PERSPECTIVES FOR ITALIAN STEEL PRODUCERS, RE-ROLLERS AND PROCESSORS

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1 STSG - EUROMETAL III. INTERNATIONAL STEEL TRADE DAY Made in Steel, Milano - April 4, 2013 PERSPECTIVES FOR ITALIAN STEEL PRODUCERS, RE-ROLLERS AND PROCESSORS Antonio Marcegaglia CEO & Managing Director, Marcegaglia, Italy

2 KEY CHALLENGES FOR THE GLOBAL STEEL INDUSTRY STEEL DEMAND Steel demand is slowing down, well below its 3.7% p.a. long term growth rate (it was 1.8% in 2012, est. 2.7%* in 2013)... YoY growth in global steel consumption (%) 20% 15% 10.1% 10% 7.6% 8.2% 6.5% 6.3% 5% 1.6% 0% Av. growth : 3.7% p.a. 14.1% 9.2% 7.0% 5.6% 0.0% 1.8% 2.7% -5% -6.4% -10% f (*WSA +3.3% WSD +2.0%) Source: WSA. SteelConsult 2

3 KEY CHALLENGES FOR THE GLOBAL STEEL INDUSTRY STEEL DEMAND and will not be driven by China and Asia as in the recent past (+15.8% CAGR between 2000 and 2011, +3.5% CAGR in the next decade) because of the reduction of fixed asset investment Macro Index, Moving Average Basis WSD CHINA MACRO-ECONOMIC STEEL INDEX (MOVING AVERAGE BASIS) VS APPARENT STEEL CONSUMPTION (ASC) Macro Index consists of fixed asset investiment (12-month moving average), retail sales, M2 money supply (6-month moving average) and value added of industry (6- month moving average). The weights are 0.35, 0.25, 0.20 and 0.20, respectively. Steel Consumption (right axis) Macro Index (left axis) ASC, Million Metric Tonnes 200 Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 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 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 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct Source: WSD estimates 3

4 KEY CHALLENGES FOR THE GLOBAL STEEL INDUSTRY OVERCAPACITY With a slower demand, overcapacity is an issue worldwide, but while in the emerging countries it can be absorbed in the long term, in the OECD countries it has become (again) a structural problem, particularly in BOF in EU. SHARE OF CAPACITY AND EXCESS CAPACITY BY PROCESS AND REGION (MT) e Capacity in OECD Total = 520 Mt e estimated overcapacity in OECD Total = 51 Mt Based on 2012 production level, integrated mills represent 85% of OECD overcapacity Europe BOF NAFTA BOF Asia BOF Europe EAF NAFTA EAF Asia EAF Source: Worldsteel, Laplace Conseil analysis 4

5 KEY CHALLENGES FOR THE GLOBAL STEEL INDUSTRY COST OF RAW MATERIALS Costs of raw materials have grown immensely (and unreasonably), leading to price instability EVOLUTION OF IRON FINE PRICES (LHS) AND COKING COAL (RHS) ($/T) COST CURVE FOR IRON ORE FINES (US$/T CIF CHINA EQUIVALENT BASIS) Due to the steepness of the cost curve A small reduction in demand or a small increase in capacity Lead to a relatively large decline in prices Coking Coal Iron ore Established low cost producers from Australia and Brazil VS New entrants and high cost producers 0 0 Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 0 Cumulative volume (million tonnes) Source: Steel Business Briefing,Bluescope, Laplace Conseil analysis Source: Macquarie Research March 2012, Laplace Conseil analysis 5

6 KEY CHALLENGES FOR THE GLOBAL STEEL INDUSTRY COST OF RAW MATERIALS and moving upstream all the profit in the value chain, while squeezing the margins of the steel mills. ESTIMATED 2012 IRON ORE COST CURVE [US$/Y CFR CHINA] US$/t Marginal cost of production: ~US$125/t RIO BHP Vale FMG China Mt iron ore 6

7 ADDITIONAL CHALLENGES FOR THE EU STEEL INDUSTRY Within OECD countries, the European ones are the worst positioned, since NET EXPORT POSITION OF THE THREE LARGEST TRADING REGIONS IN 2010 (MT) 60 NAFTA has more natural resources (raw materials and energy) is developing aggressively shale gas projects has a higher ratio of EAF based steel Japan+S.Korea Net exports to NAFTA The bulk of Japan+ S. Korea net exports are for third countries Japan+S.Korea Net exports to EU 27 EU27 net exports to NAFTA The bulk of NAFTA net imports are from third countries ASEAN have a stronger industrial base OECD (Japan and Korea) are large net exporters, mostly in the RoW 0 EU 27 + TK Japan + S.Korea NAFTA Net OECD Source: Worldsteel, Laplace Conseil analysis 7

