1. Production Cost of Pig Iron and Steel, Competition and Market in 2011 Presented by Dr. V. Vlasjuk UPE Co. Research&Consulting, Ukraine CIS Steel and Raw Materials in the World Markets Kyiv, 19 April 2011

2. 1. Growth of pig iron and crude steel production cost During 2003 - 2011 years the production cost of pig iron and crude steel grew rapidly by almost 4 times from 116$/t (pig iron 2003) to 486$/t (pig iron 1Q-2011) Increase by 370-400 $/t or 4 times I. Production cost and demand for steel Source: UPE Co. Production cost, $/t

3. 2. World steel production growth However, steel remains the main structural material and steel consumption continues to grow at an unprecedented rate. This year crude steel production in the world will reach a new record 1 500 million tons due to the further consumption increase in the developing countries (especially in China +38-40 million tons) and further recovery of production to pre-crisis level in the advanced economies Fundamental factors dominate. Robust demand in developing countries pushes up steel production Source: WSA, UPE Co. est. I. Production cost and demand for steel Crude steel production, Mt

4. Companies, production 2001, Mt 3. Iron ore: market reconfiguration in 2001-2009 under the influence of China Flat market trend until 2004 was provided by limited number of buyers and low consolidation of suppliers Countries, import 2001, Mt EU15 130 JAPAN 132 CVRD132 Rio Tinto 108 BHP Billiton 67 A decade ago … II. Rising prices for raw materials

5. Consolidation of iron ore suppliers and the emergence of China as the largest consumer has caused a fundamental reconfiguration of market and the surge in prices Countries, import 2009, MtCompanies, production 2009, Mt Nowadays … EU15 82 JAPAN 106 CHINA 628 Vale 229 Rio Tinto 172 BHP Billiton 118 II. Rising prices for raw materials 3. Iron ore: market reconfiguration in 2001-2009 under the influence of China

6. The growth of import demand for coking coal, provided by China, India and Japan, has led to increased tensions in the market 4. As a coal market tightens, prices are rocketing Source: International Energy Agency, UPE Co. est. II. Rising prices for raw materials net import +71 Mt +1 other China, India, Japan

7. Average annual prices in 2011 are expected to be 168 $/т fob Brazil for iron ore and 280 $/т fob Australia for coking coal. Further increasing demand has lead to prices growth in 2nd quarter against 1st quarter of 2011 :  iron ore +23.5% up to 184 $/т fob Brazil  coking coal+42.6% up to 328 $/т fob Australia 5. Raw material prices continue to increase Vale Carajas fines (CJF) 66% Fe $/t fob Brazil (to Asian market) Hard coking coal, Peak Downs $/t fob Australia (to Asian market) Source: UPE Co. 10-times increase 7-times increase II. Rising prices for raw materials

8. In 2011 the rise of steel cost (appx. +105$/t) is expected mostly due to increased price for iron ore, coking coal and scrap 6. Further increase of steel cost in 2011 Billet production cost ($/t ExW) in Ukraine (for non-integrated mills) +138$ +105$ Source: UPE Co. est. III. Growth of the production cost 327 465 571

9. 7. Cost of steel in the main exporting countries in 2011 Billet, $/t In recent years, Ukraine's advantage in steel production costs has decreased. This has resulted in complication of Ukrainian sales in the Middle East and North Africa Source: UPE Co. est. III. Growth of the production cost

10. 8. Faster growth of the production cost in comparison with the market price for steel products production cost, $/t ExW While the current production cost has already exceeded the peak level, steel product prices are still below the pre-crisis level 2007-2008 Source: UPE Co. est. III. Growth of the production cost export price, $/t fob Black Sea billet

11. 9. Millstones of competition Post-crisis situation in the global steel market is quite different from the pre-crisis one. The main distinction consists in the availability of two factors unfavorable for producers, namely “excess” of capacities and high production costs. This situation intensifies competition dramatically and bears substantial risks for numerous outdated and non-efficient mills, especially for those not integrated with raw material producers Overcapacity Production cost increase Capacity utilization % Steel cost $/t IV. Post-crisis changes in the world market

12. 10. Increased impact of production costs on the steel product pricing Since 2009, production cost has affected steel pricing much more intensive Pig iron IV. How does the production cost impact on pricing? Production cost as a dominant factor in pricing Market balance as a dominant factor in pricing Source: UPE Co. est.

13. 11. Decrease in profit of steelmakers Since 2010 steelmakers operate with a much more moderate margin comparing with the pre-crisis years Pig iron, $/t Billet, $/t Source: UPE Co. est Market balance as a dominant factor in pricing Production cost as a dominant factor in pricing IV. How does the production cost impact on pricing?

