E U R O P E & T H E C I S : W h a t d o e s t h e f u t u r e h o l d ?

SBB European Steel Conference Global reach; local impact

Barcelona, May 2011

ANTON BAZULEV

DIRECTOR OF EXTERNAL RELATIONS

NLMK

CIS steel sector at a glance

0

2

4

6

8

10

12CIS crude steel production CIS steel consumption

o Surplus of steel is exported from Russia and the CIS countries mostly as semi-finished products

o There is a huge potential for the CIS steel consumption

2

Source: Word Steel Association (WSA). State statistics organizations

m t

Steel exports: CIS is a largest player

0 50 100

CIS

China

Japan

EU

CIS EXPORTS BY PRODUCT

Slabs

HRC

CRC

Coated

Longs

CIS EXPORTS BY DESTINATION

EU

MENA

Asia

NAFTA

Other

LARGEST STEEL EXPORTERS

Source: WSA

Source: WSA, Statistic services (2005-2009)

Source: Statistic services (2005-2009)

3

m t %

%

Crude steel production costs

CIS STEEL PRODUCTION ADVANTAGE

0

50

100

150

200

250

Cost advantage

Labor

Scrap

Iron ore

Coal

o Cost advantage mainly lies in the access to low-cost raw materials

o Ongoing assets rewamp in CIS to eat into EU advantages – energy efficiency and labor productivity

0 100 200 300

Coal

Coke

Iron ore

Scrap

Labor

Other

Energy

CIS W.Europe

Source: WSD, Company estimates 4

$/t

$/t

CIS: further productivity growth

0

0.5

1

1.5

2

2.5

3

199

3

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

Productivity index, 1993=100

STEEL SECTOR PRODUCTIVITY

0 5 10

Russia

USA

Japan

EU

Russia USA Japan EU

o Modernization and business processes optimization significantly improved productivity of the CIS steel sector

o Still remain further room for improvement

Source: WSA Source: McKinsey researc

5

Per.hours/t

Raw material access favors production growth

TOP 3 IMPORTERS

49%

19%

11%

Iron ore imports

EU

Asia

China61%

7%

23%

C/coal imports

EU

LatAm

Asia

PRICES: COKING COAL AND IRON ORE

0

100

200

300

400

500

Jan

01

Jul 0

1

Jan

02

Jul 0

2

Jan

03

Jul 0

3

Jan

04

Jul 0

4

Jan

05

Jul 0

5

Jan

06

Jul 0

6

Jan

07

Jul 0

7

Jan

08

Jul 0

8

Jan

09

Jul 0

9

Jan

10

Jul 1

0

Jan

11

Iron ore C/coal

o CIS has the largest raw materials reserves:

o #1 in iron ore

o Top 3 – coking coal

o CIS Steel sector is vertically integrated in captive raw materials supply

o >65% - coal self-sufficiency

o >70% - iron self-sufficiency

o This leaves the sector shielded from the raw materials market fluctuations

Source: SBB, Bloomberg

Source: WSA

6

%

$/t

BF production steadily becomes less and less efficient in Europe

60%

65%

70%

75%

80%

85%

90%

95%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

BOF (EU15) run rate BOF (CIS) run rate

o During the last decade BOF steel production in EU was steadily declining

o During the downturn the BOF operations become less efficient…

o Available low cost semis allow EU steel sector to reduce costs at the trough of the cycle

Source: WSA, Company estimates

7

%

CIS & EU – natural trading partners in steel

o 35% of semis exported to EU

o 75% of CIS exports to EU are semis

o … demonstrates an excellent cross border value chain integration of low cost semis producers in CIS offering competitive pricing (as compared to EU marginal cost of steel production) and short lead times due to geographic proximity of the regions

3.678 4.430 5.623 4.418 5.764

0.000

5.000

10.000

15.000

20.000

25.000

2006 2007 2008 2009 2010

EU 27 ROW

RUSSIAN EXPORTS OF SEMIS

,000 t

75%

25%

Semis & other Finished steel

CIS EXPORTS TO EU BY PRODUCT

Source: Russia’s Federal Statistics Agency Source: Eurostat

8

%

Russian quotas to the EU

0

500

1000

1500

2000

2500

3000

3500

4000

2005 2006 2007 2008 2009 2010Remaining volumes available for imports based on importquotas

o 80% of quotas for flat steel and 20% for long steel are covered

o Imported flat steel feedstock is used for further processing and value creation by EU re-rollers and manufacturing businesses

o Possibility to add value to long steel is limited, so local production is more competitive in the regional markets

80%

20%

Flat imports (CIS) Longs imports(CIS)

IMPORT QUOTAS COVERED

,000 t Exports are sustainably lower than quotas envisage

Source: Russian Union of Metal Exporters Source: Russian Union of Metal Exporters

%

10

100

120

140

160

180

200

220

240

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009ASU EU27 Steel production EU27

o Crude steel becomes economically justified only when steel prices are high

o EU is one of the largest exporters and in order to maintain its market position in the global steel market it requires a substantial imports of semi-finished steel as the level of ASU is matching steel production

EU: market position supported by CIS supply

0

5

10

15

20

25

EU Exports EU Imports

Value added

HRC

Semis

STEEL FLOWS: CIS TO EU

Russia Ukraine

Kazakhstan

- Slab supply

- Finished steel from EU CIS: 6.7 mt

ROW: 1.2 mt

CIS: 1 mt

ROW: 15.3 mt

Source: WSA

Source: Eurostat

Source: Eurostat

mt

mt

EU is efficient in steel–intensive industries

11

0

500

1000

1500

2000

2500

2006 2007 2008 2009 2010

Mech'l engineering Locomotives & railcars

Vehicles Ships, etc

€ 500

€ 1,455 € 955

1 importedton

Value added 1 exportedton

EU: VALUE ADDED BUSINESS MODEL

,000 t

EU EXPORT OF MACHINERY PRODUCTS

o Developed manufacturing sector in EU (auto, engineering) shapes the steel sector business model favoring

o … efficient high-value tailor made products manufacturers offering

o … intensive service which requires significant technical collaboration

Source: Eurostat Source: Eurostat

€/t

BOTH TRENDS ARE BENEFICIAL FOR THE EU AND RUSSIA! 12

Strengthening Russia’s and CIS’s role as supplier of semi-finished and finished steel for

the EU

• Quality improvement

• Expanding product range

• Captive downstream assets in

the EU (NLMK, Mechel, Evraz,

others)

Developing EU processing outlets closer to Russian steel

suppliers and consumers in the CIS

• Automotive

• Mechanical engineering

RUSSIA & EU: further development trends

Trend 2: Downstream development Trend 1: Upstream integration

NLMK: Unique and competetive business model

A fully integrated supply chain with own raw material sources, conversion and logistics system

Plate BU : 1,750,000 t capacity

Strip Product BU : 2,600,000 t capacity

Available slabs 7,000,000 t

Annual production capacity (end of 2011 forecast)

12,400,000 t of steel

13

14

Conclusion: CIS and EU - partners in steel

o CIS position in low cost crude steel production perfectly fits massive sustainable market in EU which make us natural partners in steel value chain

o Last decade Russia completely overhauled its crude steel facilities making it one of the modern in the world. Around $32 bn were invested in 2000-2010

o Finished steel exports from Russia are not always able to meet local demand in EU

o EU-based rolling facilities can offer an extension to Russian steelmakers that match the demand from European customers

o Finished steel imported from EU saturates growing demand in innovative steel solution in Russia. We are an excellent example of a win-win cooperation in the global economy!

T H A N K Y O U

SBB European Steel Conference Global reach; local impact