/1

Global Steel MarketDevelopment and Trends

Mark Wiggett

Munich, 20 June 2008

Presentation to World Perforating Conference

/3

Mark Wiggett

• 28 years in the steel industry

• International Steel trading Coutinho Caro & Co / Stemcor

• General Manager, Industrial Steels Ltd: Hong Kong, 50% JV British Steel (1988-1992)

• General Manager, Industrial Steels (UK) Ltd, later Corus Trading Ltd (1993-2003)

• Editor, Steel Business Briefing (2003-)

• Manager, The Steel Index (2006-)

/4

• Steel Market Developments – Growth, outlook and regional shift

– China

• Steel Pricing– Current market

– Outlook

– Managing price risk and use of indices

• Conclusion

Agenda

/5

0

200

400

600

800

1000

1200

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

MT

6% pa

1% pa

Strong Growth

(developed regions)

Source: IISI

8% pa

Stagnation

(maturity in developed regions)

We are in an era of strong steel market growth…

Strong Growth

(developing regions)

1,344 mt

Global Crude Steel ProductionLong-term Growth Pattern, 1950-2007

/6

146 162 192

385639

70120

132

14229

41195

204

26287

154

408

Finished Steel Products (mt)

1995 2001 2007

643

775

1,2021995–2001 2001–07

Total

China

Other Asia(incl. Japan)

South America

NAFTA

CISAfrica & M.E.

EU(27)

3%

10%

1%

5%

4%

12%6%

2%

8%

18%

4%

6%

1%

10%7%

2%

3% 9%

Chinese and M East growth contrasts static EU & NA

Source: IISI

Average Annual Growth

Consumption Growth by Region

R of Europe

/7Source: IISI

Global Consumption Forecast (Finished Steel) 2007- 09

Growth expected to remain strong through 2008-09

192 195 200

31 33 3556 61 6670 76 82

142 144 14641 45 48

262 273286

408455

500

2007 2008(f) 2009(f)

1,363 mt

1,202 mt

China

Other Asia(incl. Japan)

S. America

NAFTA

CISAfrica & M.E.

EU(27)R of Europe

10%

5%

1%

2%

12%

11%

2%

2%

Growth Rate Forecasts

9% 10%9% 8%

1,282 mt

Global

2007-08 2008-09

+6.7% +6.3%

BRIC +11.1% +10.3%

China +11.5% +10.0%

India +8.9% +12.1%

Russia +10.2% +11.2%

Brazil +10.3% +8.9%

Globalexcl EU(27) & NAFTA

+8.6% +8.0%

Middle East

+11.1% +9.0%

/8

In kg per capita

663

352

274

192

39

0

100

200

300

400

500

600

700

JapanNAFTAChinaCISIndiaSource: IISI, SBB

World Finished Steel Consumption per Capita 2006e

With a lot more growth in Asia to come

Source: IISI & TSI estimates

/9

Other Europe

2%

NAFTA10%

S America

4%

China36%

Other Asia20%

Rest of World

3%

CIS9%

EU (27)16%

2007

1,344 mt

EU (25)23%

Other Europe

6%

CIS10%

S America

4%

China12%

Other Asia25%

Rest of World

4%

NAFTA16%

1995

752 mt

Source: IISI

Global Crude Steel Production by Region

The regional shift in supply continues Eastwards

/10* Pro-forma Source: Metal Bulletin

Top 20 Crude Steel Production 2007(Million Metric Tonnes of Crude Steel)

Global consolidation is continuing

Global Share of Top 5 Crude Steel Producers

0

5

10

15

20

25

30

35

40

45

1995 2000 2005 2010 2015 2020

Perc

enta

ge S

hare

(%)

Actual Forecast

/11

• Global production (crude steel) 2007 = 1,344 mt

– Growth 2006-07: +8% Growth 2002-07: +8% p.a.

• Global consumption (finished products) 2007 = 1,202 mt

– Growth 2006-07: +7% Growth 2002-07: +8% p.a.

• Chinese production (crude steel) 2007 = 489 mt (36% of global production)

– Growth 2006-07: +16% Growth 2002-07: +22% p.a.

• Chinese consumption (finished products) 2007 = 408 mt (34% of worldwide)

– Growth 2006-07: +15% Growth 2002-07: +17% p.a.

