barclays capital presentation

8/3/2019 Barclays Capital Presentation

1/24

1

Exploring the supply chain: steel market outlookEdwin Basson

Director General, World Steel Association


2/24

2

12 December 2011 2

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 anti-

competitive 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.

Dr Edwin Basson, Director General, worldsteel Barclay's Capital Global Resources Conference

28 November 2011 worldsteel.org


3/24

3

12 December 2011 3

Contents

Changes in raw material markets

Production outlook

worldsteel Short Range Outlook

Challenges for the steel industry




4/24

4

12 December 2011 4

Steelmaking Raw Materials




5/24

5

12 December 2011 5

Iron ore demand has increased sharply duringthe last decade

0

500

1000

1500

2000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

China domestic ROW domesticSeaborne supply w/o India India seaborne

Demand for iron ore increased markedly during the previous decade drivenmostly 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 middleof the decade. During the same period the domestic production of iron ore inChina also increased, but not nearly enough to feed the appetite of thesteelmaking sector in China.




6/24

66

12 December 2011 6

The era of transition

6

Market Structure : Fundamental + Non-fundamental Factors

Risks

Past

Present

Future ?

Steel Production

RM Demand

RM Production

- World, China import

- Majors / Minors- Emerging Countries- China Production

RM Balance

Shorterpricing system

Resource nationalism

Derivatives

Rising cost fornew mining projects

Project delays

Quality deteriorationof RM

Abnormal weathercondition

Supply control

Market (Fundamental) FactorsMarket (Fundamental) Factors

Non-fundamental FactorsNon-fundamental Factors

RM Price

The market structure for iron ore trade is in the process of adjusting to the newdynamics 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 steelmakingraw materials) was a function of steel production. Raw material production wasknown, as new investments were well announced and took a few years to comeinto production. Similarly, steel demand was relatively well known and growingonly moderately. All of this changed during the past decade and is todayinfluencing the stability of the markets for steelmaking raw materials.

The future is more uncertain, with a large range of factors impacting on theavailability of supply of steelmaking raw materials. Apart from the need todevelop 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 thebalance between supply and demand in the market. This contributes toincreasing uncertainty of supply and volatility of the cost of raw materials to steelmakers.




7/24

7

12 December 2011 7

Raw materials prices reflect the growingdemand from the steel sector

Source: SBB, Indian Iron Ore 63% Fe fines dry /China import CFR N.China port $/t

Iron ore Coke

Source: SBB, Coke 10.5-12.5% ash /China export FOB main ports $/t

Sep-11

186

Nov-11

147

0

50

100

150

200

250

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

Sep-11

490

Nov-11

470

100

200

300

400

500

600

700

800

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

Since the middle of the previous decade, prices for the most importantsteelmaking raw materials showed increasing volatility, but also a rising price

trend the result of the factors briefly discussed in slide 6.




8/24

8

12 December 2011 8

Composition of Gross Output

Raw material cost may be key differentiatorgoing forward

Basic metals industries strongly dependent on raw material inputsHigher raw material costs directly impact on the industry

67% 71%78%

57% 61%

22%29%33%39%43%

Intermediate consumption Value added

ConstructionMetal

Products

Mechanical

Eng.

Electrical

Eng.

Basic

Metals

The basic metals industry, which includes the steel industry, is highly sensitive tothe cost of raw materials. Slide 8 shows that the basic metals industry has the

highest level of intermediate consumption of all the basic manufacturingindustries. As a result, increasing volatility and levels in the cost of steelmakingraw materials have a marked impact on the sustainability of the steel industry.




9/24

99

12 December 2011 9

Major issues in raw materials supply

New projects realisation could be seriously limited due to

insufficient infrastructure, financing problems and difficulties inacquiring 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.




10/24

10

12 December 2011 10

Steelmaking Overview




11/24

11

12 December 2011 11

World crude steel production

Source: worldsteel, Steel Statistical Yearbook

Crude steel production by region

0

200

400

600

800

1 000

1 200

1 400

1 600

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

EU 27 Other Europe CIS North America South America Afr ica and Middle East Asia and Oceania

mln t

As could be expected from the data shown in slide 5, steel production has shownstrong growth during the past decade, and the growth experience was very

specific to China. During the past decade, China grew into a position where closeto 50% of global steel production takes place in China, with other regionsremaining relatively stable as producers.




