Marina Ivanova

Steering Committee Member, Russian Steel Consortium

Head of Government Relations, NLMK Group

OECD STEEL COMMITTEE

Developments In World Steelmaking Capacity

Russia: Steel Market

Developments

Paris, July 2013

-2- Sources: Metal-Expert, Metal Courier, Russian Statistics Agency

Recent Economic Developments in Russia

3,5% 3,4%

5,0% 5,1% 4,8%

4,3%

3,0%

2,1% 1,6%

0%

1%

2%

3%

4%

5%

6%

Q1

20

11

Q2

20

11

Q3

20

11

Q4

20

11

Q1

20

12

Q2

20

12

Q3

20

12

Q4

20

12

Q1

20

13

GDP quarterly growth rate, y-o-y, %

-10%

-5%

0%

5%

10%

15%

20%

Jan

-11

Mar

-11

May

-11

Jul-

11

Sep

-11

No

v-1

1

Jan

-12

Mar

-12

May

-12

Jul-

12

Sep

-12

No

v-1

2

Jan

-13

Mar

-13

May

-13

Manufacturing output index

Freight rail transportation volumes

• Russian economic growth started to lose momentum since H2 2012 due to global market weakness and slowdown in domestic demand

• Industrial production is almost flat in H1 2013 with freight rail transportation volumes falling y-o-y

• Economic growth projections for 2013 are reduced

IP growth rate, y-o-y, %

-3- Sources: Rosstat

• Prices for domestic energy resources are growing faster than consumer prices index (CPI)

• Russian inflation is far exceeding the ones at mature economies

• Industrial sector profits suffers from increasing utilities and labor costs

Growing Costs as a Cause for Concern

0,5

0,6

0,7

0,8

0,9

1,0

1,1

Mining (fuel and energy

sources)

Steelmaking and processing

Overall industrial

profitability

2011

2012

-5%

0%

5%

10%

15%

20%

25%

30%

2010 2011 2012

Gas Electricity Transportation costs

Consumer prices

3 years average inflation is 7%

Tariffs and inflation annual growth Industry profitability Index

-4- Sources: Russian Steel

• Domestic energy costs grew significantly over the last decade reaching and in some extent exceeding the level of developed markets

• Prices for gas are equal to the level of USA

• Electricity cost is close to that in the EU

Rapid Growth of Energy Costs

371

148

219

165

119

560

417 355 348

387

84 74 90 106 115

0

200

400

600

2008 2009 2010 2011 2012

USA Belgium Russia av

5,35 5,1

6,8 7,55

7,3 6,8 5,1

5,4 6,2 5,4

13,9 13,9 12,5

9,6

8,7

2

6

10

14

18

2008 2009 2010 2011 2012

Russia av. USA Belgium

US$/ 1000 m3 US cents per kWt*h

Gas prices Electricity prices

-5- Sources:

• Global steel prices are falling largely due to overproduction and lack of supply discipline

• Russian domestic prices largely replicate the international market situation

• There is growing pressure from steel imports

• long products import increased 39% in 2011 and 26% 2012

Challenging Environment of Steel Sector

400

450

500

550

600

650

700

750

Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013

HRC prices Rebar price

Russia domestic steel prices

$/t

0

2

4

6

8

10

12

14

16

2008 2009 2010 2011 2012

Net exports Exports Imports

Russian finished steel exports & imports

million t

-6-

Production Volume & Consumption, mmt

Russia’ Steel Industry Dynamics

Sources: Russian Statistics Agency, Worldsteel, Federal Customs Service

9,7 10,7 10,4

5,1 5,1 5,5 7,0 7,1 7,5

8,9 9,5 9,9 9,9 10,4 10,6 9,7 10,0 10,6 11,2

10,2 10,0 10,9

0

2

4

6

8

10

12

14

16

18

20

Crude steel production Finished steel production Consumption

• Steel consumption in Q2 2013 is predicted to grow about 9% over Q1 2013

• However, Q2/Q1 traditionally shows strong growth in Russia (due to severe winter)

• Q-on-q growth (Q2 2013 over Q2 2012) is only 2,8%

• Steel use for the whole of 2013 is expected to rise only 2,5% y-o-y

05

01

01

02

03

05

10

15

Others

Electrical machinery

Home appliancies

Automotive

Machinery

Metalware

Pipes & Tubes

Construction

13% 1%

3%

4%

8%

12%

23%

36%

Steel Consumption Breakdown by Sector, mmt 2012

Steel Consumption in Russia

Sector CAGR 08-12

Automotive -6%

Home appliances 8%

Machinery 0%

Metalware -3%

Construction 2%

Pipes & tubes 2%

Others 2%

Sources: Metal-Expert, Metal Courier, Russian Statistics Agency , Ministry of Industry and Trade; NLMK research -7-

• Russia’s steel consumption structure remains traditional, with construction, pipes & tubes, metalware and machinery as its most important sectors

• These sectors varied in performance over the last 5 years, some growing moderately and some stagnating

• Automotive and home appliances are two promising sectors, though still small in absolute numbers

