shifting to firmer ground? November 2010 The MENA steel industry - PowerPoint PPT Presentation

Gilles Calis, SteelConsult International MENA steel after the financial sandstorm: Is growth shifting to firmer ground? November 2010

The MENA steel industry has shown resilience during the crisis Crude steel output, index (May 2008 = 100) 140 140 120 120 100 100 80 80 60 60 40 40 China & India EU, NAFTA & Japan 20 20 World MENA 0 0 J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O 2008 2009 2010 Source: WSA, SteelConsult November 2010

Steel consumption is expected to decline modestly in 2010, but local production has gained market share from imports Supply of steel in MENA region by source (m tonnes) % of steel requirements imported from outside 70 70% Net imports of finished steel Net imports of semi-finished steel 60 60% Crude steel output in MENA region % dependency on imported steel 26 50 50% 24 25 22 16 15 40 40% 13 14 10 10 9 15 9 30 9 30% 8 14 7 7 11 10 5 10 9 20 20% 8 4 3 7 3 3 3 2 28 28 27 27 1 26 25 22 21 10 10% 19 18 16 15 14 13 13 13 0 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010e Source: SteelConsult analysis, WSA, UN Steel Statistics, ISSB 3

Cost competitiveness of GCC mills has weakened in 2010, but import duties have helped Operational production cost/t billet, US$/t, 2009 Operational production cost/t billet, US$/t, 2010e 900 900 Import duty Import duty Freight billet to Gulf Freight billet to Gulf 800 800 Other operational production costs Other operational production costs Labour Labour 2010e 2009 Energy Energy 700 700 Freight raw materials Freight raw materials Raw materials Raw materials 600 600 Billet import price GCC 28 500 27 500 28 Billet import price GCC 28 29 32 45 5 30 51 54 29 33 22 22 400 4 400 23 17 26 22 27 33 14 28 26 26 42 5 54 61 46 33 51 4 14 300 29 33 300 14 33 26 22 52 200 200 386 338 332 315 278 262 254 204 100 100 0 0 GC C (ex Ukraine (del T urkey (del C hina (del GC C (ex Ukraine (del T urkey (del C hina (del wo rks)* Gulf)** Gulf)*** Gulf)** wo rks)* Gulf)** Gulf)*** Gulf)** Source: SteelConsult Notes: *DRI/EAF mill **Integrated mill ***scrap based EAF Note: All data are averages for Calendar Year November 2010

MENA mills remain vulnerable to the global pellet premium Price (US$/dmtu) 250 250 Pellet premium 231 220 Pellets Iron ore (SSF) 200 200 172 150 150 134 118 116 114 112 100 100 97 81 86 74 63 62 52 50 50 49 50 59 47 53 36 31 29 38 28 29 37 25 22 21 21 19 17 0 0 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 Source: SteelConsult analysis, SBB Note: Contractual years (April to April) until 2009, average of quarterly prices of Calendar Year for 2010 November 2010

Turkish mills have seen a sharp improvement in their competitiveness of late, are we going to see a resumption of exports to the GCC? Operational production cost/t billet, del GCC, US$/t, Q3 2010 Operational production cost/t billet, del GCC, US$/t, Q2 2009 900 900 Other (labour, energy, freight, import duty) Other (labour, energy, freight, import duty) Scrap & Other RM Scrap & Other RM 800 800 Coal Coal Q3 2010 Iron ore Q2 2009 Iron ore 700 700 600 600 500 500 177 153 156 161 400 400 64 53 85 144 157 300 300 140 143 152 135 200 56 200 393 60 329 39 79 249 76 100 100 186 178 134 93 76 0 0 GC C (ex Ukraine (del T urkey (del C hina (del GC C (ex Ukraine (del T urkey (del C hina (del wo rks)* Gulf)** Gulf)*** Gulf)** wo rks)* Gulf)** Gulf)*** Gulf)** Source: SteelConsult Notes: *DRI/EAF mill **Integrated mill ***scrap based EAF November 2010

The price of oil has bounced back sharply… Oil price/finished steel consumption 120 Oil price (annual average, US$/barrel) Consumption of finished steel MENA (m tonnes) 100 80 60 40 20 0 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10e Source: EIA, SteelConsult November 2010

