platts 2014 conference presentation (steel sector in russia) berlin, 2-3 june 2014

PLATTS ANNUAL STEEL MARKETS EUROPE

CONFERENCE

CIS: how do they interrelate with Europe?

Berlin

2-3 June 2014

DISCLAIMER

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2

RUSSIA: #5 CRUDE STEEL PRODUCER GLOBALLY

[3]

11187 81 69 66

43

China Japan USA India Russia South Korea Germany

779

Source: Worldsteel Association, 2013.

million t

• 4% of global crude steel was produced in Russia in 2013

2013 RESULTS

RUSSIA: #6 STEEL CONSUMER GLOBALLY

Source: Worldsteel Association, 2013. [4]

9674 65 52 43 38

China USA India Japan South Korea Russia Germany

700

million t

• Russia accounted for 3% of apparent finished steel use in the world in 2013

2013 RESULTS

INDUSTRY CONCENTRATION

[5]

71%

29%

Top 4 steelmakers Other steelmakers

Median size of the plants – below 0.5 mln tpaoutput

• Over 70% of crude steel in Russia is produced by four companies

• Four largest Russian steel companies are in Top-30 of global steelmakers

69 m t

NLMK 14.6 m t

MMK 11.9 m t

Evraz 11.9 m t

Severstal 10.7 m t

TOP 4

2013 RESULTS

34 35 37 39 40 41 42 41 39 38 42 44 46 46

9 9 9 9 11 1116 19 20 16

18 1921 21

16 16 14 1415 15

13 12 12

67 7

4 259 59 60 6166 66

71 7369

6067 69 70 69

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

OHF EAF BOF

CRUDE STEEL PRODUCTION BY ROUTE

[6]

4%

30%

66%

• Russian steelmakers have modernized the assets to produce steel in a more

effective and environment-friendly way

million t

• Surplus of steel is exported from Russia mostly as semi-finished products

• Net exports of finished steel are declining as domestic steel demand grows

attracting imports

STEEL TRADE BALANCE

[7]

15,7 13,615,1 12,1 14,8 13,6

6,5 11,2 7,4

5,24,0

3,4

0

5

10

15

20

25

30

2008 2009 2010 2011 2012 2013

Semi-finished steel net exports Finished steel net exports Exports Imports

million t

Source: Research market agencies 2013, Russian statistics, NLMK estimates

EXPORTS STRUCTURE BY PRODUCT

[8]

36%

21%

19%

13%

11% Slabs

Billets

HRC

Other flat products

Long products

24 m t

• Semi-finished products account for 57% of exports

• 74% of finished steel exports are flat steel products


KEY EXPORT DESTINATIONS

[9]

38%

21%

19%

10%

8%4% Europe

Middle East

South-East Asia

CIS

North America

Other

24 m t

• Europe, Middle East and South-East Asia are key export destinations of Russia


KEY IMPORTING REGIONS

[10]

58%20%

19%

3% CIS

Asia

Europe

Other

7 m t

• Imports accounted for 16% of steel consumption in 2013

• Imports mainly come from CIS countries

• 19% is imported from Europe


EUROPE AS A TRADING PARTNER

[11]

54%

4%

19%

14%

2%7%

Slabs

Billets

HRC

CRC

Other flat products

Long products

EXPORTS TO EUROPE IMPORTS FROM EUROPE

30%

12%

24%

14%

11%

8%1%

Pre-painted sheet

Galvanized sheet

Other flat products

Sections

Rails

Other long products

Semi-finished steel

8.7 m t 1.0 m t

• Russia accounts for over 80% of European slab imports

• Europe exports high value-added flat steel and long steel in Russia


5 m t

23 31 29 36

81101

122 128

204

173159

188 176

100

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

RUSSIAN STEEL SECTOR INVESTMENTS

[12]

• Significant investments in modernization, including in minimization of environmental footprint, energy efficiency and transport infrastructure

billion RUB

Fixed asset investments of Russian steel companies

Source: Russian steel consortsium estimates, companies data* Data for Russian steel consortsium members, excluding OMK

53,5%48,5%

43,5% 43%

2000 2005 2008 2013

RUSSIAN STEEL SECTOR MODERNIZATION

[13]

Source: Russian statistics

• Russian steel companies have substantially restructured and revamped fixed assets

• Fixed assets depreciation has declined by 10 p.p. over the decade

Fixed assets depreciation

PRODUCTIVITY GROWTH AND MINIMIZATION OF ENVIRONMENTAL FOOTPRINT: NLMK CASE

[14]

• NLMK has a track record of environmental footprint reduction

o Since 2007 air emissions have reduced by 40% and waste utilization has increased by 20%

o Zero waste water discharge at Lipetsk site achieved

• Labour productivity growth of over 2.5 times since 2001

AIR EMISSION AND WASTE WATER DISCHARGE

37,5

30,5 30,4 28,5 27,922,6 19,4

1,09

0,02 00,0

0,5

1,0

1,5

0

10

20

30

40

2007 2008 2009 2010 2011 2012 2020E

Air emissions per tonne of steel

Waste water discharge per tonne of steel, rhs

Note: NLMK Russia average. BAT = “Best available technology”.

kg/t of steel

BAT 18.9

*Russian Flat Products

LABOUR PRODUCTIVITY AND ENERGY EFFICIENCY

5

5,5

6

6,5

7

7,5

100

150

200

250

300

350

400

450

2001 2007 2008 2009 2010 2011 2012 2013

Gcal/t

t of steelper

employee

Labour efficiencyEnergy efficiency (RHS) Source: Company data

RUSSIAN STEEL SECTOR PROFITABILITY

[15]

