1. New market formula and steel price in 2008 Vlasyuk V. Director, UPE Co. SE UPE Co.

2. 1. Initial factors of price formation  Demand – supply balance  Production cost

3. 2. World steel consumption 470 350 Source: IISI, UPE Co est. Industrialization of the largest by population and territory countries caused unprecedented rates of growth of steel consumption.

4. 3. Steel consumption by countries mln. tonnes Source: UPE Co est. In next 15 years the basic increase of steel consumption will be provided by China. The maximum consumption will be 780 mln tones around 2020. Then India picks up the button, but steel consumption rate of growth will decrease.

5. forecast 4. World steel consumption 730 470350 Source: IISI, UPE Co est. Steel market cycle of growth is able to last till 2022. Thus approx. 1/3rd of upswing road is passed.

6. 5. Factors restraining steel production increase  High utilization of existing steel capacities  Shortage of raw materials  Logistics restrictions Too impetuous increase in steel consumption outruns the capabilities of production.

7. 6. Steel capacity annual increase From the beginning of current market cycle (2003) rate of capacities increase was lower than rate of consumption growth. Source: IISI, OECD

8. 7. Steel capacity utilization Source: IISI, OECD As the result increased capacities utilization necessitates the putting into operation of a new steel facilities to meet the market demand. But it is complicated by the facts mentioned before.

9. 8. Market formula Historical Demand = consumption = production Coming Demand > consumption = production Starting from 2007 a new steel market formula is in effect when demand is higher than supply.

10. 9. Economic development in 2008 Source: Economist, IMF, State Committee of Statistics of Ukraine GDP growth, %200620072008f 2008 revised China11,1%11,5%10,0% India9,4%8,0%7,9% Russia6,7%7,2%6,4% Ukraine7,0% 7,2% Middle East & Africa5,7%5,2%5,7% World5,3%5,1%4,8%4,1% Crisis on stock market is able to slow down a world GDP growth but will not affect steel consumption growth provided by BRIC.

11. 10. Steel consumption in 2008 Crude steel consumption, mln. tonnes200620072008f Increase, 08-07 China38442147048 India4953585 Russia4350588 Ukraine911132 Middle East & Africa6971776 Rest of the world68570272826 World1 2391 3071 40295 Source: IISI, UPE Co est. In 2008 the expected steel consumption increase (95 mln tones) exceeds 2007 increase (68 mln tones)

12. 11. Steel capacity increase in 2008 Source: IISI, OECD The difference between expected capacities increase (40 mln tones ) and expected consumption growth (95 mln tones) will add 55 mln tones to market deficit balance.

13. 12. Utilization of steel capacities in 2008 Source: IISI, OECD, UPE Co Under “lagging” of steel capacities’ increase, their utilization should run up to 93% to meet demand. This fact will give a “market power” to producers.

14. 13. Raw materials’ price increase in 2008 Source: UPE Co est. The cost of raw materials will increase by: Iron ore US$ 37 66% Coking coal US$ 100 100% ScrapUS$ 106 36%

15. 14. Growth of production costs of crude steel in 2008 - Ukraine Source: UPE Co est. The cost of crude steel production in Ukraine is expected to increase by US$ 202,5 Raw materialsUnit price growth % 2008/20 07 rate per tonne crude steel Price increase per unit, $ increase per tonne crude steel, $ Iron oremt66%1,534,752,7 Coking coalmt100%0,7100,067,2 Scrapmt36%0,288,917,9 ElectricitykWh6%392,60,01,2 Transport tariff$/mt37%17,00,46,3 Natural gascubic m20%139,90,17,0 Ferroalloysmt75%0,01500,050,3 Total 202,5

16. 15. Growth of production costs of crude steel in 2008 - Europe Source: ISSB, UPE Co est. Raw materialsUnit price growth % 2008/2 007 rate per tonne crude steel Price increas e per unit, $ increase per tonne crude steel, $ Iron ore (Pellets)mt66%1,5736,8957,9 Iron ore transportmt30%1,5715,0023,6 Coking coalmt100%0,45100,0045,0 Coking coal transportmt30%0,4515,006,8 Coal for PCImt100%0,1760,0010,2 Coal transportmt30%0,1715,002,6 Ferroalloysmt75%0,0141500,0021,0 Scrapmt36%0,15108,0016,2 Oxygencubic m5%210,000,00350,7 ElectricitykWh3%126,000,00300,4 Total 184,3

17. 16. Crude steel cost increase in Ukraine Source: UPE Co + 203

18. 17. Effect of pricing factors in 2008 FactorEffect Market balanceAllows producers to compensate raw material cost increase an maintain high profit margin (18%-21%) Raw materials cost increase+ $ 96,7 US $ exchange rateInsignificant Market consolidationInsignificant CustomersAccept price increase

19. 18. Pig iron price forecast Source: UPE Co

20. 19. Billet price forecast Source: UPE Co In 2008 estimated billet price will be US$ 750 fob Black Sea. We can see that starting from 2002 price trend has changed. This was caused by new market formula.

21. 20. Hot rolled coil price forecast Source: UPE Co

22. 21. Conclusions 1.Impetuous increase in steel consumption outruns the capabilities of production. 2.Demand over supply excess gives to producers a market power to increase prices. 3.Steel average price in 2008 allows producers to keep profit margin at 2007’ level. 4.Average price of finished steel will increase by $145 in 2008. Consumers will accept an increase. 5.Current price spike mostly caused by expectations of iron ore price increase based on high demand. After the completion of talks, we expect steel price correction of US$ 30-50, assuming that iron ore price will not increase more than 50%. SE UPE Co.

23. SE «UKRPROMZOVNISHEKSPERTIZA» http://expert.kiev.ua/delfika/