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Steelmaking raw materials in a "Two-Speed-World"

New York, June 20, 2012Steel Success Strategies Conference

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited

McKinsey & Company | 1

Content

▪ Setting the stage – macroeconomics and steel growth

▪ Raw materials perspective

▪ Impact of Mega Trends – choices and considerations


Global scenarios – a "Two-Speed-World scenario" most likely

SOURCE: Center For Managing Uncertainty; McKinsey Global Growth Model, v3.5

Strong developed economies

Moderate to strong emerging markets Strong emerging markets

Weak developed economies

"Cooling Down"

▪ Global recession continuing and shaping investment actions

▪ Demand radically dropping and financial stress on customers and suppliers

▪ Commodities continue losing base of revenues, raw material oversupply in market

"Regaining Speed"

▪ Fast recovery from the crisis globally

▪ Increasing demand worldwide for steel and raw materials

▪ Reacceleration of growth in China (also for indirect steel export)

▪ Raw material scarcity and price fly-ups likely

Unlikely

▪ Recovery in growing regions, but mature regions remain weak (stagnating)

▪ Moderate global GDP development and regional demand growth

▪ Raw materials demand and supply in balance "Two-Speed-World"


▪ Commodity countries exposed to external factors

▪ Cost base for raw materials inflating

▪ The rationale that inflation results in devaluation does no longer seem to hold

Macro economic evolutions favor cost inflation for raw materials sold on the seaborne market

SOURCE: Global Insights, OANDA, McKinsey

36

191515

BrazilAustraliaEuropeUS

1 Eurozone countries

38

23

9

AUS/USD

Brazil/USD

EUR/USD

Currency development of "commodity countries"

Exchange rates changes (2006 - 12) Percent

Inflation evolution

Consumer Price Index growth (2006 - 12)Percent


Low case

Base case

High caseSteel demand likely to grow further at ~3% per year

1,800

1,600

1,400

1,200

1,000

800

6000

1.2% pa

7.0% pa

2030252015

2,600

0520009590 101981

2,400

2,200

2,000

85

Apparent demand for finished steel productsMillion metric tons, CAGRs 1981 - 2000, 2000 - 08

l

Historical Forecast

SOURCE: WSA; McKinsey steel demand model

Base case CAGR 2010-30 of ~3% pa


Content




McKinsey & Company | 6SOURCE: AMM (Oct 27); Eurofer; SBB; Consensus Economics, McKinsey analysis

Raw materials prices are likely to remain high

2010

Raw material basket per ton of HRCUSD/t

2011 2012E

52 67 87 102136

182135 117

207248 234 256

305 306 306 281

32 31 3340

5076

79

86

174

11385

135

145131

141

203 194 176167

414143

12

431436444

54

Q2

401

58

Q1

251

49

09

28437

08

423

67

07

269

48

06

21939

05

19733

04

15438

03

11284

2000

8813

58

1521

02

89

01 Q3 Q4 Q1

72

469447

Q4

494

63

Q3

511

75

Q2

521

77

Q1

424

69

Q4

548

66

Q3

571

71

Q2

580

72 517

Iron oreCoking coalScrapBasket based on iron ore forward curve

Additional basket cost if iron ore at analyst consensus

RAW MATERIALS PORTFOLIO


REAL DEMAND AS OF 2012NOT INCLUDING STOCKING

SOURCE: McKinsey Iron ore supply model, McKinsey Steel Raw Materials Demand Model

In the short term there is sufficient iron ore available and …Iron ore supply1 demand2 balanceMillion metric tons, Rich ore equivalent

1 2011 supply modeled at full capacity2 2005 - 11 apparent demand figures, 2012 real demand figures

3,000

2,700

2,400

2,100

1,800

151413121110090807062005

Existing production

C1C2C3

C4

1,500

1,200

900

600

300202019181716

Low demand

Base case demand

IRON ORE OUTLOOK

McKinsey & Company | 8SOURCE: McKinsey Iron ore supply model

1 Including closure of marginal capacity in China

… the iron ore pipeling is sufficiently richFull iron ore pipeline (as announced) Rich ore equivalent, million metric tonnes

