Quo vadis eu steel. More on: http://laplaceconseil.com

1. Quo Vadis
EU Steel ?
Paris,
October
29
2013

2. Four mega trends in World and EU steel industry
1. World production will continue to grow, led by China. EU production
will recover only slightly.
2. Global raw material prices, hence steel prices, will decline gently as
raw materials supply growth exceeds demand growth.
3. Technology change will accelerate and lead to increased share of
EAF production, hence lower production by BF/BOF producers.
4. “De-concentration” of Steel Industry (outside China) will continue
as many international ventures flounder. Winners are regionally
focused, prudent, producers.

3. FIRST MEGA-TREND :
World production will continue to grow, led by
China. EU production will recover only slightly.

4. Since 1974, EU28 production has slowly declined
while world production has soared thanks to China
Evolution of crude steel annual production in the world (Mt/year)
“Glorious Thirty”
“Pitiful Twenty Five”
2012 = 1541 Mt
“China Era”
229 Mt
Rest of World
Crude steel
production
170 Mt
193 Mt
Crude steel Production
in the 28 European countries
710 Mt
849 Mt
190 Mt
Source : Worldsteel Laplace Conseil analysis
China
Crude steel
production
59 Mt

5. China grew at 20% CAGR until 2008, then at 6,5%
while OECD has not yet fully recovered since 2009
Evolution of China, OECD and ROW monthly production (Mt/month)
China
OECD
ROW
Source : Worldsteel Laplace Conseil analysis

6. EU28 production has slowly declined
since the end of the “Glorious Thirty”
“Glorious Thirty”
First Oil
Crisis
Second
Oil Crisis Collapse of
the Soviet
Comecon
System
Financial
Crisis
Evolution of crude steel production in EU 28 (Mt)
* Laplace Conseil has reconstructed the cumulative production of today’s EU 28 members. Data prior to 1995 are partly estimated
Source : Worldsteel Laplace Conseil analysis

7. EU28 production grew slowly from 1993 to 2007,
collapsed in 2009, then declined by 10% on average
Evolution of crude steel production in EU 28 (Mt)
1990 – 2008 Ø = 191 Mt
2010 – 2012
Ø = 173 Mt
The
extent
of
the
current
EU
decline
is
subject
to
controversy
Average
pre
to
post
crisis
producAon
decline
is
10%
2007
peak
year
to
2012
produc4on
decline
is
20%
The
Commission,
based
on
some
industry
data,
esAmate
steel
demand
down
by
27%
Source : Worldsteel Laplace Conseil analysis

8. Despite production decline, trade kept increasing;
net steel export was always positive, except in 2008
180
160
140
120
100
80
60
40
20
0
-­‐20
Evolution of internal and external EU trade (Mt)
Internal and external EU steel exports
EU external steel net exports
1990
1995
2000
2005
2010
Source : Worldsteel Laplace Conseil analysis
Internal and external EU steel imports
In 1993, Central Europe was a strong net exporter
In 2008, EU was producing at full practical capacity

9. Long products net exports by minimills have increased in
recent years while flat products net trade has collapsed
Evolution of EU net trade (export minus import)
for flat and long products (Kt)
Long
product
net
trade
Flat
product
net
trade

10. Laplace Conseil forecasts a steady growth in
global steel production but only mild recovery for Europe
• Worldwide, steel production should increase on average by 40 to 60
Mt per year with 60 to 80% of that growth in China. While China
growth will “decelerate” when measured in percentage, in absolute
terms, annual production will cpntinue to increase significantly.
• In Europe, steel consumption will only recover when construction
restarts, which means an improvement in public finance and a
greater confidence in the future by economic agents.
• EU28 production could return in a few years to its long term average
of 190 Mt, that is 10 to 12% above current production level.

11. SECOND MEGA-TREND :
Global raw material prices, hence steel prices,
will decline gently as raw materials supply
growth exceeds demand growth

12. Since 2003, the price of raw materials grew
very strongly, but recently are coming down
Evolution of the main raw material prices (iron ore, coking coal, steel scrap and electricity in €/t)
Steel Scrap
+200%
Coking coal
+130%
Iron Ore
+ 500%
Electricity
+60%
Iron Ore
Electricity
(MWH)
Source : Platts SBB, Eurostat, Laplace Conseil analysis

13. In 2008, the steel industry was working at full
practical capacity and prices shot through the roof
Global steel production index vs global prices (SBB, 100 = Jan 2002)
500
400
300
200
100
0
SBB price Index
Monthly crude steel production
jan-­‐02
jan-­‐03
jan-­‐04
jan-­‐05
jan-­‐06
jan-­‐07
jan-­‐08
jan-­‐09
jan-­‐10
jan-­‐11
jan-­‐12
Source : SBB, WorldSteel, Laplace Conseil analyses

