Metallics/scrap Sourcing

in Today’s Volatiles World

Henk van de Belt

Lead Buyer Metallics, Group Procurement

Tata Steel Group

Commodity Sourcing in Today’s Volatile Times

Agenda

• Tata & Tata Steel

• Observations

• Trade

• Managing commodity sourcing

• Summary

Tata Group & Tata Steel

Tata Group

A worldwide concern (I)

India’s largest business group

with businesses in seven sectors

and operations in over 80 countries;

with products and services available in over 85 countries,

and over 425,000 employees.

Group revenue of $ 83.3 bn;

58% in geographies other than India.

Tata Group

A worldwide concern (II)

Largest companies

Tata Steel

Tata Motors

Tata Consultancy Services

Tata Power

Tata Communications

Tata Chemicals

Tata Teleservices

Titan

Voltas

Tata AutoComp Systems

Indian Hotels

• Tata Steel Group:

• Fortune 500 company

• One of the world’s top steel company

• The world’s 2nd most geographically diversified steel producer

• Global mining portfolio

• Employees strength of 81,000

• A balance global presence in 50 markets

• Manufacturing operations in 26 countriesacross 5 continents

• Serving customers all across the globe

• Turnover 2010-11: $26.6 billion

Tata Steel Group

At a glance

Tata Steel Group

Our values

• Unity

• Working together

• Integrity

• Fair, honest and transparent

• Responsibility

• Commitment and ownership

• Understanding

• Care, respect and genuine interest

• Excellence

• Highest standards, first time right

Tata Steel Group

Automotive Construction Energy & power

Rail Industry & portfolio (consumer goods, shipbuilding, aerospace,

defence & security)

Packaging

Lifting & excavating

9

Tata Steel Group

Tata Steel Europa

Tata Steel Group

Global reach

UK & Ireland

2 production hubsCrude steel capacity 10.7mtpa16 manufacturing locations33 distribution centres

3 manufacturing locations2 distribution centres

USA 1 production facilityCrude steel capacity 6.8mtpa22 distribution centres

India

1 production facilityCrude steel capacity 0.65mtpa4 distribution centres

South East Asia

3 production facilitiesCrude steel capacity 1.2mtpa3 distribution centres

Thailand

19 manufacturing locations13 distribution centres

EU (excl. UK, Irl & NL)

1 production facilityCrude steel capacity 7.5mtpa6 manufacturing locations3 distribution centres

Netherlands

BOF EAF

Observations

Global Scrap Demand & Supply observations

� Global scrap demand remains positive and is projected to keep growing with 25 to 30 Mt/year (2013 – 2017)expect to grow from 535Mt in 2012 to 648Mt in 2017 > +113Mt; growth mainly in SEA, China and India, not in EU27

� Russia moving from large over-supply to under-supply (conversion of OHF’s into EAF’s, depletion of scrap reservoir)

� China accounted for 99Mt of this demand in 2012 and this is expecting to grow to 137mT by 2017 > +38MT� What if China scrap charge achieved government aim of 200 kg/T of crude steel (first signals are an increase from

500kg/T to 600kg/T in EAF production) ; additional demand of ~75Mt of scrap is likely to lead to supply issues?

� Scrap prices movements trends with steel price/demand but typically show a strong first quarter and weakness in the

fourth quarter of a calendar year; Global prices trend in the same direction� Prices are volatile, again suggesting it is a competitive internationally traded commodity. � Results highly impacted by demand volatility, lead times and shipping (container) rates

as a consequence users moved from international to more interregional supply.

Source: WSA

� DRI production capacity is forecast to increase by over 40Mt to 2018 (from ~120Mt in 2012 to ~ 170Mt to 2018),additional short term supply mostly from N- America and Middle East supported by low cost energy (Shale gas), with the majority of planned capacities in troubled regions – Venezuela, Bahrain, Egypt, Iran, etc.

� DRI production is forecast to increase by over 30Mt to 2017 (from ~75Mt in 2012);

Global Scrap Demand & Supply observations

Source: WSA

� The majority of scrap generated is consumed within the region it arises.

