Global Steel Report 2010-2011 FULL REPORT

Global steel — 2010 trends, 2011 outlook

India — next landmark on the global steel landscape

3India — next landmark on the global steel landscape

Contents

Executive summary 4

1. Global steel market — driven by the emerging markets 6 BRICK markets driving growth 10

China 10 Brazil 12 Russia 14 Korea 16

Different approaches for different markets 17

2. India — next landmark on the global steel landscape 18 Why India will be the next landmark on the global steel landscape 18

Strong domestic demand drivers 20

Will India be able to replicate the growth in the China steel industry? 22

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Outlook for the Indian steel industry 26

Opportunities/barriers to entry — the competitive landscape 28

Inadequate infrastructure — challenging Indian steel producers 30

Strategic accelerants to improve logistics and supply chain management 31

3. Global steel outlook for 2011 32

4. Challenges and issues 34 Scarcity of coking coal 34

Raw material price volatility 35

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Improving product mix 41

4 Global steel — 2010 trends, 2011 outlook

Global steel — the next frontier is in emerging marketsThe 2009 global downturn and the subsequent recovery have brought to light the increasing importance of China and India to the world steel industry. In 2010, recovery in steel demand was far from consistent across the globe and steelmakers had to work hard to manage their working capital as ��"��#�However, while most of the global steel industry continued to feel pressure from the recessionary trends of 2009, steel demand and associated production in the BRICK (Brazil, Russia, India, China and Korea) regions continued to be a key driver in growth.

Brazil and South Korea recovered strongly from the economic crisis and are expected to register higher steel production in the medium term. However, the real shining lights on the horizon as far as growth in crude steel production, and the next frontier of growth, can be seen in both China and India.

Both countries’ domestic steel demand not only survived the economic slowdown, but they also grew at a ��#�$��%��&�China has become the virtual engine of the global steel industry, accounting for 45% of production in 2010, but India too has shown it is rapidly becoming an important part of the international steel market place. Indeed, it was ��*��*��steel producer in the world, and there are strong predictions it will become the second largest steel producer globally in coming years.1

Executive summary

Given the structure of the Indian economy, its stage of evolution, market size, growth, cost base, and potential resource base, Ernst & Young expects unprecedented growth in the Indian steel sector over the next decade. This will be supported by reforms in the investment environment and we believe this makes India a prime destination for global steel investors.

Why India is the next landmark on the global steel landscapeThe growing Indian economy is getting a great deal of attention in the media, with many column inches now being devoted to the potential opportunities for international suppliers and vendors. -��&��capita steel consumption and strong demand for steel due to strong economic growth gives India the competitive edge over other emerging economies. It has been a net importer of steel since 2007 and the widening difference between demand and supply ��*��new steelmaking capacity.

Drivers of growth come from the construction and infrastructure sectors which remain key steel consumers, with a share of 61% in total consumption of steel during 2008–09. With approximately US$1 trillion of expected investments in these sectors in the

2012–17 period, there will be a corresponding increase in steel demand. The automotive sector, which grew by 26% during 2009 and 2010, is also estimated to see double digit growth with the launch of low-cost passenger cars set to expand the market and hence demand. In line with economic growth, India will register strong demand across these sectors and accordingly domestic steel demand is expected to grow by around 10%–12% ��*��<��#�$��steelmakers invest in the latest generation of steel making equipment, �*�� possibly lead the world.

Abundant in iron ore while lacking in coking coal India is the world’s fourth-largest iron ��&��*��reserves to meet expected steel demand. Iron ore exports grew 5.4% between 2005 and 20092, with China taking approximately 90% of these exports. On the other hand, India is a net importer of coking coal, importing 23 million tonnes of coking coal in 2010 to meet its total requirement of around 40 million tonnes.

The demand for coking coal will increase as new steel capacity comes online, such that India’s coking coal requirement is expected to reach 90 million tonnes by FY20.3

=� >*��@��-��$��2 Indian Ministry of Mines data�� AJ��-��*��L&�J��-��>*��*&�=!�$��!=!

There has been historic rapid growth in the steel and aluminium sectors within India, and there are predictions that this trend will continue. The real key to success for many investors will be to jump on the Indian wave of opportunity while the conditions are still favorable.


Indian steel will witness unprecedented growth in the coming decadeErnst & Young expects the Indian steel industry to experience robust growth, with future demand boosting India’s per capita consumption of steel from a low base of around 54kg to far higher levels. Steel is expected to remain a key sector for the Indian Government, with the Government encouraging further growth with its increased ��N��#�

The steel growth potential in the country has attracted many global steel players to India. Those who are ��N�� *��already entered into strategic partnerships with Indian steel majors with an existing client base in the region. The Indian Government’s policy changes in iron ore mining towards competitive bidding and transparent allocation of mineral licenses is also great news for global ��*�� applies to all steel players in the market — both local and international.

Challenges and issues for the sector globally��*��"�� and increasing raw material costs, steelmakers need to factor the volatility into their business models. In doing so, they have to consider the following issues:

�� Scarcity of coking coal Coking coal is a key raw material for the production of steel. There is a ��Q��the coking coal market and the shortage of this key material is a real concern, particularly as it is unlikely to improve any time soon.

$�� to secure coal assets via joint ventures or acquisition, and they are also investing in new technologies to reduce or eliminate coking coal from the steel-making process.

�� Raw material price volatility With a scarcity of supply comes the obvious increase in prices, which in ��margin squeeze for steel producers. In 2011, crude steel production costs are likely to increase due to forecast price increases for iron ore, coking ��#�$��&�companies are looking to control raw materials via backward integration strategies; securing contracts through joint-venturing of associates and/or buying from a diverse supplier base.

�� cost effectiveness To offset the margin squeeze, steelmakers have begun focusing on ��order to reduce operating costs and improve the quality of output. Some operators are reducing operating costs by optimizing the equipment that is being used, and adapting their maintenance strategies. Some companies are also considering a shared services approach to capture �*�� common activities.

�� Energy is one of the main cost components in steelmaking operations and while the cost of energy increases, steelmakers are under pressure to optimize their energy consumption. Steelmakers are coming up with innovative ways to use outputs from steel mills to generate electricity, and we are also seeing companies invest in energy companies to secure supplies.

�� Improving product mix Some companies are investing in moving their line of steel product offerings up the value chain. Nucor has grown new markets during the recent economic downturn by developing a new and improved product mix. It has seen them move more than 500,000 tonnes of plate per year to higher value grades that carry higher margins.

The global outlook is optimisticIn 2011, global steelmakers are hoping for a more stable rate of recovery in demand. This will be dependent on whether there is an increase in consumer spending and business investment, to compensate for the potential lessening ��#�Z��*��sovereign debt crisis of many developed countries, there has been a marked shift from stimuli to austerity. In addition, the massive rise in oil prices inspired by political turmoil in the Middle East, coupled with the recent catastrophic events in Japan, increases the risks of a slowdown in growth during 2011. Global trade is estimated to grow by 5.7% in �!==&��*�*��from 2010 when global restocking fuelled an 11.5 % increase.4

The future of both the developed and the developing world will be governed by different sets of factors. The emerging markets of China and India will continue to witness strong growth in their steel industries due to robust demand for construction and civil engineering, automotive and mechanical engineering. The growth of developed markets however will be more dependent on supply-side response, innovative product offerings and substitutions. The key ��*�� steel players will ultimately depend on more tightly managed operating expenses and capital expenditure.

“The end of the annual raw material pricing negotiation in 2010 is still a relatively new phenomenon to which the steel makers are still adapting. They are incorporating it into their business model to manage the implications of this paradigm shift. With any period of dramatic industry change, opportunities eventually arise but it takes time to assess the full impact.”Michel Nestour, Director of Transactions, Mining & Metals

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The global steel industry has been on a roller coaster since 2007. The booming market of 2004–07 ��*�� #�$��&��*��Q��markets — infrastructure, construction and automotive — contracted by 7.4% year-over-year.5 The extreme lows of 2009 were followed by a steady recovery in demand and associated production, as well as a re-stocking period. During 2010, global demand for crude steel rebounded to 2008 levels as investment in infrastructure and other steel-intensive projects increased. Some of this recovery can be attributed to the timely intervention of the governments of major economies, which provided stimulus packages to arrest the economic crisis and effectively brought forward future steel demand.

Global steel market — driven by the emerging markets

Global crude steel consumption

Growth

Source: “Australian commodities: December quarter 2010", ABARES, December 2010

* F: Forecasted

Global crude steel consumption trends

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Developed versus emerging countries apparent steel usage

Emerging economies Developed economies

Source: World Steel Association (World Steel), Ernst & Young analysis, 2010

% growth (developed economies) % growth (emerging economies)

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1,0001,2001,4001,600

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Source: ABARES, December 2010

Global crude steel production trends

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�� A$��Z�� %��!=!L&�$\$�]-&�=��Z�� !=!�� A>*��*��*��L&��$��&�� !==8 “China’s steel sector, bright spots on the landscape”, OSK Research, 2 December 2010; “China Steel — Release from the iron maiden”,

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Despite this stimulus, steel consumption in developed countries, such as European countries and the US, has not recovered to pre-crisis levels and the majority of the improvement in crude steel consumption emanates from emerging markets. Demand for crude steel in Europe and the US is still 26% and 21% below what it was in 2008, and 31% and 37% below what it was in 2006, respectively.6 Economic uncertainty remains a specter in these markets. $��&�� *��are running very lean inventories, avoiding the big orders of �*��*�� &��*�*��have a positive effect when regional demand recovers.

The emerging markets helped propel growth, with crude steel consumption in China, India and Brazil growing considerably. In 2009, when consumption in every other country declined, China’s consumption grew by 15% and has �� !��!!�#��\��have also enjoyed substantial consumption increases since 2006 of 35% and 19%, respectively.

>*��@��-��$��*�� consumption will grow by 5.3% in 2011. There is some debate between steel market analysts as to the extent of demand growth from China in particular. Some7 foresee slower growth as the Chinese Government tries to curb �"��#��*��*��N�� that the Chinese Government will keep its 8% GDP growth target in the medium term8, which will mean that investment in infrastructure projects and private spending will both continue.

Emerging markets consumption grew ��&� �� and the resulting demand.


