Maria Ivanova Steering Committee Member, Russian Steel Consortium Head of Government Relations, NLMK Group OECD STEEL COMMITTEE Developments In World Steelmaking Capacity Russia: Steel Market Developments Paris, July 2013
Maria Ivanova
Steering Committee Member, Russian Steel Consortium
Head of Government Relations, NLMK Group
OECD STEEL COMMITTEE
Developments In World Steelmaking Capacity
Russia: Steel Market
Developments
Paris, July 2013
-2- Sources: Metal-Expert, Metal Courier, Russian Statistics Agency
Recent Economic Developments in Russia
3,5% 3,4%
5,0% 5,1% 4,8%
4,3%
3,0%
2,1% 1,6%
0%
1%
2%
3%
4%
5%
6%
Q1
20
11
Q2
20
11
Q3
20
11
Q4
20
11
Q1
20
12
Q2
20
12
Q3
20
12
Q4
20
12
Q1
20
13
GDP quarterly growth rate, y-o-y, %
-10%
-5%
0%
5%
10%
15%
20%
Jan
-11
Mar
-11
May
-11
Jul-
11
Sep
-11
No
v-1
1
Jan
-12
Mar
-12
May
-12
Jul-
12
Sep
-12
No
v-1
2
Jan
-13
Mar
-13
May
-13
Manufacturing output index
Freight rail transportation volumes
• Russian economic growth started to lose momentum since H2 2012 due to global market weakness and slowdown in domestic demand
• Industrial production is almost flat in H1 2013 with freight rail transportation volumes falling y-o-y
• Economic growth projections for 2013 are reduced
IP growth rate, y-o-y, %
-3- Sources: Rosstat
• Prices for domestic energy resources are growing faster than consumer prices index (CPI)
• Russian inflation is far exceeding the ones at mature economies
• Industrial sector profits suffers from increasing utilities and labor costs
Growing Costs as a Cause for Concern
0,5
0,6
0,7
0,8
0,9
1,0
1,1
Mining (fueland energy
sources)
Steelmakingand processing
Overallindustrial
profitability
2011
2012
-5%
0%
5%
10%
15%
20%
25%
30%
2010 2011 2012
Gas Electricity Transportationcosts
Consumerprices
3 years average inflation is 7%
Tariffs and inflation annual growth Industry profitability Index
-4- Sources: Russian Steel
• Domestic energy costs grew significantly over the last decade reaching and in some extent exceeding the level of developed markets
• Prices for gas are equal to the level of USA
• Electricity cost is close to that in the EU
Rapid Growth of Energy Costs
371
148
219
165
119
560
417 355 348
387
84 74 90 106 115
0
200
400
600
2008 2009 2010 2011 2012
USA Belgium Russia av
5,35 5,1
6,8 7,55
7,3 6,8 5,1
5,4 6,2 5,4
13,9 13,9 12,5
9,6
8,7
2
6
10
14
18
2008 2009 2010 2011 2012
Russia av. USA Belgium
US$/ 1000 m3 US cents per kWt*h
Gas prices Electricity prices
-5- Sources:
• Global steel prices are falling largely due to overproduction and lack of supply discipline
• Russian domestic prices largely replicate the international market situation
• There is growing pressure from steel imports
• long products import increased 39% in 2011 and 26% 2012
Challenging Environment of Steel Sector
400
450
500
550
600
650
700
750
Q1 2012Q2 2012Q3 2012Q4 2012Q1 2013Q2 2013
HRC prices Rebar price
Russia domestic steel prices
$/t
0
2
4
6
8
10
12
14
16
2008 2009 2010 2011 2012
Net exports Exports Imports
Russian finished steel exports & imports
million t
-6-
Production Volume & Consumption, mmt
Russia’ Steel Industry Dynamics
Sources: Russian Statistics Agency, Worldsteel, Federal Customs Service
9,7 10,7 10,4
5,1 5,1 5,5 7,0 7,1 7,5
8,9 9,5 9,9 9,9 10,4 10,6 9,7 10,0 10,6 11,2
10,2 10,0 10,9
0
2
4
6
8
10
12
14
16
18
20
Crude steel production Finished steel production Consumption
• Steel consumption in Q2 2013 is predicted to grow about 9% over Q1 2013
• However, Q2/Q1 traditionally shows strong growth in Russia (due to severe winter)