• Chinese exports (semi and finished products)

– 2007: 62 mt (imports 17 mt) Growth 2006-07: +19%

– 2006: 52 mt (imports 19 mt)

Summary of key 2007 steel market data

Latest Key Production & Consumption Data and Trends

Source: IISI, TSI

/12

0

10

20

30

40

50

60

70

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

f

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

f

in Mill t

Imports Exports

Total Chinese Steel Imports and Exports

China’s exports will be lower in 2008 than 2007

Million tonnes

Source: CISA and SBB

/13

ProductTax rate

June 1, 2007Tax rate afterJan 1, 2008

Semis 15% 25%

Wire rod 10% 15%

Rebar 10% 15%

Narrow strip 5% 15%

Sections 10% 10%

HRC 5% 5%

Plate 5% 5%

CRC 5% REBATE 5% REBATE

Coated 5% REBATE 5% REBATE

Unchanged

Increased

Source: NDRC, SBB Research

Chinese export taxes increased further in January 2008

Chinese Export Taxes

The export tax increases targeted semis and lower value long products, the mainstay of the smaller Chinese mills

/14

Purpose and Impact of Chinese Export Taxes

Export taxes are designed to fulfil government objectives

• Higher export taxes are intended to reduce China’s exports of lower value steel products

• Export tax changes have been effective in managing Chinese export levels over the past 2-3 years

• The multi-tier export tax system (introduced in June 2007) has been effective in achieving Chinese government objectives: Chinese long product exports have fallen faster than exports of flat products

• This multi-tier system hits the smaller Chinese mills hardest, as these typically produce rebar, wire rod and narrow strip

• Taxes make Chinese steel exports less competitive, but dependency in Asia means they have helped drive market prices up

• In the longer term, Chinese export taxes may prompt greater competition from Chinese exports of higher value steel products and finished goods (no export taxes on these)

/15

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Jan'05

Apr Jul Oct Jan'06

Apr Jul Oct Jan'07

Apr Jul Oct Jan'08

Semis Exports Finished Exports'000 t

Semis rebate abolished

Finished rebate cut from 13% to 11%

Finished rebate cut to 8%

10% export tax applied to semis

Rebate abolished/cut for finished

Export tax 5%/10% finished, 15% semis

Source: China Customs, SBB Research

Taxes raised to 15% for longs25% semis

Export taxes changes have been effective

Chinese Export Levels and Tax Changes 2005-08

/16

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jan

'05

Jul

Jan

'06

Jul

Jan

'07

Jul

Jan

'08

M tonnes

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Ja

n '0

5

Ju

l

Ja

n '0

6

Ju

l

Ja

n '0

7

Ju

l

Ja

n '0

8

M tonnes

Exports of flats Exports of longs

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Ja

n '0

5

Ju

l

Ja

n '0

6

Ju

l

Ja

n '0

7

Ju

l

Ja

n '0

8

M tonnes

Exports of semis

3.0

1.6

2.8

0.7

1.5

0.0

0.9

Source: SBB Research, China Customs

Long product exports have fallen more rapidly than flat products since the April 07 peak. Semis have dropped to zero

Chinese Export Levels by Product Type 2005-08

Multi-tier system has impacted semis and longs most

/17

-200

0

200

400

600

800

1000

1200

Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08

Price Differential USA-China HRC

US Domestic HRC (FOB US Midwest mill)

China Domestic HRC (Shanghai, incl 17% VAT) Source: SBB

US$/ metric tonne

The US-Chinese price differential is opening up again

Example: HRC Price Differentials: China vs US

/18

33%35%

27%29%

32%

14%16%

7% 8%

2%0%

16%

12%13%

24%

30%

0%

5%

10%

15%

20%

25%

30%

35%

40%

HRC Plate CRC OtherCoated

MetalCoated

Crude Wire Rod Rebar

2007

1Q08

Average growth of flat products 19.5% in 1Q08

Average growth of rebar and wire rod 1.8% in 1Q08

Source: CISA, SBB Research

Chinese Production Growth Q1 2008 vs 2007

Chinese flat product output growth is outpacing longs…

/19

HRC

CRC

Plate

HDG

W. Rod

Sections Bar

Long products

Source: SBB Research

Total to date: 191m t/y

Flat products

China’s planned / installed steel capacity additions 2007-2009 (finished steel)

China is investing heavily in more flat products capacity

/20

Key Factors

Outlook for Chinese steel

• China’s construction growth remains strong, but this is long products intensive

• Demand for long products will continue to increase as steel consumption growth moves inland in China

• Likely result is a domestic shortage of long products in China, leading to:

