Presented by Dr. V. Vlasjuk Director, UPE Co. Research&Consulting, Ukraine CIS Steel and Raw Materials in the World Markets Kyiv, April 2012

Since 1991, there have been significant differences in the development of steel production in the CIS countries. First of all, it can be seen in the technology of smelting I. The differences between CIS metallurgy Source: WSA, UPE Co. est. Mt RussiaUkraineKazakhstanBelarus Mt

The share of exports in sales is dominant in Ukraine and is still high for Russia Source: UPE Co. est. RussiaUkraine I. The differences between CIS metallurgy

At the same time, semis (billet and slab) are the main part of both Russian and Ukrainian exports, respectively, 50.8% (Russia) and 41.1% (Ukraine). Source: ISSB, State Statistics Service of Ukraine th. tonnes I. The differences between CIS metallurgy

Source: ISSB, State Statistics Service of Ukraine Mt The main export markets for CIS steel are EU27, Middle East and Asia with total share of 65% for Russia and 60% for Ukraine I. The differences between CIS metallurgy Export 2011 Mt

There is a sharp competition between Russian and Ukrainian producers on the markets of many countries Source: ISSB, State Statistics Service of Ukraine I. The differences between CIS metallurgy

Index of RU & UA export intersection ranges in 5-39% Source: UPE Co. est. I. The differences between CIS metallurgy

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 In the worsening economic situation, it enhances competition dramatically and carries significant risks for outdated and inefficient mills, especially for those which are not vertically integrated Capacity utilization % Production cost, $/t Excessive capacities Increasing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 I I. Market in 2011

Financial institution World GDP growth, % Oct 2011 Dec 2011 – Jan 2012 Feb-Apr 2012 United Nations 3.6%2.6%not revised World Bank 3.6%2.5%not revised International Monetary Fund 4.2%3.3%3.5% HSBC 2.6%1.9%2.1% Fitch Ratings 2.4%2.3% Economist Intelligence Unit 3.1%3.2% During Feb-Apr 2012 some leading financial institutions have revised their GDP growth rate forecasts slightly upward. The main reasons for the revision were the stabilization in Eurozone financial sector due to 1 trillion euro injections of liquidity and higher than expected economic growth in the USA. Nevertheless, it reflects rather stabilization than improvement of sentiment I I I. Outlook 2012

9. Financial Indicators Barely Argue the High Level of Uncertainty of Situation Source: ECB, Bloomberg IndicatorsJul 08Jan 09Feb 11Sep 11Jan 12Feb 12Apr 12 Interest rate of Federal Reserve System (USA), % 20,25 Interest rate of European Central Bank (EU), % 4,25211,5111 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, $ ,534,938,343,2 Despite huge liquidity injections in the financial system of EU, majority of these funds remain at ECB. Interest rates of world biggest economies remain at minimum levels, limiting further tools to stimulate economic growth. It only dashes the instability of macroeconomic situation I I I. Outlook 2012

In 2012 we shall see further record of steel consumption, but the annual growth rate will diminish from 7.3% (104Mt) in 2011 to 3.6% (+55Mt) Source: WSA (fact), UPE Co. (forecast 2012) Crude steel production, Mt 10. In line with the world economic performance in 2012 steel consumption will demonstrate new record but the growth will be moderate Annual growth of steel production, Mt forecast 2012 I I I. Outlook 2012

11. 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 I I I. Outlook 2012

12. 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 15%. 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. I I I. Outlook 2012

13. 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 1-2% depending on the region Scrap HMS 1&2 (80:20 mix), $/t fob Rotterdam Source: UPE Co. est. I I I. Outlook 2012

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. I I I. Outlook 2012

15. High price for scrap will allow integrated CIS producers to compete in MENA Billet, $/t Cost factor will ease its pressure on the market in Difference between Ukrainian (OBC) and Turkish (EAF) billet cost will increase to 45$/t. Source: UPE Co. est. I I I. Outlook 2012

16. 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. I I I. Outlook

The largest partners of CIS’s exporters are European and Middle-Eastern Countries. The most attractive markets of the CEE countries are Poland, Bulgaria, Romania. Perspectives of growth in the Middle East remain in Saudi Arabia, Lebanon, Egypt, UAE Source: UPE Co. est. I I I. Outlook 2012 th.tonnes Forecast of steel exports from the CIS in 2012 Mt Expected growth of sales in the import markets of the largest partners in 2012

Russia made a plunge to reduce export dependence There are a few interceptions for a number of products (rebar, wire rod, heavy plate) of Russian and Ukrainian producers in the export markets. At the same time they compete in the wire, slab and HRC markets The problem of excessive capacities intensifies competition in export markets. At the same time pressure of high cost will weaken due to decrease in raw materials price MENA will be expanding markets for CIS exporters More favorable situation for CIS exporters will emerge on Middle East market, especially for vertically integrated producers I I I. Outlook 2012

19. The instability of situation causes billet price fluctuation IV. DELPHICA master-class After the sharp price drop in Sep-Nov 2011, billet price fluctuates in the narrow range during last 5 months, tracking moderate upward trend 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). A sharp rise in prices in Feb was caused by buoyancy on the Turkish market, and CIS suppliers took advantage of it.

20. Market indicators point to the moderate price softening in the nearest future. Thus, the spring market revival is over IV. DELPHICA master-class GLOBAL TRENDS Forthcoming 3-rd quarter brings no increase in steel consumption in the world Adequate level of inventories in importing regions limits perspectives of price growth Decrease in 2Q-3Q contract prices for raw materials weakens sustaining factor of steel cost BLACK SEA PRICES TRENDS The current weakening demand on the main importing markets (MENA – due to approaching Ramadan, EU due to financial problems) Increased capacity utilization (seasonal peak before summer lull) High level of inventories in Black Sea ports The trade profitability leaves room for price flexibility The main supportive factor – expectation of macroeconomic situation improvement in 2H2012. It will limit more significant price drop in the nearest future. Source: UPE Co. est. Steel Inventories In Black Sea ports Capacity Utilization in Ukraine Trade profitability

Due to lack of adequate demand at the moment, we expect a slight decrease in billet price, as support of high cost will weaken in 2Q Nevertheless, an improvement of macroeconomic situation and steel consumption in 2H 2012 will cause reasonable price growth. 21. Currently the billet price was reached the local peak Next price peak is expected in September, followed by movement in a narrow range Due to expected improvement of macroeconomic situation and steel consumption in 2H 2012, general price level for the period will be higher, than in 1H2012 IV. DELPHICA master-class The idea of double seasonal peak will be characteristic for 2012 year After the sharp price drop in Sep-Nov 2011, billet price fluctuates in the narrow range during last 5 months, tracking moderate upward trend

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