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Global Steel Market
Development and Trends
Mark Wiggett
Munich, 20 June 2008
Presentation to World Perforating Conference
/3
Mark Wiggett
• 28 years in the steel industry
• International Steel trading Coutinho Caro & Co /
Stemcor
• General Manager, Industrial Steels Ltd: Hong Kong,
50% JV British Steel (1988-1992)
• General Manager, Industrial Steels (UK) Ltd, later
Corus Trading Ltd (1993-2003)
• Editor, Steel Business Briefing (2003-)
• Manager, The Steel Index (2006-)
/4
• Steel Market Developments
– Growth, outlook and regional shift
– China
• Steel Pricing
– Current market
– Outlook
– Managing price risk and use of indices
• Conclusion
Agenda
/5
0
200
400
600
800
1000
1200
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
MT
6% pa
1% pa
Strong Growth
(developed regions)
Source: IISI
8% pa
Stagnation
(maturity in
developed regions)
We are in an era of strong steel market growth…
Strong
Growth
(developing
regions)
1,344 mt
Global Crude Steel Production
Long-term Growth Pattern, 1950-2007
/6
146 162 192
385639
70120
132
14229
41
195
204
262
87
154
408
Finished Steel Products (mt)
1995 2001 2007
643
775
1,202 1995–2001 2001–07
Total
China
Other Asia
(incl. Japan)
South America
NAFTA
CIS
Africa & M.E.
EU(27)
3%
10%
1%
5%
4%
12%
6%
2%
8%
18%
4%
6%
1%
10%
7%
2%
3% 9%
Chinese and M East growth contrasts static EU & NA
Source: IISI
Average Annual Growth
Consumption Growth by Region
R of Europe
/7
Source: IISI
Global Consumption Forecast (Finished Steel) 2007- 09
Growth expected to remain strong through 2008-09
192 195 200
31 33 3556 61 6670 76 82
142 144 14641 45 48
262273
286
408455
500
2007 2008(f) 2009(f)
1,363 mt
1,202 mt
China
Other Asia
(incl. Japan)
S. America
NAFTA
CIS
Africa & M.E.
EU(27)
R of Europe
10%
5%
1%
2%
12%
11%
2%
2%
Growth Rate Forecasts
9% 10%
9% 8%
1,282 mt
Global
2007-08 2008-09
+6.7% +6.3%
BRIC +11.1% +10.3%
China +11.5% +10.0%
India +8.9% +12.1%
Russia +10.2% +11.2%
Brazil +10.3% +8.9%
Global
excl EU(27)
& NAFTA
+8.6% +8.0%
Middle
East +11.1% +9.0%
/8
In kg per capita
663
352
274
192
39
0
100
200
300
400
500
600
700
JapanNAFTAChinaCISIndiaSource: IISI, SBB
World Finished Steel Consumption per Capita 2006e
With a lot more growth in Asia to come
Source: IISI & TSI estimates
/9
Other
Europe
2%
NAFTA
10%
S
America
4%
China
36%
Other
Asia
20%
Rest of
World
3%
CIS
9%
EU (27)
16%
2007
1,344 mt
EU (25)
23%
Other
Europe
6%
CIS
10%
S
America
4%
China
12%
Other
Asia
25%
Rest of
World
4%
NAFTA
16%
1995
752 mt
Source: IISI
Global Crude Steel Production by Region
The regional shift in supply continues Eastwards
/10
Arc
elor
Mitt
al
Nippo
nJF
E
POSCO
Bao
stee
l
Tata-
Cor
us*
Jian
gsu
Shaga
ng
Tangs
han
US S
teel
Wuh
an
Nuc
or
Riva
Gro
up
Ger
dau
Thyss
enKru
pp
Sev
erstal
Evr
az G
roup
Ans
han
Maa
nsha
n
SAIL
Sum
itom
o
* Pro-forma Source: Metal Bulletin
Top 20 Crude Steel Production 2007 (Million Metric Tonnes of Crude Steel)
Global consolidation is continuing
Global Share of Top 5
Crude Steel Producers
0
5
10
15
20
25
30
35
40
45
1995 2000 2005 2010 2015 2020
Pe
rc
en
tag
e S
ha
re
(%
)
Actual Forecast
/11
• Global production (crude steel) 2007 = 1,344 mt
– Growth 2006-07: +8% Growth 2002-07: +8% p.a.
