2008 Chinese Manganese Ore and Alloy Market Annual Report

2008 Chinese manganese ore and alloy market annual report

Preface

2008 world economy went deeper and deeper in “the US subprime mortgage crisis”, which gradually becomes a global financial storm and even economy recession. Chinese economy also experienced violent ups and downs, and steel and relative industries were seriously damaged. In the first half of the year, steel market kept going up pushed by roaring prices of raw materials and continuous strong demand. Ferroalloy market climbed up constantly and prices of silicomanganese and ferromanganese hit record high again and again. However, in the second half, as a result of the ongoing international financial crisis, real economy was hit both at home and abroad, among which, steel industry stood in the gap. Steel prices slumped while steel production was cut down greatly subsequently. The upstream ferroalloy industry followed suit closely. Stimulated by the economy-saving policies government established, at the end of 2008 part of the steel market warmed up slightly, with some steel makers resuming production, but where the whole market is going remains to be seen for 2009.

1. Industry background

1.1 World and China crude steel production

Manganese ore products include metallurgical manganese ore, manganese carbonate powder, manganese dioxide powder used in chemicals and batteries. Manganese is mainly used as deoxidizer, additives as well as good desulfurizer in steel smelting in the form of ferroalloys. Therefore, more than 95% of manganese products are used in steelmaking, while half of the rest part was used as non-ferrous metal alloys and half in the battery, chemical industries, etc.

In China, 65% of manganese ore is used to produce alloys, 30% to produce electrolytic manganese metal, and the rest for chemical industries. Manganese alloys include silicomanganese, high, medium and low carbon ferromanganese. All the manganese alloys are used as deoxidizers and additive of alloying elements in steel production process, playing an important role in improving the quality and performance of steel products, so there is a saying “no steel without manganese”. Averagely, per ton of crude steel consumes 10 kg of manganese, and therefore, manganese alloy industry development is closely related to the steel industry.

According to preliminary statistics released on 22nd Jan, 2009 by World Steel Association,

World crude steel output is 1.3297billion tons, down by 1.2% from 1.3454 in 2007, which is a decline for the first time ever since 1998.

Looking at steel production by region, the crude steel output is 198.6 million tons for 27 counties of EU in 2008, down by 5.3% yoy; 114.1 million tons for CIS, down by 8.1% yoy; 125.4 million tons for North America, down by 5.5% yoy; 4.76 million tons for South America, down by 1.4% yoy; 1.88 million tons for Africa, down by 7.4% yoy; 1.66 million tons for Meddle East, up by 1.2% yoy and 770.5 million tons for Asia, up by 1.9% yoy.

The statistics also indicates that crude steel output is 502 million tons in China in 2008, with a yoy increase of 2.6%, accounting for 37.8% of world total output, up by1.4 from 2007 and China stays the largest producer of crude steel. The second one is Japan, of which 2008 crude steel output is 118.7 million tons, down by 1.2% yoy. The third to the tenth largest producers are US, Russia, India, South Korea, German, Ukraine, Brazil and Italy.

Meanwhile, according to the statistics released by China Steel Association, China produced 500.488 million tons of crude steel in 200, up by 1.13% yoy; 470.6741 million tons of pig iron, down by 0.7449 million tons from the previous year with a yoy decrease of 0.16%. China Steel Association pointed out that Chinese steel capacity was in oversupply. Till the end of 2008, superfluous steel smelting capacity reached about 0.16 billion tons.