12/24

12

12 December 2011 12

World crude steel production by process


%

World crude steel production by process, % to total

0

10

20

30

40

50

60

70

80

90

100

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

BOF EAF OHF

During the previous decade, the type of steelmaking technology favoured theintegrated route, with a technology reliant on blast furnaces and basic oxygen

furnaces to reduce raw materials to iron and eventually to steel. Because mostnew capacity created was of the integrated route nature, it helped to exaggeratethe changes in the raw materials markets that were discussed earlier. Theelectric arc route (EAF), was less popular owing to the high dependence of thisroute on electricity supply a source of energy that became not only more scarein recent years, but also much more costly in some countries. As a large part ofthe new steelmaking technology was developed in China, with insufficientelectricity supply, it is clear why the integrated route became more popular duringthe previous decade.




13/24

13

12 December 2011 13

Capacity utilisation yearly

Steel capacity utilisation bounced back to 81% in Jan-Sep 2011,

approaching pre-crisis level

Global Steel Capacity Utilization

Source: worldsteel, monthly statistics

88% 89%89%

88%86%

80%

84%

80%

79%

69%

75%

81%

60%

70%

80%

90%

100%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Jan-Sep

In addition to the many changes in the raw material supply chain, the steelindustry 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 preventedlarge scale business failure. However, utilisation of capacity has declined as aresult 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 betweenregions.




14/24

14

12 December 2011 14

SRO Overview




15/24

15

12 December 2011 15

Global OverviewApparent Steel Use, finished steel (SRO October 2011)

45 SRO submissions (~94% of the ASU world total, based on 2012 data)

Source: worldsteel, Short Range Outlook

1 312.4 million metric tons, 15.1% growth



2010 (estimates)

2011 (forecast)

2012 (forecast)

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.




16/24

16

12 December 2011 16

Regional SummaryApparent Steel Use, finished steel (SRO October 2011)


2010 2011 2012 10/09 11/10 12/11

World 1 312.4 1 397.5 1 473.6 15.1 6.5 5.4 121.0

European Union (27) 144.9 155.0 158.9 21.1 7.0 2.5 80.1

Other Europe 29.6 33.0 34.8 24.0 11.3 5.7 110.2

C.I.S. 48.6 55.6 59.8 34.5 14.4 7.5 106.1

N.A.F.T.A. 110.9 120.9 126.8 32.8 9.0 4.9 89.5

Central & South America 45.6 47.8 52.4 35.2 4.7 9.8 127.5

Africa 24.5 21.4 23.8 -8.9 -12.7 11.0 113.7

Middle East 47.6 50.0 53.9 14.6 5.0 7.9 123.7

Asia & Oceania 860.6 914.0 963.1 11.1 6.2 5.4 140.7

China 598.1 643.2 681.6 8.5 7.5 6.0 162.9

mmt %

2012 as

% of

2007

Regionally, the developed regions of the world are lagging the developingregions, as is clear from the lower growth rate in steel consumption for theEU. NAFTA growth rate in steel consumption benefits form the inclusion ofMexico as part of the NAFTA region. The exceptionally high growth rate forAfrica is partly the result of weak steel consumption at the start of 2011owing 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 isslowing down. This does not mean that China is becoming less important asa steel consumer. It only means that China is growing larger at a slower pace.




17/24

17

12 December 2011 17

Regional Summary at a GlanceApparent Steel Use, finished steel (SRO October 2011)

-40

-30

-20

-10

0

10

20

30

40

2006 2007 2008 2009 2010 2011

%

World EU-27 Other Europe

C.I.S. N.A.F.T.A. Central & South America

Africa Middle East Asia & Oceania

Growth Rate Index (2007=100)


-40

-30

-20

-10

0

10

20

30

40

2007 2008 2009 2010 2011 2012

%

50

60

70

80

90

100

110

120

130

140

2007 2008 2009 2010 2011 2012

The information in slide 16 is shown in a different way in slide 17. Focus in particular on the rightsight of the slide, where steel consumption by region has been indexed to 2007 consumptionlevels, with 2007 set to the level of 100. Any region showing and index level of higher than 100had a larger steel consumption in 2011 or 2012 than 2007. Again, it is clear that only the regionsof EU27 and USA has an index value of less than 100 in 2012, indicating that steel consumptionin these regions are lower today that it was in 2007. Globally, steel consumption has grown byslightly more than 20% between 2007 and 2012 indicating a continued robust and healthydemand for steel.