And oil based revenues in 2010 have climbed back to 2007 levels… Oil and gas exports (bn US$) 300 Qatar Saudi Arabia 250 UAE 200 150 100 50 0 2005 2006 2007 2008 2009 2010e Source: OPEC November 2010

Fast decisionmaking has also speeded up recovery… GDP (trn US$), 2009 16 • Despite the region’s wealth, GDP is relatively modest compared to developed economies. GDP in the whole 14 MENA region is only as large as that of Italy, whilst GDP of Saudi Arabia is comparable to that of the state of 12 Michigan. 10 • What makes the energy based wealth in the region special is the relatively small size of the national population in most of the oil and gas rich countries, the 8 small number of decision-makers who control spending 14.1 and the high extent of investment in steel intensive 6 applications, in particular construction. 4 5.1 5.0 2 3.3 2.1 2.1 0.4 0.4 0 USA Japan China Germany MENA Italy State of Michigan Saudi Arabia Source: CIA World Fact Book November 2010

Real estate investment, more than infrastructure and other sectors, boosted steel consumption in the boom years… Spending on capital projects GCC (bn US$) 90 Source: MEED Projects Real estate Infrastructure Other sectors 80 70 60 50 40 30 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: MEED, SteelConsult November 2010

Part of growth, esp. in Dubai, was based on a speculative bubble. Dubai has indeed been much harder hit than Abu Dhabi and the rest of the region Capital projects on hold or cancelled (bn US$) 500 Source: MEED Projects 450 Other 400 emirates 350 Abu Dhabi 300 250 200 Dubai 150 100 50 0 Oman Bahrain Kuwait Qatar Saudi Arabia UAE Source: MEED, SteelConsult November 2010

The UAE will remain a substantial market for steel, though growth in the next 5 years will shift away to Saudi Arabia and Kuwait Capital projects awarded/planned (bn US$) 500 Source: MEED Projects 2005-2010 awarded 450 2010-2015 planned Growth 400 350 300 250 200 150 100 50 0 Bahrain Oman Qatar Kuwait Saudi Arabia UAE Source: MEED, SteelConsult November 2010

Longer term opportunity #1: Once stabilized, Iraq has a huge potential for steel consumption growth  Iraq has seen steel demand grow fast since 2007, Finished steel consumption, Iraq (m tonnes) but at 1.5m tonnes of steel in 2009, or 48kg/head, 12 Iraq’s consumption is still embryonic.  If the country stabilizes further, its huge, dormant 10 potential steel market could gradually be unlocked: Potential market in  The country has 31m inhabitants; 8 future  Decades of underinvestment and violence have left the country in ruins. Huge investments need 6 to be made for the (re)building of infrastructure, industry, utilities and housing; 4  At 115bn barrels, it holds the world’s 3 rd largest reserves of oil, after KSA and Iran. 2  ~US$300bn of existing and future capital projects are planned in Iraq, and the country is expected to see major contracting activity in the next 5-10 years. 0 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 ff  In a stable situation, we estimate steel consumption Source: SteelConsult in Iraq could grow to at least 10m tpy. November 2010

Longer term opportunity #2: The GCC has an opportunity for 4 medium sized car plants in Saudi Arabia and/or the UAE, or >1.2m tpy of auto steel Car imports GCC (‘000 units) 2,000 Other GCC 1,800 UAE Saudi Arabia 1,600 1,400 1,200 1,000 800 600 400 200 0 2005 2006 2007 2008 2009 Source: UN Trade Statistics November 2010

Conclusions  The MENA steel industry has coped well during the crisis, but remains vulnerable to foreign competition  Steel consumption in the MENA region has been hit, though the emirate of Dubai is the only part of the region where the market has truly collapsed, as the real estate bubble burst  Future growth in consumption will be slower, but more sustainable and in line with real demand  Oil & gas revenues will remain strong, and oil & gas-rich countries will retain an advantage. Whilst steel market fundamentals will continue to be weak in Dubai, growth in the coming years will shift to Saudi Arabia, Kuwait and Abu Dhabi.  In the longer term, we see two other potential key drivers of growth in the region:  The development of Iraq could add another 8.5m tonnes of steel or more to regional demand;  The GCC region is importing some 1.2m vehicles per year, presenting an opportunity for diversification and increase of local steel consumption, esp. in higher quality flat steels. November 2010