14. Seaborne iron ore trade trebled since 2000,
exclusively as a result of Chinese demand growth
Evolution of seaborne iron ore trade by region (Mt/year)
ROW : 58 % of seaborne
iron ore trade
Source : WorldSteel, Laplace Conseil analysis
China now represents
61% of seaborne
Iron ore trade
EU 28 net imports : -25% since 2004 peak
EU 28 : 40% of seaborne
iron ore trade
ROW : 27 % of seaborne
iron ore trade

15. To meet China’s demand, the mining industry
had to open new mines and expand others
Source Macquarie Research March 2012 Laplace Conseil analysis
Cumulative volume (million tonnes)
Cost Curve for Iron ore fines (US$/t CIF China equivalent basis)
Established low cost producers from Australia and Brazil VS New entrants and high cost producers
200
150
100
50
0
In recent years, demand growth exceeded supply growth, which led
to a sharp increase in prices and huge rent for low cost miners.
Nowadays, the reverse is true. Low cost miners have increased capacity faster than demand
Which leads to a decline in price and squeeze out high cost miners

16. Today, raw materials are global commodities,
while steel is still mostly a regional industry
Global raw materials trade Regional steel trade
Iron
ore,
coal,
steel
scrap
and
alloys
are
globally
traded
commodiAes.
Increasingly,
they
are
traded
in
global
online
exchanges
such
as
LME,
now
located
in
Hong
Kong.
Reference
indices
are
published
daily
and
gain
tracAon
month
aUer
month.
16
Steel production remains a regional business.
Most steel trade is conducted regionally
Substantial prices differences remain between
regions and trans-ocean trade is small
and peripheral. There is only one global producer.
Source : Laplace Conseil analyses Source : Laplace Conseil analyses

17. Laplace Conseil forecasts a gentle decline in steel
prices, consequence of lower raw material prices
• In recent years, most steel mills have tied their selling prices to their raw material
prices through “raw material cost surcharges”.
• The procedure has durably changed the nature and the economics of the steel
industry who is now acting as a “transformer” and no longer as a full fledged
producer. The industry is now managing a “spread” and the first “spread futures”
are appearing in financial markets. It has lost major pricing power.
• The mining industry was hugely profitable in recent years, but low cost miners
have also expanded capacity at a fast and furious clip. Mining capacity is now
“slightly” outstripping demand, despite China continuing growth.
• Coal is declining faster due to competition from shale gas in North America.
• Scrap prices are tightly correlated to iron ore and coal prices and should decine
accordingly.
• We expect finished steel prices to decline slowly in the medium term, and still
remain quite volatile.

18. THIRD MEGA-TREND :
Technology change will accelerate and lead to increased
share of EAF production, hence lower production
by EU BF/BOF producers.

19. EAF production is steadily growing in EU28 while
old processes have been replaced by modern BOF
Evolution of Crude steel production by process in EU28 (Mt)
BOF
EAF
Old
processes
Thomas,
Siemens-­‐MarAn,
…
Source : Worldsteel Laplace Conseil analysis

20. For many decades, the share of EAF steel
has grown steadily in Europe and USA
EAF
share
in
crude
steel
produc3on
in
EU28
and
USA
(%)
Source : WorldSteel, Laplace Conseil analysis
USA
EU28
60%
42%

21. Consequently, the share of pig iron
to crude steel has steadily diminished…
EU28
USA
55%
35%
Ra3o
of
pig
iron
to
crude
steel
produc3on,
by
region
(%)
Source : WorldSteel, Laplace Conseil analysis

22. …and the use of steel scrap has
steadily increased especially after 1990
Evolution of steel scrap purchases in EU28 and US (Mt)
EU28
USA
77 Mt
50 Mt
Source :EFR, WorldSteel, Laplace Conseil analysis

23. BOF production is more important in Northern
and Central Europe than in Southern Europe
Repartition of crude steel production by process in EU28 (Mt and %)
Northern Europe* Southern Europe*
100% = 100 Mt 100% = 44 Mt
Central Europe*
100% = 25 Mt
BOF
70%
BOF
65%
BOF
29%
EAF
30%
EAF
71%
EAF
35%
* Northern Europe : Austria, Benelux, France, Germany, Scandinavia, UK;
Central Europe : Bulgaria, Croatia, Czech Republic, Hungary, Latvia, Poland, Romania, Slovak Republic, Slovenia;
Southern Europe : Greece, Italy, Portugal, Spain
Source : Worldsteel, Laplace Conseil analysis

24. Northern and Central Europe export 19 Mt of scrap
to third countries and 4 Mt to Southern Europe
24
Domestic Use
43 Mt
Source : EFR, Worldsteel, Laplace Conseil analysis
Domestic
Use
12 Mt
Domestic
Use
36 Mt
34
52
22
18
33
10