-8-

Transport Machinery Production Index, y-o-y, %

Pipes & Tubes Production Index, y-o-y, %

-200

-100

0

100

200

300

400

500

Jan

-08

Ap

r-0

8

Jul-

08

Oct

-08

Jan

-09

Ap

r-0

9

Jul-

09

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13

Ap

r-1

3

Automotive Industry Production Index, y-o-y, %

-45

-25

-5

15

35

55

75

Jan

-08

Ap

r-0

8

Jul-

08

Oct

-08

Jan

-09

Ap

r-0

9

Jul-

09

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13

Ap

r-1

3

-55

-35

-15

5

25

45

Jan

-08

Ap

r-0

8

Jul-

08

Oct

-08

Jan

-09

Ap

r-0

9

Jul-

09

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13

Ap

r-1

3

Not adjusted 3 months rolling average

Mechanical Engineering Production Index, y-o-y , %

-60

-40

-20

0

20

40

60

80

100

Jan

-08

Ap

r-0

8

Jul-

08

Oct

-08

Jan

-09

Ap

r-0

9

Jul-

09

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Jan

-13

Ap

r-1

3

Russia’ Steel Consuming Sectors Output Dynamics

Sources: Russian Statistics Agency

0

10

20

30

40

50

60

70

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

E

-9- Sources: McKinsey, NLMK

• Steel demand will continue to growth in long term supported by strong fundamentals

• Russia has delayed steel demand of almost 170 mt due to economic slump in 1990s

• Russian infrastructure is highly underinvested

• Steel demand have been recovering strongly in 2002-2007 and in 2009-2012

Russian Steel Sector Has Potential for Further Growth

million t

Delayed steel consumption is 170 mt

Delayed steel consumption in Russia

-

10Source:

Floor space per capita

Steel Demand Fundamentals

0

100

200

300

400

500

600

700

800

0

10

20

30

40

50

60

70

USA Southern Europe

Central and Northern Europe

China Eastern Europe

Russia

Automobiles per 1000 people

m2 units

• Construction sector is seriously underinvested

• Floor space per capita is lower than in developed economies

• 82% of housing was built more than 17 years ago

• Commercial construction is actively developing

• Car ownership per 1000 people is 3 times less than in USA

Flat Product Consumption Forecast, mmt Long Product Consumption Forecast, mmt

Coated Products Consumption Forecast, mmt Pipes & Tubes Consumption Forecast, mmt

-11-

Steel Consumption Forecast

-20

-10

0

10

20

30

40

50

2007 2008 2009 2010 2011 2012 … 2015 … 2020

Production Export Import Apparent consumption

-10

-5

0

5

10

15

20

25

30

2007 2008 2009 2010 2011 2012 … 2015 … 2020

Production Export Import Apparent consumption

-4

-2

0

2

4

6

8

10

2007 2008 2009 2010 2011 2012 … 2015 … 2020

Production Export Import Apparent consumption

-4

-2

0

2

4

6

8

10

12

14

16

2005 2006 2007 2008 2009 2010 2011 2012 … 2015 … 2020

Production Export Import Apparent consumption

Sources: Metal Courier

Steel Industry Production Index Forecast, y-o-y Industry Production Forecast, y-o-y, %

Energy Machinery Production Index Forecast, y-o-y, %

Machinery Production Index Forecast, y-o-y, %

80

85

90

95

100

105

110

115

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Pessimistic Basic Optimistic

Steel Consuming Sectors Output Forecast

92

94

96

98

100

102

104

106

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Pessimistic Basic Optimistic

60

70

80

90

100

110

120

130

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Pessimistic Basic Optimistic

80

85

90

95

100

105

110

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Pessimistic Basic Optimistic

Source: Ministry of Economic Development -

12

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

0

50

100

150

200

250

300

2005 2006 2007 2008 2009 2010 2011 2012

FAI FAI growth in comparable prices, y-o-y

Source: Rosstat, Worldsteel Association

Steel industry fixed asset invetment

Russian Steel Industry is on Modernization Track

billion RUR

62% 67%

16%

29% 22%

5%

0%

20%

40%

60%

80%

100%

2005 2013

BOF EAF OHF

• Russia’s steelmakers have been actively investing into the modernization of the assets

• ab. $8 billions of investments per year in 2005-2012

• Steelmaking capacities have been restructured in favor of more efficient and less environmentally harmful way of production

• A number of OHF capacities has been closed down in 2008-2013 with some replaced by new EAF and BOF capacities, some simply taken out of the market

• Share of OHF in steel production is targeted at 0% by 2015

Production process upgrade

6,5% growth in steel production in 2005/2012

-13-

4,8 4,8 4,7 4,5

4,3 4,3 4,3 4,2

3,0

3,5

4,0

4,5

5,0

2005 2006 2007 2008 2009 2010 2011 2012

Overall metallurgy

-14- Sources:

• Modernization results in better environmental and efficiency industry performance

• Air pollution has been reduced by 12% although steel production increased 6.5%

• Energy efficiency is reaching best available technology level

Investments into Responsible Operations and Efficiency

Air pollution

Air pollution from stationary Sources, mmt

5,0

5,5

6,0

6,5

7,0

7,5

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

12

20

15

20

20

Steel industry average

Best available technology for BOF route

Energy consumption Gcal/t

-15-

Environmental Legislation

(to be passed before 2014)

Upgrade to Best Available Tech

• Huge investment costs

• BAT not as a reference for setting the permit conditions, but as a universal direct limit

• Pollution tax payable even after achieving BAT

• Only 8 years to complete the transition which the EU hasn’t fully managed in 16 years

OR face crippling penalties

• Non-complying companies will

end up paying x100

in environmental charges

Law about BAT

• Russian producers face pollution-related costs similar to or worse than those of their international counterparts

• This places Russian steel industry on an equal footing with OECD countries

Marina Ivanova

Steering Committee Member, Russian Steel Consortium

Head of government relations, NLMK

OECD STEEL COMMITTEE

Developments In World Steelmaking Capacity

Paris, July 2013

THANK YOU