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07-Dec-2012
1
1
The Future of Steel:
How will the industry evolve ?
73rd Session of the OECD Steel Committee
Paris, 6-7 December 2012
© Laplace Conseil 2012
2
How will the industry evolve ?
• Introduction : The world of steel has already changed profoundly
• Trade : OECD still a net exporter : import vigilance and export prom.
• Excess capacity in OECD : Where is it ?
• Energy and Environment challenges = Scrap + Shale Gas/DRI
• Strategy, governance and social relations : Accelerate evolution.
• Implications for organisations, governments and associations.
07-Dec-2012
2
3
The world of steel has changed profoundly
• Since 2000, global steel demand is growing at a rate of 6%; 80% of that
growth is due to the phenomenal expansion of the Chinese economy,
which today represents 46% of global steel production and consumption,
that is more than twice its share of the global population.
• Globally, steel is the largest construction material (market value over
USD 1 trillion) and is substituting far more for traditional materials (wood,
brick) than it is losing share to lighter products (aluminium, plastics). For
many applications steel simply has no substitutes.
• Steel technology keeps changing and, in OECD countries where
demand is stable, the traditonal blast furnace integrated plants are
challenged by more nimble minimills that recycle scrap. Having captured
the long product market, they are now attacking the flat product sector.
• Large integrated companies keep closing plants and loose jobs, a painful
and inevitable evolution that result in a poor perception of the industry in
economic and political circles as well as in the media.
• It is therefore important to distinguish between the future of steel, which
is bright, and the future of the integrated sector, which is more cloudy in
Europe and North America.
4
Since the beginning of this century,
the steel industry has entered a new era
Source : WorldSteel, Laplace Conseil analysis
World Crude Steel Output (Mt)
0
200
400
600
800
1000
1200
1400
1600
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2011
Glorious
30
Iron Age Pityful
25
China
era
+6%/yr
+1%/yr
+2,5%/yr
+ 6%/yr
1526 Mt
07-Dec-2012
3
5
In 12 years, China production has sextupled,
while OECD was stable and ROW grew slowly
Source : WorldSteel, Laplace Conseil analysis
Crude Steel output, CHINA, OECD and ROW (Mt)
0
10
20
30
40
50
60
70
jan-00 jan-02 jan-04 jan-06 jan-08 jan-10 aug-12
OECD
ROW
CHINA
6
Source : WorldSteel, Worldbank, Laplace Conseil analysis
Consumption per cap / GDP per cap, PPP intern. 2005
0
200
400
600
800
1 000
1 200
0 5 000 10 000 15 000 20 000 25 000 30 000 35 000 40 000 45 000 50 000
USA
UK
Japan
Korea
Germany
GDP per cap, (PPP intern 2005)
China
China rate of steel development is much
faster than the rate of more mature economies
07-Dec-2012
4
7
0%
10%
20%
30%
1982 1992 1987 1997 2002 2007 2012 ?
Steel production
y on y growth
Gross capital
formation growth
Source : WorldSteel, Financial Times, analysis Laplace Consei
Correlation between steel production growth and gross capital formation , %
China has known regular five years cycles
for capital investment, hence steel production
8
Shanghai, Beijing and Tianjin are both the
richest areas and the most steel intensive
0
200
400
600
800
1000
1200
1400
0 2 4 6 8 10 12
Guizhou
Henan
Sichuan
Shandong
Guangdong
Beijing
Shanghai
Zheijiang
Jiangsu
Yunnan
Hebei
Hubei
Tianjin
000 000 000 000 000 000
GDP/ cap (2008)
Ste
el c
onsum
ption p
er
cap
Correlation between GDP/cap and Steel Consumption /cap
Source : WorldSteel, Worldbank, China Statistical Yearbook, NBS, Laplace Conseil analysis
07-Dec-2012
5
9
Raw material prices are the “canary in the coal mine”.
