perspectives for italian steel producers, re-rollers & processors

PERSPECTIVES FOR ITALIAN STEEL PRODUCERS,

RE-ROLLERS AND PROCESSORSIII. INTERNATIONAL STEEL TRADE DAY Made in Steel, Milano - April 4, 2013

Antonio Marcegaglia CEO & Managing Director, Marcegaglia, Italy

STSG - EUROMETAL

2PERSPECTIVES FOR ITALIAN STEEL PRODUCERS, RE-ROLLERS AND PROCESSORS - Antonio Marcegaglia, CEO Marcegaglia

STEEL DEMAND

Steel demand is slowing down, well below its 3.7% p.a. long term growth rate (it was 1.8% in 2012, est. 2.7%* in 2013)...

(*WSA +3.3% • WSD +2.0%)

KEY CHALLENGES FOR THE GLOBAL STEEL INDUSTRY

‘00

7.6%

1.6%

6.5% 6.3%

-6.4%

8.2%9.2%

7.0%

2.7%5.6%

0.0%1.8%

10.1%

14.1%

YoY growth in global steel consumption (%)

20%

15%

10%

5%

0%

-5%

-10%‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13f

Av. growth 1950-2011: 3.7% p.a.

Source: WSA. SteelConsult


STEEL DEMAND

…and will not be driven by China and Asia as in the recent past(+15.8% CAGR between 2000 and 2011, +3.5% CAGR in the next decade) because of the reductionof fi xed asset investment


WSD CHINA MACRO-ECONOMIC STEEL INDEX (MOVING AVERAGE BASIS) VS APPARENT STEEL CONSUMPTION (ASC)

Jan-

01

Jan-

03

Jan-

05

Jan-

07

Jan-

09

Jan-

11

Jan-

02

Jan-

04

Jan-

06

Jan-

08

Jan-

10

Jan-

12

Ap

r-01

Ap

r-03

Ap

r-05

Ap

r-07

Ap

r-09

Ap

r-11

Ap

r-02

Ap

r-04

Ap

r-06

Ap

r-08

Ap

r-10

Ap

r-12

Jul-0

1

Jul-0

3

Jul-0

5

Jul-0

7

Jul-0

9

Jul-1

1

Jul-0

2

Jul-0

4

Jul-0

6

Jul-0

8

Jul-1

0

Jul-1

2

Oct

-01

Oct

-03

Oct

-05

Oct

-07

Oct

-09

Oct

-11

Oct

-02

Oct

-04

Oct

-06

Oct

-08

Oct

-10

Oct

-12

Source: WSD estimates

2000

1900

1800

1700

1600

1500

1400

1300

1200

1100

1000

900

800

700

600

500

400

300

200

100

95

90

85

80

75

70

65

60

55

50

45

40

35

30

25

20

15

10

Mac

ro In

dex

, Mo

ving

Ave

rag

e B

asis

ASC

, Mill

ion

Met

ric

Tonn

es

Macro Index consists of fi xed asset investiment (12-month moving average), retail sales, M2 money supply (6-month moving average) and value added of industry (6- month moving average).

The weights are 0.35, 0.25, 0.20 and 0.20, respectively.

Steel Consumption(right axis)

Macro Index(left axis)


OVERCAPACITY

With a slower demand, overcapacity is an issue worldwide, but while in the emerging countries it can be absorbed in the long term, in the OECD countries it has become (again) a structural problem, particularly in BOF in EU.


Based on 2012 production level, integrated mills represent 85% of OECD overcapacity

SHARE OF CAPACITY AND EXCESS CAPACITY BY PROCESS AND REGION (MT)

Source: Worldsteel, Laplace Conseil analysis

28

8

7

5

2 1

10554

75

105

48

133

Europe BOF

NAFTA BOF

Asia BOF

Europe EAF

NAFTA EAF

Asia EAF

2012e Capacity in OECDTotal = 520 Mt

2012e estimated overcapacity in OECDTotal = 51 Mt


COST OF RAW MATERIALS

Costs of raw materials have grown immensely (and unreasonably), leading to price instability…


EVOLUTION OF IRON FINE PRICES (LHS) AND COKING COAL (RHS) ($/T)

Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12

Source: Steel Business Briefi ng,Bluescope, Laplace Conseil analysis

150 300

200 400

100 200

50 100

0 0

Iron ore

Coking Coal

COST CURVE FOR IRON ORE FINES (US$/T CIF CHINA EQUIVALENT BASIS)

Cumulative volume (million tonnes)

Source: Macquarie Research March 2012, Laplace Conseil analysis

150

200

100

50

0

Due to the steepness of the cost curveA small reduction in demand or a small increase in capacity

Lead to a relatively large decline in prices

Established low cost producers from Australia and Brazil VS New entrants and high cost producers


COST OF RAW MATERIALS

… and moving upstream all the profi t in the value chain, while squeezing the margins of the steel mills.


0 100 200 300 400 500 600 700 800 900 1000Mt iron ore

200

100

150

50

0

US$/t

Marginal cost of production: ~US$125/t

RIO BHP FMGVale China

ESTIMATED 2012 IRON ORE COST CURVE [US$/Y CFR CHINA]


Within OECD countries, the European ones are the worst positioned, since…

NAFTA • has more natural resources (raw materials and energy) • is developing aggressively shale gas projects • has a higher ratio of EAF based steel

ASEAN • have a stronger industrial base OECD (Japan and Korea) • are large net exporters, mostly in the RoW

ADDITIONAL CHALLENGES FOR THE EU STEEL INDUSTRY

EU 27 + TK Japan + S.Korea NAFTA Net OECD

Source: Worldsteel, Laplace Conseil analysis

30

40

50

60

20

10

0

Japan+S.KoreaNet exports to NAFTA

The bulk ofNAFTA net

imports are fromthird countries

The bulk ofJapan+ S. Korea

net exports are forthird countries

Japan+S.KoreaNet exports to EU 27

EU27 net exports to NAFTA

NET EXPORT POSITION OF THE THREE LARGESTTRADING REGIONS IN 2010 (MT)


While Europe:

• has witnessed a continued sharp reduction in steel demand (2012 real -5.1%, apparent -9.7%; 2013e real -1.8%, apparent -0.7%)

• is lacking natural resources, while has the most challenging environmental constraints

• is not a competitive region for steel, while it is the least protected market

• is facing a potential fi nancial instability, while its currency (euro) is overevaluated

• is lacking any monetary or fi scal policy, while the economy is suffering and the credit is constrained

ADDITIONAL CHALLENGES FOR THE EU STEEL INDUSTRY


Today, Italy is facing particularly challenging times:

• weak domestic market

• high cost of energy

• stiff labor market, but with growing unemployment rate

• high debt/GDP ratio

• credit crunch and high cost of money

• lack of political leadership

• micro-entrepreneurial industrial base

THE ITALIAN INDUSTRIAL SCENARIO


2011 2012 var % 12/11

Total general 29 872 238 24 875 452 -16.7

Total semiprocessed 3 192 765 2 271 337 -28.9

Total laminates 26 679 473 22 604 115 -15.3

of which: long products 11 477 730 9 400 661 -18.1

of which: fl at products 15 201 743 13 203 454 -13.1

Sections and railway track material 904 920 760 042 -16.0

Sheet piles 21 259 25 960 22.1

Total merchant bars 3 588 861 3 023 706 -15.7

of which: bars 2 553 844 2 191 125 -14.2

of which: profi les 512 866 362 335 -29.4

of which: fl ats 522 151 470 247 -9.9

Reinforcing bar 2 794 250 2 097 393 -24.9

Wire rod 4 168 440 3 493 560 -16.2

Total HR sheets and fl ats 2 060 085 1 742 612 -15.4

HR strips <600 139 653 150 459 7.7

Coils 5 512 875 5 122 638 -7.1

Galvanized and coated sheet 2 957 692 2 421 057 -18.1

Electrogalvanized sheet 189 817 161 209 -15.1

Synthetic coated sheet 657 483 513 590 -21.9

Other products (*) 737 242 656 687 -10.9

Magnetic sheet 587 677 518 871 -11.7

CR sheet and coil 2 359 218 1 916 330 -18.8

(*) Tin plate, black plate and tin free steel

Apparent consumption in 2012 in Italy was 24.9 m ton, down -16.7% from 2011 and far below the peak of 2006 and 2007.

