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Global Market and Ukrainian
Steel Industry Development
VlasyukV.S.
SE UPE Co. Research & Consulting, Ukraine
70th Session of the OECD Steel Committee Meeting,
Paris, 12-13 May 2011
SE UPE Co. Research & Consulting
State Agency of Ukraine for Management of
State Corporate Rights and Property
161
543567
0
100
200
300
400
500
600
2003 2004 2005 2006 2007 2008 2009 2010 2011-1Q
crude steel
1. Increase of crude steel production cost
During 2003 – 2011 production cost of crude steel has increased rapidly
by almost 4 times from 161$/t (2003) to 567$/t (1Q-2011)
Increase by
400 $/tor
3.5 times
I. Global market tendencies
Source: UPE Co.
Pro
duction c
ost, $
/t
Ukraine
1 328
1 218
1 424
1 500
901
652
798
836
0
200
400
600
800
1 000
1 200
1 400
1 600
1951 1961 1971 1981 1991 2001 2011 forecast
World World (w/o China)
2. World steel production growth
However, steel remains the main structural material and steel consumption continues to
grow at an unprecedented rate. This year crude steel production in the world will reach a
new record 1 500 million tonnes due to further consumption increase in the developing
countries (especially in China +38-40 million tons) and further recovery of production to
pre-crisis level in the advanced economies
Fundamental factors dominate.
Robust demand in developing
countries pushes steel production up
Source: WSA (fact), UPE Co. (forecast)
Cru
de s
teel p
rod
uction
, M
t
I. Global market tendencies
18,3 17,0 17,3
37,1
82,6
59,3
147,4
181,0
0
20
40
60
80
100
120
140
160
180
200
1998 2000 2002 2004 2006 2008 2010 (1Q)
2010 (3Q)
2011(1Q)
50,939,8
48,1
125,0
300,0
129,0
225,0
328,0
0
50
100
150
200
250
300
350
1998 2000 2002 2004 2006 2008 2010 (1Q)
2010 (3Q)
2011(1Q)
Average annual prices in 2011 are expected to be:
for iron ore - 165 $/т fob Brazil (+43.5% in comparison with 2010)
for coking coal - 280 $/т fob Australia (+50.4% in comparison with 2010).
Further increase of demand has led to growth of prices in 2nd quarter against 1st quarter of 2011 :
o iron ore +23.5% up to 184 $/т fob Brazil
o coking coal +42.6% up to 328 $/т fob Australia
3. Raw material prices continue to increase
Vale Carajas fines (CJF) 66% Fe
$/t fob Brazil (to Asian market)
Hard coking coal, Peak Downs
$/t fob Australia (to Asian market)
Source: SBB, UPE Co.
10-times
increase
7-times
increase
I. Global market tendencies
75122
16347
96
123
32
61
84
30
39
43
26
24
27
18
17
18
29
29
33
22
26
27
49
51
53
0
100
200
300
400
500
600
2009 2010 2011 forecast
other costs
labour
el/energy
Ferroalloys
Natural gas
Raw materials delivery
Scrap
Coking coal
Iron ore
In 2011 the rise of steel cost (appx. +105$/t) is expected mostly due to increased price
for iron ore, coking coal and scrap
4. Further increase of steel cost in 2011
Billet production cost ($/t ExW) in Ukraine (for non-integrated mills)
+138$
+105$
Source: UPE Co. est.
327
465
571
I. Global market tendencies
0
100
200
300
400
500
600
2003 2004 2005 2006 2007 2008 2009 2010 2011-1Q
0
100
200
300
400
500
600
700
800
2003 2004 2005 2006 2007 2008 2009 2010 2011-1Q
5. More rapid growth of the production cost in comparison with
the market price for steel products
production cost, $/t ExW
While the current production cost has already exceeded the 2008 peak level,
steel product prices are still below the pre-crisis level of 2008
Source: UPE Co. est.