Is steel heading in a new bearish direction ? Evolution of iron ore fine prices (LHS) and coking coal (RHS) ($/t)
Source : Steel Business Briefing,Bluescope, Laplace Conseil analysis
0
50
100
150
200
janv.-00 janv.-02 janv.-04 janv.-06 janv.-08 janv.-10 janv.-12
400
300
200
100
0
Coking Coal
Iron ore
10
The iron ore cost curve is very steep with many
high cost producers, leading to price instability
Source : Macquarie Research March 2012, Laplace Conseil analysis
Cumulative volume (million tonnes)
Cost Curve for Iron ore fines (US$/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
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
07-Dec-2012
6
11
How will the industry evolve ?
• Introduction : The world of steel has already changed profoundly
• Trade : OECD still a net exporter, import vigilance and export prom.
• Excess capacity in OECD : Where is it ?
• Energy and Environment challenges = Scrap + Shale Gas/DRI
• Strategy, governance and social relations : Accelerate evolution.
• Implications for organizations, governments and associations.
12
Until 2008, international trade has grown
steadily in the OECD countries
Import and export of OECD countries, Mt
-50
0
50
100
150
200
250
300
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Import
Export
Net export
Source : WorldSteel, Laplace Conseil analysis
07-Dec-2012
7
13
Japan and Korea are large net exporters, mostly
to ROW. NAFTA is the only net importing region
0
10
20
30
40
50
60
EU 27 + TK Japan + S.Korea NAFTA Net OECD
Japan+S.Korea
Net exports to NAFTA
Japan+S.Korea
Net exports to EU 27
Net export position of the three largest trading regions in 2010 (Mt)
Source : Worldsteel, Laplace Conseil analysis
EU27 net exports to NAFTA
The bulk of
Japan+ S. Korea
net exports are for
third countries
The bulk of
NAFTA net
imports are from
third countries
14
Global trade disputes have been recurrent,
but OECD has usually fared fairly well.
• Since 1990, OECD was always a net exporter of steel, except when
the industry was running practically at full capacity due to strong
domestic demand (for example from 6/2006 to 6/2008).
• Moreover, exports were usually for high value added products, while
imports were for semis and common grades steel.
• Nevertheless, import pressure often had a negative impact on price
and profitability, particularly in the US.
• With the advent of shale gas, the US has all the ingredients to
become low cost producers and can become net exporters as well.
• Import vigilance remains « de rigueur » for risk of unfair trade, but
focus should shift on export promotion.
07-Dec-2012
8
15
How will the industry evolve ?
• Introduction : The world of steel has already changed profoundly
• Trade : OECD still a net exporter : import vigilance and export prom.
• Excess capacity in OECD : Where is it ?
• Energy and Environment challenges = Scrap + Shale Gas/DRI
• Strategy, governance and social relations : Accelerate evolution.
• Implications for organizations, governments and associations.
16
Except in 2008, when the industry was running
at full capacity, OECD was always a net exporter
Net export of OECD countries, Mt
-30
-20
-10
0
10
20
30
40
50
60
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Source : WorldSteel, Laplace Conseil analysis
07-Dec-2012
9
17
A sharp price increase in S1 2008 shows that
the industry was running at full practical capacity
Source : WorldSteel, SBB, Laplace Conseil analysis
0
20
40
60
jan-00 jan-02 jan-04 jan-06 jan-08 jan-10 aug-12
0
100
200
300
OECD
ROW
China
Crude Steel output (China, OECD, ROW) versus
In OECD, the production level achieved in S1 2008 can be used
as a measure of practical capacity of the industry. The current overcapacity
can be measured against that level
18
Based on 2012 production level, integrated mills
represent 85% of OECD overcapacity
Source Worldsteel, Laplace Conseil analysis
Share of Capacity and excess capacity by process and region (Mt)
2012e Capacity in OECD
Total = 520 Mt
Europe BOF
105
NAFTA BOF
48
Asia BOF
133
Europe EAF
105
NAFTA EAF
75
Asia EAF
54
2012e estimated overcapacity in OECD
Total = 51 Mt
Asia
EA
F 1
Europe BOF
28
NAFTA BOF
8
Asia BOF
7
07-Dec-2012
10
19
Most of the current OECD overcapacity is
concentrated in integrated mills in Europe and USA
Rate of overcapacity by process and region (% of installed capacity)
Source Worldsteel, Laplace Conseil analysis
0%
10%
20%
Europe BOF NAFTA BOF Asia BOF Europe EAF NAFTA EAF Asia EAF
20
How will the industry evolve ?
