EAF and/or BF/BOF

Which route is best for Europe ?

Marcel  Genet  Laplace  Conseil  

©  Laplace  Conseil  2012  

Our current view of the industry

The Steel market is globalized, China is key

Market is +/- static in developed world

There is a large and persistent overcapacity

Overcapacity is correlated with low profits

Therefore we need to cut excess capacity

Agree

Agree

Agree

Agree

Disagree

While highly desirable, overcapacity has never been significantly cut in the last 35 years ! •  1980  EU  Manifest  Crisis  ;  1  billion  DM  aid  for  1  Mt  capacity  cut  

•  1980  US  free  market  and  “ruthless  ultra  liberalism”  

•  1990  Japan  MITI  and  industry  consensus  method  

•  2000  China  autocraIc  policy  for  100  Mt  of  “obsolete”  capacity    •  Closures  lead  to  high  disrupIon  to  customer  relaIonships  •  Closures  generate  enormous  badwill  with  workers,  authoriIes  •  Closures  are  extremely  costly  and  take  years  to  implement  •  Bankruptcy  almost  always  lead  to  restart  with  new  owner  

•  It  is  easier  to  quit  smoking…      

Depuis 1975, le marché mondial de l’acier a quasiment toujours été surcapacitaire

Le niveau minimum d’utilisation des capacités nécessaire pour induire une hausse conjoncturelle des marges et des profits est de 85 à 90%. Ce niveau n’a presque jamais été atteint malgré les efforts de réduction

Evolution du taux d’utilisation des capacités mondiales de production d’acier brut

Chocs pétroliers

Crise Manifeste en Europe

Implosion de URSS

Crise asiatique

Croissance chinoise

Crises financières

2012e

Source : OCDE, Analyse Laplace Conseil

The market will not save you; generic solution won’t save you; good strategy will

0

25

50

75

100

125

150

1 2 3 4 5 6 7 8 9 10 11

Value as of May 2012 of a capital of 100 $ invested in June 2006 in 11 leading global steel companies

x  3,5  

Source : Bloomberg

Good strategy is the result of an innovative equilibrium between capital, labor and technology.

InnovaIve  Technology  

InnovaIve  People  relaIonships  

InnovaIve  Capital  and  risk  Management  

Well adapted technology must be coupled to sound labor relationship and smart capital management

•  Smart technological choices are different by region as a result of local availability and price of raw material and energies, local market size, share, product mix and local skills base.

•  A global or international company can get leverage as long as it remembers that, for the most part, steel (unlike iron ore or coal) is a local business and “one size does not fit all”.

•  It is impossible to make good steel with a poorly motivated workforce, adversarial unions and discouraged management

•  It is impossible to make good steel with financial management disconnected from the customers, the suppliers and the workforce aspirations. Further, volatility must be addressed with modern tools

In this presentation, I will focus on a single example, the strategic choice between integrated

mills and scrap based mills

In EU 27, the share of EAF is currently equal to 42% of the total crude steel production

42%

58%

BOF and EAF share of EU27 steel production (2010)

Source  WorldSteel,  Laplace  Conseil  analysis  

In EU27, EAF steel production share has grown to 42%, while it has grown to 62% in US

Source : WorldSteel, Laplace Conseil analysis

US and EU 27 EAF production share , %

0%

10%

20%

30%

40%

50%

60%

70%

1950 1960 1970 1980 1990 2000 2010

US  

EU  

62%  

42%  

Source : WorldSteel, Laplace Conseil analysis

In the US, the EAF replaced a greater share of the obsolete technologies than in Europe

0%

20%

40%

60%

80%

100%

1950 1960 1970 1980 1990 2000 2010 0%

20%

40%

60%

80%

100%

1950 1960 1970 1980 1990 2000 2010

EU share of EAF, BOF and old technologies (%) US share of EAF, BOF and old technologies (%)

EAF EAF

BOF BOF

OHF, SM, Bessemer,… OHF, SM, Bessemer,…

Nevertheless, EU27 recycle a greater share of the steel available in the region than does the US

0%

10%

20%

30%

40%

50%

60%

70%

80%

1950 1960 1970 1980 1990 2000 2010

Scrap  consumed  =  1,1  x  EAF  +  0,15  x  BOF  +  0,35  x  OHF  Steel  available  =  Steel  producIon  –  net  direct  export  –  net  indirect  export  Net  indirect  export  =  export  of  steel  intensive  products  such  as  auto,  ship,  machines,  …  EU27  is  a  net  steel  direct  and  indirect  exporter  contrary  to  the  US      

Share  of  recycled  scrap  compared  to  steel  available  (unlagged)  

EU  

US  

US and EU 27 are by far the largest scrap exporters. Turkey, Korea and China, the largest importers

Steel scrap importers, 2010  

Turkey  35%  

South Korea  14%  China  

10%  

Taiwan  9%  

USA  7%  

EU  6%  

India  6%  

Malaysia  4%  Canada  4%  

Indonesia  3%  Thailand  

2%  

Steel scrap exporters, 2010 Mt  

USA  37%  

EU  34%  

Japan  11%  

Canada  9%  

Russia  4%  

Australia  3%   South Africa  

2%  

Source: BIR, Laplace Conseil

Source : WorldSteel, WTO, Laplace Conseil analysis

The EU scrap “mine” is bigger than the US “mine” but not all can be collected now !