Source: Companies data, Bloomberg, NLMK estimates

• Profitability margins to stagnate at single digit numbers capping ability to expand capacity

• … and leading to capacity rationalization and restructuring

EBITDA margin of the top-4 steelmakers

0%

5%

10%

15%

20%

25%

30%

35%

2007 2008 2009 2010 2011 2012 2013 2014Е

9.5%

35 36 34

1712 11

2,1

3,0 3,1

0

1

2

3

4

0

10

20

30

40

2011 2012 2013

Net debt EBITDA Net debt/EBITDA (x-times)

RUSSIAN STEEL SECTOR DEBT

[16]

Source: Russian steel consortsium data

• Capex is expected to decline due to high debt leverage, lower profitability and focus shift from growth to efficiency improvements

billion RUB

Debt leverage of Russian steel companies*

-35%

STEEL DEMAND IN RUSSIA

[17]

0

10

20

30

40

50

60

70

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

E

million t

Source: Worldsteel Association 2013.

• Steel consumption has increased by 2.7x times since 1994 to 43 million t

• Huge pent-up demand from the 1990-s

+2.7x

STEEL DEMAND FUNDAMENTALS

[18]

PASSENGER CARS PER 1000 PEOPLE

Source: Rosstat, BPIE, World Bank, Avtostat

• Strong fundamentals for steel demand growth in the mid-term

o Low motorization rate and aged car fleet

PASSENGER CAR FLEET AGE

750

510432 423 420

301233

USA

Ger

man

y

Po

lan

d

Cze

chR

epu

blic

Can

ada

Hu

nga

ry

Ru

ssia

12%

15%

23%

50%

< 3 years 3-5 years5-10 years > 10 years

STEEL DEMAND FUNDAMENTALS

[19]

FLOOR SPACE PER CAPITA

Source: Rosstat, BPIE, World Bank, Avtostat

65

42 39

23

US SouthEurope

Central andNorthern…

Russia

sq. m per capita

36%

42%

22%

Built before 1970

Built in 1970-1995

Built after 1995

• Strong fundamentals for steel demand growth in the mid-term

o Infrastructure underdevelopment

o Scarce and obsolete housing stock

HOUSING STOCK AGE STRUCTURE

25% 27%49%

68%23% 16%

7%

2%

16%14%

17%8%

36% 43%27% 22%

USA Europe BRIC Russia

Other

Machinery&Equipment

Automotive

Construction

PRODUCT MIX DEMAND CHANGING

[20]Source: NLMK estimates, bank reports

• Gradual shift is expected to the more value added products demand

o Machinery and equipment

o Automotive steel

o Sophisticated tubular solutions

Steel demand breakdown by sector

0,6

0,7

0,8

0,9

1

1,1

2012 2013 2014Е 2015Е 2016Е 2017Е

Crude steel output Steel exports

• Crude steel output is expected to decline as competition on the global markets intensifies

• Steel exports to decrease driven by domestic demand growth and decline in steel output

RUSSIAN STEEL FORECAST

[21]

Index, 2012 = 1.0

Source: Russian steel consortium estimates

• Russian steel sector is highly self-sufficient in raw materials

o 43% of coking coal, 22% of scrap and 15% of iron ore are exported

RUSSIA: SELF-SUFFICIENCY IN RAW MATERIALS


[22]

101,5

93,2

14,8

6,5

49,9

30,4

21,5

2,023,3

18,2

5,1

Iron ore* Coking coal Scrap**

* Iron ore concentrate and sinter ore, 62% Fe equivalent** Obsolete and prompt scrap

million t

RAW MATERIALS RESERVES

Source: US Geological Survey 2014, BP Statistical Review of World Energy 2013 [23]

17% 12%

21%

11%

20%

9%

15%

6%

14%

3%

27%

24% 21%

Iron ore Coal*

RoW

USA

India

China

Brazil

Australia

Russia

700

14 billion t 49 billion t

* Anthracite and bituminous

• Russia has large raw materials reserves

o Top 3 – iron oreo Top 5 – coking coal

RUSSIAN SCRAP MARKET

[24]

4,7

5,8 5,8

5,1

2010 2011 2012 2013

SCRAP EXPORTS SCRAP DEMAND GROWTH

39%

24%

16%

21%

Other

South Korea

Belarus

Turkey

18,223,1

4,9

Scrap consumption2013

Scrap needsgrowth*

Scrap consumptionwhen new

capacities on stream

• Scrap demand to grow as new EAF capacities come on stream

• Scrap shortage to drive substitutes use: pig iron, slag and DRI/HBI


* Assuming 85% capacity utilization and no use of scrap substitutes

million t million t

SUMMARY

[25]

779

• Russian steel sector used super cycle profits to modernize and improve

products quality

• Capital structure and “new normal” profitability caps further capital outlays

• Cost optimization and de-leveraging will remain in the focus

• Further restructuring / capacity rationalization

• Sustainable demand driven by fundamentals will increase steelmakers’

domestic market focus, leading to improved service and increased share of

value added products sales

[26]

779

Sergey Takhiev, Head of Investor Relations

Sergey Takhiev is head of investor relations having joined NLMK

team in April 2005 as a market research analyst. He is heading

NLMK Department from 2008.

A member of Russian Steel Information and Analysis Commission, a

Russian steel industry organization and think-tank. A member of

World Steel Association working group responsible for Russian steel

sector analysis.

Sergey gained the #4 position in the Extel European Metals and

Mining Ranking in 2013.

He holds an MBA and master’s degree in Economics.

Contacts: D: +74954117710 ext. 72225M: [email protected]

http://www.linkedin.com/in/takhiev

mailto:[email protected]

http://www.linkedin.com/in/takhiev