Manganeooo

GLOBAL Manganese ore market outlook
Too much manganese on the seas

Over the past few years, manganese can best be described as a background
commodity from a global perspective. While still a central component in
steelmaking, its impact on balance sheets of the mining majors has been
negligible, and the market itself has had little to write home about, with pricing
declining more or less in line with peer steelmaking raw materials.
However, with the imminent spin-off of South32 from core BHP Billiton,
manganese will now represent a relatively significant driver of earnings of a
diversified mining company. Given this, we have dusted down our global
manganese ore model, considered the potential market drivers and modelled
costs out to the end of the decade.
Supply stagnating, but there’s still a surplus

Like many other commodities, manganese supply is struggling for any growth.
With existing mines having mostly ramped up capacity and debottlenecked
effectively over the past couple of years, most are looking at a period of
stagnation. Moreover, we expect further cuts to Chinese and Australian output
into the medium term.
However, the demand environment looks little better, given the slower growth
rates of both Chinese and global steel output. On top of this, since the 12%
mine output surge in 2013, we estimate global inventories levels have risen by
over 1.5mt. The first thing the manganese market has to do is pare back the
level of oversupply, before moving towards balance and eventually running down
ore stocks. With little pressure to cut supply ex-China (yet), this process looks
set to be a prolonged one, with global inventories struggling to start drawing until
2018 on our base case. Certainly, the probability of a raw material constraint in
manganese over the coming years, absent a major supply shock from South
Africa, is pretty low.
A lower rand = lower manganese price forecast

Our price forecast over the coming three years is based on our estimates of the
marginal cost of South African production over this period. This implies a
manganese ore price of $4/dmtu CIF China and below over 2015-2017. Beyond
this, we do see steady price appreciation as ore stocks finally start to draw.
Macquarie’s manganese ore supply-demand balance and price forecast

million tonnes Mn contained, unless stated 2012 2013 2014E 2015F 2016F 2017F 2018F 2019F
Crude steel production, mt 1,553 1,624 1,676 1,694 1,739 1,755 1,792 1,829
% Change y-o-y 1% 5% 3% 1% 3% 1% 2% 2%
Stainless steel production, mt 35.5 38.9 42.0 44.2 46.9 49.1 51.4 53.9
% Change y-o-y 6% 9% 8% 5% 6% 5% 5% 5%
Mn ore consumption 17.3 18.0 18.3 18.5 19.0 19.2 19.6 20.0
% Change y-o-y 0% 5% 1% 1% 3% 1% 2% 2%
-Mn alloys for crude steel 15.2 15.8 15.8 15.9 16.3 16.3 16.6 16.8
Analyst(s) -EMM for stainless steel 1.3 1.4 1.6 1.7 1.8 1.9 2.0 2.0
Colin Hamilton -Other 0.8 0.8 0.9 0.9 1.0 1.0 1.0 1.1
+44 20 3037 4061 colin.hamilton@macquarie.com
Stefan Ljubisavljevic Mn ore mine production 16.9 18.9 19.1 19.1 19.0 19.3 19.6 19.8
+44 20 3037 4247 stefan.lj@macquarie.com % Change y-o-y -2% 12% 1% -0% -1% 1% 2% 1%
Global Mn ore balance -0.4 0.9 0.8 0.6 0.0 0.1 -0.0 -0.1
24 March 2015 Mn ore price forecast ($/dmtu CIF China) 4.9 5.4 4.5 3.5 3.8 4.0 4.3 4.5
Macquarie Capital (Europe) Limited *Price is for 43-44% Mn lump ore
Source: IMnI, worldsteel, ISSF, CRU, K.Fowkes, Macquarie Research, March 2015
Please refer to page 21 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
Macquarie Research Manganese ore market outlook
Too much manganese on the seas

Over the past few years, manganese can best be described as a background commodity from
a global perspective. While still a central component in steelmaking, its impact on balance
sheets of the mining majors has been negligible, and the market itself has had little to write
home about, with pricing declining more or less in line with peer steelmaking raw materials.
However, with the imminent spin-off of South32 from core BHP Billiton, manganese will now
represent a relatively significant driver of earnings of a diversified mining company. Given
this, we have dusted down our global manganese ore model, considered the potential market
drivers and modelled costs out to the end of the decade. Given that ore supply gives a strong
indicator to manganese alloy pricing, to us this is the key area of the market to focus on.
Like many bulk commodity peers, manganese ore supply grew quickly in recent years but is
now stagnating – indeed we see supply falling over the next couple of years. However, with
steel production under pressure, demand growth is also showing little signs of life, though
increased consumption in 200 series stainless steel will help over the medium term. Given the
ore market has been heavily over supplied over 2013-14, and there is little indication of
supply cuts coming through, balancing the manganese ore market looks set to be a
prolonged process.
Our USD price forecast over the coming three years is based on our estimates of the
marginal cost of South African production over this period. Given the recent Rand
depreciation, this now implies a manganese ore price of $4/dmtu CIF China and below over
2015-2017. Beyond this, we do see further steady price appreciation as ore stocks finally start
to draw. This forecast is 20% below our previous 2015 estimate, and 14-18% lower for all
future years.
Fig 1 New Macquarie manganese ore price forecasts

2014 2015 2015 2015 2015 2015 2016 2017 2018 2019
Unit CY Q1 Q2 Q3 Q4 CY CY CY CY CY LT $2014
Manganese ore - New $/mtu CIF 4.5 3.8 3.4 3.3 3.4 3.5 3.8 4.0 4.3 4.5 4.3
Manganese ore - old 4.5 4.3 4.3 4.4 4.4 4.3 4.5 4.8 5.0 5.5 5.0
Source: Platts, Macquarie Research, March 2015
24 March 2015 2
Why is interest in manganese ore increasing?

BHP Billiton is the largest manganese ore producer globally, accounting for around 20% of
global output on a manganese contained basis. The spin-off of South32 from BHP will
incorporate both the high-quality GEMCO operation in Australia and the Hotazel operations in
South Africa. On our estimations, 21% of the new company’s EBITDA (2014E) is attributed to
the manganese division. With the South32 prospectus now released, having a major listed
company with significant manganese exposure is likely to boost investor interest in what is a
relatively opaque commodity market. In this note we hope to provide investors more colour on
the manganese ore market and its prospects over the coming years.
Fig 2 BHP accounts for around 20% of global Fig 3 South32 divisional EBITDA – manganese 21% of
manganese ore output on a metal contained basis total in FY2014
BHPB Mn ore production South 32 EBITDA breakdown - FY2014

'000t Mn
4,000 Total est. Mn contained 40%
3,500 Global share (rhs) 35% 5% Alumina/Aluminium
3,000 30% 11%

29% Silver, Lead, Zinc
2,500 25%
8%
2,000 20% Manganese ore &
alloy
1,500 15%
Met Coal
1,000 10%
21%
500 5% Energy coal
26%
0 0%
Nickel
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: BHP, IMnI, Macquarie Research, March 2015 Source: BHP, Macquarie Research, March 2015
An introduction to manganese ore

