Charming the Steel Price Snake [Met Coke 2009]

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- The tyranny of large numbers continues
- The age of metallics has lost its shine
- The price outlook will float from overcast (black) to sunny (blue) to black to blue as sustainable demand recovery is delayed until 2010 or later
Becky Hites, Managing Partner, World Steel Dynamics

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Charming the Steel Price Snake [Met Coke 2009]

  1. 1. Charming the Ch i th Steel Price Snake Presentation to:Met Coke 13th Annual World Summit Pittsburgh, Pennsylvania by: Becky E. Hites Managing Partner October 14, 2009
  2. 2. Th ’ Dollars per metric tonne m 100 200 300 400 500 600 700 800 900 1000 1100 1200 Jan n-00 M j Mar-00 y-00 May Ju ul-00 Sep p-00 Nov v-00 Jan n-01 Mar-01 May y-01 (WSD s Ju ul-01 Sep p-01 Nov v-01 Jan n-02 Mar-02 May y-02 Ju ul-02 Sep p-02 Nov v-02 Jan n-03 Mar-03 May y-03 Ju ul-03 USA Sep p-03 FOB m ill Nov v-03 Jan n-04 Mar-04 May y-04 Ju ul-04 Sep p-04 Nov v-04 Jan n-05 th W ld E Mar-05 World Export May y-05 Ju ul-05 FOB port of export Septem ber 28, 2009 Sep p-05 Nov v-05 Jan n-06 Mar-06 y-06 May Ju ul-06 Sep p-06 Nov v-06 Jan n-07 SteelBenchmarker TM HRB Price Mar-07 USA, China, Western Europe and World Export ex-w orks y-07 May Ju ul-07 Western Europe Sep p-07 Nov v-07 China Jan n-08 ex-w orks Mar-08 y-08 May Ju ul-08 (WSDs PriceTrack data, Jan. 2000 - March 2006; SteelBenchmarker data begins April 2006) Sep p-08 Nov v-08 Jan n-09 Mar-09 H t y-09 May Ju ul-09 Sep p-09 Nov v-09 415 545 606 616•2 There’s a Major “Chill” on the World Export Market for Hot-Rolled Band t M k t f Hot-R ll d B d
  3. 3. WSD Isn’t Expecting A Price Plummet (Only 20% Odds) I ’t E ti P i Pl t (O l Odd )Source: WSD’s SteelBenchmarkerTM •3
  4. 4. Steel Price Outlook Scenarios and Odds• Scenario I: Steel boom returns by mid-2010. Odds = 10% (prior oddsat 2 %) There’s a f h surge of Chi 25%). h ’ further f Chinese steel demand in 2010, on top ld d i 2010of the 20% gain in 2009. Also there’s a fair to good rise in non-Chinesesteel demand. The consequence is a tightening of the globalsupply/demand balance for steelmakers metallics (pig iron, steel scrap steelmakers’ ironand steel scrap substitutes).• Scenario II: Gradual volume recovery, but difficult pricing conditionsfor the steel mills in 2010. This scenario is “THE SNAKE” pricingpattern. Odds = 70% (no change in odds). Price levels and shipmentsfor the steel mills, while not great, are far better than those in the firsthalf f 2009 Steel ill ’h lf of 2009. St l mills’ operating rates are too low to sustain hot-rolled ti t t l t t i h t ll dband export prices at desired levels; hence, only the lowest cost steelmills report good profits. •4
  5. 5. Steel Price Outlook Scenarios and Odds (Continued)• Scenario III: Shake-out conditions return (including a pricing “deathspiral’). Odds = 20% ( i odds at 5%). S l d i l’) Odd (prior dd %) Steel demand i fl or d is flatlower, with steel production rising above underlying steel demand. Thesteel mills are too slow in cutting back output once again. The Russianmills sustain output by reducing prices and the Chinese mills sharply cut prices,their export quotes. •5
  6. 6. Apparent Steel Consumption Has Rebounded From the DeepFreeze, But Perhaps Less Than Increased Supply from GlobalFreeze Restarts Global Apparent Steel Consumption Year-to-Year Change 25% 20% Forecast 15% 10% 5% 0% -5% -10% -15% -20% -25% 1Q 95 1Q 96 1Q 97 1Q 98 1Q 99 1Q 00 1Q 01 1Q 02 1Q 03 1Q 04 1Q 05 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10e 1Q 11e Source: WSD Global Steel Alert System •6