• Global consumption (finished products) 2007 = 1,202 mt
– Growth 2006-07: +7% Growth 2002-07: +8% p.a.
• Chinese production (crude steel) 2007 = 489 mt (36% of global production)
– Growth 2006-07: +16% Growth 2002-07: +22% p.a.
• Chinese consumption (finished products) 2007 = 408 mt (34% of worldwide)
– Growth 2006-07: +15% Growth 2002-07: +17% p.a.
• Chinese exports (semi and finished products)
– 2007: 62 mt (imports 17 mt) Growth 2006-07: +19%
– 2006: 52 mt (imports 19 mt)
Summary of key 2007 steel market data
Latest Key Production & Consumption Data and Trends
Source: IISI, TSI
/12
0
10
20
30
40
50
60
70
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
f
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
f
in Mill t
Imports Exports
Total Chinese Steel Imports and Exports
China’s exports will be lower in 2008 than 2007
Million tonnes
Source: CISA and SBB
/13
Product Tax rate
June 1, 2007
Tax rate after
Jan 1, 2008
Semis 15% 25%
Wire rod 10% 15%
Rebar 10% 15%
Narrow strip 5% 15%
Sections 10% 10%
HRC 5% 5%
Plate 5% 5%
CRC 5% REBATE 5% REBATE
Coated 5% REBATE 5% REBATE
Unchanged
Increased
Source: NDRC, SBB Research
Chinese export taxes increased further in January 2008
Chinese Export Taxes
The export tax increases targeted semis and lower value
long products, the mainstay of the smaller Chinese mills
/14
Purpose and Impact of Chinese Export Taxes
Export taxes are designed to fulfil government objectives
• Higher export taxes are intended to reduce China’s exports of lower
value steel products
• Export tax changes have been effective in managing Chinese export
levels over the past 2-3 years
• The multi-tier export tax system (introduced in June 2007) has been
effective in achieving Chinese government objectives: Chinese long
product exports have fallen faster than exports of flat products
• This multi-tier system hits the smaller Chinese mills hardest, as
these typically produce rebar, wire rod and narrow strip
• Taxes make Chinese steel exports less competitive, but dependency
in Asia means they have helped drive market prices up
• In the longer term, Chinese export taxes may prompt greater
competition from Chinese exports of higher value steel products and
finished goods (no export taxes on these)
/15
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Jan
'05
Apr Jul Oct Jan
'06
Apr Jul Oct Jan
'07
Apr Jul Oct Jan
'08
Semis Exports Finished Exports'000 t
Semis rebate abolished
Finished rebate cut
from 13% to 11%
Finished rebate
cut to 8%
10% export tax
applied to semis
Rebate abolished/cut for finished
Export tax
5%/10% finished,
15% semis
Source: China Customs, SBB Research
Taxes raised to
15% for longs
25% semis
Export taxes changes have been effective
Chinese Export Levels and Tax Changes 2005-08
/16
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Ja
n '0
5
Ju
l
Ja
n '0
6
Ju
l
Ja
n '0
7
Ju
l
Ja
n '0
8
M tonnes
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Ja
n '0
5
Ju
l
Ja
n '0
6
Ju
l
Ja
n '0
7
Ju
l
Ja
n '0
8
M tonnes
Exports of flats Exports of longs
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Ja
n '0
5
Ju
l
Ja
n '0
6
Ju
l
Ja
n '0
7
Ju
l
Ja
n '0
8
M tonnes
Exports of semis
3.0
1.6
2.8
0.7
1.5
0.0
0.9
Source: SBB Research, China Customs
Long product exports have fallen more rapidly than flat products
since the April 07 peak. Semis have dropped to zero
Chinese Export Levels by Product Type 2005-08
Multi-tier system has impacted semis and longs most
/17
-200
0
200
400
600
800
1000
1200
Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08
Price Differential USA-China HRC