0

500

1 000

1 500

2 000

2 500

3 000

3 500

1950 1960 1970 1980 1990 2000 2010

Size of the scrap « mine », proven probable and inferred, Mt

EU 27

US

Scrap price are back to a high and volatile level as a consequence of robust world demand

European schredded scrap prices, €/t  

0

100

200

300

400

janv.-00 janv.-01 janv.-02 janv.-03 janv.-04 janv.-05 janv.-06 janv.-07 janv.-08 janv.-09 janv.-10 janv.-11 janv.-12

Source : Platts/Steel Business Briefing

Total costs of BOF and EAF crude steel in EU 27 (€/t)  

0  

100  

200  

300  

400  

500  

600  

jan-00   jan-01   jan-02   jan-03   jan-04   jan-05   jan-06   jan-07   jan-08   jan-09   jan-10   jan-11   jan-12  

EAF  

BOF  

Source : SBB, EIA, Worldsteel, steelonthenet.com, Laplace Conseil analysis

EU27’ EAF costs are highly correlated to BOF costs and usually lower, especially in weaker markets

CAPEX and Maintenance costs are much lower for EAF steel than for BOF steel

•  New integrated capacity costs 800 – 1200 $/tonne up to semis depending of location (China is cheaper)

•  New EAF capacity costs 150 – 300 $/tonne up to semis

•  Annual maintenance costs represent on average 7% of Capex that is 50 - 80 $/tonne for integrated mills and 10 – 20 $/tonne for EAF

•  Moreover, in integrated mills, reinvestments often come in large putlays to replace a major piece of equipment : for example a new coking battery may cost 300 – 400 M$

•  Environmental costs and CO2 reduction investment compound the difficulties.

Recycling is much more environmentally friendly

•  Steel recycling uses 74% less energy, 90% less virgin materials and 40% less water; it also produces 76% fewer water pollutants, 86% fewer air pollutants and 97% less mining waste.

•  Recycling one tonne of steel saves 1100 kg of iron ore, 630 kg of coal, and 55 kg of limestone

•  CO2 emissions are reduced by 58% through the use of ferrous

scrap.

•  Recycling one tonne of steel saves 642 kWh of energy, 1,8 barrels (287 litres) of oil, 10,9 million Btu's of energy and 2,3 cubic meters of landfill space.

Source : BIR

In Greater Europe (all countries up to but excluding CIS), there are 8 to 10* mid sized integrated mills that are threatened and are risking closures, but

could be rejuvenated by switching to EAF technology.

So why not ?

* 3 plants for long products, 5 to 7 for flat products

Some objections often voiced

•  We cannot make all grades with EAF’s ; copper pollution in scrap cannot be eliminated in the steel shop.

⇒  Yes but : 85 % of flat products and 95% of long products grades can be made. Scrap merchants are happy to recycle valuable copper from their raw material source. Prompt scrap and substitutes can be used to dilute residuals

•  There is not enough scrap; an increase in demand will lead to an immediate increase in price.

⇒  No because : scrap price are set by reference to iron ore and coal prices on the basis of a global supply and demand; supply is extremely elastic. Europe is a large and growing exporter. The global equilibrium would barely be affected by a European switch of 20 – 30 Mt scrap

•  There will be job losses and a need for retraining => Yes but : a lot less than if the plant is closed

In our judgment, the choice is based on the equilibrium between technology, social and capital Example from History : Neuves-Maisons and Mondeville (mid 80ies) •  Neuves-Maisons in Lorraine was an aging small integrating plant

producing wire rods and bars from local ore and regional coke

•  Mondeville in Normandy was a similar integrated plant with local ore and fairly similar product mix.

•  Both plants were unprofitable and threatened with closure

•  Neuves-Maisons with a strong manager, cooperative unions and local support started a tough program to convert the plant to EAF. It is still doing well under Riva ownership.

•  Mondeville started ill fated investment in “special caster” to save plant and prevent job losses for local politician. It was closed shortly after

•  Today, the same dilemma is being faced by many flat steel integrated

Tough questions to ask

Innovative Technology

Innovative people relationships

Innovative Capital and risk Management

Do I use the BAT for my local conditions ? How much do I need to reinvest in next 10 years Do I want to be there in the next 10 years ?

Customers Happy ? Suppliers Happy ? Managers Happy ? Workers Happy ? Community Happy ?

Shareholders Happy ? Bankers Happy ? Risk manager Happy ? Your gut feeling OK ?

Metal and Mining strategy consultant www.laplaceconseil.com

Thank you for your attention

I’ll be happy to answer any questions you may have