Steel Global Outlook - · PDF fileEurope and India signals are more positive, ... 150520_Steel Global Overview Roland Berger.pptx 18 Commercial models will need to evolve: distribution

June 2015

Steel Global Outlook

2150520_Steel Global Overview Roland Berger.pptx

Introduction to Roland Berger Strategy Consultants

Source: Roland Berger

Founded in 1967 in Germany by Roland Berger

50 offices in 36 countries, with around 2,400 employees

About 220 RB Partners currentlyserving

~1,000 international clients

75% client retention,

30% of top 1,000 companies

Senior Partner, Paris office

Advisor to leading process industries

players worldwide :

> Steel, cast iron

> Aluminum

> Glass

> Paper

Emmanuel BonnaudRoland Berger


This document shall be treated as confidential. It has been compiled for the exclusive, internal use by our client and is not complete without the underlying detail analyses and the oral presentation. It may

not be passed on and/or may not be made available to third parties without prior written consent from Roland Berger Strategy Consultants. RBSC does not assume any responsibility for the completeness

and accuracy of the statements made in this document.

© Roland Berger Strategy Consultants

A

B

C

D

Steel industry is recovering but the situation remains fragile – Steel market

is increasingly going global – will anti-dumping recent moves affect it ?

China and Brazil are current matters of concern because of overcapacity–

Europe and India signals are more positive, NAFTA uncertain

New technologies and digital will impact steel market – supply chain

reactivity may increase significantly

Impact on Manganese: increasing Mn intensity of new materials leverages

moderate growth for steel


822 mT

(50%)

205 mT

(12%)

121 mT

(7%)

313 mT

(19%)45 mT

(3%)

1,649 mT

Source: World steel association, Roland Berger

China

+7,3% +5,1%

Europe

+4,1% +4,7%

North America

+7,6% +8,5%

Asia (excl. China)

+6,0% +7,9%South America

+3,6% +7,5%

Production CAGR 09-14

DemandCAGR 09-13

World

+5,8% +6,0%

Latest trendSteel production

(% of world prod.)

GLOBAL TRENDS

5150520_Steel Global Overview Roland Berger.pptxSource: World steel association, Fastmarkets, Roland Berger

Steelmarket

Overcapacity

> World steel capacity utilization ratio of 71,6% in March 2015

Technology and digital

> Impact on client supply chain

Chinese slowdown

> Decrease in steel demand as banks won't lend to SMEs

Cost & competitiveness

> Obsolescence and cost reduction on the top of steel companies CEOs agendas

Economic recovery

> Moderate and / or fragile economic recovery notably in Europe

Steel price

> Weak demand and currencies in steel-producing countries have pushed export activity, lowering steel prices

> No more niches

GLOBAL TRENDS


All major steel producers acknowledge a challenging context

Source: Company's annual report, Roland Berger

Several macroeconomic trends are definite

concerns, including softening market conditions

impacting our operations, geopolitical issues,

declining oil prices, and global overcapacity

and a strengthening dollar

U.S. Steel Corporation – Annual report 2014

A world that is still recovering from the

after-effects of a major economic crisis,

where demand for steel reduced

significantly in the developed nations

and has still in some countries not

reached pre-crisis levels

Lakshmi N Mittal (CEO of ArcelorMittal)

– Annual review 2014

I believe the global steel market (…) is

facing harsh conditions, as new

steelworks will successively come on

line in Asia by 2015 (…) we must

assign maximum emphases to

"technology", "cost" and "global"

CEO of Nippon Steel & Sumimoto

Metal, Annual report 2014

Looking ahead, we expect to see continued

pick-up in European manufacturing

activity to support our apparent steel

consumption growth forecast for Europe of

around 2 per cent this year (…)

Aditya Mittal (CEO ArcelorMittal Europe) –

Q1 2015

GLOBAL TRENDS


Overcapacity in China is durable

Source: World Steel association, press releases, brokers reports, Roland Berger analysis

Production and utilization rate:situation and projections

Key drivers

Demand peaked in 2013

> 2014/2013: -3.3%

> Further decline confirmed in 2015 and foreseen by 2020

Construction> Bubble down:

