Presented by Dr. V. Vlasjuk

Director, UPE Co. Research&Consulting, Ukraine

CIS Steel and Raw Materials in the World Markets Kyiv, 23-24 April 2012

I. The differences between CIS metallurgy

50 40 30 20 10 0 80 70 60 Mt

12,2 5,5 26,1

2000 Russia

4,8 20,0 44,1

2011

OHF 7% EF 29%

Ukraine 80 70 20 10 0 60 50 40 30 Mt

11,8 1,2 11,5

2000

9,5 1,9 23,2

2011

Russia 2011 OBC 64% OHF EF OBC

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

1,4

2000 Kazakhstan

2,6

2011 50 45 20 15 10 5 0 40 35 30 25 Mt

Ukraine 2011

2000 Belarus

4,6

2011

OHF 27% EF 6% OBC 67%

Source: WSA, UPE Co. est. Since 1991, there have been significant differences in the development of steel production in the CIS countries. First of all, it can be seen in the technology of smelting

I. The differences between CIS metallurgy

30 20 10 0 80 70 60 50 40 export 40,7 27,4 2007 Russia domestic 40,1 24,7 2011 30 20 10 0 80 70 60 50 40 Ukraine export 12,3 28,2 2007 Source: UPE Co. est. domestic 6,4 27,1 2011

domestic 62% Russia 2011 export 38% Ukraine 2011 domestic 19% export 81%

The share of exports in sales is dominant in Ukraine and is still high for Russia

I. The differences between CIS metallurgy

slab billet heavy plate hot-rolled coil rebar wire rod heavy section cold-rolled coil seamless tube welded tube >406,4 bar/rod light merchant bar/angle welded tube <406,4 strip 0

5 395 4 502 5 262 8 049 cold-rolled coil 3,9% 753 3 504 5 129 2 794 252 2 158 858 1 738 132 892 975 836 443 697 250 601 1 163 450 99 422 209 346 257 152

Russia 2011 Ukraine 2011

bar/rod 4,7%

4 000 th. tonnes 8 000 Source: ISSB, State Statistics Service of Ukraine

Russia 2011 others 19,8% HR coil 20,8% wire rod 6,7% rebar 8,3% slab 32,6% billet 18,2% Ukraine 2011 others 19,6% heavy plate 13,5% slab 20,8% HR coil 10,8% billet 20,3%

At the same time, semis (billet and slab) are the main part of both Russian and Ukrainian exports, respectively,

50.8%

(Russia) and

41.1%

(Ukraine).

I. The differences between CIS metallurgy

China

Mt

CIS 5,2 6,8 EU27 8,2 2,1 0,1 Asia

9 8 7 1 2 3 6 5 4

3,6 3,4 1,4 1,0 1,7 0,4 4,3 2,3 5,6 4,5 America Africa Middle East Ukraine 2011 Russia 2011

30 25 20 15 10 Mt Export 2011

24,1 23,6

5

Europe (non-EU)

Source: ISSB, State Statistics Service of Ukraine 0 Ukraine Russia The main export markets for CIS steel are EU27, Middle East and Asia with total share of 65% for Russia and 60% for Ukraine

I. The differences between CIS metallurgy

LEBANON TURKEY IRAN SWITZERLAND TAIWAN SYRIA EGYPT SAUDI ARABIA ROMANIA BULGARIA THAILAND ITALY JORDAN UTD ARAB EMIRATES TUNISIA INDONESIA

15 1 627

0

374 306 42 86 188 10 256 187 43 33 98 31 78 1 148 36 680 621 8 24 548 53 410 237 171 63 323 463

400

871 RUSSIA billet UKRAINE billet

800 IRAN TURKEY ITALY POLAND INDIA GREECE U S A VIETNAM BULGARIA ISRAEL LEBANON SYRIA GERMANY UTD ARAB EMIRATES EGYPT JORDAN 0

216 41 117 148 52 155 197 326 38 66 49 37 40 43 23 173 3 162 71 88 12 132 3 133 120

200

459 644 658 1 367 RUSSIA hr coil UKRAINE hr coil

400 600 800 Source: ISSB, State Statistics Service of Ukraine There is a sharp competition between Russian and Ukrainian producers on the markets of many countries

I. The differences between CIS metallurgy

wire slab hot-rolled coil alloy steel semis strip cold-rolled coil billet bar/rod hot-rolled sheet heavy plate heavy section rails wire rod rebar 0%

38,9%

5%

10,1% 8,3% 6,6% 5,7% 5,1% 4,9% 14,6% 14,0% 13,8% 12,9% 12,8%

10% 15% 20%

21,6% 26,6%

25% Source: UPE Co. est.

30% 35% 40% 45% Index of RU & UA export intersection ranges in 5-39%

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. Market in 2011

Excessive capacities Increasing cost 84% 82% 80% 78% 76% 74% 72% Capacity utilization %

83,1% 76,3%

300 200 100 0 700 600 500 400

2007 2011 before crisis

Production cost, $/t

588 365 2007 before crisis 2011

Despite the increase of the steel production in 2010-2011, two unfavorable factors for steelmakers have dominated on the market –

high cost

and

low capacity utilization

.

