Trends Shaping Future SteelIndustry

Trends shaping the future of the steel industry
Implications for manganese

19th June 2007
Annual Conference - Vienna 2007
Kevin Fowkes – Consultant

Duncan Hobbs – Senior Consultant
Hatch Beddows
TRENDS SHAPING THE FUTURE OF THE STEEL INDUSTRY
Contents
• Introduction
• Setting the scene
• Future outlook
– Steel demand
– Steelmaking and steel industry structure
• Conclusions
– For steelmakers
– For manganese suppliers
• Appendix: Hatch and Hatch Beddows
© Hatch Associates Limited, 2007 2

Contents
• Introduction
• Future outlook
– Steel demand
• Conclusions
– For steelmakers

INTRODUCTION
In order to understand the manganese industry it is essential to understand
the steel industry since it is the major consumer of manganese units
“Consumption is the sole end and purpose of all production”

Adam Smith, 1776
Steel demand Steelmaking Demand for Mn ferroalloys

Mn ore mining
by product by process Mn ferroalloys production
The steel industry consumes over 90% of all manganese units

Contents
• Introduction
• Future outlook
– Steel demand
• Conclusions
– For steelmakers

SETTING THE SCENE
Focusing on the years since 1945 we find three distinct phases of growth in
world steel demand
World steel demand1 1945-2007
1,500 1945-73: CAGR 6.7% 1973-92: CAGR 0.2% 1992 ff:

Two oil price shocks; CAGR 4.5%
1,250 fall of the Berlin Wall and rising
1,000
Mt
750
China’s “great
500 leap forward”
leads renewed
250 growth in world
steel demand
0
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Data: Hatch Beddows, IISI. Note: 1. Measured by crude steel production. CAGR – compound annual growth rate

SETTING THE SCENE
World steel demand and supply by region today
• Asia accounts for over half of world steel consumption, and China alone over one-third
• Asia also dominates world steel production; China is the largest producer country
World steel consumption

Text by region1 World steel production
Text by region2
Other 5%
Other 9% S.America 4%
S.America 3%
CIS countries 10%
CIS countries 5%
N.America
14% N.America 11%
Asia 53% Asia 52%
Europe 16% Europe 18%
Data: Hatch Beddows, IISI, WSD. Note: 1. Finished steel. 2. Crude steel. 2005 data. N.America includes Mexico. Other is Africa, M.East and Turkey

SETTING THE SCENE
World steel output has increased at more than double the rate of industrial
production and demand for Mn alloys has risen faster still in recent years
Growth in world markets 2001-2006
+77% +83%
2001 = 100
+48% ROW
+45%
+22% +19% China
Text
Market size,
Market
Marketin World IP Steel Stainless HC FeMn SiMn MLC FeMn
in2001
2001 Market size in 2006
Data: Hatch Beddows, IISI, IMF, IMnI, ISSF. Note: Steel indices based on production. Mn alloys indices based on gross weight consumption

SETTING THE SCENE
Faster growth in demand for Mn alloys is a function of increasing intensity of
Mn use in steelmaking
• The volume and type of Mn alloys used in steelmaking will be a function of three factors:
1. Steel product chemistry. 2. Steelmaking process and practice. 3. Mn alloy costs
Unit Mn alloy usage in steel making

8 7.2
kg / tonne of crude steel
2000-2002 2003-2005 6.4

6 5.6
4.6
4 3.6 3.4
2
0.8 1.0
0.1 0.3
0
EMM MLC FeMn HC FeMn SiMn Total Mn
Data: Hatch Beddows, IISI, IMnI, ISSF. Note: Data are world averages for stated time frames based on apparent consumption. Unit alloys usage is
calculated on a gross weight basis. Total Mn is metal contained in alloy and consumed per tonne of crude steel produced, exc. direct-charged Mn ore

SETTING THE SCENE
Responding to strong demand growth, steel prices have risen to historically
high levels … but don’t forget the dollar
US dollar price indices Plate price indices

400 400
Plate US dollar index
375
375
HR coil Euro index 370
350 350
Rebar Yen index

300 288 300
Indices, 2001 = 100
Indices, 2001 = 100

281
250 250 253
200 200
150 150
100 100
50 50
2001 2002 2003 2004 2005 2006 2007 2001 2002 2003 2004 2005 2006 2007
Data: Hatch Beddows, SBB, www.oanda.com. Note: Indices are based on European domestic prices, ex-works for flat products and delivered for rebar

Contents
• Introduction
• Future outlook
– Steel demand
• Conclusions
– For steelmakers

