreased. The tendencies towards increasing the deficit of metal scrap create pre-requisites for a gradual increase in demand for metallised raw materials.

Key advantages of HBI/DRI production as against pig iron:

  • Compactness of production facilities. HBI/DRI production is more compact and it does not require sinter plants, coke and by-product processes, and blast furnaces.
  • Environmental compatibility. Use of natural gas as a reducing agent in the process of HBI/DRI production instead of coke is more environmentally compatible. Reduction of CO2 emissions is 50–60% compared to production of pig iron in blast furnaces.
  • Energy efficiency. The process of direct iron reduction goes on in a solid phase at 900°C, which is much lower than the melting temperature of pig iron, 1,250°C. Energy saving in production of HBI/DRI amounts to approximately 35% compared to production of pig iron.

Steel market

In 2014, global steel production, as reported by WSA, grew to 1,662 million tonnes (+1.2% against 2013). Asia remains the key growing region of the world in steel production in absolute terms, where steel output increased by 16.2 million tonnes (+1.4%). The highest production growth rate was recorded in the Middle East, where steel production in 2014 grew by 7.7% (by 2 million tonnes). Steel production in the European Union is gradually recovering, rising 1.7% in 2014 (+2.9 million tonnes). In North America, steel production grew by 2% (+2.3 million tonnes). In Africa, production declined ( by 0.7% or by 0.2 million tonnes yearon- year). In other regions, production volumes dropped as well: in the CIS by 2.8% (by 3 million tonnes), in South America by 1.4% (by 0.6 million tonnes).

Growth in Steel Production by Regions in 2010–2014, %

Steel Production by Leading Manufacturers in 2010–2014, million tonnes

In 2014, Metalloinvest maintained its leading positions in the world market:

the global leader
at the market of commercial HBI

2nd largest
iron ore reserves in the world
(14.4 billion tonnes)

3rd place
largest producer of pellets globally

Factors affecting Company’s activity

Metalloinvest supplies products to all largest world markets, the Russia, Eastern and Western Europe, Asia and the Middle East being its priority regions. The macroeconomic situation in these countries influences the Company's activities and affects the changes in the Company's revenue from the sale of goods, products, work, services, and income (loss) from its core activities. Forming its long-term commercial relations with the largest consumers of its products in Russia, Metalloinvest seeks to ensure stable supplies despite a decline in the country’s GDP predicted by the International Monetary Fund (IMF) in the next two years. In spite of unfavourable macroeconomic conditions in the Russian Federation and in some regions consuming Metalloinvest’s products, the Company maintains sales of its products and aims to increase them and continues to optimise the structure of supplies in order to maximise its income and strengthen long-term relations with the consumers.

GDP Growth in 2014–2016, %

World economy3.33.53.8
Developed countries1.82.42.4
Developing countries4.44.34.7

Shipments to Russian consumers represent a substantial share of the Company’s revenue (41.1% in 2014 vs. 45.6 % in 2013), therefore, the state of the Russian economy significantly impacts the Company's performance.

Introduction of sanctions and low oil prices resulted in the reduction of predicted growth rate of the Russian economy (-3.8% in 2015 and -1.1% in 2016). However, it is expected that the need to maintain economic activity in Russia will lead to an increase in infrastructure projects and will support the niche markets in which the Company operates. Metalloinvest monitors carefully the largest federal investment programmes and adjusts its plans to build on opportunities provided by these projects.


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