Flats were down -13.1%, longs -18.1%, semis -28.9%

THE ITALIAN STEEL INDUSTRY

APPARENT CONSUMPTION

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

50 50%

30 0%

-16.7%24.9

40 25%

20 -25%

10 -50%

var. % on previous apparent consumption

M.t

.

Source: Federacciai


Steel production was down “only” -5.2%, thanks to some growth of export (+6.4%) and signifi cant reduction of imports (-20.6%)

In the fi rst two months of 2013, steel production was down -17.2%, especially in fl ats, because of the output constraints in Riva’s Taranto plant.


WORLD STEEL PRODUCTION JAN-FEB 2013

January - February 2013 2012Variation

M.t. %

European Union 27.0 28.3 -1.3 -4.5%

Others Europe 5.8 6.2 -0.4 -7.1%

C.S.I. 17.0 18.4 -1.5 -7.9%

North America 19.5 20.6 -1.2 -5.7%

South America 7.1 7.5 -0.4 -5.7%

Africa / Middle East 6.0 6.2 -0.2 -3.9%

Asia 169.7 158.1 11.6 7.3%

Oceania 1.0 0.9 0.1 5.6%

World Production 253.0 246.4 6.6 2.7%

Italy 3.9 4.7 -0.8 -17.2%

China 125.5 113.4 12.0 10.6%

World excl. China 127.6 133.0 -5.4 -4.1%

Source: elaborations on WSA data


• It is the second largest in Europe, after Germany, representing around 16% of the European Union output.

• It is a lively, open market with import representing around 56-58% of apparent consumption, but export representing 60-65% of production.

• In 2012 net export was 4.1 m ton, including (2.4) m t net import of semis +2.2 m t net export of longs +0.4 m t net export of fl ats +3.9 m t net export of fi rst and second transformation products.

• In fact a strong, independent, export oriented chain of re-rollers, processors and service centers has come about, more than in other countries.



• Family owned companies, highly fragmented - entrepreneurial / reactive / resilient - consolidation or restructuring more diffi cult

• Lack of vertical integration in the value chain - highly fl exible in sourcing, processing, selling - highly competitive / low pricing and marginality

• Very “open system” - strong import/export orientation - lack of “industrial loyalty”

Overall, lively, fl exible, competitive but …



… may face big changes:

• the ILVA case• the Lucchini case• AST for sale• other changes on the processing side

but most of the assets are sound and competitive and will be able to survive in the European context.



• With a stagnating demand (Europe) expected in the future, with limited export opportunities and some recent capacity additions (eg: steel in Russia and Turkey, HDG in Italy, etc) structural overcapacity is the new (old) challenge

• Overcapacity is a problem throughout the steel chain, from mills to tube makers and rerollers, from distribution and service centers to end-users.

• Structural overcapacity means structural squeeze in the marginality

• Other than mining, margins are now down to unsustainable levels, throughout the whole value chain

RESHAPING THE VALUE ADDED


• Consolidation between players is not an easy solution. In fact: - even if desired in some cases, there is little cash or credit lines available - consolidation without closures is not effective, consolidation with closures is too expensive - when associated to signifi cant moves, European Antitrust Authorities are not friendly to the industry - no new global consolidator (after ArcelorMittal) is showing up

• Effi ciency improvements are always possible, but most of the efforts have already been performed and the additional possible gains will hardly compensate the gap in lacking marginality.

We rather see a combined need of ....



• Voluntary or unvoluntary restructuring efforts, with capacity cuts/closures to adapt fi xed and break-even costs to the new demand levels, throughout the steel chain.

• A reduction in the cost of raw materials, in order to re-balance the value added in the steel chain, with a reduction of the mining portion in favour of the downstream.

• A closer focus of each player on his own role, geographical and target market, in order to avoid excess overlapping and value destruction.

• Sound alliances between strong players, in order to become even stronger, especially within a Region.

• A more intense effort of the industrial policy makers in favour of the steel industry, which can support the restructuring effort, protect from unfair external competition, enhance some stimulus in the steel consuming sectors.


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