PRICING & PURCHASING SUMMIT WASHINGTON DC | NOVEMBER 11-12 2014 PRICING & PURCHASING SUMMIT

Track: Metals Steel – Chaos for 2015 Masks a Long Term Buyers’ Market for 2016 and Beyond 12, November 2014 John Anton Director, Steel +1 202 481 9231 john.anton@ihs.com

Agenda Overview Supply Prices Product detail Pricing tables Summary and buying advice

The key to the steel outlook is over-production. It sets up: Pricing & Purchasing Summit / November 2014 Overview The key to the steel outlook is over-production. It sets up: a buyer’s market for 2014 eventual mill distress supply disruption and spiking prices for 2015 Demand is strong, it is not the reason for weakness in steel In the mid term: Idled capacity is restarted, so the problem recurs But it stops the construction of new mills and retards the digging of new ore mines In the longer term economic growth erodes over-capacity But profits remain weak and real prices stagnate

Pricing & Purchasing Summit / November 2014 Steel Advice for 2015 and 2016 Locking prices is a one-sided bet in Europe and Asia, a good bet in North America Lock in prices and supply over the next two-to-four months Imports are a tremendous bargain, but there is a degree of supply risk Beware of sole sourcing in 2015 Eastern hemisphere, not the Americas Someone is going out of business. If it is your sole-source, … The CME sheet contract is attractive for North American buyers, although it is thinly traded

Fundamentals vs cyclical factors Pricing & Purchasing Summit / November 2014 Fundamentals vs cyclical factors The chaos in steel for 2015 is cyclical, not fundamental. Fundamentals favor buyers market long- term Gross overcapacity of mines and mills Demand growth is slowing Majority of capacity is new and cost efficient For the remainder of the decade, any price increase will fail within a year or so. Capacity won’t go away. Once prices rise, much idle capacity is restarted. Prices relapse in 2016

Pricing & Purchasing Summit / November 2014 Supply

Pricing & Purchasing Summit / November 2014 Global steel production languished then exploded (Millions of metric tons, annual rate) Production was ~750 mmt/yr in early 1990, only up to 800 by late 2001 In only 15 years, global production has more than doubled The rate of growth slowed after the Great Recession IHS expects the growth to go back to near zero

Pricing & Purchasing Summit / November 2014 Practically all the growth came from China (Millions of metric tons, annual rate) China was a minor producer before 2001, but growing Since 2002, China has Increased production over 8x Reached half of all global output Notice that in the early growth years there were no downturns As the market matures, China now suffers from cycles, just like other regions. Other growth came from Turkey, India, Iran, and partial recovery in Russia

Pricing & Purchasing Summit / November 2014 Over-capacity dogs the steel industry (Millions of metric tons, annual rate) The red blob is an informed estimate of global capacity Utilization is no more than 75% Historically in the United States >88%, a sellers’ market <83%, a buyers’ market The overcapacity is so large, it will dog the market for years And if production growth tends toward zero, over-capacity will only be solved by permanent closures

Pricing & Purchasing Summit / November 2014 United States steel production has not fully recovered (Millions of metric tons, annual rate) Current = 87

Pricing & Purchasing Summit / November 2014 Imports are surging into the United States … (Millions of metric tons, annual rate)

Pricing & Purchasing Summit / November 2014 … because prices are far higher here than imports (Hot rolled carbon sheet, dollars per metric ton)

Pricing & Purchasing Summit / November 2014 Extreme bargains for US buyers (HRCS price differential, dollars per metric ton)

What will happen to supply? Our base case is Scenario 3 Pricing & Purchasing Summit / November 2014 What will happen to supply? Our base case is Scenario 3 Scenario 1 - China melts ~10% No bailout of steel, minimal bailout of banks Drastic cuts to Chinese output (20% or more) Minimizes disruption in EU, NAFTA, and others Economics favors this outcome Scenario 2 – China bails out massively ~15% Policy decision made to prevent disruption at all costs Continued low prices cause deeper failure outside China Europe fares horribly, NAFTA fairs badly The worst scenario for you from a delivery standpoint Scenario 3 – politically palatable China provides some – but not total – bailout support Too big to fail? Outages are high in China, concentrated in mid-sized and small producers Europe fares badly NAFTA fares well overall, but not perfectly

Underlying supply side issues Pricing & Purchasing Summit / November 2014 Underlying supply side issues DRI We expect capacity to be added but it will be incremental over several years Not a quick game- changer Only cost competitive to coal at about $4/mmbtu or less Eventually, up to 20M mt/year Scrap addition, more than replacement Trade Cases We are skeptics OCTG and rebar were pyrrhic victories Sheet was going to be filed the day after Labor Day Still not filed US mills are profitable, so they have a hard time with critical circumstances even if they get duties Australian weather Bad weather causes severe disruption Prices doubled in 2008, 50% in 2011 Asia is more dependant on Australia than ever Unpredictable, but worth watching

Pricing & Purchasing Summit / November 2014 Prices

Pricing & Purchasing Summit / November 2014 Prices overview North America is wildly different from the rest of the world in 2014, less so in 2015 2014 remains a buyers market. Don’t delay too long. Unsettled in North America Downward drift everywhere else A seller’s market for 2015. Spike expected early in 2015 Bigger moves (absolute and percent) outside North America North America stays higher but others close the gap Prices should drop back for 2016

Real scrap prices are above long term norms (Dollars per long ton) Pricing & Purchasing Summit / November 2014 Real scrap prices are above long term norms (Dollars per long ton)

Ore and scrap fall for 2015, rebound in 2016 Pricing & Purchasing Summit / November 2014 Ore and scrap fall for 2015, rebound in 2016 Ore Ore now drives scrap Ore has fallen on new supply and predatory pricing Profitable at $80 or maybe less But profit maximized at $100-115 Strong downside risk – i.e. no rebound Do Australians care more about quashing competition than near term profit?