• Introduction : The world of steel has already changed profoundly
• Trade : OECD still a net exporter : import vigilance and export prom.
• Excess capacity in OECD : Where is it ?
• Energy and Environment challenges = Scrap + Shale Gas/DRI
• Strategy, governance and social relations : Accelerate evolution.
• Implications for organizations, governments and associations.
07-Dec-2012
11
21
The OECD steel industry is facing severe
energy and environmental challenges
• For integrated mills, energy (including coking coal) is the highest
cost item; for minimills it is the second highest. Even allowing for the
recent coal price decline, energy is the cost component that has
grown the fastest.
• The industry has made very impressive efficiency improvements in
the last decades, but with current processes, the technological limits
are almost reached or uneconomical to overcome.
• Environmental pressures are also mounting : CO2 taxation and air
pollution, specifically for integrated plants that produce steel with by
coking and sintering plant, blast furnaces and BOF shops.
• Laplace Conseil believes that (part of) the solution to these
challenges is technological : replace (part of) virgin iron ore by
recycled scrap and (part of) coking coal by shale gas.
This means going « DRI and EAF » wherever possible
22
For many decades, the share of EAF steel
has grown steadily in Europe and NAFTA
Source : WorldSteel, Laplace Conseil analysis
EAF share in crude steel production, by region (%)
0%
10%
20%
30%
40%
50%
60%
70%
1961 1971 1981 1991 2001 2011
NAFTA
EU-27, TK, Nw, Sw
Jpn, Kor, Au, NZ
Asia has not followed the same track as EU and Nafta
due to the lower availability of scrap and higher electricity
cost, but also due to the modernity and effectiveness of
the integrated producers in Japan and Korea
60%
50%
15%
07-Dec-2012
12
23
The environmental advantages of scrap recycling
over traditional BF/BOF smelting are important
Electricity sources : 25% nuclear, 50 % thermal, 25% hydro and/or renewable
• Source : Industry data, Laplace Conseil estimates
21- 25
8 - 11
2.1 - 2.5
Scrap
Minimill
2.8 - 3.0
GJ/t CO2 t/t Virgin material/t
0.4 - 0.7
0.2 -0.3
Conventional
Integrated mill
Scrap
Minimill
Conventional
Integrated mill
Scrap
Minimill
Conventional
Integrated mill
Environmental comparison of minimills and integrated mills in OECD countries*
24
In EU and US, production costs of BOF are usually
above EAF, particularly when steel demand is low
0
100
300
400
500
600
EAF
BOF
200
Source : SBB, Eurostat, EIA, Steel on the net, Laplace Conseil analysis
Cost comparison BOF and EAF crude steel in Europe and USA (€/t)
100
200
300
400
500
600
EAF
BOF
0 2004 2006 2008 2010 2004 2006 2008 2010
Scrap prices are moving in sync with iron ore and coal price
So as to also capture the benefits of global steel growth
07-Dec-2012
13
25
The EU and US scrap “mines” each have
a proven and probable reserve of 3 billion tonnes
Source : Worldsteel, Laplace Conseil analysis & estimates
0
500
1 000
1 500
2 000
2 500
3 000
3 500
1950 1960 1970 1980 1990 2000 2010
EU 27
US
Size of the scrap “mine”, proven, probable and inferred, Mt*
* Computed as the difference between steel consumption (including indirect imports)
and scrap collection. An estimate is made for unrecoverable scrap due to current use
rust or uneconomic recovery
26
US and EU are large net exporter of scrap,
primarily to Turkey; OECD is a small net importer
Breakdown of OECD scrap net imports/exports, Mt
Source : WorldSteel, Laplace Conseil analyses
-15
-10
-5
0
5
10
EU JKAN NAFTA
Net OECD
Turkey
07-Dec-2012
14
27
Shale gas is redefining the US energy