FUTURE OUTLOOK: STEEL DEMAND
There is a clear correlation between growth in industrial production and
steel consumption
Steel consumption and industrial production

15%
YoY ch. in steel cons.
10%
5%
0%
-5%
r2 = 0.51
-10%
-2% -1% 0% 1% 2% 3% 4% 5% 6%
YoY ch. in industrial production
Data: Hatch Beddows, IISI, OEF. Note: annual data from 1986-2006

The rate of growth in global industrial production over the next five years is
forecast to be faster than the average of the last decade
Global industrial production

6%
4%
Growth rates
2%
0%
-2%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Data: Hatch Beddows, OEF

There is a close relationship between average income levels and finished
steel consumption per capita…
Finished steel consumption and income per capita

1,000 Korea
Taiw an
/ capita, kg
750
Japan
Text
Italy
Czech Republic Spain
500 Canada
Steel cons
Germany Sw eden
USA
Australia
Slovakia
Thailand Malaysia
250 China
Rus.
Saudi Arabia France
Ukraine Poland Hungary UK
Egypt Mexico
Vietnam Brazil Argentina

S.Africa
India Philippines
Nigeria
0
Nigeria
Indonesia
0 5 10 15 20 25 30 35 40 45
GDP / capita, US$'000 (PPP basis)
Data: Hatch Beddows, IISI, IMF. Note: 2005 data

This relationship is sustained over time and as average incomes rise
steel consumption per capita tends to increase
The r curve relationship between steel consumption and income

1,000
Korea
Steel cons / capita, kg
750 Japan
500
1975 2004
250
China
0
0 5 10 15 20 25 30
Real GDP / capita, US$'000 (PPP basis)
Data: Hatch Beddows, IISI, IMF

Adding another dimension underscores potential for growth in steel demand.
Half of the world’s population lives in high growth, developing countries
Steel consumption and income per capita

1,000 Korea
Taiwan
800
Steel cons / capita, kg
600 Japan
China
Russia
400 USA
USA
EU-15
India A-10
200
Mexico
0 Mexico
Brazil
Indoesia Brazil
-200
Indonesia
0 10 20 30 40 50
GDP / capita, US$'000 (PPP basis)
Data: Hatch Beddows, IISI, IMF. Note: 2005 data. Size of bubbles is proportional to population in each country or region

The potential for long-term growth in steel demand is substantial.
Maybe ~500Mt of finished steel in the next ten years or so…?
Long-term outlook on steel demand1, Mt
Region 2006 LT CAGR2 ~2016 Key differences
North America 143 1.7% 170
South America 34 3.9% 50
Europe 173 0.7% 185
CIS 53 3.5% 75
China
China 351 4.3% 535 184
India
India 44 9.6% 110 66
Japan 109 0.1% 110
Other
Other Asia
Asia 121 7.7% 255 134
Rest of world 107 4.7% 170
World total
World total 1,135 3.9% 1,660 525
Data: Hatch Beddows, IISI. Note: 1. Finished steel consumption. 2. CAGR – compound annual growth rate. N.America includes Mexico.
Rest of world includes Africa, Middle East and Turkey

As well as the world steel market growing substantially in size over the next
ten years the product mix is expected to change
• Demand for flat products is forecast to grow faster than for long products
• This has important implications for the product form of future Mn alloys demand
World steel demand1 in 2006 World steelText

demand1 ~2016
Text
Long products
Long products 44%
47%
Flat products
53% Flat products
56%
Data: Hatch Beddows, IISI. Note: 1. Finished steel

Contents
• Introduction
• Future outlook
– Steel demand
• Conclusions
– For steelmakers

FUTURE OUTLOOK: STEELMAKING AND STEEL INDUSTRY STRUCTURE
Future patterns of steel production will reflect a number of factors
• Distribution of steel demand
• Costs of iron and steelmaking
• Supplies of raw materials and energy
• De-integration of steelmaking and rolling
• Consolidation of ownership and control
• Backward integration by steelmakers into raw materials
• Impact of environmental controls and government industrial policies
• Introduction of new technology in iron and steelmaking, casting and rolling
Where steel is wanted is not necessarily where it will be made

Costs of steelmaking vary widely by region with important implications for
decisions on the location of new production and capacity
Cross-matrix comparison of indicative regional slab production costs1