10% reduction of buildingsales in the construction market

Automotive> Slower growth

Others> Slower growth of mechanical

engineering and white goods

800814823815731702639577512490

200920082007 2015 202020142013201220112010

Crude steel production [T m]

75%70%71%72%72%80%80%80%80%80%

2015 20202014201220112010200920082007 2013

Crude steel capacity utilisation

CHINA


No immediate consolidation signal

Context and recent moves

Government target (2011):

> Bring 60% of steel sector (from 40%) under the control of the 10 biggest players

by 2015

Large players increasingly reluctant to take over unprofitable capacity

> 60% target pushed back to 2025

> Distribution suffers


CHINA

New industry focus on

> Tightening of environmental legislation

> Competitiveness and exports

> Creating 3 to 5 globally competitive "super large" steelmakers by 2025

9150520_Steel Global Overview Roland Berger.pptxSource: World Steel association, press releases, brokers reports, Roland Berger analysis

5% p.a. demand increase from 80 mT in 2013 to 89 in 2015

Construction> Public investment in

infrastructure projects (freight network, building construction)

Automotive> Strong growth –

4% increase in 2014

Others> Recovery of industrial

production and GDP

140

8381777369645853

91

2020201520142013201220112010200920082007


66%74%75%79%86%90%92%97%94%90%

2020200920082007 201520142013201220112010


India shows positive signals on steel demand but capacity is increasing too much

INDIA


Key drivers


Government support to steelmakers:

> Favorable regulatory framework

> Loans, waivers, tax incentives for steelmakers

Government fixed production targets of 300 mT by 2025:

> Recent announcement of the first steel capacity addition (122 mt) – financing to be confirmed

> Consolidation of raw material providers to secure sourcing

In the meantime (2015), spectacular rise of imports from China (depreciation of the rupee increases steel manufacturing cost as the coking coal and coke is imported)


India wishes to increase domestic capacity but Chinese imports also grow

INDIA



Demand peak in 2014

> 2015/2014: -0,9%

> 1% increase p.y. by 2020

Construction

> 3% increase p.a.

Automotive

> Record high in 2015

Others

> Negative context in oil & gas sector

> Robust employment growth

12011412111912211911284

125133

2008 202020152014201320122011201020092007


74%69%75%74%76%73%72%55%

85%91%

2011201020092008 202020152014201320122007


NAFTA steel market is recovering pulled by automotive and construction

NAFTA


Key drivers


The Big 4 now control over 80% of NA market

Poor profitability since 2008 has resulted in low CAPEX and accelerated industry

consolidation: the Big 4 now control over 80% of NA market

Companies efforts to reduce operating costs combined with more favorable

market conditions and anti-dumping regulation changes boosted profitability in

2014

Situation in 2015 is mixed, with well-oriented demand but "imports have effectively

taken all of the growth upside for the industry" (Nomura) – new antidumping

measures to come as idled production capacity at U.S. mills has grown to 31%


NAFTA



Strong demand decrease> -7% in 2014 and -8% in 2015> Expected recovery in 2016 (3%)

Construction> 10% CAGR by 2019

(Olympic games)

Automotive> Biggest decrease since

2002 (-7%)

Others> Exports hampered by strong

currency; Petrobras in standby

3634343435353327

3434

202020152012 2014201320112010200920082007


65%69%69%71%71%71%69%63%81%87%

2009 20132010 20142007 20152011 202020122008


Brazil suffers from high overcapacity

BRAZIL


Key drivers


All major steelmakers have developed a footprint in Brazil

Capacity development / takeover by major steel producers in the past:

> VSB – JV between Vallourec and NSSMC for the creation of a tube mill (2011)

> Wuhan Iron and Steel bought Brazilian MMX (2009)

> Acesita SA (stainless steel) by ArcelorMittal (2008)

Large steel producers recently increased their Brazilian footprint:

> ArcelorMittal acquired a company engaged in sales of steels for automotive (Aug. 14) and announced the creation of an R&D center in Brazil (Apr. 2015)

> JV between Brazilian CSN and Asian steel consortium (Dec. 14)

