A New Era of Global Steel: the end of state control and

protectionism?

Stuart Reynolds

icea 11 April 2006

Agenda Steel Policy: a potted history Steel markets: global restructuring

pressures Globalisation trends

Structure of the world industry Why globalisation? Companies’ strategies

Steel policy: a potted history(Europe)

19th –early20th centuries Steel demand linked to munitions Wealthy steel dynasties with

political power 1950s: over 1000 steel

companies in Europe: 400 Italy over 300 UK

Post war reconstruction ECSC – foundation for the common market Policy:

“Ensure an orderly supply to the common market … “ensure … consumers … have equal access to the

sources of production… “ensure … lowest prices … while allowing .. normal

return to invested capital … “… encourage undertakings to expand and improve

their production potential … “promote improved working conditions and an

improved standard of living for the workers … “promote the growth in international trade … “promote an orderly expansion and modernisation of

production …”

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1952 1957 1962 1967 1973 1977 1981 1986 1990 1995 2000

Million tonnes

Evolution of crude steel production in the EU member states

Sweden

Finland

Austria

Portugal

Spain

Greece

Denmark

Ireland

UK

Luxembourg

Belgium

Netherlands

Italy

France

Germany

1950-1970: Central planning

Common external tariff Managed prices Levy on companies Subsidies for investment Collaborative R&D Detailed data collectionnew investment in big integrated

plants national champions

1960-1990: nationalisation & state control

Excess capacity, inefficiency state subsidies, nationalisation

Post 1979 State of Manifest Crisis: Davignon Plan Production quotas Inhibited new investment and innovation

ESF/ERDF funds for training, infrastructure etc in closure areas

1980s - 2000: re-privatisation

Debt write-off; investment subsidies for restructuring

EC monitored restructuring plansCompany Privatisation date

British Steel 1987

SSAB (Sweden) 1989

Ilva (Italy) 1992-95

Usinor-Sacilor (France) 1995

SN (Portugal) 1995-6

Voestalpine (Austria) In stages 1995-2003

Aceralia (Spain) 1997

1990 - 2007: Transition and Accession to EU 1990s: global overcapacity ECE and CIS crisis:

Demand collapse (50–70% fall) Obsolete plant Environmental problems

EU State aid code – capacity reduction Accession plans: privatisation and

restructuring of steel in ECE Transfer to steel barons in CIS End of ECSC:

1952 1957 1962 1967 1973 1977 1981 1986 1990 1995 2000

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ECSC trade with third countries

Imports Exports

Steel markets

Steel consumption: mixed fortunes

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1994 - 1999 1999 - 2004

An

nu

al in

crea

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Matureeconomies

China

ROW

In the long term, steel intensity is declining in the mature economies….

…but elsewhere demand growth is strong.

Source: IISI, IMF

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87 90 95 00 04

Ste

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EU 15

Japan

North America

Its all about investment

75-80% of steel consumption goes into investment….Construction

50%

Other investment

30%

Consumption20%

..and the location of investment and construction has shifted to China,

… then S Asia, L America? …

But investment is volatile!

In China today, nearly 50% of GDP is accounted for by investment.

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Malaysia

Thailand

Korea

China

Source: ADB

The “Asian crisis” in 1998 saw investment levels slashed.

What about manufacturing? Heavy engineering and vehicle

manufacturing is on the move: From Germany to Slovakia and Poland From North America to Mexico and China From Japan to China and ASEAN

It is also growing, but only slowly.

Steel demand and GDP

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-5%

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GDP growth (%)

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Asia

EU

N.Am

L.Am

Below 2 - 3% GDP growth, steel declines

Consumption changes2004 - 2010By region: The mature economies: +17Mt China: +185Mt ROW: +83Mt TOTAL: +275Mt

Average annual growth rate:4.3%… but it depends on China!

2000- 2007?: the China boom First sustained period of capacity

shortage Massive cash flows to steel traders/

exporters Huge investment in new capacity in

China; modernisation in CIS Shift of power to ore exporters Plans for massive new capacity in Brazil,

India

Capacity Crude steel capacity in 2004 was around

1.2 billion tonnes By 2007, this will have increased by

180Mt (15%). 140 Mt in China 40Mt elsewhere

Demand increases by ~135Mt China estimated to have already 100Mt

excess capacity

2004 trade patterns

-30 -20 -10 0 10 20 30 40

Europe

North America

Industrial Asia

China

CIS

Latin America

ROW

Net exports (Mt)

Value-added fin. prods HR fin. prods Semis

Semis and hot rolled products from the CIS and Latin America.

Cold rolled, alloys, tubes etc. from Industrial Asia and Europe.

