06/12/2013

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Sifting Through the Steel Scrap-

Heap

OECD Steel Committee

December 6, 2013

AGENDA

Global steel demand and demographics of output

determine the future demand for steel scrap

Steel scrap – the key industry structure “Wildcard”

Q & A

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Unbalanced Global Steel

Demand & Output

Why Will Chinese Steel

Demand Stagnate?

1. Unsustainable apartment construction.

2. FAI in the Chinese West lower economic multiplier

3. Rise in “shadow” loans a danger sign.

4. Municipalities have huge debt.

5. Higher household spending cuts steel intensity.

6. 200 million new urban jobs?

7. Not much net export growth. Strong RMB.

8. Rebar and HRB used far more efficiently.

9. Steel intensity at peak with FAI at 50% of GDP

10. Air & water pollution and water constraints.

11. Capital spending by heavy industry to plummet. 4

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BRIC’s are BRICKS

Sharply lower steel production estimates for

2025

Brazilian forecast cut 32% to 42.5 mmt.

CIS (Russian) forecast cut 28% to 122.7 mmt.

India forecast cut 30% to 115 mmt.

China forecast reduced 12% to 861 mmt.

MENA (increasingly self-sufficient) up 34% to 67 mmt.

5

2013e2013/2012

y/y2014e

2014/2013

y/y

CAGR

2008-

2014

2025e

CAGR

2015-

2025

Gross

Capacity

2013

2025

Capacity

2013

Capacity

Utilization

2025

Capacity

Utilization

Advanced Countries 452 -2.4% 464.6 2.7% -0.9% 542 1.3% 599 609 75.5% 89.0%

Japan 108.8 1.5% 110.2 1.3% -1.2% 121.1 0.9% 134.0 141.0 81.2% 85.9%

Western Europe 136.3 -3.0% 140.4 3.0% -2.5% 162.3 1.2% 199.7 179.7 68.3% 90.3%

United States 87.0 -1.9% 89.5 2.9% -0.4% 110.0 1.8% 113.0 125.0 77.0% 88.0%

Small Cap. Adv. 120.2 -5.2% 124.5 3.5% 1.0% 148.2 1.5% 152.8 162.8 78.7% 91.1%

China 780 6.7% 800 2.6% 8.1% 861 0.6% 927 977 84.2% 88.1%

Developing World ex-China 362 -1.5% 370 2.14% 1.6% 496 2.6% 499 621 72.6% 79.9%

Africa 6.8 -7.9% 7.2 7.1% -2.6% 10.0 2.8% 14.1 16.6 47.8% 60.1%

Brazil 33.4 -3.6% 34.0 1.7% 0.1% 42.5 2.0% 46.0 54.9 72.7% 77.5%

CIS 106.6 -4.4% 108.3 1.6% -1.0% 122.7 1.2% 167.0 176.3 63.8% 69.6%

Eastern Europe 12.9 -9.4% 13.4 4.1% -5.2% 17.0 2.0% 19.6 23.6 65.8% 71.9%

Developing Asia 21.7 1.6% 22.4 2.8% 1.3% 40.6 5.2% 29.4 51.7 73.9% 78.5%

India 79.8 3.9% 79.3 -0.6% 6.3% 114.9 3.3% 98.0 132.0 81.4% 87.0%

Latin America 31.2 -1.6% 32.9 5.3% 0.5% 46.8 2.8% 39.2 52.0 79.7% 90.0%

Turkey 34.1 -4.9% 34.6 1.5% 4.4% 34.5 -0.2% 40.3 40.3 84.6% 85.7%

MENA 35.5 3.9% 37.7 6.3% 6.9% 66.7 5.5% 45.1 73.1 78.6% 91.2%

World Total 1,594 2.1% 1,634 2.5% 3.5% 1,898 1.3% 2,025 2,206 78.7% 86.1%

World Ex-China 814 -2.0% 834 2.5% 0.2% 1037.3 1.9% 1,098 1,229 74.2% 84.4%

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Global Steel in the Decade Ahead:

Continued Slow Growth

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AGENDA

Global steel demand and demographics of output determine

the future demand for steel scrap

Steel scrap – the key industry structure “Wildcard”

Q & A

8

Steelmakers’ Metallics

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9

Global Steel Scrap Demand

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Obsolete Scrap Usage Ratio (RHS)

Obsolete Scrap Requirement (LHS)

New Scrap Usage (LHS)

Home Scrap Usage (LHS)

10 Since 2000, global steel scrap trade has increased 40 million tonnes to 99 million tonnes in 2012.

The Developing World and China have accounted for 26, or 65%, of new global demand.