  7. 7. Global Crude Steel Production Could Recover to the 1.3 Billion Tonne Rate by the Fourth Quarter Global Steel Production, Consumption and Related Items (million metric tonnes, crude steel equivalent (CSE) basis) ------------------------------------------ Annualized ----------------------------------------------------- SAAR* Less: Steel Ratio: Equals: Minus: User Equals: Steel Year on Year Crude Steel Net Mill Inventory Crude Apparent Steel Inventory Consumption % Change inQuarter Production Exports Addition to ASC Consumption (CSE) Addition (crude EQ) Consumption1Q 08 1,364 3.4% 0 0 1.00 1,364 4.8% 30 1,334 4.3%2Q 08 1,444 6.8% 0 20 1.01 1,424 6.3% 50 1,374 3.9%3Q 08 1,411 3.2% 0 -15 0.99 1,426 4.4% -25 1,451 8.0%4Q 08 1,207 -11.8% 0 -15 0.99 1,222 -10.5% -60 1,282 -4.6%1Q 09 1,164 -14.7% 0 -55 0.95 1,219 -10.6% -55 1,274 -4.5%2Q 09 1,114 -22.8% 0 -25 0.98 1,139 -20.0% -50 1,189 -13.5%3Q 09e 1,246 -11.6% 0 17 1.01 1,229 -13.8% 0 1,229 -15.2%4Q 09e 1,311 1 311 8.6% 8 6% 0 -5 5 1.00 1 00 1,316 1 316 7.7% 7 7% 10 1,306 1 306 1.9% 1 9%1Q 10e 1,288 10.6% 0 10 1.01 1,278 4.8% 15 1,263 -0.9%2Q 10e 1,284 15.3% 0 22 1.02 1,262 10.8% 15 1,247 4.9%3Q 10e 1,316 5.6% 0 7 1.01 1,309 6.5% 10 1,299 5.6%4Q 10e 1,348 2.8% 0 9 1.01 1,339 1.8% 10 1,329 1.8%1Q 11e 1,374 6.7% 0 24 1.02 1,350 5.7% 22 1,328 5.2%2Q 11e 1,356 1 356 5.6% 5 6% 0 23 1.02 1 02 1,333 1 333 5.6% 5 6% 22 1,311 1 311 5.1% 5 1%3Q 11e 1,390 5.6% 0 6 1.00 1,384 5.7% 10 1,374 5.8%4Q 11e 1,424 5.6% 0 10 1.01 1,414 5.6% 5 1,409 6.0%1Q 12e 1,446 5.2% 0 9 1.01 1,437 6.5% 12 1,425 7.3%2Q 12e 1,425 5.1% 0 9 1.01 1,416 6.2% 7 1,409 7.5%3Q 12e 1,461 5.1% 0 10 1.01 1,451 4.8% 1 1,450 5.5%4Q 12e 1,496 5.1% 0 6 1.00 1,490 5.4% 2 1,488 5.6%* SAAR = seasonally-adjusted annual rate.Source: IISI for historical steel production and WSDs GSA for annual apparent steel consumption figures. Source: WSD’s Global Steel Alert System •7
  8. 8. China Recovered First From A Production Stand-Point… Stand- Regional Crude Steel Production (Year-to-Year Change)50% Forecast40% China30% Developing World20%10% 0%-10%-20% Advanced Countries-30%-40%-50% Q1-98 Q3-98 Q1-99 Q3-99 Q1-00 Q3-00 Q1-01 Q3-01 Q1-02 Q3-02 Q1-03 Q3-03 Q1-04 Q3-04 Q1-05 Q3-05 Q1-06 Q3-06 Q1-07 Q3-07 Q1-08 Q3-08 Q1-09 Q3-09 Q1-10 Q3-10 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Source: WSD Global Steel Alert System •8
  9. 9. But Has Paid The Price As It Enters Its Fifth Pricing Death Spiral Since 2005 •9
  10. 10. Global Steel Production and Consumption Patterns WSD Estimated Changes in Steel Production Region 2008 2009 2010 2011 2012 Advanced -3.2% -27.0% 17.3% 8.0% 5.0% Countries ROW -4.1% -12.8% 13.2% 0.6% 5.5% ex-China China 1.1% 10.8% 2.1% 6.9% 4.9% TOTAL -1.9% -9.0% 9.3% 5.6% 5.1% WSD Estimated Changes in Apparent Steel Demand Region 2008 2009 2010 2011 2012 Advanced -5.8% -24.0% 12.3% 2.9% 6.7% Countries ROW -0.9% -20.8% 9.6% 8.3% 8.1% ex-China Chi China 4.0% 20.1% 1.5% 5.2% 3.3% TOTAL -1.1% -7.9% 6.8% 5.4% 5.7% •10
  11. 11. Flatter World Cost Curve Provides Incentive For Mills to Export When the FOB Port of Export Price is $475 per Tonne or More 2009 Preliminary versus 2008 World Cost Curve for Steel Sheet Producers y Hot Rolled Band Operating Cost including Overhead Note: Circles indicate midpoint cost for the quartile. 1050 950 850 Median $776 $ PER METRIC TONNE $644 750 T Sept. 2008 $632 $668 650 $558 $486 550 Median $457 $433 $444 450 $381 350 June 2009 250 0 50 100 150 200 250 300 350 400 450 500 550 CUMULATIVE CAPACITY (million tonnes) Source: WSD’s World Cost Curve for Sheet Producers •11