China Crude Steel Production by Year 100,000 Tons 600 35.00%

30.00% 500

25.00% 400

20.00% 300 15.00%

200 10.00%

100 5.00%

0 0.00% 2001 2002 2003 2004 2005 2006 2007 2008

Crude Steel Output Grow th Rate y-o-y

Influenced by the financial crisis, Chinese crude steel reached 0.50 billion tons in 2008, only slightly higher than 0.49 billion tons in 2007and much lower beyond the expectation industry insiders made at the beginning of 2008. At that time, 2008 crude steel output was expected to reach 0.52-0.54 billion tons. The yoy increase declined to as low as 1.1%,

Asian Metal Ltd. All rights reserved. Tel: +86-10-59080011/22/33/44 2 Asian Metal Ltd. All rights reserved. Tel: +86-10-59080011/22/33/44 strongly contrasting to 15.7% in 2007 and ending the double-digit growth for 7 years. The statistics from China Steel Association also shows that Chinese steel production was 0.58 billion tons, with a mere increase of 3.6% yoy. China Steel Association predicts the pig iron output will decline to 0.46 billion tons, crude steel to 0.48 billion tons and steel products to 0.50 billion ton in 2009, while global crude steel production is expected to decrease by 10% this year.

Steel industry is one of the most badly hit industries. From the beginning of 2008 to June, crude steel and steel products outputs were growing fast and stably, with an increase of 10% or higher on a month-on-month basis. However, monthly growth rate plunged since July and became negative in September, while crude steel production declined 17% MoM and steel products down 12.4% MoM in October, marking a historic drop.

2008 China Crude Steel and Steel Products Output Growth m-o-m % 20

0 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec -5

-10

-15

-20

Crude Steel Steel Products

Source: National Bureau of Statistics of China

This is partly resulted from the shrinking demand and partly from inventory adjusting by steel suppliers. The global financial crisis began to affect entity economy in the second half of 2008; orders from constructions, autos and household electrical appliances quickly diminished; steel prices slumped; global leading steelmakers such as ArcelorMittal and Severstal cut down production greatly and steel output was reduced on a large scale across the world. Major steel mills in China like Baosteel and Shougang followed the suit, with most small-sized steelmakers shut down. Financial statistics from 71 steelmakers covered by Chins Steel Association shows that industry-wide monthly loss took place in November, with a total volume of 12.77 billion tons. Thereafter, government issued a few economic-stimulating policies. Besides, inventory began to diminish in steel mills. Steel

Asian Metal Ltd. All rights reserved. Tel: +86-10-59080011/22/33/44 3 Asian Metal Ltd. All rights reserved. Tel: +86-10-59080011/22/33/44 demand warmed up slightly and prices rebounded at the end of 2008.

Bulk ferroalloys market followed the step of steel market closely in 2008, just like riding a roller coaster.

1.2 Policy background

1.2.1Export duty rises to 20% for silicomanganese and ferromanganese

To control the development of high-energy consuming and high-polluting industries, the government decided to raise the export duty from 10% in 2007 to 20% since jan1st, 2008 for silicomanganese and ferromanganese.

Actually, export control measures of ferroalloys have been carried out ever since 2005. The 8% export rebate was canceled from 2005; 5% export duty was laid in 2006 and was raised to 10% in 2007.

1.2.2 Ministry of Commerce to carry out ferroalloy export license system

In order to further regulate ferroalloy export, Ministry of Commerce decided to carry out ferroalloy export license system in August , and 164 firms including both producers and traders have been approved qualified for A grade ferroalloys (including silicomanganese and ferromanganese) export in the coming 2009 till the end of 2008.

Some of the key conditions are: one producer must have be approved qualified for “ferroalloy industry entry conditions” by NDRC and its total export volume of ferromanganese, silicomanganese and ferrosilicon reached 3,000t in 2007/2008; one trader must make purchase from these producers qualified for ”ferroalloy industry entry conditions”; its total export volume of ferromanganese, silicomanganese and ferrosilicon reached 3,000t in 2007/2008 and its registered capital should reach RMB50,000,000.

Industry insiders believe that the newly-set regulation will further limit ferroalloy export and large-sized firms will benefit.

1.2.3 VAT reform

Approved by State Department in August, 2008, VAT reform will come into effect from 2009. The VAT rate of both local manganese ore and imported materials will be raised from 13% to 17%, while it seems to have few inferences on manganese ore and alloy industry so far.