• Q-on-q growth (Q2 2013 over Q2 2012) is only 2,8%
• Steel use for the whole of 2013 is expected to rise only 2,5% y-o-y
05
01
01
02
03
05
10
15
Others
Electricalmachinery
Homeappliancies
Automotive
Machinery
Metalware
Pipes & Tubes
Construction
13% 1%
3%
4%
8%
12%
23%
36%
Steel Consumption Breakdown by Sector, mmt 2012
Steel Consumption in Russia
Sector CAGR 08-12
Automotive -6%
Home appliances 8%
Machinery 0%
Metalware -3%
Construction 2%
Pipes & tubes 2%
Others 2%
Sources: Metal-Expert, Metal Courier, Russian Statistics Agency , Ministry of Industry and Trade; NLMK research -7-
• Russia’s steel consumption structure remains traditional, with construction, pipes & tubes, metalware and machinery as its most important sectors
• These sectors varied in performance over the last 5 years, some growing moderately and some stagnating
• Automotive and home appliances are two promising sectors, though still small in absolute numbers
-8-
Transport Machinery Production Index, y-o-y, %
Pipes & Tubes Production Index, y-o-y, %
-200
-100
0
100
200
300
400
500
Jan
-08
Ap
r-0
8
Jul-
08
Oct
-08
Jan
-09
Ap
r-0
9
Jul-
09
Oct
-09
Jan
-10
Ap
r-1
0
Jul-
10
Oct
-10
Jan
-11
Ap
r-1
1
Jul-
11
Oct
-11
Jan
-12
Ap
r-1
2
Jul-
12
Oct
-12
Jan
-13
Ap
r-1
3
Automotive Industry Production Index, y-o-y, %
-45
-25
-5
15
35
55
75
Jan
-08
Ap
r-0
8
Jul-
08
Oct
-08
Jan
-09
Ap
r-0
9
Jul-
09
Oct
-09
Jan
-10
Ap
r-1
0
Jul-
10
Oct
-10
Jan
-11
Ap
r-1
1
Jul-
11
Oct
-11
Jan
-12
Ap
r-1
2
Jul-
12
Oct
-12
Jan
-13
Ap
r-1
3
-55
-35
-15
5
25
45
Jan
-08
Ap
r-0
8
Jul-
08
Oct
-08
Jan
-09
Ap
r-0
9
Jul-
09
Oct
-09
Jan
-10
Ap
r-1
0
Jul-
10
Oct
-10
Jan
-11
Ap
r-1
1
Jul-
11
Oct
-11
Jan
-12
Ap
r-1
2
Jul-
12
Oct
-12
Jan
-13
Ap
r-1
3
Not adjusted 3 months rolling average
Mechanical Engineering Production Index, y-o-y , %
-60
-40
-20
0
20
40
60
80
100
Jan
-08
Ap
r-0
8
Jul-
08
Oct
-08
Jan
-09
Ap
r-0
9
Jul-
09
Oct
-09
Jan
-10
Ap
r-1
0
Jul-
10
Oct
-10
Jan
-11
Ap
r-1
1
Jul-
11
Oct
-11
Jan
-12
Ap
r-1
2
Jul-
12
Oct
-12
Jan
-13
Ap
r-1
3
Russia’ Steel Consuming Sectors Output Dynamics
Sources: Russian Statistics Agency
0
10
20
30
40
50
60
70
19
91
19
92
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
20
09
20
10
20
11
20
12
20
13
E
-9- Sources: McKinsey, NLMK
• Steel demand will continue to growth in long term supported by strong fundamentals
• Russia has delayed steel demand of almost 170 mt due to economic slump in 1990s
• Russian infrastructure is highly underinvested
• Steel demand have been recovering strongly in 2002-2007 and in 2009-2012
Russian Steel Sector Has Potential for Further Growth
million t
Delayed steel consumption is 170 mt
Delayed steel consumption in Russia
-
10
-
Source:
Floor space per capita
Steel Demand Fundamentals
0
100
200
300
400
500
600
700
800
0
10
20
30
40
50
60
70
USA SouthernEurope
Central andNorthernEurope
China EasternEurope
Russia
Automobiles per 1000 people
m2 units
• Construction sector is seriously underinvested
• Floor space per capita is lower than in developed economies
• 82% of housing was built more than 17 years ago
• Commercial construction is actively developing
• Car ownership per 1000 people is 3 times less than in USA
Flat Product Consumption Forecast, mmt Long Product Consumption Forecast, mmt
Coated Products Consumption Forecast, mmt Pipes & Tubes Consumption Forecast, mmt
-11-
Steel Consumption Forecast
-20
-10
0
10
20
30
40
50
2007 2008 2009 2010 2011 2012 … 2015 … 2020
Production Export Import Apparent consumption