landscape: prices are at the lowest since 2002
0
2
4
6
8
10
12
14
16
18
1996 1998 2000 2002 2004 2006 2008 2010 2012
Japan LNG Cif
Germany
average
import price
UK Heren
NBP Index
US
Henry Hub
Evolution of natural gas prices accross OECD countries (US$/MBTU)
Source : EIA, BP, Laplace Conseil Analysis
28
US mills are located over huge shale gas plays
* Pittsburg-Cleveland area: 7 BF/BOF plants + 22 EAF plants (cap. 21Mtpy)
** Chicago area: 4 BF/BOF plants + 4 EAF plants (cap. 24Mtpy)
*** Ontario Area: 3 BF/BOF plants + 4 EAF plants (cap. 10Mtpy) Areas further detailed (see regional maps)
Source: EIA, AISI, USGS, Laplace Conseil analysis
Main shale gas reserves
Iron Ore deposits
EAF plants flats
BOF plants
EAF plants others
Canada
Location of US steel mills and shale gas plays
07-Dec-2012
15
29
In 2012, natural gas prices provide a competitive
advantage to DRI compared to scrap, over $100/t
Source: SBB, EIA, Steelonthenet, UBS, Nucor, Laplace Conseil analysis
0
100
200
300
400
500
DRI US HM#1 Scrap Solid Pig Iron
(Brazil imports)
Pellets
Transport
Natural Gas
Electricity Oxygen
Labour
Maintenance 289
406
484
Cost comparison, DRI, Scrap, Pig Iron and Hot Metal Average cost Q2 2012, United States, $/t
Note: Yield, carbon value and copper penalty are not included
Liquid pig iron
(average US integrated
476
30
Nucor, already technology leader is the first to
capitalize on the game changing shale/DRI strategy
• Nucor is the world leader in EAF/TSC (thin slab caster) technology for
hot rolled coils production with 6 minimills in operation in the US and a
combined capacity of 12 Mt of hot rolled coils (not including plates).
• Nucor is building a DRI plant in Alabama (2 modules for 5 Mt) in
addition to its 2 Mt plant in Trinidad and has signed a 20 years
contract for shale gas with Encana Oil and Gas Inc. to drill at « cost
plus carried interest » all the gas needed for Nucor operations.
• Nucor flat product expertise coupled with its DRI experience will be
used to enter the automotive sheet market and other high grade steel.
• Nucor has an unbroken record of 156 quarterly dividends, has the best
return of capital employed of the industry and has never lay-off a
“teammate” throughout the steel cycles.
07-Dec-2012
16
31
Minimill technology drawing on DRI, EAF and TSC
costs one fourth of the same integrated mill
Source : SBB, USGS, Steel on the net, EIA,WSJ, Laplace Conseil analysis
Comparison between Integrated and minimill philosophies for investment (Billion US$)
6,8
11,8
0,75
3,0
5
0,25
1,0
1,0
0
2
4
6
8
10
12
TK CSA Br
5 Mt
TK Alabama US
4,2 Mt
Total
integrated
DRI
2,5 Mt
Scrap
2,5 Mt
EAF/TSC
5 Mt
Cold & Coat
4 Mt
Total
Minimill
Port and infrastructure
Coke oven HR
Sintering plant
Power plant
2 Blast furnaces
BOF
Slab caster
Transport to US
Hot strip mill
Cold rolling Mill
Galv lines
Comparison of Scrap/DRI/EAF vs iron ore/coal/BF/BOF
Iron ore and scrap : 200 -250% of integrated route
Total Energycost (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
In NAFTA, DRI/EAF production will grow from
9 to 39 Mt, replacing imports and half the BF/BOF
Source: WorldSteel, AISI, Midrex, Laplace Conseil analysis
NAFTA market supply by origin (Mt crude steel)
BOF / BF
36%
EAF Scrap
47%
EAF DRI
7%
Steel net imports
10%
2011, 100% = 130 Mt Forecast 2020, 100% = 139 Mt
25 / 39 #BF in use / available
BOF / BF
19%
EAF Scrap
53%
EAF DRI
28%
15 / 21 #BF in use / available
07-Dec-2012
17
33
With the advent of DRI, nearly half of the NAFTA
integrated mills will be threatened by closure
RG Steel likely closure
6 Mt
Top 2 Co’s integrated
possible closures
18 Mt
Other integrated
possible closures
5 Mt
Operating
BOF
34 Mt