Manganese (Mn) is the 12th-most abundant element in the Earth’s crust. Commercial sources
of the metal are found as manganese oxide, hydroxide or carbonate, with oxide ores
generally higher grade and more extensive. Once mined, the manganese ore is beneficiated,
in a process involving crushing, washing and screening, to deliver a consistent grade of
saleable ore product, ready for further processing. In Australia, beneficiation yields are
estimated at 50%. The resulting commercial ores are generally labelled as low (<30% Mn),
mid (30≥x<44% Mn) or high grade (≥44% Mn) manganese ores.
More than 95% of all manganese ore output is used to produce either manganese ferroalloys
– ferromanganese (FeMn) and silicomanganese (SiMn) – or electrolytic manganese metal
(EMM). These are vital ingredients in the production of carbon and stainless steel.
Manganese plays three key roles in steelmaking:
 It is an alloying agent that helps to achieve specific metallurgical properties in finished
steel products. Manganese in steel increases tensile strength, toughness, hardness,
wear resistance and machinability (although it reduces ductility and weldability), and
this is its main use in steelmaking today.
 It ‘fixes’ residual sulphur impurities originating from the raw materials used in
steelmaking. Because hot metal desulphurisation is standard practice in steelmaking
today, use of manganese for this purpose has fallen from past levels. However,
manganese remains essential for fixing the sulphur that remains in all steelmaking.
There are no substitutes.
 It ‘kills’ (deoxidises) steel. However, it has mainly been replaced for this purpose by
aluminium and silicon today.
24 March 2015 3
After steelmaking-driven manganese ferroalloy and EMM demand, the next most important
market for manganese comes in the form of electrolytic manganese dioxide (EMD). EMD is
used, among other things, in the production of dry-cell batteries (alkaline and lithium-ion
batteries) and chemicals (including fertilisers). A small proportion of low-grade manganese
ore is also directly charged in blast furnace ironmaking, to adjust the Mn content of the
produced pig iron and to de-sulphurise hot metal.
Fig 4 Manganese market overview – the overwhelming majority of all manganese ore produced is used in
steelmaking
Source: CPM, K.Fowkes, Hatch, Macquarie Research, March 2015. Note: 2012 data, basis Mn units. 1. Some Mn ore is charged directly in blast furnace
ironmaking, mainly in Japan and Korea. 2. Some SiMn is used to produce MC FeMn by silicothermic reduction, mainly in China. 3. American Petroleum
Institute.
In this report we will focus on the main demand driver for manganese – steelmaking. But
before we do, we will briefly explain the processes of turning commercial manganese ore into
manganese ferroalloys and EMM.
The production of manganese ferroalloys (FeMn and SiMn) involves the conversion of ore
generally containing <46% manganese to an alloy containing between 65% (SiMn) and 85%
(LCFeMn) manganese, via a carbothermic reduction. In the case of high-carbon FeMn
(HCFeMn), broadly speaking this is done by mixing manganese ore with iron ore, coke and a
lime flux, which is then reduced in a blast furnace or electric-arc furnace process. MCFeMn
and LCFeMn (but not HCFeMn) also use SiMn in the production process, though MC FeMn is
also produced via the decarburisation of HCFeMn in an oxygen-blown converter. The majority
of world FeMn production today takes place in electric furnaces, which have some important
advantages over blast furnaces, such as higher Mn yields, less carbon consumption and
greater flexibility in alloy production. Meanwhile, SiMn is produced by reduction in electric-arc
furnaces, typically using MnO-rich slag from the HCFeMn production process as well as
manganese ore, a quartzite (SiO2) instead of lime flux, and iron ore. The produced alloys are
then cast and crushed.
Manganese ores vary widely in their content of manganese, iron and other elements and
consumers will blend ores of different sources to produce an alloy with a certain desired
Mn:Fe ratio, while reducing cost.
Choice of ferroalloy: This is a complex subject, but as a general rule, a steelmakers’ Mn
ferroalloys selection is first and foremost driven by the chemistry of the steel product in
question, whilst bearing in mind any process constraints. SiMn has generally proven to be the
alloy of choice, a key reason being that two alloys are added in one product, which has
tended to be more cost effective than, for example, an equal mix of HCFeMn and FeSi, in
most markets.
24 March 2015 4
Fig 5 Mn ore grade targets for different ferroalloys products and indicative specifications of products
Indicative specifications:
SiMn Mn content 65% C content 2.0% Si content 16%
HCFeMn Mn content 76% C content 7.5% Si content neg
MCFeMn Mn content 78% C content 1.5% Si content neg
LCFeMn Mn content 85% C content 0.5% Si content neg
Source: C&M, Metallurgy of Manganese, Macquarie Research, March 2015
Electrolytic manganese metal is pure manganese. Manganese ores are milled to a powder,
which is then reduced to a soluble form in rotary kilns. The reduced ore is dissolved in acid
solution and then purified by the precipitation of impurities and filtration. Sulphur dioxide is
added and then it is electrolysed, with pure manganese depositing on the cathode, from
which it is stripped. Other than its use in stainless steel production, powdered electrolytic
manganese is also added to nonferrous (mainly aluminium and copper) alloys.
Fig 6 SiMn has proven to be the alloy of choice Fig 7 The intensity of use of SiMn has been rising
World Mn f erroalloys consumption Unit Mn f erroalloys consumption

'000 t kg/t steel
14,000 9
HCFeMn 8 HCFeMn
12,000 MLCFeMn
MLCFeMn 7
10,000 SiMn
SiMn 6
8,000 5
6,000 4
3
4,000
2
2,000 1
0 0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: IMnI, Macquarie Research, March 2015 Source: IMnI, Macquarie Research, March 2015
24 March 2015 5
Manganese ore pricing

Manganese ore is a bulk commodity and reference pricing has evolved similar to that of other
bulk commodity markets. Up until 2007, it was priced on annual contracts, basis 46% Mn
FOB Australia, with lead settlements negotiated with Japanese consumers. The annual
pricing system then gave way to quarterly contract pricing from 2008-2009, after which
contract pricing broke down. Now manganese ore is generally priced on a spot basis, basis
CIF China denominated in US$/dmtu. 1 dmtu is the price for 1% manganese, so to get the
gross weight price of the ore, one must multiply this benchmark price by the Mn content of the
ore. The standard referenced grade for spot pricing is 43-44% Mn. BHP Billiton, the world’s
largest producer of manganese ore, prices its material on a monthly basis, announcing offers
direct to customers for each of its branded products (e.g. 46% GEMCO lump). These prices
are also closely followed and our base case is that the monthly pricing mechanism will be
maintained following the South32 spin-off.
Fig 8 Manganese ore spot prices - currently at their

lowest level since mid-2009 Fig 9 BHP Billiton’s quoted Mn ore prices
China's Mn ore spot import prices BHPB's Mn ore spot prices

20 10
43-44% Mn, US$/dmtu CIF China
18 9
16 8
US$/dmtu CIF China
14 7
12 6
10 5
8 4
6 3
Fines 48% Mn
4 2 Lump 46% Mn
2 1 Lump 38% Mn
0 0
Jan 07 Jan 09 Jan 11 Jan 13 Jan 15 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15
Source: Platts, Tex Report, Macquarie Research, March 2015 Source: Tex Report, Macquarie Research, March 2015
24 March 2015 6
Manganese ore market outlook - demand