221 350 231369

955

496

2020capacity

Depletion1Ramp-up of current production

Under imple-mentation

Feasible prjects

Concep-tional projects

114

Potential projects

4,008

1,971

Probable projects

2010 supply

IRON ORE OUTLOOK

McKinsey & Company | 9SOURCE: Factiva, Company reports and presentations, abare, CISA, Unctad, Tex report, ISSB, Indian bureau of mines, Chinamining.org

Low case supply scenarioHigh case supply scenarioAs announced

835

476

22552

866685

515416

2871667223

623

63230

19

538

1,037

2,157

18

453

2,109

17

377

1,949

16

306

1,664

15

214

1,240

14

128

13122011

1,149

2020

2,166

Expected cumulative project capacity1 according to different scenariosMillion metric tonnes

1 Including C1, C2, C3, C4 projects and not including additional ramp-up volume of project that already started by Q3 2010

Several iron ore supply scenarios corresponding to different realization rates of the projects

Possible scenarios affecting project pipeline

C1

C2

C3

C4

RealizationPercent

100

100

100

90

85

75

80

70

50

60

40

25

DelayMonths

6

6

12

12

18

24

24

30

36

36

36

48

Base

High

Base

Low

High

Base

Low

High

Base

Low

Low

High

IRON ORE OUTLOOK


Key considerations on the iron ore market

Reducing industry concentration

▪ Current market share of 59% for top 3 iron ore producers expected to reduce by ~ 5 -10% points, mainly driven by growth of other miners, international acquisitions by Chinese miners and further vertical integration of major steel players

A

Increasing reliance of China on seaborne ore

▪ Chinese domestic iron ore production expected to decline by 2015 driven by depletion and closure of high cost mines

▪ Given increasing reliance on seaborne iron ore, China is gradually strengthening its global position in the iron ore industry

B

Reducing share of Indian iron ore exports

▪ Indian iron ore supply is expected to increase by ~ 7% p.a. between 2010 and 2015, mainly to satisfy increasing domestic demand (~ 10% p.a.)

▪ Share of seaborne supply (current export level at 50%) expected to decline by half

▪ Majority of incremental production capacity going forward is captive

C

Increasing share of concentrates

▪ Global iron ore production profile is expected to evolve to less concentrates by 2015 driven by closures of high cost Chinese mines

▪ On the seaborne market, the increasing number of magnetite export projects is expected to increase the share of concentrates

D

Share of captive iron slightly increasing

▪ The share of integrated iron ore supply is expected to slightly increase compared to non-integrated iron ore, representing ~ 25% of the global iron ore production in 2015

E

SOURCE: McKinsey

IRON ORE OUTLOOK


341271643151

818

2020

1,081

Net otherEuropeMenaSouth America

IndiaChina2010

SOURCE: McKinsey Integrated Steel Making Raw Materials Demand model Q1/2012, McKinsey Metallurgical Coal Supply Model Q1/2012

4829383869125

161

2020

1,383

1,200

183

Other (net)

CanadaMozam-bique

MongoliaCISAustraliaChina2010

876

Base caseAs announced

The global coking coal market will likely be more than balanced by 2020 if projects come online as assumed in the base case

1 Production data refer to saleable volumes after washing including capacity utilization

Implications▪ Limited risk of shortage

going forward ▪ China, India and South

America will add ~ 210 Mt or 80% of the demand growth

▪ Growth in China will be largely met by increasing local supply

▪ Significant capacity expansions in China, Australia, CIS and new major producing regions (Mongolia, Mozambique) required to meet demand

Demand base case

Supply1

METALLURGICAL COAL OUTLOOK

Global coking coal demand and supplyMillion tons


Key considerations on the metallurgical coal markets

SOURCE: McKinsey


▪ Development of new coking coal assets particularly in Mozambique, Mongolia, and potentially Indonesia and Russia, quality profiles and distribution

▪ Speed of expansions in Australia ▪ Impact of deteriorating local coking coal qualities on role of China on the

seaborne market ▪ Impact of governmental considerations on speed of expansion, trade flow

management

A Expansion options of supply base

▪ Development of production cost of marginal producers in China and in North America

▪ Underlying cost inflation as primary cost driver

B Cost position of the marginal supplier

Technical substitution

▪ Optimization of blast furnace operations resulting in decreasing overall coke rates