– ongoing long product price rises

– limited long product exports

• Growth in China’s flat product capacity, however, could result in:

– a fall in domestic flat product prices in the medium-term

– lower margins at China’s larger producers

– a return to opportunistic exports, if Chinese prices fall below RoW prices

/21

• Steel Market Developments – Growth, outlook and regional shift

– China

• Steel Pricing– Current market

– Outlook

– Managing price risk and use of indices

• Conclusion

Agenda

/22/22

• Q2-Q3 2007: Demand stagnated, prices stabilized/weakened but Asian prices began rising in Q3

• Q4 2007: Asian prices rose strongly, EU and US steady/weak

• Q1 2008: All steel prices increased to record highs

• Iron Ore:

– Benchmark increases 65-71%...where accepted

– Indian spot prices more than double to over $200/t cfr

• Scrap: prices rose rapidly early Q1 2008, then again in Q2

• Coking Coal: Contract settlement trebles price!!

• Energy: All producers’ costs increasing

Review of Market Price Developments

Overview (Last 4 quarters)

/23

100

200

300

400

500

600

700

800

900

Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08

Domestic Coil Prices, 1998-2008

Source: SBB

S. Europe CRC (ex-works)

N. Europe HRC (ex-works)

US HDG Coil (FOB Midwest mill)

All steel prices have surged in 2008 to record highs, in all regions

€/ metric tonne

All steel prices have risen to record highs in 2008

/24

0

20

40

60

80

100

120

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Iron Ore Prices, 1993-2008

Source: SBB

Vale Fines - Brazil to Europe (FOB Ponta da Madeira)

US$cent/ dmtu

BHP-Billiton fines – Australia to Japan (FOB W. Australian Port)

Iron ore prices increased by ~70% in April 2008, although the Australian miners are still to settle

Iron ore price rises underpinned steel price increases

/25

• Flat products:

– demand stagnated in Q2 2007; US pricing especially weak

– prices remained stable during Q3; starting to rise in Asia

– steady in Q4 (ArcelorMittal announces no increases) except in Asia where prices rose sharply

– US and Asian prices climb sharply during Q1 2008 as producers secure regular increases; European prices still stable as mills wary of stock levels and imports

– European prices rise at start of Q2 as producers secure their announced increases.....and a further rise when raw material costs exceeded expectations

– US mills post ever-higher prices in Q2 as scrap rises....

Review of Market Price Developments

Last 4 quarters’ Overview

.

/26/26

• US prices leap up further, through US$ 1000/s.ton

- BUT ArcelorMittal announce stable prices for July/Aug

- Prices may be weakening from early June

• N European prices firming slowly as mills announce further increases for Q3

• S European prices rising even faster, despite apparent weakness in demand

• Asian prices still firming, but Chinese material is competitive again

WHERE WILL CHINESE EXPORT MATERIAL APPEAR??

Review of Market Price Developments

Last 3 months – Flat Products

/27/27

Today’s Market (June 2008)

• USA:

– stocks below normal; imports down so far; exports up

– prices rising (but rebar only in line with scrap surcharges)

• EU:

– stocks below normal (especially in South)

– longs prices rising; likely to rise further, peak in Q3

• Asia:

– stocks normal, but buyers living hand-to-mouth

– Chinese prices and import prices rising, but there may be more availability if prices remain firm

Review of Market Price Developments

/28/28

• Contract iron ore prices already increased and “priced in”. Spot levels may fall back

• Shipping costs remain high; rising energy costs

• Stock levels are low everywhere, but the industry may be getting used to working with reduced inventories

• Demand likely to decrease from early Q3 onwards, but only slowly due to low stock...will there be a seasonal upturn in Q4?

– prices firm in Q3, easing in Q4 assuming production levels are not increased more than demand

• ‘Year-end’ now typically earlier than historically, as buyers cut back purchases before the new year

Overview

Pricing outlook: the rest of 2008

/29/29

• US stable with likely slight weakness for rest of Q3

Will there be enough demand in Q4 to get prices moving upwards again?

• Europe: prices are expected to rise steadily during Q3, as mills appear to have the momentum. They have exceeded their €700/t targets already....€800/t??

