1
March 12, 2014
Global Iron Ore & Steel Forecast 17th Annual Conference
Changes ahead Key Drivers of Steel Demand and Outlook
2
Steel leadership shifts along the stagnant demand
Structural Changes in the Steel Industry – Past
U.K.
(19C) U.S.
(1910-1960)
Japan
(1970-1990)
China
(2000-present)
Stagnation
- 1907-1946(about 40yrs)
- Annual avg of 1.9%
The third boom The second boom
- 1875-1907(about 33yrs)
- Growth at annual avg of 10.8%
- Beginning of the world’s steel
industry
- 1946-1973(About 27yrs)
- Annual avg of 7.0% - 1998-2007(about 9 yrs)
- Annual avg of 6.3%
The first boom
Stagnation
- 1973-1998(about 25 yrs)
- Annual avg of 0.9%
- The first and second oil shocks
12
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1875 1900 25 40 45 50 55 60 65 70 75 80 85 90 95 00 05 10
Global steel production
Excluding China
China’s steel production - 2008-present
- Annual avg of 2.3%
Stagnation?
(billion tons)
3
Adopted new steel-making technology
- Industrial Revolution and Bessemer process
- Used coal within the area
Key: Innovative technology
Coastal steel mills as a new business model
- Commercialization of continuous casting
- LD converter
- Mass production through large blast furnaces
Key: Technology and raw materials
Open-hearth furnace, Integrated steel mills
- Automobiles expansion, railway revolution
- Domestic market, self-sufficient raw materials
Key: Market and raw materials
Demand grown rapidly
- Led by automobile and shipbuilding industries
- Use the existing technology, adopt new facilities
- Domestic coal reserves, abundant labor force
Key: Large domestic market
Structural Changes in the Steel Industry – Past
4
Structural Changes in the Steel Industry – Present
40%
35%
55%
42%
40%
25%
18%
6%
23%
15%
2%
3%
9%
14%
12%
28%
20%
21%
24%
23%
17%
16%
5%
7%
Source : worldsteel, KOSA, NSRI, Eurofer
Others
Machinery
(2012)
(2012)
(2011)
(2012)
(2012)
5
2000-2007 2008-2011
6.8%
2.7%
(steel production)
△4.1%p
① Growth
2007 2012
13.2%
0.2%
(Top 10 steel makers)
△13.0%p
② Profit
Source : worldsteel Source : Bloomberg
2005 2012
9 companies
7 companies
(Fortune 500 firms)
△ 2
③ Company Value
Source : Fortune
*Excluding 4 Chinese steel companies * Operating profit/Sales
Structural Changes in the Steel Industry – Present
6
China, the core of the global steel, is staggering
China Risk
(Unit : %, yoy)
Oversupply across industries - On average, 28% in the manufacturing,
21% in the steel and 12% in the auto industry
Protectionism - Rapid increase in case filing against China
over anti-dumping and countervailing duties
Slowdown
of China’s
GDP growth
Serious oversupply - Capacity reached 1 billion tons
- Construction of large steel mills continues
Sharp fall in growth and profit - Demand increase around 4%
- Operating profit near zero
Steel
- Its status as a leader falls sharply
- Mecca of growth Epicenter of chaos
Structural Changes in the Steel Industry – What is the Problem?
Impact of uncertain global economy
9.7 9.5
9.1
8.9
7.9 7.6
7.4
7.9 7.7
7.5
7.8
7.7
'11.1Q 3Q '12.1Q 3Q '13.1Q 3Q
7
Hebei 42.8
Bao Steel 42.7
Wuhan 36.4
Shagang 32.3
Shougang 31.4
Ansteel 30.2
Player Steel
production
Baoshan 17.7
Source : worldsteel, million tons Source : worldsteel
Structural Changes in the Steel Industry – Future?
Source : worldsteel
2000 2012
55 million tons
Export
11 million tons
15.1%
46.9%48.5%
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- Struggle over interests between the central and local governments
- Difficulty in systematic restructuring due to inadequate financial system
- Sharp decline in profits of steelmakers
Rising pressure for survival and restructuring
- Financial costs in the distribution process : Increase 50% per ton
- Limits to the steel industry heavily depending on gross fixed capital formation
- Basis for growth, such as investment in infrastructure, has weakened
The Xi Jinping government,
“The government won’t continue to
provide the current level of financial
support. We’ll follow the logic of
market even if that means decreases
in steel production.”
The new government’s policies
for the steel industry
The Steel Industry
Market
concentration
(Top 10 companies)
3~5 global companies 60%
* Joint statement released by 12 government
ministries (Jan. 22, 2013)
Structural Changes in the Steel Industry – Future?