▪ Impact of increasing PCI rates on reducing coking coal needs▪ Efficiency gains in coke batteries through technology upgrades, pre-treatment

and revision of met coal blends

C

Substitution ▪ Impact of growing scrap availability in China potentially resulting in increasing share of EAF steel production (post 2020)

▪ Implications of low cost shale gas on the steel industry in North America, e.g., shift to gas-based DRI production

D

McKinsey & Company | 13SOURCE: McKinsey global coking coal model Q2 2011; McKinsey coking coal cost model Q2 2011

U.S. coal is likely to be the price setting mechanism for the global market

90th percentile ex. US cost

Brownfield pricing regime – including U.S.+5/+25% premium over C90 seaborne cash cost incl. U.S.

Greenfield pricing regime – including U.S.+25/+45% premium over C90 seaborne cash cost incl. U.S.

Brownfield pricing regime – excluding U.S.+5/+25% premium over C90 seaborne cash cost e.x. U.S.

Greenfield pricing regime – excluding U.S.+25/+45% premium over C90 seaborne cash cost e.x. U.S.

SupplyMtpy


Washed seaborne coking coal cost curve FOB 2010Cash cost U.S.$/ton, real 2010

90th percentile cash cost incl. US

76

13012011010090807060403020 230220210200190180170160150140100

175

150

130115

95

AUS-

T4

93

CAN

-T2

91

NZ

89

AUS-

T3

88

AUS-

T2

50

RU

S

64

CO

L

83

IND

O110

AUS-

T1

65

84

CAN

-T1


SCRAP OUTLOOK

SOURCE: McKinsey

0

200

400

600

2025201510052000

0

200

400

600

0

200

400

600

14

Growth in global scrap supply will come mainly from increasing obsolete scrap volumes, certainly after 2020Global scrap supply by typeMillion metric ton

MEDIUM-DEMAND SCENARIO

3,5%

Drivers

▪ Volumes driven by steel production

▪ Collection rates near maximum already

▪ Volumes driven by steel consumption

▪ Limited potential for improvement in collection rates

▪ Volumes driven by historical (10 - 30 year) steel consumption

▪ Improvement for obsolete scrap rates possible in developing regions

1 Home scrap (generated in steelmaking)

2 Prompt scrap (generated in steel trans-formation)

3 Obsolete scrap (end-of-life recovery)

Historical Forecast

3,5%

4,7%

McKinsey & Company | 15SOURCE: World Steel Association, McKinsey steelmaking raw material demand model

63%69%69%66%65%62%62%58%55%57%

37%31%31%34%35%38%38%42%45%43%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

90

752

95

848

20001980

716

85

719 770 1.146

15

2.331

20

2.0801.798

10

1.417

05 2025

The long-term global trend towards more iron ore based steel production is only expected to reverse beyond 2015 - 20Global crude steel production by iron source1

Million metric tons

MEDIUM DEMAND SCENARIO

Iron ore based

Scrap based

Historical Forecast

SCRAP OUTLOOK


Most steel scrap is exported from developed countries, and imported into developing countries

SOURCE: ISSB, McKinsey

Steel scrap trade volumes by countryMillion metric tons

2010

Main exporting countries1 Importing countries1

Sweden 1.0

Hungary 1.0

South Africa 1.2

Czech Republic 1.4

Denmark 1.4

Australia 1.6

Netherlands 1.8

Romania 2.3

Russia 2.4

Canada 3.8

France 4.4

Germany 4.8

Japan 5.9

United Kingdom 6.9

USA 16.5

Pakistan 0.8

Greece 0.8

Indonesia 1.2

0.5

Vietnam 1.9

Luxembourg 2.5

Egypt 2.7

Italy 3.9

India 4.1

Spain 4.6

Taiwan 4.7

China 7.5

South Korea 8.0

Turkey 16.7

Malaysia 1.8

Thailand

1 Net trade flows


2020 scrap outlook

SOURCE: McKinsey Metallics Practice

2020 expectations RationaleChina becomes balanced

▪ China will gradually decrease its scrap imports as its internal scrap generation is steeply rising

▪ In case that the global economy slows down and scrap prices drop accordingly (compared to iron ore and coking coal prices), China will be an opportunistic buyer of scrap, similar as in 2009