When considering demand for manganese in steelmaking, there are two key factors: 1) the
volume of steel production and, 2) the intensity of manganese usage in this production.
Crude steel production – Crude steel output drives more than 85% of manganese ore
demand through Mn ferroalloys and is therefore the key demand-side focus. Crude steel
production has continued to reach new records in recent years following a post-GFC
slowdown, driven overwhelmingly by Chinese output growth. Specifically, of the 345mt of
global increase since 2008, 336mt was accounted for by China. China’s current estimated
steel consumption by the real estate and infrastructure sectors alone is equal to the combined
annual consumption of the USA, South Korea, Japan, Russia and India.
But production growth is slowing: from 2008-2014 global steel output grew at just 4% CAGR,
down from 7% CAGR in the preceding 6-year period. Over the next 6-year period (2014-
2020) we expect a further slowdown to just 2% CAGR, linked to our expectations of slower
Chinese production growth. Chinese crude steel production grew 5% YoY in 2014 and we
expect growth of just 1% CAGR from now until 2020. And this slowdown is not offset by base
effects – in other words, actual volume growth will also fall.
Steel does though remain the linchpin of any urbanising and industrialising economy, and as
such provided global growth persists we still expect global steel output to steadily trend
towards 1.9bn tonnes by the middle of the next decade. Less than half this growth will come
from China, with the majority coming from other emerging markets. Steel production in the
developed world remains below 2007-08 levels, a situation likely to persist for the foreseeable
future.
One of the keys for steel consumption growth is ASEAN. This region is well ahead of India in
terms of consumption per capita and industrialisation, and is thus moving close to the real
rapid growth phase of steel consumption (indeed Thailand and Vietnam are already there).
However, there are also some headwinds to a replica of the China model of steel
consumption growth. The first is the ongoing competition from China itself, which still has
scope to improve the cost competitiveness of the manufacturing base by moving inland.
Meanwhile, the lack of a command economy to prioritise fixed asset investment spend means
these countries will naturally be more boom and bust, while they are always going to have a
stronger non-industrial and services element relative to industry compared with China at a
similar stage. Perhaps the bigger question for this region is where the steel to fuel growth
comes from – is it domestically produced or does the excess capacity in a slowing China over
the next decade continue to be bled out as ASEAN -targeted exports? Either way, growth
here should be a decent driver of manganese demand.
Fig 10 We forecast just 2% global steel production

growth from 2014 to 2020, versus 4% CAGR 2008-2014 Fig 11 Even accounting for base effects, annual
and 7% CAGR 2002-2008 volume growth slows markedly over the next 6 years
Global crude steel production Steel production growth - Mtpa

Mt
2,000 80 World China
1,800 71
70
1,600
58 56
1,400 60 53
1,200 50
Mtpa
1,000
800 40 32
600 30
World
400
20 13
200 China
0 10
2014E
2016F
2018F
2020F
2000
2002
2004
2006
2008
2010
2012
0
2002-2008 2008-2014 2014-2020F
Source: worldsteel, NBS, Macquarie Research, March 2015 Source: worldsteel, NBS, Macquarie Research, March 2015
24 March 2015 7
Fig 12 Crude steel production forecasts by region

Million tonnes 2014E 2015F 2016F 2017F 2018F 2019F 2020F CAGR Tonnage
Europe 174 174 177 180 184 187 190 2% 16

CIS 106 107 108 109 109 110 110 1% 4
North America 121 121 121 122 123 123 124 0% 3
South America 45 46 48 49 50 51 53 3% 7
China 836 844 869 864 881 895 913 1% 76
India 83 89 96 103 112 121 130 8% 47
Japan 111 110 111 113 115 116 118 1% 7
Korea 72 73 75 77 79 80 82 2% 11
Other Asia 45 45 46 47 48 49 51 2% 6
ROW 83 84 87 90 93 96 99 3% 16
Total 1,676 1,694 1,739 1,755 1,792 1,829 1,870 2% 194
Source: worldsteel, NBS, Macquarie Research, March 2015
With Chinese apparent steel consumption lower YoY over the past 4 months, the age-old
question of whether Chinese steel has peaked has a lot more pertinence, particularly given
current consumption levels. There is no doubt that it is certainly getting close, be we do still
expect positive growth to the end of the decade. Our calculations suggest Chinese ‘capital
stock’ of steel is still only ~40% of that in the US on a per capita basis, and peaking out can
be a long process.
Machinery looks set to be a key driver of Chinese steel demand over the next decade. In our
view, demographics will dictate that China needs industrial productivity gains to remain
competitive internationally. This in turn implies a prolonged mechanisation and automation
cycle, boosting machinery demand. This cycle did appear to be starting in the high inflation
days of 2010-11, but has stalled since given the need to grow into excessive capacity
additions and the rising corporate debt problem. Once the government has SOEs on an even
keel, and feels they are once more sustainable businesses, the shackles on industrial supply
additions will likely give way to a capacity upgrade cycle. Besides manufacturing, we feel
agriculture is another area set for strong machinery demand growth, as the bid to increase
yields with fewer farmers is supported.
However, given its current demand run rate of over 300mtpa (roughly equivalent to US,
Japan, Korea and Russia combined), the Chinese construction sector is still a big swing
factor. Certainly, we are not (and have never been) proponents of a Chinese construction
collapse, and still consider it an important pillar of the Chinese economy in the future.
However, recent years have seen a ‘catch-up’ after years of under-building – with
construction of housing units running above the 10 million per annum base level we think is
required to support continuing urbanisation. Interestingly, demographics actually help
Chinese steel demand in this area – aging populations make less efficient use of the housing
stock, thus living area per capita rises. Living area per capita is still the biggest swing factor in
our Chinese steel demand model. Despite this, and the rising height intensity of buildings, a
normalisation of the build rate means we are already close to peak construction steel in
China. This is unlikely to collapse, but also will not be the biggest delta in demand growth.
One factor which can always be a swing in China is the export expectation. After 2014’s
surprise on the upside for exports, the removal of the boron-added steel rebate has made
Chinese material less competitive internationally. As the Chinese government tries to turn the
domestic sector around, in order to bring corporate debt under control, the export market is
providing a semi-lucrative outlet for excess capacity and production. In all likelihood, China
will still be a significant exporter to the wider global market, but perhaps not at the levels seen
over recent months as the domestic industry grows into the installed capacity. With this,
China will continue to consume the majority of the world’s first use manganese units.
We currently forecast a Chinese crude steel production CAGR of <2% through 2020, taking
Chinese crude steel production just above 900mtpa by the end of the decade. This is a
significantly slower growth rate in both relative and absolute terms than that seen over the
past 15 years.
24 March 2015 8
Fig 13 China crude steel forecasts

2012 2013 2014E 2015F 2016F 2017F 2018F 2019F 2020F
Crude steel production 724 796 836 844 869 864 881 895 913
YoY 4% 10% 5% 1% 3% -1% 2% 2% 2%
Imports 15 16 16 11 11 11 11 11 11
Finished 13 14 15 10 10 10 10 10 10
Semis 0 1 0 0 0 0 0 0 0
Exports 67 71 108 78 78 50 44 39 39
Finished 60 63 94 70 70 45 40 35 35
Semis 0 1 4 0 0 0 0 0 0
Net Exports 51 55 92 66 66 39 33 28 28
Finished 47 49 79 60 60 35 30 25 25
Semis 0 1 4 0 0 0 0 0 0
Apparent demand 673 741 745 778 802 826 847 867 885
Stock change -1 5 -9 3 3 3 3 3 3
Real Steel Demand 675 736 753 775 799 823 844 864 882
YoY 3% 9% 2% 3% 3% 3% 3% 2% 2%
Source: worldsteel, NBS , Macquarie Research, March 2015
Intensity of usage in crude steel: Metals market demand forecasts are frequently linked, or
at least part-linked, to industrial production expectations. Manganese ore consumption has,
particularly since 2009, outgrown both world industrial production and world crude steel
production. Since Mn ferroalloy process yield losses can be assumed to be improving, with
the phasing out of things like OHF steelmaking globally, this implies that the intensity of
manganese usage in crude steel production has been increasing. Specifically, we estimate
that in the last decade the intensity of Mn usage in crude steel production has increased by
around 10%. For the purposes of this intensity analysis, we ignore the small portion of non-
steel ferroalloy usage and do not make adjustment for yield losses; instead we are just
looking at Mn units directed to ferroalloy production.
Fig 14 Mn ore consumption has outpaced both world Fig 15 The implied intensity of Mn usage in crude
industrial production and steel production steel has increased by around 10% in the last decade
World Mn ore consumption vs. IP and crude Implied Mn ore consumption per tonne
250 steel production crude steel production
10.5
kg Mn in ore/tonne crude steel
200 Mn ore usage

