07-Dec-2011

1

Vlasjuk V.S. SE UPE Co. Research & Consulting, Ukraine

71stSession of the OECD Steel Committee Meeting, Paris, 05-06 December 2011

SE UPE Co. Research & Consulting

Ministry of Economic Development and Trade of Ukraine

By the results of 10 months 2011 Ukraine holds the 9th place (with share 2.3% from the world

production) in the rating of the largest steel-producing countries

crude steel production

2,2%

2,3%

2,3%

3,0%

4,4%

4,5%

4,7%

5,6%

7,1%

45,5%

28,1

29,2

29,7

37,8

56,6

57,3

59,7

72,0

90,5

582,2

0 200 400 600 800

Turkey

Ukraine

Brazil

Germany

South Korea

Russia

India

United States

Japan

China

0% 20% 40% 60%

mln tonnes

Share, % 10 months 2011Ukraine

Source: WSA, State Statistics Service of Ukraine

Share %

07-Dec-2011

2

Despite the increase of the steel production in 2010-2011, two unfavorable factors for

steelmakers have dominated on the steel market – high cost and low demand

Overcapacities

Increasing cost

Capacity utilization %

Steel cost, $/t

83,1%

75,4%

70%

72%

74%

76%

78%

80%

82%

84%

before crisis (2007)

after crisis (2011)

365

600

0

100

200

300

400

500

600

700

before crisis (2007)

after crisis (2011)

After record 2007, in 2009-2011 Ukraine’s steel export reduced by 5.7 Mt,

especially to Africa, Turkey, America and CIS countries

Ukrainian steel products export,

mln. tonnes

* estimation based on 10 months 2011

Source: State Statistics Service of Ukraine

Decrease of Ukrainian exports to regional

markets in 2011 against 2007

28,226,3

22,523,8

22,5

0

5

10

15

20

25

30

2007 2008 2009 2010 2011*

-905

-1 811

-2 034

-2 251

-3 000 -2 000 -1 000 0 1 000

CIS

America

Turkey

Africa

th. tonnes

07-Dec-2011

3

31,833,1 34,1

36,938,7 38,6

40,942,8

37,1

29,5

32,734,8

0

5

10

15

20

25

30

35

40

45

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 E

This year crude steel production in Ukraine will increase by 2.1Mt (+6.4% y-to-y) to 34.8 Mt.

However, the losses in export prevent Ukrainian steel production from recovery to the pre-crisis level 2007

Source: State Statistics Service of Ukraine

Crude steel production, Mt

44,2 44,9 47,6 45,2 45,2 46,6

40,9 42,8

37,1

29,832,7

34,8

0,0

10,0

20,0

30,0

40,0

50,0

60,0

2006 2007 2008 2009 2010 2011E

capacity crude steel production

Now crude steel capacities in Ukraine make up 46.6Mt. During the year they were utilized

averagely by 74.8%, by 15% less than in 2007

Source: State Statistics Service of Ukraine

Capacity utilization (%) Ukrainian

Mt

Source: WSA, OECD, UPE Co.

85,8%

83,3% 78,6%

68,4%72,2%

75,8%

92,5%95,4%

77,9%

66,0%

72,4%

74,8%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

2006 2007 2008 2009 2010 2011

world Ukraine

07-Dec-2011

4

77,271,7

65,7

77,1 79,5

0

10

20

30

40

50

60

70

80

90

2007 2008 2009 2010 2011 est

20,619,5

17,418,6

19,7

0

5

10

15

20

25

2007 2008 2009 2010 2011 est

Growing demand for raw materials on the world market contributed to the rapid recovery of coke

and iron ore production in Ukraine

Source: State Statistics Service of Ukraine

Coke, Mt Iron ore, Mt

20,7 21,727,1 27,1 27,1 31,1

21,6 20,818,1 15,7 15,7 11,8

1,9 2,42,4

2,4 2,4 3,7

0

10

20

30

40

50

60

2005 2007 2008 2009 2010 2011

EAF

OHF

OBC

44,2 44,9 47,6

45,2 45,2 46,6

During 2011 4.0 Mt of open-hearth furnaces were decommissioned

whereas oxygen converters (4.0 Mt) and new EAF (1.3 Mt) were commissioned.

Complete replacement of open hearth technology in Ukraine is planned till 2018

Source: State Statistics Service of Ukraine

Mt

Ukrainian steel capacities by process

OBC67%

OHF25%

EAF8%

2011

OBC48%

OHF46%

EAF6%

2007

07-Dec-2011

5

Economic growth in Ukraine will continue in 2012, but it will be slightly lower in the background of

deteriorating finance climate

Source: State Statistics Service of Ukraine

GDP % Industrial production % Construction %

-15,0%

4,2% 4,7% 4,3%

-20%

-15%

-10%

-5%

0%

5%

10%

2009 2010 2011 est 2012 forecast

-21,9%

11,2%8,0%

5,5%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

2009 2010 2011 est 2012 forecast

-48,2%

-5,4%

11,7%8,0%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

2009 2010 2011 est 2012 forecast

3,44,2

4,9

6,87,5

8,28,7

11,2

9,3

6,2

7,5

9,410,4

0

2

4

6

8

10

12

The expected growth rate of apparent steel consumption is 10% in 2012 vs. 26% in 2011.