CIS will remain balanced but no longer export

▪ CIS will give preference to internal use over exports▪ Imports will not be significant due to local availability of iron

ore and coking coal

Europe and North America will remain at similar levels of net scrap exports as today

▪ Total scrap generation is likely to remain similar over the next decade (historical steel consumption is more or less flat)

▪ Very few investments in new EAF steelmaking capacity expected in either region; Hence, internal consumption (and exports) will remain very similar

India and Latin Americawill not become major importers

▪ Availability of local iron ore will keep demand for scrap at low levels

▪ Temporay imbalances likely, due to growth patterns but also due to local prices

MENA, South-East Asia (and Africa) will remain net importers of scrap

▪ Scrap required to feed minimills, with the balance addressed with DRI

SCRAP OUTLOOK


Inhalt





Three hypotheses going forward

SOURCE: McKinsey

Emerging Regionswill shape demand and competition

▪ Chinese demand will continue and sourcing behavior of China will shape the market

▪ Without China’s seaborne demand as engine for commodity exploration the raw materials supercycle would be over fast

1

"Multiple inflation factors" will dramatically change the economics of mines

▪ Cost inflation will continue to drive prices up but will not be fully passed through to customers

▪ Commodity suppliers will need to adopt to more efficiency and need to keep prices up to keep growth economics intact

2

Recycling and secondary marketswill provide more opportunities to grow

▪ Increasing returns on steel scrap likely to promote growth and investments

▪ EAF route and other new technologies will become a favourable investment, due to CO2 emmission advantages and energy discontinuities (e.g., shale gas)

3

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BACKUP


Economic development and urbanization of the developing world will be the largest driver for steel demand growth

1 CIS, MENA, Latin America, Subsaharan Africa, Other Asia

Sources: WSA; McKinsey steel demand model

139

139

138

137

98

127

144

151

158

154

181

198

203

203

144

893

708

271

North America

2,180

886

586

217

China

ROW 1

25

India

Developed Asia

Europe

2030

2,370

20

1,936

820

474

160

15

1,632

710

373

102

2010

1,335

605

27162

Apparent demand for finished steel productsMillion metric tons CAGR

2010 - 15 2015 - 20 2020 - 30

5.410.5 9.3

0.23.2 1.9

0.95.3 2.6

-0.1-0.7 0.0

4.16.6 4.9

0.93.2 2.9

4.1 3.5 2.0Global


Synthesis – key discussion points

Iron ore ▪ Risk of oversupply short term, while in the medium to long term new investments are needed to address global demand

▪ Industry concentration (top-3) expected to reduce from 59% in 2010 to 50 - 54% in 2020▪ Chinese domestic production expected to decline by 2015▪ Evolving towards " Greenfield incentive pricing "

Coking coal

▪ Strong announced capacity pipeline could push coking coal production to ~ 1.2 bn tons by 2020 (from recent market tightness and price hikes)

▪ Global coking coal market will likely be more than balanced by 2020 if projects come online as assumed in our base case, which means only a part of projects is required to meet base case demand; additional projects would put downward pressure on prices

▪ U.S. coal is likely to be the price setting mechanism for the global market

Scrap ▪ Strong growth in global scrap supply will come mainly from increasing obsolete scrap volumes, mainly after 2020

▪ Long-term global trend towards more iron ore based steel production is only expected to reverse beyond 2015 - 20

▪ Most steel scrap is exported from developed countries, and imported into developing countries

▪ Scrap prices are set based on substitution logic with hot metal (but can deviate from this in cycle peaks and troughs)

McKinsey & Company | 24SOURCE: Factiva, Company reports and presentations, abare, CISA, Unctad, Tex report, ISSB, Indian bureau of mines, Chinamining.org

Low case supply scenarioHigh case supply scenarioAs announced

835

476

22552

866685

515416

2871667223

623

63230

19

538

1,037

2,157

18

453

2,109

17

377

1,949

16

306

1,664

15

214

1,240

14

128

13122011

1,149

2020

2,166

Expected cumulative project capacity1 according to different scenariosMillion metric tonnes

1 Including C1, C2, C3, C4 projects and not including additional ramp-up volume of project that already started by Q3 2010

Several iron ore supply scenarios corresponding to different realization rates of the projects

