Long products market in the MENA region

Arab Steel Summit 2015 November 9-11, 2015, Sharm El-Sheikh, Egypt

Andrey Pupchenko, Deputy Managing Director, Metal Expert

Contents

I. Consumption to expand moderately

II. Oversupply grows in the region III. Competition stiffens

© Metal Expert

I. Consumption to expand moderately

o Political instability and war conflicts

o Low oil and gas prices

o Withdrawal of Iran sanctions

o Egypt has ambitious plans to renovate

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Long products consumption in MENA in 2014

Total: 77 million t © Metal Expert

GCC; 20; 26%

Turkey; 16; 21%Iran; 15;

20%

Egypt; 8.8; 11%

others; 17; 22%

MENA consumption will grow in 2016, although at a lower rate than expected earlier

+5.1 million t

+7% 82.6 million t of total consumption

Changes in long products consumption (2016/2014) © Metal Expert

-2

-1

1

2

3

4

5

GCC Turkey Iran others Egypt Yemen Libya Iraq

mill

ion

t

© Metal Expert

Markets of consumption increase in 2014-2016

- Low oil and gas export prices + Accumulated budget proficit of previous years + 3% increase of MEED‘s GCC Projects index in 2015

+4.3 million t +19%

GCC

Turkey

- Political instability - World economy slowdown - Ambitions to grow

+1.9 million t +11%

Iran

- Sanctions withdrawal will have effect - World economy slowdown + 37% increased of MEED‘s Iranian Projects index in Q3 15

+0.5 million t +3%

© Metal Expert

Iraq

Yemen

Libya

- Military conflicts

-1.6 million t

-38%

- Political instability

- Growth has been delayed so far…

Egypt

- 0.2 million t

-3%

Markets of consumption decrease in 2014-2016

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o New capacities will substantially undercut MENA's longs import in 2016

o MENA's import of Chinese longs & billets will continue to influence

II. Oversupply grows in the MENA region

Forecast of long products capacity expansion in 2016

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Country Capacity change Import in 2014

Turkey 2000 1383

Oman 1580 437

Iraq 950 2010

Egypt 830 1506

Libya 800 363

Syria 600 113

Saudi Arabia 550 1443

Algeria 500 4067

Iran 500 688

Pakistan 100 0

Yemen 0 765

Jordania 0 226

Tunis -250 253

Total 8160 (62% of import) 13253 000' t

• MENA's deficit of square billet capacities will be around 2.6 million t in 2016, which will lead to a big redistribution of trade flows

• Billet import into Turkey will additionally increase by 1.2-1.7 million t in 2016

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Forecast of surplus/deficit in billet capacities in the MENA region

-5

-4

-3

-2

-1

0

1

2

3

2016 2017

mill

ion

t

+ 1.4 million t

Forecast of surplus/deficit in billet capacities in the MENA region

New export-oriented billet capacities in Iran will eliminate deficit in the MENA region in 2017

Country 2016 2017

Iran 1,100 1,950

Oman -2,180 500

Egypt 350 300

Turkey -780 200

Syria -415 0

Jordania -360 0

Yemen -150 0

Saudi Arabia 10 0

Algeria -150 -350

Total -2,575 2,600

© Metal Expert 000' t

© Metal Expert

MENA's import of Chinese longs & billets more than doubled in 2014

2.1

4.6

4.0

0

1

2

3

4

5

2013 2014 2015

Mill

ion

t

© Metal Expert

Million t

New capacities will substantially undercut MENA's longs import in 2016

Source: World Steel Markets, Metal Expert estimates

77

58

5

8

11

0

10

20

30

40

50

60

70

80

90

Consumption Production in 2014 Сapacity, implemented in 15-16

Import

III. Competition stiffens in MENA

© Metal Expert

'Super cycle' in raw materials comes to an end as iron ore price loses 2/3 of its value

© Metal Expert

0

2

4

6

8

Oct.

99

Au

g.0

0

Jun.0

1

Apr.

02

Fe

b.0

3

De

c.0

3

Oct.

04

Au

g.0

5

Jun

.06

Ap

r.07

Fe

b.0

8

De

c.0

8

Oct.