14. Price $/t fob Black Sea Billet HRC 12. Quarter contracting for raw materials enhances volatility of steel prices After the transition to quarterly contracts for the supply of raw materials, the rate of steel price growth has increased considerably at the beginning of year in anticipation of rising prices for iron ore and coal IV. How does the production cost impact on pricing?

15. 13. Key macroeconomic and financial indicators still favorable for global economy Source: ECB, Bloomberg IndicatorsJul 08Jan 09Jun 10Apr 11 Interest rate of Federal Reserve System (USA), %2,00,25 Interest rate of European Central Bank (EU), %4,252,01,01,25 Interest rate of Bank of Japan, %0,50,1 0,0 3 month USD LIBOR/OIS spread, b.p.701203316* Commercial bank deposits at ЕCB, $ bn0,636021424 Price per share JP Morgan Chase on NYSE, $41233945 * Correspond to pre-crisis level which made up 10-15 (June 2007) Today's global financial situation looks to be quite stable owing to the governmental monetary policy (low interest rates and free access to liquidity). In 2011 quite comfortable conditions for crediting can be expected due to economic growth and lending renewal in developed countries V. Market Outlook

16. 14. …Nevertheless alarms of the looming threat are coming … Source: Bloomberg, IMF, UPE Co. Soft monetary (easy-money) policy by the FED (during 2005-2007 interest rate decreased from 6% till 1%) Over the 2008-2010 the FED issued aprox. 10 trln. $ which began to appear on the commodity market New bubbles? FED can not change its nature. Bail-out programs and huge amount of liquidity issued by the FRS during 2008-2010 cause risks of new bubbles in post-crisis global economy. Rocketing price for oil and gold are the first warning signs V. Market Outlook

17. 15. Expected average prices for raw materials in Ukraine Source: UPE Co. est. This year the peak in raw materials prices fell on 2 quarter. As predicted, in the 3-4 quarters coking coal prices will be lower, thereby reducing the cost of Ukrainian steel V. Market Outlook Iron ore concentrate (65% Fe), $/t fca Coking coal charge (K 30%, Zh 30%, G&PS 40%) $/t fca

18. Seasonal activity Restocking forecast 13. Forecast of production cost and market price for billet in 2011 fact Source: UPE Co. est. Prices have peaked in January-February on production cost rises and speculative buying caused by coal shortage from Australia (heavy rains). This was the top point of the year. In the second half of year prices will rise in September due to increase of demand, but owing to decreasing production cost the seasonal price peak will be lower than in February V. Market Outlook Seasonal activity Restocking Psychological expectation of further price growth for steel and raw materials

19. 14. Forecast of production cost and market price for hot-rolled coil in 2011 fact forecast Source: UPE Co. est. V. Market Outlook Seasonal activity Restocking Seasonal activity Restocking Psychological expectation of further price growth for steel and raw materials Prices have peaked in January-February on production cost rises and speculative buying caused by coal shortage from Australia (heavy rains). This was the top point of the year. In the second half of year prices will rise in September due to increase of demand, but owing to decreasing production cost the seasonal price peak will be lower than in February

20. 15. Effect of steel production cost on the market Dominant influence of production costs on the pricing in the steel market Change of the seasonal price variations, namely more intensive price increase in 1st quarter Acceleration of vertical integration V. Market Outlook

21. 16. Doubling of the annual steel consumption in China for the needs of industrialization 2010-2025 China will continue its industrialization until 2030 at least. Max annual steel consumption will reach about 1,200 million tons in 2025. Thus, the current annual steel consumption is only half of the expected maximum Mt V. Market Outlook Source: UPE Co. est.

22. 17. Deceleration of the growth rate in the iron ore import and its further reduction The growth of the domestic iron ore production will result in the reduction of the import growth rate up to 2.5% per year between 2011-2019. Since 2019 further decrease in the import demand is expected Mt V. Market Outlook Source: UPE Co. est.

23. 18. China as a cooler of iron ore market in the next 15 years From 2011 we will witness the change of China`s role in the global market. Instead of warming up the prices China will become a factor of prices cooling and stabilization. The future configuration of the market will be casted by confrontation of China`s cooling effect and oligopoly exporters` warming up one I. Quiet period II. Warming up the market China’s demand growthProducers consolidation Warming up effect of oligopoly The cooling effect of China III. Cooling the market by China Carajas fines 67% Fe, $/t, FOB, Brazil, V. Market Outlook

24. Steel market: ●Analytics ● Forecast ● Scenario tel/fax (+38044) 484-64-83 e-mail admin@delphicasteel.com wwwhttp://www.delphicasteel.com