Operating costs(BOF- HRC 2005)

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$/to

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Other costs

Manpow er

Energy

Ferrous raw materials

Coal and coke

There are wide cost differences between producers in the BRIC regions and elsewhere. And plenty of scope for these differences to get wider!

Trend in China’s trade China became a net exporter in late 2005

Lower value products Higher value products

76Mt of new HRC capacity by 2008

Trade patterns will change …

The key questions: Can Europe and Industrial Asia continue

to export on the basis of their lead in technology? (no)

Will low cost countries produce semis for finishing elsewhere? (yes)

Will China export aggressively if it has a capacity surplus? (probably)

Will North America reduce its net imports? (maybe)

This fundamental shift can only be achieved by global firms …

Crude steel production will have to Fall in Europe and Industrial Asia Rise by much more than consumption in

Latin America, China and India Rise at least in line with consumption in

North America, CIS, and ME/NA.

… and this assumes no economic crash in China!

Globalisation trends

The industry’s views Competitors, suppliers and customers are

more global & concentrated than steel Industry wants more consolidation, to

stabilise prices and capacity They want more bargaining power with

suppliers and big customers Need more globalisation to optimise

location, procurement, trade benefits, and transfer of know-how

The objectives of global steel companies Control raw materials Control trade(rs) Defence against losses in EU/ US Transfer know-how Reduce competition in the high

value steel markets

The present global & regional concentration in the

steel industry

IISI top companies 2004/5Company 2004 region Company 2004 region

Mittal Steel (inc ISG) 66 ** global Chelyabinsk (Mechel) 6.2 CISArcelor 46.9 ** EU/LA Panzhihua 6 ChinaNippon Steel 32.4 ** Japan voestalpine 5.9 EUJFE 31.6 ** Japan Azovstal 5.7 CISPOSCO 30.2 Korea AK Steel 5.6 ** USAShanghai Baosteel 21.4 China CSN 5.5 LAUS Steel 20.8 ** USA/Europe Benxi 5.5 ChinaCorus Group 19 ** EU Baotou 5.4 ChinaNucor 17.9 ** USA Anyang 5.2 ChinaThyssenKrupp 17.6 ** EU Celsa 5.1 ** EURiva Acciao 16.7 ** EU Erdemir Group 5 TurkeyGerdau 14.6 ** LA Stelco 4.9 CanadaSeverstal + Lucchini 14.1 ** CIS/USA/EU USIMINAS 4.7 LASumitomo 13 Japan Nangang 4.6 ChinaTechint Group (inc SIDOR, HYLSA) 12.4 ** LA Rautaruukki 4.5 EUEvrazHolding 12.2 ** CIS Zaporizhstahl 4.5 CISSAIL 12.1 India Dofasco 4.4 CanadaAnshan 11.3 China Tata Iron and Steel Co 4.2 S AsiaMagnitogorsk 11.3 CIS COSIPA 4.2 LAChina Steel 10.9 China SSAB 4.1 ** EUWuhan 9.3 China Tangshan Guofeng Steel 4 ChinaNovolipetsk 9.1 CIS Nisshin Steel 4 ChinaImidro 8.7 Iran EZZ 4 JapanShougang 8.5 China Hadeed 3.9 M EastSalzgitter 8.1 EU CST 3.8 LAMaanshan 8 China Alchevsk 3.8 CISKobe Steel 7.7 Japan Tokyo Steel 3.6 JapanINI Steel 7.6 Korea Urals Steel 3.6 CISJiangsu Shagang Group 7.6 China Shaoguan 3.5 ChinaKrivorozstal 7.1 CIS Tianjin Tiantie 3.4 ChinaValin Steel Group 7.1 China Rashtriya Ispat Nigam Limited 3.4 S AsiaTangshan 7.1 China Lion Group 3.4 SE AsiaMariupol (Ilyich) 6.9 CIS Commercial Metals 3.4 ** USAJinan 6.9 China Hebei Jinxi 3.4 ChinaHandan 6.8 China Tangshan Jianlong 3.4 ChinaBlueScope 6.7 Australia Xuanhua 3.3 ChinaLaiwu 6.6 China Xinyu 3.3 ChinaDuferco Group 6.5 ** EU

total above 568.7world total 1057

Big economies of scale, and important know-how, but ….