Possible scenarios affecting project pipeline

C1

C2

C3

C4

RealizationPercent

100

100

100

90

85

75

80

70

50

60

40

25

DelayMonths

6

6

12

12

18

24

24

30

36

36

36

48

Base

High

Base

Low

High

Base

Low

High

Base

Low

Low

High


In our base case, potential iron ore supply capacity could amount to ~ 3 billion tons by 2020Potential iron ore supply capacity by regionmillion metric tonnes, rich ore equivalent

BASE CASE

SOURCE: McKinsey Iron ore supply model, UNCTAD

2015 - 202010 - 15

CAGR Percent

8.4 4.2

-5.8 -3.7

6.8 5.4

7.2 3.6

9.1 1.4

1.6 1.2

5.9 1.2

7.8 5.8

11.2 3.6

204

221235

469

348

289

434

649

795

32287240

2,476

15

4750

503

123

296

2010

50 53

352

655

141

1,971

85 35

209

362

+4% p.a.

OtherNorth AmericaMENAEuropeCIS

India

Brazil

China

Oceania

2020

2,879

164


A Industry concentration is expected to reduce from 59% in 2010 to 50 - 54% in 2020

Concentration in seaborne market will remain high, allowing major producers to adjust supply to demand and avoid over-capacity and price pressure

63

15 2020

50 - 54155 - 561

2005

~ 59

10

1 Range driven by different supply scenarios

SOURCE: UNCTAD, raw material database; McKinsey iron ore supply model

ESTIMATESEXCLUDING M&A

Share of the three largest producers in seaborne market (controlled or influenced)Percent


289301313326335348361

409450470469

417405395

336

266

202019181716151413121110090807062005

B Chinese domestic iron ore production is expected to decline by 2015 driven by depletion of existing production and closure of high cost mines, increasing reliance on seaborne iron ore

SOURCE: McKinsey Iron ore supply model

China landed cost assumptionUSD/tonne

110140175200220

Chinese domestic Iron ore productionMillion metric tons rich ore equivalent

CHINA


By 2015, iron will move towards "greenfield incentive" pricing

Demand

Industry structure

2015

Greenfield incentive pricingCash cost Brownfield Fly up

FOR DISCUSSION

Secondary supply

Scrap sufficient to serve significant part of steel demand in China/other emerg. econ.

Scrap sufficient to serve largest part of steel demand

Scrap sufficient to serve large part of steel demand

Very little scrap available in China/other emerging econ.

Project pipelineBalanced supply due to realization of reasonable part of planned greenfields projects in line with demand growth

Significant oversupply due to realization of large majority of planned greenfields

Oversupply due to realization of substantial part of planned greenfield projects

Supply shortage due to insufficient availability of greenfield projects

Frequent issues esp. in new locations, causing some disruption at times

Political/environ./ legal issues

No major issues arise Some issues arise, but not disruptive to industry

Industry is constantly disrupted by large array of issues

Lead time of 7-9 years due to stronger shift to non-traditional locations with significant new challenges (e.g., infrastructure development)

Lead timeLead time of 5-6 years as most new projects are devel-oped in traditional locations/ challenges

Lead time of 6-7 years due to gradual shift to non-traditional locations with new challenges

Lead time of 8-10 years due to strong shift to non-traditional locations and substantial bottlenecks in equipment supply

Strong move to magnetite-based reserves

Grade erosion/ depletion

Hematite-based reserves remain dominant

Gradual move to magnetite-based reserves

Rapid depletion of hematite reserves

"Big three" continue to be act as industry leaders

Industry concentration

Sufficient number of new entrants to lead to a frag-mented industry structure

"Big three" remain most relevant players, but not acting as industry leaders

"Big three" are able to expand current market participation due to acquisition of new entrants

Steel demand growth of 3-4% p.a. short-term/2-3% p.a. long-term, driven by robust urbanization and industrialization in China and other emerging economies (e.g., India, Brazil), but increasingly served through scrap buildup in China

Demand growth drivers

Stagnation of steel demand due to economic slowdown and subsequent halt in urbanization/indus-trialization of emerging economies (esp. China)

Steel demand growth of 2-3% p.a. short-term/1-2% p.a. long-term, driven by slowing urbanization and industriali-zation in China/other emer-ging economies (e.g., India)

