A Decade of “Pain” to follow a Decade of “Gain?” CANACERO September 11, 2013.

A Decade of “Pain” to follow a Decade of “Gain?”

CANACERO

September 11, 2013

Four Mega-Trends Will Determine the Outlook

Slower demand growth, economic uncertainty, overcapacity and increased competition are likely to result in a difficult environment for the steel industry through 2015-2017 and perhaps beyond. Chinese steel demand growth an increasingly important “wildcard.”

End of steel’s “Age of Metallics”

“Flattened” cost curve exacerbating the competition for the last tonne and delaying output cuts by steel mills. Currency weakness in Developing World ex-China adding a new wrinkle.

Is anyone prepared for the massive avalanche of Chinese steel scrap in the decade ahead, along with the accompanying ramifications on the global industry structure?

Unbalanced Global Steel Demand & Output

Fixed Asset Investment = Key Driver of Steel Demand

bil.USD % of GDP ASC % of ASC ASC/GDP bil.USD % of GDP ASC % of ASC ASC/GDP GFCF ASC

mt/bil.USD mt/bil.USD

Gross Fixed Capital Formation 2,877 48.7% 563 93.4% 0.1957 1,756 12.0% 68 74.7% 0.0387 1.64 8.28

Non Residential 2,049 34.6% 413 68.5% 0.2016 1,366 9.3% 51 56.0% 0.0373 1.50 8.10Commercial and Health Care 23 0.4% 3 0.5% 0.1281 92.8 0.6% 4 4.4% 0.0431 0.25 0.75

Industrial Equipment 286 4.8% 90 14.9% 0.3151 160.7 1.1% 3 3.3% 0.0187 1.78 30.00

Information Processing 28 0.5% 3 0.5% 0.1053 600.1 4.1% 1 1.1% 0.0017 0.05 3.00

Manufacturing 888 15.0% 175 29.0% 0.1970 41.8 0.3% 16 17.6% 0.3828 21.25 10.94

Mining Exploration, Shafts and Wel 115 1.9% 23 3.8% 0.1999 105.8 0.7% 4 4.4% 0.0378 1.09 5.75

Power and Communication 153 2.6% 26 4.3% 0.1700 84.1 0.6% 7 7.7% 0.0832 1.82 3.71

Transportation 332 5.6% 71 11.8% 0.2142 113 0.8% 11 12.1% 0.0973 2.93 6.45

Other Equipment 223 3.8% 22 3.6% 0.0985 167.2 1.1% 5 5.5% 0.0299 1.34 4.40

Residential 829 14.0% 150 24.9% 0.1810 390 2.7% 17 18.7% 0.0436 2.12 8.82

Housing- all but social 652 11.0% 120 19.9% 0.1840 126.6 0.9% 12 13.2% 0.0948 5.15 10.00

Social housing 34 0.6% 5 0.8% 0.1471

Other structures 143 2.4% 25 4.1% 0.1754 263.8 1.8% 5 5.5% 0.0190 0.54 5.000.0%

Household consumption 2,158 36.5% 38 6.3% 0.0176 10,350 70.6% 24 26.4% 0.0023 0.21 1.58Auto and parts 300 5.1% 20 3.3% 0.0667 343 2.3% 18 19.8% 0.0525 0.87 1.11

Appliance and furnishings 94 1.6% 12 2.0% 0.1277 260 1.8% 3 3.3% 0.0115 0.36 4.00

Others 1,764 29.8% 6 1.0% 0.0034 9,747 66.5% 3 3.3% 0.0003 0.18 2.000.0%

Government consumption 693 11.7% 1 0.2% 0.0014 3,005 20.5% 1 1.1% 0.0003 0.23 1.000.0%

Net export 186 3.1% 1 0.2% 0.0054 -452 -3.1% -2 -2.2% 0.0044 -0.41 -0.50

Total GDP or ASC 5,914 100.0% 603 100.0% 0.1020 14,660 100.0% 91 100.0% 0.0062 0.40 6.63Population Million persons 1,341 311 4.31Total rebar consumption ( mil.t) 115 6 19.17GDP per capita (US$ / person) 4,410 47,138 0.09ASC per capita (kg / person) 450 293 1.54Rebar Consu. per capita (kg / person) 86 19 4.45*: Detailed Chinese GFCF figures are based on FAI figures reduced by 30% to made them comparable with reported GFCF as a share of GDP.

Source: WSD estimates, preliminary

China versus United States in 2010: Economic Indices versus Apparent Steel Consumption

Ratio: China/USAChina United States

5 0.0030

0.0035

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e

Intensity of consumption and net export on real GDP base(right axis)

Steel intensity of GFCF on realGDP base (left axis)

Chinese Steel Intensity for FAI and Household Consumption

6

Don’t Underestimate the Power of the “FAI Flywheel”

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7,500

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9,375

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12,000

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Apparent Consumption of Steel Products (Right)

Fixed Asset Investment (Left)

Source: IMF, OECD, WSD Estimates

Global FAI vs. Apparent Steel Consumption

8

225.00

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Advanced Countries FAI v. ASC (Absolute Figures)

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Developing World ex-China FAI vs. ASC

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Steel Products Apparent Consumption (Right)


China FAI v. ASC (Absolute Figures)

Chinese Construction Market “House of Cards?”

