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Global Market and Ukrainian

Steel Industry Development

VlasyukV.S.

SE UPE Co. Research & Consulting, Ukraine

70th Session of the OECD Steel Committee Meeting,

Paris, 12-13 May 2011

SE UPE Co. Research & Consulting

State Agency of Ukraine for Management of

State Corporate Rights and Property

161

543567

0

100

200

300

400

500

600

2003 2004 2005 2006 2007 2008 2009 2010 2011-1Q

crude steel

1. Increase of crude steel production cost

During 2003 – 2011 production cost of crude steel has increased rapidly

by almost 4 times from 161$/t (2003) to 567$/t (1Q-2011)

Increase by

400 $/tor

3.5 times

I. Global market tendencies

Source: UPE Co.

Pro

duction c

ost, $

/t

Ukraine

1 328

1 218

1 424

1 500

901

652

798

836

0

200

400

600

800

1 000

1 200

1 400

1 600

1951 1961 1971 1981 1991 2001 2011 forecast

World World (w/o China)

2. World steel production growth

However, steel remains the main structural material and steel consumption continues to

grow at an unprecedented rate. This year crude steel production in the world will reach a

new record 1 500 million tonnes due to further consumption increase in the developing

countries (especially in China +38-40 million tons) and further recovery of production to

pre-crisis level in the advanced economies

Fundamental factors dominate.

Robust demand in developing

countries pushes steel production up

Source: WSA (fact), UPE Co. (forecast)

Cru

de s

teel p

rod

uction

, M

t


18,3 17,0 17,3

37,1

82,6

59,3

147,4

181,0

0

20

40

60

80

100

120

140

160

180

200

1998 2000 2002 2004 2006 2008 2010 (1Q)

2010 (3Q)

2011(1Q)

50,939,8

48,1

125,0

300,0

129,0

225,0

328,0

0

50

100

150

200

250

300

350

1998 2000 2002 2004 2006 2008 2010 (1Q)

2010 (3Q)

2011(1Q)

Average annual prices in 2011 are expected to be:

for iron ore - 165 $/т fob Brazil (+43.5% in comparison with 2010)

for coking coal - 280 $/т fob Australia (+50.4% in comparison with 2010).

Further increase of demand has led to growth of prices in 2nd quarter against 1st quarter of 2011 :

o iron ore +23.5% up to 184 $/т fob Brazil

o coking coal +42.6% up to 328 $/т fob Australia

3. Raw material prices continue to increase

Vale Carajas fines (CJF) 66% Fe

$/t fob Brazil (to Asian market)

Hard coking coal, Peak Downs

$/t fob Australia (to Asian market)

Source: SBB, UPE Co.

10-times

increase

7-times

increase


75122

16347

96

123

32

61

84

30

39

43

26

24

27

18

17

18

29

29

33

22

26

27

49

51

53

0

100

200

300

400

500

600

2009 2010 2011 forecast

other costs

labour

el/energy

Ferroalloys

Natural gas

Raw materials delivery

Scrap

Coking coal

Iron ore

In 2011 the rise of steel cost (appx. +105$/t) is expected mostly due to increased price

for iron ore, coking coal and scrap

4. Further increase of steel cost in 2011

Billet production cost ($/t ExW) in Ukraine (for non-integrated mills)

+138$

+105$

Source: UPE Co. est.

327

465

571


0

100

200

300

400

500

600

2003 2004 2005 2006 2007 2008 2009 2010 2011-1Q

0

100

200

300

400

500

600

700

800

2003 2004 2005 2006 2007 2008 2009 2010 2011-1Q

5. More rapid growth of the production cost in comparison with

the market price for steel products

production cost, $/t ExW

While the current production cost has already exceeded the 2008 peak level,

steel product prices are still below the pre-crisis level of 2008


export price, $/t fob Black Sea

billet billet


83,1%

75,3%

70%

72%

74%

76%

78%

80%

82%

84%

before crisis (2007)

nowadays(2011)

365

570

0,00

100,00

200,00

300,00

400,00

500,00

600,00

before crisis (2007)

nowadays(2011)

6. Millstones of competition

Post-crisis situation in the global steel market is quite different from the pre-crisis one. The main distinction

consists in the availability of two factors unfavorable for producers, namely “excess” of capacities and high

production costs. This situation intensifies competition dramatically and bears substantial risks for numerous

outdated and non-efficient mills, especially for those not integrated with raw material producers

