Barclays Capital Presentation

Exploring the supply chain: steel market outlook
Edwin Basson Director General, World Steel Association
Dr Edwin Basson, Director General, worldsteel
Barclay's Capital Global Resources Conference
Antitrust
Most nations (and the European Union) impose constraints on the conduct of market participants through antitrust laws. Violation of these laws can result in civil and criminal penalties. Agreements to fi x prices, limit production or divide markets are typical of the activities that most clearly violate antitrust laws. Many antitrust laws apply also to other anti-competitive practices such as the exchange among competitors of sensitive proprietary information relating, for example, to current production costs or non-public strategic plans. In some cases a violation can be found if there is an effect on commerce in a country, even though the offending conduct took place outside that country. However, it is recognised that not all co-operation among competitors is bad and that indeed some such activities may be pro-competitive. Hence the proliferation of industry associations that serve the interests of their members while avoiding anticompetitive activities. worldsteel is a pro-competitive industry association. As such, its members can feel confident that their participation in worldsteel will not violate the antitrust laws, provided that they avoid improper ancillary activities.
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Contents
Changes in raw material markets Production outlook worldsteel Short Range Outlook Challenges for the steel industry
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Steelmaking Raw Materials
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Iron ore demand has increased sharply during the last decade
2000
1500
1000
500
0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 China domestic Seaborne supply w/o India ROW domestic India seaborne
12 December 2011
Demand for iron ore increased markedly during the previous decade driven mostly by demand from China for imported iron ore. This ballooning demand was prevalent during the period 2000 to 2010, but was very strong during the middle of the decade. During the same period the domestic production of iron ore in China also increased, but not nearly enough to feed the appetite of the steelmaking sector in China.
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The era of transition

Market Structure : Fundamental + Non-fundamental Factors
Market (Fundamental) Factors Market (Fundamental) Factors
Steel Production RM Balance RM Demand
- World, China import
Past
RM Production
- Majors / Minors - Emerging Countries - China Production
RM Price Present
Shorter pricing system Resource nationalism Rising cost for new mining projects Project delays
Risks Future ?
Derivatives Abnormal weather condition Quality deterioration of RM Supply control
Non-fundamental Factors 6 Non-fundamental Factors

12 December 2011 6
The market structure for iron ore trade is in the process of adjusting to the new dynamics of iron ore demand and supply. Historically, the market balance was relatively predictable, resulting in a relatively stable price that cleared the market. Raw material (iron ore in this case, but also coking coal and other steelmaking raw materials) was a function of steel production. Raw material production was known, as new investments were well announced and took a few years to come into production. Similarly, steel demand was relatively well known and growing only moderately. All of this changed during the past decade and is today influencing the stability of the markets for steelmaking raw materials. The future is more uncertain, with a large range of factors impacting on the availability of supply of steelmaking raw materials. Apart from the need to develop new mines, the existing infrastructure required to supply raw materials, such as ports and railway infrastructure are increasingly under pressure. Uncontrollable effects such as adverse weather regularly have an impact on the balance between supply and demand in the market. This contributes to increasing uncertainty of supply and volatility of the cost of raw materials to steel makers.
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Raw materials prices reflect the growing demand from the steel sector
Iron ore
250 200 150 100 50 0
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
800 Sep-11 186 700 600 500 Nov-11 147 400 300 200 100
Coke
Sep-11 490 Nov-11 470
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Source: SBB, Indian Iron Ore 63% Fe fines dry / China import CFR N.China port $/t
Source: SBB, Coke 10.5-12.5% ash / China export FOB main ports $/t
12 December 2011
Since the middle of the previous decade, prices for the most important steelmaking raw materials showed increasing volatility, but also a rising price trend the result of the factors briefly discussed in slide 6.
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Raw material cost may be key differentiator going forward

Basic metals industries strongly dependent on raw material inputs Higher raw material costs directly impact on the industry
Composition of Gross Output

Construction Metal Mechanical Electrical Products Eng. Eng. Basic Metals
43%
39%
33%
29%
22%
57%
61%
67%
71%
78%
Intermediate consumption
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Value added
The basic metals industry, which includes the steel industry, is highly sensitive to the cost of raw materials. Slide 8 shows that the basic metals industry has the highest level of intermediate consumption of all the basic manufacturing industries. As a result, increasing volatility and levels in the cost of steelmaking raw materials have a marked impact on the sustainability of the steel industry.
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Major issues in raw materials supply