Steel demand growth of 3-5% p.a., driven by strong urbanization and industrialization in China and other emerging economies (e.g., India, Brazil), with Chinese scrap not yet playing a significant role

Supply

Main deter-minant of short term price regime

Substitutes Not relevant as there are no substitutes for iron ore in steel production

Traders No large impact by trading on price regime for iron ore

Exploration costs Not relevant as exploration cost is <1% of revenues in iron ore

SOURCE: McKinsey Iron Ore Supply model


Volume Mt2.2002.0001.6001.4001.2001.0008006004002000

6571

85

99

1.800

Based on typical premiums over the 90th percentile seaborne cash cost, a LT FOB price range of 70 - 100 USD/t is expected

SOURCE: McKinsey Iron ore supply model

2020 Seaborne FOB cash costs for 62% standard sinter feed equivalent2010 USD (real)

Greenfield pricing regime:+25/+40% premium over C90 seaborne cash cost

C90

Brownfield pricing regime:+5/+25% premium over C90 seaborne cash costCash cost pricing: -5/+5 % premium

MEDIUM DEMAND


Type of expansions

SOURCE: McKinsey Metallurgical Coal Supply Model Q1/2012

1 Ramp-up of current production in China (i.e. mines already operating but upgrading capacity)2 Depletion of currently operating mines (ex-China)3 Top down capacity accounted starting 2020

Coking coal – Strong announced capacity pipeline could push coking coal production to ~ 1.2 bn tons by 2020 (from recent market tightness and price hikes)

▪ C0: Current production, including ramp up of projects which already came on stream in 2009; depletion of current operations

▪ C1: Expansions which have been fully agreed, under construction and proceed according to plan to finish more or less in time (only minor delays due to technical issues)

▪ C2: Expansions/new projects that are agreed and technically defined (reserves, product flow …) but to happen with possible delays due to political issues, social and environmental issues, equipment shortage …

▪ C3: Uncertain future projects, close to existing infrastructure or in political instable regions having more risk to get licensing

▪ C4: Uncertain future projects with no supporting infrastructure but more details defined than exploration phase (possible reserves and possible production volumes …)

74 70 125

81

876

+323

2020 capacity

1,200

C53

18

C4

50

C3

44

C2C1Deple-tion2

Ramp-up1

2010 supply

BASE CASE

Full coking coal pipeline – saleable productionMillion tons


1,5001,4001,3001,2001,1001,000

900800700600500400300200100

0

C0

C1C2C3C4C5

2019181716151413121110090807062005

Low demand

Base demand

High demand

… which means only C2 projects are required until 2020 to meet base case demand; additional C3 and C4 projects would put downward pressure on prices

SOURCE: McKinsey Integrated Steel Making Raw Materials Demand model Q1/2012, McKinsey Metallurgical Coal Supply Model Q1/2012

▪ Assuming a high demand scenario, C3-C4 projects required already in 2013/14 to meet demand

▪ In the base case supply/ demand scenario market is balanced until 2020, limited risk of severe supply shortage until 2020

▪ No C3-C4 projects required to come online

▪ Assuming a low demand scenario all projects fully agreed and already under construction (C1) would be sufficient to meet demand until 2020

Supply base case

Global coking coal demand and supplyMillion tons


Annual hard coking coal contract price FOB Australia1

USD/ton

SOURCE: McCloskey; TEX report; press search, press clippings

1 Annual benchmark contract prices are negotiated for the Japanese fiscal year (Apr - Apr)

For the last 2 years seaborne hard coking coal pricing is in a fly-up pricing regime despite a continuous price decline in the last 4 quarters

210

235

285

315330

225209

225

200

129

300

98116

125

5847494340

06 Q3Q2090807

90th percentile seaborne cash cost (excl. US)

90th percentile seaborne cash cost (incl. US)

Q1Q4Q3Q2Q1Q4 Q20403022000 01 05

10 11 2012

Fly-up pricing regime> 45% premium over C90

Incentive pricing regime:+5/+45% premium over C90 incl. US cost

Incentive pricing regime:+5/+45% premium over C90 excl. US cost

McKinsey & Company | 33SOURCE: World Steel Association, McKinsey steelmaking raw material demand model

63%69%69%66%65%62%62%58%55%57%

37%31%31%34%35%38%38%42%45%43%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