Index (2000 = 100)
10.0
3YMA
150 9.5
9.0
100
World IP
8.5
50 Mn ore cons
8.0
Steel prod
0 7.5
2014E
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014E
2000
2002
2004
2006
2008
2010
2012
2016F
2018F
2020F
Source: worldsteel, IMnI, Macquarie Research, March 2015 Source: worldsteel, IMnI, Macquarie Research, March 2015
Intensity of manganese usage is a function of process and product mix. As mentioned above,
process evolution is likely to be reducing intensity of Mn ore use in steelmaking. But this has
been far outweighed by the trend towards higher strength steels in applications such as
autos, where properties like strength to weight ratio have come into sharp focus. Tracking the
extent to which the manganese composition of particular steel products changes with time is
tricky, so we provide a rough guide to manganese content of certain steel products in the bar
chart below.
24 March 2015 9
The second, more transparent, trend to track is how the product mix is evolving (assuming
fixed Mn content). Long steel products tend to be more Mn-intensive than flat steel products,
with mild carbon steel longs contained around 0.7%Mn versus 0.5%Mn for mild carbon steel
flats. Post-GFC, growth in Chinese steel production has been driven more by demand for
long products than flat, on continued urbanisation and infrastructure development.
Fig 16 Manganese content of selected steel products
Mangalloy (Hadfield steel) 13.0%

Stainless 200 series 10.0%
Extra strength auto sheet 2.0%
High strength plate 1.5%
API-grade plate 1.4%
Rails 1.2%
Stainless 300 / 400 series 1.0%
API seamless 1.0%
High-strength auto sheet 0.9%
Engineering steels 0.9%
Mild carbon steel longs 0.7%
Mild carbon steel flats 0.5%
Mild auto sheet - internal 0.4%
Mild auto sheet - external 0.4%
0% 2% 4% 6% 8% 10% 12% 14%
Source: worldsteel, Macquarie Research, March 2015
As China progresses in its move towards a more consumption-driven economy, from which
the likely gainers are autos, machinery and appliances, we expect steel production growth to
swing back in the favour of flat products and put pressure on the intensity of Mn usage.
Indeed, we are already starting to see trend reversal of rising intensity and model that this will
continue going forward. We expect, more anecdotally rather than quantitatively, that the
penetration potential for higher strength steel in certain key applications probably has limited
upside as well.
Base effect larger than the intensity impact: In the past decade, the more significant driver
of manganese demand has been rising crude steel production, as opposed to the rising
intensity of Mn usage in crude steel production. Specifically, since 2005 we estimate that 73%
of the incremental Mn usage in crude steel has been a volume effect, with the remaining 27%
an intensity-effect. This is why, going forward, we see steady growth in Mn demand despite
our assumption of gradually declining intensity. Based on our current steel production
forecasts, we would need intensity in crude steel production to fall around 1.8% per annum
each year to 2020 for overall Mn usage in crude steel to see no growth to the end of this
decade. We make an assumption of a 0.5%pa intensity decline, so that intensity is back to
2009/10 levels by the end of the decade.
Fig 17 A more consumer-driven Chinese economy Fig 18 Volume growth has been a larger Mn demand
means flat steel demand growth to exceed longs driver than intensity, and we expect it to remain so
China steel demand growth - longs/f lats How Mn usage growth in crude steel has
18% sector breakdown broken down over past 10 years
20,000
16%
'000 tonnes Mn
14% 16,000
Longs Flats
12% 12,000
% CAGR
10% 8,000
8% 4,000
6%
0
4%
Intensity
Steel prod.
in crude steel
in crude steel
2005 usage
2014 usage
effect
effect
2%
0%
2002-2008 2008-2014 2014-2020F
Source: NBS, Macquarie Research, March 2015 Source: worldsteel, IMnI, Macquarie Research, March 2015
24 March 2015 10
Usage in stainless steel – stainless steel currently accounts for around 9% of global
manganese consumption. 200 series stainless steels (200S) typically contain 6-15%
manganese (we assume an average of 10% in our demand modelling), while 300 and 400
series stainless steels (300S & 400S) only contain around 1% manganese. Thus, while 200S
production accounted for just 21% of global stainless production in 2014, it equated to 72% of
manganese usage in stainless steel.
Since 2000, world stainless steel production has grown at 6% CAGR, consisting of 200S
production growth of 19% CAGR and 300S & 400S production growth of 4% CAGR. The
rapid growth in 200S production has been driven overwhelmingly by China, which in 2000
produced almost no 200S stainless steel and today accounts for 75% of global 200S
production. The rapid rise of 200S production in China (and to a lesser extent India) was a
response to a lack of availability and hence high price of nickel in the mid-2000s, causing
substitution away from the generally preferred 300S products. In short, 200S stainless steels
have used manganese as a (partial) nickel replacement.
Fig 19 200 series stainless steel contains around 10% Fig 20 The rapid rise of 200S production in China
manganese and is a key driver of Mn consumption drove Mn consumption in stainless over past 15 years
The role of 200 series stainless in Mn Mn usage in stainless steel output

100% 1,600
200S share global stainless output
1,400 200S 300S & 400S
80% 200S share Mn usage in stainless
1,200
'000 tonnes Mn
60% 1,000
800
40% 600
400
20%
200
0% 0
2014E
2000
2002
2004
2006
2008
2010
2012
2016F
2018F
2020F
2016F
2018F
2020F
2014E
2000
2002
2004
2006
2008
2010
2012
Source: ISSF, INSG, CRU, Macquarie Research, March 2015 Source: ISSF, INSG, CRU, Macquarie Research, March 2015
The problem with 200S stainless steels is that because output growth was mainly a cost-
driven measure, the properties are generally considered to be inferior, particularly in critical
use applications where high corrosion resistance is, for example, required. (Note: reducing
nickel content means it is necessary to reduce chrome content as well, and it is Cr which
makes the greatest contribution towards corrosion resistance). As a result, 200S stainless
steels are mainly limited to internal uses, though they do have some advantages over 300S,
such as greater strength and hardness, which in turn also means less formability and
weldability.
Looking ahead, we expect the growth rate of 200S stainless production to slow to 5% CAGR
from 2014-2020, the same as the growth in 300S & 400S production. Although we remain
positive on the outlook for the nickel price, we have reduced our price expectations over the
past 6 months and don’t expect nominal prices to approach ~$30,000/t, which is a level that
has been discussed as a potential trigger for further switching away from high-Ni stainless
production. But even if we did get there, we assume that a large portion of the available
substitution towards non-300S stainless steels has already taken place. Thus, although 200S
production will remain the main driver of Mn demand in stainless, we do not expect its Mn
consumption share to increase materially and expect total Mn usage growth in stainless to
slow to a 5% CAGR 2014-2020 from 11% CAGR 2000-2014.
24 March 2015 11
Fig 21 Stainless steel production forecasts and estimated manganese usage