  12. 12. Market Factors Driving Down the Price• Steel buyers’ reluctance to place orders because they are worried thatprices will fall (the “chill”) i ill f ll ( h “ hill”)• Rising steel production outside of China as the mills respond toimproved orders. p• Increasing export offerings by Chinese mills that are suffering from amassive fall in their home price and extreme overproduction.• Substantial non-Chinese excess steelmaking and rolling mill capacity.• Perhaps lower than perceived steel demand due to reduced activity.• F lli steel scrap and pig iron prices. Falling t l d i i i• Availability of distressed cargos at reduced prices.• A fairly flat World Cost Curve. Curve •12
  13. 13. Inventories Have Been Dramatically Reduced Throughout the Manufacturing System Global Steel Production, Consumption and Related Items ( (million metric tonnes, crude steel equivalent ( q (CSE) basis) ) ) SAAR* Less: Steel Ratio: Equals: Minus: User Equals: Steel Year on Year Crude Steel Net Mill Inventory Crude Apparent Steel Inventory Consumption % Change inYear Production Exports Addition to ASC Consumption (CSE) Addition (crude EQ) Consumption1997 799 6.5% 6 5% 0 10 1.01 1 01 789 6.8% 6 8% 8 781 5.2% 5 2%1998 777 -2.7% 0 -3 1.00 780 -1.1% -5 785 0.5%1999 789 1.5% 0 -8 0.99 797 2.1% -2 799 1.7%2000 849 7.7% 0 3 1.00 846 6.2% -3 849 6.3%2001 851 0.2% 0 -5 0.99 856 1.2% -4 860 1.3%2002 905 6.3% 0 3 1.00 902 5.3% 5 897 4.3%2003 971 7.3% 7 3% 0 -2 2 1.00 1 00 973 7.9% 7 9% 0 973 8.5% 8 5%2004 1,070 10.2% 0 -8 0.99 1,078 10.8% 10 1,068 9.8%2005 1,146 7.2% 0 9 1.01 1,138 5.6% 19 1,119 4.8%2006 1,251 9.1% 0 9 1.01 1,242 9.2% 19 1,223 9.3%2007 1,351 8.0% 0 9 1.01 1,343 8.1% 21 1,322 8.1%2008 1,356 1 356 0.4% 0 4% 0 -3 3 1.00 1 00 1,359 1 359 1.2% 1 2% -1 1 1,360 1 360 2.9% 2 9%2009e 1,209 -10.9% 0 -17 0.99 1,226 -9.8% -24 1,250 -8.1%2010e 1,309 8.3% 0 12 1.01 1,297 5.8% 13 1,284 2.8%2011e 1,386 5.9% 0 16 1.01 1,370 5.6% 15 1,355 5.5%2012e 1,457 5.1% 0 9 1.01 1,448 5.7% 6 1,443 6.5% •13
  14. 14. Market Factors Perhaps Mitigating the Downward Price Pressure• The weak US dollar versus the Euro.• Somewhat higher industrial activity in a number of non-Chineseconsuming industries in the past few months because they had cuttheir output to levels even below the reduced demand for products.• The apparent end of non-Chinese steel buyers’ and traders’inventory liquidations.• Seasonal factors including the end of the European vacation, Indianmonsoon and Ramadan observance periods.• Reduced foreign steel deliveries to a number of home country home-countrymarkets.• In North America, orders still higher than production for higher-value-added steel sheet products for the automotive and appliance l dd d t l h t d t f th t ti d liindustries. •14
  15. 15. USA Hot-Rolled Band Pricing Situation Fluid Hot-R ll d B d P i i Sit ti Fl id H t• Through the first week of October, mills were still receiving goodorders for a number of higher value added products. value-added• Foreign deliveries are down substantially due to uncertainty aboutthe sustainability of increased prices.• Buyers’ inventories have been sharply reduced.• The potential for a major decline in HRB prices doesn’t seem to begreat unless there is a huge drop in the steel scrap price. price• The USA economy is now in a recovery mode (albeit from verydepressed levels).• Distributors’ inventories are close to all time lows on a days’ supplybasis.• The battle for market share among the mini-sheet mills and theintegrated mills will likely remain intense. •15