1.2.4 EU delays anti-dumpling tax

In august, 2008, EU delayed the anti-dumpling tax again for silicomanganese of Chinese and Kazakhstani origins to September 6, 2009. In December, 2007, EU set the anti-dumpling tax rate at 8.2% for Chinese materials and 6.5% for Kazakhstani materials but delayed it by 9 months thereafter.

2. China manganese ore market structure

2.1 China manganese ore resources and distribution

There are abundant manganese ore renounces in China about 0.53 billion tons, with 0.22 billion tons of reserve and base reserve. However, China only takes up less than 3% of the world’s identified manganese resources, while South Africa accounts for about 77%, Ukraine 10%, Gabon and Australia no more than 3%.

World Manganese Ore Resource

Others Australia Br az il China Gabon 2% 3% 1% 2% 2% India Uk r aine 3% 10%

South Africa 77%

Source：USGS 2009

In China, land-based manganese resources are large but irregularly distribute, as Guangxi, Hunan, Yunnan and Guizhou all together take up 75% of the total resources.

China Mn Ore Resouces Distribution

Sichuan Others 4% 9% Liaoning Guangxi 6% Chongqing 32% 6%

Guizhou 11% Yunan Hunan 14% 18%

Source：National manganese technology committee 2007

In recent years, China has been mining 12-15 million tons of manganese ore annually, accounting for more than 30% of world production. 65% of Chinese output is used to produce manganese alloys, 30% to produce electrolytic manganese and the rest is used in chemical and battery industries.

According to incomplete statistics, there are more than 500 manganese mines both private and state-owned across the country, and about 4 million tons of manganese ore can be produced in the “manganese triangle” at the junction of Hunan, Guizhou and Chongqing each year.

However, Chinese domestic manganese ore is of poor quality due to low grade with average below 21% Mn and high impurities. As a result, Chinese manganese alloy industry is highly depending on imported manganese ore. At present, as the world's largest importer, China accounts for 40% of the global trade volume of manganese ore. China imported more than 7.5 million tons of manganese ore in 2008, with a yoy increase of 14%. Most materials are imported from Australia, Gabon, Brazil, South Africa, etc, while major suppliers are BHB with a market share of 25%, Eramet Comilog and Asia Mineral respectively about 15% and Vale 5%.

2.2 China manganese ore import

2.2.1 Manganese ore import hits new record in 2008

China Mn Ore Import by Year 100,000 Tons Gr. 800 70%

700 60%

600 50%

500 40%

400 30%

300 20%

200 10%

100 0%

0 -10% 2001 2002 2003 2004 2005 2006 2007 2008

Total Import Imported Mn Ore Growth y-o-y

Driven by the climbing-up prices of manganese alloys and constant strong demand in the first half of the year, Chinese manganese ore import reached 7.57 million tons in 2008, making a yoy growth of 14% and hitting a new record, although the market slowed down in the second half. Meanwhile, Chinese manganese alloy production increased less than 2% from 2007, when 6.50 million tons of manganese alloys was produced and 6.63 million tons of manganese ore was imported. That means almost 1.00 million tons of imported manganese ore were unused in stocks at the end of 2008.

From 1.71 million tons in 2001 to 7.57 million tons in 2008, Chinese manganese ore import increased more than 350%, while manganese alloy production increased from 2.29 million tons to 6.63 million tons, with a total growth of less than 220%, indicating that more imported manganese ore is consumed in pre ton of alloys. That more low and medium grade materials such as Southeast Asian manganese ore 30-35% have been imported in recent years may be one of the key reasons for which Chinese dependence on imported manganese ore is growing. In the long run, it will keep pushing up international manganese ore price level. As a result, on the one hand, Chinese manganese majors have to go out of the country to gain resources; on the other hand; we have to make choice whether to import manganese ore or to import manganese alloys directly.

