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1
Accelerating DistinctivenessAccelerating Distinctiveness——Seamless PipeSeamless Pipe
-- Invest in more cuttingInvest in more cutting--edge productsedge products --
April 2006
2
Seamless PipeSeamless PipeEnergy Sector
<Reference>
Respond to increased customer demand for high-grade OCTG
→ Invest in more cutting-edge products
Focus on high-grade products Reinforce SCM with major oil companies
05 08
Seamless pipes sales volume
1.1MT 1.2MTOCTG
Line pipe and other
dem
andsDominant position
Current position
Accelerating distinctiveness
No.1 brand in the field
3
1. 1. Seamless Pipe BusinessSeamless Pipe Business
(1) Global Energy Trends 4- 6
(2) Changes in Supply/Demand Structure 7-10
(3) Sumitomo Metals’ Strengths 11-15
4
Source: IEA World Energy Outlook 2005
IEA = International Energy Administration Million TOE/ year
0
3,000
6,000
9,000
12,000
15,000
18,000
1971 1980 1990 2000 2010 2020 2030
Outlook for Energy Demand Outlook for Energy Demand
1,400Million TOE/ year
CY
Oil
Natural gas
Coal
Nuclear Power
Others
5
Crude Oil PricesCrude Oil Prices
Crude Oil Prices Since 1970s Oil Shocks (Average Annual WTI Price)
0
10
20
30
40
50
60
70
80
1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
(US$/Barrel)
Average breakeven point for oil majors Average breakeven point for oil majors (Sumitomo Metals estimates)(Sumitomo Metals estimates)
Breakeven point for lowBreakeven point for low--cost oil fieldscost oil fields(Middle East shallow oil wells; Sumitomo Metals estimates)(Middle East shallow oil wells; Sumitomo Metals estimates)
Breakeven point for highBreakeven point for high--cost oil fields cost oil fields (small(small--scale offshore fields; Sumitomo Metals scale offshore fields; Sumitomo Metals estimates)estimates)
71.79 (As of April 19, 2006)
EIA oil price scenario ($30EIA oil price scenario ($30--35)35)
IEA oil price scenario ($35IEA oil price scenario ($35--39)39)
EIA = Energy Information Administration
IEA = International Energy Administration
6
Global Rig/Well Count and Projected OCTG DemandGlobal Rig/Well Count and Projected OCTG Demand
4,600
5,350
4,4805,030
5,500
6,240 6,250 6,250 6,300 6,380 6,500
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
OCTG demand (right axis) Well count (left axis) Rig count (right axis)
Rig count: No. of working rigsWell count: Wells drilled during the year
(Well count) (Rig count, thousand tons)
Source: Sumitomo Metals estimates compiled from available statistics
7
Mergers and Acquisition in the Oil and Gas IndustryMergers and Acquisition in the Oil and Gas Industry
1997 1998 1999 2000 2001 CurrnetlyRanking
1 Shell (Anglo-Dutch) Shell
2 Exxon (US) ExxonMobil
3 Mobil (US) BP
4 BP (UK) BP Amoco Total
5 Texaco (US) Chevron
6 Chevron (US)
7 Total (France) TotalFina
8 Amoco (US)
10 Elf (France)
12 PetroFina (Belgium)
16 ARCO (US)
Long-term contract
Ongoing business relationship
Relationship with Sumitomo Metals
Number of Major oil
companies
11 10 9 6 5
Long-term contract
Comprehensive long-term contract
Ongoing business relationship
8
Mergers and Acquisition in the Seamless Pipe SupplierMergers and Acquisition in the Seamless Pipe Supplier
1992 1995 1997 2000 2002 Currently
Sumitomo Metals Sumitomo Metals
Nippon Steel Stopped operation of yahata works
Kawasaki Steel JFE
NKK
Vallourec Vallourec
Mannesmann
North Star
Brazil Mannesmann
British Steel
Siderca Tenaris
Tamsa
Dalmine
Algoma
Number of Major Supplier13 12 11 10 9 6 5 4
Changes in Supply/Demand Structure for Changes in Supply/Demand Structure for Seamless PipeSeamless Pipe
(1)Changes in Demand Structure
Supply-side mergers have resulted in fewer manufacturers