Brazil Russia India US EAF China Japan E.Eur W.Eur US BOF
Brazil - -15 -25 -55 -70 -85 -90 -95 -105
Russia 15 - -10 -45 -60 -70 -75 -85 -95
India 25 10 - -30 -45 -60 -65 -70 -80
US EAF 55 45 30 - -15 -25 -35 -40 -50
China 70 60 45 15 - -15 -20 -25 -35
Japan 85 70 60 25 15 - -5 -15 -20
E.Eur 90 75 65 35 20 5 - -5 -15
W.Eur 95 85 70 40 25 15 5 - -10
US BOF 105 95 80 50 35 20 15 10 -
Data: Hatch Beddows, WSD. Note: 1. 2005 data. Calculations are based on regional average costs. Table reads left to right and a negative number
signals a comparative cost saving and competitive advantage

Trade in semi-finished steel is rising both in volume terms and as a
proportion of total steel production
World trade in semi-finished steel

80 8%
Share of total steel output

60 6%
Exports, Mt
40 4%
20 2%
0 0%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Data: Hatch Beddows, IISI, ISSB

Key factors of production in high-growth steel markets and low-cost
steelmaking locations tend to favour the BF / BOF process route
EAF steelmaking Russia

• EAF steelmaking has certain advantages over • Huge iron ore and met. coal reserves
BF / BOF steelmaking; notably, lower capital cost. • Low cost energy and local scrap, but scrap fund falling
Also, advances in electric steelmaking practice have • Advantage tilting toward BF / BOF steel
improved product quality and so market access
• However, scrap supply is expected to remain China
structurally tight for the next 10-20 years, until • Low grade iron ore reserves
China starts to recycle significant volumes of
• Large met. coal reserves
obsolete scrap from its recently increased levels
of steel consumption, while DRI / HBI plants remain • No local scrap, limited energy
limited in scale and there are certain raw materials • Advantage BF / BOF steel
constraints India SE Asia
• Huge high grade • Limited iron ore
iron ore reserves • Some met. coal
Brazil • Limited met. coal reserves
• Huge, low cost, high grade • Some sponge iron • No local scrap and
iron ore reserves but no local scrap little DRI
• No met. coal nor local scrap • Advantage BF / BOF • Factors balanced
• Advantage BF / BOF steel
Data: Hatch Beddows

The Arcelor-Mittal merger creates a steel company on an entirely new scale…
• In 2006, ~120Mt crude steel produced, almost four times that of its nearest rival
• 2006 EBITDA ~US$15BN, which rivals the earnings of the biggest mining company and is
greater than the total revenues of many other steelmakers
Crude steel output in 20061 EBITDA in 20062
100 15
US$BN
10
Mt
50
5
0 0
l
on
O
l
al
O
al
l
us
l
ee
ee
ee
ee
i tt
i tt
SC
SC
llit
or
St
St
St
St
rM
rM
Bi
/C
PO
PO
n
n
E
E
lo
lo
ta
po
po
JF
JF
ce
ce
BH
Ta
ip
ip
Ar
Ar
N
N
Data: Hatch Beddows, ArcelorMittal, Factiva, IISI. Note: 1. Although Tata only acquired Corus in March 2007, the chart shows their combined output to
illustrate the impact of the acquisition. 2. FYs ending Jun. 2006 BHPB, Dec. 2006 ArcelorMittal and POSCO, and Mar. 2007 Nippon Steel and JFE Steel

With significant strategic consequences for the ongoing consolidation of the
steel industry
• ArcelorMittal is close to 50% self-sufficient in iron ore and 20% in coking coal and
continues to seek opportunities to increase its coverage
• Steelmakers self-sufficient in iron ore and partially in coking coal command a clear
advantage over their competitors and are likely to become increasingly dominant
– Steelmakers in Russia, most in India, some in Brazil and Ukraine, and maybe
ArcelorMittal
• Probable strategic responses to this challenge

– BOF steel producers backward integrate into iron ore and coking coal
– Non-integrated BOF producers push for price reductions from suppliers
– Steelmakers seek new commercial relationships with suppliers
– Consolidation continues

ArcelorMittal has opened the final chapter in the consolidation story as the
steel industry goes global
• Regional consolidation is reaching its limits in many product markets in Europe and USA
• If consolidation is to continue it must involve leading companies integrating internationally
• Strong companies will attract capital to become stronger; weaker ones will be acquired
World's leading steel producers1 2006

125
Tata/Corus Severstal
100
Riva
75 POSCO
Tangshan
Mt
50 JFE Steel Nucor

U.S. Steel
25
Nippon Steel Baosteel
0
AM No. 2-5 No. 6-11
Data: Hatch Beddows, IISI. Note: 1. Crude steel production. AM is ArcelorMittal

Contents
• Introduction
• Future outlook
– Steel demand
• Conclusions
– For steelmakers