('000 metric tonnes) 2012 2013 2014 2015F 2016F 2017F 2018F 2019F 2020F
World
Total Stainless 35,536 38,887 41,982 44,150 46,859 49,129 51,418 53,857 56,257
% Change y-o-y 6% 9% 8% 5% 6% 5% 5% 5% 4%
200-series (Mn) 6,917 7,746 8,614 9,098 9,679 10,219 10,713 11,069 11,438
% Change y-o-y 19% 12% 11% 6% 6% 6% 5% 3% 3%
300-series 20,135 21,679 23,339 24,630 25,971 27,071 28,342 29,783 31,176
400-series 8,484 9,461 10,029 10,422 11,209 11,839 12,362 13,005 13,643
China
Total Stainless 16,111 19,461 21,816 23,306 25,259 26,734 28,234 29,684 31,084
% Change y-o-y 15% 21% 12% 7% 8% 6% 6% 5% 5%
200-series (Mn) 4,977 5,740 6,494 6,884 7,365 7,807 8,198 8,444 8,697
% Change y-o-y 29% 15% 13% 6% 7% 6% 5% 3% 3%
300-series 7,926 9,771 10,865 11,645 12,463 12,992 13,684 14,413 15,082
400-series 3,208 3,950 4,457 4,778 5,431 5,935 6,353 6,827 7,305
Mn usage ('000t Mn)

200S (10% Mn) 692 775 861 910 968 1,022 1,071 1,107 1,144
300S & 400S (1% Mn) 286 311 334 351 372 389 407 428 448
Total 978 1,086 1,195 1,260 1,340 1,411 1,478 1,535 1,592
Est. Avg. Recovery 75% 75% 75% 75% 75% 75% 75% 75% 75%
Mn ore usage ('000t
Mn) 1,304 1,448 1,593 1,680 1,786 1,881 1,971 2,046 2,123
Source: ISSF, INSG, CRU, Macquarie Research, March 2015
24 March 2015 12
China a black box, as usual

Similar to iron ore, China’s domestic manganese ore reserves and resources are low grade.
Hence while China produces more ore on a gross weight basis than any other country, it is
not the largest producer on a metal contained basis, a title which belongs to South Africa.
Even so, given the more fragmented nature of Mn ore supply relative to iron ore, China is still
estimated to be the world’s second-largest supplier of ore on a metal contained basis,
equivalent to ~20% of global mine output. China’s major manganese regions are
concentrated in the south of the country; average resource grades are estimated to be ~22%
Mn, though the IMnI estimates that produced grades are even lower than that.
Fig 22 China is the largest producer of ore on a gross Fig 23 China’s major manganese regions are mainly
weight basis, but grades are low at ~20% Mn located in the South of the country
China's domestic manganese ore production

25,000
GW ore
20,000 Mn contained
'000 tonnes
15,000
10,000
5,000
0
2014E
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: IMnI, Macquarie Research, March 2015 Source: C&M, K.Fowkes, Hatch, SRK, Macquarie Research, March 2015
This means that annual mine output is only 30-35% of current annual consumption, with
China now estimated to account for just under 65% of global manganese ore consumption.
This is well ahead of China’s share of consumption of base metals, which are generally in the
45-50% range, and is more in line with China’s share of global seaborne iron ore imports.
This has led to growth in manganese ore imports of 15% CAGR over the past decade. South
Africa and Australia are the largest suppliers of manganese ore to China, with shares of 36%
and 32% respectively in 2014, followed by Gabon and Ghana. The common interpretation of
this import growth is that China has struggled to source the raw materials it needs
domestically, which has created a widening import gap. A more nuanced explanation is that
China has the production potential to source a greater proportion of its requirement
domestically, but that the price is not sufficient to incentivise it.
Fig 24 Manganese ore grade and production Fig 25 China is now estimated to account for more
comparison across 8 largest supply countries than 60% of world manganese ore consumption
Manganese ore production versus grade Global Mn ore consumption

6,000 20,000 100%
China
18,000 ROW 90%
5,000 South
Africa 16,000 China share (rhs) 80%
China
'000 tonnes Mn
'000 tonnes Mn
14,000 70%
4,000
12,000 60%
Australia 10,000 50%
3,000
8,000 40%
2,000 Gabon 6,000 30%
India 4,000 20%
1,000 Brazil
2,000 10%
Ghana
Ukraine 0 0%
0
2014E
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
0% 20% 40% 60%

Mn ore grade (%)
Source: IMnI, Macquarie Research, March 2015 Source: IMnI, Macquarie Research, March 2015
24 March 2015 13
Fig 26 China’s Mn ore imports have grown at 15% Fig 27 High Chinese Mn ore port stocks are price-
CAGR over the past decade negative
China's Mn ore imports by country vs. price China's Mn ore port stocks vs. price
18 16 Ore stocks Price (rhs)
ROW 4 20
16 MMR 14
m tonnes gross weight
Mn ore price ($/dmtu)
m tonnes gross weight

14 BRA
Mn ore price ($/dmtu)

GAB 12
12 ZAF 3 15
10
10 AUS
Price (rhs) 8
8 2 10
6
6
4 4
1 5
2 2
0 0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
0 0
2008 2009 2010 2011 2012 2013 2014 2015
Source: China Customs , Macquarie Research, March 2015 Source: Mysteel, Macquarie Research, March 2015
We should recall that this is exactly how other (seaborne) bulk commodity markets have been
‘clearing’, with cheaper seaborne supply displacing domestic production. Certainly there has
been no obvious positive relationship between the Mn ore spot price and China’s manganese
ore imports since the GFC. The final factor to consider is that the difference between Mn ore
and the other bulk commodity markets is that it is much smaller, and thus even though there
is no exchange-based centralised storage system for manganese (similar to coal/iron ore/
steel), surpluses/deficits in the market can be more easily absorbed in stocks. Chinese port
stocks, the most tracked measure, have been as high as 4mt gross weight over the past few
years. For simplicity, assuming a 40% average grade of these stocks, this equates to 1.6mt
metal contained, versus a market surplus last year of around 800kt Mn. Thus, it can be
argued that stocks in combination with underlying steel sector demand conditions are more
indicative of underlying Chinese demand conditions, rather than import flow.
One of the reasons why China’s share of global manganese ore consumption is greater than
that of its crude steel production is that China is by far the world’s largest producer of EMM,
with estimates putting its share of world production in excess of 95%. As a result, China has
been a substantial exporter of EMM, with the rest of the world dependent on Chinese supply
for stainless production. A combination of GFC demand-side pressures and export policy
dampened Chinese exports from 2009-2012, but they have since reaccelerated with the
removal of the 20% export duty at the start of 2013. Meanwhile, China has remained broadly
balanced in ferroalloys trade following the imposition of a 20% tax in 2009, which has not
since been removed.
Fig 28 China is the world’s largest producer and Fig 29 China’s trade in Mn ferroalloys is broadly
exporter of EMM balanced
China's EMM exports China's Mn f erroalloys net exports

400 900
20% export
350 tax removed 800
700
300 20% export tax
'000 tonnes GW
'000 tonnes GW
600 in effect
250 GFC slowdown
500
200 400
150 300
200
100
100
50
0
0 -100
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: China customs, Macquarie Research, March 2015 Source: China customs, Macquarie Research, March 2015
24 March 2015 14
Supply and the cost curve

The world’s 5 largest manganese ore producing countries – South Africa, China, Australia,
Gabon and Brazil – account for more than 80% of global manganese ore supply today. We
expect their combined share of global supply to remain relatively stable over the next 5 years
and expect total global mine output to grow at just 1% CAGR to 2020. In short, we would
describe the manganese ore market as one that depends largely on what existing assets from
existing supply regions deliver, within the scope of available transportation infrastructure.
Some left-field supply is emerging, from countries such as Malaysia and Myanmar, but
volume-wise this remains relatively small. Meanwhile, high-grade and potentially low-cost
resources in West Africa are mainly a story for the very long term, given current pricing and
the capex needed to develop infrastructure. In this report, we focus on the 5 major suppliers.
Fig 30 Global manganese ore supply – five countries control more than 80% of global mine output (Mn units)
World manganese ore production World manganese ore production share

