1. STEEL INDUSTRY UNDER THE PRESSURE OF DISTRESSED MARKET: THE WAY PASSED AND OUTLOOK FOR RECOVERY Presented by Dr. V. Vlasjuk UPE Co. Research&Consulting, Ukraine 12 th Central and Eastern European Steel Conference Prague – September 2009

2. 1. Crude steel consumption per capita as fundamental for further steel demand growth Consumption level for advanced countries ~550-650 kg Source: WSA, UPE Co. estimation Strategically world steel demand is high. The difference between the present consumption per capita in developing countries and standards for advanced economies creates the great potential for further growth I. World finance and steel industry

3. 2. World steel consumption affected by finance disturbance Source: WSA (fact), UPE (forecast) Approx. 1150 Mt of crude steel will be consumed in the world in 2009 that is 160 Mt (-12.2%) less than in 2007. 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 The biggest cyclic fall since the Great Depression

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

5. 4. Macroeconomic development in 2009 The developed economies which create the main picture of present crisis have started to demonstrate first signs of recovery in April-May. Since May steel production also has been increasing on a month-to-month basis II. Where is market now? Source: National Statistics Offices Source: WSA

6. 5. Dynamics of some industrial indicators important for steel consumption USA housing market has recovered with a moderate pace since May as follows from increase of new housing starts and sales stimulated by Governmental mortgage program and significant price fall The slowing pace of new projects being put on hold probably reflects the fact that the bottom in construction sector was reached in 1Q while starting from 2Q we could observe the upward trend Dynamics of construction projects on hold or cancelled in Saudi Arabia USA new housing starts, mln. units II. Where is market now? Source: MEED Projects Source: USA Department of Commerce

7. 6. Macroeconomic and financial indicators (evolution from pre-crisis till now) Some key financial market indicators show improvement, however “toxic assets” remain high and investment activity still remains under pressure of uncertainty and shortage of credit IndicatorsJul 08Jan 09Sept 09 Interest rate of Federal Reserve System (USA), %2,00,25 Interest rate of European Central Bank (EU), %4,252,01,0 Interest rate of Bank of Japan, %0,50,1 3 month USD LIBOR/OIS spread, b.p.7012013 * Commercial bank deposits at ЕCB, $ bn0,6360190 Oil (Brent), $/barrel1384271 Inflation rate, % (y/y):Jul 08 Jan 09Jul 09 USA5,60,0-2,1 Eurozone4,01,1-0,7 Japan2,30,0-2,2 Source: IMF, Bloomberg II. Where is market now? * Pre-crisis level-10-15 (June 2007)

8. 7. The main stages of steel market development in time of crisis Starting May in response to improving demand, world steel production demonstrates an increase on month-to-month basis after the biggest drop in December. Present economic and financial indicators allow to say that the bottom obviously was passed in December 2008 – March 2009 Source: WSA December-March can be identified as 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 very fragile market balance

9. 8. Steel production by regions 2009/2008 Source: WSA III. Ukrainian steel sector under condition of distressed market This year Ukrainian steel production has dropped more in comparison with other leading exporters. But advanced economies have suffered the most crucial decrease

10. 9. Capacity utilization in Ukraine Currently Ukrainian steel capacity is used by 58.4%, while minimum (32.5%) was observed in November 2008. The average operating rate in January-August 2009 is 59.2%. So, Ukrainian industry has managed to keep its order book at a level necessary to survive Source: UPE III. Ukrainian steel sector under condition of distressed market

11. 10. Steel cost in Ukraine before crisis and now before crisiscurrent Direct expenses (raw + energy + labour) Billet Under the conditions of crisis Ukrainian steel sector has demonstrated sufficient strength due to ability to reduce production costs. It becomes possible after decrease of iron ore and coking coal prices, correspondingly by 51% and 65% Source: UPE $585 $304 III. Ukrainian steel sector under condition of distressed market

12. 11. Steel cost by main exporters Direct expenses (raw + energy + labour) Billet Source: UPE Now the Ukrainian steel cost is lower than those of other leading exporters of ordinary steel, except for Russia. This allows Ukrainian exporters to compete not only in the Middle East, but in South East Asia and China III. Ukrainian steel sector under condition of distressed market