Recovery in global steel production��*��*��&�� production enjoyed a robust growth rate of 7% to reach 1,327 million tonnes in 2008. Steelmakers responded quickly to falling demand at the end of 2008 by cutting production. For �*��*��!!�&��65% before getting back up to between 70%–80% in the second half of 2009.9 In 2009, the US and the European Union (EU) suffered the sharpest drop in steel production of -36% and -31%, respectively.10

Steel production recovered in 2010 and crude steel production reached a record high of 1.4 billion tonnes. However, it was not a consistent upward trend throughout the year (see monthly production chart). Some of this volatility can be attributed to the usual seasonal cycles experienced by the steel industry, ��*��*��*�� *��*��been a factor in disrupting the consistency of demand.

$�� *�� J*��#�>*��@��-��$��recorded Chinese crude steel production of 573.6 million tonnes in 2009 and 626.7 million tonnes in 2010, a rise of around 9.3% year-over-year. In early 2010, there were major concerns that the rapid growth of China’s steel production was putting pressure on international steel markets. However, the corresponding growth in Chinese domestic demand alleviated some of the tension. In addition, the gap between international steel prices and Chinese prices narrowed, reducing the attractiveness of importing Chinese steel. Chinese production was cut in the second half of 2010 in line with their energy ��*��]��*��Q��*�the Government encouraged consolidation in the sector.

9 “The Lodestone: steel mini up-cycle in the making? Steel production remains key”, JP Morgan, 12 November 2010=!� @��-��$��&�]��

Crude steel capacity Capacity utilization

Source: Time to steel ahead, Ernst & Young, 2010

Global capacity utilization trends

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0200400600800

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1,6001,8002,000

2003 2004 2005 2006 2007 2008 2009 2010F

Global monthly crude steel production growth

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World ex BRIC China IndiaBrazil Russia

Source: World Steel Association, Ernst & Young, 2010

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$��*��*��&��strong global steel consumer and producer, strongly supporting growth in the sector. In 2010, growth in the steel sector exceeded pre-crisis levels, producing 66.8 million tonnes of crude steel. With its largely untapped and upwardly mobile population, the steel sector’s future growth potential in this market is unprecedented.

The steady rise in steel demand in 2010 meant that capacity utilization levels averaged around 77%. Steelmakers are predicting a more stable recovery of demand in 2011, and it is likely that global capacity utilization rates may inch back towards the highs of 2007 and early 2008.

Source: World Steel Association (1980-2009A), Ernst & Young estimates

Global crude steel production trends by regions

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RoW China EU–15 India Japan USA


ChinaChina is presently the largest steel-consuming and steel-producing country in the world, accounting for 45% of world steel production in 2010. Monthly crude steel production growth in China saw a peak of 56 million tonnes in May 2010, before hitting a low for the year of 47.9 million tonnes in September. In the last quarter of 2010, production rose above 50 million tonnes per month. The mid-year slowing of production was primarily due to a fall in steel prices, leading to production cuts by some mills in the region. It is estimated that 30% of the small and medium-sized mills in Hebei Province stopped production during that time.11 The decline ��=��$��&��*��iron ore prices, put pressure on margins.In addition, the Chinese Government made a decision to consolidate the highly fragmented steel industry (currently the top 10 steel producers in China account for only 44% of the total steel production)12 and thereby rein in steel production to ��*��#�>��*��&��*��Industry and Information Technology (MIIT) released a new policy that measures steel mills according to four parameters:

�� Emission of sulfur dioxide, dust and waste water

�� ]��

�� Furnace sizes

�� Output capacity

By implementing this policy, the Chinese Government is aiming to close down many of the smaller steelmakers in the sector, many of which have older-style plants, which are emissions-intensive. In another move to reduce the volume of exports from the country, in particular by the smaller steelmakers, the Chinese Government also removed a 9% export rebate on hot-rolled coils (HRC), sections and narrow cold-rolled coil products and hot-dipped galvanized products on 15 July 2010.

Beijing aims to have its top 10 steel producers control 60% of national steel capacity by 2015, up from 44% in 2009.13 The Government has also banned any new steel projects before 2012 to rein in steel targets. This means that the most feasible route for growth is through mergers and acquisitions. China’s largest steelmaker by output, Hebei Iron & Steel Group, and its sixth largest steelmaker, Shandong Iron & Steel Group, were each formed via the merger of two local medium-sized ��#�$��&��J*�� Tianjin established a merged company, Tianjin Bohai Iron & Steel Group Corp., to form one of China’s top 10 steelmakers by output.

Source: Australian Commodities, ABARES, Ernst & Young analysis, March 2011

Steel production and consumption in China

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BRICK markets driving global steel growth

==� AJ*��-��*��L&��>*��*&�=!�$��!=!12 Ibid.13 “Operation of the steel industry, 2010 and 2011 outlook”, Ministry of Industry and Information of the People’s Republic of China, 16 February 2011

Steel demand and associated production in the BRICK regions, particularly China, has been a key driver in growth over the last decade. India has also registered strong demand for steel in the last five years. However, there has not been a significant increase in Indian steel production in the last few years due to stringent mining and land allotments laws, making the country a net importer of steel. Brazil and Russia also recovered strongly from the economic crisis and offer an avenue for higher steel production in the medium ��&��*��N��*�� #�$��J*��&��*��\��J�� *��&� ��N��*��*��for steel going forward.


“China Steel — Release from the iron maiden”, JP Morgan via Thomson Research, 10 August 2010

China steel industry capacity and utilization rate

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Outlook for ChinaThe Chinese Government’s plans to reduce excess capacity �� *��#�J��J*��82% in 2010. With growth in steel production estimated to be around 5% in 2011, there could be around 800 million tonnes of capacity available in China by the end of 2011. Despite this, �*��<��*��J*��&��#�#&�from the construction, machinery, transportation, home appliances and shipbuilding, which will consume a fair proportion of domestic steel production.

The construction sector is showing signs of slowing due to monetary policy tightening in a bid to cool the over-priced property market. High interest rates will impact key automotive and household appliances sectors and is expected to result in slower economic growth in 2011.14 This may moderate the growth in Chinese steel production. In addition, smaller steel producers in China may also be pushed out of business in 2011 as the cost of production will continue to severely shrink their margins. In 2010, average margins were at 2.9% and the top 20 steelmakers accounted for 83% ��#15

Source: “Steel – China/ Taiwan – selectively positive,” Nomura via Thomson Research, 20 September 2011

China steel demand breakdown (by million tonnes)

Automobile 6%

Home appliance 2% Oil & Gas 2%Shipbuilding 3%

Construction55%Machinery

19%

Others 13%

Source: “China steel — release from the iron maiden,” JP Morgan, 10 August 2010, via Thomson Research, Ernst & Young analysis

Chinese steel end-market demand growth

10 10 9 9

30

18

11

34

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Automotive Home appliances

Mechanical equipment

Infrastructure

Year-over-year FY09/FY10EYear-over-year FY08/FY09

“China remains the steam engine for the global steel industry”Peter Markey, China Mining & Metals Leader

14 “Industry forecast — excess capacity may be hard to curb”, Business Monitor International, 25 February 201115 “Operation of the steel industry, 2010 and 2011 outlook”, Ministry of Industry and Information of the People’s Republic of China, 16 February 2011


Brazil

\��*��$��and the second-largest steel producer on the $��*��^-#�\�� an estimated 32.8 million tonnes of steel in 2010, up 23.8% from 2009. Prices in Brazil were expected to remain high in 2010 as the economy appeared to be recovering in the aftermath of the global economic crisis; however, lower prices in other steel-producing countries and a strong Real led to an influx of steel imports into Brazil. Steel imports reached a high in the third quarter of 2010 and at times there was up to a 30% difference between the ��\��#�$��result, national producers had to adjust their prices to remain competitive. The Brazilian Government is planning to impose a minimum import price for certain types of steel products. In addition, importers will have to pay an extra tax of 12% on the minimum ��*��#�$��these measures, it is forecast that steel imports — or at the very least the growth in steel imports — will decline in 2011.16

The steel industry in Brazil has important competitive advantages, including big iron ore mines with high iron content and modern and competitive steelmaking capabilities When compared with other countries, Brazil’s steel industry ��*��&��*��(steel tonnes per man-hour). Moreover, production equipment and environment control methods are state-of-art in the main steel plants.

>*��~��Q��Q��gives Brazil a competitive advantage, as it facilitates important ��*��$��Q��*��*��^-#�>*��&�*��&��*��\��#�>*��amount of idle capacity — in 2009 there was a 26.5 million tonnes of production versus 40 million tonnes of capacity. The exchange rate also impacted unit cost indicators (US$ per tonne) which slightly hampered competitiveness. Moreover, the industry deals with some traditional Brazilian business constraints. Brazil has one of the highest tax burdens in the world17, as well as logistics bottlenecks in a domestic ��*��#�$��&�\��steelmakers are struggling to stay competitive with lower cost steel imports.

The Brazilian steel industry is investing in innovation and cost reduction initiatives in a bid to improve its competitiveness. In the long term, these measures should help companies ��*�� #�

The industry is also investing in all stages of production and supply chain. This includes backward integration into mines and energy generation as a way of hedging costs, and to forward integrate into logistics and cold lines (mills) to get closer to clients, while retaining the hot lines (blast furnace to slab). The steelmakers are also offering value- added service with products, e.g., just-in-time deliveries and technical assistance.

Source: ABARES, World Steel Association, September quarter 2010

Steel production and consumption trends in Brazil

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Production Consumption

16 “Brazil Metals Report Q1 2011”, Business Monitor International, 201117 “Brazil has the greater tax burden of the BRICs, says study”, India Brazil Chamber of Commerce, 24 November, 2010


>*��\��*��*�� as it has low per capita consumption of steel of 103kg in 2009 versus the global average of 190kg. Brazil exported 33% of its total steel production in 2009, with major export �� $��~��&��$��~�}�� _��*�$��~��#18

Brazil’s steel production has grown only 1.8% between 2001 and 2010. However, production in 2009–10 increased by around 20% year-over-year, while consumption increased by more than 30% during the same period, due to the smaller base in 2009.

