1. STEEL INDUSTRY AFTER THE YEAR OF CRISIS: THE WAY PASSED AND OUTLOOK FOR RECOVERY Presented by Dr. V. Vlasjuk UPE Co. Research&Consulting, Ukraine 67 th Session of the OECD Steel Committee Meeting, Paris, 10-11 th December 2009 Ministry of Industrial Policy of Ukraine

2. 1. World steel consumption affected by financial disturbance Source: WSA (fact), UPE (forecast) Approx. 1210 Mt of crude steel will be consumed in the world in 2009 or 110 Mt (-8.2%) 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 after World War period

3. 2. 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 for 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

4. 3. Macroeconomic development in 2009 Starting May 2009, in response to improving demand, world steel production demonstrate increase on m-to-m basis. Also, during 2009 the steel market has mainly passed through the destocking phase Some key indicators show improvement of confidence climate. Particularly, inter-bank crediting is going better II. Where is market now? Source: WSA IndicatorsJul 08Jan 09Oct09 3 month USD LIBOR/OIS spread, b.p.7012012* Commercial bank deposits at ЕCB, $ bn0,6360130 Price per share JP Morgan Chase on NYSE, $412344 World steel production % m-to-m * Pre-crisis level-10-15 (June 2007)

5. 4. The main stages of steel market development in time of crisis Currently general market conditions are better than year ago and fragile market balance is observed. But it is too early to speak about confident recovery in view of the next factors: 1) The market fundamentals remain weak in advanced countries 2) The world economy obviously can not develop stably without governments’ support (stimulus packages) 3) The problem of huge “toxic” assets remains unsolved 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

6. 5. Input of new capacities in the world in 2003-2010 Presently more than 500 Mt of steel capacities stay idle. Intensive capacity increase (up to 600 Mt) in 2003-2009 combined with the market shrinking creates the basis for the permanent market disbalance in future, especially if growth rate of Chinese steel consumption will slow down Apparent crude steel consumption in the worldWorld steel capacities Utilization 500 Mt Sources: WSA, OECD II. Where is market now?

7. 6. 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 months 2009 / 10months 2008

8. 7. Capacity utilization in Ukraine and the world in 2009 This year capacity utilization in Ukraine will be 60% Due to the export order-book Ukrainian steel industry has managed to keep its production at the level necessary to survive 20082009 III. Ukrainian steel sector under condition of distressed market 60% Ukraine Regions

9. 8. Steel cost in Ukraine before and after year of crisis Direct expenses (raws + 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 due to decrease of iron ore and coking coal prices, correspondingly by 51% and 75% Source: UPE $585 $280 III. Ukrainian steel sector under condition of distressed market

10. 9. 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 supply not only in the Middle East, but in South East Asia and China III. Ukrainian steel sector under condition of distressed market

11. 10. 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

12. 11. Expected steel sector performance in 2010 Source: UPE This year Ukraine will produce 29.6 Mt crude steel that is less than last year production by 7.6 Mt (-20%). There will be lost approximately 4 Mt export and 3 Mt domestic shipment. In 2010 Ukraine expects to produce 32.5Mt due to increase of export shipments (+2Mt) and domestic consumption (+1Mt) III. Ukrainian steel sector under condition of distressed market Crude steel production Domestic consumptionExport

13. 12. Expected raw materials prices and production cost in 2010 Source: UPE Next year basic raw material prices will demonstrate rising tendency. Particularly, iron ore +5%, coking coal +27%. Consequently, steel production cost will increase. In Ukraine we expect steel cost growth by 15% or $45/t Direct expenses (raw materials+energy+labour) Growth rate % 2010/2009 IV. Forecast & scenario 2010

14. 13. The current active model of steel price trend Low demand At present time steel prices are moving in a narrow corridor, pressed by low demand from above and high production cost from below. The next year market will remain to be the market of buyers. But under effect of production cost and steel consumption increase, upgoing price tendency should be expected Source: UPE Production cost IV. Forecast & scenario 4Q-2009

15. 14. Expected price in 2010 (billet, hr-coil fob Black Sea as indicator) forecast Prices for billet will rise by $60/t to the annual average level $440/t Hot-rolled coil will demonstrate some more intensive increasing tendency, namely, by $75/t up to $505/t Source: UPE IV. Forecast & scenario $380/t $430/t $505/t $440/t

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