Top 5 companies = 20% of world steel

Top 10 companies = 30% Top 75 companies = 50% Very many single plant companies,

below economic size

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Leading EU steel producers by revenue

Flat products Long products Special steels Other activities

Most big steel companies only make steel …

…. but the biggest EU steel company gets most revenue (and profit) from downstream engineering

Organic growth is rare All the top twenty steel companies

have been created by recent mergers & acquisitions

... except Baosteel, Posco and SAIL

Europe’s top 5

Arcelor (in EU) 40 10 integrated plants in EU, 2 in Brazil; 18 EAF plants

Corus 19 4 main integrated sites; 1 EAF site

ThyssenKrupp 17 1 main integrated site; various special steels

Riva 16 1 integrated plant; 18 EAF plants

Mittal (in EU) 15 3 integrated plants (Poland, Czech); 5 EAF plants

Total of top 5 110 19 integrated plants; c 50 EAF plants

Regional output 183 share of top 5: 60%

North America’s top 5

Mittal Steel (in NAFTA)

20 9 integrated works (Burns Harbour, Cleveland, Indiana Harbor, Sparrows Point, Weirton (2004), Riverdale, Inland,

Sidbec, Mexicana); 3 EAF works

US Steel (in the USA)

16 3 integrated sites (Fairfield, Gary, Mon Valley)

Nucor 16 18 EAF works

AK Steel 5 2 integrated works (Middletown, Ashland), 2 EAF works

Ipsco 3 3 EAF plants + pipe mills

Total of top 5 60 14 integrated; 26 EAF based sites

Regional output 122 share of top 5: 50%

Industrial Asia’s top 5

Nippon Steel 32 6 integrated works

JFE Steel 30 2 main locations, each with two large sites

Posco 30 2 integrated, 1 EAF works

Sumitomo 13 3 integrated, 2 EAF sites

Kobe 7 2 integrated sites

Total of top 5 112 17 integrated sites, 3 EAF sites

Regional output 156 share of top 5: 72%

CIS’s top 5

Mittal (Krivorozhstal + Temirtau)

12+ 2 integrated sites

Evraz Holding 12 3 main integrated sites (Zapsib, Kuznetsk, Nizhny Tagil)

Magnitogorsk 11 1 integrated site

Severstal 10 1 integrated site

Novolipetsk 9 1 integrated site

Total of top 5 55+ 8 integrated plants

Regional output 100 share of top 5: 55+%

Latin America’s top 5Techint 12 Siderca, Siderar, Sidor, Hylsamex; 2 DRI

plants; Tenaris tube group

Gerdau 8 Acominas; minimills in S America; Ameristeel in N America;

Arcelor 8 Belgo-Mineira, CST, Acesita, Acindar

Usiminas 9 Usiminas, Cosipa

Mittal 5 Ispat Mexicana, Caribbean Ispat

Total top 5 42 12 integrated plants, ~20 minimills

Regional output 64 share of top 5: 66%

Regional but not globalCIS Industri

al AsiaEurope North

AmericaLatin

America

Output of top 5 (Mt)

49 112 110 60 42

Regional share 49% 72% 60% 50% 66%

No of integrated plants

7 17 19 14 12

No of minimills - 3 50 26 20

Typical size of integ. plants

7Mt 6Mt 4Mt 3Mt 2.5Mt

..and still a long way from restructured into efficient sized units

Lessons from other sectors

Suppliers: Iron ore 3 majors : 36% of

world output and 50% of world trade

Mt 2004

% of world

CVRD 220 19%

Rio Tinto 108 9%

BHP Billiton 102 9%

430 36%

Global 1200

Customers: Automotive 10 global

majors have 90% of world car market

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Major competitor: CementMt

2003% of

world

Lafarge 108 5%

Holcim 94 5%

Cemex 65 3%

Heidelberg 62 3%

Italcementi 46 2%

395 20%

Global 2000

Smaller plants and only local markets, with little trade, yet top 5 hold 20% of global output

Major competitor: aluminium

Top 5 have 40% of world market

Mt 2005

% of world

Alcoa 3.6 11%

Alcan 3.5 11%

RUSAL 2.7 9%

Norsk Hydro 1.7 5%

BHP Billiton 1.3 4%

12.8 40%

Global 31.6

Past & recent M&A activity

More, bigger, more cross border mergers & acquisitions

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CrossBorder

CrossContinent

No of deals Value of deals ($bn)

Source: PwC “Forging Ahead”

A few big mergers … 2005 Mittal: ISPAT Intl, LNM, ISG 2002Arcelor: Arbed, Usinor,

Aceralia (+CST +Dofasco) 2000JFE: Kawasaki, NKK 1999Corus: British Steel, Hoogovens 1999Thyssen Krupp: Thyssen,

Krupp, Hoesch 1990s Evraz: Nizhny Tagil (NTMK), West

Siberia (ZSMK) and Novokuznetsk (NKMK).

A few companies grew through frequent acquisitions / privatisations

Mittal: Krivoyrozhstal, Polska, Sidex, Karmet, … and many others

Ispat Industries/ GSH: Kremikovtsi, Delta, Natsteel, Izmir, Bosnia, Libya

Severstal: Rouge, Lucchini … Riva: Ilva + minimills Gerdau: minimills in N & S America; Portugal;

Spain Techint/ Ternium: SIDOR, HyL..