US Domestic HRC (FOB US Midwest mill)
China Domestic HRC (Shanghai, incl 17% VAT) Source: SBB
US$/
metric
tonne
The US-Chinese price differential is opening up again
Example: HRC Price Differentials: China vs US
/18
33%35%
27%29%
32%
14%16%
7%8%
2%0%
16%
12%13%
24%
30%
0%
5%
10%
15%
20%
25%
30%
35%
40%
HRC Plate CRC Other
Coated
Metal
Coated
Crude Wire Rod Rebar
2007
1Q08
Average growth of flat
products 19.5% in 1Q08
Average growth of rebar
and wire rod 1.8% in 1Q08
Source: CISA, SBB Research
Chinese Production Growth Q1 2008 vs 2007
Chinese flat product output growth is outpacing longs…
/19
HRC
CRC
Plate
HDG
W. Rod
SectionsBar
Long products
Source: SBB Research
Total to date:
191m t/y
Flat products
China’s planned / installed steel capacity additions
2007-2009 (finished steel)
China is investing heavily in more flat products capacity
/20
Key Factors
Outlook for Chinese steel
• China’s construction growth remains strong, but this is long products
intensive
• Demand for long products will continue to increase as steel
consumption growth moves inland in China
• Likely result is a domestic shortage of long products in China,
leading to:
– ongoing long product price rises
– limited long product exports
• Growth in China’s flat product capacity, however, could result in:
– a fall in domestic flat product prices in the medium-term
– lower margins at China’s larger producers
– a return to opportunistic exports, if Chinese prices fall below RoW
prices
/21
• Steel Market Developments
– Growth, outlook and regional shift
– China
• Steel Pricing
– Current market
– Outlook
– Managing price risk and use of indices
• Conclusion
Agenda
/22 /22
• Q2-Q3 2007: Demand stagnated, prices stabilized/weakened
but Asian prices began rising in Q3
• Q4 2007: Asian prices rose strongly, EU and US steady/weak
• Q1 2008: All steel prices increased to record highs
• Iron Ore:
– Benchmark increases 65-71%...where accepted
– Indian spot prices more than double to over $200/t cfr
• Scrap: prices rose rapidly early Q1 2008, then again in Q2
• Coking Coal: Contract settlement trebles price!!
• Energy: All producers’ costs increasing
Review of Market Price Developments
Overview (Last 4 quarters)
/23
100
200
300
400
500
600
700
800
900
Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
Domestic Coil Prices, 1998-2008
Source: SBB
S. Europe CRC
(ex-works)
N. Europe HRC
(ex-works)
US HDG Coil
(FOB Midwest mill)
All steel prices have surged in 2008 to record highs,
in all regions
€/
metric
tonne
All steel prices have risen to record highs in 2008
/24
0
20
40
60
80
100
120
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Iron Ore Prices, 1993-2008
Source: SBB
Vale Fines - Brazil to Europe
(FOB Ponta da Madeira)
US$cent/
dmtu
BHP-Billiton fines – Australia to Japan
(FOB W. Australian Port)
Iron ore prices increased by ~70% in April 2008,
although the Australian miners are still to settle
Iron ore price rises underpinned steel price increases
/25
• Flat products:
– demand stagnated in Q2 2007; US pricing especially weak
– prices remained stable during Q3; starting to rise in Asia
– steady in Q4 (ArcelorMittal announces no increases)
except in Asia where prices rose sharply
– US and Asian prices climb sharply during Q1 2008 as
producers secure regular increases; European prices still
stable as mills wary of stock levels and imports
– European prices rise at start of Q2 as producers secure
their announced increases.....and a further rise when raw
material costs exceeded expectations
– US mills post ever-higher prices in Q2 as scrap rises....