Demand-side mergers have created “super majors” that employ even longer timeframes for oil and gas field development
Smaller fluctuation in demand
Higher prices with smaller fluctuation
9
Rising energy needs in BRICs is supporting high demand for seamless pipe
Higher and stable demand
(2)Changes in Supply Structure
10
0
50
100
150
200
250
300
350
0
10
20
30
40
50
60
70
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 0807
Smaller Price Fluctuation/Rising Base PricesSmaller Price Fluctuation/Rising Base Prices
Index of Seamless pipe export price at Wakayama Custom.(6 Months Floating Average Jun, 1988=100)
WTI Spot Price FOB ($/ Barrel)
$/BarrelJune, 1988=100
Rising base prices
Smaller Price Fluctuation
Number of Major Supplier
13 412 11 10 9 6 5
Comparison between peak and bottom over
short timeframe
Crude oil price range
Seamless pipe price range
Number of Major oil companies
11 6 510 9
3.3times 2.2times 1.6times
11
Sumitomo MetalsSumitomo Metals’’ Strengths:Strengths:Working Closely with CustomersWorking Closely with Customers
Track record as No1 seamless pipe supplier
High Quality
Manufacturing technology
Product Lineup(From carbon steel to super high-alloy)
Technical Support
Delivery track record
Request for Technical Advice from Customers
Identify customer needs ahead of competitors
Working Closely with CustomersMeetings to share technical informationJoint R&D
Technical deliberations in the laboratoryPrototype testingProduction of the test sample for test in actual condition
Customer field testsCustomer technical evaluations
Maintaining World-leading Technology
Development Capabilities
12
Large-scale oil and natural gas development projects
Rising number of OCTG and line pipe Rising number of OCTG and line pipe projects worldwideprojects worldwide
12
★★★ Deep sea Gulf of Mexico
★ Offshore Nigeria
★ Offshore Angola
★★ Caspian Sea
Astrakhan
★ Offshore Norway
Offshore East Coast Canada
★
★ Offshore Persian Gulf (Khuff layer development)
★ Australia
★ The North Sea
★ Iran
★ Offshore Malaysia Sarawak
★ Sakhalin
★ Alaska
Texas★ ★ Louisiana
★ ★ Trinidad Colombia
★★ Libya
Algeria
★ Siberia★ Russia
★★ ChinaTarim, Szechuan,Changjing,、Dagang
★
Subsea pipeline Super 13 Cr
Arctic regions -40º
Sour wellH2S ~10atm
Deep wells5,000~10,000m well depth
Deep sea~2,000m water depth
★Deep sea ★ Deep well★ Highly corrosive environment
Major Customers of OCTG and Linepipe
13
Duplex stainless
steel
10-4 10210-2 1
10-2
1
102
SevereH2S partial pressure (atm)
CO
2 pa
rtial
pre
ssur
e (a
tm)
Seve
re
Only Sumitomo Metals can fully cover customer requirementsfor extreme well conditions
13 CrSuper
13 Cr
Application of Sumitomo Metals Material
Alloy steelfor sour service
Ni alloy
Carbon steel
Low-alloy steel
Competitors’lineup
World’s top lineup of materials
CO2 environment13 Cr
stainless
Duplex stainless steel
+High temperature
+H2SSuper13 Cr
+Higher H2S Ni Alloy
Use of corrosion inhibitor
Pollution & Higher cost
×
<Material selection for Natural gas development>
Past Currently
<Changes in drilling environment>
High pressure High temperature H2S
CO2
Natural gas development
Deep well
Sour condition
13
14
API Joints (Round Thread)
*Leak*Low Strength
(Jump out)*Erosion caused
by turbulence
VAM Joints(T&C type)
*Gas-tight*High strength*Internal flushness
Harsh environment
Gas wells
Offshore
Oil wells
NEW VAM
VAM TOP
Well depths 3.0 6.0 km
Bottom Hole Pressure 270 540 atm
Metal seal
Sumitomo MetalsSumitomo Metals’’ Strengths: Strengths: WorldWorld--leading VAM Series premium jointleading VAM Series premium joint
API
Ratio of VAM series high-grade joints
2005: 83% 2008: 85%
(Deep wells, Horizontal wells etc.)
