World steel industryIndustry and competitive analysis

April 2009

Renaud BruyeronGrigory FedorishinPriyanka NathJulian PetrescuQuirine Van Voorst Tot Voorst

Agenda• General dynamics of the industry

with focus on a value chain

• Developments in the industry - China

Mining and primary processing

• Iron ore• Coal

Blast furnace steel making Automotives

Construction

Service centres

Electrical Arc Furnace steel making (mini

mills)Scrap production

Threat of new entrants: HIGH

• Fragmented• No significant capital

required

Threats of substitutes: LOW

• Lack of substitutes

Threat of new entrants: MEDIUM

• Moderate capex

Power of suppliers: HIGH

• Consolidation (oligopoly) versus fragmentation of steel

• Threat of downstream integration

• Lack of substitutes

Threats of substitutes: LOW

• Lack of substitutes

Threat of new entrants: LOW

• High fixed investments• Regulation / licensing• Large scale

Power of suppliers: MEDIUM

• Fragmented (-)• Shortage of supply (+)

Threats of substitutes: LOW

• Lack of substitutes

Threats of substitutes: LOW

• Lack of substitutes

Power of buyers: HIGH

• Consolidation vs fragmentation of steel

• Cyclical industries• Undifferentiated

product• Low switching

costs

Threats of substitutes: LOW / MEDIUM

• Lack of substitutes for construction

• Substitutes available for automotives

Threat of new entrants: LOW • High fixed investments• Large scale

HIGH POWER LOW POWER HIGH POWER

Threat of new entrants: LOW• High fixed investments• Large scale

Steelmakers’s low power in the value chain...

...may be improved through vertical integration

UpstreamDownstream – service centers

Downstream – alliances and JVs

Efficiency No NoYes

• Scope economies

Transaction Cost

No No

Yes• Asset specificity• Frequency of

transaction• Knowledge transfer

problem

Market Power (ST vs LT?)

Yes• Power versus

consolidated suppliers

• Entry deterrence

No (steel derivatives?)

Yes• Differentiation

Does vertical integration make sense?

... and consolidation

• Greater negotiation power versus suppliers

• Better service of global customers with more consistent offerings and greater supply chain efficiencies

• Reduction in overcapacity – better discipline and response to demand fluctuations

• Reduction of cyclicality – capacity control and price management

• Exchange of operational knowledge and best practices (learning economies)

• Ability to actively invest in R&D and quality updates

• Better position to attract efficient capital

Most of the scale economies are realised on the level of stand-alone plant, but consolidation brings:

Chinese steel makers: a big threat?

• Fostering steel giants with annual production >50 Mt

• Already 4 players in global top 10

• Encouraging consolidation

• Combine 800 players into 10 global top 25 players

• Imposing import tariffs and export rebates

China is building national winners in steel

While posing restrictions on foreign players

• Requirements for foreign players on minimum production level of specific types of steel

• Types for which China is still a net importer

• Restrictions on foreign majority ownership stakes in Chinese companies

China is the world’s largest consumer and producer of steel

China’s steel industry threatened itself?

• Highly fragmented market

• Top 15 accounted for only 45%

• Advanced productivity next to undeveloped productivity

• Complicates consolidation

• High energy consumption, heavy polluters

Structural challenges Resource restrictions

• High dependence on mineral import

• Shortage of coal, electricity and water resources

• Low railroad conveyance and port load and unload ability

China won’t be the lowest cost nor the highest quality producer Low cost: South America, CIS - High quality: EU & US

Q&A

Steel making process