  16. 16. The Mini-Sheet Mills Were Quick to Ramp-Up Production When Market Mini- Ramp- Demand Solidified, While the Integrated Mills Lagged •16
  17. 17. EAF Production Accounted for Almost 68% of Total Crude Steel Production in June Versus a Prior 59% Peak •17
  18. 18. USA Service Center Inventories at Historically Low Levels •18
  19. 19. Million Tonnes 0 5 10 15 20 25 30 35 40 45 50 Jan-01 May-01 Sep-01 Jan-02 May-02 Source: WSD estimates Sep-02 Jan-03 Imports May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 USA Imports Remain Low Jan-07 Exports May-07 USA Monthly Steel Imports and Exports Annualized Rate Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09•19
  20. 20. USA Industrial Activity Off 23% Year-to-Year….. Year-to-Year Components of IDX (2004=100) as of August 2009 & 2008 Y/Y Share Share Y/YIndicator Index Figure Weighted Index % Chg of Index of Index First August August August August August August 8 months 2009 2008 2009 2008 2009 % ChgCES : Short-Lead-Time Capital Goods Oil & Gas Well Drilling 67.6 137.9 2.03 4.14 -51.0% 3.0% 2.6% Railroad Rail & Miscellaneous 74.5 122.7 2.23 3.68 -39.3% 3.0% 2.9% Business Equipment 111.1 131.6 5.56 6.58 -15.6% 5.0% 7.2% Trucks (Not Seasonally Adjusted) 41.2 55.8 2.88 3.91 -26.3% 7.0% 3.7% Fabricated Metals 84.5 106.7 10.15 12.80 -20.8% 12.0% 13.2% Non-Electrical Machinery 59.3 91.0 7.12 10.93 -34.8% 12.0% 9.2% Total 29.97 42.03 -28.7% 42.0% 38.9% -29.8%CEL : Long-Lead-Time Capital Goods Ships & Boats Construction 84.8 96.4 0.85 0.96 -12.0% 1.0% 1.1% Electrical Equipment 102.1 121.2 5.10 6.06 -15.8% 5.0% 6.6% Non-Residential Construction (NSA) 94.6 119.7 21.76 27.53 -21.0% 23.0% 28.2% Total 27.71 34.56 -19.8% 29.0% 36.0% -16.3%CDIDX : Consumer Goods Residential Housing (Not Seas. Adj.) 49.2 62.0 1.48 1.86 -20.7% 3.0% 1.9% Household Appliance 79.5 90.0 3.18 3.60 -11.6% 4.0% 4.1% Automobiles (Not Seasonally Adj.) 55.8 69.5 8.93 11.12 -19.7% 16.0% 11.6% Total 13.59 16.58 -18.0% 23.0% 17.6% -38.7%MIDX : Miscellaneous Industries Defense & Space Equipment 118.8 117.1 1.19 1.17 1.5% 1.0% 1.5% Farm Equipment 101.3 110.9 2.03 2.22 -8.6% 2.0% 2.6% Metal Cans 84.9 116.3 2.55 3.49 -27.0% 3.0% 3.3% Total 5.76 6.88 -16.2% 6.0% 7.5% -26.3%Total 77.02 100.05 -23.0% 100.0% 100.0% -26.6% •20
  21. 21. And Down Almost 27% Year-to-Date Year-to- •21
  22. 22. USA Steel Shipments Are Expected To Be Down 36% For 2009 USA Steel Consumption / Shipment Outlook (million short tons) 1995 2000 2005 2006 2007 2008 2009e 2010e 2011eFirst quarter 24.9 28.6 27.1 27.8 26.3 27.5 13.0 18.0 22.0Second quarter 24.4 28.5 25.6 28.8 26.5 27.5 13.1 20.0 23.0ThirdThi d quarter t 24.0 24 0 27.3 27 3 25.7 25 7 26.8 26 8 27.1 27 1 26.0 26 0 17.5 17 5 20.0 20 0 22.0 22 0Fourth quarter 24.2 24.7 26.6 26.1 26.5 16.8 19.0 21.0 20.0Shipments 97.5 109.1 105.0 109.5 106.4 97.8 62.6 79.0 87.0Plus: Imports 24.4 38.0 32.1 45.3 33.2 31.9 15.0 22.0 26.0Less: Imported semis converted to finished 5.0 8.6 6.9 9.3 6.6 5.9 1.5 3.0 4.0 products by AISI-reporting companies AISI reportingLess: Exports 7.1 6.5 9.4 9.7 11.2 13.5 8.5 10.0 10.0Subtotal: Apparent steel demand 109.8 131.9 120.8 135.8 121.9 110.3 67.6 88.0 99.0Less: Est. user/buyer inventory build -2.0 -2.0 -6.4 6.6 -2.5 -4.0 -10.0 2.0 4.0Equals: Actual steel consumption 111.8 133.9 127.2 129.2 124.4 114.3 77.6 86.0 95.0Index of activity in 15 steel consuming industries (2004 = 100) 99 116 102 108 108 100 80 93 102% change 4.3% 5.8% 1.9% 6.3% 0.1% -7.6% -20.2% 16.3% 9.7%Steel consumption per point of activity index (million tons) ti it i d ( illi t ) 1.134 1 134 1.152 1 152 1.247 1 247 1.192 1 192 1.146 1 146 1.140 1 140 0.970 0 970 0.925 0 925 0.931 0 931Source: AISI, Company Reports and WSD estimates •22