18/24

19

12 December 2011 19

Apparent Steel Use (ASU), 2007-2012World without China

mmt and y-o-y % growth


771800

589

714754

792

5.2

-3.5

-23.7

21.3

5.6 5.0

-30

-20

-10

0

10

20

30

2007 2008 2009 2010 2011 2012

%

0

100

200

300

400

500

600

700

800

900

mmt

mmt y-o-y % growth

Despite the strong position of China on the global steel market, the world excluding China hasalso shown growing demand for steel and is expected to show additional demand growth ofslightly less than 300 million tonnes between 2009 and 2012.




19/24

20

12 December 2011 20

Regional Contribution to Demand GrowthApparent Steel Use, finished steel (SRO October 2011)


2010 2011 2012 10/09 11/10 12/11

World 172.3 85.2 76.0 100.0 100.0 100.0

European Union (27) 25.3 10.1 3.9 14.7 11.9 5.1

Other Europe 5.7 3.3 1.9 3.3 3.9 2.5

C.I.S. 12.5 7.0 4.2 7.2 8.2 5.5

N.A.F.T.A. 27.4 10.0 6.0 15.9 11.7 7.8

Central & South America 11.9 2.1 4.7 6.9 2.5 6.1

Africa -2.4 -3.1 2.4 -1.4 -3.7 3.1

Middle East 6.0 2.4 3.9 3.5 2.8 5.2

Asia & Oceania 85.9 53.4 49.1 49.9 62.7 64.6

China 46.7 45.1 38.4 27.1 53.0 50.5

increase in tonnages (mmt) share in world total increase (%)

The important role of China in the steel market cannot be ignored as isevident from the fact that China has accounted for 53% of the additionalgrowth in steel demand between 2010 and 2011. NAFTA and the rest of Asiaand Oceania also played an important role in the growth of demand between2010 and 2011.




20/24

21

12 December 2011 21

World Steel Trade by Region, Net Exports mmt

2000 2005 2010


-10

-2

11

8

-33

49

-14

-2

EU

Other Europe

CIS

NAFTA

SoAm

Afr&ME

Asia excl Chn

China 0

-30

-11

12

-26

53

-1

14 10

4

-4

-7

45

-14

-46

24

The regional shifts in the steel industry are also clear from a comparison ofthe import and export patterns of the major regions. Comparing the net

trade balances for the years 2000, 2005 and 2010 shows clearly thatAfrica and Mid-East is becoming a large net importer of steel. With ayoung population and growing wealth as a result of exports of oil and othermineral resources, demand in this region is far outstripping supply,resulting in growing net imports. The CIS remains constant as a netexporter, while NAFTA is declining as a net importer. China has changedfrom a net importer to a net exporter during the period.




21/24

22

12 December 2011 22

Conclusion

Global steel demand has maintained relatively stable recoverymomentum 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




22/24

23

12 December 2011 23

Steel Industry Challenges




23/24

24

12 December 2011 24

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 steelproduction is increasing

Developing regions do not have a debt overhang, and areproducing net cash flow on annual basis

Raw material challenge

Europe as net importer of steel making raw materials

Energy as constraint

Environmental challenge Energy

Despite the regional shifts in production and trade, the global steel industry facesthree significant challenges in the near future. Firstly, weak economic growth is

expected almost universally in all regions in 2012. While this does not mean thatthe global economy will go into a recession, it does mean that growth is expectedto slow down, presenting the steel industry with more challenging marketconditions. Secondly, the changes in the raw material markets and the increasingvolatility of these markets are presenting steel makers with a significantchallenge. The options to steel makers are varied and includes the option ofinvesting in own raw material capacities to developing a focus on more exclusivesteel products in an effort to maintain profit margins. Lastly, the steel industry willhave to invest in technological solutions to become more sustainable and to limitthe impact of the industry on the environment. It is impossible, to consider afuture, 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 tocapture the opportunities that the road to a future sustainable society offers.




24/24


barclays capital presentation

Documents