-10
-5
0
5
10
15
20
25
30
2007 2008 2009 2010 2011 2012 … 2015 … 2020
Production Export Import Apparent consumption
-4
-2
0
2
4
6
8
10
2007 2008 2009 2010 2011 2012 … 2015 … 2020
Production Export Import Apparent consumption
-4
-2
0
2
4
6
8
10
12
14
16
2005 2006 2007 2008 2009 2010 2011 2012 … 2015 … 2020
Production Export Import Apparent consumption
Sources: Metal Courier
Steel Industry Production Index Forecast, y-o-y Industry Production Forecast, y-o-y, %
Energy Machinery Production Index Forecast, y-o-y, %
Machinery Production Index Forecast, y-o-y, %
80
85
90
95
100
105
110
115
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Pessimistic Basic Optimistic
Steel Consuming Sectors Output Forecast
92
94
96
98
100
102
104
106
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Pessimistic Basic Optimistic
60
70
80
90
100
110
120
130
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Pessimistic Basic Optimistic
80
85
90
95
100
105
110
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Pessimistic Basic Optimistic
Source: Ministry of Economic Development -
12
-
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
0
50
100
150
200
250
300
2005 2006 2007 2008 2009 2010 2011 2012
FAI FAI growth in comparable prices, y-o-y
Source: Rosstat, Worldsteel Association
Steel industry fixed asset invetment
Russian Steel Industry is on Modernization Track
billion RUR
62% 67%
16%
29% 22%
5%
0%
20%
40%
60%
80%
100%
2005 2013
BOF EAF OHF
• Russia’s steelmakers have been actively investing into the modernization of the assets
• ab. $8 billions of investments per year in 2005-2012
• Steelmaking capacities have been restructured in favor of more efficient and less environmentally harmful way of production
• A number of OHF capacities has been closed down in 2008-2013 with some replaced by new EAF and BOF capacities, some simply taken out of the market
• Share of OHF in steel production is targeted at 0% by 2015
Production process upgrade
6,5% growth in steel production in 2005/2012
-13-
4,8 4,8 4,7 4,5
4,3 4,3 4,3 4,2
3,0
3,5
4,0
4,5
5,0
2005 2006 2007 2008 2009 2010 2011 2012
Overall metallurgy
-14- Sources:
• Modernization results in better environmental and efficiency industry performance
• Air pollution has been reduced by 12% although steel production increased 6.5%
• Energy efficiency is reaching best available technology level
Investments into Responsible Operations and Efficiency
Air pollution
Air pollution from stationary Sources, mmt
5,0
5,5
6,0
6,5
7,0
7,5
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
12
20
15
20
20
Steel industry average
Best available technology for BOF route
Energy consumption Gcal/t
-15-
Environmental Legislation
(to be passed before 2014)
Upgrade to Best Available Tech
• Huge investment costs
• BAT not as a reference for setting the permit conditions, but as a universal direct limit
• Pollution tax payable even after achieving BAT
• Only 8 years to complete the transition which the EU hasn’t fully managed in 16 years
OR face crippling penalties
• Non-complying companies will
end up paying x100
in environmental charges
Law about BAT
• Russian producers face pollution-related costs similar to or worse than those of their international counterparts
• This places Russian steel industry on an equal footing with OECD countries
Maria Ivanova
Steering Committee Member, Russian Steel Consortium
Head of government relations, NLMK
OECD STEEL COMMITTEE
Developments In World Steelmaking Capacity
Paris, July 2013
THANK YOU