In the worsening economic situation, it enhances competition dramatically and carries significant risks for outdated and inefficient mills, especially for those which are not vertically integrated

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. Outlook 2012

Financial institution

United Nations World Bank International Monetary Fund HSBC Fitch Ratings Economist Intelligence Unit

World GDP growth, % Oct 2011 Dec 2011 – Jan 2012 3.6% 2.6% Feb-Apr 2012 not revised 3.6% 2.5% not revised 4.2% 2.6% 3.3% 1.9% 2.4% 3.1% 3.5% 2.1% 2.3% 3.2% During Feb-Apr 2012 some leading financial institutions have revised their GDP growth rate forecasts slightly upward. The main reasons for the revision were the stabilization in Eurozone financial sector due to 1 trillion euro injections of liquidity and higher than expected economic growth in the USA.

Nevertheless, it reflects rather stabilization than improvement of sentiment

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. Outlook 2012

9. Financial Indicators Barely Argue the High Level of Uncertainty of Situation

Indicators

Interest rate of Federal Reserve System (USA), % Interest rate of European Central Bank (EU), % Interest rate of Bank of Japan, % 3 month USD LIBOR/OIS spread, b.p.

Commercial bank deposits at ЕCB, $ bn Price per share JP Morgan Chase on NYSE, $ Source: ECB, Bloomberg

Jul 08 Jan 09 Feb 11 Sep 11 Jan 12 Feb 12 Apr 12

2 4,25 0,5 70 0,6 41 0,25 2 0,1 120 360 23 0,25 1 0,1 15 27 45 0,25 1,5 0,1 25 232 33,5 0,25 1 0,1 47 528 34,9 0,25 1 0,1 39 495 38,3 0,25 1 0,1 32 743 43,2 Despite huge liquidity injections in the financial system of EU, majority of these funds remain at ECB. Interest rates of world biggest economies remain at minimum levels, limiting further tools to stimulate economic growth.

It only dashes the instability of macroeconomic situation

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. Outlook 2012

1 800 1 600 1 400 1 200 1 000 800 600 400 200 Annual growth of steel production, Mt -50 -100 -150 -200 200 150 100 50 0

67 -172

2009

139 61 47 57 19 36 World (w/o China) China

2010 2011 2012F

World World (w/o China)

forecast 2012

1 520 1 323 1 575 1 218

forecast 2012

901 856 837 652

0 1952 1958 1964 1970 1976 1982 1988 1994 2000 2006 2012F Source: WSA (fact), UPE Co. (forecast 2012) In 2012 we shall see further record of steel consumption, but the annual growth rate will diminish from 7.3% (104Mt) in 2011 to 3.6% (+55Mt)

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. Outlook 2012

World capacity and production of crude steel, mln. tonnes Capacity utilization, % 2300 2100 1900 1700

capacity steel production 1 624 1 709 1 789 1 916 1 990 2 070

495 Mt 470 Mt 1500 1300 1100 900

1 460 1 360 1 195 1 270 1 069 1 147 1 247 1 346 1 329 1 218 970 1 424 1 520 1 575

700 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012F Source: WSA, OECD, UPE Co. est.

90% 85%

81,2% 85,4% 84,2% 84,3% 82,9%

80%

77,8% 76,4% 76,1% 74,3%

75% 70% 65%

68,1%

60% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012F As intensive putting into operation of new steel capacities in 2009-2011 has been continued in spite of the crisis, currently about

470

million tons of capacities stay idle. In 2012 this indicator will reach

495Mt

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. Outlook 2012

80 60 40 20 0 200 180 160 140 120 100 Vale Carajas fines (CJF) 66% Fe, $/t fob Brazil (to Asian market)

59 115 172 146

350 300 250 200 150 100 50 0

129

Hard coking coal Peak Downs $/t fob Australia

191 289 230

2009 2010 2011 2012F 2009 2010 2011 2012F Source: UPE Co. est. It is expected that the average price of iron ore in 2012 will decrease comparing to 2011 by

15%

.

Average price for coking coal in 2012 for quarterly contracts will fall comparing to 2011 by

20%

to

$ 230

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. Outlook 2012

500 450 400 350 Scrap HMS 1&2 (80:20 mix), $/t fob Rotterdam 300 250 200 150 100 50

249

0 2009 Source: UPE Co. est.

322

2010

430

2011

440

2012F Due to insufficient supply of scrap by the main exporters of the EU and the CIS and the rising demand, the average price for scrap in 2012 will increase by

1-2%

depending on the region

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. Outlook 2012

700 +118$ Billet cost ($/t ExW) in Ukraine (for non-integrated mills)

588

-23$

565

600 500

470 117 117 Other

400 300

112

17 24

39 61

18 31

40 89

18 34

42 93 Ferroalloys Natural Gas Transport

200

118 106 Scrap 96

100

122

0 2010 Source: UPE Co. est.