20 35%
Other
18 Brazil 30%
16 Gabon
Australia 25%
Million tonnes Mn
14
China 20%
12 South Africa
10 15%
8 10%
6 5%
4 0%
2015F
2014E
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2
0
2014E
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
South Africa China Australia

Gabon Brazil Other
Source: IMnI, Company data, Macquarie Research, March 2015
South Africa: BHP Billiton (27%) and Assmang (23%) control half of all South African
manganese production and all of the high-grade production. Other producers of note are
UMK, Kalagadi, Tsipi and Kudamane. Production takes place in the Kalahari manganese
field, which is the largest producing region in the world and has a massive resource base
accounting for ~ 75% of the world’s identified manganese resources. The resources are high-
grade and low-cost by global standards, but transportation infrastructure is a major constraint.
Demand far outstrips the availability of manganese rail capacity, as offered by state-owned
rail company Transnet. In 2014, South African manganese ore exports were just over 12mt
gross weight, versus current rail capacity of around 7mtpa (up from ~5.5mtpa in 2013 and
4mtpa in 2011). Rail capacity has been a consistent bottleneck in the South African
manganese industry and means that with the exception of the two big producers – BHP and
Assmang – all other output is reliant upon trucking, to a greater or lesser extent. As a result,
the cost of ore transportation to port is more than 2x the mining cost for the highest cost
export suppliers.
Unlike the thermal coal market, where port capacity is plentiful and rail is the constraint, the
South African manganese industry also suffers from port availability issues. Port Elizabeth,
more than 1,000km to the south of the Kalahari, is the only dedicated manganese export
terminal. Its capacity is estimated around 6mpta and there is little scope for further expansion.
The remaining export volume must make its way either to iron-ore focused Saldanha Bay or
to Durban. Saldanha Bay is the next best option for a manganese ore exporter, given the
shorter transportation distance and direct rail access, but Transnet has historically made little
capacity available for manganese. Last year it was reported that UMK, Kalagadi, Tshipi and
Assmang all shipped increased volumes through Saldanha Bay, on the back of iron ore
market weakness. And with the iron ore market looking bleak, there is the potential for more
manganese to flow in that direction. But it is not thought to be a game-changer, with Durban
handling the majority of the volume not going to Port Elizabeth. This is the most costly option
of the three.
24 March 2015 15
To help resolve the problem, Transnet has committed to investing in rail and port
development to establish a manganese corridor from the Northern Cape to the deepwater
Port of Ngqura, 20km Northeast of Port Elizabeth. The line would have an eventual handling
capacity of 16mtpa of manganese ore. First export shipments are expected in 2019, but there
have been many delays and that timeline looks somewhat tentative.
Fig 31 South Africa’s Kalahari manganese field is the Fig 32 2014 was a strong year for South African
largest producing region in the world production and exports, up 26% and 21% YoY
South Af rican Mn ore production and

18,000 exports
16,000
'000t annualised GW
14,000
12,000
10,000
8,000
6,000
4,000
2,000 Production Exports
0
Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14
Source: Frontier Advisory, Macquarie Research, March 2015 Source: Government data, Macquarie Research, March 2015
In 2014, South African exports rose 21% YoY and production was up 26% YoY, on a gross
weight basis. On the one hand, strong export growth in a falling cost environment (due to a
falling Rand) is logical. On the other, it is an illustration of the difficulty in quantitatively
tracking available infrastructure for manganese exports and what that means in terms of an
export maximum. Given the realised export run-rates in certain months of 2H14, we see room
for further full-year export growth. We forecast an average production growth rate of just over
100ktpa to 2018, with a larger step up after that. Over the period, this equates to supply
growth of 3% CAGR. A major supporting factor is that we expect continued weakness in the
South African Rand and with the majority of supply costs local currency denominated, the
competitive position of South African producers will improve. The vast majority of South
African output is now in either the first or second quartile of the cost curve (basis CIF China).
Fig 33 South African volume growth is coming mainly Fig 34 We now expect continued Rand weakness over
from mid-grade material 2015 and beyond – much more so than 1 year ago
South Af rican Mn ore production by grade USD/ZAR currency f orecast

13
14,000
30-40% Mn 40-45% Mn >45% Mn
12
12,000
'000t annualised GW
10,000 11
8,000 10
6,000 9
4,000 8
Current Year Ago
2,000 7
1Q15E
2Q15E
3Q15E
4Q15E
1Q16E
2Q16E
3Q16E
4Q16E
1Q17E
2Q17E
3Q17E
4Q17E
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
0
Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14
Source: Government data, Macquarie Research, March 2015 Source: Bloomberg, Macquarie Research, March 2015
24 March 2015 16
China: Given that we discussed the Chinese manganese market above, we will reserve this
section for a brief explanation of our future supply expectations. Falling grades and a lack of
currency benefit, in an environment where most producer currencies have collapsed against
the US dollar over the past 9 months, means that the incentive for Chinese mine supply to
exhibit any growth is simply not there. We assume that Chinese mine supply falls in 2015,
before flattening off. Like most mined commodity markets, China is the marginal producer and
a portion of its output will respond to the price rather than drive it directly. We assume the top
third (~1,200kt Mn contained) of Chinese manganese output will essentially be loss-making
throughout our forecast period.
Australia: There are open pit 3 mining operations in Australia – BHP’s GEMCO at Groote
Eylandt (soon to be part of South32), Consolidated Minerals’ (Consmin) Woodie Woodie in
the Pilbara and OMH’s Bootu Creek in the Northern Territory. Of these, the GEMCO
operation is the lowest-cost, helped by its 46% average grade, low fuel consumption and
economies of scale, with 4,800kt gross weight production per annum, ramping to 5,300kt in
2017. The Consmin operation also has high grades, often achieving a premium to the
GEMCO benchmark, but suffers from a high cost to port, making it a marginal producer at
current spot price levels. Meanwhile, Bootu Creek is the highest cost operation shipping
large seaborne volumes to China, owing in a large part to low grades (35%Mn), the highest
fuel costs of any global manganese mining operation plus a high transport cost to port. While
the A$ depreciation is seeing costs fall dramatically at this operation (we assume ~30% YoY
in USD terms), we struggle to see Bootu Creek surviving at manganese ore prices sub
$5/dmtu and see total Australian 2020 output 9% down on last year’s production.
Gabon: Eramet’s Moanda mine is the main source of ore output, producing a high-grade
lump product. The company reported production of 3,481kt in 2014 on a gross weight basis,
down 6% YoY following a rail accident. Operations are now back to normal and are said to be
running at 3,800ktpa, implying that on a YoY basis we can expect an uplift in supply by
around 9% YoY in 2015, assuming current run rates are sustained. The company is aiming to
lift production towards 4,000kt over the next few years, which we assume materialises. The
opening of the Moanda metallurgical complex, consisting of a 65ktpa silicomanganese plant
and a 20ktpa EMM plant, should provide support towards that output goal. Eramet accounts
for approximately 85-90% of all Gabon manganese ore output, on the IMnI’s total Gabon
production numbers, with the other significant production coming from the Bembele Mine,
owned by China’s Citic Dameng. Eramet’s Moanda is positioned in the second quartile
operation of the cost curve and will have gained from the recent fall in the Euro, given the
Central African Franc is a French Treasury-backed currency.
Brazil: Brazilian supply is mid-to-high grade. The most important is Vale, which has two main
operations: Azul, located in the Carajas, and Urucum, near the Bolivian border. There is
unlikely to be much output growth between now and the scheduled depletion of these assets
in the mid-2020s. Brazilian operations are solidly in the first quartile of the cost curve.
Fig 35 Manganese ore production forecasts by country

('000 tonnes Mn
contained) 2013 2014E 2015F 2016F 2017F 2018F 2019F
South Africa 4,640 5,680 5,800 5,900 6,000 6,100 6,300