  23. 23. Steel’s Age of Metallics Has Lost Its Shine• The global obsolete steel scrap requirement in 2018 may decline to less than 80% of the obsolete steel scrap reservoir that’s on average 10-40 years old, versus about 95% in 2008.• While steel scrap price volatility will remain huge in the future, the price range for it may be far lower than what occurred in 2007-2008.• USA #1 heavy melting steel scrap prices in the next decade may typically range from $150 to $300 per gross ton, with only brief periods outside of this range, versus $300 to $570 per ton in 2007 to July 2008.• Pig is no longer beautiful and production outside of China will grow less than expected. •23
  24. 24. Dollars per gross ton s 0 100 200 300 400 500 600 700 800 900 Jan-00 Mar-00 St l S May-00 Jul-00 Sep-00 Nov-00 Jan-01 Mar-01 May-01 Jul-01 Sep-01 Nov-01 Jan-02 Mar-02 May-02 Jul-02 Sep-02 Nov-02 Jan-03 Mar-03 May-03 Jul-03 Sep-03 , P i V l tilit Nov-03 Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 SteelBenchmarker Jan-05 R Mar-05 Septem ber 28, 2009 TM May-05 Jul-05 Sep-05 USA, delivered to steel p Nov-05 Jan-06 Mar-06 plant May-06 Jul-06 Sep-06 Nov-06 Scrap Price Jan-07 Mar-07 i B t May-07 Jul-07 Sep-07 #1 Busheling Nov-07 Shredded Scrap Jan-08 L Mar-08 #1 Heavy Melting (AMM scrap price data, Jan. 2000 - Jan. 2007; SteelBenchmarker data begins Feb. 2007) May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 L May-09 Jul-09 Sep-09 Nov-09 252 282 319 l Steel Scrap Price Volatility Will Remain, But At Lower Levels•24
  25. 25. China’s Demand For Global Iron Ore Will Ease in 2010Chi ’ D d F Gl b l I O E i• Chinese iron ore production is about 20% marginal.• There’s much low cost capacity in China; perhaps half the current capacity is extracted for less than $60 per tonne.• Capital spending in 2009 could top $11 billion for iron ore mine g improvements and expansions.• Chinese production/demand will expand much less in the future than the past.• There is an excess supply of Capesize vessels.• Increases in global iron ore capacity still are massive.• Foreign iron ore deliveries to China in 2009 will be about 576 million tonnes, versus 444 million tonnes in 2008, but could drop to 520 million tonnes in 2010.• WSD sees a decline in iron ore fines prices in 2010. •25
  26. 26. Fixed Asset Investment in the Chinese Iron Mines Fi d A tI t t i th Chi I Mi China Iron Mines Fixed Asset Investment (in millions) 2003 2004 2005 2006 2007 2008 2009e 2010eRMB 5,007 5 007 13,294 13 294 28,196 28 196 35,649 35 649 42,723 42 723 66,867 66 867 75,900 75 900 40,000 40 000Y-to-Y change 166% 112% 26% 20% 57% 14% -47%US$ 605 1,606 3,503 4,571 5,934 9,649 11,500 5,857Y-to-YY to Y change 166% 118% 30% 30% 63% 19% -49% 49%Source: WSD estimates •26
  27. 27. China’s Iron Ore Market Analysis Chi ’ I O M k tA l i Chinese Iron Ore Market Analysis (million tonnes) 2006 2007 2008 2009e 2010eImported iron ore prices ($ per tonne with VAT) tonne,Benchmark 63.5% Fe contract price, FOB Australia 47 51 89 56(2)Delivered to Chinese port from Brazil 89 170 160 102 (3)Delivered to Chinese port from Western Australia 70 99 128 84 (3)Delivered to Chinese port from India 89 221 171 87 (3)China domestic market price ($ per tonne, with VAT 85 176 184(1) 102 100Capital outlays on iron ore (US$ billion) 4.6 5.9 9.6 11.5 5.9Y-to-Y % Change 28.3% 62.7% 19.8% -48.7%China iron ore production capacityCost: $100 plus per tonne 10 40 50 60 60Cost: $80 to $99 per tonne 