Presented by Dr. V. Vlasjuk Director, UPE Co. Research&Consulting, Ukraine The 17 th CIS Metals Summit, Moscow, th February 2012

Despite the increase of the steel production in , two unfavorable factors for steelmakers have dominated on the market – high cost and low capacity utilization. In the worsening economic situation, it enhances competition dramatically and carries significant risks for outdated and inefficient mills, especially for those which are not vertically integrated Capacity utilization % Production cost, $/t Excessive capacities Increasing cost

Financial institution World GDP growth, % Oct 2011Dec 2011 – Jan 2012 United Nations 3.6%2.6% World Bank 3.6%2.5% International Monetary Fund 4.2%3.3% HSBC 2.6%1.9% During October 2011 – January 2012 leading financial institutions have permanently revised rate of GDP growth downward. The main reasons for revision were escalation of Italy`s and Spain`s debt and budget problems, downgrading of credit ratings for France, Italy, Spain, Portugal, Ireland, Austria; risk of USA technical default and downgrading of USA credit rating by S&P to AA+

3. Also, the financial indicators demonstrated deterioration in economic conditions Source: ECB, Bloomberg IndicatorsJul 08Jan 09Feb 11Sep 11Jan 12Feb 12 Interest rate of Federal Reserve System (USA), % 20,25 Interest rate of European Central Bank (EU), % 4,25211,511 Interest rate of Bank of Japan, % 0,50,1 3 month USD LIBOR/OIS spread, b.p Commercial bank deposits at ЕCB, $ bn 0, Price per share JP Morgan Chase on NYSE, $ ,534,938,3

GDP growth rate in the world in 2012 will decrease to 2.8% versus 4.0% in 2011 Growth rate of industrial production will be reduced even more substantially from 8% (2011) to 4% (2012) GDPIndustrial Production Source: IMF, Bloomberg, UPE Co 4. Correspondingly the global economic growth rate will slow in 2012

In 2012 we shall see further record of steel consumption, but the annual growth rate will diminish from 7.3% (104Mt) in 2010 to 3.6% (+55Mt) Source: WSA (fact), UPE Co. (forecast 2012) Crude steel production, Mt 5. In line with the world economic performance in 2012 steel consumption will demonstrate modest increase Annual growth of steel production, Mt forecast 2012

If the growth rate of the world steel consumption in 2011 was 9.8% (+136 million tons), the growth in 2012 will be only 3.6% (+54 million tons) In China, the growth of steel consumption will be reduced significantly from 81Mt (2011) to 22-23Mt (2012) 6. China continues to keep leadership in the world steel consumption growth Annual increase, Mt Source: WSA, UPE Co. est.

7. Decrease of steel consumption growth rate will escalate the problem of excessive capacities As intensive putting into operation of new steel capacities in has been continued in spite of the crisis, currently about 470 million tons of capacities stay idle. In 2012 this indicator will reach 495Mt Source: WSA, OECD, UPE Co. est. World capacity and production of crude steel, mln. tonnes Capacity utilization, % 495 Mt 470 Mt

8. But there is also good news for steel producers. Prices for iron ore and coking coal will decrease It is expected that the average price of iron ore in 2012 will decrease comparing to 2011 by 8.2% for quarterly contracts and by 3.6% on the spot market. Average price for coking coal in 2012 for quarterly contracts will fall comparing to 2011 by 20% to $ 230 Vale Carajas fines (CJF) 66% Fe, $/t fob Brazil (to Asian market) Hard coking coal Peak Downs $/t fob Australia Source: UPE Co. est.

9. At the same time, scrap prices will keep rising Due to insufficient supply of scrap by the main exporters of the EU and the CIS and the rising demand, the average price for scrap in 2012 will increase by 2-5% depending on the region Scrap HMS 1&2 (80:20 mix), $/t fob Rotterdam Source: UPE Co. est.

We expect that billet cost in 2012 will decrease compared with the 2011 by 23$ to 565 $/t, which is due to lower prices for iron ore (-12%) and coking coal (-10%). At the same time the price of ferrous scrap will increase by 5%. Billet cost ($/t ExW) in Ukraine (for non-integrated mills) +118$ -23$ Cost factor will ease its pressure on the market in 2012 Source: UPE Co. est.

11. High price for scrap will allow integrated CIS producers to compete in MENA Billet, $/t In 2012 the difference between Ukrainian (OBC) and Turkish (EAF) billet cost will increase to 45$/t. Source: UPE Co. est.

12. Price trend model 2012 Unlike , when average prices rose by $ / t, we expect that average prices will decline in 2012 as a result of reduced costs and growing pressure of excessive supply Excessive capacities Production cost Billet, $/t fob Black Sea Source: UPE Co. est.

In 2012 the average prices for billet and HRC will be 600$/t and 646$/t respectively, which is by $ lower than in Steel prices 2012 will decline under pressure of weak demand Source: UPE Co. est.

At the beginning of Nov 2011 we forecasted a w-shaped dynamics of billet price in winter It was a right anticipation, except for scale of dip (or heightened volatility). It was caused by worsening of macroeconomic situation due to deterioration of financial market participants sentiment. This was a main reason for our 2012 price trend revision – shift of yearly peak to Sep-Oct Delphica masterclass: Forecast billet price trend in 2012 Expectation for improvement of macroeconomic situation and steel consumption a bit later - in 2H 2012 Price is nearing bottom level. Squeezed margins of Turkish producers and signs of demand improvement in Asia and Turkey will help to stabilize prices

1.Lack of markets 2.The growing threat of trade restrictions 3.Export expansion from China 15. Risks for steelmakers in 2012

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