Successful strategies volatile markets - effective operating - PowerPoint PPT Presentation

February 19, 2015 VIEWPOINT Perfect Storm Successful strategies volatile markets - effective operating models and high operational efficiencies

PwC and Strategy& are creating a new kind of consulting business that delivers extraordinary client impact Scale, quality prominence, and deep Our Vision relationships, skills, and insight The pre-eminent strategy through execution firm that delivers superior value, offers premium talent, and is differentiated by its ability to help clients Global strategy build their own capabilities model, leading on a global scale. foresight, capabilities positioning Strategy& Confidential Property Feb, 2015 Prepared for Metals & Mining event 1 150202_Strategy_Metals Mining - PwC event Feb19th_vhandout.pptx

Combined capabilities offer broader, deeper value to our clients Consulting services Consulting services Strategy OPS HR IT Financial Strategy OPS HR IT Financial Industry practices Industry practices Communications & Communications & Consumer goods Energy Consumer goods Energy media media Financial services Healthcare Manufacturing Financial services Healthcare Manufacturing Public sector Retail Utilities Public sector Retail Utilities + Consulting services Strategy OPS HR IT Financial Industry practices Outstanding Forensics Deals Communications & Consumer goods Energy Strong media Assurance Tax Moderate Financial services Healthcare Manufacturing Limited Public sector Retail Utilities None Source: Kennedy Consulting & Research Advisory Strategy& Confidential Property Feb, 2015 Prepared for Metals & Mining event 2 150202_Strategy_Metals Mining - PwC event Feb19th_vhandout.pptx

METALS & MINNING INDUSTRY TRENDS Trends such as high volatility, customer integration & product commoditization have impact on metals companies Industry trends 1 • Uncertain raw material prices and availabilities • Changing industry structures Manage • Complex regulatory and legal environment (e.g. carbon emissions) volatility • Shifting public involvement (e.g. Chinese government) 2 • Increasing degree of production outsourcing Integrate with • Intensive rate of application development usage customers • Close supply chain management integration process • Increased need for price stability 3 • Higher stability in production and quality processes Recognize • Available in know how in process technology product • Increasing customers driven standardization of steel grades commoditization Strategy& Confidential Property Feb, 2015 Prepared for Metals & Mining event 3 150202_Strategy_Metals Mining - PwC event Feb19th_vhandout.pptx

To benefit from these trends, all business model transformations need to be based on coherent capabilities Strategy & “Capabilities -driven strategy“: Growth priorities • Increase sales with existing Growth of customers core • Gain new customers in the same capabilities market segment • Develop in new, complementary in Multiplication product and service areas by using of capabilities existing and available capabilities Core Cor • Transfer and shift of capabilities in Transfer of new geographies and market capabilities segments … only in isolated cases … • In case of fundamental change of Development success factors for the company : of new adaptation of skills • If additional skills are required: capabilities targeted close by acquisitions Source: Strategy& analysis Strategy& Confidential Property Prepared for Metals & Mining event 4 150202_Strategy_Metals Mining - PwC event Feb19th_vhandout.pptx

METALS & MINING EXAMPLE For example, ArcelorMittal’s capabilities are centred around a coherent “core” to differentiate from competition Coherent capabilities of ArcelorMittal Common capabilities of ArcelorMittal (“core“) Expansion of global and low New frontiers in process cash raw material access excellence for entire network • Tailored balance of global and local: Integration and balance of global (e.g. mining) and local business (e.g. distribution) across entire value chain with strong local execution • High customer proximity: Flexible orientation on the needs, requirements and geographical location of customers Customer proximity and Quality and solutions focus • Continuous product and process distribution service on products and customers optimization: Technical improvements excellence leveraging and impacting the network • Global consistency: Reliability and dependability in the application of quality standards for products and processes Source: Strategy& analysis Strategy& Confidential Property Prepared for Metals & Mining event 5 150202_Strategy_Metals Mining - PwC event Feb19th_vhandout.pptx

