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ANDRZEJ M KOTAS
African Steel Master Class
Dubai, UAE - 4th June 2014
Andrzej M Kotas
African Steel Investment Opportunities
Contents
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Introduction
Why Africa?
Competitive landscape
Challenges of technology and quality
Steel costs - raw materials, labour, energy
Steel prices
Investment opportunities
Industry evolution – the next 5 years
Introduction
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Andrzej Kotas – steel expert of ~25 years
MD of Metals Consulting International Ltd
Founder of http://www.steelonthenet.com
Steel industry specialist: restructuring,
investment planning, feasibility studies
• Central & Eastern Europe, 20 years ago
• Middle East, 10 years ago
• 2014, East & West Africa (today’s focus)
Why Africa?
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EUROPE
AFRICA
Steel overcapacity1
Stagnating market2
BAT/emission controls
CO2-related costs
Energy & labour cost
• Little competition
• Underdeveloped
demand3
• Few capex controls
• Tariff protection
• Low cost inputs
1: OECD in December 2013 noted a current excess of global steelmaking capacity of over 300 million tonnes
2: EU market decline since 2007 peak has been ~25% in tonnage terms
3: Steel demand in many parts of Africa is still ~30 kg/capita versus ~200 kg/capita worldwide
Competitive landscape (1)
African
production is
often
technologically
behind1
• Average West European economy
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Integrated and EAF-based steelmaking with CC
One or two large 2-3 mt/year steelmakers making HRC
Perhaps two 1 mt/yr cold rollers / HDG producers
Perhaps two or three 1 mt/yr long product plants [bar, rebar] with
some special steel e.g. SBQ
• Typical African economy
• Only scrap-based steelmaking. Mostly very small steelmakers
each with 40-50kt steel capacity
• No HSM or H/S mills. Maybe 1-2 reversing CRMs <125kt
• Many small rebar producers ~40kt/year each
• No special steel
1:
Thus, ingot shops are common. Rebar is twisted rather than thermo-mechanically treated and often cold-drawn.
Competitive landscape (2)
# Facilities
Angola &
Nigeria have
similar
capacity
profiles
Steel
Plate
HRC
CRC
Coated
H/S
LL
W Tube
Kenya
9
0
0
2
1
0
12
7
Tanzania
2
0
0
1
1
0
2
2
Uganda
3
0
0
1
1
0
5
1
Total
14
0
0
4
3
0
19
10
Average plant size, kt
40
n/a
n/a
85
70
n/a
40
30
Local industries are dominated by small-scale steelmaking
and production of light long products [mostly rebar]
Analysis is at end-2013. Figures shown are production capacities / year. HRC denotes hot rolled coil, CRC is cold
rolled coil, H/S is heavy sections and LL is light long products.
Competitive landscape (3)
• These differences have certain supply-side
implications
• Semi-finished imports often significant
• Indigenous raw materials such as iron ore
and coal often unused1
• Competition often non-existent
• Downstream production often very
fragmented and very small-scale2
1:
Large scale facilities producing several million tonnes / year of steel via BOF-based steelmaking usually cannot be
justified by market size
2: In some parts of East or West Africa, it will be quite normal to find a half a dozen firms supplying a 500 kt/year rebar
market. In Europe, a market of this size would be served by a single steelmaker
Challenges - technology
• African environment better lends itself to
different steelmaking technology
• Lack of a well-developed grid and frequent
power outages mean that induction furnacebased steelmaking is often preferred to EAF
steelmaking
• Induction furnace scale of ~20-40kt/year also
better suited to the smaller market size
• This gives significant capex advantages1
1:
An average size 650 kt/year EAF will involve ~$110m of capex. An average 40 kt/year IF may cost just $4m
Challenges – quality (1)
• Quality of African-produced steel is
sometimes below that of Western standards
• Rebar in particular, is often locally produced
as a low tensile- strength product1
• This explains the existence of a significant
import market for British Standard rebar
• Standards development represents a real
opportunity for local investment
1:
In Nigeria for example, ‘Nigerian standard’ rebar cannot be used for construction of multi-storey buildings. BS4449
rebar is imported instead. For discussion see http://www.vanguardngr.com/2011/01/new-standard-for-steel-industry/.
