CRU Steel and Metallics Price Indices (Jan 1997 = 100)

[Pages:6]67th SESSION OF THE OECD STEEL COMMITTEE

10-11 December 2009, Paris

SPO

Developments in the Metallics Market and Its Effects on the Global Steel Industry

MEHMET AKF KOCA

State Planning Organization of Turkey Expert for the Iron and Steel Industry

Metallics and Steel Prices

Metallics prices are increasing more than steel prices in the upward cycle. Metallics prices are decreasing more than steel prices in the downward cycle.

CRU Steel and Metallics Price Indices (Jan 1997 = 100)

600 500 400 300 200 100

0

Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 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 Jul-08 Jan-09 Jul-09

Source: CRU

Longs Index

Global Index

Metallics Index

P. 2

1

Long-Term Trends Affecting Metallics Market

1. Increasing electric arc furnace capacity in the world 2. Restrictions on exports of raw materials 3. Consolidation among raw materials producers 4. Horizontal and vertical consolidation in the steel industry

P. 3

1. Increasing EAF Capacity in the World

Share of EAF production within the total crude steel production in the world increased from 25.4 % in 1985 to 33.9 % in 2000; however it decreased to 30.6 % in 2008.

EAF Share (% ) in Global Crude Steel Production (Milllion Tons)

1600 1400 1200 1000

800 600 400 200

0

40

35

33.9

32.6

31.9

31.6

30.8

30.6 30

27.9

25.4

25

20

15

1985

1990

1995

2000

2005

2006

Total

EAF

EAF (%)

2007

10 2008

Source: World Steel Association

China? Others?

P. 4

2

1. Increasing EAF Capacity in the World

Share of EAF production has been decreasing in China; whereas it has been increasing in the rest of the world.

EAF Share (% ) in Total Crude Steel Production (Million Tons) (CHINA)

600

35

500

30

25

400

21.5

21.1

19.0

20

300

15.9

15

200

11.7

10.5

9.1

9.1 10

100

5

0 1985

1990

1995

2000

2005

2006

2007

0 2008

Total

EAF

EAF (%)

Source: World Steel Association

EAF Share (% ) in Total Crude Steel Production (Million Tons) (EXCL. CHINA)

900

60

800

55

700

50

600

500

40.9

42.4

43.4

43.7 45 40

400

37.1

300

34.6

35

200

28.5

30

100

25.7

25

0 1985

1990

1995

2000

2005

2006

2007

20 2008

Total

EAF

EAF (%)

Source: World Steel Association

P. 5

1. Increasing EAF Capacity in the World

EAF plants are favored against integrated plants

-- Low investment cost -- Short investment time -- Low minimum efficient scale -- Flexible production terms

Conversion to EAF technology in Russia and Ukraine

-- 30 million tons of new production capacity planned before the crisis

China may invest more on EAF technology in the future

-- Grade and cost problems in domestic iron ore mines -- Risk of high dependency on imported iron ore -- Higher domestic supply of scrap as a result of increasing consumption -- Restrictions on integrated plants due to environmental concerns

P. 6

3

2. Restrictions on Exports of Raw Materials

Reasons for export restrictions

-- Supporting competitiveness of domestic steel industries -- Keeping materials at home for future usage

Export restrictions applied by different countries

-- Export quotas (Coking coal and coke) -- Export licenses (Coking coal and coke) -- Export taxes (Scrap, iron ore) -- Port and transportation limitations (Scrap)

P. 7

3. Consolidation Among Raw Materials Producers

Advantages of consolidation in raw materials sector

-- Improved bargaining power vis-a-vis steel producers -- Less competition in local, regional and global markets -- Fast and easy growth?

High consolidation in the iron ore market

-- 3 largest producers (VALE, Rio Tinto and BHP Billiton) -- 35% of global production and 70% of seaborn trade -- Potential merger between BHP Billiton and Rio Tinto? -- Iron ore market influences scrap market

Consolidation efforts in scrap markets

-- European Metal Recycling (EMR) -- Sims Metal Management (SIMS)

P. 8

4

4. Horizontal and vertical consolidation in the steel industry

Mergers and acquisitions in the steel sector

-- Optimization of production among different plants -- Increased bargaining power against raw materials producers -- Potential cost savings in operations, R&D and logistics -- Better access to emerging markets and global customers -- Better access to capital markets

Important consolidations in recent years

-- 2006, Merger between Mittal Steel and Arcelor -- 2007, Acquisition of Corus by Tata Steel

Backward consolidation with raw materials production

-- Secure raw materials sourcing with advantageous pricing -- Integration between raw materials production and steel production

P. 9

Conclusions

Long-term trends affecting metallics market -- Increasing electric arc furnace capacity in the world -- Restrictions on exports of raw materials -- Consolidation among raw materials producers -- Horizontal and vertical consolidation in the steel industry

Raw materials producers will gain increased bargaining power against the steel producers that are not backward integrated with raw materials production.

Policy response by respective governments Promote unrestricted better access to raw materials

-- Higher scrutiny on consolidation efforts in raw materials market. -- Elimination of restrictions on raw materials exports. Policy response by the industry Increase alternatives for raw materials sourcing -- Investment on scrap substitutes (DRI, HBI)

P. 10

5

67th SESSION OF THE OECD STEEL COMMITTEE

10-11 December 2009, PARIS

SPO

THANK YOU!

MEHMET AKF KOCA

State Planning Organization of Turkey Expert for the Iron and Steel Industry

makoca@.tr

6

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