Overcapacity

Production cost

increase

Capacity utilization %

Steel cost $/t


100

200

300

400

500

600

700

800

2003 2004 2005 2006 2007 2008 2009 2010 2011-1Q 2011-2Q

production cost+transport

market price, fob Black Sea

7. Decrease in profit of steelmakers (e.g. Ukraine)

Since 2009 steelmakers operate with a much more modest margin

as compared to the pre-crisis years

Billet, $/t

Source: UPE Co. est

Market balance as a

dominant factor in pricingProduction cost as a

dominant factor in pricing


8. Impact of steel production cost on the market

Decrease of steelmakers profit

Change of the seasonal price variations, namely

more intensive price increase in 1st quarter

Acceleration of vertical integration


9. Key macroeconomic and financial indicators still favorable

for global economy

Source: ECB, Bloomberg

Indicators Jul 08 Jan 09 Jun 10 Apr 11

Interest rate of Federal Reserve System (USA),

%2,0 0,25 0,25 0,25

Interest rate of European Central Bank (EU), % 4,25 2,0 1,0 1,25

Interest rate of Bank of Japan, % 0,5 0,1 0,1 0,0

3 month USD LIBOR/OIS spread, b.p. 70 120 33 16*

Commercial bank deposits at ЕCB, $ bn 0,6 360 214 24

Price per share JP Morgan Chase on NYSE, $ 41 23 39 45

* Corresponds to pre-crisis level which made up 10-15 (June 2007)

Today's global financial situation looks to be quite stable owing to the governmental monetary policy

(low interest rates and free access to liquidity). In 2011 quite comfortable conditions for crediting can

be expected due to economic growth and lending renewal in developed countries


0

20

40

60

80

100

120

140

0

200

400

600

800

1000

1200

1400

1600Ja

n

Ap

r

Jul

Oct

Jan

Ap

r

Jul

Oct

Jan

Ap

r

Jul

Oct

Jan

Ap

r

Jul

Oct

Jan

Ap

r

Jul

Oct

Jan

Ap

r

Jul

Oct

Jan

Ap

r

Jul

Oct

Jan

Ap

r

Jul

Oct

Jan

Ap

r

Jul

Oct

Jan

Ap

r

Jul

Oct

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Billet $/т fob Black Sea (left axis) Crude oil, WTI $/bbl (right axis)

10. …Nevertheless alarms of the looming threat are coming …

Source: Bloomberg, IMF, UPE Co.

Soft monetary (easy-money)

policy by the FED

(during 2005-2007 interest rate

decreased from 6% till 1%)

Over the 2008-2010 the

FED issued aprox. 10 trln. $

which began to appear on

the commodity marketNew

bubbles?

FED can not change its nature. Bail-out programs and huge amount of liquidity issued

by the FRS during 2008-2010 cause risks of new bubbles in post-crisis global

economy.

Rocketing price for oil and gold are the first warning signs


11. Rates of economic development in Ukraine

Despite continuing economic recovery in the period of 2010-2011 Ukrainian key

macroeconomic indicators are still below pre-crisis levels.

II. Ukrainian steel industry development

4,5%

11,5%

7,0%

0%

2%

4%

6%

8%

10%

12%

14%

GDP Industrial Production Construction

2011, forecast

100 102

8791

95

30

40

50

60

70

80

90

100

110

2007 2008 2009 2010 2011F

GDP Index (2007=100)

10095

74

82

92

30

40

50

60

70

80

90

100

110

2007 2008 2009 2010 2011F

IP Index (2007=100)

100

84

44 4144

30

40

50

60

70

80

90

100

110

2007 2008 2009 2010 2011F

Construction Index (2007=100)

Source: State Statistics Committee of Ukraine

31,833,1 34,1

36,938,7 38,6

40,942,8

37,1

29,5

32,734,5

0

5

10

15

20

25

30

35

40

45

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

12. Crude steel production

In 2011, steel production in Ukraine will reach 34,5 mln t, which corresponds

only to 2002 level and is much lower than in pre-crisis 2007. So the impact of

recent crisis on the steel output in Ukraine is still very essential.

Mt


Source: State Statistics Committee of Ukraine (fact), UPE Co. est.

18,6 20,728,4

20,9 21,616,6

1,51,9

3,1

0

10

20

30

40

50

60

2000 2005 2010

EAF

OHF

OBC

13. Steel capacity utilization

Within 2005-2010, Ukraine has increased steelmaking capacities on the base of operating

plants. Ukrainian ISW`s still use outdated OHF technology, but its share is continuously

decreasing. Particularly, in the period of the last 5 years the volume of OHF in total

steelmaking capacities has decreased from 21.6 mln t to 16.6 mln t.