China 3,800 3,800 3,600 3,600 3,600 3,600 3,600
Australia 3,335 3,368 3,150 2,850 2,850 2,850 2,850
Gabon 1,967 1,849 2,018 2,045 2,071 2,124 2,124
Brazil 1,121 1,121 1,121 1,121 1,121 1,121 1,121
Other 3,693 3,309 3,421 3,493 3,540 3,564 3,614
Total 18,556 19,127 19,111 19,009 19,183 19,360 19,609
% YoY 10% 3% 0% -1% 1% 1% 1%
Source: IMnI, Company Data, Macquarie Research, March 2015
Given an oversupplied market, naturally manganese ore is trading into the cost curve. And,
like many other commodities, that curve is heading lower. On our estimates, average global
manganese ore mining costs will drop 19% YoY in 2015. Just as with iron ore, the falling oil
price and producer self-help are playing a part in this. Meanwhile, roughly half of Chinese
consumption comes from manganese units sourced from Brazil, Australia and South Africa
where currencies have depreciated heavily.
24 March 2015 17
We model the cost curve on availability of material into the Chinese market, given the CIF
nature of manganese pricing, and incorporating a value in use adjustment to compare like for
like. There is a clear dichotomy in the curve, with Chinese material now dominating the top
end having seen next to no currency benefit over the past year – in 2014 this would have
been much more interspersed through the curve. The bottom half of the curve is dominated
by international market supply. In recent times, the fall in spot price has more or less
matched the fall in cost structure at marginal international assets – in our view the cost curve
is crucial in determining the market clearing price.
Post the demerger, South32 will inherit assets towards the bottom end of the delivered China
cost curve. Moreover, GEMCO is far and away the largest supplier of seaborne manganese
units into China – more than double its nearest competitor. As such, the China linkage will be
crucial for South32 to manage over time, but its lower-cost structure will put it in a strong
position.
Looking further forward, we do expect to see a steady, but not aggressive upward shift in the
cost curve over time. Our economics team expects a partial reversal of producer currency
depreciation from 2016 and beyond, while part of producer self-help (particularly cutting
sustaining capital) is temporary and will need to return on a three year view. By 2017-18 we
expect some Australian and South African production to move into the top part of the cost
curve.
Fig 36 BHP’s (South32’s) GEMCO operation is far and Fig 37 Current spot pricing is trading at a level which
away the largest seaborne supplier to China puts pressure on ex-China supply
Mn units shipped to China, by mine Manganese Ore Cost Curve - 2015

5
1400
1200 South Africa Other China Australia
1000
kt Mn contained
800
600
3 BHP/South32
USD/dmtu CIF China
400 assets
200
0 2
Assmang Gloria
Eramet Moanda
Assmang Nchwaning
ConsMin
Kalagadi
Ghana Manganese
Vale Urucum
BHPB Wessels
Kudamane
Tsipi
ENRC
OMH Bootu Creek
UMK
BHPB Mamatwan
Vale Azul
BHPB Gemco
-
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
kt Mn contained
Source: Customs Statistics, Macquarie Research, March 2015 Source: Company Data, Macquarie Research, March 2015
Price realisations are key: More than 95% of high-grade (≥44%Mn) manganese ore output
is controlled by 5 companies: BHP, Eramet, Assmang, Vale and Consolidated Minerals.
There is debate to be had about whether Vale should be included in this list, with grades from
its largest mine (Azul) now often assumed to be ~40%Mn. In any case, the market for high-
grade ores is highly concentrated. Increasingly, commodity markets with ‘referencing pricing’
are characterised by company price realisations being at a discount to the reference price –
think met coal and ferrochrome – because the price reference is to a premium product. How
close companies get to realising the reference price is driven by their output mix.
This is an area the South32 marketing division may be looking at with interest post the
demerger. The new company’s inherited assets, GEMCO and Wessels, have enough of a
market leading position, particularly into Asia, to push through industry changes. While at the
moment we model status quo in terms of monthly pricing, it is possible to see South32 move
to more of a portfolio of supply contracts with a mixture of spot-linked and quarterly, and
perhaps even annual contracts. We would also expect to see value in use given a strong
focus from a marketing perspective, especially into East Asian buyers.
24 March 2015 18
Fig 38 More than 95% of high-grade global Fig 39 There is a wide range of manganese ore
manganese ore output comes from 5 companies grades available from different mines
Share of high-grade Mn ore output
4%
9% BHP
Eramet
36%
13% Assmang
Vale
Consmin
15% Other
22%
*2013 data, referencing IMnI’s total high-grade (≥44%Mn) output

Source: IMnI, Company data, Macquarie Research, March 2015 Source: IMnI, Macquarie Research, March 2015
Supply-Demand Balance & price forecast

Like many other commodities, manganese supply is struggling for any growth. With existing
mines having mostly ramped up capacity and debottlenecked effectively over the past couple
of years, most are looking at a period of stagnation. Moreover, pricing is not likely to be at a
level to encourage extra tonnes from the elastic supply in the curve – indeed, we expect
further cuts to Chinese and Australian output into the medium term. We expect no net growth
in manganese supply over 2015-16, and only 700kt Mn contained (3.6%) over 2014-2019. In
light of this, Chinese output will continue to be required at or around current levels. In
practice, however, this will flex depending on price within any given year.
However, the demand environment looks little better, given the slower growth rates of both
Chinese and global steel output. Certainly, the current half should mark the nadir in demand
growth rate (we expect -2% YoY global consumption), but through 2019 the absolute rise in
Mn consumption within alloys is only likely to reach ~1mt of Mn contained. As noted above,
though, stainless steel demand is set to grow further, adding 600kt Mn contained to global
demand on a 5-year view (though at present, Chinese stainless steel demand for EMM looks
very weak). When combined, this equates to a 1.8% CAGR in demand – hardly something to
get excited about.
Moreover, this comes against a backdrop of an oversupplied base market at the current time.
The wider market has still to adjust following the 12% mine output surge in 2013, since which
we estimate global inventories levels have risen by over 1.5mt. The first thing the
manganese market has to do is pare back the level of oversupply, before moving towards
balance and eventually running down ore stocks. With little pressure to cut supply ex-China
(yet), this process looks set to be a prolonged one, with global inventories struggling to start
drawing until 2018 on our base case. Certainly, the probability of a raw material constraint in
manganese over the coming years, absent a major supply shock from South Africa, is pretty
low.
In terms of market pricing, as we noted above the ex-China cost curve is extremely important
for pricing. Even more so, we think moves in the Rand are crucial. Our USD price forecast
over the coming three years is based on our estimates of the marginal cost of South African
production over this period. Given the currency moves, this now implies a manganese ore
price of $4/dmtu CIF China and below over 2015-2017, though the drop in Rand terms is not
as extreme. Beyond this, we do see further steady price appreciation as ore stocks finally
start to draw. However, this forecast is 20% below our previous 2015 estimate, and 14-18%
lower for all future years.
24 March 2015 19
Just like iron ore, we see little need for new manganese ore capacity to come to market on a
5-year view. As such, our price forecast has manganese ore trading below the $5/dmtu real
$2014 level we consider long run equilibrium consistently over the coming 5 years. When new
manganese projects are eventually required, we would expect to see a higher market price to
incentivise these – like many ‘junior’ bulks new manganese ore projects struggle to justify
upfront infrastructure development given the relatively low tonnages involved. The risk of this
coming sooner is predicated on Chinese supply – should domestic resources be depleted
aggressively over the near future, we would see long-term pricing sooner rather than a base
case of later.
Fig 40 Manganese ore supply/demand balance. Tough near-term, slightly brighter

