has the me's cost competitiveness in steel seen a ... · has the me's cost...

1© 2006 SteelConsult International Page

Has the ME's costcompetitiveness in steel

seen a structuralimprovement?

SteelConsult InternationalDrentestraat 111083 HK AmsterdamThe NetherlandsTel: + 31 (0)20 661 8900E-mail: info@steelconsult.comwww.steelconsult.comwww.steelearningsbarometer.com

Metal Bulletin

10th Middle East Iron & SteelConference

10-12 December 2006

JW Marriott Hotel, Dubai,UAE


Introduction

About SteelConsult International

• SteelConsult International is a consultancy specialized in the iron & steel industry and itsmarkets.

• From our offices in Amsterdam, The Netherlands, we work for clients around the world, incl. steelmills, distributors, processors, traders, consumers, banks, government institutions and suppliersto the steel industry.

• Our consultants have a background in the iron & steel sector, providing a firm base of experienceand an extensive contact network across the industry.

• Our first working language is English, but we can also work with you in French, German, Dutch,and Spanish. Read more about us on www.steelconsult.com!

Why SteelConsult?Product AreasServices

• Languages:• Processed Products• Customer Satisfaction Surveys

• Commitment• Tubes• Cost and Feasibility Studies

• Customer focus• Long Products• Financial Modelling

• End-use sector knowledge• Flat Products• Business Planning

• Expertise & experience• Semis• Market Research

• Specialized in Iron & Steel• Steelmaking Raw Materials• Strategy Consulting


Middle-East Cost Competitiveness in Steel

Many countries in the ME have a large wealth of oil & gas

Oil production (1,000 bbl/day)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

Mo rocco

Algeria

TunisaLib

yaEgypt

UAE

Saudi Arabia

Bah rain

Om

an

KuwaitQata

rIra

qIra

n

Jord

an

Lebanon

Syria

Yemen

0

10

20

30

40

50

60

70

80

90

100

Oil produc tion Gas produc tion

Source: CIA

Gas production (bln m3/year)


8.4

7.6

6.6

6.6

5.8

5.7

4.8

2.9

2.6

1.6

1.5

1.2

1.1

0.9

0.8

0.7

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0

USA

Canada

UK

Belgium

South Korea

Japan

China

India

Ukraine

Bolivia

Trinidad

Iran

Russia

Oman

Qatar

Saudi Arabia


Natural gas prices are much lower than in the emerging markets ofChina and India and the mature markets of Japan, Europe and NorthAmerica

Source: American Chemistry Council

Natural gas cost by country 2005 (US$/GJ)



Pushed by higher iron ore and energy prices, ME DRI production costshave doubled between 2000 and 2005. Cost prices are expected to comedown in 2010 and 2015, but remain at higher levels than in the past

54 57

130

105

83

3 4

7

6

6

0

20

40

60

80

100

120

140

160

180

200

1995 2000 2005 2010* 2015*

DRI pellets del Natural gas Electricity Labour Other

DRI operational cost price**, GCC (US$/tonne DRI)

Source: SBB, MB, local specialists, SteelConsult analysisNote: **excl. overhead and capital costs, incl. maintenanceAssumed 100% fed by pellets Capacity 500k tpy facility

54 57

130

105

83

4

10

8

8

5

0

20

40

60

80

100

120

140

160

180

200

1995 2000 2005 2010* 2015*


DRI operational cost price**, Egypt (US$/tonne DRI)



However, despite its raw material disadvantage, the GCC’s energybenefit makes it one of the world’s most competitive regions forproducing DRI. Costs are some US$80/t lower than in the USA.

110 115130

120130 130 130 125

1212

7 30

3755 64

83

44

4

10

7

1810

9

0

50

100

150

200

250

VenezuelaRussia GCC India China Japan Europe USA


DRI operational cost price by country/region, 2005 (US$/tonne DRI)

83% 84% 87%

72% 72%

60% 59%54%

9% 8% 5%

19% 21%

26% 29% 36%

3% 3% 3% 6%4%

9% 5% 4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%



DRI operational cost price by country/region, 2005 (%)


The price of natural gasis the main costdifferentiator inproducing DRI



Like for DRI, EAF steelmaking costs have also increased in the ME…

74 78

164

136113

10 11

19

16

165861

66

66

66

0

50

100

150

200

250

300

1995 2000 2005 2010* 2015*

DRI Electricity Labour Other

EAF operational cost price**, GCC (US$/tonne liquid steel)


70 77

165

135111

1116

28

24

24

52

55

59

59

59

0

50

100

150

200

250

300

1995 2000 2005 2010* 2015*


EAF operational cost price**, Egypt (US$/tonne liquid steel)



In EAF steelmaking, the ME cost advantage over India, China and thedeveloped parts of the world is even more pronounced than for DRI.However, Venezuela and Russia are even more cost competitive

146 151 164183 197

237 242 254

18 2019

4531

8045

40

0

50

100

150

200

250

300

350

400

450



EAF operational cost price by country/region, 2005 (US$/tonne steel)

63% 63% 65% 62%67%

61%66% 68%

8% 8%7% 15%

11% 20% 12% 11%

28% 28% 26% 22% 22%17% 18% 18%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Ve nezuelaRussia GCC India China Japan Europe USA

DRI Electric ity Labour Other

EAF operational cost price by country/region, 2005 (%)




