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"We will reach peak power by the end of the year"
IRC top manager on the prospects for the development of the Chinese iron ore market and the company's project in the EAO
Chief Financial Officer - Executive Director of IRC Limited Danila Kotlyarov on the WEF fields specifically for EastRussia spoke about the situation in the Chinese iron ore market, ways to insure the mining business from high price volatility, as well as the present and future of Kimkano-Sutarsky GOK.
- GOK, I remind you, actually started working from the beginning of this year. No large and technologically complex enterprise at 100% of capacity in the world does not immediately come out. As of July, we went to 60% - this is the order of 170-180 thousand tons of shipment monthly. The total capacity of the project is about 240 thousand tons per month. We plan to reach the peak power by the end of the year, although this is not an end in itself. The indicator can be exceeded: our operational experience of the Olekminsky mine in the Amur Region showed that in 2015 the company operated at 120% of the nominal capacity.
- Nevertheless, Olekminsky GOK company in its time was conserved - because of the falling prices in the market. Does price volatility persist?
- The volatility was huge over the past year. In 2016, the "bottom point" for the price was $ 35 per ton. At the end of last year - has grown to $ 80-90. In March 2017-th - fell to $ 50. Now it has grown again - up to $ 70-80. Analysts believed that the prospects for this year are not very interesting. Nevertheless, the situation in the market over the past months has improved, and there are several reasons for this. First, no one expected the recovery of the Chinese economy, but it is happening. The demand for steel and building materials is growing. Affects the situation and the closure of inefficient steelmaking capacities in the market. The remaining seek to increase efficiency, which entails a curious effect, not observed before: the market is clearly divided into segments of high-quality and low-quality iron ore. The first deficit, the second falls demand. Previously, the price premium between high and low-quality ore was insignificant, now it reaches 20%.
- For IRC, what does that mean?
- Low-quality iron ore with an iron content of less than 60% on the Chinese market is imported mostly from Australia and Brazil. This is the bulk of the volume, according to various estimates, up to 70%. Our products as high grade ore with a general market oversaturation is in high demand. We have no difficulties with selling. But the volume of deliveries of IRC in comparison with the general volumes of the market is not so great. China imports in a year under 1 billion tons of ore, the planned productivity of the Kimkano-Sutarsky GOK - 3,2 million tons per year.
- Prices fluctuate, but you still plan to reach the designed capacity. The cost price of production allows?
- According to the latest data, the cost of production and delivery of products is about $ 50. The selling price favors the development of the project so far, with an increase in production, our unit costs will decrease. Therefore, we hope that we will earn enough to develop the project and close the ICBC loan, on which we had "holidays" for the 2017 year. The first redemption on it in 2018 year, remains $ 230 million. All forecasts say that in the near future the price below $ 60 per ton will not fall. This is substantially below current levels, but it will ensure the survival of the enterprise. If the price is better, we have the potential for expansion - before processing 15 million tons per year. But for this you need to launch the Sutarsky field.
- As in such conditions of strong fluctuations in prices, the company is building a strategy for the medium term?
"Planning an economy is really difficult, especially for an enterprise that is just starting up and has not yet accumulated any profit or funds. Today we signed an agreement with Sberbank on working with derivative financial instruments, which help to hedge price risks. This is not so simple, given the specifics of the market: the ore has actually become an exchange product, but the liquidity of the commodity is not as high as that of oil or gold, and the volatility is high. In China, the ore is traded on the Dalian and Singapore exchanges. None of the Chinese customers agree to make contracts with a fixed price. The alternative is only hedging. We can conclude an agreement on the sale of ore with the bank at a fixed price for a specific month, and if the price is higher, we give the premium to the bank, if it falls - we earn less, but the bank pays the difference. It is possible to hedge the risks and the ruble-dollar pair.
- There are no problems with exporting products for export? Are you still waiting for the completion of the Nizhneleninsk-Tongjiang bridge construction?
- The main shipments now go through a checkpoint in Grodekovo, where the export flow is growing in general. The bridge is very much waiting, because it was originally designed for our project and reduces the delivery distance to the border with China by an order of magnitude - 150 km instead of 1000 km to Grodekovo. Today, on the sidelines of the forum, I saw the head of the Far Eastern Development Foundation, Alexei Chekunkov, who assured that in June 2018 the bridge would be delivered. We hope so, especially since the project is not abandoned by the EAO Governor Alexander Levintal, nor by the Deputy Prime Minister of Russia Yuri Trutnev.