07-Dec-2012

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The Future of Steel:

How will the industry evolve ?

73rd Session of the OECD Steel Committee

Paris, 6-7 December 2012

© Laplace Conseil 2012

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How will the industry evolve ?

• Introduction : The world of steel has already changed profoundly

• Trade : OECD still a net exporter : import vigilance and export prom.

• Excess capacity in OECD : Where is it ?

• Energy and Environment challenges = Scrap + Shale Gas/DRI

• Strategy, governance and social relations : Accelerate evolution.

• Implications for organisations, governments and associations.

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The world of steel has changed profoundly

• Since 2000, global steel demand is growing at a rate of 6%; 80% of that

growth is due to the phenomenal expansion of the Chinese economy,

which today represents 46% of global steel production and consumption,

that is more than twice its share of the global population.

• Globally, steel is the largest construction material (market value over

USD 1 trillion) and is substituting far more for traditional materials (wood,

brick) than it is losing share to lighter products (aluminium, plastics). For

many applications steel simply has no substitutes.

• Steel technology keeps changing and, in OECD countries where

demand is stable, the traditonal blast furnace integrated plants are

challenged by more nimble minimills that recycle scrap. Having captured

the long product market, they are now attacking the flat product sector.

• Large integrated companies keep closing plants and loose jobs, a painful

and inevitable evolution that result in a poor perception of the industry in

economic and political circles as well as in the media.

• It is therefore important to distinguish between the future of steel, which

is bright, and the future of the integrated sector, which is more cloudy in

Europe and North America.

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Since the beginning of this century,

the steel industry has entered a new era

Source : WorldSteel, Laplace Conseil analysis

World Crude Steel Output (Mt)

0

200

400

600

800

1000

1200

1400

1600

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2011

Glorious

30

Iron Age Pityful

25

China

era

+6%/yr

+1%/yr

+2,5%/yr

+ 6%/yr

1526 Mt

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5

In 12 years, China production has sextupled,

while OECD was stable and ROW grew slowly

Source : WorldSteel, Laplace Conseil analysis

Crude Steel output, CHINA, OECD and ROW (Mt)

0

10

20

30

40

50

60

70

jan-00 jan-02 jan-04 jan-06 jan-08 jan-10 aug-12

OECD

ROW

CHINA

6

Source : WorldSteel, Worldbank, Laplace Conseil analysis

Consumption per cap / GDP per cap, PPP intern. 2005

0

200

400

600

800

1 000

1 200

0 5 000 10 000 15 000 20 000 25 000 30 000 35 000 40 000 45 000 50 000

USA

UK

Japan

Korea

Germany

GDP per cap, (PPP intern 2005)

China

China rate of steel development is much

faster than the rate of more mature economies

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0%

10%

20%

30%

1982 1992 1987 1997 2002 2007 2012 ?

Steel production

y on y growth

Gross capital

formation growth

Source : WorldSteel, Financial Times, analysis Laplace Consei

Correlation between steel production growth and gross capital formation , %

China has known regular five years cycles

for capital investment, hence steel production

8

Shanghai, Beijing and Tianjin are both the

richest areas and the most steel intensive

0

200

400

600

800

1000

1200

1400

0 2 4 6 8 10 12

Guizhou

Henan

Sichuan

Shandong

Guangdong

Beijing

Shanghai

Zheijiang

Jiangsu

Yunnan

Hebei

Hubei

Tianjin

000 000 000 000 000 000

GDP/ cap (2008)

Ste

el c

onsum

ption p

er

cap

Correlation between GDP/cap and Steel Consumption /cap

Source : WorldSteel, Worldbank, China Statistical Yearbook, NBS, Laplace Conseil analysis

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Raw material prices are the “canary in the coal mine”.

