Consolidation in the global steel industry, what … company, which is the case for much of the ME steel industry • However, the ME steel industry’s ownership structure also represents

1© 2007 SteelConsult International Page

Consolidation in the global Consolidation in the global steel industry, what does it steel industry, what does it mean for the Middlemean for the Middle--East?East?

SteelConsult InternationalAntonio Vivaldistraat 52C1083 HP AmsterdamThe NetherlandsTel: + 31 (0)20 661 8900E-mail: info@steelconsult.comwww.steelconsult.comwww.steelearningsbarometer.com

Metal Bulletin

11th Middle East Iron & Steel Conference

9-11 December 2007JW Marriott Hotel, Dubai,

UAE


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Consolidation in global steel: What does it mean for the Middle-East?

Recent scale growth in the steel industry has mainly been realized through Mergers & Acquisitions. There has been a considerable acceleration of M&A transactions during the last decade

0

2

4

6

8

10

12

14

16

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

YTD

Number of M&A’s in steel industry

Source: SteelConsult analysisNote: * capacity added to acquiring or larger M&A party

0

10

20

30

40

50

60

70

80

90

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

YTD

Capacity added through M&A’s* (m tpy)



The last few years have seen a number of important and unprecedented developments in the M&A environment of the steel industry

• Since late 2004, a number of important and unprecedented M&A developments have shaken up the steel industry:

– Erdemir, Kryvorizhstal and Dofasco were sold at record prices

– Arcelor’s bid for Dofasco first hostile takeover attempt in the steel industry since Krupp’s(failed) attempt to acquire Thyssen in 1997.

– Mittal Steel’s takeover of Arcelor was the second.

– By taking over Arcelor, Mittal Steel has eliminated the only competitor that could hope to keep up

– Commercially successful companies from emerging markets increasingly buying quality leaders in mature markets that are performing poorly or are relatively undervalued:

• Severstal buying Rouge Steel and Lucchini

• LNM/Mittal Steel buying Inland, ISG, Arcelor and other

• NLMK buying Dansteel

• Tata Steel buying Corus

• Evraz buying Oregon Steel Mills, Palini e Bertoli and Highveld

• Essar buying Algoma

• Metinvest buying Spartan UK and Trametal



Prices for steel assets have gone up to multi-billion US$ levels during the last two years

Source: SteelConsult analysisNote: *Price based on 100% of shares

0

2

4

6

8

10

12

14

16

Sidor

Inlan

d Steel

Cocke

rill S

ambre

Kremiko

vtzi

Ameriste

elKos

iceSide

xTric

oLT

VAco

minas

Nova H

utAcm

e

Bethleh

em Stee

l

Nation

al Stee

lSart

idPHS

Rouge

Stee

lDun

aferr

Sid. H

unea

doraNSCWeirto

nAcin

darNatS

teel

North S

tar millsISG

CSTLu

cchin

iHyls

amex

Czesto

chow

aVitk

ovice

Kremiko

vtzi

Hunan

Vali

nErde

mir

Kryvori

zhsta

lWuha

nDofa

sco

Arcelor

Milleniu

m Steel

Huaiga

ngOva

ko

Suez S

teel

Corus

Highveld

NS Grou

pSica

rtsa

Harris

Steel

Lone

Star

Oregon

Steel

Bayi S

teel

Algoma

Ipsco

StelcoMaxi

Price paid* (bn US$)



Recent sums translate to prices of US$400-1,100/tonne capacity, and 4-10 times EBITDA. This compares to an average of just US$180/ tonne and 3.6 times EBITDA in other transactions since 1997

0

200

400

600

800

1,000

1,200

Sidor

Inlan

d Steel

Cocke

rill S

ambre

Kremiko

vtzi

Ameriste

elKos

iceSide

xTric

oLT

VAco

minas

Nova H

utAcm

e

Bethleh

em Stee

lSart

id

Nation

al Stee

lPHS

Rouge

Stee

lDun

aferr

Sid. H

unea

dora

Nat. S

teel P

hil.

Weirton

Acindar

NatStee

l

North S

tar mills ISG

CSTLu

cchin

iHyls

amex

Czesto

chow

aVitk

ovice

Kremiko

vtzi

Averag

e '97

-'05

Hunan

Vali

nErde

mir

Kryvori

zhsta

lWuha

nDofa

sco

Arcelor

Millenn

ium Stee

lHua

igang

Ovako

Suez S

teel

Corus

Algoma

Stelco Maxi

0

2

4

6

8

10

12

Source: SteelConsult analysisNotes: *Price based on 100% of shares** EBITDA during 4 quarters prior to final bid

Price paid* (US$/tonne capacity crude steel) Price/EBITDA**



Until 27 January 2006, steel companies were expecting to consolidate towards a handful of giants of 100-120m tpy capacity by 2010. MittalSteel and Arcelor were well underway…

Source: IISI

17

18

18

18

19

23

30

31

32

47

63

0 10 20 30 40 50 60 70

TKS

RIVA

Corus Group

Nucor

US Steel

Baosteel

JFE

POSCO

Nippon Steel

Arcelor

Mittal Steel

Situation on 1 January 2006

Crude steel output, 2005


Source: IISINote: *Incl. Sicartsa **Incl. Stelco ***Incl. Bayi


Instead of a handful of giants, there is now one supergiant with 120-130m tpy capacity. Will the gap ever be bridged? Or will it become even larger?