export price, $/t fob Black Sea
billet billet
I. Global market tendencies
83,1%
75,3%
70%
72%
74%
76%
78%
80%
82%
84%
before crisis (2007)
nowadays(2011)
365
570
0,00
100,00
200,00
300,00
400,00
500,00
600,00
before crisis (2007)
nowadays(2011)
6. Millstones of competition
Post-crisis situation in the global steel market is quite different from the pre-crisis one. The main distinction
consists in the availability of two factors unfavorable for producers, namely “excess” of capacities and high
production costs. This situation intensifies competition dramatically and bears substantial risks for numerous
outdated and non-efficient mills, especially for those not integrated with raw material producers
Overcapacity
Production cost
increase
Capacity utilization %
Steel cost $/t
I. Global market tendencies
100
200
300
400
500
600
700
800
2003 2004 2005 2006 2007 2008 2009 2010 2011-1Q 2011-2Q
production cost+transport
market price, fob Black Sea
7. Decrease in profit of steelmakers (e.g. Ukraine)
Since 2009 steelmakers operate with a much more modest margin
as compared to the pre-crisis years
Billet, $/t
Source: UPE Co. est
Market balance as a
dominant factor in pricingProduction cost as a
dominant factor in pricing
I. Global market tendencies
8. Impact of steel production cost on the market
Decrease of steelmakers profit
Change of the seasonal price variations, namely
more intensive price increase in 1st quarter
Acceleration of vertical integration
I. Global market tendencies
9. Key macroeconomic and financial indicators still favorable
for global economy
Source: ECB, Bloomberg
Indicators Jul 08 Jan 09 Jun 10 Apr 11
Interest rate of Federal Reserve System (USA),
%2,0 0,25 0,25 0,25
Interest rate of European Central Bank (EU), % 4,25 2,0 1,0 1,25
Interest rate of Bank of Japan, % 0,5 0,1 0,1 0,0
3 month USD LIBOR/OIS spread, b.p. 70 120 33 16*
Commercial bank deposits at ЕCB, $ bn 0,6 360 214 24
Price per share JP Morgan Chase on NYSE, $ 41 23 39 45
* Corresponds to pre-crisis level which made up 10-15 (June 2007)
Today's global financial situation looks to be quite stable owing to the governmental monetary policy
(low interest rates and free access to liquidity). In 2011 quite comfortable conditions for crediting can
be expected due to economic growth and lending renewal in developed countries
I. Global market tendencies
0
20
40
60
80
100
120
140
0
200
400
600
800
1000
1200
1400
1600Ja
n
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
Jan
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r
Jul
Oct
Jan
Ap
r
Jul
Oct
Jan
Ap
r
Jul
Oct
Jan
Ap
r
Jul
Oct
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Billet $/т fob Black Sea (left axis) Crude oil, WTI $/bbl (right axis)
10. …Nevertheless alarms of the looming threat are coming …
Source: Bloomberg, IMF, UPE Co.
Soft monetary (easy-money)
policy by the FED
(during 2005-2007 interest rate
decreased from 6% till 1%)
Over the 2008-2010 the
FED issued aprox. 10 trln. $
which began to appear on
the commodity marketNew
bubbles?
FED can not change its nature. Bail-out programs and huge amount of liquidity issued
by the FRS during 2008-2010 cause risks of new bubbles in post-crisis global
economy.
Rocketing price for oil and gold are the first warning signs
I. Global market tendencies
11. Rates of economic development in Ukraine
Despite continuing economic recovery in the period of 2010-2011 Ukrainian key
macroeconomic indicators are still below pre-crisis levels.
II. Ukrainian steel industry development
4,5%
11,5%
7,0%
0%
2%
4%
6%
8%
10%
12%
14%
GDP Industrial Production Construction
2011, forecast
100 102
8791
95
30
40
50
60
70
80
90
100
110
2007 2008 2009 2010 2011F
GDP Index (2007=100)
10095
74
82
92
30
40
50
60
70
80
90
100
110
2007 2008 2009 2010 2011F
IP Index (2007=100)
100
84
44 4144
30
40
50
60
70
80
90
100
110
2007 2008 2009 2010 2011F
Construction Index (2007=100)
Source: State Statistics Committee of Ukraine
31,833,1 34,1
36,938,7 38,6
40,942,8
37,1
29,5
32,734,5
0
5
10
15
20
25
30
35
40
45
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F
12. Crude steel production
In 2011, steel production in Ukraine will reach 34,5 mln t, which corresponds
only to 2002 level and is much lower than in pre-crisis 2007. So the impact of
recent crisis on the steel output in Ukraine is still very essential.
Mt
II. Ukrainian steel industry development
Source: State Statistics Committee of Ukraine (fact), UPE Co. est.
18,6 20,728,4
20,9 21,616,6
1,51,9
3,1
0
10
20
30
40
50
60
2000 2005 2010
EAF
OHF
OBC
13. Steel capacity utilization
Within 2005-2010, Ukraine has increased steelmaking capacities on the base of operating
plants. Ukrainian ISW`s still use outdated OHF technology, but its share is continuously
decreasing. Particularly, in the period of the last 5 years the volume of OHF in total
steelmaking capacities has decreased from 21.6 mln t to 16.6 mln t.
Capacity utilization in Ukraine in post-crisis period is below the world average level,
which reflects the existence of excessive capacities and enhanced competition.