25. The Scrap and EAF industry employs more workers than
the integrated sector who needs to import iron ore and coal
Comparison
between
employment
in
scrap/EAF
and
BF/BOF
sectors
HOT
Phase
MelAng
CasAng
Hot
rolling
DomesAc
Scrap
collecAon
and
Processing
Cold
rolling
and
CoaAng
HOT
Phase
SmelAng
CasAng
Hot
rolling
Sweden
ore
and
Poland
coal
400
000
300
000

26. In addition, EU28 has accumulated a stock of steel
scrap of 2500 Mt for the future, quite a scrap mine !
USA steel
scrap mine
EU28 steel
scrap mine
Growth of the EU28 and USA scrap mines* (Mt)
EU28
annually
uses
80
to
90
Mt
of
steel
scrap,
that
is
3
%
of
the
“mine”
In
the
US,
it
is
2,4%
* The scrap mine is the difference between scrap arising and scrap use net of cumulative losses and uneconomic collection
Source : EFR, WorldSteel, Laplace Conseil analysis

27. Steel scrap and long product exports help offset
the large trade deficit in iron ore and coking coal
EU Steel purchase of raw materials EU Steel net external trade balance
100% = € 47 Billion 100% = € 10 Billion
Total raw material
trade deficit
€ 8 billion
Steel scrap
Trade surplus
€ 5 billion
Iron ore
trade deficit
€ 14 billion
Coking coal
trade deficit
€ 5 billion
Long product
Trade surplus
€ 6 billion
Source :Platts SBB, Worldsteel, Eurofer, EFR, Laplace Conseil estimates

28. The environmental advantages of scrap recycling
over traditional BF/BOF smelting are important
GJ/t CO2 t/t Virgin material/t
21- 25
8 - 11
Source : Industry data, Laplace Conseil estimates
2.1 - 2.5
Scrap
Minimill
2.8 - 3.0
0.4 - 0.7
0.2 -0.3
Conventional
Integrated mill
Scrap
Minimill
Conventional
Integrated mill
Scrap
Minimill
Conventional
Integrated mill
Environmental comparison of EAF and BF/BOF in EU28

29. The EU steel industry uses 23% of all coal, 1,9 %
of electricity, 0,9% of gas and emits 6% of CO2
Share of energy consumed and CO2 emitted by the Steel industry in the EU (%)
25%
20%
15%
10%
5%
0%
coal Electricity Gas total energy CO2
Source : IEA, WorldSteel, BP Energy statistics, World Coal association, Midrex, Laplace Conseil analysis

30. Thanks to its higher share of EAF, NAFTA has the
lowest energy consumption and CO2 emissions
Comparison of Energy and CO2 per tonne in OECD regions
17
16
15
14
13
12
11
10
GJ / t crude steel T CO2 / t crude steel
EU28 EU28
Europe 27 + TK NAFTA Australasia
1,70
1,60
1,50
1,40
1,30
1,20
1,10
1,00
Europe 27 + TK NAFTA Australasia
Source : IEA, WorldSteel, BP Energy statistics, World Coal association, Midrex, Laplace Conseil analysis

31. Minimill technology drawing on DRI, EAF and TSC
costs one fourth of the same integrated mill
Comparison between Integrated and minimill philosophies for investment (Billion US$)
Hot strip mill
Cold rolling Mill
6,8
11,8
0,75
Galv lines
Source : SBB, USGS, Steel on the net, EIA,WSJ, Laplace Conseil analysis
3,0
5
0,25
1,0
1,0
TK CSA BR
5 Mt
TK Alabama US
4,2 Mt
Total TKS
integrated
Nucor
DRI
2,5 Mt
DJJ
Scrap
2,5 Mt
Nucor
EAF/TSC
5 Mt
Nucor
Cold & Coating
4 Mt
Total
Nucor
Minimill
Port and infrastructure
Coke oven HR
Sintering plant
Power plant
2 Blast furnaces
BOF
Slab caster
Transport to US
Comparison of Scrap/DRI/EAF vs iron ore/coal/BF/BOF
Iron ore and scrap : 200 -250% of integrated route
Total Energy cost (coal vs nat gas) : 50% of integrated
CO2 emissions : 30% of integrated route (CH4)
Dust and other emissions : 20 - 40% of integrated route
Labor cost : 35 to 40% of integrated route
Maintenance cost : 25% of integrated route
Total transports to client cost : 30 - 50% of integrated route
Financial cost : 20% of integrated route
Total cost comparison : minimill is 20 – 30% lower cost

