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Global Outlook for Pipes from a Steel Maker’s Perspective
National Association of Steel Pipe Distributors
New YorkSeptember 15, 2006
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Sanjiv Goel General Manager Pipes & Tubes
Mittal Steel Holdings B.V.
Hofplein 20
3032 AC Rotterdam
The Netherlands
T: + 31 10 217 96 37
www.mittalsteel.com
Introduction
More than 20 yrs in the industry, in several countries
I am based in Holland
How you can reach me
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Agenda
• Arcelor Mittal
• Mittal Steel Pipes & Tubes
• Global outlook for Pipes & Tubes
• Challenges ahead for steel makers
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Arcelor Mittal
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Mittal Steel and Arcelor together have created the global leader in steel
#1 steel producerOver 20 acquisitions
during the past 5 years
#2 steel producerNumerous acquisitions over the past 5 years
Creating a sustainable future for the steel industry through consolidation
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The merger creates the undisputed leader…
0
25
50
75
100
125
Combined entity production vs. competitors(2004 pro forma - Mt)
Arc
elor
Mit
tal
Stee
l
106
31 31 3121 21
0
3
5
8
10
13
Combined entity EBIT vs. competitors(2004 pro forma - $B)
Arc
elor
Mit
tal
Stee
l
10.9
4.7
3.42.8 2.5
1.5
Combined Entity Production vs.
Competitors (2004 pro forma –
mt)
Combined Entity EBIT vs.
Competitors (2004 pro forma –
US$bn)
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The merger creates a powerful combination…
• Leadership position in high-end segments in North America, with strong R&D capabilities
• Operations in high-growth economies with low-cost, profitable assets and local operating expertise in numerous emerging markets
• Access to raw materials and upstream integration • Entrepreneurial culture• Leadership position in high-end segments in Western Europe, with strong
R&D capabilities• Low-cost slab manufacturing in Brazil which can be expanded for export to
Europe and North America• Successful distribution business in Europe
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• Reduce earnings volatility• Better capacity
management• Improved returns on capital
• Slow growth in mature markets
• Growth driven by emerging markets
Forces driving consolidation in the steel industry
Increasing need for
Sustainability
Steel
Industry
Consolidati
on
Economies of Scale
Increasing
Concentration
Among Suppliers
Capture Growth
Opportunities in
New Markets
• Disproportionate negotiating power due to raw materials supplier consolidation
• Plant specialisation, manufacturing excellence, and greater ability to sustain R&D investments
Globalisation &
Consolidation of
Customers
• Service global customer base increasingly seeking global procurement
• Critical mass in R&D • New product development
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Consolidation process is moving to the next phase
• Industry remains fragmented and largely regional– Medium-scale producers
• Large transformational combinations will be faster, more capital efficient and carry less risk than a series of acquisitions– Good quality assets becoming increasingly scarce– Fierce competitive bidding – Continuous need for integration
• First mover advantage will be critical in global steel industry consolidation
• Industry leaders of the future will be global producers with annual capacity of 150-200m tonnes
2002-2004
Regional Consolidation
2004-2005
Increasing Cross-Border Consolidation
2006-
Formation of Global Steel Companies
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Mittal Steel Pipes & Tubes
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• Over 2,000,000 MT/yr of production capacity
• 50/50 seamless-welded (excl. Valin JV in China)
• On four continents
• And growing ….
Our profile…
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Our production capacity…
0
500
1000
1500
2000
2500
MT (000)
Welded Seamless
KrakowIasi
RomanVereenigi
ng
???Aktau (Greenfield Project)
OstravaKarvina
AnnabaGalati
Temirtau
Contrecoeur
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• Early 2005 Mittal’s tube plants were still a conglomerate of independent units.
• Late last year a comprehensive Pipe & Tube strategy became operational.
• Today Mittal Steel owns a highly profitable tube producing “division” – ranking # 6 in the world.