Why does the ME account for such a high share of DRI expansions?An important difference with Venezuela and Russia, is that the MEregion is still a large net importer of steel

Production/consumption ME, k tonnes

0

10,000

20,000

30,000

40,000

50,000

60,000

95 96 97 98 99 00 01 02 03 04 05 06e 07* 08* 09* 10*0

5,000

10,000

15,000

20,000

25,000

30,000Steel consumptionCrude steel productionApparent steel shortageLinear (Trend)

Apparent steel shortage, k tonnes

Source: IISI, MESTEEL, UN Statistics, company websites, local specialists



In addition, the price of oil does not only provide a comparative costadvantage to the ME region in producing energy intensive products,but also boosts local consumption of steel, esp. in construction

0

50

100

150

200

250

300

350

'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05

Steel consumption ME Price of oil*

Source: EIA, EIU, IISINotes: *OPEC average (US$/barrel)

Index value, 1995 = 100



Furthermore, high oil revenues facilitate the finance of newinvestments, including those in DRI and EAF plants

Capacity expansions ME, m tpy

0

2

4

6

8

10

12

14

'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06e '07* '08* '09* '10* '11ff*0

10

20

30

40

50

60

70

EAF DRI/HBI Oil price

Price of oil, OPEC average (US$/barrel)

Source: SBB, MB, company websites, local specialists



Finally, due to its relatively low volume of manufacturing activity, theME is not as scrap rich as some other parts of the world. The mostimportant source of scrap in the Middle-East is obsolete scrapScrap availability ME by source, m tonnes

0.8 0.8 0.9 0.9 0.9 1.0 1.1 1.3 1.5 1.5 1.71.0 1.1 1.2 1.2 1.2 1.3 1.6 1.5

1.9 2.0 2.11.9 1.9 2.0 2.0 2.4 2.32.4

3.2

4.0 4.2 3.5

0.1

-0.1 -0.2-0.9 -1.4 -1.6

-0.3 -0.6-1.5 -1.3

0.4

-4

-2

0

2

4

6

8

10

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Home scrap Prompt scrap

Obs olete scrap Net imported sc rap

Source: IISI, MB, MESTEEL, UN Statistics, company websites, local specialists

• Home scrap is producedat the mill and instantlyrecycled.

• Prompt scrap isgenerated as waste byproducers of metalproducts.

• Obsolete scrap becomesavailable when used metalproducts are collected forrecycling.

• Metal products havedifferent life cycles,varying from cans (6months), cars (7 years) tobuildings (>20 years).

• Part of past steelconsumption is lost andnever recycled.



Prices for scrap, pig iron and DRI/HBI are usually aligned. Metallicsprices have about doubled since 2003 and have become more volatile

0

50

100

150

200

250

300

350

400

J M S J M S J M S J M S J M S J M S J M S J M S J M S J M S

Sc rap Rotterdam, fob export*

Pig iron, export CIS fob Black/Balt ic Sea

DRI, import c& f Europe

Price, US$/metric tonne

Source: SBB, MB, MidrexNote: * 50% HMS#1, 50% HMS#2

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006



The margins between the operational cost price of DRI in the ME andinternational metallics prices have vastly improved since 2002

0

50

100

150

200

250

300

350

J M S J M S J M S J M S J M S J M S J M S J M S J M S J M S

Sc rap, sales price Rotterdam, fob export*

Pig iron, sales price CIS, fob Black/Baltic Sea

DRI cost price** GCC

Price, US$/metric tonne

Source: SBB, MB, local specialists, SteelConsult analysisNotes: * 50% HMS#1, 50% HMS#2 **excl. overhead and capital costs, incl. maintenance

The margins between the operational cost priceof DRI in the ME and international metallicsprices have vastly improved since 2002

Metallics markets went through a period of prolonged weaknessbetween 1998 and 2001, as global markets were suffering fromlarge scale opportunistic supplies of pig iron from the CIS

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006



World oil prices have made a step change up. The EIA expects worldoil prices to remain between US$45-60/barrel until 2030. Even in thelowest price scenario, the oil price is expected to remain above thelevel of the previous peak in 2000

0

20

40

60

80

100

120

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04'06

*'08* '10* '12* '14* '16* '18* '20

*'22* '24* '26

*'28* '30*

High price

Reference

Low price

Source: Energy Information Agency (US Department of Energy) Annual Energy Outlook 2006

World oil price (real prices in 2004 US$) in EIA Annual Energy Outlook 2006

Forecast

In its reference case, theEIA expects oil prices toremain between US$45-

60/barrel until 2030

Previous peak



Reserves of oil & gas will last for at least several generations more inmany countries in the ME

Years of reserve oil

0

50

100

150

200

250

Algeria

Tunisa

Libya

EgyptUA E

Saudi Ara

bia

Bahrain

Oman

Kuwait

Qatar

Iran

Syria

Yemen

0

100

200

300

400

500

600

700

800

900

Years of reserve oil Years of reserve gas

Source: CIANote: At current production levels

Years of reserve gas



Thank you for your attention!

SteelConsult InternationalDrentestraat 111083 HK AmsterdamThe Netherlands

Tel: +31 20 661 8900Fax: +31 20 661 8901Email: [email protected]

www.steelconsult.comwww.steelearningsbarometer.com

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