8 ADDITIONAL CHALLENGES FOR THE EU STEEL INDUSTRY While Europe: has witnessed a continued sharp reduction in steel demand (2012 real -5.1%, apparent -9.7%; 2013e real -1.8%, apparent -0.7%) is lacking natural resources, while has the most challenging environmental constraints is not a competitive region for steel, while it is the least protected market is facing a potential financial instability, while its currency (euro) is overevaluated is lacking any monetary or fiscal policy, while the economy is suffering and the credit is constrained 8

9 THE ITALIAN INDUSTRIAL SCENARIO Today, Italy is facing particularly challenging times: weak domestic market high cost of energy stiff labor market, but with growing unemployment rate high debt/gdp ratio credit crunch and high cost of money lack of political leadership micro-entrepreneurial industrial base 9

10 THE ITALIAN STEEL INDUSTRY M.t. Apparent consumption in 2012 in Italy was 24.9 m ton, down -16.7% from 2011 and far below the peak of 2006 and Flats were down -13.1%, longs -18.1%, semis -28.9% var. % on previous apparent consumption 50 50% 40 25% 30 0% % -25% 10-50% APPARENT CONSUMPTION var % 12/11 Total general Total semiprocessed Total laminates of which: long products of which: flat products Sections and railway track material Sheet piles Total merchant bars of which: bars of which: profiles of which: flats Reinforcing bar Wire rod Total HR sheets and flats HR strips < Coils Galvanized and coated sheet Electrogalvanized sheet Synthetic coated sheet Other products (*) Magnetic sheet CR sheet and coil (*) Tin plate, black plate and tin free steel Source: Federacciai 10

11 THE ITALIAN STEEL INDUSTRY Steel production was down only -5.2%, thanks to some growth of export (+6.4%) and significant reduction of imports (-20.6%) In the first two months of 2013, steel production was down -17.2%, especially in flats, because of the output constraints in Riva s Taranto plant. WORLD STEEL PRODUCTION JAN-FEB 2013 Variation January - February M.t. % European Union % Others Europe % C.S.I % North America % South America % Africa / Middle East % Asia % Oceania % World Production % Italy % China % World excl. China % Source: elaborations on WSA data 11

12 THE ITALIAN STEEL INDUSTRY It is the second largest in Europe, after Germany, representing around 16% of the European Union output. It is a lively, open market with import representing around 56-58% of apparent consumption, but export representing 60-65% of production. In 2012 net export was 4.1 m ton, including (2.4) m t net import of semis +2.2 m t net export of longs +0.4 m t net export of flats +3.9 m t net export of first and second transformation products. In fact a strong, independent, export oriented chain of re-rollers, processors and service centers has come about, more than in other countries. 12

13 THE ITALIAN STEEL INDUSTRY Family owned companies, highly fragmented - entrepreneurial / reactive / resilient - consolidation or restructuring more difficult Lack of vertical integration in the value chain - highly flexible in sourcing, processing, selling - highly competitive / low pricing and marginality Very open system - strong import/export orientation - lack of industrial loyalty Overall, lively, flexible, competitive but 13

14 THE ITALIAN STEEL INDUSTRY may face big changes: the ILVA case the Lucchini case AST for sale other changes on the processing side but most of the assets are sound and competitive and will be able to survive in the European context. 14

15 RESHAPING THE VALUE ADDED With a stagnating demand (Europe) expected in the future, with limited export opportunities and some recent capacity additions (eg: steel in Russia and Turkey, HDG in Italy, etc) structural overcapacity is the new (old) challenge Overcapacity is a problem throughout the steel chain, from mills to tube makers and rerollers, from distribution and service centers to end-users. Structural overcapacity means structural squeeze in the marginality Other than mining, margins are now down to unsustainable levels, throughout the whole value chain 15

16 RESHAPING THE VALUE ADDED Consolidation between players is not an easy solution. In fact: - even if desired in some cases, there is little cash or credit lines available - consolidation without closures is not effective, consolidation with closures is too expensive - when associated to significant moves, European Antitrust Authorities are not friendly to the industry - no new global consolidator (after ArcelorMittal) is showing up Efficiency improvements are always possible, but most of the efforts have already been performed and the additional possible gains will hardly compensate the gap in lacking marginality. We rather see a combined need of... 16

17 RESHAPING THE VALUE ADDED Voluntary or unvoluntary restructuring efforts, with capacity cuts/closures to adapt fixed and break-even costs to the new demand levels, throughout the steel chain. A reduction in the cost of raw materials, in order to re-balance the value added in the steel chain, with a reduction of the mining portion in favour of the downstream. A closer focus of each player on his own role, geographical and target market, in order to avoid excess overlapping and value destruction. Sound alliances between strong players, in order to become even stronger, especially within a Region. A more intense effort of the industrial policy makers in favour of the steel industry, which can support the restructuring effort, protect from unfair external competition, enhance some stimulus in the steel consuming sectors. 17

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