Capacity utilization in Ukraine in post-crisis period is below the world average level,

which reflects the existence of excessive capacities and enhanced competition.

Capacity by process, Mt Utilization, %

41.044.2

48.1


81%87%

93%

61%70%

79%84% 83% 68%

75%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Ukraine

World

Source: Production-Economic Association “Metallurgprom”

14. Raw materials prices increase

In line with the global tendencies, prices for raw materials in Ukraine in 1H2011 has risen

as compared to 2010 levels:

• Iron ore – by 58% to 130 $/t

•Coking coal – by 27% to188 $/t

•Scrap – by 41% to 376 $/t

$/t on a delivered to mill basis, w/o VAT

296

79

148

176

199

0

50

100

150

200

250

300

350

370

140

267

392

360

0

50

100

150

200

250

300

350

400

450Iron Ore Concentrate,

66% FeCoking Coal Scrap 3A

105

55

82

121

138

0

20

40

60

80

100

120

140

160



534

325

462

570

0

100

200

300

400

500

600

2008 2009 2010 2011F

15. Steel cost

Due to rise in raw materials prices, this year cost of steel will increase by 24% y-o-y (for

non-integrated mills) and surpass pre-crisis level.

$/t, ExW basis



28,2

26,3

22,523,8

24,5

20

25

30

2007 2008 2009 2010 2011F

16. Steel export: regional structure

In 2011, Ukrainian export will go up modestly – to 24.5 mln t, which is substantially less

than 2007 level. Middle East and Africa, as well as EU will remain key partners of Ukraine

Asia16%

America3%

Middle East & Africa

32%

EU24%

Europe (non EU)

11%

CIS14%

2010

Asia10% America

9%

Middle East & Africa

31%EU

18%

Europe (non EU)17%

CIS15%

2007

Ukrainian export, Mt



26,1

3,44,2

4,9

6,87,5

8,2 8,7

11,2

9,3

6,27,5

8,5

0

5

10

15

20

25

30

1990 - 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F

17. Apparent steel use

After almost 2-times drop in 2008-2009, domestic steel consumption continues to recover.

This year, internal consumption will add approximately 1 mln. t of finished steel products,

which corresponds to the level 2005-2006

Mt


Source: UPE Co. est

18. Steel import increase

In 2010, Ukraine has turned back to active import of steel. It is expected to import up to 2

mln t of steel products this year. The dominant share of imported products is not

produced in Ukraine.

The share of import in covering of domestic demand will rise to 24%

Mt


18%

25%

15%

22% 24%

2,1

2,3

1,0

1,7

2,0

0%

10%

20%

30%

40%

50%

0,0

0,5

1,0

1,5

2,0

2,5

2007 2008 2009 2010 2011F

share of import, %

import steel products


18,6 20,728,4 32,4

44,9

20,921,6

16,612,71,5

1,93,1 4,6 6,2

0

10

20

30

40

50

60

2000 2005 2010 2012F 2018F

EAF

OHF

OBC

19. Modernization projects for steel production

A key point of modernization is the replacement of OHF by OBC and EAF. The total

capacity is expected to reach 51.1 mln t in 2018.

Also we anticipate to abandon the use OHF

OBC59%

OHF35%

EAF6%

2010

OBC88%

OHF0%EAF

12%

2018


41,044,2

48,149,7 51,1

Capacity by process, Mt


24,4

22,8

22,0

22,5

23,0

23,5

24,0

24,5

25,0

before after

20. Energy and materials saving

The effect of modernization programs:

Energy consumption (GJ)

per 1t crude steel

1,35

1,13

1,00

1,05

1,10

1,15

1,20

1,25

1,30

1,35

1,40

before after

CO2 emission (t)

per 1t crude steel

reduction by 6,6% specific energy

consumption from 24,4GJ to 22,8 GJ per

1t steel, incl. saving of up to 2.5 bln. m3 of

natural gas annually

cutting down СО2 emissions by 16,3% from

1,35t to 1,13t per 1 t of steel; and other

pollutants by 33% from 1,45kg to 0,96kg per

1 t of steel

-6.6% -16.3%



21. The cost of modernization programs

Updating programs will allow to comply with advanced

world environment protection standards

Total value of modernization programs makes up

approximately $ 21 bln, incl. $15 bln in steel-melting

properly

The main financial burden will be borne by companies.

Also exists an essential need in loan capital


Steel market:

Analytics Forecast Scenario

tel/fax (+38044) 484-64-83

e-mail [email protected]

www http://www.delphicasteel.com

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