Chinese Construction Market “House of Cards?”

13Increased consumption (and reduced FAI) as a share of GDP likely to mean much slower steel demand growth (outright contraction??)

China FAI Long-Term Outlook

India v. ChinaMinimizing Potential

GDP (% y/y)

Consumer Price

InflationSavings (%GDP)

Investment (%GDP)

Investment (% Change y/y)

Steel Demand (% y/y)

2000 4.0% 23.3% 24.2%2001 3.9% 3.8% 22.9% 22.6% -3.1% 0.7%2002 4.6% 4.3% 25.3% 23.9% 10.7% 4.1%2003 6.9% 3.8% 27.6% 26.1% 16.6% 6.6%2004 7.7% 3.8% 31.4% 31.2% 28.8% 4.2%2005 9.0% 4.2% 32.9% 34.2% 19.4% 51.2%2006 9.4% 6.2% 34.2% 35.3% 12.7% 6.8%2007 10.1% 6.4% 37.0% 37.7% 17.7% 12.9%2008 6.2% 8.3% 32.2% 34.6% -2.4% 0.4%2009 5.0% 10.9% 34.9% 37.0% 12.2% 26.4%2010 11.2% 12.0% 33.7% 36.9% 11.0% 4.1%2011 7.7% 8.9% 31.9% 35.3% 3.1% 9.2%2012 4.0% 9.3% 29.8% 34.9% 2.8% 0.3%

Source: IMF, WSD Estimates

Indian GDP Components 2008-2012


2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

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0.0%

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China Steel Dmnd India Steel DemandChina FAI (rhs) India FAI (rhs)

Mil

lion

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% G

DP


2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

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India Steel Dmnd @ China Growth Rate India Steel Demand China FAI (rhs)

Mil

lion

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% G

DP

17

Global Steel in the Decade Ahead:Continued Slow Growth






19China’s prodigious and rapid growth via the BF/Integrated route changed the landscape of global steel production

Global Steel Production & Methodology:China Driving the “Bus”

183

444

527

690

39 44 49 80

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300209

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182209

147

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140

151 136

166

104

164

152

183

0

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1200

2003 2007 2009 2013f 2003 2007 2009 2013f

BOF EAF

China Advanced Developing

+43%

+19%

+31%

20Global iron ore demand has increased 703 million tonnes since 2003, of which China has accounted for 669 million tonnes (95%).

∆ = 697 Million tonnes

Global Iron Ore Demand

21Domestic production has increased 7.7% CAGR since 2000, while imports have grown 22% CAGR and account for 61% of the total requirement.

Chinese Iron Ore Supply

70 92 111 148208

275326

383444

628 619687 735

149 142161

193

209

284

323

368305

264 306

323

361

0

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1200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Imports Production

Mill

ion

Met

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22While Chinese demand increased 198% (14.6% CAGR) since 2003, the price of ore delivered to China has increased 293% (18.7% CAGR).

Iron Ore Price and Demand

$30

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Chinese Iron Ore Demand

Average Annual Price of Iron Ore Delivered to Hebei Province

Iron Ore Price Trendline

USD

per Tonne

23

Region Project Status Gross Capacity Region Project Status Gross Capacity

CIS 3.5 Europe 9.5Construction 3.5 Closed, reopen/plans 2

Europe 7.5 Closed, reopen/plans 7.5Closed, reopen/plans 5.0 Oceania 112.8

Feasibility 2.5 Conceptual 15North America 32.0 Feasibility 80.8

Construction 7.0 Operating, exp/constr 14Feasibility 3.0 Operating, exp/plans 3

Operating, exp/constr 8.0 South America 61.3Operating, exp/plans 14.0 Operating, exp/plans 10

Oceania 137.8 Feasibility 24Conceptual 15.0 Operating, exp/constr 27.3Construction 63.0

Feasibility 15.0 Under Construction/Operating 41.3Operating, exp/constr 1.8 Conceptual/Prefeasibility/Feasibility 119.8Operating, exp/feasib 43.0 Operating Expansion-Planning Stage 13.0

South America 147.5 Closed-Reopen Plans 9.5Conceptual 10.0 Grand Total 183.6Construction 19.5

Feasibility 19.5 Source: UNCTAD & WSD estimates

Operating, exp/constr 42.0Operating, exp/plans 4.1

Prefeasibility 50.0Operating 2.4

Under Construction/Operating 147.2Conceptual/Prefeasibility/Feasibility 158.0Operating Expansion-Planning Stage 18.1Closed-Reopen Plans 5.0Grand Total 328.3

Source: UNCTAD & WSD estimates

2013 Upcoming Iron Ore Projects 2014 Upcoming Iron Ore Projects(million tonnes) (million tonnes)

Capacity Expansion PipelineRunning Away from Demand

24Chinese “high-cost” production may amount to only ~75 million tonnes – a figure that is easily displaced by lower-cost imported material