Brazil's economic context and issues at Petrobras will probably place new projects on hold

Source: Company information, World steel association, Brazil steel association, Roland Berger

BRAZIL



3,6% increase in 2014, ~2,5% in both 2015 (188 Mt) and 2016 (193 Mt)

Automotive

> Recovery expected to continue in coming years

> Decreasing steel intensity

Construction

> Weakened activity but expected recovery in 2015S2 / 2016

200202206205208217207168

230241

2020201520142013201220112010200920082007


69%69%70%70%72%75%74%57%

87%

2011 202020152014201320122010200920082007


Demand in Europe is soft again, generating low capacity utilization

EUROPE


Key drivers


Pre-crisis consolidation move now over ?

Robust M&A activity pre-crisis

> Usinor / Arcelaria – Arcelor (2001)

> Thyssen-Krupp in (1999)

> Arcelor-Mittal in (2006)

> Tata-Corus in (2006)

Improvement of operational margins for steel makers in Europe, e.g. in Q1 2015:

> 15% increase of ArcelorMittal EBITDA in Europe

> 14% increase of APERAM EBITDA


EUROPE


Capacity reduction moves ongoing

> Vallourec announced capacity reduction (SSV)

> Ilva is highly distressed and may be taken over by ArcelorMittal or by an Italian consortium; systemic solution is looked after to include Lucchini and Terni

17150520_Steel Global Overview Roland Berger.pptxSource: Roland Berger analysis

> Digitalization and "industry 4.0" support industrial production and are then favorable to steel demand

> Digitalization is shortening market cycles and making demand more variable, more granular and diversified

– Requirement for higher flexibility, shorter lead times, higher customization (steel / alloys types), smaller lots size

– Need for steel producers to adapt to this new complexity

– more visibility on supply sources and prices

> Supply-chain reactivity increasingly seen as a way to protect from imports

> Competing materials, potentially combined with 3D printing might be able to adapt more rapidly to evolutions in demand (e.g., plastics, concrete) and possibly lead to steel/mill substitution

IMPACT OF DIGITAL


Commercial models will need to evolve: distribution and mills will need to move closer to end customers

Key aspects of

Industry 4.0

Average score

Virtual conception

1 – Low maturity 4 – High maturity

Non auto sectors will bridge the gap and push steel makers to adapt their customer relationships as they have done in Automotive – Aluminum good benchmark

Source: Interviews, Roland Berger

1 2 3 4

3.3

Automotive Construction

1 2 3 4Big data management

Additive manufacturing

Mass customization

Mechanical engineering

1 2 3 4

2.0

Energy

1 2 3 4

2.3

Home appliances

1 2 3 4

1.8

Packaging

1 2 3 4

2.0 1.5

IMPACT OF DIGITAL


> Significant research to develop steels with improved tensile strength (TWIP, AHSS)

– Steels with higher manganese content (~12% manganese in TWIPsteel)

– Main applications in automotive industry

> Recent scientific works on stainless steel to reduce costs and improve elongation for automotive and packaging

– Substitution of nickel by manganese to reduce costs1) (Series 200 stainless steel)

0

10

20

30

40

50

60

70

80

200 400 600 800 1000 1200 1400 1600

Growing interest for manganese applications in steel

Source: World steel association, World Auto Steel, Roland Berger

Tensile strength [MPa]

Elongation [%]

1) Series 200 production strongly correlated with Ni price

Stainlesssteel

MANGANESE IMPACT

20150520_Steel Global Overview Roland Berger.pptxSource: Roland Berger analysis

Overall

Automotive

Construction

Railway

Oil & Gas

Packaging

Mining

Market evolution

Manganese intensity

Steel intensity

Impact on manganese

consumption (Mid-term CAGR)

1 – 3 %

5 – 7 %

3 – 5 %

6 – 8 %

6 – 8 %

~ 0 %

3 – 4 %

MANGANESE IMPACT

Documents

Steel Global Outlook - · PDF fileEurope and India signals are more positive, ... 150520_Steel Global Overview Roland Berger.pptx 18 Commercial models will need to evolve: distribution