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an update on the Russian steel sector (2013 results)
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PLATTS ANNUAL STEEL MARKETS EUROPE
CONFERENCE
CIS: how do they interrelate with Europe?
Berlin
2-3 June 2014
DISCLAIMER
This document is confidential and has been prepared by NLMK (Company) solely for use at 10th Annual Platts Annual Steel Markets Europe Conferenceand may not be
reproduced, retransmitted or further distributed to any other person or published, in whole or in part, for any other purpose.
This document does not constitute or form part of any advertisement of securities, any offer or invitation to sell or issue or any solicitation of any offer to purchase or subscribe
for, any shares in the Company or Global Depositary Shares (GDSs), nor shall it or any part of it nor the fact of its presentation or distribution form the basis of, or be relied on
in connection with, any contract or investment decision.
No reliance may be placed for any purpose whatsoever on the information contained in this document or on assumptions made as to its completeness. No representation or
warranty, express or implied, is given by the Company, its subsidiaries or any of their respective advisers, officers, employees or agents, as to the accuracy of the information
or opinions or for any loss howsoever arising, directly or indirectly, from any use of this presentation or its contents.
The distribution of this document in other jurisdictions may be restricted by law and any person into whose possession this document comes should inform themselves about,
and observe, any such restrictions.
This document may include forward-looking statements. These forward-looking statements include matters that are not historical facts or statements regarding the authors
intentions, beliefs or current expectations concerning, among other things, the company’s results of operations, financial condition, liquidity, prospects, growth, strategies, and
the industry in which the company operates. By their nature, forwarding-looking statements involve risks and uncertainties because they relate to events and depend on
circumstances that may or may not occur in the future. The company cautions you that forward-looking statements are not guarantees of future performance and that the
company’s actual results of operations, financial condition and liquidity and the development of the industry in which the company operates may differ materially from those
made in or suggested by the forward-looking statements contained in this document. In addition, even if the company’s results of operations, financial condition and liquidity
and the development of the industry in which the company operates are consistent with the forward-looking statements contained in this document, those results or
developments may not be indicative of results or developments in future periods. The Company does not undertake any obligation to review or confirm analysts’ expectations
or estimates or to update any forward-looking statements to reflect events that occur or circumstances that arise after the date of this presentation.
By attending and viewing this presentation you agree to be bound by the foregoing terms.
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
Source: Research market agencies 2013, Russian statistics, NLMK estimates
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
Source: Research market agencies 2013, Russian statistics, NLMK estimates
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
Source: Research market agencies 2013, Russian statistics, NLMK estimates
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
Source: Research market agencies 2013, Russian statistics, NLMK estimates
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
Source: Research market agencies 2013, Russian statistics, NLMK estimates
[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
Source: Research market agencies 2013, Russian statistics, NLMK estimates
* 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