The yoy growth of Chinese manganese ore import have been fluctuating in wide range in recent years as Chinese firms own little bargaining power in the international market and have to follow miners’ step, leading the import market of manganese ore changing dramatically. It is expected crude production may decline in China in the coming year, so manganese ore import is not likely to increase and may even decline as well.

2.2.2 Origins more dispersed for imported manganese ore

China Mn Ore Import by Origin

100% 7% 13% 9% 4% 24% 3% 5% 12% 80% 7% 17% 8% 9% 15% 15% 60% 12% 20% 8% 19% 26% 40% 13%

46% 20% 43% 34% 30%

0% 2005 2006 2007 2008

Australia Gabon S. Africa Brazil Southeast Asia Others

When manganese ore import volume hitting new record in 2008, origins of Chinese imported manganese ore seems more dispersed. The top three origins accounted for 71% of Chinese total import in 2008, down from 81% in 2007. Meanwhile, the market share of Australian manganese ore decreased greatly from 46% in 2007 to 30% in 2008, and the volume declined from 3.08 to 2.30 million tons as well with a yoy decreased of 25%.

It is noteworthy that manganese ore from Southeast Asian countries engaged in the most diverse endeavors in 2008, as the import quantity soared to 890,000 tons in 2008, more than doubled from 290,000 tons in 2007, while its market share increased from 4% to 12%.

2005-2008 China Mn Ore Import by Origin（10,000 Tons）

2005 2006 2007 2008 CAGR. Gr.2008 y-o-y World 458 621 663 757 18% 14% Brazil 55 43 33 58 2% 78% Gabon 60 118 132 199 49% 50% S. Africa 37 118 111 110 44% -1% Australia 156 267 308 230 14% -25% Southeast Asia 41 19 29 89 29% 203% Others 110 56 50 71 -14% 42%

2.2.3 Chinese imported manganese ore market fluctuate dramatically in 2008

2008 China Mn Ore Import by month

1,000 Tons USD/t 1,000 700 900 600 800 700 500 600 400 500 300 400

300 200 200 100 100 0 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec import volume average unit price

In the first half of 2008, Chinese economy was growing fast and steadily, and prices manganese alloys kept hitting now record high, stimulating manganese ore import to increase. The average price of imported manganese ore climbed up continuously from USD300/t at the beginning of the year to almost USD600/t in September. Taking Australian lumps 43-44% for example, the spot price was RMB85/dmtu ex ports in the first two months but roared to RMB100/dmtu in March when steelmakers and manganese alloy smelters resumed production. The price of silicomanganese 65/17 hit new record high at RMB12,200/t ex works at the same time. Prices of manganese alloys and imported manganese ore were pushed up by each other. In July, 2008 Chinese manganese ore import reached more than 900,000 tons, but dropped sharply with a mom decrease of one third to 600,000 tons in August due to Beijing Olympic Games, during which some steel mills and alloy manufacturers were forced to shutdown.

In the following months, world financial crisis began to hit real economy; prices of steel products and manganese alloys plummeted; a large number of producers shut down or cut production; inventories were piled up as backlogs. The price of silicomanganese 65/17 plummeted after the National day holidays, from its peak at RMB13,000/t to below RMB7,000/t with a decrease of near 50% in only three months. The spot market of imported manganese ore followed suit with a slight lag. The spot price of Australian lumps 43-44% reached a historic high at EMB140/dmtu in July and bottomed at RMB55/dmtu in November, making a decrease of near 60%.