Is steel heading in a new bearish direction ? Evolution of iron ore fine prices (LHS) and coking coal (RHS) ($/t)

Source : Steel Business Briefing,Bluescope, Laplace Conseil analysis

0

50

100

150

200

janv.-00 janv.-02 janv.-04 janv.-06 janv.-08 janv.-10 janv.-12

400

300

200

100

0

Coking Coal

Iron ore

10

The iron ore cost curve is very steep with many

high cost producers, leading to price instability

Source : Macquarie Research March 2012, Laplace Conseil analysis

Cumulative volume (million tonnes)

Cost Curve for Iron ore fines (US$/t CIF China equivalent basis

Established low cost producers from Australia and Brazil VS New entrants and high cost producers

200

150

100

50

0

Due to the steepness of the cost curve

A small reduction in demand or a small increase in capacity

Lead to a relatively large decline in prices

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How will the industry evolve ?

• Introduction : The world of steel has already changed profoundly

• Trade : OECD still a net exporter, import vigilance and export prom.

• Excess capacity in OECD : Where is it ?

• Energy and Environment challenges = Scrap + Shale Gas/DRI

• Strategy, governance and social relations : Accelerate evolution.

• Implications for organizations, governments and associations.

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Until 2008, international trade has grown

steadily in the OECD countries

Import and export of OECD countries, Mt

-50

0

50

100

150

200

250

300

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Import

Export

Net export

Source : WorldSteel, Laplace Conseil analysis

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Japan and Korea are large net exporters, mostly

to ROW. NAFTA is the only net importing region

0

10

20

30

40

50

60

EU 27 + TK Japan + S.Korea NAFTA Net OECD

Japan+S.Korea

Net exports to NAFTA

Japan+S.Korea

Net exports to EU 27

Net export position of the three largest trading regions in 2010 (Mt)

Source : Worldsteel, Laplace Conseil analysis

EU27 net exports to NAFTA

The bulk of

Japan+ S. Korea

net exports are for

third countries

The bulk of

NAFTA net

imports are from

third countries

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Global trade disputes have been recurrent,

but OECD has usually fared fairly well.

• Since 1990, OECD was always a net exporter of steel, except when

the industry was running practically at full capacity due to strong

domestic demand (for example from 6/2006 to 6/2008).

• Moreover, exports were usually for high value added products, while

imports were for semis and common grades steel.

• Nevertheless, import pressure often had a negative impact on price

and profitability, particularly in the US.

• With the advent of shale gas, the US has all the ingredients to

become low cost producers and can become net exporters as well.

• Import vigilance remains « de rigueur » for risk of unfair trade, but

focus should shift on export promotion.

07-Dec-2012

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How will the industry evolve ?

• Introduction : The world of steel has already changed profoundly

• Trade : OECD still a net exporter : import vigilance and export prom.

• Excess capacity in OECD : Where is it ?

• Energy and Environment challenges = Scrap + Shale Gas/DRI

• Strategy, governance and social relations : Accelerate evolution.

• Implications for organizations, governments and associations.

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Except in 2008, when the industry was running

at full capacity, OECD was always a net exporter

Net export of OECD countries, Mt

-30

-20

-10

0

10

20

30

40

50

60

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Source : WorldSteel, Laplace Conseil analysis

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A sharp price increase in S1 2008 shows that

the industry was running at full practical capacity

Source : WorldSteel, SBB, Laplace Conseil analysis

0

20

40

60

jan-00 jan-02 jan-04 jan-06 jan-08 jan-10 aug-12

0

100

200

300

OECD

ROW

China

Crude Steel output (China, OECD, ROW) versus

In OECD, the production level achieved in S1 2008 can be used

as a measure of practical capacity of the industry. The current overcapacity

can be measured against that level

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Based on 2012 production level, integrated mills

represent 85% of OECD overcapacity

Source Worldsteel, Laplace Conseil analysis

Share of Capacity and excess capacity by process and region (Mt)

2012e Capacity in OECD

Total = 520 Mt

Europe BOF

105

NAFTA BOF

48

Asia BOF

133

Europe EAF

105

NAFTA EAF

75

Asia EAF

54

2012e estimated overcapacity in OECD

Total = 51 Mt

Asia

EA

F 1

Europe BOF

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NAFTA BOF

8

Asia BOF

7

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Most of the current OECD overcapacity is

concentrated in integrated mills in Europe and USA

Rate of overcapacity by process and region (% of installed capacity)

Source Worldsteel, Laplace Conseil analysis

0%

10%

20%

Europe BOF NAFTA BOF Asia BOF Europe EAF NAFTA EAF Asia EAF

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How will the industry evolve ?