More producer increases expected for Q4

• Asian market levels driven by Chinese supply prices, with swing suppliers (eg CIS) only interested in highest prices

Demand eases during Q3, but Q4 is seasonally strong

Pricing outlook: the rest of 2008

Global Flat Products 2008

© Gary Larson

/30

• Q2 2007: demand dropped after prices “went too high”

– prices fell from record levels as buyers were overstocked

• Q3 2007: demand slackened as stocks still too high

– scrap fell & rebar prices dropped sharply in Europe & ROW

• Q4 2007: US and Asia prices slowly rising due to scrap/billets, but Europe still weaker

• Q1 2008: demand only lacklustre, as is typical for Q1, but prices begin upwards charge led by Middle East appetite

– scrap prices leap at start of year, but stabilise at end of Q1

• Q2 2008: rebar prices surge again as raw material increases take effect; scrap prices rising…in response to higher iron ore?

Review of Market Price Developments

Global Long Products May 2007 – May 2008

/31

• Q2 & Q3 2008: Demand continues to be seasonally firm

– supply likely to be steady and imports remain well below recent figures in US and Europe, then prices should rise further until end of Q3

• Q4 2008: Demand slackens

– prices likely to ease down, possibly sharply lower in scrap-based regions

• Prices in Middle East based Black Sea

– supply remain sky-high

Pricing outlook: the rest of 2008

Global Long Products 2008

© Gary Larson

/32/32

• Iron ore prices should peak in 2008 (2009?) as supply-demand balance will ease by 2010, but miners may hold onto gains based high steel prices. Coking coal remains high

• Scrap supply remains tight; prices firm...higher in short-term

• Shipping costs may eventually ease back towards historical levels, as new capacity offsets higher fuel prices

• Price volatility continues, with shorter cycles – steel futures contracts developing to offer price risk management tools

• Fewer buyers willing or able to commit ahead of price rises; new industry behaviour of managing with lower inventories

• The enlarged consolidated companies continue to manage any short-term falls in demand

Price Dynamics – Looking Forward

Pricing outlook: long-term

/33

• Managing businesses involved in buying or selling steel is an increasing challenge

Managing Price Risk

• Steel price volatility and uncertainty is detrimental in many different ways:– Supplier/customer relationships– Bidding on contracts– Production planning– Investment planning– Raising finance– Cost of capital, etc…

/34

US Coil Prices (FOB Midwest mill)

US$/ metric tonne

500

600

700

800

900

1000

1100

1200

1300

1400

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08

Source: The Steel Index (monthly averages)

Hot Dipped Galvanised Coil

Cold Reduced CoilHot Rolled

Coil

125% increase

in 11 months

Managing Price Risk: Increasing volatility

/35

• Steel price cycle amplitudes are increasing− Historically maximum peak-to-trough price movements

were typically 40%

− 2004-05 saw 60% price movement peak-to-trough in one year

− 2007-08 has seen some prices double in < 1 year

• Cycles are shortening− Historically it took 2-3 years from peak to trough

Many predicted increased steel industry consolidation would bring greater price stability

– this is clearly not the case (yet)

Managing Price Risk: Increasing volatility

/36

• Responses:– need for frequent, independent, reliable, up-to-date

steel market price information and lead indicators– increasing use of index-based steel pricing

arrangements, sometimes linked with financial instruments to hedge exposure

• Emergence of financial tools to help manage steel price risk/exposure– exchange-traded steel futures contracts (DGCX rebar

in Dubai, LME billet in Middle East and Asia)– over-the-counter (OTC) forward contracts with brokers

Managing Price Risk

/37

• Results of a recent survey undertaken by The Steel Index:

Managing Price Risk

– 56% of clients currently use The Steel Index as a basis for pricing some or most of their physical transactions

– a further 32% expect to use The Steel Index in this way in the future

• This highlights a dramatic shift away from fixed-price arrangements over the past few years

50%

6%

44%

Most transactions

Some transactions

No transactions

/38

• Weekly steel reference prices for specified products

• Compiled from verifiable industry transaction price data– submitted confidentially by companies actively

buying and selling relevant steel products (currently over 350 registered ‘data providers’)

• Fully transparent and verifiable processes• Available on-line and by e-mail

www.thesteelindex.com

The Leading Steel Price Information Service

/39

Weekly Reference Price Results by e-mail

Example

The Steel Index Reference Prices (Domestic Markets)

1,0501,013n/a+0.5%51,050HR Coil ($/tonne)**

Turkey

646415+10.2%60+2.7%17646Rebar (€/tonne)

814610+3.6%28+1.0%8814Plate (€/tonne)

794656+1.7%13+0.5%4768Plate (€/tonne)