Demand for imported steel scrap

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Global Exports of Steel Scrap

Developing World Imports of Steel Scrap

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11 Turkey has become the world’s largest importer of steel scrap, accounting for 23% of imports in

2012. Combined the top 10 scrap importing countries account for 75% of global trade.

Top Importers of Steel Scrap:

2005 versus 2012

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Turkey South Korea India Bellux Germany China Italy Taiwan Spain UnitedStates

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12 In 2012, total global trade of steel scrap was 100 million tonnes, of which the United States

accounted for 21%. The top 10 exporters of scrap account for 76% of all exports.

Top Exporters of Steel Scrap:

2005 versus 2012

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United States Germany Japan UnitedKingdom

France Netherlands Russia Canada Bellux

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Global Steel Scrap Supply

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Global Scrap Reservoir 1940-2010

Advanced Economies

Developing World ex-China

China

Advanced and Industrialized Developing Economies have been the dominant source of steel

scrap supply growth in the past 30+ years. In 2012, 82% of all scrap exports originated from

Advanced Countries

14

The Global Metallics Balance system calculates that China’s steel scrap reservoir that is 10-40

years old will expand from 12.1 billion tonnes in 2012 to 25.4 billion tonnes in 2035. By 2035,

China’s steel scrap reservoir may account for 49% of the global reservoir versus 16% in 2013.

Chinese Obsolete Scrap: Are you ready for arrival?

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China

Developing World ex-China

Advanced Countries

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15 When net-exports of steel scrap are accounted for as a part of Advanced Country obsolete steel

scrap demand, a significantly “tighter” supply-demand balance of steel scrap is implied.

Advanced Country Steel Scrap Surplus Not

as Abundant at Second Glance

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Trade Adjusted Obsolete Scrap Demand

Average Scrap Reservoir 10-40 Years Old

16 WSD assumes three sources of obsolete steel scrap: automotive (avg. age 5-15 yrs.), appliances

(avg. age 10-15 yrs.), and structural steel and capital equipment (avg. age 20-60 yrs.)

USA Steel Scrap Reservoir

Demographics

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1980 1985 1990 1995 2000 2005 2010 2011 2012 2013e 2014e 2015e 2016e 2017e

Auto Appliances Structural/Capital Equipment

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17 WSD’s alternative scrap calculation methodology implies a constant replenishment of the US

reservoir due to the continued cycle of consumer durables into the scrap reservoir.

USA Reservoir Comparison

18

Chinese steel consumption allocated to autos and appliances accounted for about 4% of steel

consumption in 2012 versus approximately 27% in the United States. The size of the Chinese

reservoir is largely a function of the “lifespan” of structural steels and capital equipment.

Chinese Steel Scrap Supply Demographics

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19

Assuming that the avg. age of structural steel and capital equipment is 20-60 years old, WSD’s

calculations imply a scrap deficit of 38 million tonnes in 2013, 30 mmt in 2015 and a surplus of

steel scrap of 20 mmt in 2025.

Chinese Steel Scrap Supply-Demand:

Obsolete Scrap Reservoir (20-60 yrs. old assumption)

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Average Reservoir 10-40 Years Old

Obsolete Scrap Demand

Segmented Reservoir Calculation 20-60 year old assumption

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Assuming that the avg. age of structural steel and capital equipment is 15-45 years old, WSD’s

calculations imply a scrap deficit of 26 million tonnes in 2013, 17 mmt in 2015 and a surplus of

steel scrap of 72 mmt in 2025.

Chinese Steel Scrap Supply-Demand:

Obsolete Scrap Reservoir (15-45 yrs. old assumption)

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Average Reservoir 10-40 Years Old

Obsolete Scrap Demand

Segmented Reservoir Calculation 15-45 year old assumption

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WSD forecasts the global surplus of steel scrap will rise from 14 million tonnes in 2013 to 104

mmt in 2025. Assuming the avg. age of structural/capital reservoir China is 15-45 years old,

China accounts for 69% of the surplus in 2025.

Global Steel Scrap Supply-Demand Forecast

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Obsolete Scrap Reservoir

Obsolete Scrap Reservoir

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What does it all mean?

Initial fork in the road is a policy matter: Steel scrap currently has a 40% export duty

Precedent based on revocation of the 40% export duty on coke

Assuming the “excess” scrap is contained in China: Oversupply = price decline = stimulus for substitution to the degree

possible

Increased consumption in the BOF

Increased EAF output – energy grid a constraint, good for “green” policy targets

Assuming the “excess” scrap is available to the global market: Oversupply = price decline = stimulus for substitution to the degree

possible

Increased consumption in the BOF unlikely

Temporary cost advantage for the EAF industry possible, other upstream sectors affected

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Thank You