Global Steel Industry Trends: Is the perception the reality? - PowerPoint PPT Presentation

18 th May 2004 Global Steel Industry Trends: Is the perception the reality?

Investors have perceived the steel industry negatively “Poor returns over the long term, high volatility, relatively small size and constrained liquidity has moved the steel sector to the fringe of the equity investment universe” ABN Amro (early this decade) 2

Structural issues have caused poor steel industry returns Low demand growth Fragmented industry High fixed & capital costs Political industry Historical Industry Performance Overcapacity Long term price decline Full utilisation, marginal pricing Price volatility Poor returns Capacity creep Concentrated Suppliers High exit costs Global auto customers 3

However, recent dramatic rises in global steel prices may suggest structural improvement CRU Global Steel Price Index (Index April 1994 = 100) 160 Global Flat Products Long Products 140 120 100 80 60 Jun Jun Jun Jun Jun Jun Sep Dec Mar Sep Dec Mar Sep Dec Mar Sep Dec Mar Sep Dec Mar Sep Dec Mar Sep Dec Mar 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 4 Source: CRU International

What is changing? Global economic growth – synchronised Global steel demand, especially China Supply/demand gap in China Industry behaviour in OECD/privatisations Input costs Different pattern for capacity additions 5

Strong global economic growth outlook Real Global GDP % Growth 5% Forecast 4% 3% 2% 1% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2010 6 Source: Consensus Economics, IISI

Likely to be synchronised growth in OECD OECD Leading Indicators 6 Month Annualised % Change 15 US Europe Japan 12 9 6 3 0 -3 -6 -9 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 7 Source: OECD

Also, strong growth in large emerging economies GDP % Growth - Emerging Economies 12 Forecast 10 8 6 4 2 0 -2 -4 -6 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 China India Russia Brazil 8 Source: Consensus Economics, IISI

Australia performing strongly – including steel using sectors Inflation, Interest Rates & Unemployment (%, pa) Australian GDP Growth (%, pa) 20% 6% Forecast Forecast 5% 16% 90 Day Bank Bills 4% 12% 3% Unemployment Rate 8% 2% Real Interest 4% 1% Rates CPI 0% 0% 90 92 94 96 98 '00 '02 '04 '06 90 92 94 96 98 '00 '02 '04 '06 Construction Value (Constant A$bn) Sectoral Investment (Constant A$bn) 16 40 Forecast Forecast 12 30 Residential Manufacturing Mining Engineering 8 20 Agriculture 4 10 Non-Residential 0 0 90 92 94 96 98 '00 '02 '04 '06 90 92 94 96 98 '00 '02 '04 '06 9 Source: BIS Shrapnel, Access Economics

Global steel demand growing strongly – largely driven by China Global Steel Demand – IISI Base Case (million tonnes) 1,200 1,090 Forecast China ROW World 987 963 929 1,000 864 805 755 748 800 698 699 681 705 659 650 672 668 654 631 623 619 601 595 576 571 563 558 600 By 2010, China 385 400 may be 35% of 315 295 275 global demand, 233 vs 27% in 2003 186 153 200 124 123 111 101 103 87 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2010 10 Source: IISI

Has the steel industry returned to the demand growth seen before the 1973 oil crash? World Steel Consumption by Region (million tonnes crude steel) Forecast 1,200 China 1,000 800 Japan Other Asia 600 West Europe 400 East Europe Ex Soviet Oceania, Mid East, Africa 200 Canada USA 0 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 11 Source : Macquarie Bank, ‘The Steel, Iron Ore & Coal Outlook’, Jan 04

There is currently a large Supply / Demand gap in China “Let China sleep, for when she wakes she will shake the world” - Napoleon Total Chinese Steel Imports 38 (million tonnes) 9 24 4 18 16 15 4 2 29 12 3 4 20 14 14 12 8 1998 1999 2000 2001 2002 2003 Flat Products Long Products 12 Source : Macquarie Bank, ‘The Steel, Iron Ore & Coal Outlook’, Jan 04

China is experiencing massive capacity growth Estimated Chinese Industry Capacity Expansion from 2002 vs 2006 (million tonnes) 267 68 230 2002 63 195 2006 167 108 45 58 38 26 12 Ironmaking Steelmaking Hot Strip Mills Cold Rolling Mills 13 Source: HB Advisors/Rothschild, ‘China – Should We Be Scared?’, Feb 04, World Steel Dynamics

Consolidation in OECD Production Share of Top 3 Steelmakers in Each Region (%, 1998 vs 2003) Japan US EU 55% 50% 64% 49% 33% 31% JFE, USS, Arcelor, NSC, ISG, LNM, Sumitomo Nucor Corus ‘98 ‘03 ‘98 ‘03 ‘98 ‘03 14 Source : POSCO, ‘POSCO Growth & Innovation, Jan 04

Input costs are rising - Scrap US #1 Heavy Melting Scrap (US$/ mt) 240 220 200 180 160 140 120 100 80 60 90 91 92 93 94 95 96 97 98 99 00 01 02 03 15 Source: Datastream

Input costs are rising – Steelmaking raw materials 16 Source : ANZ Bank ‘Resources Market Outlook’, Mar 04, Tex Report

Increased Chinese demand is causing rise in input costs. Currently no excess seaborne iron ore capacity Seaborne Iron Ore Demand Vs Theoretical Capacity (million tonnes) DEMAND 700 Forecast 600 Others Theoretical capacity 500 400 China 300 200 Japan 100 EU 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2010 17 Source: IISI

Shipping costs have risen dramatically: Global fleet cannot meet demand – exacerbated by port congestion Capesize Fleet Capacity (Million DWT) Shipping rates (Index) 93 90 87 82 82 81 77 72 64 8,000 BDI Index BCI Index 6,000 1995 1996 1997 1998 1999 2000 2001 2002 2003 4,000 Port Congestion Index – Aust Coal Ports 2,000 16 SSY Coal Port Congestion Index 0 12 Jan- Mar- May- Jul-98 Oct- Dec- Feb- May- 95 96 97 99 00 02 03 8 4 0 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 BDI – Baltic Dry Index, BCI – Baltic Cape Index 18 Source: IISI, Baltic Dry Index, SSY

Other raw material costs also increasing 19 Source: Datastream

What is changing? Global economic growth – synchronised Global steel demand, especially China Supply/demand gap in China Industry behaviour in OECD/privatisations Input costs Different pattern for capacity additions 20

Implications Don’t expect a weak Chinese economy any time soon Steel prices are likely to remain high for some time Pressure for structural change in finished products pricing An inflationary phase? 21