Very few grew big through organic growth ..

Nucor: based on new technology India, China …

… but most new capacity & growth in the past came from public sector or public/private projects for regional development

learning problems, low quality and productivity, protection, subsidies, dumping

The key players & their strategies

Who are the predators? Mittal Arcelor Russians: Severstal, Evraz, Mechel,

Metalloinvest, IUD/Duferco, SCM

Tata 2nd rank EU players ..Baosteel & Chinese?

MittalLow cost, low end products, global spot

markets Integrating back into ore, coal Trying to get into China Little presence in western EU Little presence in Latin America except

Mexico Little presence in ASEAN

Re-merging of Mittal Steel & GSH??

ArcelorHigh value, high tech products, targeted markets Shifting iron & steelmaking out of EU-ETS zone

into Brazil/ CDM zone Building global “star alliance” (Nippon, Tata,

Baosteel, Severstal, Erdemir) Needs control of raw materials

Planning to spend $3.5bn on acquisitions.Bid for PHS, Erdemir, Krivorozhstal … but lost.Next step India, China, Mexico?

2nd rank EU playersHigh cost, medium scale, small shrinking markets need to form bigger groups, but no evident

predator Need to escape from high cost EU

Targets for Russian/Ukrainian predators. Northern group: Corus, SSAB, Ruukki, TKS, Salzgitter, Voestalpine.Southern group: Celsa, Riva, Duferco/IUD, Lucchini/Severstal.

Volume < 10Mt

Volume > 10Mt

High level of product focus and differentiation

Low level of product focus and differentiation

Mittal

Arcelor

Corus (a)

TKS

Riva

Salzgitter

Rautaruuki

Voestalpine

Celsa

SSAB

Lucchini

Duferco (b)

Part of diversified group

Primarily a steel producer

(a) If Aluminium assets sold(b) But other activities are trading in

steel

Key

Focus on products and qualityFocus on customer service

Need to grow, specialise or exit Focus on cost minimisation

Strategic focus of key European players

Russian / Ukrainian barons Want to take money out of CIS Already nearly integrated with ore, coal,

transport

Evraz, Mechel listed in London, NY: NLMK listing soon.Severstal: Rouge, Lucchini, SeverCorr, Alliance with ArcelorMetalloinvest tried for CorusIUD merging with DufercoWhat will SCM do after losing Krivorozhstal?

1st stop EU/USA; next stop India/China?

Tata India’s only global group – in IT, services,

transport Expanding in India, looking outwards: investing

$23bn Seeking downstream processors in Asia Hard for foreigners to enter India, easy for

Indians to invest outside: but where?

Alliance with Arcelor: zone of influence Africa/Asia?

Industrial AsiaNippon: alliance with Kobe, Sumitomo, Arcelor: cross shareholding with POSCO Posco: greenfield projects in China, India, Brazil?JFE: still restructuring from 2002 merger of NKK/Kawasaki. Many downstream investments/alliances

Have been reluctant to merge or acquire: cultural

conservativism or preoccupied with domestic growth?

China Needs massive consolidation in China – next 10 years Clear national strategy Would be prey for predators, but Chinese policy doesn’t allow foreign control Need control of raw materials and technology

Strong big groups will emerge then target the rest of the world

The Chinese Policy Consolidate: Top 10 to control 50% by 2010

(currently 16%) Expansion permits: only companies with >5Mt

allowed new greenfield sites (15 companies) Foreign investors:

Must have >10Mt No majority foreign ownership in crude steelmaking

No statement on privatisation

Few international links with China .. Baosteel /Arcelor alliance Arcelor beam project with Laiwu Mittal investment in Valin JFE /Guangang proposal for 10Mt project in

Guangzhou POSCO/ Shagang proposal for 10Mt project in

Fujian

Policy issues today CO2 emissions trading/ Kyoto OECD State aids and anti-dumping

agreement China’s investment, consolidation,

and export policies National/ regional ownership issues:

resurgent protectionism

Questions for the future Who will be the top 5 global steel

producers? What will the Japanese do? Will the separation of miners and

steelmakers break down? If so, what will RioTinto, BHP do?

What impact of Kyoto and energy prices? In the very long term, is future

steelmaking technology nuclear-based? Will the future energy mega-firms control steelmaking?

Kyoto BF steel produces 2t of CO2/ t steel At today’s CO2 price (~$30/t) this adds

15% to cost of EU steel; But grandfather rights mean steel

companies will “hoard” capacity, not invest in low CO2 routes

And EAF steelmaking, less CO2, but less competitive because of power prices

Eventually, it will accelerate shift to Brazil, India and Ukraine