• Introduction : The world of steel has already changed profoundly

• Trade : OECD still a net exporter : import vigilance and export prom.

• Excess capacity in OECD : Where is it ?

• Energy and Environment challenges = Scrap + Shale Gas/DRI

• Strategy, governance and social relations : Accelerate evolution.

• Implications for organizations, governments and associations.

07-Dec-2012

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The OECD steel industry is facing severe

energy and environmental challenges

• For integrated mills, energy (including coking coal) is the highest

cost item; for minimills it is the second highest. Even allowing for the

recent coal price decline, energy is the cost component that has

grown the fastest.

• The industry has made very impressive efficiency improvements in

the last decades, but with current processes, the technological limits

are almost reached or uneconomical to overcome.

• Environmental pressures are also mounting : CO2 taxation and air

pollution, specifically for integrated plants that produce steel with by

coking and sintering plant, blast furnaces and BOF shops.

• Laplace Conseil believes that (part of) the solution to these

challenges is technological : replace (part of) virgin iron ore by

recycled scrap and (part of) coking coal by shale gas.

This means going « DRI and EAF » wherever possible

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For many decades, the share of EAF steel

has grown steadily in Europe and NAFTA

Source : WorldSteel, Laplace Conseil analysis

EAF share in crude steel production, by region (%)

0%

10%

20%

30%

40%

50%

60%

70%

1961 1971 1981 1991 2001 2011

NAFTA

EU-27, TK, Nw, Sw

Jpn, Kor, Au, NZ

Asia has not followed the same track as EU and Nafta

due to the lower availability of scrap and higher electricity

cost, but also due to the modernity and effectiveness of

the integrated producers in Japan and Korea

60%

50%

15%

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The environmental advantages of scrap recycling

over traditional BF/BOF smelting are important

Electricity sources : 25% nuclear, 50 % thermal, 25% hydro and/or renewable

• Source : Industry data, Laplace Conseil estimates

21- 25

8 - 11

2.1 - 2.5

Scrap

Minimill

2.8 - 3.0

GJ/t CO2 t/t Virgin material/t

0.4 - 0.7

0.2 -0.3

Conventional

Integrated mill

Scrap

Minimill

Conventional

Integrated mill

Scrap

Minimill

Conventional

Integrated mill

Environmental comparison of minimills and integrated mills in OECD countries*

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In EU and US, production costs of BOF are usually

above EAF, particularly when steel demand is low

0

100

300

400

500

600

EAF

BOF

200

Source : SBB, Eurostat, EIA, Steel on the net, Laplace Conseil analysis

Cost comparison BOF and EAF crude steel in Europe and USA (€/t)

100

200

300

400

500

600

EAF

BOF

0 2004 2006 2008 2010 2004 2006 2008 2010

Scrap prices are moving in sync with iron ore and coal price

So as to also capture the benefits of global steel growth

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The EU and US scrap “mines” each have

a proven and probable reserve of 3 billion tonnes

Source : Worldsteel, Laplace Conseil analysis & estimates

0

500

1 000

1 500

2 000

2 500

3 000

3 500

1950 1960 1970 1980 1990 2000 2010

EU 27

US

Size of the scrap “mine”, proven, probable and inferred, Mt*

* Computed as the difference between steel consumption (including indirect imports)

and scrap collection. An estimate is made for unrecoverable scrap due to current use

rust or uneconomic recovery

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US and EU are large net exporter of scrap,

primarily to Turkey; OECD is a small net importer

Breakdown of OECD scrap net imports/exports, Mt

Source : WorldSteel, Laplace Conseil analyses

-15

-10

-5

0

5

10

EU JKAN NAFTA

Net OECD

Turkey

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Shale gas is redefining the US energy

landscape: prices are at the lowest since 2002

0

2

4

6

8

10

12

14

16

18

1996 1998 2000 2002 2004 2006 2008 2010 2012

Japan LNG Cif

Germany

average

import price

UK Heren

NBP Index

US

Henry Hub

Evolution of natural gas prices accross OECD countries (US$/MBTU)