<VAM TOP application>
Horizontal wells
Deep wells
13CR, Super High Alloy
High strength
Strength against compression
Onshore
15
Global Market Share of highGlobal Market Share of high--grade productsgrade products
Sumitomo Metals has captured Sumitomo Metals has captured roughly 80% of the market for roughly 80% of the market for
super highsuper high--alloy OCTGalloy OCTG
Share of 13Cr OCTG sales(Sumitomo Metals estimates for 2005)
Share of super high-alloy OCTG sales(Sumitomo Metals estimates for 2005)
15
Top two companies have captured Top two companies have captured more than 70% of the market for more than 70% of the market for 13Cr OCTG13Cr OCTG
(Super 13Cr forms 40%)Sumitomo
Metals
80%
Competitors
20%
Sumitomo Metals
33%
Competitor A
40%
Competitor B
14%
Competitor C
13%
16
2. 2. Seamless Pipe Business StrategySeamless Pipe Business Strategy
(1) Key Strategy 17
(2) Meeting Demand for high-grade Products 18-19
(3) Overview of Investment in high-grade Products 20-21
(4) Further Enhancing the Sumitomo Metals Brand 22-23
17
Key StrategyKey Strategy
Meeting surging demand of high-grade
products
Meeting surging demand of high-grade
products
Further strengthening brand power
Further strengthening brand power
Increase capacity by Increase capacity by 100,000 tons/year, 100,000 tons/year,
targeting at hightargeting at high--grade grade productsproducts
Establish SCM systemEstablish SCM system
Reinforce R&DReinforce R&D
Extensive Product LineupExtensive Product Lineup
High QualityHigh Quality
Accelerate Distinctiveness Accelerate Distinctiveness in the Seamless Pipe Businessin the Seamless Pipe Business
18
110 110
110 110
140 150
910800
620
800
1010
870 910
10501130
540
240 240
630
100
0
200
400
600
800
1000
1200
97’ 98’ 99’ 00’ 01’ 02’ 03’ 04’ 05’ 06’ 08’/2Q~
Increase Seamless Pipe Capacity Increase Seamless Pipe Capacity by 100,000 tons/yearby 100,000 tons/year
Invest to increase production capacityInvest to increase production capacity
1240
Supply shortage
Volume required by customers
Others
1240+α
Sales volume: thousand tons/year
Power generation
Petrochemical
Line Pipe
OCTG
Energy-Related(81%)
Expand Sales of highExpand Sales of high--grade OCTGgrade OCTG
Invest to increase the capacity of high-grade productsInvest to increase the capacity of high-grade products
17 23 16 28 2947
32 35 4365
804346
31
4470
5457 63
73
90
100
20
15
1388
44
4
2
55
0
20
40
60
80
100
120
140
160
180
200
97' 98' 99' 00' 01' 02' 03' 04' 05' 06' 08'
Super high-alloy
13Cr (including line pipes)
Alloy steel for Sour service
19
Sales volume: thousand tons/year
20
Overview of Investment Overview of Investment in more Cuttingin more Cutting--edge Productsedge Products
Phased increases by first half of fiscal 2008
Invest in threading facility to increase capacity (7units 8units) Threading capacity
410,000 tons 550,000 tons
Threading
During first half of fiscal 2008
Increase heat treatment capacity for small diameter pipe (2 lines 3 lines)Heat treatment capacity 490,000 tons 660,000 tons
Heat-treatment
Invest to boost capacity utilization rate by faster change over
Establish 1.24million tons of capacity
Capacity increase
Phased increases by first half of fiscal 2008
Pipe Rolling
Implementation PeriodTarget
1. Investment
Phased increases by end of fiscal 2006
Production capacity 80,000 tons 100,000 tons
13CR
Second half of fiscal 2006
Production capacity 14,000 tons 20,000 tons
Super high-alloy
2. Capex : 40 JPY billion
Steel Making ProcessIron ore is melted in the blast furnace to obtain a pig ironBillet is casted after the chemical compositions are adjusted to the customers’ requirement
Pipe Rolling ProcessBillet is pierced to be a hollow shape and rolled to a designated size
Finishing Process
((Reference) Seamless Steel Pipe Manufacturing Reference) Seamless Steel Pipe Manufacturing Process and Key Areas of InvestmentProcess and Key Areas of Investment
Heat treatment
Piercing process
Billet casting
Heat-treatment and threading is applied based on the requirement of the customers
21
Rolling process
Supe
rhi
gh-a
lloy
13Cr
Allo
y st
eel f
orSo
ur S
ervi
ce
Threading
22
Provide Technology
Provide Solutions
Before Service
After Service
Material sales
Material sales
Before Service
After Service
Conventional steel business
Sumitomo Metals is aiming toSumitomo Metals is aiming to
Sumitomo Metals’ Steel Business
23
Solid Partnership with Key CustomersSolid Partnership with Key Customers
Further enhance SCM and R&D
Long-term contracts with key customers
Oil majors: ExxonMobil, BP, Shell and othersState owned oil companies : Statoil, Aramco and
others
Long-term contracts with key customers
Oil majors: ExxonMobil, BP, Shell and othersState owned oil companies : Statoil, Aramco and
othersSCMSCM R&DR&D
Increase R&D personnelAssign customer support specialists
Become the No.1 Solutions Provider for the Oil and Gas Industry
Become the No.1 Solutions Provider for the Oil and Gas Industry