Source: World Steel Association, 2010

Net trade of Brazil

02,0004,0006,0008,000

Thou

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10,00012,00014,000

2001 2002 2003 2004 2005 2006 2007 2008 2009

A$��N��<��&� Brazil’s production growth continues to climb.”Carlos Assis&�-��*�$��

18 “Steel — 2009”, Brazil Steel Institute, 2009

Outlook for BrazilBrazil’s steel industry should achieve strong growth in the next few years due to the rise in demand from the domestic economy, as well as the low cost of production of steel due to strong raw material linkages of the local steel players (Brazil is the third largest producer of iron ore). Steel sales in Brazil recovered rapidly following the recession due to the robust real estate sector, and an increase in vehicle sales and consumer durables. The macroeconomic factors are positive and hence the demand from these end-user sectors should remain in the short term. Brazil’s imports meet 20% of the apparent steel demand, and are expected to increase in line with the robust economic growth of the country and the ensuing demand.


Russia

Russia, which produced 67 million tonnes of steel in 2010, is the fourth-largest steel producer in the world.19 Following the global financial crisis, Russia’s steel sector is recovering. This recovery is being boosted by the Russian Government’s support of steel-intensive industries, such as automotive, manufacturing, machine building, oil and gas, and energy. This has created higher steel demand in the domestic market and Russia should surpass pre-crisis production levels in 2011. Steel-producing companies in Russia have better raw material integration compared to their global peers. J��*��-��=!!��Q��ore and coking coal; Novolipetsk Steel (NLMK) is 100% ��Q��!��Q��]��=��Q��coking coal, respectively.20

Source: World Steel Association, ABARES, September quarter 2010

Steel production and consumption trends in Russia

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Production Consumption

Russia is a major exporter of steel and an estimated 47% of the country’s total output in 2010 was destined for international markets. In 2010, there was a steady recovery in steel production but it still remains below its all time high. Consumer spending is expected to increase in the country in line with the forecast economic growth, which should boost domestic demand for steel products.

=�� @��-��$��&��!!��!� A��&L�$��J��>*��*&��}�� !=!


Steel production and export scenario

Source: “Russian steel”, ING via Thomson Research, October 2010

44.89 45.70 56.16 46.94

55.11 54.30 43.84 53.06

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Domestic sales (% of total output) Exports (% of total output)

Future mid-term growth is well supported by export appetites of the Russian oil and gas industry. Gazprom and Transneft megaprojects include the investment of US$25 billion in the construction of new pipelines connecting Eastern Siberian ��*�$��#�$��capacities will be utilized as a result of expected boost in exports after Russia accesses the World Trade Organization ~@>��#�$��&�the accession to the WTO is expected to occur during 2011 and will bring gradual removal of anti-dumping tariffs imposed on Russian steel by 28 countries.

Domestic future demand for steel will also be supported by an anticipated increase in industrial construction and infrastructure development, mainly in the Russian Far East, Eastern Siberia and Polar Urals, as a result of foreign direct investment improvements after Russia’s accession to the WTO. This is accompanied by over US$100 billion in investment in the expansion and modernization of the metallurgical sector as forecast by the Russian Ministry of Industry and Trade in its strategy until 2020.

“Post-crisis recovery and expected World Trade Organization accession boosted domestic and export demand for Russian steel.”Evgeni Khrustalev, CIS Mining & Metals Leader


Since the global financial crisis, Korea has been able to capitalize on the competitiveness of its currency to take market share in the steel industry from Japanese steelmakers. By mid-2010, Korean steel products were 36% cheaper than those produced in Japan.21 In 2010, Korean crude steel production increased by 20.2% to 58.3 million tonnes.22 Business Monitor International (BMI) forecast further growth in crude steel output to 66.5 million tonnes in 2011.23 The increase in crude steel production is the result of expansion in capacity by the top two steelmakers — POSCO and Hyundai Steel. With POSCO’s current capacity at around 37.5 million tonnes per annum, and a target of 41 million tonnes of domestic capacity, it is likely that the company will undertake further expansion.24 This is in addition to the new two million tonnes per annum steel plate plant in Gwanyang which began commercial operation in 2010.

��-J��Q��*��$��*��low cost production, a high quality product mix and very low �� #��-J��*��*��*��mergers & acquisitions growth as it looks for ways to consolidate its domestic position and expand into foreign markets. The biggest steel deal of the year was completed when POSCO acquired a 68.2% interest in steel trader Daewoo International Corp. for US$2.8b in cash. This strategic acquisition enables POSCO to access Daewoo’s large sales network in emerging markets and to leverage the trader’s raw material trading experience.

The second largest steelmaker, Hyundai Steel, has added 4 million tonnes to its existing crude steel capacity (an additional 27%) with the start-up of its No.2 blast furnace in early 2011. The steelmaker’s No.1 blast furnace is operating at 85–90%. The growth in steel capacity over 2010 and into 2011 has led to some oversupply in the Korean market. This has been exacerbated by a 5% dip of crude steel consumption in Korea in 2010 to 52 million tonnes.

Korean production and consumption 2003-2010

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60

70

Outlook for KoreaIn 2011, domestic steel consuming sectors are expected to take up some of the increased steel production and as a result crude steel consumption is forecast to increase in 2011 by 4% to 54 million tonnes.25 Demand from domestic steel consumers ��&��#�#&��*��industry is predicted to grow by 3% in 2011, as is the shipbuilding sector on the back of higher than forecast orders in 2010. Demand from the home appliance market is solid, although there may be some pressure on the demand for consumer durables as the Bank of Korea may raise interest ��"��#�

Korea exports a good proportion of steel to both China and India. With around 25% of Korean steel going to China, any slowing in Chinese growth is a risk to the Korean steel industry.

Korea

21 “South Korea Metals Report Q1 2011”, Business Monitor International, January 2011�� #��#�#��-��$��&��*��!==23 “South Korea Metals Report Q1 2011”, Business Monitor International, January 201124 “Steel Korea”, Nomura Financial Investment (Korea) Co Ltd, 17 November 2010�}� A$��L&�$\$�]-&��*��!==


��!=!&��<��*�� =}�&��*��*�� partly due to the stronger won, which made imported steel more attractively priced than locally produced steel. Korean steel imports are forecast to decline 12.6% in 2011 to 23.8 million tonnes as a result of increased domestic production. It is expected that increasing demand from emerging markets, such as India, will lead to a 15.9% increase in steel exports in 2011.27

Different approaches for different markets

“Korea is the sixth-largest steel producer in the world producing 58.5 million tonnes in 201026, with strong growth prospects on the back of demand from India, and POSCO’s expansion plans.”Sangwook Cho, Partner, Mining & Metals, Korea

�� @��-��$��&��!=!27 “South Korea Metals Report Q1 2011”, Business Monitor International, January 2011

$��&��*��economy will mean that steelmakers will have to take into account very different considerations depending on where their production facilities are based. Some of these include:

Strategies for different markets

Developed markets Emerging markets

�� Estimating future end-user demand, sizing the business correctly and ��*��*��<��"��&��semis versus tubes

�� Continuing to take advantage of demand growth and matching production capability to the growing local market demand

�� Protecting the top line by moving away from production-led companies to new customer-centric companies by reorganizing the commercial function and gaining a better understanding of what customers want and value. It is also possible to either move distribution centers or service centers to emerging markets or make acquisitions to gain market share where demand is growing

�� Harnessing the technological know-how of the producers from developed countries to maximize production, step into the value-��Q��

�� Hedging increasing power costs �� Managing increasing power needs which also compete with other growing industries in emerging countries for electricity

Steelmakers in both emerging and developed countries will need to seek cross-border opportunities to manage the input costs of iron ore and coking coal. Strong balance sheets are required to make acquisitions so steelmakers may need to look for less obvious targets or smaller deposits in which they can either partially or fully participate. Steelmakers will also have to apply discipline to increase their management of working capital needs and hedging the new paradigm of indexed raw material pricing.


The global steel outlook is optimistic, with 7% growth expected in 2011 alone, most of it from the BRICK countries. Given the structure of the Indian economy, its stage of evolution, market size, growth, cost base, and potential resource base, unprecedented growth in the Indian steel sector is expected over the next decade. This will be supported by reforms in the investment environment, which will make India a prime destination for global steel investors.

The Indian steel industry has witnessed robust growth during 2005–2010, with production (crude steel) and consumption ~��*��*��#��#��&��#��!=!&��*��*��producer of crude steel, with domestic production growing at a rate of 9.5% between 2000 and 2010, driven by capacity expansion and improved utilization. Even in 2010, the steel sector witnessed steady growth and exceeded the pre-crisis ��#�$��*��@��-��$��&��66.8 million tonnes of crude steel in 2010.

Over the past few years, steel consumption has been driven primarily by the increasing infrastructure-related investment. Z��*��&��*��remained resilient due to strong domestic demand from Indian end users. Consequently, in 2009, when global steel consumption declined by 8.5% year-over-year, steel ��"��#��&��*��capita consumption is still one of the lowest in the world, presently standing at around 50kg per capita versus 430kg for China and a global average of approximately 190kg.

Finished steel consumption (2005–2011)

Source: Annual report 2010–11, Ministry of Steel, Government of India

*Data annualized untill December 2010

0

2

4

6

8

10

12

14

16

0

10

20

30

40

50

60

FY05 FY06 FY07 FY08 FY09 FY10 FY11*

Grow

th (%

)

Mill

ion

tonn

es

Consumption Growth

India — next landmark on the global steel landscapeWith its large steel industry and strong economy, India is poised to become a dominant player in the global steel sector. India’s economy now accounts for almost 2.4% of global GDP, up from 1.6% in 2003, and is predicted to grow to 3.6% by 201528 on the back of sustained GDP growth of 8%–9%.

Why India will be the next landmark on the global steel landscape

28 Global Insight, 2011


Capacity additions not keeping pace with rising demand>*��#�$��*��*�capacity has increased by 8.7% between 2005 and 2010, this was outstripped by growth in consumption of 9.7% over the same period. The main capacity additions have �� N�� <��&��*��N�� &��infrastructure bottlenecks.

Capacity, production and utilization numbers (2005–2011)

Source: Annual report 2010–11, Ministry of Steel, Government of IndiaData annualized until December 2010

Mill

ion

tonn

es

Capa

city

util

izat

ion

(%)

Capacity (million tonnes)Production (million tonnes)Capacity utilization (%)

01020304050607080

FY11FFY10FY09FY08FY07FY06FY0586.587.087.588.088.589.089.590.090.591.091.5

“India will be the next landmark on the global steel landscape, with leading producers, investors and suppliers keen to participate in the Indian steel dream.”Anjani K Agrawal, Indian Mining & Metals Leader

India imports steel as supply lags demandSince 2007, India has been a net importer of steel, with the demand/supply gap expected to widen further over the next ��#��#��=!#�-��imports may reduce over the next three years, as around 20 ��<�� <�� #��&��*��expansions have been delayed due to land allotments laws and environmental clearances issues, Ernst & Young expects India to remain a net importer of steel over the longer term.