9
After the low growth trap in the SR, New Normal is 3%
Source : Global Insight, Note: On the basis of PPP
Around 4% before the crisis 2% recently Low- to mid-3% after 2015
%
World New Normal
Low
Growth
- 4.0
- 2.0
0.0
2.0
4.0
6.0
8.0
00 02 04 06 08 10 12 14 16 18 20 22
Emerging Countries
Developed Countries
%
8.0
4.0
0.0
4.0
8.0
12.0
00 02 04 06 08 10 12 14 16 18 20 22
China
India
Brazil
Russia
Challenging Environments – ① Delayed recovery of the world economy
Developed economies : Prolonged low growth due to excessive national debt and
accumulated current account deficit
Emerging economies : Return to a New Normal of 5% from a high growth of 8%
- BRICs : Growth expected to slow down compared to that before the global economic crisis
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Steel industry faces stagnant growth engines
Worldsteel.org has adjusted down its continued low steel demand projection
Annual growth in global steel demand will slow down to around 2% for the next 10 years,
after recent high level of 5%
- China moves into slower growth phase, while emerging economies struggling with structural issues
Source : worldsteel (Oct 2013) Source : worldsteel, POSRI
Challenging Environments – ② Slow growth in steel demand
World
China
India
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 22
(mil tons)
Note: Apparent steel use, finished steel
1,219 1,219
1,141
1,300
1,403 1,430
1,475 1,523
7.0
0.0
-6.4
14.0
7.9
2.0 3.1 3.3
-10.0
-5.0
0.0
5.0
10.0
15.0
800
1,000
1,200
1,400
1,600
'07 '08 '09 '10 '11 '12 '13(e) '14(f)
demand (mil tons)
y-o-y growth (%)
11
Overcapacity, a continued crucial issue
(million tons)
Excess steelmaking capacity is estimated at 525 million tons around the world (2013)
- East Asia has more than 50% of total surplus
- Steel capacity utilization ratio trends down to mid-70%, from 90% of the pre-Crisis level
Source : worldsteel, POSRI
Korea
666 808
205 250
2012 2022
69
66 65
68
2012 2022
106 136
12
- 11
2012 2022
29 40
20 12
2012 2022
62 78
- 28 - 35 2012 2022
77
115
24 11
2012 2022
27
40
7 0
2012 2022
56 60
23 30
2012 2022
Africa
India
China
Brazil
USA
ASEAN
Japan
Overcapacity
Crude Steel Consumption
Challenging Environments – ③ Global overcapacity
12
High raw material costs laying heavier burden
Prices of iron ore and coking coal rose 7.4x and 3.6x respectively (2000~13)
- Despite having decreased, the prices remain high, and its volatility has increased since quarterly
pricing was adopted (2Q ’10)
Cost portion of raw materials in the steelmaking cost getting higher
- High costs can be attributed to various supply risks(oligopoly, low grade materials, natural disasters)
- China’s high production cost serves as the lower limit of international raw material price
49.8 49.0
58.3 61.4
69.9 70.0 74.0
'00 '02 '04 '06 '08 '10 '12
Note: On the basis of integrated steel mills, Source: MBR, etc.
0
50
100
150
200
250
300
350
'00 '02 '04 '06 '08 '10 '12 '14.1
Coking coal
(hard coking coal, Australia
FOB)
Iron ore (iron ore fines, Fe 62%, China CFR)
131 143
289
161
61
91
18
51
172
250
125
40
Challenging Environments – ④ High raw material cost
(%) ($/ton)
13
Varied Demand & Competing Alternative Materials
∙ Lighter car bodies
∙ Electric vehicles
∙ Hydrogen-fuel cars
∙ Extra-large vessels
∙ Eco-ships
∙ Efficient transportation
∙ Oil fields in deep sea &
coldest places
∙ Shale gas
Changes in Steel-using Sectors Decline of Steel Use
+
2012
980
(57%)
1,720
740
2025
710
(46%)
1,550
840
Source : Ducker Worldwide
Steel materials
Non-ferrous materials
(Polymer, Aluminum)
Steelmakers must provide technical solutions, as well as the steel product itself
Challenging Environments – ⑤ Customer needs / Steel alternatives
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Soaring environmental costs & emergence of new energy
* CCS: Carbon Capture and Storage
* ETS: Emission Trading Scheme
Tighter regulations on environmental pollutions, such as greenhouse gas emission, have
driven up costs
- Need to use clean energy and CCS technology to reduce CO2 emissions
Shale gas could lead to structural changes in cost competitiveness among steelmakers
Challenging Environments – ⑥ Environmental issues and energy
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1,511
1,700
1,950
717 815
930
2012 2017 2022
For the next decade, low growth is inevitable without next growth engine and recovery of economy
- Global steel production is expected to rise by 400 million tons to reach 1.95 billion tons in 2022
Growth will improve due to new coastal integrated steel mills in Southern China
- Baosteel’s Zhanjiang mill by the end of 2015, Wugang's Fangchenggang mill around 2017
Source : worldsteel, POSRI * Steel demand outlook considering economic growth, fixed asset investment and each country’s plan to expand facilities
(million tons, % CAGR)
2.4%
2.8%
200
400
600
800
1000
1200
1400
1600
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Steel in the world
Steel in China
Steel: World 4.7%, China 17.6%
Price: Iron ore -1.3%, Coking coal -0.6%
Steel: World 10.8%, China 31.5%
Price: Iron ore 21.7%, Coking coal 15.8%
1992-2002 2002-2012
China Effect
Global Steel production, low growth for next 5 years
China’s steel production to be only 2.6% of annual growth
∆ RM Price > ∆ Steel Production
Increased Volatility
Outlooks on Demand
2.6% 2.7%
W O R L D
C H I N A (mil tons, % CAGR)
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Conclusion
Steel industry faces an unprecedented crisis
- Stagnant demand, Oversupply Intense competition
- Low steel prices, High RM costs Profit squeeze
Breakthrough opportunities are pursued
- Urbanization and population growth
- Innovations in sustainable technologies for
product and process
- Excess capacity absorbed in the long term
Cooperation between steel and raw materials
- Necessary for win-win growth