$0

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Cumulative Capacity (Million Tonnes)

Chinese Iron Ore Cost Curve(Normalized to 62% Fe)

Source: WSD World Iron Ore Cost Curve

Chinese Domestic Iron ore Production Cost

25Chinese “high-cost” production may amount to only ~75 million tonnes – a figure that is easily displaced by lower-cost imported material

$0

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Cumulative Capacity (Million Tonnes)

World Iron Ore Cost Curve(normalized 62% Fe)

Source: WSD World Iron Ore Cost Curve

The cost curve database includes for non-China, 45 operating and 10 planned mines with a total capacity of 864 million tonnes, FOB the port of export; and for China, 45 individual mines, 10 steel-mill-weighted average cost mines and 21 provincial composite cost mines,FOB mine. The combined capacity of all the Chinese mines is 438 million tonnes.

Global Iron ore Production Cost






27Despite rising I.O. and coal costs, Indian producers are well-positioned to remain among the lowest cost well into the future

-100

0

100

200

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400

500

600

700A

ust

rali

a

Bra

zil

Ch

ina

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Eas

tern

Eu

rop

e

Wes

tern

Eu

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Ind

ia

Jap

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orea

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US

A I

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$ pe

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Pig Iron / Hot Metal Average Production Cost by Region

Energy Credit

Energy

Other

Labor

Scrap

Iron Ore

Coal/Coke

Wide Disparities between the “Haves” & “Have Nots”

28

Stronger US Dollar to Have Numerous Ramifications

80

90

100

110

120

130

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

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Per

cen

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USA Trade-Weighted Dollar Value

Source: Bloomberg

6 years

7 years

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10 years

6 years

WSD estimate

29Flattening of the cost curve promotes increased competition and delays production cutbacks when the price plummets below the marginal cost of the high-cost producer

WSD’s World Cost Curve for Hot-rolled Band (Including overhead)

$300

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$550

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0 50 100 150 200 250 300 350 400 450 500 550 600 650

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Cumulative Capacity (million metric tonnes)

August 2011

August 2012

August 2012

30WSD’s World Cost Curve has flattened substantially since the peak cost period in July 2011.

World ex-China Hot-rolled Band (Including overhead)

31Despite a decline in costs from recent peaks,

Chinese producers remain in a difficult position

ChinaHot-rolled Band (Including overhead)






33

Chinese Scrap Overload

34

Steelmakers’ Metallics

35Obsolete steel scrap demand was 358 million tonnes in 2011 and the recovery rate was the highest on record. In 2012, the obsolete scrap requirement was flat at 358 million tonnes implying a 0.94 recovery rate from the obsolete scrap reservoir

that is on average 10-40 years old.

Global Steel Scrap Demand

0.00

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1.00

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0

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Obsolete Scrap Usage Ratio (RHS)

Obsolete Scrap Requirement (LHS)

New Scrap Usage (LHS)

Home Scrap Usage (LHS)

36

Global Steel Scrap Supply

0

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12000

1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

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Global Scrap Reservoir 1940-2010

Advanced Economies

Developing World ex-China

China

Advanced and Industrialized Developing Economies have been the dominant source of steel scrap supply [growth] in the past 30+ years

37WSD analysis indicates that the obsolete scrap recovery rate and the price of shredded scrap

price are highly correlated with a 0.90 coefficient of correlation.

0

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Ratio: Trade Adjusted Obsolete Scrap Usage to Average Reservoir 10-40 years old

2011

2010

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2008

2007

20062005

2004

2003

2002

2001

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2012

Global Steel Scrap: Price versus Recovery Ratio

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2013 Metallics Requirements

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2025 Metallics Requirements

40

Chinese Obsolete Scrap:Supply-Demand Balance

0

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Obsolete Scrap Reservoir 10-40 Years Old

Obsolete Scrap Demand

Shift: Scrap Deficit to Scrap Surplus

2015: +12 million

2020: +67million

2025: +150million

2012 Demand and Reservoir: 63 million tonnes and 57 million tonnes 2025 Demand and Reservoir: 67 million tonnes and 220 million tonnes

41

Chinese Obsolete Scrap:Increase BOF Scrap Ratio from 14.5% to 20%

0

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Mil

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2020: +51 million

2025: +119 million

2012 Demand and Reservoir: 63 million tonnes and 57 million tonnes 2025 Demand and Reservoir: 101million tonnes and 220 million tonnes

42

Chinese Obsolete Scrap:Increase both EAF share of crude steel production

to 20% of all Chinese production

0

50

100

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2020: +47 million

2025: +117 million


43

Chinese Obsolete Scrap:Increase both EAF and BOF related consumption

0

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Mil

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2020: +32 million

2025:+89 million


442013 Demand and Annual Reservoir: 68 million tonnes and 57 million tonnes

2035 Chinese Annual Reservoir: 400 million tonnes

Chinese Obsolete Scrap:Are you ready for arrival?

45

Thank You

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A Decade of “Pain” to follow a Decade of “Gain?” CANACERO September 11, 2013.

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