��

Source: Annual report 2010–11, Ministry of Steel, Government of IndiaData annualized until December 2010

Thou

sand

tonn

es

-5,000-4,000-3,000-2,000-1,000

01,0002,0003,000

FY11FFY10FY09FY08FY07FY06FY05


The construction and infrastructure sector is India’s largest steel consumer, accounting for 61% of total steel consumption in FY09, and future demand looks strong.

Infrastructure: the key driver of steel consumption in IndiaBetween FY09 and FY10, infrastructure development ��*�� #��&� ��"�� by only 3.2%. This trend is likely to continue in the short term, ��*��#�$��Planning Commission projections, total investment in the infrastructure sector in the Eleventh Five-Year Plan (2007–2012) will be around INR20.6 trillion (US$444.8 billion) and the Twelfth Five-Year Plan (2012–2017) forecasts investment of approximately INR45 trillion (US$971.7 billion).29 In FY10, around 7.2% of GDP was spent on infrastructure. The Indian Government aims to increase this to around 9% by 2014.

Investment in infrastructure

Source: “Indian Economy: Update”, Ernst & Young, August 2010

24 2632

3947

55

69

82 83.5

0102030405060708090

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

F

Inve

stm

ent i

n U

S$ b

illio

n

Investment in infrastructure (percent of GDP)

Source: “Juggernaut is starting to roll… with a few links missing”, Goldman Sachs via Thomson Research, 11 October 2010

6.0 6.06.5

7.27.9

8.49.0

9.59.9

10.310.7

5.0

6.0

7.0

8.0

9.0

10.0

11.0

FY07

FY08

FY09

FY10

FY11

F

FY12

F

FY13

F

FY14

F

FY15

F

FY16

F

FY17

F

Investment as % of GDP

Power and pipeline construction in particular will be important drivers of steel demand. During the Tenth Five-Year Plan (2002–2006), demand for power increased at a rate of 6.2% �� }#��&��#�>��India’s chronic power shortages, the Government’s Eleventh Five-Year Plan envisaged capacity additions of 100,000MW by 2012, and launched several initiatives, including the Ultra Mega Power Projects. However, capacity additions fell behind this target, leaving a widening gap to be bridged during the next plan period.

Demand for steel is also expected to come from the huge network of pipelines to be laid over the next few years for oil and gas transportation, with the network for liquid fuel transportation likely to grow from the present 16,800km to 22,000km in 2014.

In addition, the shipbuilding industry is likely to undergo a fast growth cycle due to increasing sea-borne trade and coastal shipping trends, further pushing up demand for steel.

29 Conversion rate as at 21 March 2011

Strong domestic demand drivers


Opportunities across the infrastructure sector

Sector Key opportunities

Power �� Government target of 100,000 MW by 2012

�� Both generation and transmission capacities ��*��

Oil and gas �� Pipeline network, city gas distribution and ��upgrading

Roads and highways �� National Highway Development Program (NHDP) — plans to construct and upgrade more than 50,000km of national highway by December 2015

Railways �� Dedicated Rail Freight Corridor (DRFC) network expansion lagging behind freight growth; this will need to be made up

Ports �� 12% during 2010–2012; the capacity increase or upgrade bodes well for the steel industry

Water and waste management

�� The Jawaharlal Nehru National Urban Renewal Mission is expected to increase steel consumption

Other major steel consumers in India are the automobile and ��&��*��*��over the last few years:

Automotive is the next manufacturing hub — The sector, which grew by 27% in FY09 and 26% in 2009–2010, is likely to continue to enjoy double-digit growth as the launch of low-cost passenger cars expands the market. With many automobile manufacturers increasing capacity and (or) establishing manufacturing operations in India, demand for the high-quality, value-added steel segment will see immense growth. The auto component industry grew by 20% between FY09 and FY10 to reach a turnover of US$22 billion, and is estimated to grow by 18% year-over-year between FY10 and FY11 to reach US$26 billion.

Capital goods sector to accelerate demand for steel — This sector, which currently accounts for 11% of steel consumption, *��*��market share. For example, in China, machinery production alone accounts for more than 100 million tonnes of steel per ��#�@�*��*�� &� ��internal cash accruals and greater capital availability, corporate India’s ambitious capital expenditure plans will generate greater demand for steel.

Outlook for domestic steel demand Domestic demand for steel is anticipated to grow by around 12% in the next two years on the back of forecast strong �Z��*&��*��*��"�� steel, although both are set to increase. The short-term �� *��"�� growth of about 10%–12% and 9%–10%, respectively, over the next two years.30

Estimated growth in steel demand

Source: Steel Products update, CRISIL Research, June 2010

2630

1412

1620

16

10

16

0

5

10

15

20Gr

owth

(%) 25

30

35

Cars and utilityvehicles

Commercial vehciles

Infrastructure

2009–10E 2010–11F 2011–12F

30 “Steel products update”, CRISIL Research, June 2010


China—India comparison

Parameters China to India ratio India’s lag in years

GDP 3.8 11.0

Industrial output 8.0 18.0

Steel production 9.4 18.0

Car sales 5.0 6.0

Bank loans 9.2 16.0

Source: “Sizing up India and China”, IIFL via Thomson Research, 1 November 2010

Elements China India

Reforms started 1978 1991

GDP composition — industry and construction — at the start of reforms

48% 27%

Share of investments in GDP expenditure at the start of reforms

38% 25%

Share of investments in GDP expenditure (2009)

48% 32%

Share of investments in incremental GDP ��

52% 38%

Share of consumption in incremental GDP ��

31% 56%

Source: “Sizing up India and China”, IIFL via Thomson Research, 1 November 2010

�_��$��!!��!!��*��#��&�data is for the 12-month period ending in March of the subsequent year.

China’s reforms began 13 years before India’s. Even at the start of its reform process, China was a more industrialized economy. “Industry and construction” constituted 48% of its GDP, in comparison to 27% for India when reforms began in 1991. China has continued to focus on infrastructure. Its share of GDP expenditure accelerated from 38% to 48% during the reform journey, while India’s GDP grew from 25% to 32%.

In 1991, China produced 71 million tonnes of steel, which grew to 127 million tonnes by 2000. In the same period, India grew from its steel production from 17 million tonnes to 26 million tonnes. In China, steel production picked up pace after 2000, ��!��!=!#�$��*��*��*��*��&�� terms, China’s steel production is 9.4 times that of India’s.32

Will India be able to replicate the growth in China’s steel industry?Over the last decade, China witnessed exponential growth in its steel industry, registering a growth rate of 17.2% in production and 14.3% in consumption. In absolute terms, China is produced 627 million tonnes of steel in 201031 — around 47% of global steel production versus 151 million tonnes in 2001. The ongoing debate is whether India should aspire to grow to such levels and, if required, whether it can replicate China’s growth model in the sector. The following indicators provide vital clues.

�=� >*��@��-��$��&��!=!��32 Ibid.


China and India — crude steel production and GDP growth

Source: IHS, Global Insights, ABARES, World Steel Association

0

2

4

6

8

10

12

14

16

Grow

th (%

)

18

20

2006 2007 2008 2009 2010 2011F

Real GDP growth of China Crude steel production growth of China Real GDP growth of India Crude steel production growth of India

During the decade, China invested over half its incremental GDP into infrastructure development to sustain high economic ��*&��*��*��country’s GDP crossed the US$1 trillion mark. India is currently ��#�$��*��Z��*��US$1 trillion mark in 2009, investment in infrastructure accounted for 7.5% of GDP — one of the highest in the world. Infrastructure investments are expected to be close to 9.9% of GDP during the Twelfth Five-Year Plan (2012–2017).

4.5 4.75.3

5.76.4

7.2

910 10

9 910

23456789

1011

Spen

ding

(% o

f GDP

)

FY04 FY05 FY06 FY07 FY08 FY09

Infrastructure spend


India China

The difference between the two economies has been the level of lending to the infrastructure sector. In China, infrastructure lending as a percentage of total lending was around 28%, while in India it was around 10% between FY04 and FY10. However, in India, lending to infrastructure also grew to 13% in 2010 versus 7.9% in FY05, to support increased project activity.

Lending to infrastructure as a percent of total lending


4.97.9 8.0 8.0 9.2 10.4

13.1

21 21.5 22.3 23.625.2 25.7

29.5

0

5

10

15Le

ndin

g (%

of t

otal

lend

ing)

20

25

30

35

FY04 FY05 FY06 FY07 FY08 FY09 FY10E

India China

Based on India’s GDP data, Ernst & Young believes the economy is on a strong growth path. In the coming years, we anticipate steel consumption growing in line with GDP growth in the expected 8%-plus range. While India does not need to emulate the volume achieved by China, production must accelerate to meet the robust growth in demand. The extent of production growth will depend on how well stakeholders address the market’s challenges.


Raw material availability — abundant in iron ore but deficient in coking coal

Abundance of iron ore reservesIndia is the world’s fourth-largest producer of iron ore after J*��&�$��\��#��*�� }� ��%��&��*��<�*Q*�*��*��*�� #��#�$��*��*��*��\��$��&��*�� the key advantages of India’s domestic steel industry.

Iron ore exports grew 5.4% between 2005 and 201033, with China taking approximately 90% of these exports. The debate of rationalizing iron ore exports in favor of domestic use continues, with the Government following a mixed policy of increasing the duty on iron ore exports.

Coking coal deficienciesWhile India has the fourth-largest proven coal reserves in the world, they are low quality and coking coal makes up only 17% of the total reserve. In FY10, India imported 23 million tonnes of coking coal to meet its total requirement of around 40 million tonnes, 34%34 of total coal imports.