32. By
2020,
one
third
of
the
exisAng
EU
integrated
mills
are
likely
to
be
closed
and
many
replaced
by
EAF’s
Source: Kuuskraa et al, Laplace Conseil analysis
Opera3ng
BOF
103
Mt
Top
3
Co’s
integrated
possible
closures
29
Mt
Other
integrated
possible
closures
10
Mt
EU27 + TK integrated capacity in 2012
100% = 150 Mt crude steel
Liège
+
Florange
+
Carsid
closure
8
Mt

33. The impact of EU regulations on the steel industry is
large and borne mostly by steel scrap using EAF’s
Total cost of regulation
100% = 2300 M€
BOF
46%
EAF
54%
Source : CEPS, EU Commission, Laplace Conseil analysis
Total industry CO2
100% = 236 Mt

34. FOURTH MEGA-TREND :
“De-concentration” of Steel Industry (outside China)
will continue as many international ventures flounder.
Winners are regionally focused, prudent, producers.

35. International acquisitions have been unsuccessful
so far. Many are unraveling.
• Russia international strategy is a costly failure :
– Severstal Lucchini acquisition is in receivership with no buyer in sight
– NLMK plate mill assets in DK,BE,IT, are in trouble and partly closed
– Evraz acquisition in Czech Republic is also in difficulty
– Same situation in US
• European investments in Brazil for integrated mills also in trouble
– ThyssenKrupp 12 B$ investment in Brazil and US may be sold at 80 – 90% discount
– Vallourec Sumitomo investment in integrated tube; capacity may be saved by offshore oil find
• US Steel investment in Slovakia unprofitable and dependent on State aid for
energy.
• Tata Steel investment in Corus very unprofitable despite high quality asset in
Ijmuiden.
• ArcelorMittal, the world largest steelmaker, is rated BB- by debt agencies and
its market share has lost 80% of its value since its peak and 60% since 2010.
• Can anyone name a significant international steel acquisition or merger that
can be considered financially successful ?

36. For OECD producers, three elements distinguish
the most profitable companies from the rest.
1. Genuine commitment to new ideas and rapidly switching to best
available technology for the available raw material resources.
2. Genuine commitment to customers and staying close to them.
3. Genuine commitment to employees and staying close to them.
Nearly all steel companies profess adhering to these values, but
those few who genuinely practice them stand out of the pack

37. Three companies, among the most successful,
share common characteristics in different cultures
• Nucor : US leader in growth and profitability
– World leader in EAF for flat products, thin slab caster and shale gas DRI
– Network of autonomous US minimills responsible of regional markets
– 11900 highly motivated and incentivized, non union “teammates”
• Voest Alpine : EU leader in growth and profitability
– Inventor of LD steelmaking, first in EU to build a shale gas DRI in US
– 2 integrated mills highly specialized and network of value adding plants
– 43 000 employees fully participating through “mitbestimmung”
• Posco : Asian leader in growth and profitability
– Inventor of Finex steelmaking process; CEO is former head of R&D
– 2 large integrated steel mills :clear emphasis on Korean and regional market
– Smart Work Place Initiative; leading social engineer in Korea

38. Without merger or major acquisitions, the leaders have
steadily grown their market share
Posco maintains its share relative to regional giants
(Hyundai, Nippon, JFE, Baosteel, Wuhan, Tata, Sail, Bluescope, China Steel)
Nucor has captured 20% of the US market
mostly through internal growth
Voest Alpine has doubled its market share
in EU15 despite quotas and other limitations
Source:
OECD,
WorldSteel,
Factset,
Laplace
Conseil
analysis

39. The three leaders have had consistently
higher EBITDA/Sales than their peer group.
EBITDA on Sales
Average gap : 4,11%
EBITDA on Sales
Average gap : 1,89%
EBITDA on Sales
Average Gap : 4,80%
Source:
OECD,
WorldSteel,
Factset,
Laplace
Conseil
analysis

40. Nucor market capitalization on sales
is 50% above the ratio of its competitors
Source:
OECD,
WorldSteel,
Factset,
Laplace
Conseil
analysis

41. Conclusions
• The steel industry is characterized by a volatile and generally low
profitability. The good years are few and far apart.
• The industry has tried a number of “generic strategies” :
– Moving to higher growth markets
– Merging with or acquiring competitors to gain benefit of scale
– Increasing the share of “high value added” products
– Integrating upstream into coal and iron ore mining
• In the last 40 years, these “generic strategies” did not work
• Successful results seem to come from superior execution :
– Genuine commitment to rapidly switching to best available technologies
– Genuine commitment to superior customer services
– Genuine commitment to superior employee co-management
• Eurometal members can learn from these successful strategies to
conduct their operations

42. Thank you for your attention
Metal and mining Consultant
www.laplaceconseil.com