STEEL INDUSTRY TRENDS Only coherent capabilities provide the foundation for the successful transformation of metals business models • Stronger corporate core with close controlling and integration (e.g. procurement and sales processes price/margin setting) • Significant development of commercial capabilities (e.g. controlling & supply chain management) “Steel companies will need to adapt a ‘transformation’ business model which floats on top of current price fluctuations. The only model of continuous efficiency optimization is outdated.” (EVP, Steel Company) Steel business model Steel supply chain Steel Steel marketing management and procurement and sales operations • • • Strategic sourcing excellence Increase in operational flexibility for Initiation of value based pricing • • Financial hedging as an emerging blast furnace and steel plant Closer customer integration in • option for some steel companies Continuous focus on optimization supply chain processes • • Selective inventory build up if credit of charge by raw iron production Discontinuation of price formulas facilities allows and procurement • • Close monitoring of market Allocation of free capacity to indicators accommodate different operating mode “Steel provides more ‘green’ value “We have not considered financial to many products that its price “The need for operational flexibility hedging as option. If we see reflects” (EVP, Steel Company) opportunities, we employ selective in blast furnaces requires reduced “Supply chain excellence provides forward buying” utilization.” (EVP, Steel Company) added value and lock- in” (CEO Steel Company) (EVP Sales, Steel Company) Strategy& Confidential Property Feb, 2015 Prepared for Metals & Mining event 6 150202_Strategy_Metals Mining - PwC event Feb19th_vhandout.pptx

STEEL INDUSTRY TRENDS Metals industry trends also require adaptations in organizational operating models and core processes Main Challenges Operating Models: Requirements for Steel • Supply chain management integration from “Iron ore” to steel service centers Management of • Strategy and guidelines on production and • Execution of market volatility maintenance optimization from raw iron to cold rolling strategies • Guidelines on strategy development processes KPI • Resources optimization in personnel, Energy + and CAPEX • Continuous process Corporate Core: efficiency optimization Holding Leader- Customer • Development and ship Functions integration Corporate standardization Policy Strategic of administrative Results/ Guidance Service and support + Accountability resources Request Recognition of Business Shared steel Units Services Service commoditization (SLAs) Strategy& Confidential Property Feb, 2015 Prepared for Metals & Mining event 7 150202_Strategy_Metals Mining - PwC event Feb19th_vhandout.pptx

Integrating a significant local mining base, Russian metall- urgical companies have successfully focused on exports Revenue by segments, USD mln, 2013 Market positioning % of interna- tional sales • #1 Russian beams and 57 6% 15% 75% 4% 14 775 rails producer • Most diversities product 55 11% 9% 80% 13 312 mix • #1 producer of flat polymer- 9% 60 88% 0% 10 909 coated products 3% • #1 Russian coking coal 32% 6% 52% 10% 8 575 32* and producer • Focus on hot-rolled flat 4% 96% 8 190 16 1% products (63% of sales) • #1 Russian iron ore 26% 28% 15% 30% 7 323 55 producer Mining external Mining internal Steel less mining internal Other *- For steel products as they have the biggest proportion of sales Source: Annual reports; PwC analysis Strategy& Prepared for Metals & Mining event 8 150202_Strategy_Metals Mining - PwC event Feb19th_vhandout.pptx

Despite declining revenues, companies have been able to improve EBITDA margin and have consequently … Revenue, USD bn, Q1’13 - Q2’14 EBITDA margin, %, Q1’13 - Q3’14 35 CAGR, Q1’13 - -3,1% 16,5 Q2’14, % 16,2 15,2 12% 14,9 30 12% 14,4 14,1 12% 12% 13% 14% 14% 12% 0 25 14% 13% 12% -2 12% 20% 21% 20 21% +4 23% 16% 21% 15 14% 13% 16% 12% +2 13% 13% 10 17% 17% 18% 17% 20% 18% -3 5 22% 23% 23% 24% 24% 24% -2 0 Q1’13 Q2’13 Q3’13 Q4’13 Q1’14 Q2’14 Q1’13 Q2’13 Q3’13 Q4’13 Q1’14 Q2’14 Q3’14 Metalloinvest Severstal NLMK Evraz NLMK MMK Mechel MMK Evraz Severstal Mechel Metalloinvest Strategy& Prepared for Metals & Mining event 9 150202_Strategy_Metals Mining - PwC event Feb19th_vhandout.pptx