33 Indian Ministry of Mines data�� J��&�J��&�Z�� !=!

Export of iron ore

Source: Annual report 2010–11, Ministry of Mines, Government of India

Mill

ion

tonn

es

% of

tota

l pro

duct

ion

Exports (LHS) % of total production (RHS)

78.184

48.7%

68.5

101.553.5% 50.9%

32.1%

68.932.3%

50

60

70

80

90

100

110

FY10FY09FY08FY07FY06FY05

46.4%

0

10

20

30

40

50

60

Production of iron ore

Source: Annual report 2010–11, Ministry of Mines, Government of India

Mill

ion

tonn

es

100

120

140

160

180

200

220

240

FY11FFY10FY09FY08FY07

187.7

213.2 213218.6

212.6


�}� AJ��-��>*��L&�J��-��&��>*��*&�=!�$��!=!

The demand for coking coal will only increase as new steel capacity comes online, with India’s coking coal requirement expected to reach 90 million tonnes by FY20.35 Looking forward, Ernst & Young expects access to coking coal to have a huge impact on the margins of steel manufacturers. This will be less of an issue for integrated steel players (ISP), which operate captive coke capacities, producing around 40% of total coke in India annually. However, secondary steel producers (SSP), which require around 10 million tonnes of coking coal per annum, will be largely dependent on imported coke.

Growing coking coal demand

Source: "Domestic demand", Opinion, CRISIL Research, July 2009

37.6 41.045.6

52.858.7

65.0

23.0 22.7 22.4 22.2 21.9 21.7

0

10

20

30

40

50

60

70

2008

–09

2009

–10

2010

–11F

2011

–12F–

2012

–13F

2013

–14F

Mill

ion

tonn

es

Demand Production


Outlook for the Indian steel industry

Capacity additions by major steel producers to meet increasing demand��*��*��201036 and is expected to become the world’s second largest producer in coming years, if all planned capacity expansion projects become operational. Projects expected to be operational in the next three years include those by Tata Steel, �-@�-��&�-$��]��#�\��estimated project completions, total crude steel capacity in India is expected to be around 112.5 million tonnes by 2015 — a growth rate of 9%.

Expected capacity additions

Crude steel capacity (millions of tonnes)

Year-ending 31 March 2007 2008 2009 2010 2012F 2015F

Tata Steel (India) 5 5 6.8 6.8 6.8 12.7

Essar Steel (India) 4.6 4.6 4.6 4.6 9.2 9.2

Ispat 3.6 3.6 3.6 3.6 3.6 3.6

JSW Steel 3.8 3.8 3.8 7.8 11 11

RINL 3.5 3.5 3.5 3.5 3.5 6.3

JSPL 2.9 2.9 2.9 2.9 4.9 6.9

-$�� 13.8 13.8 13.8 13.8 15.9 24.7

Bhushan Steel 0.3 0.3 0.3 0.3 2.2 5.1

Bhushan Power & Steel

1.4 1.4 1.4 1.4 1.4 1.4

Others 17.9 20.9 25.6 28 28 31.6

Total crude steel capacity

56.8 59.8 66.3 72.8 86.6 112.5

-��A��-��-��$��L&�\_�� Securities via Thomson research, 19 October 2010

Given its direct correlation to GDP growth, Ernst & Young expects the Indian steel industry to experience robust growth, with future demand lifting India’s per capita consumption of steel from its low base of around 54kg to far higher levels. We believe the sector’s long-term positive indicators (such as strong demand from key end-use sectors and iron ore availability) will exceed its challenges (such as land allotment issues, shortage of coking coal and environmental ��#�$�� &��<��remain a key sector for the Government. This is reflected in the Government’s encouraging growth goals for the steel sector and in the number of Memorandum of Understandings (MOUs) the central and state governments have signed for greenfield projects.

International steel majors are expanding their Indian presence$�� *��*��*��&�several global steel players have been planning to enter the market or have announced expansion plans for their Indian ��#��&�$��-J��*��N��#

Some global players have entered strategic partnerships or N��*��N��&��*��N�� &��*��established companies already have an existing client base in �*��#��&�$��*��%��^��&��*��-��Industries has partnered with Bhushan Steel for technological and marketing collaboration, which may be extended to equity ��N��#��]�*��N��-@�-��&��*��=}��%��*��#�-$��has entered a joint venture with POSCO to have FINEX ��*��\��#�$��alliances and joint ventures are in the pipeline.

�� >*��@��-��$��



“Demand for steel in India is growing at the rate of 15%-20%. We expect demand to grow exponentially over the next few ��#��*��"��&��*��*��&��ports will limit the natural evolution of steel consumption and will debilitate the creation of steel supply.”Mr. R. K. Miglani, Chairman, Uttam Galva Steels Limited

Opportunities/barriers to entry — the competitive landscape

Source: Ernst & Young analysis

New entrants—low to moderate

Limited number of new players asindustry is capital-intensive

�

�

Global players keen to gain foothold� Regulatory environment

Substitutes—low

Steel industry faces a threat from aluminium and plastic industry

�

Internal competition—low

Currently the competition among players is low because it is a supplier’s market

�

Entry of global players will intensify competitive landscape

�

Suppliers—moderate to high

The coking coal suppliers have considerable power

�

-�� but price is set according to international benchmark

�

Customers—low to moderate

Demand is high and currently outpaces supply

�

Price adjustments barely �"��

�

Five forces determine the resilience of the Indian steel industry and its competitive position.


Low to moderate threats from new entrantsThe two biggest barriers to entry in the Indian steel industry ��*��the extended set-up period due to the challenges of land acquisition and other regulatory procedures. These issues have deterred many global steel producers in the past, with many now undertaking joint ventures with established Indian steelmakers. We take a closer look at the regulatory barrier.

Complicated regulatory regime in India��N�� <��N��&� ��*��<�� #��<��&�$��*�� *��N�� *�� *��were proposed. The major stumbling blocks relate to land acquisition, mining leases, forest clearances and relief and rehabilitation (R&R) policies.

While such challenges are generic to large projects in several ��*��&��*��*��

�� %��N��"��*�India’s social set up — almost 70% of land is covered by agriculture and forests, further accentuating the lower land:population ratio

�� Certain inadequacies in the land acquisition regulations ~�#�#&�� &��benchmarking, coverage of displaced persons)

�� Divergence between state and central legislation and procedures

Of late, some projects in the mining and metals sector have been stalled under the Forest Right Act (FRA) which safeguards the social rights of the forest-dwelling tribal population. The ��$��*��%��*��*��consent of residents or the people dependent on that area. Most mining resources lie in the tribal belt of the resources rich states of Orissa, Chhattisgarh and Jharkhand, which have recently seen local community uprisings.

The Government is seeking to work out solutions in keeping with its inclusive growth agenda, with its draft Mining Bill already addressing some of these complex issues. The industry is also consciously moving to obtain a social license to operate by supporting community development and is well advised to address longer-term sustainability issues.

Low degree of internal competitionIndustry competition is minimal as the Indian steel sector is a suppliers’ market, with excess demand met by imports — cheaper steel from China and specialty steel from South Korea ��#�$ �� N��>��-��&��-@�-��&�-$��and RINL. These companies are expected to contribute to the ��N��*��*��*�� N��#�However, several multinational steel companies are keen to enter the Indian steel market. Once they set up their operations, there will be greater competition for resources, talent and market share.

Minimal threats from steel substitutes-�� &��*�� &��alloys, have replaced steel in the automobile industry. However, as these substitutes are not suitable for many key end-user segments, it seems unlikely they will have a major impact on the demand for steel in the short to medium term.

Vertical integration>*��N��&��*��>��-��-$��&�*��integrated to secure raw materials. For example, Tata Steel is �!��Q��=!!��Q��&��-$��Q�� most of its coking coal requirement. The rest of the players in the Indian steel industry have varying degrees of self-��&��their requirements. For these non-integrated steel players, the cyclical and volatile nature of prices for iron ore and coking coal is a major risk.

Currently, iron ore pricing is internationally benchmarked, with miners, such as NMDC and Sesa Goa, representing around 23% of the iron ore production in India. However, coking coal ��*�� "��*��&� as India imports more than 70% of its requirement.

Fragmented customer base drives pricing More than 60% of the demand for steel in India comes from the construction and infrastructure sector. However, the supply side is still more consolidated than the end-user segments, ��"��#


The major impediment to growth in the Indian steel sector is inadequate infrastructure. India needs a robust transport framework to support its planned volumes of steel production. $��*��%��*��investment in key infrastructure areas, such as railways, roads and ports.

Constrained railway haulage capacityUntil 1995, India’s railway network was more advanced than China’s. Since then, inadequate investment has meant it is constraining the growth of the mining and metals sector. Over the past 15 years, the railway network has only grown by 3%. It retains only 30% of the transportation market, despite being a cheaper and faster freight option than road. To help Indian railways gain a bigger share of the freight market, in 2005 the Indian Government offered licenses to private players to start container operations in the country. However, today, the rail container sector accounts for only about 1% of the cargo handling market.

Inadequate infrastructure — challenging Indian steel producers

Congested portsCurrently, Indian ports face issues such as low productivity, high costs and large vessel turnaround periods. With dependence on low ash coking coal and export/import of steel set to increase in the future, the importance of port infrastructure to the steel industry cannot be underestimated. $ ��!��*��*�� *��western ports of Jawaharlal Nehru Port Trust (JNPT), Mundra, ��#��rate of approximately 12% between 2010 and 2012. The port development plan established by the Indian Government in ��!��=&!!��*�planned capacity of major ports to be 1,002 million tonnes by FY12. However, actual capacity additions are lagging.37

Inadequate road infrastructureRoads carry 57%38��*��*��#�>*��"�< ��and “last mile connectivity” that road transporters offer have increased their share of road haulage, even though road transport is relatively more expensive than rail. Out of the total road length of 3.3 million kilometers, national highways and state highways comprise merely 6%, with almost no expressways. National highways comprise only 2% of the total ��*� �� !��&�clearly indicating the stress suffered by the existing road infrastructure. Given the steel production target will require increased haulage via the road network, the road network must be expanded and upgraded.

Breakup of freight handled in India

-��A��J��Q>*��~��*��L&��Z�J�-��&�=�Z�� !!�&��>*��*

!

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=&!!!

=&}!!

�&!!!

�&}!!

�&!!!

�&}!!