As for the futures market of imported manganese ore, the average price reached its peak

Asian Metal Ltd. All rights reserved. Tel: +86-10-59080011/22/33/44 9 Asian Metal Ltd. All rights reserved. Tel: +86-10-59080011/22/33/44 in September and then declined slowly but still above USD400/t CIF CMP. The reasons should be that on one hand, the futures market was moving on with a lag of about two months; on the other hand, Chinese major buyers signed contracts with overseas miners on a quarter basis. Even though the spot price had dropped greatly, all buyers could do was to delay the delivery of cargos but with contract prices unchanged at high levels. In fact, few contracts were reached during October and November，when large stocks piled up in Chinese ports with a quantity of near 2.00 million tons at its peak.

China Mn Ore and SiMn Price Curve

RMB/mtu RMB/t 140 14,000

130 13,000

120 12,000

110 11,000

100 10,000

90 9,000

80 8,000

70 7,000

60 6,000

50 5,000

40 4,000 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08

Australian lumps 43-44% spot price SiMn 65/17 price

3. China manganese alloy market

3.1 Podution, export and demand

The same with manganese ore, Chinese manganese alloy ouput and demand also rank first in the world. China accounts for more than 40% of the world’ manganese alloy production, followed by CIS, 15%; European Union and South Africa both less than 10%. About 11 kilograms of manganese is consumed in per ton of crude steel in China and the volume is increasing year by year. In 2008, Chinese crude steel production increased slightly by 1% to 500 million tons, accounting for 38% of global production. The consumption of manganese alloys also takes up 40% of global demand, followed by Japan, the United States with both less than 10%.

From 2001 to 2008 Chinese manganese alloy production and domestic demand have been growing steadily year after year. In 2008, production and the apparent demand reached 6.63 * million tons and 5.52 * million tons respectively, both with a small yoy increase of less than 2%. Manganese alloys export reached 1.11 million tons, only 10,000 tons more than it was in 2007. At the same time, from 2001 to 2008 the CAGR was 16%

Asian Metal Ltd. All rights reserved. Tel: +86-10-59080011/22/33/44 10 Asian Metal Ltd. All rights reserved. Tel: +86-10-59080011/22/33/44 for manganese alloy production, 17% for consumption and only 12% for export, indicating that domestic sales percent increases while export declines for Chinese manganese alloys, which is just the purpose of a variety of policies the government set.

Silicomanganese accounts for more than 60% of the total production and consumption, followed by high carbon ferromanganese, 25%, while medium and low carbon ferromanganese takes up the rest. However, the percent of ferromanganese will increase in the coming years with Chinese steel industry upgrade taking place.

China Mn Alloy Demand & Export by Year 10,000 Tons

700

111 600 110 CAGR 12% 80 500 55 400 99

300 552 70 516 540 CAGR 17% 62 200 48 413 329 237 100 181 208

0 2001 2002 2003 2004 2005 2006 2007 2008

Demand Export

Notice: 1. Apparent Demand = Production- Export, as the import volume is so low that can be neglected in China. 2. * Estimated by Writer

3.2 Manganese alloy export

3.2.1 Export volume in 2008 is almost equal to the previous year

In 2008 Chinese manganese alloy export reached 1.11 million tons, almost equal to 2007, in which 1.10 million tons were exported. However, things went differently for different products. Silicomanganese export decreased 12% to 0.74 million tons in 2008, and its share declined greatly to 67% from 77% in 2007. Although silicomanganese is still the main product in terms of manganese alloy export, it becomes less competitive in the international market.

China Mn Alloy Export by Year (‘000 tons)

2004 2005 2006 2007 2008 CAGR. Gr. 2008 y-o-y

SiMn 694 377 518 844 741 2% -12%

HC FeMn 236 128 181 147 181 -6% 23%

MC&LC FeMn 66 41 103 105 184 29% 76%

Total 996 546 803 1,096 1,106 3% 1%

High carbon ferromanganese export reached 0.18 million tons in 2008, increased greatly by 23% from 2007 and its share also increased from 13% to 16%.