This year Ukraine will import up to 1.88 Mt of steel products or 20% of total consumption.

In 2012 steel import to Ukraine is expected nearly 2.1 Mt

Source: State Statistics Service of Ukraine, UPE Co. (forecast),

Steel products, Mt

total consumption

import

07-Dec-2011

6

31,833,1 34,1

36,938,7 38,6

40,942,8

37,1

29,8

32,734,8 35,9

0

5

10

15

20

25

30

35

40

45

Due to losses in export markets steel production in Ukraine in 2012 will rich about 36 million tons,

remaining at 2002-2003 level

Source: State Statistics Service of Ukraine (fact), UPE Co. (forecast)

Prices for iron ore and coking coal in Ukraine in 2012 is expected to decline by 13% and 5%

correspondently.

At the same time shortage of scrap will support growing price trend (+8.6% to 2011)

Source: UPE Co.

Iron ore concentrate (65% Fe),

$/t cpt, w/o VAT

Coking coal charge,

$/t cpt, w/o VAT

Scrap 3A,

$/t cpt, w/o VAT

44

79

127

110

0

20

40

60

80

100

120

140

2009 2010 2011 2012F

85

159

194 184

0

50

100

150

200

250

2009 2010 2011 2012F

170

269

382415

0

50

100

150

200

250

300

350

400

450

2009 2010 2011 2012F

07-Dec-2011

7

122175 152

96

118112

61

899239

4042

24

3129

17

1817

112

117117

0

100

200

300

400

500

600

700

2010 2011 2012 F

Other

Ferroalloys

Natural Gas

Transport

Scrap

Coking coal

Iron ore

Due to the expected decline in prices for iron ore and coking coal in 2012

Ukraine’s producers (non integrated) will be able to reduce production costs by 5%

Source: UPE Co.

470

588 560

+118$ -28$

Billet cost of non-integrated companies, $/t

Source: Bloomberg, UPE Co (est)

Steel (-6p.p.)

Iron Ore (+21p.p.)

Coal (+15p.p.)

EBITDA margin of world steel

producers is gradually recovering

EBITDA margin of mining companies will

stabilize in 2011-2012

0%

10%

20%

30%

40%

50%

60%

2003 2010 2011e 2012f

18%

11% 12% 13%

31%

49%54% 53%

20%

37% 36%33%

Steel Iron Ore Coal

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e 2012f

Emerging Markets Developed Markets

Russia Ukraine

The gap in the profitability of raw material producers and steelmakers will generally remain in 2012,

though steelmakers margin will rise slightly contrary to the diminishing earnings of raw material producers.

Presently some Ukrainian steel mills still remain not enough efficient.

2011 vs. 2003

07-Dec-2011

8

497

753

380

533

632 605

0

200

400

600

800

1000

1200

1400

Jan

Mar

May Ju

l

Sep

No

v

Jan

Mar

May Ju

l

Sep

No

v

Jan

Mar

May Ju

l

Sep

No

v

Jan

Mar

May Ju

l

Sep

No

v

Jan

Mar

May Ju

l

Sep

No

v

Jan

Mar

May Ju

l

Sep

No

v

2007 2008 2009 2010 2011 2012

Billet average price for a month

Billet average price for a year

In contrast to 2009-2011 when average prices for steel products abruptly increased by $100-150/t,

in 2012 we expect price weakening due to lower production costs and more enhance pressure of

market shortage and excess supply

Source: UPE Co.

excess supply

cost

$/t

fob B

lack S

ea

541

809

423

582

669 645

0

200

400

600

800

1000

1200

Jan

Ap

r

Jul

Oct

Jan

Ap

r

Jul

Oct

Jan

Ap

r

Jul

Oct

Jan

Ap

r

Jul

Oct

Jan

Ap

r

Jul

Oct

Jan

Ap

r

Jul

Oct

2007 2008 2009 2010 2011 2012

HR Coil average price for a month

HR Coil average price for a year

497

753

380

533

632 605

0

200

400

600

800

1000

1200

1400

Jan

Ap

r

Jul

Oct

Jan

Ap

r

Jul

Oct

Jan

Ap

r

Jul

Oct

Jan

Ap

r

Jul

Oct

Jan

Ap

r

Jul

Oct

Jan

Ap

r

Jul

Oct

2007 2008 2009 2010 2011 2012

Billet average price for a month

Billet average price for a year

During the 1st quarter 2012 market will remain unfavorable and prices will be at current low level.

Expected higher consumption in the second half of 2012 will cause a moderate rise in prices

Source: UPE Co.

$/t fob Black Sea

07-Dec-2011

9

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