17

18

19

20

26

30

33

120

5

10

26

25

18

32

0 20 40 60 80 100 120 140

TKS

Severstal

RIVA

Tangshan

Nucor

Tata Corus

Baosteel***

US Steel**

POSCO

JFE

Nippon Steel

ArcelorMittal*

CSA slab project by 2009

Firm expansions in South America, Ukraine, South Africa and Kazakhstan by 2010



10

26

120

5

32

10

4

20

30

19

26

18 18

33

25

0 20 40 60 80 100 120 140

Top-3 ME

Nos. 6-11

Nos. 2-5

ArcelorMittal*


ArcelorMittal is as large as Nippon Steel, JFE, POSCO and USS combined. Or as Baosteel, Tata Corus, Nucor, Tangshan, RIVA and Severstal put together…

Nippon Steel JFE POSCO US Steel**

Baosteel*** Tata Corus Nucor Tangshan RIVA Severstal


Source: IISINote: *Incl. Sicartsa **Incl. Stelco ***Incl. Bayi

Imidro Ezz Hadeed



ArcelorMittal is still not a particularly large player compared to leaders in other industries, where market leaders account for >20% of the global market…

11%14%

19% 19% 20% 20%23%

33%37%

9%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

ArcelorMittal Alcoa-Aluminum

GeneralMotors

Caterpillar Hewlett-Packard

ABB Norilsk Alcoa-Alumina

Nokia Vale*

Source: SteelConsult analysisNote: *sea-borne ore

Global market share industry leader 2006



As an illustration, 14% global market share would translate to a steel super giant of around 300m tpy in 10 years’ time

Steel output LNM/Mittal Steel/ArcelorMittal, m tonnes

Source: ArcelorMittal company reports and presentations, SteelConsult analysis

0

50

100

150

200

250

300

350

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

e20

0820

0920

1020

1120

1220

1320

1420

1520

1620

17

?



In the past, many acquisitions in steel consisted of troubled companies and privatizations…

M&A’s in steel industry, capacity addition to dominant party (mln tpy)

0

5

10

15

20

25

30

Sidor

CSIKrup

pInl

and S

teelHoo

gove

nsC. S

ambreKrem

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stee l

Kangw

onAlex

andria

VSZ K

osice

Cosipa

Alfasid

Arbed

NKKSide

xTric

oLT

VCo-S

teel

Acomina

sKuz

netsk

Nova H

utAcm

eBirm

ingha

mASW

Bethleh

em Stee

l

Nation

al Stee

lSart

idPHS

Rouge

Stee

l

H. Ostr

owiec

Dunafe

rrNSC (P

hil.)

We irton

Mergers Privatization Bankrupt/Chapter 11 Other acquisitions

‘97 ‘99 ‘00 ‘01 ‘02 ‘03‘98

Source: SteelConsult analysis



However, the era of privatizations is over and hostile takeovers will become increasingly common

M&A’s in steel industry, capacity addition to dominant party (mln tpy)

0

10

20

30

40

50

60

Acindar

NatStee

lNort

h StarISGCST

Echen

gLu

cchin

iHyls

amex

Czesto

chow

aVitk

ovice

Kremiko

vtzi

Hunan

Vali

nErde

mir

Kryvori

zhsta

lJili

n Jial

ong

Wuhan

Benxi

Xuanh

uaChe

ngde

Dofasc

oArce

lorMille

nnium

Hefei

Huaiga

ngOva

koLa

iwu

Smorgon

Corus

Wheelin

g P.

Highveld

NS Grou

pSica

rtsa

Lone

Star

Oregon

Steel

Bayi S

teel

Sicarts

aAlgo

maIps

coStelco Max

i

Mergers Privatization Bankrupt/Chapter 11 Other acquisitions

‘04 ‘05 ‘06

Source: SteelConsult analysis

‘07



The ME steel sector ownership structure protects much of the industry from unfriendly approaches, but also represents a barrier to the positive sides of consolidation

• The steel mills that are in the M&A driving seat have their own raw materials and/or are commercially more successful than their targets, selling steel at the best margin rather than the best quality

• Technology and quality leadership do not provide protection from hostile takeovers. Serving the demanding auto sector has status, but is not necessarily the most profitable business

• There is also no protection in size

• The only robust barrier to undesired takeovers is a critical share of private or state ownership in the company, which is the case for much of the ME steel industry

• However, the ME steel industry’s ownership structure also represents a barrier to consolidationof the steel industry in the region

• While markets are booming, there is no urgent necessity for scale enlargement

• However, the steel industry in the rest of the world is changing rapidly as a result of the ongoing consolidation. The ME steel industry is growing fast through expansions but organic growth cannot keep up with acquisitive growth



The average output of the Top-10 steel mills has doubled in 10 years’time, enabling operational and commercial advantages