��!� ��!� ��!� ��!�

Mill

ion

tonn

es

Air Sea Road Railways

37 “India Transportation: Sea and Land Cargo — Let the rough”, Nomura International (Hong Kong) Ltd. via Thomson Research, 18 February 2009

38 “Railways: Uncertain today clear tomorrow”, IDBI Capital via Thomson Research, 8 October 2010


Every tonne of steel produced requires the movement of four tonnes of material. Inadequate infrastructure and the ��*��*��impacted the Indian steel industry, with serious cost implications. The steel industry should evaluate and pursue the following four initiatives to address the issues:

1. Transform the network structure — It is critical to know that materials are moving on the most optimal network and mode. Currently, around 60% of tonne kilometers are covered through costly road transportation. The steel industry must invest in creating the nodes at the right location and, if required, teaming with integrated logistics service providers to help build the most optimal infrastructure. Enhanced usage of inland container depots, logistics parks, and Free Trade Warehousing Zones also will help create a more robust and economic network.

2. Improve the utilization of logistics assets — Steel companies should leverage existing assets by improving maintenance and planning.

3. �� Most of the additional costs incurred by the steel industry can be �� &��*��&�resulting in demurrages and detentions. Higher visibility of information along the supply chain, improved planning, and collaboration between various service providers would ��*��#�

4. � ��!�plants, railways and ports — To achieve economies of scale, mining and steel companies can work together to build infrastructure assets.

“In addition to productivity improvements and securitization of resource needs, the Indian steel industry should focus on developing products that meet customers’ needs, many of whom are becoming more sophisticated.”Mr. Malay Mukherjee&�J*��]<��&�]��-��\��

Strategic accelerants to improve logistics and supply chain management


Strong growth in emerging economies is likely to pull global recovery along in the short term. In many emerging economies, it seems that the recovery has entered a self-��*��&��<��rather than restocking. The modest recovery in more advanced economies remains vulnerable to ongoing volatility, ��#��&�*��&��that much of this volatility and uncertainty will ease during 2011 and an increase in industrial growth is expected in the second half of the year.

>*��*��&�e.g., vertical integration and shifts in value creation towards resources and cost-curve changes. These changes increase the need for agility, risk-reward ratios and rebalanced expectations of return on capital expenditure.

$��*��&��that demand from steel consumers — the construction and automotive sectors — will increase during the course of 2011. ��*��%��!==&��*��*��Europe is recovering slowly, while in Germany and Italy, in particular, there appears to be robust demand. In the US, ��*�� *��quarter of 2011 and shipments from service centers were up by 32.5% year-over-year to 3.42 million tonnes in January 2011, and well above December 2010 shipments of 2.82 million tonnes. Canada enjoyed increased steel shipments from service centers of 22.7% to 545,100 tonnes, substantially higher than shipments of 380,800 tonnes in December 2010.There are indications that the demand for steel will recover more evenly over the next year and as a result global crude steel production is forecast to increase by 7% in 2011.

Global steel outlook for 2011

There is likely to be further domestic consolidation in the steel industry as industry concentration is low. The top 10 steel companies make up around 23% of production, which is considerably lower than the broader mining sector.

Chinese domestic consolidation is likely to continue as ��*��*�� the Chinese steel industry.

India is expected to emerge as the third largest consumer of ��!==&��J*��*��^-#�$��*��growing at nearly 9%, construction of infrastructure and investment by global automakers is likely to increase over the next 10 years. The Indian car industry is forecast to expand from producing 2.5 million units in 2010 to 8 million by 2020.

India’s growth has led, and will continue to lead, developed countries such as the US and Japan to seek access to India’s market potential. We expect to see more deals such as the largest inbound deal in 2010 where JFE Steel acquired a stake in JSW Steel to gain access to the Indian market without having to develop its own mills.

��N��*��&�therefore, any acquisitions are likely to be strategic — to gain access to raw materials, new markets or improved technology. >*��*�*��*�� sheet strength to make such acquisitions may consider JVs or investments to secure raw material off-take agreements.

The outlook for 2011 is optimistic as global growth has returned and the likelihood of a double-dip ��*�� #�$�� *�39, consumer spending and business investment is likely to become key drivers of economic growth as support from inventory cycles and fiscal stimuli diminish.

39 “Global executive summary — The global outlook is a little brighter,” Global Insight, November 2010


“We anticipate that in 2011 and 2012 there will be ongoing domestic consolidation across the sector, particularly in India and China, and a continued focus on acquisitions of raw materials and clean energy.”Michael Elliott, Global Mining & Metals Leader

China’s growth in steel production and consumption will moderate from 2011 to 2015 as China seeks to make its economic growth more sustainable. Demand is expected to be slower in 2011 due to tighter credit in response to ��"�� speculation, which will adversely impact consumer spending and infrastructure investment. Despite this, continued urbanization, industrialization, and a focus on increasing domestic consumer spending means that crude steel consumption is still estimated to grow by 5%. This equates to China requiring an additional 31 million tonnes of steel in 2011 as compared to 2010.

Technology will continue to play a role in increasing the ��#�-��this will also be focused on how to make better use of raw materials, such as the development of technology to �� *��*��low grade ore.

The Japanese earthquake and ensuing tsunami are costing Japan dearly and could have a long term impact on the mining ��#�$��*��*��infrastructure and port, but steel exports may be impacted for some time until the production and logistical bottlenecks are ��#��J*��$��¡�� steel exporter so any tightening of supply, will cause prices to rise and leave room for neighboring players, in particular China ��*��#��*��&��expecting Japan to begin importing steel to support the rebuild, as even a doubling of domestic demand can be met from domestic supply.

Outlook for steel production and consumption to 2015

Source: ABARES, Ernst & Young analysis, January 2011

0

200

400

600

800

1,000

1,200

2010E 2011F 2012F 2013F 2014F 2015F

World steel production (ex China)

Mill

ion

tonn

es

World steel consumption (ex China) Chinese productionChinese consumption


>*��"��&��volatility are the two biggest challenges facing steelmakers. $��*��*��&��need to factor this volatility into their business models.

In doing so, steelmakers have to consider the following issues:

1. Scarcity of coking coal

2. Raw material price volatility

3. ��

4. ��

5. Improving product mix

1. Scarcity of coking coalCoking coal is a key raw material for the production of steel. There are, however, many infrastructure bottlenecks around the world which have caused a supply-demand gap in the coking coal market. The supply of coal is expected to remain �� $��&� -��*�$��#�>*�� *��$��*��*��*��#��*��*��"��¢��!=!�� early 2011 caused an estimated loss of around 5% of the global trade of coking coal.40

In addition, it is expected that the supply gap may worsen as large producers and exporters of coal, such as China, Indonesia and Russia, begin to use more coal for domestic consumption rather than exports. However, exports from the US are expected to lend support to the overall supply situation, provided the country is able to tackle the cost, manpower and investment constraints.

In India, scarcity of coking coal is a real issue as coking coal accounts for only 17% of the country’s overall proven coal reserves. Further, inferior grades of coal with high ash content account for a high proportion of the reserves; the prime grade makes up only 4.8% of the reserves. Of that, only 60%–65% of the metallurgical coal produced in the country is suitable for use in the steel industry.

Due to growth in global steel demand, coupled with supply constraints at the major exporting countries, the global ��*��&��expected to remain high. To secure supplies for their operations, global steel companies are actively scouting for cross-border acquisitions of coal assets. They are also forging alliances with mining companies to develop new mines around the world.

The scarcity and increased cost of coking coal opens up the opportunity of implementing some of the newer steelmaking technologies. There are ways of reducing or eliminating the amount of coking coal used in the steelmaking process. For example, pulverized coal injection directly into blast furnaces can reduce the amount of coal used. One tonne of PCI coal used for steel production displaces about 1.4 tonnes of coking coal.

Direct smelting processes, such as Corex, do not require the use of coking coal but use thermal coals directly. Since coking and sintering plants are not required for the Corex process, substantial cost savings of up to 20% can be achieved in the production of hot metal compared to the traditional blast furnace process. FINEX is another process in use where molten iron is produced directly using iron ore ��Q��#

Challenges and issuesSteelmakers have had a challenging couple of years in the wake of the global financial crisis. In 2010, recovery in steel demand was far from consistent and steelmakers had to work hard at managing every aspect of their business in the face of fluctuating demand. This is compounded by increasing raw material costs.

The shortage of coking coal is a concern and is unlikely to improve any time soon.

�!� A\��*��L&�_��$��\��&��=�� !==

Key considerations for steelmakers1. What long-term strategies have you got in place to

ensure the availability of coking coal?

2. Have you weighed up the capital investment of new technology against the long-term cost of implications of purchasing a scarce resource?

3. What alternative reduction agents could be used to replace coking coal? What are the R&D capital expenditures that are needed to fund a viable coking coal alternative?


The steel industry has been characterized by excess global supply, which restricts the ability of the industry to raise prices during periods of economic growth and resist price decreases during periods of economic contraction. Following the dramatic slump from US$870 per tonne in 2008 to US$540 per tonne in 2009, the global average hot rolled coil (HRC) price has increased by 67% from January 2009 to January 2011. Steelmakers successfully protected prices by rapidly ��*��#��J��*��Q��levels and are not expected to do so until 2012.41 Continuing to manage capacity utilization to ensure that the market is not oversupplied is vital to maintaining steel prices.

41 “Industry focus: metals and mining,” VTB Capital via Thomson Research, 8 November 2010�� A��$� ��!==��*��&LZ��*��\��>*��*&�==��!==

In addition, the substantial and volatile increase in raw material ��*��%��steel producers, as well as working capital squeeze. For example, coking coal prices rose from US$129 per tonne in 2009 to average US$195 per tonne (JFY) in 2010 and iron ore prices rose from US$80 per tonne in 2009 to average US$147 per tonne (62% CFR) in 2010.42 Steelmakers have been unable to negotiate raw material prices down, and with demand being far from stable, they have been unable to fully pass on these increases in costs to steel consumers.

In 2011, crude steel production costs are forecast to increase due to forecast price increases for iron ore, coking coal and ��*��#�$��*��prices will exceed US$200 per tonne and coking coal prices will be higher at US$240–$260 per tonne. Energy costs continue to trend higher around the world.

Source: World Steel Association, CRISIL Research

Global monthly steel production and price trends

Prod

uctio

n (m

illio

n to

nnes

)

HRC

pric

e (U

S$ p

er to

nne)

Crude steel production HRC price

0

20

40

60

80

100

120

140

Feb-

11

Jan-

11

Dec-

10

Nov

-10

Oct

-10

Sep-

10

Aug

-10

Jul-1

0

Jun-

10

May

-10

Apr

-10

Mar

-10

Feb-

10

Jan-

10

Dec-

09

Nov

-09

Oct

-09

Sep-

09

Aug

-09

Jul-0

9

Jun-

09

May

-09

Apr

-09

Mar

-09

Feb-

09

Jan-

09

0100200300400500600700800900

The strategies being adopted to offset price volatility are drastic and are transforming the market place.