Review of Market Price Developments
Last 4 quarters’ Overview
.
/26 /26
• US prices leap up further, through US$ 1000/s.ton
- BUT ArcelorMittal announce stable prices for July/Aug
- Prices may be weakening from early June
• N European prices firming slowly as mills announce
further increases for Q3
• S European prices rising even faster, despite apparent
weakness in demand
• Asian prices still firming, but Chinese material is
competitive again
WHERE WILL CHINESE EXPORT MATERIAL APPEAR??
Review of Market Price Developments
Last 3 months – Flat Products
/27 /27
Today’s Market (June 2008)
• USA:
– stocks below normal; imports down so far; exports up
– prices rising (but rebar only in line with scrap
surcharges)
• EU:
– stocks below normal (especially in South)
– longs prices rising; likely to rise further, peak in Q3
• Asia:
– stocks normal, but buyers living hand-to-mouth
– Chinese prices and import prices rising, but there
may be more availability if prices remain firm
Review of Market Price Developments
/28 /28
• Contract iron ore prices already increased and
“priced in”. Spot levels may fall back
• Shipping costs remain high; rising energy costs
• Stock levels are low everywhere, but the industry may be
getting used to working with reduced inventories
• Demand likely to decrease from early Q3 onwards, but only
slowly due to low stock...will there be a seasonal upturn in Q4?
– prices firm in Q3, easing in Q4 assuming production levels
are not increased more than demand
• ‘Year-end’ now typically earlier than historically, as buyers cut
back purchases before the new year
Overview
Pricing outlook: the rest of 2008
/29 /29
• US stable with likely slight weakness for rest of Q3
Will there be enough demand in Q4 to get prices moving
upwards again?
• Europe: prices are expected to rise steadily during Q3, as
mills appear to have the momentum. They have
exceeded their €700/t targets already....€800/t??
More producer increases expected for Q4
• Asian market levels driven by Chinese supply prices, with
swing suppliers (eg CIS) only interested in highest prices
Demand eases during Q3, but Q4 is seasonally strong
Pricing outlook: the rest of 2008
Global Flat Products 2008
© Gary Larson
/30
• Q2 2007: demand dropped after prices “went too high”
– prices fell from record levels as buyers were overstocked
• Q3 2007: demand slackened as stocks still too high
– scrap fell & rebar prices dropped sharply in Europe & ROW
• Q4 2007: US and Asia prices slowly rising due to
scrap/billets, but Europe still weaker
• Q1 2008: demand only lacklustre, as is typical for Q1, but
prices begin upwards charge led by Middle East appetite
– scrap prices leap at start of year, but stabilise at end of Q1
• Q2 2008: rebar prices surge again as raw material increases
take effect; scrap prices rising…in response to higher iron ore?