1,135762+16.1%157+7.5%791,135Plate ($/short ton)

607400+4.7%27+2.2%13607Rebar (€/tonne)**

764562+7.2%51-0.9%7757HDG Coil (€/tonne)

702547+7.7%50+3.7%25702CR Coil (€/tonne)

632475+5.2%31+1.8%11630HR Coil (€/tonne)

N. Europe

748539+8.6%59+0.9%7748HDG Coil (€/tonne)

1,137718+24.5%224+4.9%531,137HDG Coil ($/short ton)

533

463

599

512

Low*

+6.9%

+4.8%

+22.7%

+26.5%

47

31

200

211

4-week change

+4.3%

+1.5%

+3.5%

+19.1%

1-week change

30

10

37

166

1,0821,082CR Coil ($/short ton)

730730CR Coil (€/tonne)

673

1,006

High*

673HR Coil (€/tonne)

S. Europe

1,006HR Coil ($/short ton)

USA

1,0501,013n/a+0.5%51,050HR Coil ($/tonne)**

Turkey

646415+10.2%60+2.7%17646Rebar (€/tonne)

814610+3.6%28+1.0%8814Plate (€/tonne)

794656+1.7%13+0.5%4768Plate (€/tonne)

1,135762+16.1%157+7.5%791,135Plate ($/short ton)

607400+4.7%27+2.2%13607Rebar (€/tonne)**

764562+7.2%51-0.9%7757HDG Coil (€/tonne)

702547+7.7%50+3.7%25702CR Coil (€/tonne)

632475+5.2%31+1.8%11630HR Coil (€/tonne)

N. Europe

748539+8.6%59+0.9%7748HDG Coil (€/tonne)

1,137718+24.5%224+4.9%531,137HDG Coil ($/short ton)

533

463

599

512

Low*

+6.9%

+4.8%

+22.7%

+26.5%

47

31

200

211

4-week change

+4.3%

+1.5%

+3.5%

+19.1%

1-week change

30

10

37

166

1,0821,082CR Coil ($/short ton)

730730CR Coil (€/tonne)

673

1,006

High*

673HR Coil (€/tonne)

S. Europe

1,006HR Coil ($/short ton)

USA

* Past 12 months except Turkish prices since April 1, 2008 ** Under development

The Steel Index Reference Prices (Exports/Imports)

1,030574+12.8%117+1.6%161,030CR Coil (US$/tonne)**

915511+5.5%48+1.4%13915HR Coil (US$/tonne)**

Low*4-week change1-week change High*Chinese Exports to Europe/NA

1,030574+12.8%117+1.6%161,030CR Coil (US$/tonne)**

915511+5.5%48+1.4%13915HR Coil (US$/tonne)**

Low*4-week change1-week change High*Chinese Exports to Europe/NA

* Since May 14, 2007 ** Under development

/40

Subscribers receiveSubscribers receive::

Weekly prices & delivery lead-time dataWeekly prices & delivery lead-time dataAccess to website price archiveAccess to website price archive

On-line price analyser tools for easy On-line price analyser tools for easy currency conversioncurrency conversion

Facility to download price archive to Facility to download price archive to Excel spreadsheetExcel spreadsheet

www.thesteelindex.comwww.thesteelindex.com

/41

• Steel Market Developments – Growth, outlook and regional shift

– China

• Steel Pricing– Current market

– Outlook

– Managing price risk and use of indices

• Conclusion

Agenda

/42

• Tighter global steel supply-demand balance…

− steel demand in the world, outside China, has grown nearly 200mt in the past 7 years

− effectively eliminating surplus global steelmaking capacity and absorbing China’s switch from net importer to net exporter

− Chinese exports will be lower this year, taxes on these exports have increased and demand in Asia is strong

• … resulting in higher prices globally

− in spite of only moderate-weak steel demand in North America and Europe and threat of economic recession

− in spite of credit crunch and financial market turbulence

Conclusion

/43

• Raw materials at structurally higher levels

− supply-demand balance to remain tight in the short-medium term, but ease by 2010

− increasing sale of iron ore on spot price basis (rather than fixed price annual contracts)

− greater price volatility (iron ore, coal, scrap)

• China still key to global market situation

• Increasing importance over time of India and Middle East

• Steel price outlook increasingly unpredictable

• Increasing use of steel price indices and futures/forwards

• Steel sector returns to remain good in medium-term

Conclusion

/44

Thank You

/45

Thank You