Source: Worldsteel, Laplace Conseil analysis
NAFTA Integrated mills utilization forecast by 2020
NAFTA 100% = 63 Mt crude steel
34
In Europe, shale gas are apparently abundant
but exploration/exploration is still very prudent
Source: Kuuskraa et al
Europe non conventional gas resources
07-Dec-2012
18
35
In Europe, integrated plants will probably shift to
more EAF production, some DRI could be imported
Source: WorldSteel, AISI, Midrex, Laplace Conseil analysis
EU-27 +TK, SWI, NW production , by origin (Mt crude steel)
BOF / BF
51%
EAF Scrap
48%
EAF DRI 1%
2011, 100% = 213 Mmt Forecast 2020, 100% = 236 Mmt
55 / 79 #BF in use / available
BOF / BF
44%
EAF Scrap
50%
EAF DRI 6%
41 / 49 #BF in use / available
36
By 2020, the European integrated capacity
could be reduced by one third
Source: Kuuskraa et al, Laplace Conseil analysis
Operating
BOF
103 Mt
Top 3 Co’s integrated
possible closures
29 Mt
Other integrated
possible closures
10 Mt
EU27 + TK 100% = 150 Mt crude steel
Liège + Florange + Carsid closure
8 Mt
07-Dec-2012
19
37
How will the industry evolve ?
• Introduction : The world of steel has already changed profoundly
• Trade : OECD still a net exporter : import vigilance and export prom.
• Excess capacity in OECD : Where is it ?
• Energy and Environment challenges = Scrap + Shale Gas/DRI
• Strategy, governance and social relations : Accelerate evolution.
• Implications for organizations, governments and associations.
38
We believe that “Changes” will continue to
characterise the OECD steel industry evolution
• The integrated sector will continue to bear the brunt of the effort, in
particular the two or three largest integrated companies.
• While restructuring is currently more important in Europe, it is
probable that North America will soon join in the process as more
modern producers increase their presence in the market thanks to
shale gas DRI.
• Consequently, strategy, governance and social relationship will
need to evolve
– The strategy of the large integrated companies will need to change so as to take
into account the impact of cheaper scrap and DRI, especially in the US.
– The governance of these companies will also need to change to find solutions at
the shop floor level and not just in boardrooms. (Mitbestimmung or co-
determination as practiced in Germany and many neighbouring countries)
– The social relationships will need to improve to reduce confrontation, share
decisions and flatten hierarchical pyramids for better workers empowerment.
07-Dec-2012
20
39
How will the industry evolve ?
• Introduction : The world of steel has already changed profoundly
• Trade : OECD still a net exporter : import vigilance and export prom.
• Excess capacity in OECD : Where is it ?
• Energy and Environment challenges = Scrap + Shale Gas/DRI
• Strategy, governance and social relations : Accelerate evolution.
• Implications for organizations, governments and associations.
40
Implications for international organizations,
governments and industry associations
• Focus assistance on the remaining unrestructured integrated
producers where the bulk of the overcapacity is concentrated.
• Encourage OECD trade of high grade steel as well as technology
and best practices; Relax but remain vigilant for « unfair » imports.
• Promote recycling (collectors, processors, EAF steelmakers).
• Encourage use of gas as substitute for coal wherever possible.
Anticipate replacement of older BF/BOF by DRI/EAF.
• Encourage modern social relationships and local management.
• Promote steel as best material for the future.
07-Dec-2012
21
41
Thank you for your attention
Metal and mining Consultant
www.laplaceconseil.com