Source : EIA, BP, Laplace Conseil Analysis

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US mills are located over huge shale gas plays

* Pittsburg-Cleveland area: 7 BF/BOF plants + 22 EAF plants (cap. 21Mtpy)

** Chicago area: 4 BF/BOF plants + 4 EAF plants (cap. 24Mtpy)

*** Ontario Area: 3 BF/BOF plants + 4 EAF plants (cap. 10Mtpy) Areas further detailed (see regional maps)

Source: EIA, AISI, USGS, Laplace Conseil analysis

Main shale gas reserves

Iron Ore deposits

EAF plants flats

BOF plants

EAF plants others

Canada

Location of US steel mills and shale gas plays

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In 2012, natural gas prices provide a competitive

advantage to DRI compared to scrap, over $100/t

Source: SBB, EIA, Steelonthenet, UBS, Nucor, Laplace Conseil analysis

0

100

200

300

400

500

DRI US HM#1 Scrap Solid Pig Iron

(Brazil imports)

Pellets

Transport

Natural Gas

Electricity Oxygen

Labour

Maintenance 289

406

484

Cost comparison, DRI, Scrap, Pig Iron and Hot Metal Average cost Q2 2012, United States, $/t

Note: Yield, carbon value and copper penalty are not included

Liquid pig iron

(average US integrated

476

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Nucor, already technology leader is the first to

capitalize on the game changing shale/DRI strategy

• Nucor is the world leader in EAF/TSC (thin slab caster) technology for

hot rolled coils production with 6 minimills in operation in the US and a

combined capacity of 12 Mt of hot rolled coils (not including plates).

• Nucor is building a DRI plant in Alabama (2 modules for 5 Mt) in

addition to its 2 Mt plant in Trinidad and has signed a 20 years

contract for shale gas with Encana Oil and Gas Inc. to drill at « cost

plus carried interest » all the gas needed for Nucor operations.

• Nucor flat product expertise coupled with its DRI experience will be

used to enter the automotive sheet market and other high grade steel.

• Nucor has an unbroken record of 156 quarterly dividends, has the best

return of capital employed of the industry and has never lay-off a

“teammate” throughout the steel cycles.

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Minimill technology drawing on DRI, EAF and TSC

costs one fourth of the same integrated mill

Source : SBB, USGS, Steel on the net, EIA,WSJ, Laplace Conseil analysis

Comparison between Integrated and minimill philosophies for investment (Billion US$)

6,8

11,8

0,75

3,0

5

0,25

1,0

1,0

0

2

4

6

8

10

12

TK CSA Br

5 Mt

TK Alabama US

4,2 Mt

Total

integrated

DRI

2,5 Mt

Scrap

2,5 Mt

EAF/TSC

5 Mt

Cold & Coat

4 Mt

Total

Minimill

Port and infrastructure

Coke oven HR

Sintering plant

Power plant

2 Blast furnaces

BOF

Slab caster

Transport to US

Hot strip mill

Cold rolling Mill

Galv lines

Comparison of Scrap/DRI/EAF vs iron ore/coal/BF/BOF

Iron ore and scrap : 200 -250% of integrated route

Total Energycost (coal vs nat gas) : 50% of integrated

CO2 emissions : 30% of integrated route (CH4)

Dust and other emissions : 20 - 40% of integrated route

Labor cost : 35 to 40% of integrated route

Maintenance cost : 25% of integrated route

Total transports to client cost : 30 - 50% of integrated route

Financial cost : 20% of integrated route

Total cost comparison : minimill is 20 – 30% lower cost

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In NAFTA, DRI/EAF production will grow from

9 to 39 Mt, replacing imports and half the BF/BOF

Source: WorldSteel, AISI, Midrex, Laplace Conseil analysis

NAFTA market supply by origin (Mt crude steel)

