1. Steel market in 2009 and the main risks for exporters
Presented by Dr. Vlasjuk V.
Director UPE Co., Ukraine

2. 1. Seasonal steel prices in 2005-2008
UPE Co.
1. Seasonal steel prices in
Last year price trend developed very dramatically

3. 2. Steel price dynamics (billet, $/t fob Black Sea)
UPE Co.
2. Steel price dynamics (billet, $/t fob Black Sea)
Prices effected by speculative factors
587
Prices effected by the fundamental factors
UPE forecast
Source: UPE Co.
Price sky records in 2008 were stimulated by speculative demand in the situation of overheated market

4. 3. Current price moving (billet, $/t fob Black Sea)
Low demand
Production cost
At present time steel prices are moving in narrow horizontal corridor, having been pressed by low demand from above and high production cost from below. Such situation makes tougher the arguments of steel producers during raw material prices negotiations

5. 4. Steel production growth rate, %
UPE Co.
4. Steel production growth rate, %
4q 2008 /3q 2008
2008 / 2007
Source: WSA
Steel sector was appeared to be one of the most affected by global financial crisis, having varied impact on different countries

6. 5. Сurrent status of global financial system
UPE Co.
5. Сurrent status of global financial system
The global financial system remains extremely unsteady despite of huge governmental support (above $7 trln) and nobody knows how long it will last
Credit markets continue to be frozen
The previous bailout programs (about $3 trln) are appeared to be insufficient for curbing financial disturbance. So additional state injections in financial sector are necessary
The epicenter of the crisis, USA continues to demonstrate financial instability. Potential losses of American financial sector are estimated at nearly $3,6 trln.
Probability of new wave of bank losses and writedowns remains high

7. 6. Some macroeconomic and financial indicators
UPE Co.
6. Some macroeconomic and financial indicators
Indicators
Interest rate of Federal Reserve System (USA), %
2,0
0,25
Interest rate of European Central Bank (EU), %
4,25
2,5
Interest rate of Bank of Japan, %
0,5
0,1
3 month USD LIBOR/OIS spread, b.p.
0,7
1,2
0,98
Commercial bank deposits at ЕCB, $ bn
0,6
360
220
Oil (Brent), $/barrel
138 42 48
Monthly inflation, %:
Jun 08
Nov 08
Dec 08
USA
5,0
1,1 EU
4,3
2,8
2,2
Japan
1,9
1,0
Source: IMF, Bloomberg
Despite of some indicator’s improvement, business and investment activity is further deteriorating

8. 7. Basic outlook for 2009 global financial market
UPE Co.
7. Basic outlook for 2009 global financial market
Despite the prompt and large-scale government actions, world financial crisis is not yet under the control
Probability of new wave of bank defaults and writedowns remains high
Under such conditions, it is not worth to expect substantial advance in lending of real sector at least in the first half of 2009

9. 8. Precondition and potential of crude steel consumption growth
UPE Co.
8. Precondition and potential of crude steel consumption growth
Consumption level for industrial countries ~ kg
Source: WSA, UPE Co. est.
Steel consumption per capita (fact 2007), kg
The difference between the present consumption per capita in developing countries and standards for advanced economies strategically creates the great potential for further growth

10. 9. Potential of crude steel consumption growth
UPE Co.
9. Potential of crude steel consumption growth
+930 Mt
Source: UPE Co. est.
Strategically the demand for steel remains high, thereby we shall expect the renewal of high growth rate of steel demand in future

11. 10. World steel consumption (fact 1950-2008 and expectation)
UPE Co.
10. World steel consumption (fact and expectation)
Source: WSA, UPE Co. est.
Now we have recession but it doesn’t cancel the basic upward trend. Most probably steel market will renew upward tendency in 2010 and growth cycle caused by “march” of developing countries is able to last till 2025.

12. UPE Co.
11. Infrastructure projects as key direction of state economic stimulus programs
Source: Bloomberg, UPE Co. est.
The steel market in 2009 will be maintained by implementation of infrastructure projects as far as infrastructure spending is considerable part of state economic stimulus programs

13. 12. 2009 steel market general outlook
UPE Co.
steel market general outlook
Global finance remains unstable, respectively we shouldn’t expect lending resumption in the near future
However, there will be demand for steel supported by construction, particularly within the infrastructure projects
Most probably steel production will hit the bottom in the first quarter of current year due to high inventories and lowest consumption within 2009
Source: UPE Co. est.