15 15 15 15 14 14 15 15 15

17 17

2021 21

23

26

2830

3335

0

5

10

15

20

25

30

35

40

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007e

Average crude steel output Top-10 steel mills, (m tonnes)

Source: IISI, SteelConsult analysis



The improved financial performance and scale enlargement of the steel industry has led to financially very powerful players, with large war chests and the need to reinvest excess cash

Source: SteelConsult International (www.steelearningsbarometer.com)Note: * pro-forma incl. all acquisitions in all years

EBITDA Top-65 listed steel companies (bn US$)

27

35

22

29

42

85

9298

0

10

20

30

40

50

60

70

80

90

100

1999 2000 2001 2002 2003 2004 2005 2006

Global Steel Earnings (Top-65)

0

5

10

15

20

25

1999 2000 2001 2002 2003 2004 2005 2006 2007e

ArcelorMittal*

POSCO

NSC

TKS

EBITDA (bn US$)



Higher spending power is enabling steel mills to grow fast, not only horizontally but also up- and downstream. A new type of competitor is emerging, controlling the chain from mine to distribution…

STEEL MILL END-USER

1980

STEEL MILL1990

2000 STEEL MILL END-USER

INTEGRATED PRODUCER, PROCESSOR AND DISTRIBUTOR OF STEEL

SERVICE CENTER / STOCKIST

MINING COMPANY

Iron oremining

Iron andsteelmaking

Steelrolling

Steelprocessing

Steeldistribution

Steel consump

tion

END-USER

STOCKIST

END-USER

SERVICE CENTER / STOCKIST



Some signs of consolidation are visible in the CIS, which would lead to new, larger players self-sufficient in raw materials and investing heavily in modernization and expansion

DonetskAlchevsk I&S

ZaporizhstalKryviy Rih Mariupol

im. Ilyich

DMZ

Azovstal

Petrovsky

Enakievo I&SMakeyevki

DnMK

• In Russia, NLMK recently purchased a 51% stake in Maxi Group

• In Ukraine, Metinvest announced plans for a multi-billion dollar merge with Smart Holding.

• Also Russia’s Metalloinvest and Ukraine’s Industrial Union of Donbass(ISD) are seriously studying proposals for a merger of the two companies’ operations.

• The 200km radius around Donetsk holds 49BFs and 45m tpy of steel capacity.

• Much of the mills are still using Open Hearth Furnaces and Ingot Casting, but are modernizing and expanding fast.



New capacity from new entrants is also emerging in Turkey and India…Turkey could well be used as a springboard to the ME market, especially if new investments would lead to local oversupply

• In addition to potential new leaders in the CIS, the Turkish steel industry is also seeing rapid developments

• Adding to investments already under progress by Erdemir, ArcelorMittal, NLMK and MMK have recently announced new investment projects in Turkey

• In India, ArcelorMittal and POSCO are preparing investments in large greenfield integrated plants

• Corus has brought cutting edge R&D knowledge and operating practices to Tata, which will lead to considerable synergies in cost and quality in the future

POSCO

ArcelorMittal

Tata Corus

Metinvest/SmartMetalloinvest/ISD

NLMK MMKArcelorMittal



As a result of consolidation, ME mills are facing fast growing, powerful competitors that are spreading activities increasingly closer to the ME region

• The consolidation of the global steel industry will continue, as war chests are filled, earnings remain strong and steel mills seek geographical and scale growth

• Many smaller or poorly performing assets have been absorbed by the large and the strong in recent years, focus to shift to larger deals, likely incl. more hostile moves

• Future consolidation will be increasingly intercontinental, as regional industries have neared the limits of competition authorities in North and South America, Europe and Southern Africa

• Merchant semi markets are getting tighter, as consolidation leads to increased used of excess output for intra-company shipments

• Organic growth through new investments is firm in the ME, but competitors outside the region are growing both via new investments and M&As, leading to the emergence of fast growing, powerful competitors on the doorstep of the Middle-East region

• These players are not just growing through horizontal expansion within the steel industry, but also vertically in mining, processing and distribution, leading to players with scale, low cost raw materials, high quality performance and control over an increasingly large part of the supply chain



It may take some time before circumstances are conducive to consolidation within the ME steel industry, but progress can be made in various other ways

• Benefits of consolidation do not necessarily require full mergers and acquisitions, synergies can also be realized by JVs and alliances with steel mills inside and outside the ME, with the option to expand co-operation in the future

• ME companies have a lot to bring to foreign partners who may wish to establish a presence in the region

• Growth by acquisitions can also be realized outside the ME region, as demonstrated by Al Tuwairqi

• Furthermore, growth can also be realized by vertical expansion for example by investment in processing and distribution



Thank you for your attention!

SteelConsult InternationalAntonio Vivaldistraat 52C1083 HP AmsterdamThe Netherlands

Tel: +31 20 661 8900Fax: +31 20 661 8901Email: [email protected]

www.steelconsult.comwww.steelearningsbarometer.com

Consolidation in the global steel industry, what … company, which is the case for much of the ME steel industry • However, the ME steel industry’s ownership structure also represents

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