2. Raw material price volatility


Passing costs on to steel clientsEarly in 2010, there were structural changes to iron ore pricing. Steelmakers agreed to the demands of mining majors to exchange the annual benchmark negotiations with quarterly contracts. The quarterly prices are determined such that upcoming quarterly prices are the average spot price for the previous quarter.

The move to quarterly contracts was driven by the chronically tight supply of iron ore, which gave miners increased ��#�>*��*��quarter were around US$120-US$140 per tonne for 62% iron ��\��~��\��$��&��^-£=�}�per tonne for lump. These prices were up between 88%-92% on the contract price negotiated in 2009.

$��*��*��sales contracts to include either an index-based raw material surcharge, or to reduce the term of the contract to allow for increased pricing volatility. Some European steel mills, such as $��¤��&�*��*��*��sales contracts to half-yearly to ensure they have better visibility on forward-looking costs for the contract period. Thyssenkrupp has maintained its annual contracts as it could ��"�< ��*��&��*��<Q ��raw materials surcharge. This allows it to partially protect ��*��*��"�< �� ore price terms.43

Z��*��*��"�< ��&�steelmakers are still facing the challenge of raising steel prices ��*��*��increases in production costs.

Integrating raw materials The backward integration into raw material sources by steelmakers is a clear trend as volatility in raw material pricing has increased.

It is clear that lower cost steel producers are those with conveniently-located integrated raw material operations such as iron ore mines and coke plants. Steelmakers are acquiring mining operations to secure these supplies. During 2010, there were 20 deals by steelmakers targeting either iron ore or coking coal.

��<��&�$��<��ore projects and it is possible that it could be supplying iron ore to third parties in the future. The company plans to increase its �� }��*��<��#��production in 2010 is estimated to reach 69 million tonnes and the company is targeting 100 million tonnes by 2015.44

$��*��N��supplies by acquiring mines or entering into joint ventures. However, strict land acquisition laws are slowing this process. The three largest companies in India are affected differently depending on their level of integration into raw materials:

�� The Steel Authority of India — the largest public sector steel producer has fully integrated into iron ore and sells more than 95% of its steel production in India, making it more resilient to changes in global price volatility. However, its dependence on coking coal has squeezed margins in 2010.

�� Tata Steel — one of the world’s low-cost steel producers, enjoys healthy margins in its domestic operations as it has full integration into iron ore and partly into coking coal.

�� JSW Steel — lacks full integration within India in iron and ��&�� *��in raw material prices.

Other steelmakers around the world have also stated their ��*��Q��&��#�#&��$��¡�� &��-$&��*��Q��\��!=�#�

Examples of recent deals:

�� New Millennium Capital Corp and Tata Steel have signed a joint development agreement for the Taconite project in Canada.45

�� $��_��$�%��*��%��\��*��N��$1.52 per share ($596m) bid for the Canadian miner.46

>*��&�*��&��*��%��companies. Good quality assets are not cheap, for example, the US$3.9b cash offer by Rio Tinto for Riversdale is at a 39.3% premium to the three month volume weighted average price to 3 December 2010. In addition, taking control of a mine �� than that of running a steelmaking operation. For example, it may require the development of local infrastructure in politically risky countries. Financial reporting and tax regimes for mining companies are very different and steelmakers would need to fully understand these differences.

43 “Thyssen will introduce raw materials surcharge system for annual steel sales contracts”, Metal Bulletin News Alert Service, 3 September 2010 �� A$�� L&�Metal Bulletin News Alert Service, 19 November 2010�}� A>��-��_��>��N��L&�Montreal Gazette, 7 March, 2011�� A$��&�_��\��<��&��*��L&�Miningweekly.com, 18 February, 2011


47 “Industry forecast - excess capacity will be hard to curb”, Business Monitor International, 25 February 2011; A��J*��&�� L&�Z��J��-��&��=�$��!=!

48 “Nippon Steel, Sumitomo Metal to merge in Oct. 2012”, Kyodo News, 3 February 2011

Backward integration challenges

Assets availability and quality

�� Producing vs exploration

�� Political risk and country risk

Minority vs control

�� On/off balance sheet risks

Valuation �� Competition from miners, SWFs or resource funds

New risks�� Infrastructure and logistics (port, railway, power)

�� Mining laws (licences/tax) and environment

Integration�� New reporting (KPIs)

�� Transfer pricing

Funding�� Debt vs equity

�� Joint venture with/without off-take agreement

Source: “Backward Integration for steel companies”, Global Steel 2011 conference in New Delhi/Michel Nestour, January 2011

Increasing bargaining powerSteelmakers in various countries are adopting strategies which will increase their bargaining power both with raw material suppliers and their customers.

In Germany, ThyssenKrupp is seeking the establishment of a joint raw materials procurement agency to give the country’s steelmakers greater buying power and attempt to lessen price ��#�$��-��\��\��&��analysts are not convinced that such an agency would increase purchasing and pricing power.

The Chinese Government has implemented policies to consolidate the steel industry in China. The more consolidated the industry becomes the more combined bargaining power the steelmakers will have in their price negotiations with miners. It was thought that in some of the negotiations over the last year that some of the smaller Chinese steelmakers may have undermined the bargaining position of the Chinese -��$��~J�-$�� *�*�� J�-$�*��*��#47 Consolidation will help reduce the number of iron ore importers and make demand for iron ore in China more predictable. With fewer faces at the negotiating table, China hopes to have more

bargaining power in pricing. China is also increasing domestically produced iron ore output (although lower grade), as well as overseas investment in iron ore mines.

In Japan, the proposed merger of Nippon Steel and Sumitomo Metal Industries to create the world’s second largest steelmaker is expected to help the two companies strengthen their bargaining power in negotiations with iron ore and coking coal producers amid fast hikes in prices of these steelmaking materials.48 In addition, a merger of this scale may also improve the combined entity’s bargaining power with its clients. But until new iron ore supply comes onto the market in 2013-4, it is unlikely that this type of consolidation will really improve their bargaining power. However, there will be more transparency of demand for iron ore.

Key considerations for steelmakers1. What vertical integration strategies are you adopting to

assimilate raw materials into the supply chains?

2. Is it sustainable to pass the additional costs on to customers?

3. $�� *��&��*��quasi-integration strategies are feasible?

4. Could steel producers develop a client relationship with equipment manufacturers for miners and hence become indispensable for this industry?

5. What IP strategies are supportive to establish value-based pricing scheme for mining equipment manufacturers?

6. Given that volatility and cyclicality will persist in the ��&��*��*��~�#�#&�hedging) that are needed to mitigate the impairments?

7. What should be the price limits for this hedging service?

8. Who are the most reliable “hedging” partners to develop a strategic alliance?

9. What is in it for the “hedging” partners?


$��!!�¥�!=!&� steelmakers had to take steps to ensure that their businesses were operating at optimal efficiency. These included:

�� Improving operational performance

�� Managing capacity utilization to match volatile demand

�� Undertaking strategic joint ventures

Improving operational performance�� Asset management — Reduced capacity utilization has led

astute operators to adapt their maintenance strategies to �"��*�� *��<�� %��#�$��reduce the frequency of planned maintenance activities �*�*��*��while retaining performance.

�� Asset utilization and optimization — Some operators are reducing operating costs by optimizing the equipment that is being used. For example, mothballing higher cost areas of a processing plant. While this may reduce the overall throughput or yield of the plant, it increases the cash operating margin.

�� Yield and quality ��@*��*��*��*�*��&��and quality initiatives focus on improving the outputs of the process. This entails renewing the focus on yield from hot ��&��*��for the same unit cost. Improving the quality of the outputs also reduces costs by reducing the level of rework and the level of scrap material.

�� Shared services approach — Companies are beginning to re-examine how to reduce other costs by implementing a �*��*��*�� economies of scale for common activities. Common processes that have been moved into a shared services model include procurement, information technology, communication and payroll. Some operators are now considering other activities that could be centralized, including operational planning and maintenance scheduling.

$��&��&�*�� *��#��example, in 2010, the steelmaker centralized its European ��#�\��Q�!=!&�$��*��*��^-£� ��*�*��largely selling, general and administrative costs, as well as �<��#49

Key factors to successful strategic cost reduction programs50

Based on our experience, successful margin improvement programs are based on six tightly integrated elements:

�� Strategic clarity — the strategy of the organization, and the capabilities and resources required to execute it are clearly understood

�� Leadership alignment and commitment — the leadership is �� *��

�� Focus on maximum value — management maintains focus on achieving the maximum possible savings

�� Operational performance — benchmarked best practice and breakthrough thinking are used to drive cost reductions

�� Execution discipline�� system is used to promote disciplined execution of initiatives, and identify and remedy low-performing initiatives

�� Embedding cost optimization behaviours — cost savings are sustainable in the long term by embedding cost optimization behaviors within the cultureCompanies usually only tackle these issues

during times of volatility. But these are practises that should be constantly reassessed and revised for improvement. �� $��&��-��*��-<�*�$��-��

Conference, 30 November 201050 “Margin protection — cutting costs not corners”, Ernst & Young, 2009

3. Focus on maxim

um value

6. Embed cost optimization behaviours

2. L

eade

rship

align

men

t and

com

mitm

ent

1. Strategic clarity

4. Operational performance

5. Execution discipline

3. Increasing operational efficiency and cost effectiveness


"�� Companies that have successfully undertaken performance �� *��following ways:

�� Reduced or re-balanced operational, infrastructure and management costs

�� Improved balance between security and cost of controls

�� Decreased revenue leakage

�� J��*��*��supply chain

�� Improved IT performance, from strategic alignment to day-to-day operations

�� Better return on program investments

�� Process transformation

�� $��<��*��<��*��<�� *�"��

Managing capacity utilization to match demandGlobal steel production capacity utilization in 2010 was estimated to be around 75%. Volatility in demand for steel products is making managing capacity utilization something of a balancing act. Steelmakers are being very careful not to restart idle capacity too soon, as any oversupply will pose a risk to the recovery of steel prices particularly if there is no demand to match production.