14. 13. Macroeconomic background for 2009
UPE Co.
13. Macroeconomic background for 2009
World GDP will drop to - 0.2% in 2009 influenced by financial and economic crisis (2.1% in 2008)
United States and other advanced economies lead recession, with GDP fall 1.2% in 2009 (increase 1.0% in 2008)
Emerging and developing economies are likely to weather storm better, but not insulated, with growth up to 2.5% in 2009 (5.5% in 2008)
Global inflation will lower in to 2.1% comparing with 3.5% in 2008
Real estate, construction, finance, retail and automotive will be most affected by world financial and economic crisis in 2009
Infrastructure projects within the framework of implementing the economic stimulus plan would support global steel consumption next year
Annual average oil price (Brent) for 2009 – $50 per barrel
Source: IMF, IIF

15. 14. Crude steel consumption 2009 by regions
UPE Co.
14. Crude steel consumption by regions
Source: UPE Co. est.
The world steel consumption in 2009 will decrease from 1306 (2008) to 1245 mln. t or approx. by 60 mln. t. China will show the increase up to 10 mln. t but it will not be enough to prevent global descending trend. EU, NAFTA, Japan will demonstrate the most deep drop next year.

16. 15. World crude steel consumption 2009
UPE Co.
15. World crude steel consumption 2009
Source: UPE Co. est.
The decrease in 2009 will bring back world steel consumption to the level of 2006

17. 16. World crude steel production 2009
UPE Co.
16. World crude steel production 2009
Source: WSA, UPE Co. est.
To consume current excessive inventories and restore world market balance it will be necessary to cut global production to mln. t in 2009 or by 100 mln t (-8% y-to-y)

18. 17. Steel capacity utilization 2009
UPE Co.
17. Steel capacity utilization 2009
Source: WSA, UPE Co. est.
Source: UPE Co. est.
Despite market depression and cut of production, global steelmaking capacities will continue to expand by 59 mln. t. in 2009, thereby reviving the “excessive capacity” problem
With the 77% capacity utilization next year, world will see a lot of inefficient and excessive mills. Due to the lack of orders the market in should be considered as the market of buyers and the producer’s profit will be restricted by 5-7%

19. 18. Prices for raw materials 2009
UPE Co.
18. Prices for raw materials 2009
fob Brazil
fob Australia
fob Rotterdam
Carajas fines, 67% Fe
Source: ISSB, UPE Co. est.
In view of market reality raw materials suppliers will be forced to reduce the raw material prices in 2009: for iron ore by 35-50%, for coking coal by 50-57%, for scrap by 45-50%

20. Consumption per 1t steel
UPE Co.
19. Steel production cost for Ukrainian mills (nonintegrated vertically*)
Raw materials
unit
Consumption per 1t steel
2008 year
2009 year
Cost changes , $/t
Price for unit, $
Cost component $/t
Price changes 2009/2008 %
Iron ore t
1,39
117,5
163
-50% 59 82
-82
Coking coal
0,57
300
171
-60%
122 69
-102
Scrap
0,27
310 84
-45% 46
-38
Transport
$/t 35 0%
Natural Gas
th.m3
0,16
229 37
35%
309 49 13
Ferroalloys kg 11 2 22 1
-11
Other
102
-30% 71
-31
Total
614
364
-250
* mills without own raw materials sources
Source: UPE Co. est.
Due to reducing the raw materials prices, cost production will drop approx. by $250 to the level of $364 per ton in case of Ukraine

21. 20. Production cost level determining steel price in 2009
UPE Co.
20. Production cost level determining steel price in 2009
Production cost determining steel prices in 2009
*-integrated mills with own iron ore resources
Source: UPE Co. est.
Predominantly world price level in 2009 will be determined by production cost of China’s producers

22. 21. Chinese game on the global market in 2007- 2008
UPE Co.
21. Chinese game on the global market in
Source: ISSB, UPE Co. est.
Presently China is a world price determining power. During the price trend depended essentially upon Chinese export volume

23. 22. Steel price dynamics (billet, $/t fob Black Sea)
UPE Co.
22. Steel price dynamics (billet, $/t fob Black Sea)
Prices effected by speculative factors
Prices effected by the fundamental factors
Source: UPE Co. est.
Under effect of the fundamental factors the price are getting back to their historical orbit

24. 23. Forecast of export steel price in 2009 ($/t fob Black Sea)
UPE Co.
23. Forecast of export steel price in ($/t fob Black Sea)
The very smooth price trend in the first half of 2008 will be followed by some uptrend in the second half of 2009

25. 24. Current price moving (billet, $/t fob Black Sea)
UPE Co.
24. Current price moving (billet, $/t fob Black Sea)
Low demand
Production cost
At present time steel prices are moving in narrow horizontal corridor, having been pressed by low demand from above and high production cost from below. Such situation makes tougher the arguments of steel producers during raw material prices negotiations

26. 25. The main risks for exporters in 2009
UPE Co.
25. The main risks for exporters in 2009
Rise of trade protectionism
Cancellation of steel export tax in China
Shrinkage of the import markets

27. DELPHICA tel/fax (+38044) 484-64-83 e-mail expert@expert.kiev.ua
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