13. 12. Ukrainian steel export by regions 2009/2008 Source: UPE Production cost decrease and consequently low prices have allowed Ukrainian exporters to keep their position on Asian markets and save export portfolio. The dramatic fall of steel export to Europe, USA and CIS was partially compensated by growing shipments to China III. Ukrainian steel sector under condition of distressed market

14. 13. Expected steel sector performance in 2009 Source: UPE -23.1% -14.6% -35.2% This year Ukraine will produce 28.5 Mt crude steel that is less than last year production by 8.6 Mt. There will be lost approximately 4 Mt export and 3 Mt domestic shipment III. Ukrainian steel sector under condition of distressed market

15. 14. Estimation of current market balance IV. Forecast & scenario 4Q-2009 The present level of steel inventories:  USA – 6,3 Mt (lowest from July 2008 with decreasing tendency)  EU – remains high with decreasing trend  Japan – 5,6 Mt (low)  China – most data affirms about high inventories  Middle East – sufficient to stay out of market over 2-3 weeks Source: WSA, Eurostat, USA Department of Commerce Generally steel market in advanced economies has already passed through destocking phase in June- July. In July-early August the market has come to state of fragile balance. But in September due to increasing steel production and demand slowing some excess of steel proposal can be expected. Consequently this excess should be consumed in 4Q 2009.

16. 15. Prospective performance of main steel-using sectors in 4Q-2009 In 4Q 2009 a growth is expected in construction sector of USA, EU, China, Russia and Middle East mostly due to increasing governmental investment into infrastructure. As a result, one should expect the growing demand for long products n/a The automotive sector of EU, China and Russia will show some drop in production because of ending the vehicle-stimulating programs in Europe (Germany) as well as permanent weak demand for new cars. So, it leads to decrease of demand for hot-rolled coil % 4Q/3Q Machinery will demonstrate growth in 4Q-2009. Also heavy plate demand is expected to increase due to growth of order in shipbuilding in China and South East Asia. Source: Bloomberg, UPE est. In 4Q 2009 we can expect the increasing demand for long products, but descending trend for some flat products, particularly for hot-rolled coil construction automotive machinery n/a IV. Forecast & scenario 4Q-2009

17. 16. Utilization of world steel capacity (current and forecast) Source: UPE Expected growing demand for steel under condition of near to normal inventories will lead to slight increasing order portfolio and capacity utilization in 4Q-2009. IV. Forecast & scenario 4Q-2009

18. 17. Risk factor - China: Chinese game on the global market Presently China is a world price determining power. During 2007-2008 the price trend depended essentially upon Chinese export activity Source: ISSB, UPE IV. Forecast & scenario 4Q-2009

19. 18. Risk factor - China: Expected China's behaviour in 4Q 2009  This year China has demonstrated itself as self-sufficient in steel  Currently Chinese steel sector is operating at full capacity (~93%). Decreasing domestic steel demand in July-September creates product surplus and thus increases export potential  China would continue export expansion in 4Q. However higher production costs in China compared with those of other exporters (Ukraine and Russia) will restrict scope for Chinese export. China will hardly continue its export expansion in 4Q because of expected increase of domestic demand and production cost barrier Direct production cost (raw + energy + labour) HRC Source: UPE IV. Forecast & scenario 4Q-2009

20. 19. The current active model of steel price trend Low demand At present time steel prices are moving in a narrow horizontal corridor, pressed by low demand from above and high production cost from below. Under growing demand in 4Q-2009, prices will rise, being pushed up by producers strongly motivated to improve their financial position Source: UPE Production cost IV. Forecast & scenario 4Q-2009

21. 20. Expected price in 4Q-2009 410 440 forecast Upward trend and price increase by $25-50/t are expected for long steel products till the end of 2009 because of steady demand on growing construction market. HRC will demonstrate moderate plummeting tendency in October-November followed by slight rise till the end of the year. Also Chinese factor due to production cost restrictions will give the space for CIS exporters to play bullish game Source: UPE 515510 IV. Forecast & scenario 4Q-2009

22. 21. The glance into the next year Suppressing factors  Budgets deficits  High inflation rate  Financial unstability Supporting factors Industry and construction growth Credit growth Recovery of steel consumption Risks for steel market  Speculative price bubbles  Fragile market balance and overproduction  Depreciation of the USD V. Forecast & scenario 2010

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