� c.10% is international trade and typically flows from developed economies into developing economies with the biggest exporters being NAFTA and EU27.

� Internationally trade set by import requirement of Turkey who import c.21.5mT in 2011 (+11.8%)� Asia (excluding China) currently import c.14.3mTpa and China 5.3mTpa.� Dependency on scrap varies dramatically by region,

SEA make 83% of their steel from scrap whilst China 18%, India 29%, Japan/ S.Korea and Taiwan 41%.

International Scrap Trade

Source: WSA 04

Issues in scrap market

Scrap Trade

Situation Main Concerns

40 countries restrict scrap export by prohibiting exports, imposing taxes or controlling through administrative measures.

This protectionism could have a domino effect and hinder scrap trade (EU, USA)

Export taxes creates distortions in the intern. scrap market (price)

Scrap quality

More scrap flow in several countries.

Availability of prompt could become an issue

Without additional “pure material”, this scrap will no longer be fit for commodity grade products

• Flexible scrap collection

acceptance encourages exports

in small quantities.

• Recession and process efficiency

leads to lower prompt scrap

generation.

• Increase of non-desirable trace

elements (Ni, Cr,…) in steel due to

repeated recycling.

Strategic Objectives for Scrap

From our scrap strategy meetings the following objectives were noted:

– Optimising the use of internal scrap generation

– Working with steel plants to manage metallicsbased on value-in-use

– Securing low cost supply chains and making them more efficient for both domestic and import markets

– Group lead buying of imported scrap

– Reducing Group’s working capital

– Emphasis on supply chain visibility and control, including targeted purchases without merchant involvement & backward integration

– Set up more strategic long term scrap supplier relationship

– Explore scrap exporting area’s again

Megatrends – Impact in Steel & Commodities

• Global trends impacted massively

• China drove demand; India is accelerating it

• Capacity utilisation not yet on pre crisis levels

• Price volatility enormous in the last few years

• Cost price of raw material in steel > 60 % ; spread in scrap versus steel squeezing

• Consolidation in commodity market reduced due to crisis – but could it go any further ?

• Prohibiting exports by imposing taxes or controlling through administrative measures

• Consequences

• Spot prices very volatile

• Hedging and backward integration part of sourcing strategies

• Supplier /customer relationships changed; long term damaged?

• CSR stretches wider and outside consumer industries

Adjust sourcing strategies

Adapt sourcing organisations

Managing Commodity Sourcing

Tata Steel Group Procurement

• Principles

• Maintain a single face to the market

• Maximise value through our supplier relationships

• Achieve visibility of all spend and its co-ordination by sector

• Align and integrate our processes and communications with those of our end-users

• To be a single World Class organisation sharing best practice in tools, processes and procedures

• To promote compliance with Supplies and Corporate policy across all Tata Steel Businesses

Raw Materials

Bulk Shipping

Alloys

ScrapRefractories

Energy & Utilities

Metals

MineralsRolls

Paint

MRO Goods

Services

Corporate Services

CapitalSteel Other

Transport

Annual spend in the Group:

Managing Commodity Sourcing

Moving to the Next Phase

• Supplier Relationship Management is vital moving forward

• Needs to be carefully managed in raw materials and scrap markets driven by commodity behaviour

• Balance of power a challenge

• Technical projects will need to be more robust to drive value

• Risk management will play a greater role

─ Hedging

─ Cover policies

─ Input pricing more closely linked to outsell prices

• Backward integration is an important strategic choice

o Maybe in partnership with suppliers

o Will need to be carefully managed and value creation clearly understood

Summary & Conclusions

Commodity Sourcing in today’s volatile times

• Summary & Conclusions

• The markets have changed forever

• You need to adjust sourcing organisations to respond

• Sourcing strategies are more linked to marketing & sales

due to the impact of cost changes

• It can be managed – do not have to be a complete hostage to fortune

• Be proactive – evaluate options and put them on the corporate agenda

Thank You