long-term.
million tonnes Mn contained, unless stated 2012 2013 2014E 2015F 2016F 2017F 2018F 2019F
Crude steel production, mt 1,553 1,624 1,676 1,694 1,739 1,755 1,792 1,829
% Change y-o-y 1% 5% 3% 1% 3% 1% 2% 2%
Stainless steel production, mt 35.5 38.9 42.0 44.2 46.9 49.1 51.4 53.9
% Change y-o-y 6% 9% 8% 5% 6% 5% 5% 5%
Mn ore consumption 17.3 18.0 18.3 18.5 19.0 19.2 19.6 20.0
% Change y-o-y 0% 5% 1% 1% 3% 1% 2% 2%
-Mn alloys for crude steel 15.2 15.8 15.8 15.9 16.3 16.3 16.6 16.8
-EMM for stainless steel 1.3 1.4 1.6 1.7 1.8 1.9 2.0 2.0
-Other 0.8 0.8 0.9 0.9 1.0 1.0 1.0 1.1
Mn ore mine production 16.9 18.9 19.1 19.1 19.0 19.3 19.6 19.8
% Change y-o-y -2% 12% 1% -0% -1% 1% 2% 1%
Global Mn ore balance -0.4 0.9 0.8 0.6 0.0 0.1 -0.0 -0.1
Mn ore price forecast ($/dmtu CIF China) 4.9 5.4 4.5 3.5 3.8 4.0 4.3 4.5
*Price is for 43-44% Mn lump ore
Source: IMnI, worldsteel, ISSF, CRU, K.Fowkes, Macquarie Research, March 2015
Fig 41 Our manganese ore price forecast, in USD and Fig 42 We expect pricing to trade significantly into
ZAR terms the cost curve over the coming years
Macquarie manganese ore price forecast - USD Estimated proportion of manganese ore supply to
USD/dmtu vs. ZAR ZAR/dmtu 50% China in cash negative territory
8 80 45%
7 70 40%
US$/dmtu
35%
6 ZAR/dmtu (RHS) 60 30%
5 50 25%
20%
4 40 15%
3 30 10%
5%
2 20 0%
2015F
2017F
2019F
2016F
2018F
2014E
2009
2010
2011
2012
2013
2016F
2017F
2018F
2015F
2019F
2014
Source: Platts, Bloomberg, Macquarie Research, March 2015 Source: Company Data, Macquarie Research, March 2015
24 March 2015 20
Important disclosures:
Recommendation definitions Volatility index definition* Financial definitions
Macquarie - Australia/New Zealand This is calculated from the volatility of historical All "Adjusted" data items have had the following
Outperform – return >3% in excess of benchmark return price movements. adjustments made:
Neutral – return within 3% of benchmark return Added back: goodwill amortisation, provision for
Underperform – return >3% below benchmark return Very high–highest risk – Stock should be catastrophe reserves, IFRS derivatives & hedging,
expected to move up or down 60–100% in a year IFRS impairments & IFRS interest expense
Benchmark return is determined by long term nominal – investors should be aware this stock is highly Excluded: non recurring items, asset revals, property
GDP growth plus 12 month forward market dividend speculative. revals, appraisal value uplift, preference dividends &
yield minority interests
Macquarie – Asia/Europe High – stock should be expected to move up or
Outperform – expected return >+10% down at least 40–60% in a year – investors should EPS = adjusted net profit / efpowa*
Neutral – expected return from -10% to +10% be aware this stock could be speculative. ROA = adjusted ebit / average total assets
Underperform – expected return <-10% ROA Banks/Insurance = adjusted net profit /average
Medium – stock should be expected to move up total assets
Macquarie First South - South Africa or down at least 30–40% in a year. ROE = adjusted net profit / average shareholders funds
Outperform – expected return >+10% Gross cashflow = adjusted net profit + depreciation
Neutral – expected return from -10% to +10% Low–medium – stock should be expected to *equivalent fully paid ordinary weighted average
Underperform – expected return <-10% move up or down at least 25–30% in a year. number of shares
Macquarie - Canada
Outperform – return >5% in excess of benchmark return Low – stock should be expected to move up or All Reported numbers for Australian/NZ listed stocks
Neutral – return within 5% of benchmark return down at least 15–25% in a year. are modelled under IFRS (International Financial
Underperform – return >5% below benchmark return * Applicable to Asia/Australian/NZ/Canada stocks Reporting Standards).
only
Macquarie - USA
Outperform (Buy) – return >5% in excess of Russell Recommendations – 12 months
3000 index return Note: Quant recommendations may differ from
Neutral (Hold) – return within 5% of Russell 3000 index Fundamental Analyst recommendations
return
Underperform (Sell)– return >5% below Russell 3000
index return
Recommendation proportions – For quarter ending 31 December 2014

AU/NZ Asia RSA USA CA EUR
Outperform 51.80% 58.06% 45.07% 44.42% 60.54% 46.81% (for US coverage by MCUSA, 5.29% of stocks followed are investment banking clients)
Neutral 31.80% 27.37% 30.99% 50.10% 35.37% 33.51% (for US coverage by MCUSA, 3.08% of stocks followed are investment banking clients)
Underperform 16.39% 14.57% 23.94% 5.48% 4.08% 19.68% (for US coverage by MCUSA, 0.44% of stocks followed are investment banking clients)
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GLOBAL Manganese ore market outlook

Too much manganese on the seas

Supply stagnating, but there’s still a surplus

A lower rand = lower manganese price forecast

Macquarie’s manganese ore supply-demand balance and price forecast

Too much manganese on the seas

Fig 1 New Macquarie manganese ore price forecasts

Source: Platts, Macquarie Research, March 2015

Why is interest in manganese ore increasing?

BHPB Mn ore production South 32 EBITDA breakdown - FY2014

3,000 30% 11%

An introduction to manganese ore

Source: C&M, Metallurgy of Manganese, Macquarie Research, March 2015

World Mn f erroalloys consumption Unit Mn f erroalloys consumption

Manganese ore pricing

Fig 8 Manganese ore spot prices - currently at their

China's Mn ore spot import prices BHPB's Mn ore spot prices

Manganese ore market outlook - demand

Fig 10 We forecast just 2% global steel production

Global crude steel production Steel production growth - Mtpa

Fig 12 Crude steel production forecasts by region

Europe 174 174 177 180 184 187 190 2% 16

Fig 13 China crude steel forecasts

200 Mn ore usage

Fig 16 Manganese content of selected steel products

Mangalloy (Hadfield steel) 13.0%

The role of 200 series stainless in Mn Mn usage in stainless steel output

Fig 21 Stainless steel production forecasts and estimated manganese usage

Mn usage ('000t Mn)

China a black box, as usual

China's domestic manganese ore production

Manganese ore production versus grade Global Mn ore consumption

0% 20% 40% 60%

Mn ore price ($/dmtu)

m tonnes gross weight

Mn ore price ($/dmtu)

China's EMM exports China's Mn f erroalloys net exports

Supply and the cost curve

World manganese ore production World manganese ore production share

South Africa China Australia

South Af rican Mn ore production and

South Af rican Mn ore production by grade USD/ZAR currency f orecast

Fig 35 Manganese ore production forecasts by country

South Africa 4,640 5,680 5,800 5,900 6,000 6,100 6,300

Mn units shipped to China, by mine Manganese Ore Cost Curve - 2015

Share of high-grade Mn ore output

*2013 data, referencing IMnI’s total high-grade (≥44%Mn) output

Supply-Demand Balance & price forecast

Fig 40 Manganese ore supply/demand balance. Tough near-term, slightly brighter

Recommendation proportions – For quarter ending 31 December 2014

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