BOF / BF

36%

EAF Scrap

47%

EAF DRI

7%

Steel net imports

10%

2011, 100% = 130 Mt Forecast 2020, 100% = 139 Mt

25 / 39 #BF in use / available

BOF / BF

19%

EAF Scrap

53%

EAF DRI

28%

15 / 21 #BF in use / available

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With the advent of DRI, nearly half of the NAFTA

integrated mills will be threatened by closure

RG Steel likely closure

6 Mt

Top 2 Co’s integrated

possible closures

18 Mt

Other integrated

possible closures

5 Mt

Operating

BOF

34 Mt

Source: Worldsteel, Laplace Conseil analysis

NAFTA Integrated mills utilization forecast by 2020

NAFTA 100% = 63 Mt crude steel

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In Europe, shale gas are apparently abundant

but exploration/exploration is still very prudent

Source: Kuuskraa et al

Europe non conventional gas resources

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In Europe, integrated plants will probably shift to

more EAF production, some DRI could be imported

Source: WorldSteel, AISI, Midrex, Laplace Conseil analysis

EU-27 +TK, SWI, NW production , by origin (Mt crude steel)

BOF / BF

51%

EAF Scrap

48%

EAF DRI 1%

2011, 100% = 213 Mmt Forecast 2020, 100% = 236 Mmt

55 / 79 #BF in use / available

BOF / BF

44%

EAF Scrap

50%

EAF DRI 6%

41 / 49 #BF in use / available

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By 2020, the European integrated capacity

could be reduced by one third

Source: Kuuskraa et al, Laplace Conseil analysis

Operating

BOF

103 Mt

Top 3 Co’s integrated

possible closures

29 Mt

Other integrated

possible closures

10 Mt

EU27 + TK 100% = 150 Mt crude steel

Liège + Florange + Carsid closure

8 Mt

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How will the industry evolve ?

• Introduction : The world of steel has already changed profoundly

• Trade : OECD still a net exporter : import vigilance and export prom.

• Excess capacity in OECD : Where is it ?

• Energy and Environment challenges = Scrap + Shale Gas/DRI

• Strategy, governance and social relations : Accelerate evolution.

• Implications for organizations, governments and associations.

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We believe that “Changes” will continue to

characterise the OECD steel industry evolution

• The integrated sector will continue to bear the brunt of the effort, in

particular the two or three largest integrated companies.

• While restructuring is currently more important in Europe, it is

probable that North America will soon join in the process as more

modern producers increase their presence in the market thanks to

shale gas DRI.

• Consequently, strategy, governance and social relationship will

need to evolve

– The strategy of the large integrated companies will need to change so as to take

into account the impact of cheaper scrap and DRI, especially in the US.

– The governance of these companies will also need to change to find solutions at

the shop floor level and not just in boardrooms. (Mitbestimmung or co-

determination as practiced in Germany and many neighbouring countries)

– The social relationships will need to improve to reduce confrontation, share

decisions and flatten hierarchical pyramids for better workers empowerment.

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How will the industry evolve ?

• Introduction : The world of steel has already changed profoundly

• Trade : OECD still a net exporter : import vigilance and export prom.

• Excess capacity in OECD : Where is it ?

• Energy and Environment challenges = Scrap + Shale Gas/DRI

• Strategy, governance and social relations : Accelerate evolution.

• Implications for organizations, governments and associations.

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Implications for international organizations,

governments and industry associations

• Focus assistance on the remaining unrestructured integrated

producers where the bulk of the overcapacity is concentrated.

• Encourage OECD trade of high grade steel as well as technology

and best practices; Relax but remain vigilant for « unfair » imports.

• Promote recycling (collectors, processors, EAF steelmakers).

• Encourage use of gas as substitute for coal wherever possible.

Anticipate replacement of older BF/BOF by DRI/EAF.

• Encourage modern social relationships and local management.

• Promote steel as best material for the future.

07-Dec-2012

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Thank you for your attention

Metal and mining Consultant

www.laplaceconseil.com