175

2011

155

2012 F

Coking coal Iron ore

We expect that billet cost in 2012 will decrease compared with the 2011 by 23$ to 565 $/t, which is due to lower prices for iron ore (-12%) and coking coal (-10%). At the same time the price of ferrous scrap will increase by 5%.

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. Outlook 2012

15. High price for scrap will allow integrated CIS producers

Billet, $/t

to compete in MENA

700 600 500 400 300 200 100

2011 588 565

0

Ukraine

Source: UPE Co. est.

2012F 525 510 Russia 631 615 China 600 610 Turkey (EAF)

Cost factor will ease its pressure on the market in 2012. Difference between Ukrainian (OBC) and Turkish (EAF) billet cost will increase to 45$/t.

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. Outlook 2012

1400 1200 Excessive capacities 1000 800

753

600

497

400

380 533 632 608 605

200 average monthly annual average Production cost 0 J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N 2007 2008 2009 2010 2011 2012 Source: UPE Co. est.

Unlike 2009-2011, when average prices rose by $ 100-150 / t, we expect that average prices will decline in 2012 as a result of reduced costs and growing pressure of excessive supply

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. Outlook 2012

Expected growth of sales in the import markets of the largest partners in 2012 Forecast of steel exports from the CIS in 2012 ITALY IRAN TURKEY LEBANON TAIWAN GERMANY U S A DENMARK INDIA POLAND SYRIA THAILAND INDONESIA ROMANIA IRAQ BULGARIA EGYPT SOUTH KOREA JORDAN AZERBAIJAN UNITED KINGDOM UTD ARAB EMIRATES SAUDI ARABIA

-360 -160 -50 -50 -50 -40 -80 -30 -100 50 80 60 10 40 20 20 50 10 100 110 120 210

60 50 40 30 20 10 0 Mt

52,5

2010

50,6

2011

51,2

2012F -500 -300 -100 100 300 th.tonnes

Source: UPE Co. est.

The largest partners of CIS’s exporters are European and Middle-Eastern Countries. The most attractive markets of the CEE countries are

Poland, Bulgaria, Romania

. Perspectives of growth in the Middle East remain in

Saudi Arabia, Lebanon, Egypt, UAE

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. Outlook 2012

     Russia made a plunge to reduce export dependence There are a few interceptions for a number of products (rebar, wire rod, heavy plate) of Russian and Ukrainian producers in the export markets. At the same time they compete in the wire, slab and HRC markets The problem of excessive capacities intensifies competition in export markets. At the same time pressure of high cost will weaken due to decrease in raw materials price MENA will be expanding markets for CIS exporters More favorable situation for CIS exporters will emerge on Middle East market, especially for vertically integrated producers

IV

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700 $/t Billet, fob Black Sea 680 660 640 620 632 $/мт 2011, billet price fluctuates in the 580 narrow range during last 5 months, 540 520 500 monthly average - fact yearly average forecast nov 2011 605 $/мт 2011 2012

At the beginning of Nov 2011 we forecasted a w-shaped dynamics of billet price in winter 2011-2012. It was a right anticipation, except for scale of dip (or heightened volatility). A sharp rise in prices in Feb was caused by buoyancy on the Turkish market, and CIS suppliers took advantage of it.

IV

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GLOBAL TRENDS

• Forthcoming 3-rd quarter brings no increase in steel consumption in the world • Adequate level of inventories in importing regions limits perspectives of price growth • Decrease in 2Q-3Q contract prices for raw materials weakens sustaining factor of steel cost

Capacity Utilization in Ukraine

90% 85% 80% 75% 70% 65% 60% 55% 50% 86,4% 72,2% 83,3% 69,4% 70,1% 85,8%

Steel Inventories In Black Sea ports BLACK SEA PRICES TRENDS

• The current weakening demand on the main importing markets (MENA – due to approaching Ramadan, EU due to financial problems) • Increased capacity utilization (seasonal peak before summer lull) • High level of inventories in Black Sea ports • The trade profitability leaves room for price flexibility 2500 2000 1500 1000 500 0

Total Uktainian products 1443 1098 1232 914 1919 1934 1820 1357 1307 The main supportive factor – expectation of macroeconomic situation improvement in 2H2012. It will limit more significant price drop in the nearest future.

700 650 600 550

Trade profitability $/т

500 450 400 billet price, fob Black Sea cost+transport+port charges Source: UPE Co. est.

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700 680 $/t Billet, fob Black Sea 660 640 620 600 After the sharp price drop in Sep-Nov 632 $/мт narrow range during last 5 months, 540 520 500 monthly average - fact yearly average forecast The idea of double seasonal peak will be characteristic for 2012 year 605 $/мт Due to expected improvement of macroeconomic situation and steel consumption in 2H 2012, general price level for the period will be higher, than in 1H2012 2011 2012

Due to lack of adequate demand at the moment, we expect a slight decrease in billet price, as support of high cost will weaken in 2Q 2012. Nevertheless, an improvement of macroeconomic situation and steel consumption in 2H 2012 will cause reasonable price growth.

Steel market: ●Analytics ● Forecast● Scenario

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