New projects realisation could be seriously limited due to insufficient infrastructure, financing problems and difficulties in acquiring environmental permissions, etc. Existing supply sources also face increasing risks such as abnormal weather (in Australia) and export restrictions in the major exporting countries. Global steel industry is expected to continue to grow despite high uncertainties in the global economy. Also, raw materials demand may stay robust for the time being.
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Steelmaking Overview
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World crude steel production

Crude steel production by region
mln t 1 600 1 400 1 200 1 000 800 600 400 200 0 2001
EU 27
2002
CIS
2003
2004
2005
2006
2007
2008
2009
2010
Other Europe
North America
South America
Africa and Middle East
Asia and Oceania
Source: worldsteel, Steel Statistical Yearbook

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As could be expected from the data shown in slide 5, steel production has shown strong growth during the past decade, and the growth experience was very specific to China. During the past decade, China grew into a position where close to 50% of global steel production takes place in China, with other regions remaining relatively stable as producers.
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World crude steel production by process

World crude steel production by process, % to total
%
100 90 80 70 60 50 40 30 20 10 0 2001 2002 2003 2004 2005 BOF
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2006 EAF
2007
2008
2009
2010
OHF
During the previous decade, the type of steelmaking technology favoured the integrated route, with a technology reliant on blast furnaces and basic oxygen furnaces to reduce raw materials to iron and eventually to steel. Because most new capacity created was of the integrated route nature, it helped to exaggerate the changes in the raw materials markets that were discussed earlier. The electric arc route (EAF), was less popular owing to the high dependence of this route on electricity supply a source of energy that became not only more scare in recent years, but also much more costly in some countries. As a large part of the new steelmaking technology was developed in China, with insufficient electricity supply, it is clear why the integrated route became more popular during the previous decade.
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Capacity utilisation yearly

Steel capacity utilisation bounced back to 81% in Jan-Sep 2011, approaching pre-crisis level
100%
Global Steel Capacity Utilization
90% 86% 84% 80% 80% 80%
88%
88% 89%
89% 81% 79% 75%
70% 69%
60% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Jan-Sep
Source: worldsteel, monthly statistics

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In addition to the many changes in the raw material supply chain, the steel industry had to contend with the impact and aftermath of the world financial crises of 2008/9. This was done rather successfully by the industry and has prevented large scale business failure. However, utilisation of capacity has declined as a result of the financial crises, as can be seen by the sharp drop in 2009. To date, while the industry is recovering strongly, this recovery is rather unequal between regions.
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13
SRO Overview
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Global Overview
Apparent Steel Use, finished steel (SRO October 2011)
2010 (estimates) 1 312.4 million metric tons, 15.1% growth 2011 (forecast) 1 397.5 million metric tons, 2012 (forecast) 1 473.6 million metric tons,
45 SRO submissions (~94% of the ASU world total,
Source: worldsteel, Short Range Outlook
12 December 2011 15
6.5% growth
5.4% growth
based on 2012 data)
The steel industry is a large global industry, with close to 1400 million tonnes of estimated steel consumption during 2011, and expected growth into 2012.
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Regional Summary
2010 World European Union (27) Other Europe C.I.S. N.A.F.T.A. Central & South America Africa Middle East Asia & Oceania China
12 December 2011
2011
mmt
2012
10/09 11/10 12/11

%
2012 as % of 2007 121.0 80.1 110.2 106.1 89.5 127.5 113.7 123.7 140.7 162.9
1 312.4 1 397.5 1 473.6 144.9 29.6 48.6 110.9 45.6 24.5 47.6 860.6 598.1 155.0 33.0 55.6 120.9 47.8 21.4 50.0 914.0 643.2
16
15.1 21.1 24.0 34.5 32.8 35.2
6.5 7.0 11.3 14.4 9.0 4.7
5.4 2.5 5.7 7.5 4.9 9.8 11.0 7.9 5.4 6.0
158.9 34.8 59.8 126.8 52.4 23.8 53.9 963.1 681.6
-8.9 -12.7 14.6 11.1 8.5 5.0 6.2 7.5
Regionally, the developed regions of the world are lagging the developing regions, as is clear from the lower growth rate in steel consumption for the EU. NAFTA growth rate in steel consumption benefits form the inclusion of Mexico as part of the NAFTA region. The exceptionally high growth rate for Africa is partly the result of weak steel consumption at the start of 2011 owing to the political uncertainty in the region for a large part of 2011. Lastly, it is interesting to note that the growth rate for steel consumption in China is slowing down. This does not mean that China is becoming less important as a steel consumer. It only means that China is growing larger at a slower pace.
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Regional Summary at a Glance