09

Au

g.1

0

Jun

.11

Ap

r.12

Fe

b.1

3

De

c.1

3

Oct.

14

Au

g.1

5

Ferrous scrap, Turkey, c&f from USA

Iron ore concentrate (61.5%), China, c&f from AustraliaOct.99=1

Long products supply into MENA in 2014

Total: 19 million t

Turkey; 6; 32%

China; 5; 24%

Ukraine (to Iraq & Egypt mainly); 2;

9%

Western Europe (to Algeria &

Morocco); 6; 29%

Others; 1; 6%

© Metal Expert

Including billets

© Metal Expert

Chinese mills have negative margins and cannot follow cheap-export strategy any more

Margins of Chinese mills exporting to GCC countries

-20

-10

0

10

20

30

40

50

60

70A

pr.

15

May.1

5

Jun.1

5

Jul.15

Aug.1

5

Se

p.1

5

Oct.15

$/t

billets long products

Turkey's long products export (using scrap in EAFs) is not competitive at current scrap prices

Rebar costs of different suppliers into the GCC market, CFR basis © Metal Expert

296

318

389

200

250

300

350

400

Chinese from iron ore(at $53/t)

UAE from iron ore(at $73/t)

Turkey from scrap(at $195/t)

$/t

A. Prices find its bottom finally

B. Steel export from China comes down

C. Iron ore to ferrous scrap ratio defines whether square billet continues to replace ferrous scrap in Turkey

D. Iranian billets export is yet to come

© Metal Expert

Major factors for MENA's long products market in 2016

Iron ore determines steel price bottom in 2016

Scenario #1 Probability: 70%

IRON ORE PRICE WILL DECLINE TO NEW LOWS

Iron ore*: 40-50 Scrap parity**: 115-125

Current scrap price***: 195

Consequences: o Chinese steel export comes down

o Scrap prices will not bottom out at

parity level

o Turkey's steel export will be competitive only using imported low-cost billets, as it was in 2015

* - $/t, iron ore, 62% Fe, China, import from Australia, CFR ** - $/t, scrap HMS 1&2 (80:20), Turkey, import from the USA, CFR *** - valid for early November 2015

© Metal Expert

Iron ore determines steel price bottom in 2016

Scenario #2 Probability: 30%

IRON ORE PRICE WILL STAY IN CURRENT RANGE

Iron ore*: 55-65 Scrap parity**: 140-150

Current scrap price***: 195

* - $/t, iron ore, 62% Fe, China, import from Australia, CFR ** - $/t, scrap HMS 1&2 (80:20), Turkey, import from the USA, CFR *** - valid for early November 2015

Consequences:

o China will not provide affordable prices to compensate risks of long-term delivery to MENA

o Scrap prices will move down to parity

o Turkey's steel export will get some support

© Metal Expert

Scenario #1: square billet continues to replace ferrous scrap in Turkey as in 2015

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Conclusions

• MENA's consumption to expand moderately – only by 2.5 million t in 2016

• Oversupply will grow in the region – 8 million of new capacities in long products will be competing with current import

• Billet demand from re-rollers will grow by around 2.6 million t as not all capacity-expansion projects will be on time

• Steel export from China will come down notably, as Chinese mills have negative margins and cannot follow cheap-export strategy any more

• Turkey's steel export will be competitive only by using imported low-cost billets, as it was in Q3 2015

© Metal Expert

Metal Expert provides exclusive data in monthly report Turkey & Middle East Steel

- Rebar output by producer in Turkey

- Ferrous scrap inventory at Turkish mills (actual for the time of

publishing – every mid-month)

- Margin assessment (market price minus estimated costs) for main export destinations and domestic deliveries

- Comparison of in-house billet production cost (using imported scrap) and prices for billet imports from CIS

- The forecasts of ferrous scrap consumption and prices for the next three months

Subscription department +38 056 239 88 50, +38 056 370 12 06, +38 056 370 12 07 subscriptions@metalexpert-group.com

Thank you for your attention

Andrey Pupchenko Deputy Managing Director

Metal Expert +38-056 370-12-07 (ext. 160)

a.pupchenko@metalexpert-group.com