Similar rebar quality issues arise in other countries http://news.nationalgeographic.com/news/2013/13/130425bangladesh-dhaka-building-collapse-world/
Challenges – quality (2)
• Chart shows a recent
analysis of rebar quality
in Nigeria
• TMT quality (BS4449)
was all imported
• TMT rebar commands a
~10% price premium1
• The quality issue offers
an investment opportunity
1:
TMT rebar is equivalent to BS4449 rebar in chart above
The demand trends
are to greater use of
better quality steel
On a 250kt rebar mill, this premium alone would provide additional revenue of $15m / year if rebar sells at $600/t
The story so far …
• Many countries in East or West Africa can be
characterised in terms of under-developed
demand & little competition
• Technology is often dated
• Quality can be below international norms
• This creates many supply-side opportunities
underpinned by evolving demand1
How about the industry economics?
1:
Meaning greater steel volumes, broader product mix, with steel produced to higher standards.
Steel costs – raw materials (1)
• Africa is known to have abundant reserves of
iron ore
• Typical selling price iron ore lump:
$150/tonne1
• Typical excavation cost: $50/tonne2
Infrastructure and mine development
costs will be significant, but over time,
African iron ore mining should
develop into a colossal cash cow
1:
2:
Typical international price in 2013, 65% Fe content, fob basis
See http://www.steelonthenet.com/kb/iron-ore-extraction-costs-2013.html
Steel costs – raw materials (2)
• Ferrous scrap remains a dominant steel
making raw material in many parts of Africa
• Scrap export bans in COMESA countries
and in ECOWAS mean that the scrap price is
sometimes [not always] $100 or more below
the international market price
• Illicit scrap trade is non uncommon
Steel costs – raw materials (3)
• Chart shows an analysis
of 2013 scrap-based
liquid steelmaking costs
in West Africa
• Scrap is a dominant cost
but priced at $250/t not
$375/tonne
• This has major impact on
steelmaking economics
1:
Scrap availability is
often also an issue1
I suggest a drive around Luanda. The Angolan capital is littered with automotive carcasses – suburbs also
Steel costs - labour
• Some African labour costs
are ~10% of those in the EU
• Productivity is much worse
• On a workforce of 250, an
employer can nonetheless
save $2.5m per year
• Restrictive practices as in
some parts of EU don’t arise
1:
Chart adapted by MCI from https://www.destatis.de/EN/PressServices/Press/pr/2013/03/PE13_116_624.html
1
Steel costs – energy (1)
• World (and African)
electricity prices per
unit highly variable
• Nigeria is low cost,
Ghana is high cost
• Congo HEP could
radically reduce future
electricity costs
1:
Nigerian costs assume in-house power generation from lowcost gas. Ghana costs assume own sub-station.
Source: KPMG report ‘Economic analysis in relation to the Latvian obligatory electricity surcharge’ November 2012
Construction of Congo’s Grand Inga HEP project is scheduled to start in 2016. See
http://guardianlv.com/2014/04/worlds-biggest-hydro-power-project-bigger-than-chinas-three-gorges-in-africa-given-goahead-by-world-bank/
2:
Steel costs – energy (2)
• Other fuel costs also
show much variability
across Africa
• Nigeria has very low cost
gas
• Angola also has
favourable fuel oil prices
Region
Fuel
Price
World
Fuel oil
Nat gas
$14/GJ
$17/GJ
Nigeria
Nat gas
$4/GJ
Angola
Fuel oil
Nat gas
$10/GJ
• Offshore oil and gas exploration is
currently underway on East African coast
Steel prices (1)
• One of the most attractive aspects about
steel investment in Africa is the import
tariff on imported finished steel goods
• Such import tariffs are imposed both by
ECOWAS and by COMESA, with WTO
approval1
• The tariffs radically transform steelmaking
profitability
1:
MCI understand that the purpose of these tariffs is to encourage indigenous producers to invest in new capacity,
thus benefiting employment and the balance of trade.