Review of Market Price Developments
Global Long Products May 2007 – May 2008
/31
• Q2 & Q3 2008: Demand continues to be seasonally firm
– supply likely to be steady and imports remain well
below recent figures in US and Europe, then prices
should rise further until end of Q3
• Q4 2008: Demand slackens
– prices likely to ease down, possibly
sharply lower in scrap-based regions
• Prices in Middle East based Black Sea
– supply remain sky-high
Pricing outlook: the rest of 2008
Global Long Products 2008
© Gary Larson
/32 /32
• Iron ore prices should peak in 2008 (2009?) as supply-
demand balance will ease by 2010, but miners may hold
onto gains based high steel prices. Coking coal remains high
• Scrap supply remains tight; prices firm...higher in short-term
• Shipping costs may eventually ease back towards historical
levels, as new capacity offsets higher fuel prices
• Price volatility continues, with shorter cycles – steel futures
contracts developing to offer price risk management tools
• Fewer buyers willing or able to commit ahead of price rises;
new industry behaviour of managing with lower inventories
• The enlarged consolidated companies continue to manage
any short-term falls in demand
Price Dynamics – Looking Forward
Pricing outlook: long-term
/33
• Managing businesses involved in buying or
selling steel is an increasing challenge
Managing Price Risk
• Steel price volatility and uncertainty is detrimental in many different ways:
– Supplier/customer relationships
– Bidding on contracts
– Production planning
– Investment planning
– Raising finance
– Cost of capital, etc…
/34
US Coil Prices (FOB Midwest mill)
US$/
metric
tonne
500
600
700
800
900
1000
1100
1200
1300
1400
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08
Source: The Steel Index (monthly averages)
Hot Dipped
Galvanised Coil
Cold Reduced Coil
Hot Rolled
Coil
125%
increase
in 11
months
Managing Price Risk: Increasing volatility
/35
• Steel price cycle amplitudes are increasing
− Historically maximum peak-to-trough price movements
were typically 40%
− 2004-05 saw 60% price movement peak-to-trough in
one year
− 2007-08 has seen some prices double in < 1 year
• Cycles are shortening
− Historically it took 2-3 years from peak to trough
Many predicted increased steel industry
consolidation would bring greater price stability
– this is clearly not the case (yet)
Managing Price Risk: Increasing volatility
/36
• Responses:
– need for frequent, independent, reliable, up-to-date
steel market price information and lead indicators
– increasing use of index-based steel pricing
arrangements, sometimes linked with financial
instruments to hedge exposure
• Emergence of financial tools to help manage steel
price risk/exposure
– exchange-traded steel futures contracts (DGCX rebar
in Dubai, LME billet in Middle East and Asia)
– over-the-counter (OTC) forward contracts with brokers
Managing Price Risk
/37
• Results of a recent survey undertaken by The
Steel Index:
Managing Price Risk
– 56% of clients currently use The Steel Index as a
basis for pricing some or most of their physical
transactions
– a further 32%
expect to use
The Steel Index
in this way in the
future
• This highlights a dramatic shift away from fixed-
price arrangements over the past few years
50%
6%
44%
Most transactions
Some
transactions
No
transactions
/38
• Weekly steel reference prices for specified
products
• Compiled from verifiable industry transaction
price data
– submitted confidentially by companies actively
buying and selling relevant steel products
(currently over 350 registered ‘data providers’)
• Fully transparent and verifiable processes
• Available on-line and by e-mail
www.thesteelindex.com
The Leading Steel Price Information Service
/39
Weekly Reference Price Results by e-mail
Example
/40
Subscribers receive:
Weekly prices & delivery lead-time data
Access to website price archive
On-line price analyser tools for easy
currency conversion
Facility to download price archive to
Excel spreadsheet
www.thesteelindex.com
/41
• Steel Market Developments
– Growth, outlook and regional shift
– China
• Steel Pricing
– Current market
– Outlook
– Managing price risk and use of indices
• Conclusion
Agenda
/42
• Tighter global steel supply-demand balance…
− steel demand in the world, outside China, has grown
nearly 200mt in the past 7 years
− effectively eliminating surplus global steelmaking
capacity and absorbing China’s switch from net
importer to net exporter
− Chinese exports will be lower this year, taxes on these
exports have increased and demand in Asia is strong
• … resulting in higher prices globally
− in spite of only moderate-weak steel demand in North
America and Europe and threat of economic recession
− in spite of credit crunch and financial market turbulence
Conclusion
/43
• Raw materials at structurally higher levels
− supply-demand balance to remain tight in the short-
medium term, but ease by 2010
− increasing sale of iron ore on spot price basis (rather
than fixed price annual contracts)
− greater price volatility (iron ore, coal, scrap)
• China still key to global market situation
• Increasing importance over time of India and Middle East
• Steel price outlook increasingly unpredictable
• Increasing use of steel price indices and futures/forwards
• Steel sector returns to remain good in medium-term
Conclusion
/44
Thank You
/45
Thank You
