THE IMPACT OF CRISIS 2009 AND PROSPECTIVE STEEL MARKET RECOVERY IN 2010 Presented by Dr. V. Vlasjuk UPE Co. Research&Consulting, Ukraine The 15 th CIS Metals Summit, Moscow, th February 2010

1. World steel consumption affected by financial disturbance Source: WSA (fact), UPE (forecast) Approx Mt of crude steel were consumed in the world in 2009 or by 55 Mt (-4%) less than in The fall in developed countries (-30%) has hit a historical record. So, steel industry has proved to be very sensitive to the financial risks, more than to the risks of another nature. Industrial recovery of W.Europe and Japan Industrialization of developing countries (China, India, Iran, Brasil etc. ) forecast 500 Mt I. World finance and steel industry 500 Mt The most dramatic cyclic fall since WW II

2. Volatility of steel market as a result of uncontrolled easy-money policy The current crisis has demonstrated that the steel industry can be something like a toy in the hands of financiers. So, to shape more confident future for real economy, financial system should be reformed to become more transparent, manageable and responsible Credit boom Price bubble Credit flows are dried Source: UPE Co. Easy-money policy Commodity markets are frozen I. World finance and steel industry

3. Macroeconomic development in 2009 Starting July 2009, in response to massive government stimuli, Global Manufacturing Purchases' Manager Index has risen above the neutral 50.0 mark for the first time since May 2009 July data indicates the beginning of gradual recovery in global industrial output thanks to US, Japan and emerging Asian economies upturn Some key financial indicators also show improvement of confidence climate. Particularly, inter-bank crediting is going better II. Where is market now? Source: JP Morgan Chase, Markit Economics IndicatorsJul 08Jan 09Feb10 3 month USD LIBOR/OIS spread, b.p *10* Commercial bank deposits at ЕCB, $ bn 0, Price per share JP Morgan Chase on NYSE, $ Global Manufacturing PMI * Correspond to pre-crisis level which made up (June 2007)

4. The main stages of steel market development in time of crisis Currently general market conditions are better than an year ago and fragile market balance is observed. But it is too early to talk about confident recovery in view of the next factors: 1) The market fundamentals remain weak in advanced countries 2) The world economy obviously can not develop stably without governments’ support (stimulus packages) 3) The problem of huge “toxic” assets remains unsolved Source: WSA December-March can be identified as a bottom for steel market in view of current economic indicators II. Where is market now? Rapid market freezing and overproduction The first signs of recovery and market balance

5. Macroeconomic background III. Forecasts & scenarios 2010  Global GDP is expected to rise by 3.9% in 2010 following the financial and economic crisis (-0.8% in 2009). The recovery mode will strongly depend on the rate of reducing the government stimulus packages and time of starting the «exit strategy» led by world Central Banks  United States and other advanced economies will demonstrate weak economic growth with 2.1% GDP rise in 2010 (fall by 3.2% in 2009)  Emerging and developing economies are still the key driver of global economic growth with GDP surge of 6.0% in 2010 (2.1% in 2009)  Global inflation will rise to 2.2% in 2010 comparing with 1.3% in 2009 leading by gradual economic recovery and due to negative price effect of previous unprecedented easy monetary policy  Annual average oil price (Brent) for 2010 – $76 per barrel  To sum up, the world economic growth in 2010 will be limited by continuing bank and company deleveraging as well as ballooning of government debt in advanced countries Source: IMF, World Bank

6. Expected real consumption of crude steel Approx Mt crude steel will be consumed in 2010 (by 30 Mt more than in the most successful 2007) China and the rest of Asian countries will be the leaders where steel consumption will totally increase by 60 Mt in comparison with 2009 Source: UPE Co. III. Forecasts & scenarios 2010 by regionsby industries

7. Expected consumption, stocks and production of crude steel in 2010 During 2009 market has gone through the main destocking phase when 60 Mt of “excessive” inventories inherited from 2008 were consumed. Correspondingly, this process has reduced orders book and steel production. In 2010 we do not expect dramatic market and inventories changes like in 2008 and the world production will be equal to the world consumption. So, to cover the global demand it will be necessary to produce 1360 Mt of crude steel or by 140 Mt (+11.7%) more than in 2009 Source: UPE Co. III. Forecasts & scenarios 2010

8. Crude steel production in the world in Crude steel production in 2010 will exceed the record of 2007 Source: WSA, UPE Co. forecast III. Forecasts & scenarios 2010 UPE Co. forecast 1230Mt UPE Co. current forecast

505 Mt 9. Input of capacities and their utilization in the world in Input of new steel capacities has continued despite crisis in Presently more than 500 Mt of steel capacities stay idle. Intensive capacity increase (up to 600Mt) in combined with the market shrinking creates the basis for the permanent market disbalance in future, especially if growth rate of Chinese steel consumption will slow down Capacities input and steel production in the worldWorld steel capacities utilization Sources: WSA, OECD III. Forecasts & scenarios 2010

10. Raw materials cost 2010 Substantial steel production increase and correspondingly enhancing demand for raw materials will lift the price in 2010: iron ore by 20-25%, coking coal by 30-35%, scrap by 18-20% Source: ISSB, UPE Co. est. fob Rotterdamfob Australia fob BrazilCarajas fines, 67% Fe III. Forecasts & scenarios 2010

11. Production cost in Ukraine Production cost in Ukraine will increase in 2010 substantially due to rising price for iron ore (+35%), coking coal (+25%) and scrap (+30%) III. Forecasts & scenarios 2010 Source: UPE Co. est.

12. Steel cost in Ukraine Direct expenses (raws + energy + labour) Billet Under the conditions of crisis Ukrainian steel sector has demonstrated sufficient strength due to ability to reduce production costs in But this year production cost will increase by 60-65$/t owing to upward trend for raw material prices Source: UPE $585 $280 III. Forecasts & scenarios 2010 $342

13. Expected steel cost by main exporters in 2010 Billet production cost Source: UPE Production cost will increase more substantially for Ukrainian producers (+60$/t) in comparison with Russia (+45$/t), China (+25$/t) and Turkey (+40$/t) in 2010 III. Forecasts & scenarios 2010 Сost determining steel prices in 2010

14. The current active model of steel price trend Low demand At present time steel prices are moving in a narrow corridor, pressed by low demand from above and high production cost from below. In 2010 market will remain to be the market of buyers. But under effect of production cost and steel consumption increase, upgoing price tendency should be expected Source: UPE Production cost III. Forecasts & scenarios 2010

Under effect of the fundamental factors the prices have got back to their historical orbit Prices effected by the fundamental factors Source: UPE Co. est. 15. Steel price dynamics (billet, $/t fob Black Sea) III. Forecasts & scenarios 2010

16. Expected price in 2010 (billet, hr-coil fob Black Sea as indicator) forecast Prices for billet will rise by $65/t to the annual average level $445/t Hot-rolled coil will demonstrate some more intensive increasing tendency, namely, by $80/t up to $510/t Source: UPE $380/t $430/t $510/t $445/t III. Forecasts & scenarios 2010

17. Conclusions Input of new steel capacities has been continued despite finance crisis. Combined with the slow market development, the intensive capacity increase creates the basis for the permanent market disbalance and raises the problem of “excessive capacities” Expected saturation of Chinese steel consumption will intensify the problem of overcapacity in Import demand in some key regional markets will decrease due to own metallurgy development and slowing pace of steel consumption, especially in Turkey, Middle East and North Africa In view of overproduction and slowing pace of steel consumption, lower operation cost will become the key factor of successful steel strategy Mergers and Acquisitions will accelerate, reflecting the strengthening competition for raw material access

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