Ore and scrap fall for 2015, rebound in 2016 Pricing & Purchasing Summit / November 2014 Ore and scrap fall for 2015, rebound in 2016 Scrap Scrap is falling in reaction to ore Follows our outlook, just came sooner Scrap fundamentals are relatively unchanged Consumption is not down much Generation continues apace The declines imply lower surcharges Steel prices are falling with scrap Mills may resist in 2015 as steel supply tightens

Pricing & Purchasing Summit / November 2014 Product Detail

Hot rolled carbon sheet (Dollars per metric ton) Pricing & Purchasing Summit / November 2014 Hot rolled carbon sheet (Dollars per metric ton) Demand is solid from autos, tepid from construction We assume Chinese and European distress causes consolidation Prices do not fall as much in 2016 This allows the North American premium to close Forecast risks More bailout, less 2015 increase Less merger, more 2016 decline outside North America

Pricing & Purchasing Summit / November 2014 Comparison of sheet grades in the United States (Dollars per metric ton) Premium for CR over HR is abnormally wide Thus CR does not rise as much as the gap normalizes The premium for galvanized over CR has widened The gap expands a bit more in 2015 as zinc is under modest pressure WARNING: The correlation of the Galvanized – CR gap to the price of zinc is actually quite tenuous

Plate – A36 discrete (Dollars per metric ton) Pricing & Purchasing Summit / November 2014 Plate – A36 discrete (Dollars per metric ton) Widest geographic price disparity of any product This has a huge benefit for Chinese line pipe makers The United States price gap is so wide we actually see no increase for next year The spike came early, here in 2014 Massive disruption expected in China, so no 2016 decline Risky, makes a big (but logical) leap of faith

Rebar (and Wire Rod) (Dollars per metric ton) Pricing & Purchasing Summit / November 2014 Rebar (and Wire Rod) (Dollars per metric ton) Rebar and wire rod cost almost exactly the same in all markets The graph is rebar East Asian pricing has collapsed, and Europe is suffering Yet imports have not impacted North America to a great degree Anti-dumping on rebar hit Mexico but effectively left Turkey unscathed Anti-dumping in play for wire rod, but we are skeptics as to real impact

Merchant bar (MBQ) and Special bar (SBQ) (Dollars per metric ton) Pricing & Purchasing Summit / November 2014 Merchant bar (MBQ) and Special bar (SBQ) (Dollars per metric ton) Merchant bar follows rod and rebar, although often $80 to $100 higher Special bar supply improved with the opening of new mills More supply allowed prices to stabilize rather than rise Not enough to bring prices down Lead times are long, but no longer insanely excessive Because it is so high, we do not show a spike in 2015 Mills may try to tag along for the ride

Stainless (Dollars per metric ton) Pricing & Purchasing Summit / November 2014 Stainless (Dollars per metric ton) Little geographic disparity Prices are driven by nickel, chromium, and other alloys Such prices are set globally on the LME and SHFE You have already missed the bottom on prices, but more increases are coming Mills are weak, so production is suffering Europe is particularly weak That in turn is tightening the market Buy soon

Pricing & Purchasing Summit / November 2014 Alloys We have a tool that lets you calculate the surcharge for 157 different alloys Stainless grades Aluminum alloys Tool steels Incanel, Hastelloy Brass, bronze, etc You can also enter your custom chemistry You can compare costs savings if you switch from one grade to another Using 420 instead of 304 yields tremendous savings We will be glad to demo this to anyone interested

Pricing & Purchasing Summit / November 2014 Pricing Tables

Hot rolled carbon sheet (Dollars per metric ton) Pricing & Purchasing Summit / November 2014 Pricing & Purchasing Summit / November 2014 Hot rolled carbon sheet (Dollars per metric ton) 2014 2015 2016 United States 723 779 742 % 3.2 7.8 -4.8 Europe 608 724 712 -1.3 19.1 -1.6 China 573 704 -3.7 23.0 0.0

Rebar (Dollars per metric ton) Pricing & Purchasing Summit / November 2014 Pricing & Purchasing Summit / November 2014 Rebar (Dollars per metric ton) 2014 2015 2016 United States 721 756 712 % -0.2 4.9 -5.9 Europe 609 687 699 -5.1 12.9 1.7 China 492 593 -13.6 20.6 0.0

Stainless (Dollars per metric ton) Pricing & Purchasing Summit / November 2014 Stainless (Dollars per metric ton) 2014 2015 2016 United States 3108 3433 3589 % 16.5 10.5 4.6 Europe 3117 3456 3538 8.8 10.9 2.4 China 2859 3349 3481 8.0 17.2 3.9

Pricing & Purchasing Summit / November 2014 Buying Advice

A great market for buyers should become a sellers market early in 2015 Pricing & Purchasing Summit / November 2014 Summary Buy soon, particularly in the Eastern Hemisphere Prices are a one-sided bet in Europe and Asia Prices are favorable bet in North America, although there is some risk If imports really start to flow, the price differential gives downside room Watch out for supply issues Some mills will go out of business If you sole source, your supplier might not deliver A great market for buyers should become a sellers market early in 2015

Thank You! Questions?