Agenda

1. A New Era of Global Steel: the end of state control and protectionism?Stuart Reynoldsicea11 April 2006

2. Agenda • Steel Policy: a potted history • Steel markets: global restructuring pressures • Globalisation trends • Structure of the world industry • Why globalisation? • Companies’ strategies

3. Steel policy: a potted history(Europe)

4. 19th –early20th centuries • Steel demand linked to munitions • Wealthy steel dynasties with political power • 1950s: over 1000 steel companies in Europe: 400 Italy over 300 UK

5. Post war reconstruction • ECSC – foundation for the common market • Policy: • “Ensure an orderly supply to the common market … • “ensure … consumers … have equal access to the sources of production… • “ensure … lowest prices … while allowing .. normal return to invested capital … • “… encourage undertakings to expand and improve their production potential … • “promote improved working conditions and an improved standard of living for the workers … • “promote the growth in international trade … • “promote an orderly expansion and modernisation of production …”

7. 1950-1970: Central planning • Common external tariff • Managed prices • Levy on companies • Subsidies for investment • Collaborative R&D • Detailed data collection new investment in big integrated plants  national champions

8. 1960-1990: nationalisation & state control • Excess capacity, inefficiency  state subsidies, nationalisation • Post 1979 State of Manifest Crisis: Davignon Plan • Production quotas • Inhibited new investment and innovation • ESF/ERDF funds for training, infrastructure etc in closure areas

9. 1980s - 2000: re-privatisation • Debt write-off; investment subsidies for restructuring • EC monitored restructuring plans

10. 1990 - 2007: Transition and Accession to EU • 1990s: global overcapacity • ECE and CIS crisis: • Demand collapse (50–70% fall) • Obsolete plant • Environmental problems • EU State aid code – capacity reduction • Accession plans: privatisation and restructuring of steel in ECE • Transfer to steel barons in CIS • End of ECSC:

12. Steel markets

13. Steel consumption: mixed fortunes In the long term, steel intensity is declining in the mature economies…. …but elsewhere demand growth is strong. Source: IISI, IMF

14. Its all about investment 75-80% of steel consumption goes into investment…. ..and the location of investment and construction has shifted to China, … then S Asia, L America? …

15. But investment is volatile! The “Asian crisis” in 1998 saw investment levels slashed. Source: ADB In China today, nearly 50% of GDP is accounted for by investment.

16. What about manufacturing? • Heavy engineering and vehicle manufacturing is on the move: • From Germany to Slovakia and Poland • From North America to Mexico and China • From Japan to China and ASEAN • It is also growing, but only slowly.

17. Steel demand and GDP Below 2 - 3% GDP growth, steel declines

18. By region: The mature economies: +17Mt China: +185Mt ROW: +83Mt TOTAL: +275Mt Average annual growth rate:4.3% … but it depends on China! Consumption changes2004 - 2010

19. 2000- 2007?: the China boom • First sustained period of capacity shortage • Massive cash flows to steel traders/ exporters • Huge investment in new capacity in China; modernisation in CIS • Shift of power to ore exporters • Plans for massive new capacity in Brazil, India

20. Capacity • Crude steel capacity in 2004 was around 1.2 billion tonnes • By 2007, this will have increased by 180Mt (15%). • 140 Mt in China • 40Mt elsewhere • Demand increases by ~135Mt • China estimated to have already 100Mt excess capacity

21. 2004 trade patterns Semis and hot rolled products from the CIS and Latin America. Cold rolled, alloys, tubes etc. from Industrial Asia and Europe.

22. Operating costs(BOF- HRC 2005) There are wide cost differences between producers in the BRIC regions and elsewhere. And plenty of scope for these differences to get wider!

23. Trend in China’s trade • China became a net exporter in late 2005 Lower value products Higher value products

24. 76Mt of new HRC capacity by 2008

25. Trade patterns will change … The key questions: • Can Europe and Industrial Asia continue to export on the basis of their lead in technology? (no) • Will low cost countries produce semis for finishing elsewhere? (yes) • Will China export aggressively if it has a capacity surplus? (probably) • Will North America reduce its net imports? (maybe)

26. This fundamental shift can only be achieved by global firms … Crude steel production will have to • Fall in Europe and Industrial Asia • Rise by much more than consumption in Latin America, China and India • Rise at least in line with consumption in North America, CIS, and ME/NA. … and this assumes no economic crash in China!

27. Globalisation trends

28. The industry’s views • Competitors, suppliers and customers are more global & concentrated than steel • Industry wants more consolidation, to stabilise prices and capacity • They want more bargaining power with suppliers and big customers • Need more globalisation to optimise location, procurement, trade benefits, and transfer of know-how

29. The objectives of global steel companies • Control raw materials • Control trade(rs) • Defence against losses in EU/ US • Transfer know-how • Reduce competition in the high value steel markets

30. The present global & regional concentration in the steel industry

31. IISI top companies 2004/5

32. Big economies of scale, and important know-how, but …. • Top 5 companies = 20% of world steel • Top 10 companies = 30% • Top 75 companies = 50% • Very many single plant companies, below economic size

33. Most big steel companies only make steel … …. but the biggest EU steel company gets most revenue (and profit) from downstream engineering

34. Organic growth is rare • All the top twenty steel companies have been created by recent mergers & acquisitions • ... except Baosteel, Posco and SAIL

35. Europe’s top 5

36. North America’s top 5

37. Industrial Asia’s top 5

38. CIS’s top 5

39. Latin America’s top 5

40. Regional but not global • ..and still a long way from restructured into efficient sized units

41. Lessons from other sectors

42. Suppliers: Iron ore • 3 majors : 36% of world output and 50% of world trade

43. Customers: Automotive • 10 global majors have 90% of world car market

44. Major competitor: Cement • Smaller plants and only local markets, with little trade, yet top 5 hold 20% of global output

45. Major competitor: aluminium • Top 5 have 40% of world market

46. Past & recent M&A activity

47. More, bigger, more cross border mergers & acquisitions No of deals Value of deals ($bn) Source: PwC “Forging Ahead”

48. A few big mergers … • 2005 Mittal: ISPAT Intl, LNM, ISG • 2002 Arcelor: Arbed, Usinor, Aceralia (+CST +Dofasco) • 2000 JFE: Kawasaki, NKK • 1999 Corus: British Steel, Hoogovens • 1999 Thyssen Krupp: Thyssen, Krupp, Hoesch • 1990s Evraz: Nizhny Tagil (NTMK), West Siberia (ZSMK) and Novokuznetsk (NKMK).

49. A few companies grew through frequent acquisitions / privatisations • Mittal: Krivoyrozhstal, Polska, Sidex, Karmet, … and many others • Ispat Industries/ GSH: Kremikovtsi, Delta, Natsteel, Izmir, Bosnia, Libya • Severstal: Rouge, Lucchini … • Riva: Ilva + minimills • Gerdau: minimills in N & S America; Portugal; Spain • Techint/ Ternium: SIDOR, HyL ..

50. Very few grew big through organic growth .. • Nucor: based on new technology • India, China … … but most new capacity & growth in the past came from public sector or public/private projects for regional development  learning problems, low quality and productivity, protection, subsidies, dumping