30 35 40 70 70Cost: $60 to $79 per tonne 90 90 90 90 100Cost: less than $60 per tonne 170 185 210 210 220Total 300 350 390 430 450Chinese iron ore production by cost categoryHigh cost: $100 plus per tonne 10 30 30 0 0Medium high cost: $80 to $99 p tonne g per 20 30 30 10 0Medium low cost: $60 to $79 per tonne 90 90 90 90 75Low cost: less than $60 per tonne 170 185 200 210 220Total 290 335 350 310 295(1) September, 2008(2) Benchmark prices down 35%(3) Includes $11 or $26 per tonne in ocean freight and insurance expense, $6 per tonne in ship unloading fees, and 17 17% VAT. Does not include the estimated $13 per tonne transportation fee from the port to the steel mill.Source: WSD estimates •27
  28. 28. US$ / Per Tonne ( CIF ) e 50 0 100 150 200 250 5/16/2005 7/11/2005 9/5/2005 10/31/2005 Source: WSD estimates 12/25/2005 2/27/2006 4/24/2006 6/19/2006 8/14/2006 10/9/2006 12/4/2006 1/29/2007 3/26/2007 seaports 5/21/2007 7/20/2007 Ore inventory at 9/17/2007 11/19/2007 1/21/2008 3/18/2008 5/16/2008 Prices, $ Per Tonne 7/14/2008 9/8/2008 Imported Indian Ore Retail 11/3/2008 1/5/2009 3/9/2009 China Iron Ore Inventory and Indian Ore Retail Prices at Ports 5/7/2009 High Iron Ore Inventories at the Chinese Ports Have Contributed to Lower Spot Market Prices 7/6/2009 8/31/2009 0 10 20 30 40 50 60 70 80 million tonnes•28
  29. 29. China’s Iron Ore Supply/Demand Analysis Chi ’ I O S l /D dA l i Chinas Iron Ore Demand and Supply Balance (million tonnes) 2000 2005 2006 2007 2008 1H 09 2H 09e 2009e annualizedCrude steel production p 129 356 423 494 500 533 577 555Pig iron production 131 330 404 471 471 518 566 542Demand for dressed ore (1.55 * pig iro 203 512 626 735 735 808 883 846Domestic iron ore productionSmall iron mine output (WSD estimate 50 85 105 130 160 110 130 120Preliminary report iron ore output 222 397 574 707 824 760 800 780Final reported iron ore output 223 420 588 707 824 783 777 780Un-reported iron ore output 43 68 50 10 0 0 20 10Total crude iron ore output 266 488 638 717 824 783 797 790Fe content analysisReported ore 32.0% 31.8% 31.5% 31.3% 31.2% 31.3% 31.3% 31.0%Unreported ore 30.5% 31.4% -1.6% 30.5% 30.0% 30.5% 30.5% 30.0%Average calculated Fe content 31.8% 31.8% 28.9% 29.0% 31.2% 31.3% 31.3% 31.0%Fe content required for blast furnace 63.5% 63.5% 63.5% 63.5% 63.5% 63.5% 63.5% 63.5%Dressed ore output (1) 133 244 290 335 350 316 304 310Y-to-Y change 24.5% 18.9% 15.5% 4.5% -14.7% -9.0% -11.4%Ratio of crude ore / dressed ore 2.00 2.00 2.20 2.19 2.35 2.5 2.5 2.54Imported iron ore requirement 70 268 336 400 385 594 477 536Ports and mills inventory change 0 6 -10 -17 59 40 40 40Imported iron ore 70 274 326 383 444 634 517 576Y-to-Y change 31.7% 19.2% 17.5% 15.9% 42.9% 16.5% 29.7%Investment in iron ore mining Bil RMB na 28.2 28 2 35.7 35 7 41.8 41 8 68.0 68 0 72.8 72 8 79.0 79 0 75.9 75 9 Bil US$ na 3.5 4.6 5.8 10.0 10.7 12.3 11.5 RMB per $ 8.1 7.8 7.2 6.8 6.8 6.8 6.8Crude steel production 129 356 423 494 500 533 577 555Exports (crude steel basis) 10 28 55 75 64 18 38 28Imports (crude steel basis) 22 30 20 19 17 22 14 18Net imports (crude steel basis) 12 2 -35 -56 -47 4 -24 -10Domestic crude steel apparent deman 141 358 388 438 453 537 553 545Y-to-Y Change 24.3% 8.4% 12.9% 3.4% 22.6% 26.3% 20.3%(1) Dressed ore is upgraded iron ore (concentrate).Source: WSD estimates •29