Steel prices (2)
COMESA import tariffs, 2014
Product
Tariff
Semi-finished steel
• For example, COMESA
import tariffs are up to 25%
• On a tonne of HDG sheet
costing $850/tonne, the tariff
amounts to over $200/tonne
• This is all incremental profit
ABOVE normal returns you
would expect to make
elsewhere in the world1
Billet
0%
Slab
0%
Flat products
Hot rolled plate
0%
Hot rolled coil & sheet
0%
Cold rolled coil & sheet
10%
Hot dip galvanised sheet
25%
Organic coated coil &
sheet
25%
Long products
Heavy sections
0%
Light sections
10%
Rebar
10%
Wire rod
10%
Steel wire
10%
Tube products
Welded tube
Source: WTO
25%
Not surprisingly, capacity structure in many parts of Africa parallels the tariffs – with much downstream investment in
HDG, OCS and rebar; but very little in H/S, plate or HRC.
1:
Steel prices (3)
• On zero-tariff products, a price premium
exists also in many parts of Africa
• This is transport cost related
• Consider a country such as Mozambique
• Nearest large suppliers of HRC will be in
South Africa, India, Korea, Japan … with a
transport cost of ~$75/tonne
• As a [notional] monopoly producer of HRC in
Mozambique, this premium is yours to take
Economic summary (1)
• Consider production of rebar in a mediumsized ECOWAS or COMESA country
• The chart overleaf summarises the main
African price / cost distortions compared
to average EU steelmaking economics1
1:
Main assumptions are scrap based production of rebar at a scrap price of $375/t [$250/t in Africa]; EAF or IF
steelmaking; African labour costs per tonne at ~40% EU levels; African fuel oil / gas costs at 85% of EU levels; African
electricity prices 50% higher than EU levels; and a 10% import tariff on rebar otherwise priced at ~$600/t. MCI rebar
cost model predicts a resulting profit of $42/t in Europe and $273/t in Africa.
INDICATIVE
Economic summary (2)
Factors Behind Greater African Steel Company Profitability
250
Difference, $ / tonne
200
150
100
50
0
Scrap
Yield
Energy
Labour
Other
Depreciation
Price prem
Profit
-50
• Cost model predicts African steelmaking with
profit ~$230/tonne better than Europe
• Lower scrap price and the tariff-related price
premium are 1° factors behind this difference
Economic summary (3)
• In reality, profits of $230/tonne on production
of rebar etc are unlikely to last
• Illicit scrap export will take place, and scrap
will become more difficult to come by
• Competition will also reduce actual prices
available to local suppliers
With a small scrap cost advantage of even $25/tonne and a small price
premium, a surplus profit approaching $100/tonne is nevertheless not
impossible, improving average profitability from ~$40/tonne to ~$140/tonne1
1:
This is of course just a notional example
Reality check
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Why is nobody investing in Europe?
Where are the consulting opportunities?
Downsides of investing in Africa?
Who will be the ‘Mittal’ of Africa?
These topics will be open for later discussion
Investment opportunities
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Scrap collection - strategic
TMT rebar – standards driven
Welded tube1
Production of steel rail2
Evolution long to flat (LISCO, QASCO, Ezz)
The first “one million tonner”
Note importance of oil & gas in Nigeria – and in the medium term – in Tanzania, Mozambique etc. Note also
however the import tariff of 25%
2: There is no rail network in Iraq, Oman, Yemen or Oman. How about construction of LAPSSET (or even of the EastWest trans-African rail route) ? Who is to supply this rail?
1:
Industry evolution – next 5 yrs
• Consolidation of rebar production / large
increase in average plant sizes
• Entry into new OCS, CRC, HRC production
• Greater use of DRI / pig iron / Corex1
• Large-scale import displacement
• Much foreign investment from Asia-Pacific;
probably Europe as well
1:
This will be driven by increasing availability of iron ore, as also by future scrap shortages
Next Steps
For further discussion about steel sector
investment in Africa please contact:
Andrzej M Kotas, Managing Director
Metals Consulting International Ltd
Website: http://www.steelonthenet.com
Email: [email protected]
or call +44 775 149 0885