World C.I.S. Africa % 40 30
% 40 30 20 10 0 -10 -20 -30 -40
2007 2008 2009 2010 2011 2012
EU-27 N.A.F.T.A. Middle East
Other Europe Central & South America Asia & Oceania
Growth Rate
140 130 120 110 100 90 80
Index (2007=100)
20 10 0 -10 -20 -30 -40 2006 2007 2008
70 60 50
2009
2010
2011
2007
2008
2009
2010
2011
2012

12 December 2011 17
The information in slide 16 is shown in a different way in slide 17. Focus in particular on the right sight of the slide, where steel consumption by region has been indexed to 2007 consumption levels, with 2007 set to the level of 100. Any region showing and index level of higher than 100 had a larger steel consumption in 2011 or 2012 than 2007. Again, it is clear that only the regions of EU27 and USA has an index value of less than 100 in 2012, indicating that steel consumption in these regions are lower today that it was in 2007. Globally, steel consumption has grown by slightly more than 20% between 2007 and 2012 indicating a continued robust and healthy demand for steel.
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17
Apparent Steel Use (ASU), 2007-2012

World without China mmt and y-o-y % growth
mmt % 30 y-o-y % growth mmt 900
21.3
20 10 0 -10 -20
800 5.2
800
771 714 589
754
792
700 600
5.6 -3.5
5.0
500 400 300 200 100
-30 2007 2008
-23.7
2009 2010 2011 2012

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Despite the strong position of China on the global steel market, the world excluding China has also shown growing demand for steel and is expected to show additional demand growth of slightly less than 300 million tonnes between 2009 and 2012.
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Regional Contribution to Demand Growth

2010 World European Union (27) Other Europe C.I.S. N.A.F.T.A. Central & South America Africa Middle East Asia & Oceania China
12 December 2011
2011 85.2 10.1 3.3 7.0 10.0 2.1 -3.1 2.4 53.4 45.1
20
2012 76.0 3.9 1.9 4.2 6.0 4.7 2.4 3.9 49.1 38.4
10/09 100.0 14.7 3.3 7.2 15.9 6.9 -1.4 3.5 49.9 27.1
11/10 100.0 11.9 3.9 8.2 11.7 2.5 -3.7 2.8 62.7 53.0
12/11 100.0 5.1 2.5 5.5 7.8 6.1 3.1 5.2 64.6 50.5
increase in tonnages (mmt)
share in world total increase (%)
172.3 25.3 5.7 12.5 27.4 11.9 -2.4 6.0 85.9 46.7
The important role of China in the steel market cannot be ignored as is evident from the fact that China has accounted for 53% of the additional growth in steel demand between 2010 and 2011. NAFTA and the rest of Asia and Oceania also played an important role in the growth of demand between 2010 and 2011.
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World Steel Trade by Region, Net Exports mmt