90

752

95

848

20001980

716

85

719 770 1.146

15

2.331

20

2.0801.798

10

1.417

05 2025

The long-term global trend towards more iron ore based steel production is only expected to reverse beyond 2015 - 20Global crude steel production by iron source1

Million metric tons

MEDIUM DEMAND SCENARIO

Iron ore based

Scrap based

Historical Forecast


Most steel scrap is exported from developed countries, and imported into developing countries

SOURCE: ISSB, McKinsey

Steel scrap trade volumes by countryMillion metric tons

2010

Main exporting countries1 Importing countries1

Sweden 1.0

Hungary 1.0

South Africa 1.2

Czech Republic 1.4

Denmark 1.4

Australia 1.6

Netherlands 1.8

Romania 2.3

Russia 2.4

Canada 3.8

France 4.4

Germany 4.8

Japan 5.9

United Kingdom 6.9

USA 16.5

Pakistan 0.8

Greece 0.8

Indonesia 1.2

0.5

Vietnam 1.9

Luxembourg 2.5

Egypt 2.7

Italy 3.9

India 4.1

Spain 4.6

Taiwan 4.7

China 7.5

South Korea 8.0

Turkey 16.7

Malaysia 1.8

Thailand

1 Net trade flows


Scrap prices vary across countries, based on local and regional supply/demand balances

SOURCE: Metal Bulletin Research, Steel Business Briefing, ISSB, McKinsey

438

416

411

483

479

453

441

399

489

456

457

2010

20%

28%

71%

-15%

-28%

11%

-14%

5%

HMS 1 scrap priceUSD/metric ton

Scrap export rateScrap net exports over steel production, volumes Comments

▪ As a large exporting region, scrap prices in North America are relatively low

▪ Demand, and therefore scrap prices, are higher in East Coast

▪ With large importers nearby (e.g. Turkey), scrap prices in Europe are higher than in the USA

▪ Within Europe, domestic scrap prices depend on the local supply/demand balances

▪ Japan’s domestic price is set based on export price, which is supported by imports in larger Asia

493

Spain

West Coast

Midwest

East Coast

UK

France

Germany

Italy

Japan – domestic1

Japan – export1

South Korea import

China – domestic -1%

▪ Being large importers in a scrap-scarce region, prices in South Korea and China are high

1 HMS 2


0

100

200

300

400

500

600

700

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

11 Q2

10 Q3

10 Q4

11 Q1

Hot metal raw material cost1

USD/metric ton

Domestic European scrap price (E3 classification type)USD/metric ton

08 Q3

08 Q2

09 Q1

08 Q1

09 Q4

09 Q209 Q308 Q4

10 Q110 Q2

In "average" times, scrap prices are set based on substitution logic with hot metal

SOURCE: McKinsey

WESTERN EUROPE

1 Marginal pig iron production costs based on 100 % merchant coke input Also holds for the America’s

▪ In normal quarters scrap prices are closely correlated to pig iron raw materials cost within a narrow equilibrium band

▪ The scrap price is set by intergrated steel mills, that can adapt the BOF scrap rate according the price

▪ Being traded mostly on spot, scrap prices are more volatile than iron ore and coking coal prices

Price fly-up during boom times

Depressed price during crisis times


Equilibrium scrap price forecast

2015 equilibrium prices for scrap expected to land between 310 and 400 USD per metric ton

SOURCE: McKinsey

WESTERN EUROPE

50

100

150

200

250

300

350

400

450

500

131109070503 20152001

Methodology▪ Correlation

between pig iron raw material cost and scrap price

▪ Forecasted pig iron cost based on the 3 steel demand scenarios

Equilibrium price – Domestic European E3 scrapUSD/Metric ton

2011 H1 scrap price: 455 USD/t

Historical Forecast


▪ Commodity country exposed to external factors

▪ Thus the cost base for raw materials increase

Currency developments and country specific inflation will impact the cost base of raw materials significantly

SOURCE: Global Insights, OANDA, McKinsey

Currency development of "commodity countries"

Exchange rates, indexed

Inflation of countries

Consumer Price Index

1 Eurozone countries

80

90

100

110

120

130

140

150

US

20122006

100

110

120

130

140

Australia

Brazil

20122006

USEurope1

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