  30. 30. Iron Ore Price Forecast I O Pi F t Iron Ore Price Forecast ($ per metric tonne) CVRD CVRD Fines Fines Del. Pellets Pellets Del. Pellet-Fines (FOB) % Chg Freight Rotterdam % Chg (FOB) % Chg Freight Rotterdam % Chg Spread2000 17.99 17 99 4% 5.60 5 60 23.59 23 59 9% 32.01 32 01 6% 5.60 5 60 37.61 37 61 9% 14.01 14 012001 18.77 4% 5.07 23.84 1% 32.57 2% 5.07 37.64 0% 13.802002 18.32 -2% 4.00 22.32 -6% 30.78 -5% 4.00 34.78 -8% 12.472003 19.97 9% 8.00 27.97 25% 34.40 12% 8.00 42.40 22% 14.442004 23.69 19% 22.00 45.69 63% 40.22 17% 20.00 60.22 42% 16.532005 39.85 39 85 68% 17.00 17 00 56.85 56 85 24% 76.08 76 08 89% 17.00 17 00 93.08 93 08 55% 36.23 36 232006 47.42 19% 16.00 63.42 12% 73.79 -3% 16.00 89.79 -4% 26.372007 51.93 10% 30.00 81.93 29% 78.46 6% 30.00 108.46 21% 26.542008 85.94 66% 40.00 125.94 54% 144.56 84% 40.00 184.56 70% 58.622009 61.71 -28% 10.00 71.71 -43% 74.74 -48% 10.00 84.74 -54% 13.03Forecast2010 43.19 -30% 11.00 54.19 -24% 56.19 -25% 11.00 67.19 -21% 13.002011 36.71 -15% 12.00 48.71 -10% 49.71 -12% 12.00 61.71 -8% 13.002012 36.71 0% 14.00 50.71 4% 49.71 0% 14.00 63.71 3% 13.002013 36.71 0% 15.00 51.71 2% 49.71 0% 15.00 64.71 2% 13.002014 36.71 36 71 0% 15.00 15 00 51.71 51 71 0% 49.71 49 71 0% 15.00 15 00 64.71 64 71 0% 13.00 13 002015 37.45 2% 15.00 52.45 1% 50.45 1% 15.00 65.45 1% 13.00Source: WSD •30
  31. 31. China Steel Is Driving Its Bus Into the Great WallEntering a period of:• Reduced demand growth.• Intense price competition.• The need f major consolidation (occurring already at a for ( sizable pace).• Mills need to reestablish their priorities (to profits over growth). th)• Mills need to adapt new competitive strategies.• The Chinese steel market is in an inherently unstable y situation. •31
  32. 32. Market Differs By Product• In the long products sector, China has 300+ companies sector companies.• In the flat sector, there are many plate mill companies, including a number of independent plate mills.• In the sheet sector, there are about 35 companies. There is not a single independent wide hot-strip mill to our knowledge. •32
  33. 33. Can China’s Massive Bus Make It To The Top of The Hill? • China is about to enter a period of sharply lower economic growth and perhaps even no steel demand growth and, perhaps, growth. • Factors restraining the economy include: Rise in fiscal deficit to 5.0% share of GDP. Massive rise in bank loans. FAI/GDP ratio in 2009 will be reported at about 70%; but probably is more like 50 55% Can’t keep growing 50-55%. Can t growing. • When will Chinese steel demand “hit the wall”? Our guess is this summer, but it could also be by next spring. • Analogy of the 22-wheeler truck that’s heading up the hill – starts out at 140 km/hour and 10 km/hour at the top. In fact, the Chinese 22-wheel bus may not make it to the top this time – i.e., i e demand could decline decline. •33
  34. 34. GDP Growth of 9% Expected for 2009; Steel Consumption Up 20% China Growth of GDP By Category (year-to-year change) ( t h ) By Final By Gross Capital Apparent Steel Real GDP Consumption Formation By Net Export Consumption % 2002 9.1 91 3.8 38 4.6 46 0.6 06 20.9 20 9 2003 10.0 3.6 6.5 -0.1 25.6 2004 10.1 4.1 5.6 0.5 10.0 2005 10.4 3.9 4.2 2.2 25.3 2006 11.6 4.5 4.8 2.3 10.2 2007 11.9 11 9 5.1 51 4.9 49 1.9 19 11.9 11 9 2008 9.0 3.8 4.3 0.9 4.4 2009E 9.0 3.5 6.0 -0.5 20.3 2010E 8.0 3.5 3.9 0.6 1.1 2011E 7.0 70 3.5 35 2.5 25 1.0 10 2.7 27 2012-2020E 6.0 3.5 2.0 0.5 3.0 Source: Government documents and WSD estimates •34
  35. 35. New Bank Loans in 2009 to Top $1.5 Trillion; $1 5 Total Debt Approaching $6 Trillion Chinese Total and New Bank Loans for 2009 (billion RMB, billion US$ as indicated) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec TotalTotal bank loan (RMB) 31,992 33,064 34,955 35,547 36,214 37,745 38,114 38,524 39,124 39,624 40,224 40,824 40,374Total bank loans (US$) 4,684 4,841 5,118 5,205 5,302 5,526 5,580 5,640 5,728 5,801 5,889 5,977 5,911New bank loans (RMB) 1,645 1,072 1,891 592 667 1,531 369 410 600 500 600 600 10,477New bank loans (US$) 241 157 277 87 98 224 54 60 88 73 88 88 1,534Source: PBC statistics and WSD estimatesS C S •35