2000
China Asia excl Chn Afr&ME SoAm NAFTA CIS Other Europe EU
2005
0 -11 -30
-46 -7
2010
24
-10 -2 -14 8 -33 49 -2 11

-1 -26
12
-4 -14
53
4
45
14
10

12 December 2011 21
The regional shifts in the steel industry are also clear from a comparison of the import and export patterns of the major regions. Comparing the net trade balances for the years 2000, 2005 and 2010 shows clearly that Africa and Mid-East is becoming a large net importer of steel. With a young population and growing wealth as a result of exports of oil and other mineral resources, demand in this region is far outstripping supply, resulting in growing net imports. The CIS remains constant as a net exporter, while NAFTA is declining as a net importer. China has changed from a net importer to a net exporter during the period.
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Conclusion
Global steel demand has maintained relatively stable recovery momentum so far, despite lingering uncertainties and volatilities in the global economy Current forecast implies continued recovery amid rising uncertainties Containment of the euro zone crisis and healthy growth of the emerging economies, especially of China, critical to current forecast
Otherwise, substantial downside risk to the forecast
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Steel Industry Challenges
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Medium-term challenges
Despite differences between regions, the industry will need to address the same three key issues in the medium term Economic growth Growing regions in the world are also those where steel production is increasing Developing regions do not have a debt overhang, and are producing net cash flow on annual basis Raw material challenge Europe as net importer of steel making raw materials Energy as constraint Environmental challenge Energy
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Despite the regional shifts in production and trade, the global steel industry faces three significant challenges in the near future. Firstly, weak economic growth is expected almost universally in all regions in 2012. While this does not mean that the global economy will go into a recession, it does mean that growth is expected to slow down, presenting the steel industry with more challenging market conditions. Secondly, the changes in the raw material markets and the increasing volatility of these markets are presenting steel makers with a significant challenge. The options to steel makers are varied and includes the option of investing in own raw material capacities to developing a focus on more exclusive steel products in an effort to maintain profit margins. Lastly, the steel industry will have to invest in technological solutions to become more sustainable and to limit the impact of the industry on the environment. It is impossible, to consider a future, modern sustainable society, without also thinking about steel as the core element in such a future sustainable society. It is up to the steel industry to capture the opportunities that the road to a future sustainable society offers.
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Exploring the supply chain: steel market outlook

Edwin Basson Director General, World Steel Association

Dr Edwin Basson, Director General, worldsteel

Barclay's Capital Global Resources Conference

Dr Edwin Basson, Director General, worldsteel

Barclay's Capital Global Resources Conference

Dr Edwin Basson, Director General, worldsteel

Barclay's Capital Global Resources Conference

Steelmaking Raw Materials

Dr Edwin Basson, Director General, worldsteel

Barclay's Capital Global Resources Conference

Dr Edwin Basson, Director General, worldsteel

Barclay's Capital Global Resources Conference

The era of transition

Non-fundamental Factors 6 Non-fundamental Factors

Dr Edwin Basson, Director General, worldsteel

Barclay's Capital Global Resources Conference

Sep-11 490 Nov-11 470

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Dr Edwin Basson, Director General, worldsteel

Barclay's Capital Global Resources Conference

Raw material cost may be key differentiator going forward

Composition of Gross Output

Dr Edwin Basson, Director General, worldsteel

Barclay's Capital Global Resources Conference

Major issues in raw materials supply

Dr Edwin Basson, Director General, worldsteel

Barclay's Capital Global Resources Conference

Dr Edwin Basson, Director General, worldsteel

Barclay's Capital Global Resources Conference

World crude steel production

Africa and Middle East

Asia and Oceania

Source: worldsteel, Steel Statistical Yearbook

Dr Edwin Basson, Director General, worldsteel

Barclay's Capital Global Resources Conference

World crude steel production by process

Dr Edwin Basson, Director General, worldsteel

Barclay's Capital Global Resources Conference

Capacity utilisation yearly

Global Steel Capacity Utilization

90% 86% 84% 80% 80% 80%

89% 81% 79% 75%

Source: worldsteel, monthly statistics

Dr Edwin Basson, Director General, worldsteel

Barclay's Capital Global Resources Conference

Dr Edwin Basson, Director General, worldsteel

Barclay's Capital Global Resources Conference

based on 2012 data)

Dr Edwin Basson, Director General, worldsteel

Barclay's Capital Global Resources Conference

10/09 11/10 12/11

15.1 21.1 24.0 34.5 32.8 35.2

6.5 7.0 11.3 14.4 9.0 4.7

158.9 34.8 59.8 126.8 52.4 23.8 53.9 963.1 681.6

-8.9 -12.7 14.6 11.1 8.5 5.0 6.2 7.5

Regional Summary at a Glance

Dr Edwin Basson, Director General, worldsteel

Barclay's Capital Global Resources Conference

EU-27 N.A.F.T.A. Middle East

Other Europe Central & South America Asia & Oceania

20 10 0 -10 -20 -30 -40 2006 2007 2008

Source: worldsteel, Short Range Outlook