The export of medium and low carbon ferromanganese rocketed to 0.18 million tons in 2008, with a yoy increase of 76%, overtook high carbon ferromanganese for the fist time and became the second largest product. Its share also increased from 10% in 2007 to 17% in 2008. From 2004 to 2008, the CAGR is 29% for medium and low carbon ferromanganese, substantially higher than manganese alloy overall average growth rate of 3%, showing that Chinese low-carbon ferromanganese becomes more competitive in the international market and its demand is increasing gradually. This movement is expected to continue in the coming years.

China Mn Alloy Export 1,000 Tons 900 800 700 600 500 400 300 200 100 0 2004 2005 2006 2007 2008

SiMn HC FeMn MC&LC FeMn

3.2.2 Manganese alloy export destination

Japan remains the primary export destination for Chinese manganese alloys, accounting for 28% of total export, followed by Netherlands, 10%, Taiwan, South Korea and US with each proportion at 8-9%. Export data from 2004 to 2008 show that Chinese export of

Asian Metal Ltd. All rights reserved. Tel: +86-10-59080011/22/33/44 12 Asian Metal Ltd. All rights reserved. Tel: +86-10-59080011/22/33/44 manganese alloys is of high concentration, with the top five export destinations accounting for about 70% of the total.

Looking at each product respectively, Japan still firmly ranks the primary destination for Chinese silicomanganese export. In 2008, Japan imported 0.27 million tons of silicomanganese from China, accounting for 36% of Chinese total export, while China also accounts for 80% of Japanese silicomanganese import. It is worth noting that in 2008 China exported 72,000 tons of silicomanganese, decreased sharply by 29% yoy, although Taiwan remains the second largest export destination, accounting for 10% of total silicomanganese export. South Korea imported 67,000 tons of silicomanganese from China in 2008, ranking the third largest export destination with a proportion of 8%. The Following is Netherlands, who imported 48,000 tons increased by 37% yoy and the proportion increased from 4% in 2007 to 7%, ahead of countries like Malaysia and Russia to become China's fourth largest export destination for silicomanganese.

2008 China Mn Alloy Export by Destination

100%

30% 29% 80% 38%

16% 60% 7% 34% 9% 11% 10% 40% 13%

14% 25% 20% 36% 17% 4% 8% 0% SiMn HC FeMn M&LC FeMn

Japan Taiwan prov Korea Rep Netherlands United States Others

High carbon ferromanganese export destinations are more dispersed than silicomanganese. The top three ones are Japan, US and Taiwan, with respective proportion of 17%, 16% and 14%. China exported 23,000tons and 19,000 tons of high carbon ferromanganese to Korea and the Netherlands respectively in 2008, up by a substantial increase of 102% and 200%, taking up 13% and 11% of total Chinese export.

The substantial increase of Chinese export for low and medium carbon ferromanganese was mainly resulted from the import growth from US and Netherlands. The export increased to 63,000 tons to US, up by 145% and to 46,000tons to Netherlands, up by 333%.These two countries account for nearly 60%of Chinese low and medium carbon

Asian Metal Ltd. All rights reserved. Tel: +86-10-59080011/22/33/44 13 Asian Metal Ltd. All rights reserved. Tel: +86-10-59080011/22/33/44 ferromanganese export. Because low and medium carbon ferromanganese is mainly used in stainless steel production, its demand is bound to continue to grow pulled by steel industrial upgrading. On the other hand, Europe and America are the most serious areas hit by economic crisis, and stainless steel production is expected to decline in 2009, slowing down the demand for low and medium carbon ferromanganese accordingly.

4. Market outlook

Chinese manganese ore and alloys market may shrink further in 2009 amid the going-on economy crisis worldwide. China Steel Association expects Chinese crude steel production to decline by 4% in 2009 as well as the demand for manganese alloys. At present, Chinese manganese alloy production capacity is surplus by nearly 1 / 3, so a large number of enterprises without advantages themselves or in both upstream and downstream industries are likely to be eliminated during the economic crisis and a substantial shrinking of the industry.