CONCLUSIONS: FOR STEELMAKERS
If recent years have been good for growth in steel demand the future may be
even better, which will present new challenges – but there are risks
• Steel demand is running at record levels; nominal prices are at or near historic highs
• Consensus forecasts are for faster growth in industrial production over the next five years
• A powerful development-driven demand dynamic in populous industrialising / urbanising

countries underscores potential for further substantial long-term growth in steel demand
• As well as growing, steel markets will see continuing change in product mix over time
• Steelmakers face a supply-side challenge to invest in new production and capacity to

meet demand growth but need to see the potential for positive returns
• In the past, the principal challenge to steelmakers was in selling production profitably.
In future, the principal challenge may be in sourcing raw materials competitively
• Consolidation and backward integration, possibly extending to ferroalloys, will continue
• However, risks of an economic shock(s) remain, which would undermine steel demand

Contents
• Introduction
• Future outlook
– Steel demand
• Conclusions
– For steelmakers

CONCLUSIONS: FOR MANGANESE SUPPLIERS
The overall outlook for manganese demand is good but beware the detail.
Appropriate responses require a clear understanding of the customer
• Mn is essential in steelmaking and demand has been rising even faster than steel
production in recent years. Prospects for strong growth in steel demand point to the
potential for further strong growth in Mn alloys demand
• Future Mn demand will, of course, be a function of total steel production. It will also be
affected by other factors, with impacts which will change over time
– Product mix and steel chemistries
– Steelmaking process and practice
– Cost of alternative alloying additions
• Future patterns of Mn demand growth will reflect location decisions for increased steel
production and capacity – Asia-Pacific basin expanding share, Atlantic basin contracting
– De-integration means where steel is wanted is not necessarily where it will be made
The steel industry consumes over 90% of all manganese units

Contents
• Introduction
• Future outlook
– Steel demand
• Conclusions
– For steelmakers

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TRENDS SHAPING THE FUTURE OUTLOOK OF THE STEEL INDUSTRY
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Trends shaping the future of the steel industry

Implications for manganese

Annual Conference - Vienna 2007

Kevin Fowkes – Consultant

• Setting the scene

• Appendix: Hatch and Hatch Beddows

© Hatch Associates Limited, 2007 2

• Setting the scene

• Appendix: Hatch and Hatch Beddows

© Hatch Associates Limited, 2007 3

“Consumption is the sole end and purpose of all production”

Steel demand Steelmaking Demand for Mn ferroalloys

The steel industry consumes over 90% of all manganese units

© Hatch Associates Limited, 2007 4

• Setting the scene

• Appendix: Hatch and Hatch Beddows

© Hatch Associates Limited, 2007 5

World steel demand1 1945-2007

1,500 1945-73: CAGR 6.7% 1973-92: CAGR 0.2% 1992 ff:

© Hatch Associates Limited, 2007 6

World steel consumption

Europe 16% Europe 18%

© Hatch Associates Limited, 2007 7

Growth in world markets 2001-2006

© Hatch Associates Limited, 2007 8

Unit Mn alloy usage in steel making

2000-2002 2003-2005 6.4

© Hatch Associates Limited, 2007 9

US dollar price indices Plate price indices

Rebar Yen index

Indices, 2001 = 100

© Hatch Associates Limited, 2007 10

• Setting the scene

• Appendix: Hatch and Hatch Beddows

© Hatch Associates Limited, 2007 11

Steel consumption and industrial production

© Hatch Associates Limited, 2007 12

Global industrial production

© Hatch Associates Limited, 2007 13

Finished steel consumption and income per capita

Vietnam Brazil Argentina

© Hatch Associates Limited, 2007 14

The r curve relationship between steel consumption and income

© Hatch Associates Limited, 2007 15

Steel consumption and income per capita

© Hatch Associates Limited, 2007 16

Long-term outlook on steel demand1, Mt

Region 2006 LT CAGR2 ~2016 Key differences

North America 143 1.7% 170

South America 34 3.9% 50

Europe 173 0.7% 185

Japan 109 0.1% 110

Rest of world 107 4.7% 170

© Hatch Associates Limited, 2007 17

World steel demand1 in 2006 World steelText

Data: Hatch Beddows, IISI. Note: 1. Finished steel

© Hatch Associates Limited, 2007 18

• Setting the scene

• Appendix: Hatch and Hatch Beddows

© Hatch Associates Limited, 2007 19

• Distribution of steel demand

• Costs of iron and steelmaking

9/F Portland House, Bressenden Place, London, SW1E 5BH, UK