• Focus on sales & marketing: new offices in Houston and Dubai
September 2006 : Formation of a separate strategic division
Our recent history…
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Our sales offices and production units…
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Mittal Steel’s Pipe & Tube activities are approaching customers by application-segment:
• Energy
• Construction
• Engineering & Automotive
Thus combining seamless and welded products, services and projects as required by our customers
Our segmentation…
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Global Outlook for Pipes & Tubes
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Market environment: consumption of 85 million tons, dominated by China
Source: IISI; ISSB; JFK; McKinsey 2006
4,24,2
8,2
10,3
11,0
17,2
57,0
23.8
China Europe North America
Developed
Asia
CIS Emerging Asia
Latin America
3.2
Middle East
1.8
Africa
1.0
Australia
27.9
Total
84.9
28% 20% 13% 12% 10% 5% 5% 4% 2% 1% Percentage of
total
Absolute growth
2000-2005146% 12% 3% -6% 31% 30% 17% 49% 21% 69%
Absolute growth ’05-’10 (projected)
48% 12% 10% -4% 21% 25% 11% 27% 17% 9%
Seamless
Welded
Apparent consumption 2005, mln tons
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Market environment: expected growth of 4.1% per annum to 104 million tons
Source: Global Insight; McKinsey analysis
Total 2005 Projection 2010
8.2%
CAGR’05-’10
4.9
3.2
Europe
1.1
0.6
1.6
1.3
North America
1.0
Latin America 4.2
Emerging Asia 4.2
CIS 8.2
Developed Asia 10.3
Africa
3.4
11.0
Australia
1.8
Middle East 3.2
17.2
China 23.8
0.1
0.5
11.2
2.3%
2.0%
-0.7%
3.8%
4.5%
2.2%
4.9%
3.2%
1.7%
84.9 103.6Total
35.2
19.3
12.1
9.9
9.8
5.3
4.7
4.1
2.1
1.1
7.7%
2.3%
3.0%
2.4%
5.5%
5.6%
3.9%
4.8%
5.3%
2.6%
Real GDP CAGR
4.1%
Seamless Welded Total 2005
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Market environment: capacity concentrated in seamless, fragmented in welded
21%
21%58%
Global players*
Local
champions**
Other
4% 9%
• 89%
Global players*Local
champions**
Other
Seamless capacity, 2005100% = 39 mln tons
Welded capacity, 2005100% = 109 mln tons
– Large share of capacity controlled by few players
• Global players: Tenaris (10%), Vallourec (7%), and Sumitomo (5%)
• Local champions: TMK (9%), Interpipe (5%), Tianjin (4%), Bao Steel (3%)
– Very fragmented market• Over 1,000 companies
Characteristics differs by products• Small diameter pipes (<6.3’’)
– 67% of welded market– Highly fragmented
local/regional market driven by efficiency
• Medium pipes (6.3’’< D < 16’’) – 16% of welded market– Regional/global market
driven by efficiency• Large diameter pipes (>16’)
– 17% of welded market– Global market driven by
investments and know-how
Seamless capacity concentrated to small set of:
– Global players– Local champions in
CIS and China– In the next 5 years time
we expect new capacity of 2.5 mi tons
•Welded capacity is very fragmented
– Small and medium diameter dominated by local players
– Large diameters is a global market driven by investment and know-how
– In the next 5 years time we expect new capacity of nearly 1.5 mi tons
•Still further options for consolidation out
Source: JFK; China steel yearbook; Company publications; Analyst reports; company websites; McKinsey
* Tenaris, Vallourec Mannesmann, Sumitomo** TMK, OMK, Interpipe, Tianjin, Bao Steel
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Market environment: summary of global perspective
• The overall tube market shows attractive growth from 85 million tons in 2005 to104 million tons in 2010
– Some selected segments are of major interest due to high share of growth, financial attractivity, or stable (less cyclical) demand, e.g. OCTG, line transportation, automotive or specific parts of industrial.
– Regions to focus upon include:» China, » OCTG in North America, » line transportation in CIS and Middle East.
• In the tube market polarization is occurring around “solutions in specialties” and “standard products” with different success factors for customer value creation and supplier value capture, with the specialty market being more protected against competition.
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Challenges Ahead for Steel Makers
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World energy demand.. ever growing …
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Oil prices continue going up…
2007 -2010
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Landscape…
• High oil prices are there to stay: > US$ 70 per barrel and expected to rise further during the next 10 years
• Allowing for economic exploration for deep reservoir both land and marine under difficult climatologically conditions and for energy source of lower quality (for example high sulfur)
Lead to following challenges…
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Challenges…
• More higher steel grades required => X70 – X120;
Q125; specialty grades and beyond
• Gas discoveries lead to large diameter pipes => plates
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Challenges…
• Sour service requirements everywhere
• Drilling in difficult areas leads to the need for alloyed / high strength material
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What producers need to do to face the challenges...
• Embrace growth geographies – these are a major driver of the future
• Market better – to open up latent demand
• Manage better – for value, rather than volume
• Price better – microeconomics based; minimize volatility
• Continue consolidation trendWill lead to an attractive and
sustainable industry in the 21st century
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• The upstream steel industry is consolidating
• The pipe & tube industry will also consolidate- Has already partially taken place in seamless
- Mittal Steel will grow its participation in tubes:
• Direct producer of pipes & tubes
• Key supplier of inputs for pipe & tube-making
• Access to inputs and raw materials will be paramount
Which trends will influence the pipes industry?
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• Within 5 years the growth rate for natural gas will be twice as high as for crude oil (fueling demand for large diameter pipes…)
• Within 7 years premium connections will have some sort of universal standard rather than the multiple proprietary types (is API strong enough to drive this process?)
Some less obvious medium term trends …
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Summary…
• Further consolidation in Pipe Industry as already seen in Steel. Recent mergers Tenaris/Maverik & Ipsco/NS group.
• Pipe industry shall need dedicated steel sources.
• Steel and Pipe Industry to work together in R&D efforts to meet new challenges.
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THANK YOU!
Any questions?