  36. 36. China s Fixed Asset Investment Forecast Up 33% in 2009 China’s China Trade Balance and Fixed Asset Investment versus GDP Annualized Rate (2) 2000 2005 2006 2007 2008 2009e 2010e Jul-08 Jul-09 (1)(2)GDP ($ billions) 1,080 2,247 2,650 3,291 4,341 4,796 5,269 4,292 4,442 (1)(3)China fixed asset investment ($ billions) 398 1,083 1,381 1,810 2,493 3,362 3,691 2,786 3,553 Ratio FAI to GDP 37% 48% 52% 55% 57% 70% 70% 65% 80% Adjusted FAI to GDP (3) 36% 43% 43% 42% 43% 44% 43% 43% 44%GDP (billion RMB) 8,940 8 940 18,387 18 387 21,087 21 087 24,953 24 953 30,067 30 067 32,770 32 770 35,400 35 400FAI (billion RMB) 3,293 8,860 10,986 13,723 17,266 22,964 24,800China trade ($ billions)Imports all products 225 660 792 956 1,130 860 1,062 1,312 1,116Exports all products 249 762 969 1,218 1,426 1,122 1,233 1,609 1,241Trade surplus (deficit) 24 102 178 262 296 262 171 298 125 % of GDP 2% 5% 7% 8% 7% 5% 3% 7% 3%Year-to-year changeGDP ($ billions) 36% 18% 24% 32% 10% 10% 3%GDP (RMB) 34% 15% 18% 20% 9% 8%FAI ($ billions) 28% 28% 31% 38% 35% 10% 28%FAI (RMB) 26% 24% 25% 26% 33% 8%Imports all products 18% 20% 21% 18% -24% 24% 23% -15% 15%Exports all products 28% 27% 26% 17% -21% 10% -23%Exchange rate-RMB per $ 8.28 8.18 7.96 7.58 6.93 6.83 6.72 6.83 6.83Notes:(1) FAI and GDP are before any inflation adjustment( )(2) GDP "monthly" is p y previous qquarter run rate(3) Chinese reported FAI figures include investment in land and other items that cause the figures to be overstated relative to the approach used by the IMF.Source: Peoples Bank of China, Bloomberg and WSD estimates •36
  37. 37. Factors Working to Mitigate the Impact to the Global Steel Industry • Steel production is prone to massive swings up, but also down. • It’s possible that steel demand could increase in China due to the 33% increase in fixed asset investment in the country this year. • Even with the lower export prices buyers have remained on the prices, sidelines for fear of adverse market moves in pricing during the 2-3 months that the steel is “on the water”. • The Chinese RMB will begin to appreciate again over the next 1-3 13 years, increasing relative steel production costs. • The Chinese government is almost certain to continue to take actions to reduce significant steel exports due to the strain that steel g p production puts on the country’s infrastructure (power, transportation, etc). • By 2018, the global steel industry will need the flat-rolled tonnage y , g y g constructed in China as the non-Chinese world pulls back investment. •37
  38. 38. Milli Tonnes ion 0 100 10 20 30 40 50 60 70 80 90 Jan-01 Apr-01 China’s Jul-01 Oct-01 Jan-02 Source: WSD estimates Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 China Steel Monthly Exports Annualized Rate Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 China s Steel Exports Are Down 70% Through July 2009 At An•38 Annualized 17 Million Tonne Rate Versus 58.5 Million Tonnes in 2008
  39. 39. Steel Survival Strategies London Conference St l S i l St t i L d C f Who’s Left Standing? November 16-17, 2009 16- SSS- SSS-E VII Marriott Grosvenor Square, London Square To register, go tohttp://www.metalbulletin.com/events/Details/Intro.aspx?EventID=1032.com. •39

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