Capacity by process, Mt Utilization, %
41.044.2
48.1
II. Ukrainian steel industry development
81%87%
93%
61%70%
79%84% 83% 68%
75%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Ukraine
World
Source: Production-Economic Association “Metallurgprom”
14. Raw materials prices increase
In line with the global tendencies, prices for raw materials in Ukraine in 1H2011 has risen
as compared to 2010 levels:
• Iron ore – by 58% to 130 $/t
•Coking coal – by 27% to188 $/t
•Scrap – by 41% to 376 $/t
$/t on a delivered to mill basis, w/o VAT
296
79
148
176
199
0
50
100
150
200
250
300
350
370
140
267
392
360
0
50
100
150
200
250
300
350
400
450Iron Ore Concentrate,
66% FeCoking Coal Scrap 3A
105
55
82
121
138
0
20
40
60
80
100
120
140
160
II. Ukrainian steel industry development
Source: Production-Economic Association “Metallurgprom”
534
325
462
570
0
100
200
300
400
500
600
2008 2009 2010 2011F
15. Steel cost
Due to rise in raw materials prices, this year cost of steel will increase by 24% y-o-y (for
non-integrated mills) and surpass pre-crisis level.
$/t, ExW basis
II. Ukrainian steel industry development
Source: UPE Co. est.
28,2
26,3
22,523,8
24,5
20
25
30
2007 2008 2009 2010 2011F
16. Steel export: regional structure
In 2011, Ukrainian export will go up modestly – to 24.5 mln t, which is substantially less
than 2007 level. Middle East and Africa, as well as EU will remain key partners of Ukraine
Asia16%
America3%
Middle East & Africa
32%
EU24%
Europe (non EU)
11%
CIS14%
2010
Asia10% America
9%
Middle East & Africa
31%EU
18%
Europe (non EU)17%
CIS15%
2007
Ukrainian export, Mt
II. Ukrainian steel industry development
Source: State Statistics Committee of Ukraine (fact), UPE Co. est.
26,1
3,44,2
4,9
6,87,5
8,2 8,7
11,2
9,3
6,27,5
8,5
0
5
10
15
20
25
30
1990 - 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F
17. Apparent steel use
After almost 2-times drop in 2008-2009, domestic steel consumption continues to recover.
This year, internal consumption will add approximately 1 mln. t of finished steel products,
which corresponds to the level 2005-2006
Mt
II. Ukrainian steel industry development
Source: UPE Co. est
18. Steel import increase
In 2010, Ukraine has turned back to active import of steel. It is expected to import up to 2
mln t of steel products this year. The dominant share of imported products is not
produced in Ukraine.
The share of import in covering of domestic demand will rise to 24%
Mt
II. Ukrainian steel industry development
18%
25%
15%
22% 24%
2,1
2,3
1,0
1,7
2,0
0%
10%
20%
30%
40%
50%
0,0
0,5
1,0
1,5
2,0
2,5
2007 2008 2009 2010 2011F
share of import, %
import steel products
Source: State Statistics Committee of Ukraine (fact), UPE Co. est.
18,6 20,728,4 32,4
44,9
20,921,6
16,612,71,5
1,93,1 4,6 6,2
0
10
20
30
40
50
60
2000 2005 2010 2012F 2018F
EAF
OHF
OBC
19. Modernization projects for steel production
A key point of modernization is the replacement of OHF by OBC and EAF. The total
capacity is expected to reach 51.1 mln t in 2018.
Also we anticipate to abandon the use OHF
OBC59%
OHF35%
EAF6%
2010
OBC88%
OHF0%EAF
12%
2018
II. Ukrainian steel industry development
41,044,2
48,149,7 51,1
Capacity by process, Mt
Source: Production-Economic Association “Metallurgprom”
24,4
22,8
22,0
22,5
23,0
23,5
24,0
24,5
25,0
before after
20. Energy and materials saving
The effect of modernization programs:
Energy consumption (GJ)
per 1t crude steel
1,35
1,13
1,00
1,05
1,10
1,15
1,20
1,25
1,30
1,35
1,40
before after
CO2 emission (t)
per 1t crude steel
reduction by 6,6% specific energy
consumption from 24,4GJ to 22,8 GJ per
1t steel, incl. saving of up to 2.5 bln. m3 of
natural gas annually
cutting down СО2 emissions by 16,3% from
1,35t to 1,13t per 1 t of steel; and other
pollutants by 33% from 1,45kg to 0,96kg per
1 t of steel
-6.6% -16.3%
II. Ukrainian steel industry development
Source: Production-Economic Association “Metallurgprom”
21. The cost of modernization programs
Updating programs will allow to comply with advanced
world environment protection standards
Total value of modernization programs makes up
approximately $ 21 bln, incl. $15 bln in steel-melting
properly
The main financial burden will be borne by companies.
Also exists an essential need in loan capital
II. Ukrainian steel industry development
Steel market:
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