$��*��*��*��capacity management strategy in Europe. The company has switched its strategy to one of planned capacity reductions prior to the market super-cycle of recent years, to one of ��*��"��in demand. It has developed procedures for taking blast furnaces (BFs) out of service, cooling them and then bringing them back on line as and when needed without permanent ��#�-��*�� $��_��*�$��\��#51

Undertaking strategic joint venturesCompanies can minimize spend on a particular operation by either reducing equity through a joint venture, or by using a bilateral agreement with another company to share equipment and therefore achieve economies of scale. This can help to share risk and operating and capital requirements for a particular operation.

There has been a trend recently of companies seeking joint ventures in order to gain access to developing markets, e.g., Nippon Steel is in talks with Tata Steel to expand their Indian partnership. The companies have already agreed to form a high-end automotive steel joint venture in India and are now considering a blast furnace unit at an initial investment of around US$2b-US$3b. The proposed blast furnace is expected to have a production capacity of 3 million tonnes per year and is expected to start production in 2013.52

$��*��<��*�� -@�Steel and Japan’s JFE Steel, whereby JFE will acquire a 14.9% stake in JSW Steel for US$1b. JSW Steel will use the proceeds to reduce its debt, its working capital and capital expenditure. JFE Steel will provide technology to JSW for manufacturing slabs and HRC to be used in the production of automobile sheet products at JSW’s upcoming cold rolling mill (CRM). In return, JFE Steel will obtain access to the automotive market in India.53

}=� A]^��*�*��*��"�< ��L&�� , 8 March 201052 “Nippon Steel, India’s Tata Steel conclude joint-venture contract for automotive cold rolled sheet”, Japan Metal Daily, 11 January 201153 “JFE buys $1 billion stake in JSW Steel to tap rising Indian auto demand”, Bloomberg, 27 July 2010

Key considerations for steelmakers1. Do we understand the trend in our costs versus

our major peers?

2. Have we taken advantage of best practice procurement?

3. @*�� supply chains?

4. Would our high cost operations provide more value by way of divestment?

5. Where can productivity be improved from our existing cost base?

6. How can costs be reduced without compromising our strategic purpose or competitive advantage?

7. Z��*��supporting tools?

8. How can an effort of this magnitude be managed across the entire enterprise and still maintain momentum?

9. Have the opportunities been analyzed not only for �� &� ��&�complexity, timing, redundancy and risk?

10. �� *�� realization that is in line with our performance measurement systems?

11. How do we sustain our cost reduction efforts?


Energy is one of the main cost components in steelmaking operations and, therefore, as the cost of energy increases, steelmakers are under pressure to optimize their energy consumption. Some approaches include:

�� The application of technology to maximize energy savings and reduce CO2 emissions

�� Operating equipment at or near design capacity

�� Keeping equipment and technology well maintained

�� Investment in clean technology54

There are new processes for ironmaking and steelmaking that have potential for reducing cost and energy intensity. These include directly reduced iron production and cast-and-roll strip production. Steelmakers are also coming up with innovative ways to use outputs from steel mills to generate electricity, �#�#&��*��^-&�$��*�� *��^-£��#��boiler project funded in part by $31.6m from the US Energy Department. The project is expected to generate 350,000 pounds of steam per hour to produce electricity on-site. ��*��N��electricity and decrease greenhouse gas emissions by 340,000 tons annually.55

New technologies may not only increase productivity, but they could also help to reduce raw material costs or even address ��#��&�-$��_]¦��*��Bokaro facility whereby molten iron is produced directly using ��Q��&��*��*��through sintering and coke making, which is essential to traditional blast furnace methods. Constructing a FINEX plant costs less than a blast furnace facility of the same scale.

Furthermore, production costs are lower due to cheaper raw materials and lower facility costs, pollutant exhaustion, maintenance staff and production time. In addition, a FINEX plant produces fewer pollutants, such as sulphur dioxide, nitrogen dioxide and carbon dioxide, than the traditional methods of producing steel.

$��*��*�� emissions. In Europe, steelmakers have already made the “quick win” changes to reduce their carbon emissions by 2020. Further investment is going to require more complicated solutions which may make steelmakers in Europe less ��*�� #��$��&�� !==#�$��steelmakers have already signalled that this will make them uncompetitive in the global market and warned that it will likely lead to plant closures with a loss of 15,000 jobs. Their argument is that the coal price (which represents around 40% of their costs) is so high that they are already doing everything they can to reduce usage.

Steelmakers are also investing in energy producers to secure their energy supplies, e.g., Turkish iron and steel producer, §¨��©&��^-£�#}� ��!==��!=�#�The company will sell surplus energy to the public.56 We expect this trend to continue, with steelmakers potentially looking to invest in clean energy during 2011.

54 “Benchmarking energy intensity in the Canadian steelmaking industry”, prepared for the Canadian Steel Producers $��_��J��&��!!�

}}� A$��^-$�*�� N��L&�Metal Bulletin News Alert Service, 3 November 201056 “Turkish steelmaker to invest $2.5 bln in energy”, Hurriyet Daily News&��$��!=!

4. Improving energy efficiency

“The future growth in steel relies upon sustainable steel solutions that will reduce the carbon footprint of steel consuming industries through material and energy ��*��resource and energy consumption.“Pierre Mangers, Executive Director, Mining & Metals

Key considerations for steelmakers1. How can you use technology to maximize energy

savings and reduce CO2 emissions?

2. Do you have comprehensive maintenance strategies?

3. $��*��ª�

4. Have you investigated the total cost of becoming a renewable energy generator?

5. Realizing that climate change policy will place limitations on activities once implemented. $��*��*�� *��comply with any new regulation and adopt a leading role in this area.


Companies are increasing their focus on downstream applications and solutions driven products for their higher value add. For example, Nucor in the US is investing in moving its line of steel product offerings up the value chain. Its plate and structural mills have grown markets during the recent economic downturn with a new product mix of 240,000 tonnes shipped over the last two years. The company’s improvements to its product lines have the combined effect of moving more than 500,000 tonnes of plate per year from commodity grades to higher-value grades that carry higher margins. ��*��*��==&�-$��!��Q��&�which not only commands higher prices, but its demand is growing fast as global automobile players aggressively expand their presence in India. To meet this demand, Indian steel majors are collaborating with foreign players to access advanced technologies in specialized steel. For example, JFE Holdings and JSW Steel have joined up to implement a continous annealing lines, as have Essar Steel and Kobe.57

57 “JSW Steel to build 2.3 million tpy CR mill at Vijayanagar”, Metal Bulletin News Alert Service, 28 January 201158 “SBB World of Steel”, �� , January 201159 “Severstal increases product range at Cherepovets”, Metal Bulletin News Alert Service, 11 February 2011

There is increased downstream focus which ��&��risk and increases margins.

5. Improving product mix

Evraz is expanding its product offering to take advantage of the Russian Government’s plans to increase infrastructure and also to access the construction market in the south of Russia. The steelmaker is investing in a 750,000 tonnes per year high speed rail production facility and also plans to increase rebar and angles capacity by 950,000 tonnes per year.58 Russian steelmaker Severstal has produced 42 new types of steel at its Cherepovets plant in 2010. The majority of the steelmaker’s new products were for the energy industry.59

Key considerations for steelmakers1. $��<ª

2. How are you continually improving and developing new products to match changing demand?

3. How much is your company investing in R&D to ensure future solutions?

4. Have you considered alliances with other steelmakers to leverage new product ideas?


$��*��If you would like to discuss any of the content within this paper, please contact one of our authors.

Michel Nestour Director of Transactions, Mining & Metals

Tel: +44 20 7951 4936 [email protected]

Anjani Agrawal Indian Mining & Metals Leader


Pierre Mangers Executive Director, Mining & Metals

Tel: + 61 8 9429 2216 [email protected]

Angie Beifus Senior Analyst, Mining & Metals


S112

2578

Global Mining & Metals LeaderMike Elliott Tel: +61 2 9248 4588 [email protected]

OceaniaScott Grimley Tel: +61 3 9655 2509 [email protected]

ChinaPeter Markey Tel: +86 21 2228 2616 [email protected]

JapanKentaro Nakamichi Tel: + 81 3 5401 6407 [email protected]

Europe, Middle East, India and Africa LeaderMichael Lynch-Bell Tel: +44 20 7951 3064 [email protected]

Africa$�� Tel: +27 11 772 3052 [email protected]

Commonwealth of Independent StatesEvgeni Khrustalev Tel: +7 495 648 9624 [email protected]

France and LuxemburgChristian Mion Tel: +33 1 46 93 65 47 [email protected]\

India$�N��$�� Tel: +91 982 061 4141 [email protected]

United KingdomLee Downham Tel: +44 20 7951 2178 [email protected]

Americas and United States Leader$�� Tel: +1 314 290 1205 [email protected]

CanadaTom Whelan Tel: +1 604 891 8381 [email protected]

South America and Brazil LeaderJ��$�� Tel: +55 21 2109 1606 [email protected]

ArgentinaPablo Decundo Tel: +54 11 4515 2684 [email protected]

ColombiaJoss McGregor Tel: +57 1 484 7120 [email protected]

Chile$��Z�� Tel: +56 2 676 1207 [email protected]

Mexico��$��®� Tel: +52 55 1101 6451 [email protected]

PeruVictor Burga Tel: +51 1 411 4419 [email protected]

Ernst & Young

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About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 141,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

Ernst & Young refers to the global organisation of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organisation, please visit www.ey.com

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This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

Liability limited by a scheme approved under Professional Standards Legislation.

Ernst & Young’s Global Mining & Metals Center With a strong outlook in the sector, the global mining and metals industry is focused on future growth through expanded production, without losing sight of operational efficiency and cost optimization. The sector is also faced with the increased challenge of changing expectations in the maintenance of its social license to operate and meeting government revenue expectations.

Ernst & Young’s Global Mining & Metals Center brings together a ��*��*��±� a team with deep technical experience in providing assurance, tax, transactions and advisory services to the mining and metals sector.

The Center is where people and ideas come together to help mining and metals companies meet the issues of today and anticipate those of tomorrow. Ultimately it enables us to help you meet your goals and compete more effectively. It’s how Ernst & Young makes a difference.

Documents

Global Steel Report 2010-2011 FULL REPORT